<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON FEBRUARY 28, 1995
===============================================================================
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(MARK ONE)
[ X ] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934 (FEE REQUIRED)
FOR THE FISCAL YEAR ENDED NOVEMBER 30, 1994
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934 (NO FEE REQUIRED)
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 INCORPORATION OR (I.R.S. EMPLOYER IDENTIFICATION NUMBER)
ORGANIZATION)
2850 OCEAN PARK BOULEVARD, SANTA MONICA, 90405
CALIFORNIA
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
</TABLE>
Registrant's telephone number, including area code: (310) 452-4327
Securities registered pursuant to Section 12(b) of the Act:
Common Stock, No Par Value The New York Stock Exchange
Securities registered pursuant to Section 12(g) of the Act:
7 3/4% Convertible Subordinated Debentures due 2002
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
FILING REQUIREMENTS FOR THE PAST 90 DAYS. YES X NO
INDICATE BY CHECK MARK IF DISCLOSURE OF DELINQUENT FILERS PURSUANT TO ITEM
405 OF REGULATION S-K IS NOT CONTAINED HEREIN, AND WILL NOT BE CONTAINED, TO THE
BEST OF THE REGISTRANT'S KNOWLEDGE, IN DEFINITIVE PROXY OR INFORMATION
STATEMENTS INCORPORATED BY REFERENCE IN PART III OF THIS FORM 10-K OR ANY
AMENDMENT TO THIS FORM 10-K.
AS OF FEBRUARY 21, 1995, THE AGGREGATE MARKET VALUE OF THE COMMON STOCK
HELD BY NON-AFFILIATES OF THE REGISTRANT WAS APPROXIMATELY $95,388,926 BASED
UPON THE CLOSING SALES PRICE OF THE COMMON STOCK ON THAT DATE.
NUMBER OF SHARES OF COMMON STOCK OF THE REGISTRANT OUTSTANDING AS OF
FEBRUARY 21, 1995: 22,936,433.
DOCUMENTS INCORPORATED BY REFERENCE: (A) ANNUAL REPORT TO SHAREHOLDERS FOR
THE YEAR ENDED NOVEMBER 30, 1994, INCORPORATED PARTIALLY IN PART II HEREOF, AND
(B) PROXY STATEMENT FOR THE 1995 ANNUAL MEETING OF SHAREHOLDERS, INCORPORATED
PARTIALLY IN PART III HEREOF.
------------------------
THIS REPORT INCLUDES A TOTAL OF 22 PAGES
THE EXHIBIT INDEX APPEARS ON PAGE 16
===============================================================================
<PAGE> 2
L.A. GEAR, INC.
TABLE OF CONTENTS
ANNUAL REPORT ON FORM 10-K
FOR THE FISCAL YEAR ENDED NOVEMBER 30, 1994
<TABLE>
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PAGE
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<S> <C> <C>
PART I
- ------
Item 1. Business................................................................. 1
Item 2. Properties............................................................... 9
Item 3. Legal Proceedings........................................................ 9
Item 4. Submission of Matters to a Vote of Security Holders...................... 10
PART II
- -------
Item 5. Market for the Registrant's Common Stock and Related Stockholder
Matters.................................................................. *
Item 6. Selected Financial Data.................................................. *
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations.................................................... *
Item 8. Financial Statements and Supplementary Data.............................. *
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure..................................................... 11
PART III
- --------
Item 10. Directors and Executive Officers of the Registrant....................... **
Item 11. Executive Compensation................................................... **
Item 12. Security Ownership of Certain Beneficial Owners and Management........... **
Item 13. Certain Relationships and Related Transactions........................... **
PART IV
- -------
Item 14. Exhibits, Financial Statement Schedule and Reports on Form 8-K........... 13
Signatures............................................................................. 22
</TABLE>
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* Incorporated by reference to L.A. Gear's 1994 Annual Report to Shareholders.
** Incorporated by reference to L.A. Gear's Proxy Statement for the 1995 Annual
Meeting of Shareholders.
<PAGE> 3
PART I
------
ITEM 1. BUSINESS
- -----------------
GENERAL
- -------
L.A. Gear, Inc. (L.A. Gear, Inc. and its subsidiaries are collectively
referred to herein as "L.A. Gear" or the "Company") is a California corporation
which was organized on February 7, 1979. The Company is a holding company that,
through its principal subsidiary, L.A. Gear California, Inc., designs, develops
and markets a broad range of quality athletic and lifestyle footwear for adults
and children.
According to a report published in Sporting Goods Intelligence on December
9, 1994, Nike and Reebok collectively had over 50% of the United States branded
athletic footwear market in 1994, with the Company ranking fourth with
approximately a 5% domestic market share. While certain products compete
directly with Nike and Reebok, the Company seeks to differentiate itself by
offering fun, innovative, high-quality, fashionable footwear at affordable
prices.
During the past three years, the Company's ongoing restructuring program
has centered on establishing a solid financial and operational foundation
through disciplined expense management, improved quality and procurement and
focused inventory planning. Improvements in these areas continued during fiscal
1994 as (i) domestic operating expenses (exclusive of non-recurring charges and
credits) decreased by $11.1 million (9.3%) compared to 1993 and (ii) inventories
were reduced by approximately 3.9 million pairs ($52.2 million), or 41.9%, to
approximately 5.4 million pairs ($57.6 million) at November 30, 1994 from
approximately 9.3 million pairs ($109.8 million) at November 30, 1993.
In June 1994, senior management was realigned as the Company's Board of
Directors elected William L. Benford as President and Chief Operating Officer
and Robert H. Landes as Executive Vice President -- Sales and Marketing. Under
the leadership of this new senior management team, the Company is redirecting
its sales and marketing efforts for fiscal 1995 (i) to return to the Company's
footwear heritage as a women's brand, (ii) to capitalize on the strength of the
Company's children's business, and (iii) to re-energize the L.A. Gear brand
through increased visibility.
In June 1994, the Company expanded its distribution in the mass market by
entering into a multi-year agreement to sell at least $240 million (subject to
certain adjustments) of L.A. Gear branded products to Wal-Mart over the
Company's 1995, 1996 and 1997 fiscal years. The Company's relationship with
Wal-Mart is designed to help generate sales velocity without unduly affecting
the Company's efforts to develop a stronger presence in its traditional footwear
distribution channels.
The Company believes that the footwear industry is beginning a
consolidation phase. Accordingly, in 1995 the Company will seek to implement an
"L.A. Brands" strategy aimed at recognizing and capitalizing on opportunities to
expand its product lines and distribution channels through the acquisition of
other footwear brands and the licensing of key trade names. In January 1995 the
Company announced an agreement to acquire Ryka Inc. ("Ryka"), the first step in
the implementation of the "L.A. Brands" strategy. Ryka is a publicly held,
Massachusetts-based company which designs, develops and markets high-performance
athletic footwear specifically for women. The acquisition is subject to the
fulfillment of certain conditions (including approval by Ryka's shareholders)
and is scheduled to be completed in the summer of 1995.
PRODUCTS
- --------
In fiscal 1994, the Company's products were organized into three separate
lines: Athletic, Lifestyle and Children's. The Athletic category was comprised
of men's and women's fitness, basketball, cross-training, running, walking,
tennis and aerobic shoes and included the new FLAK(TM) line featuring a patented
impact absorption system. The Lifestyle category was comprised of men's and
women's casual and fashion athletic styles. The Children's category consisted of
shoes for boys and girls based on the Athletic and Lifestyle lines as well as
products specifically developed for children and infants. In 1994, the Company
continued to develop its line of children's lighted shoes, one of the most
successful shoe collections in the Company's history. The Company sold
1
<PAGE> 4
approximately 8.1 million and 4.5 million pairs of children's L.A. LIGHTS(TM)
and Light GEAR(TM), representing 74.2% and 62.3% of total children's net sales
in fiscal 1994 and 1993, respectively. In May 1994, the Company (i) introduced
a new ball bearing switch to replace the mercury switch technology previously
found in some styles of its children's lighted shoes, and (ii) established a
landmark national collection/disposal/recycling program for shoes containing
mercury switches in order to address environmental concerns consumers may have
regarding the ultimate disposal of such shoes.
As a result of the redirection of the Company's sales and marketing
efforts, L.A. Gear's 1995 women's product lines will emphasize a return to the
Company's heritage as a women's athletic/lifestyle brand. The Company's 1995
women's footwear collection will seek to fill the gap between casual and
strictly performance footwear at price points designed to make the brand
attractive to both style and value conscious consumers. Product offerings have
been divided into three categories: L.A. Fitness includes value priced
cross-training and walking shoes priced to retail between $35 and $60; L.A.
Basics features updated classic sporty and casual wear priced to retail below
$50; and L.A. Style features athletic/outdoor inspired fashion footwear priced
to retail between $40 and $50.
The Company plans to continue to capitalize on the strength of its
children's business through innovation and styling in its lighted and
non-lighted product lines. In 1995, a new non-lighted product category, Street
Hockey, aimed at the six-year-old and up market, will be introduced. The Street
Hockey line, designed with input from "The Great One", Wayne Gretzky of the Los
Angeles Kings, features Wayne's signature and number 99 on the shoes. An updated
girls line of fashion-athletic shoes featuring feminine touches and bright
colors will also be offered in 1995.
Streamlined men's product lines for 1995 feature the FLAK(TM) athletic
performance line and the L.A. Gear(R) line which offers stylish athletic and
outdoor looks at value prices.
Approximately ninety percent of the Company's footwear styles available
domestically in 1995 will carry a suggested retail price below $55 in line with
its long term strategy to provide value priced footwear. For the 1995
Back-To-School ("BTS") season the Company will introduce approximately 73 new
styles, down significantly from the 120 new styles produced for the 1994 BTS
season.
MARKETING
- ---------
Advertising, promotional and merchandising activities are the principal
elements in the Company's selling and marketing strategies. In 1994, the
Company's marketing efforts primarily consisted of television, radio and outdoor
advertising focusing on men's FLAK(TM) products and children's lighted footwear.
In 1995, the Company's marketing plan seeks (i) to re-energize the L.A.
Gear brand identity and (ii) to focus on the women's and children's markets. The
Company has retained Chiat/Day, a nationally recognized advertising agency, to
assist in the creation of new advertising campaigns and marketing concepts and
the production of advertising materials. A national television and print
advertising campaign aimed at women is scheduled to launch in March 1995 and
continue throughout the year. L.A. Gear advertisements will appear in
publications such as Cosmopolitan, Glamour, Mademoiselle, Elle, People and Good
Housekeeping on a monthly basis. Children's television commercials featuring the
Company's lighted footwear and the new Street Hockey line will air on Fox,
Nickelodeon and the Cartoon Network.
The Company has promotional contracts with professional athlete endorsers
which provide for endorsement fees as well as the payment of royalties based on
sales of selected footwear styles and apparel. In 1994 a promotional contract
was signed with Wayne Gretzky to promote the Company's new line of Street Hockey
footwear and apparel. The Company will also continue to feature Karl "The
Mailman" Malone of the Utah Jazz and Joe Montana of the Kansas City Chiefs in
its advertising and promotional campaigns. Participation in major international,
national and regional sporting goods and footwear trade shows is also an
important part of the Company's sales, marketing and promotional activities.
The Company believes that enhancing brand recognition through the use of
distinctive, readily identifiable trademarks and logos is an important factor in
(i) creating a market for its products, (ii) distinguishing its products from
the products of others in a very competitive market place and (iii) licensing
its trademarks for non-footwear products.
2
<PAGE> 5
DISTRIBUTION
- ------------
The Company's footwear products are sold in the United States to
approximately 3,900 accounts that include department, shoe, sporting goods and
athletic footwear stores, mass market department stores and mass merchandisers.
Internationally, the Company's products are sold in approximately 55 countries.
The Company sells its products domestically through its direct employee sales
force and internationally primarily through independent distributors,
wholly-owned subsidiaries and its Far East joint venture. See "-- International
Sales." In order to manage and control the disposition of inventory, the Company
owns and operates eight outlet stores located in California, Texas, Arizona and
Florida.
In June 1994, the Company expanded its distribution in the mass market
channel by entering into a multi-year agreement to sell L.A. Gear branded
products to Wal-Mart. In the fourth quarter of fiscal 1994, the Company made the
initial shipment of $20.9 million of footwear to Wal-Mart. The commitment by
Wal-Mart to purchase a further $80 million of L.A. Gear products in each of the
fiscal years 1995, 1996 and 1997 is subject to reduction in 1996 and 1997 if
retail sales do not meet designated targets. The Company also intends to make
available to Wal-Mart, through its licensees, new product lines of affordable
apparel and accessories. The agreement does not provide for the sale of L.A.
Tech(TM), FLAK(TM) or any L.A. Gear(R) lighted footwear products to Wal-Mart.
The following table sets forth certain information regarding the Company's
net sales.
<TABLE>
<CAPTION>
NET SALES
----------------------------------------------------------
1994 1993 1992
---------------- ---------------- ----------------
$ % $ % $ %
-------- --- -------- --- -------- ---
(DOLLARS IN THOUSANDS)
----------------------
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Domestic Footwear
Children's.......................... $165,460 40% $128,458 32% $ 90,997 21%
Women's............................. 63,218 15 82,771 21 112,990 26
Men's............................... 67,186 16 73,132 18 104,593 24
Other................................. 1,721 1 1,959 1 2,688 1
-------- --- -------- --- -------- ---
Total Domestic Net Sales.... 297,585 72 286,320 72 311,268 72
International Footwear and other...... 118,381 28 112,038 28 118,926 28
-------- --- -------- --- -------- ---
Total Net Sales............. $415,966 100% $398,358 100% $430,194 100%
======== === ======== === ======== ===
</TABLE>
Sales to Wal-Mart accounted for 9.5% of the Company's net sales in 1994.
None of the Company's customers individually accounted for 10% or more of the
Company's net sales in 1994, 1993 or 1992. The Company's five largest customers
worldwide, in the aggregate, accounted for approximately 26.8%, 20.7% and 26.3%
of the Company's net sales in 1994, 1993, and 1992, respectively. Sales in the
United States represented 71.5%, 71.9% and 72.4% in 1994, 1993, and 1992
respectively, of the Company's consolidated net sales. Sales in Europe
represented 15.4%, 13.9%, and 13.5% in 1994, 1993, and 1992, respectively, of
the Company's consolidated net sales. Sales in any individual geographic region
outside the United States or Europe represented less than 10% of consolidated
net sales in 1994, 1993 and 1992.
ORDERING PROGRAMS
- -----------------
The Company has a combination of "at once" and "futures" ordering programs.
In contrast to an "at once" ordering program, in which shoes are shipped in
response to the placement of orders, a formal "futures" ordering program
requires retailers and international distributors to place orders from four to
six months in advance of delivery. The "futures" program therefore reduces the
Company's need to purchase inventory in anticipation of customer demand. To
encourage "futures" orders, the Company offers certain discounts and
incentives, subject to minimum order requirements. The Company's goal is to
achieve a balance between its "futures" and "at once" programs in which the "at
once" program is used primarily for "fill-in" orders and for products that
remain relatively unchanged from season to season while the "futures" program
is used for new introductions. The mix of "futures" and "at once" orders varies
significantly from quarter to quarter and year to year, and, therefore, current
"futures" order levels are not necessarily indicative of sales for subsequent
periods.
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<PAGE> 6
INTERNATIONAL SALES
- -------------------
Internationally, the Company's products are sold through independent
distributors, its wholly-owned subsidiaries and its Far East joint venture with
Inchcape Pacific Limited ("Inchcape").
During 1994, the Company continued the expansion of its international
distribution network. In December 1993, the Company entered into a joint venture
with Inchcape to market and sell L.A. Gear(R) branded products in selected Far
East markets, including Hong Kong, Singapore, Malaysia, Indonesia, Thailand,
Taiwan and The People's Republic of China. In June 1994, the Company acquired
certain assets of its exclusive distributor (and one affiliate) in Mexico. In
1993, the Company acquired its previously independent distributors in The
Netherlands, Luxembourg, Belgium, Germany, Austria, and the United Kingdom and
formed a wholly-owned distribution subsidiary in Italy. The Company established
its own subsidiary in France in March 1992. By selling through its foreign
subsidiaries, the Company realizes a wholesale margin on the sale to the
retailer that is greater than that on sales to independent distributors. Prior
to selling directly to retailers through its subsidiaries and joint venture,
products were sold primarily to distributors at a stated margin over the
Company's factory purchase price and the Company exercised little or no control
over the pricing of products for resale by the distributor. In 1994 sales to the
Company's foreign subsidiaries' customers represented 12.0% of the Company's
consolidated net sales.
The Company's international operations are subject to currency fluctuations
over which it has no control. As L.A. Gear only commenced business in Mexico in
June 1994, the impact of the devaluation of the peso (beginning in December
1994) has not had a significant impact on the financial position of the Company.
However, the Company is currently reviewing the business plan for its Mexican
operations in light of the devaluation and is not yet able to determine the
impact, if any, the devaluation will have on its future operations.
The Company enters into forward exchange contracts, generally with terms of
less than one year, as a hedge against certain of its foreign currency
commitments, primarily repayments of U.S. dollar denominated obligations to the
Company by its European subsidiaries.
Although the Company realizes higher margins on sales made by its
subsidiaries, it also incurs greater operating costs, including the cost of
holding inventory. In addition, the Company is increasingly exposed to the other
customary risks of doing business abroad. See "-- Manufacturing" and "-- Trade
Legislation." The Company expects that these risks and costs will be justified
by the opportunity to increase sales and gross margins through implementation of
more competitive marketing and distribution programs internationally. However,
there can be no assurance that the investment in international distributors will
maintain or increase the level of international sales or gross margins. In
territories where the Company changes from previously independent distributors
to wholly-owned subsidiaries in order to institute direct sales, international
sales may be adversely affected during the transition period.
MANUFACTURING
- -------------
The Company's footwear is manufactured to its specifications by independent
producers located primarily in The People's Republic of China, Indonesia, South
Korea, and Brazil. During fiscal 1994, manufacturers located in these countries
supplied 76%, 21%, 2% and 1% of total pairs of footwear purchased by the
Company, respectively.
Since 1992, the Company has made significant changes in the footwear
manufacturing plants utilized by the Company in order to realize procurement
efficiencies, achieve product quality objectives and lower product costs. In
addition, in fiscal 1992, the Company engaged an affiliate of Pentland Group,
plc ("Pentland") to act as its sourcing agent in the Far East. The
responsibilities of the sourcing agent include inspecting finished goods prior
to shipment by the manufacturer, supervising development, production and
management and facilitating the shipment of goods from foreign ports. All
manufacturing of footwear is performed in accordance with specifications
furnished by the Company, subject to quality control standards which include
the right to reject products that do not meet such specifications. Pentland
provides similar sourcing services to other footwear companies. Improved
product quality has resulted in a decrease in the percentage of defective
returns from customers.
4
<PAGE> 7
During fiscal 1993, the Company, in an effort to improve product design and
product quality, invested in a sophisticated state-of-the-art Computer-Aided
Design and Manufacturing System ("CAD/CAM"). The CAD/CAM technology is designed
to reduce the time it takes to introduce new products to market by shortening
the design and development stages. Certain of the new styles that were
introduced in 1994 had components designed on CAD/CAM, including the
incorporation of the FLAK(TM) cushioning system in the basketball, running,
cross-training and women's fitness lines for the 1994 Back-To-School season. As
the Company increases its utilization of CAD/CAM in 1995 this should further
enable the Company to respond more quickly to changing consumer preferences and
to estimate more accurately, and exercise better control over, production costs.
The principal materials used in the Company's footwear products are
leather, rubber and synthetic fabrics. The Company's suppliers buy raw materials
in bulk. Most raw materials are available in the countries where manufacturing
takes place. Although the Company's suppliers have thus far experienced little
difficulty in satisfying their raw materials requirements, a loss of supply of
any one of the major component materials could temporarily disrupt production.
The footwear products imported into the United States by the Company are
subject to customs duties. Under the Harmonized Tariff System, duties on the
footwear products imported by the Company range from 6% to 37.5% of production
costs (plus a unit charge in some cases of approximately 90 cents). Duty rates
depend on the construction of the shoe, as well as whether the principal
component is leather or other materials. In fiscal 1994 these duties averaged
approximately 10.2% on the cost of the Company's footwear. The Company is
unable to predict whether additional United States customs duties may be
imposed upon the importation of its products in the future.
As a result of the Company's use of foreign manufacturing facilities, the
Company is subject to the customary risks of doing business abroad, including
fluctuations in the value of currencies, export duties, import controls and
trade barriers (including quotas), restrictions on the transfer of funds, work
stoppages and, in certain parts of the world, political instability. To date,
these factors have not had a material adverse impact on the Company's
operations. The Company competes with other shoe companies, such as Nike,
Reebok, adidas and Stride Rite, for production capacity. Management believes
that its present sources of supply are adequate and that, if existing production
capacities become unavailable or inadequate, the Company has the ability to
develop alternative sources over time for the footwear obtained from its current
producers. The Company's operations could, however, be materially and adversely
affected by a substantial delay in locating alternative sources of production.
See "-- Trade Legislation."
Although all of the Company's inventory purchases and product sales (and
the prices of most of the raw materials used in the manufacture of its products)
are denominated in U.S. dollars, the Company's product costs, pricing structure
and profit margins depend, in part, on the currency exchange rates between the
United States and the countries where its products are manufactured. The
currencies of these countries have, from time to time, increased in value
against the U.S. dollar and may experience further increases in the future as a
result of various economic and political factors. Although the Company believes
that such fluctuations in exchange rates have not had a material impact on its
operations to date, such fluctuations could, depending upon their extent and
duration, materially increase the Company's future cost of goods, resulting in
higher product prices or lower profits unless alternative manufacturing
arrangements can be implemented.
INVENTORY LEVELS
- ----------------
Through sales of selected excess inventory during 1994, the Company reduced
inventory by approximately 3.9 million pairs ($52.2 million), or 41.9%, to 5.4
million pairs ($57.6 million) at November 30, 1994. The decrease in inventory
was due primarily to improved inventory management throughout the year and sales
of $18.7 million (1.2 million pairs) of selected excess inventory to Wal-Mart
during the first quarter of 1994.
The Company continually monitors its inventory levels and, when necessary,
reduces excess inventory through utilization of selected segments of the mass
market discount channel and its outlet stores.
5
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TRADEMARKS AND PATENTS
- ----------------------
The Company regards its intellectual property among its most valuable
assets. It is the policy of the Company to defend vigorously its trademarks and
patents against infringement to the fullest extent practicable under the laws of
the United States and other countries in which its products are manufactured or
sold.
L.A. Gear(R) and L.A. Tech(R) are federally registered trademarks of the
Company in the United States. L.A. Gear is a registered trademark in 86 foreign
countries for footwear, apparel and other products. L.A. Tech is a registered
trademark in 24 foreign countries (with applications pending in more than 25
additional foreign countries) for footwear, apparel and other products. The
Company has numerous other trademarks that are registered in the United States,
many of which are also registered in foreign countries. The Company has more
than 400 foreign trademark registrations and more than 200 foreign trademark
applications pending.
The Company has obtained utility and design patents for numerous footwear
technologies and ornamental aspects of its shoes and has numerous patent
applications pending for other footwear technologies and designs. The Company
has also acquired licensed rights for certain footwear technologies and
trademarks from third parties for use in its products.
EMPLOYEES
- ---------
At November 30, 1994, the Company had 565 full-time domestic and 161
full-time international employees compared to 644 full-time domestic and 154
full-time international employees at November 30, 1993. The Company's employees
are not covered by any collective bargaining agreement, and the Company
considers its relations with its employees to be satisfactory.
SEASONALITY
- -----------
The Company believes that sales of its footwear products tend to be
seasonal in nature, with the highest level of sales generally occurring in the
third quarter of its fiscal year (representing shipments for the Back-to-School
season). The Company plans to have, on a continuing basis, new products
specifically designed for a Back-to-School season, a Spring season (which will
ship in the second fiscal quarter) and a limited Holiday season (which will ship
in the fourth fiscal quarter).
BACKLOG
- -------
The Company had a combined domestic and international order backlog at
December 31, 1994 of approximately $171 million. The backlog includes the
minimum $80 million purchase commitment under the Wal-Mart agreement for fiscal
1995. Approximately 25% of the December 31, 1994 backlog is for children's shoes
containing lighted technology, compared to approximately 36% of the backlog at
December 31, 1993. The Company's agreement with Wal-Mart does not provide for
the sale of children's lighted products to Wal-Mart.
Shipments and sales depend on, among other things, the combination of
"futures" and "at once" orders. See "-- Ordering Programs." Accordingly, the
comparison of backlog from period to period may not be indicative of eventual
actual shipments. Although orders are generally not cancelable by their terms,
in the past the Company has, at its option, allowed orders to be canceled by
customers.
As part of a multi-year agreement, Wal-Mart will purchase a minimum of $240
million of L.A. Gear branded footwear over the fiscal years 1995, 1996 and 1997
(subject to reduction in 1996 and 1997 if retail sales do not meet designated
targets). The agreement does not provide for the sale of L.A. Tech(TM),
FLAK(TM) or any L.A. Gear lighted footwear products to Wal-Mart.
6
<PAGE> 9
COMPETITION
- -----------
The athletic and athletic-style footwear industry is highly competitive in
the United States and on a worldwide basis. The Company's competitors include
both specialized athletic shoe companies and companies with diversified footwear
product lines. The principal elements of competition in the athletic and
athletic-style footwear market include brand awareness, product quality,
performance, design, pricing, marketing and distribution. The Company's products
compete primarily on the basis of recognition of the Company's trademarks,
innovative design, value, quality, fashion, style and incorporation of the
latest technological advances. The Company's primary competitors in domestic and
international athletic and athletic-style markets -- Nike, Reebok and,
internationally, adidas -- are more established and have greater financial,
distribution and marketing resources, as well as greater brand awareness, than
the Company. According to a report published in Sporting Goods Intelligence on
December 9, 1994, Nike and Reebok collectively had over 50% of the United States
branded athletic footwear market in 1994, with the Company ranking fourth with
an approximate 5% domestic market share.
The casual and lifestyle footwear market is also highly competitive but is
more fragmented than the athletic and athletic-style footwear market. As the
Company attempts to expand its share of the casual footwear market, the Company
faces competition from a number of other companies which produce and market
casual footwear products (including other marketers of athletic and
athletic-style footwear that are also expanding into the casual footwear
market). The principal elements of competition in the casual footwear market are
similar to those in the athletic footwear market, and include brand identity,
price, product quality, fashionable designs, product marketing and distribution.
The intensity of the competition faced by the Company, as well as the rapid
changes in fashion, technology and consumer preferences that can occur in the
footwear markets, are significant risk factors in the Company's operations.
There can be no assurance that the Company will be able to (i) respond in a
timely manner to changing consumer preferences, (ii) maintain or increase the
Company's current share of the total athletic and casual footwear markets it has
established to date, or (iii) penetrate new markets.
TRADE LEGISLATION
- -----------------
The Company's practice of overseas manufacturing to specification, with
subsequent importation into the United States, exposes it to the possibility of
product supply disruptions and increased costs in the event of administrative
developments adverse to continued trade or the enactment of protectionist
legislation.
On March 3, 1994, an executive order by President Clinton extended the
Super 301 provisions of the Omnibus Trade and Competitiveness Act of 1988 for
1994 and 1995. Super 301 permits the United States to target specific countries
with persistent trade barriers for possible trade sanctions. The Super 301
provisions require the Administration to identify countries engaging in unfair
trade practices and take action according to a strict timetable, including the
imposition of restrictions or duties on imports from such countries. In October
1994, however, the United States Trade Representative (the "USTR") announced
that it would not identify any countries under the Super 301 provisions. The
Company is unable to predict whether any countries where significant suppliers
or a significant number of customers of the Company are located will be
identified by the USTR under such provisions in 1995.
In addition to the Super 301 provisions, Special 301 provisions require the
identification of countries that deny adequate protection or market access for
intellectual property rights. In May 1993, the USTR initiated an investigation
of Brazil under these provisions which was completed in March 1994 without the
imposition of restrictions on imports from Brazil. Under the Special 301
provisions, the USTR named or retained China, Taiwan, Indonesia and South Korea
on the "Priority watch list" or "watch list" in 1994. In July 1994 the USTR
initiated an investigation of China under the provisions of Special 301 which
investigation was completed in February 1995 without the imposition of
restrictions on imports from China.
The Company is unable to predict whether Taiwan, Indonesia, China or South
Korea, or any combination of the four, will be identified under the Super 301 or
Special 301 provisions in 1995 or in the future, whether the United States will
retaliate against any of those countries for unfair trade practices or whether
any such retaliation will result in increases in cost, or reductions in the
supply, of footwear generally, or the Company's footwear in particular.
7
<PAGE> 10
In May 1994, President Clinton extended the "most favored nation" ("MFN")
status in China to June 1995. If China's MFN status is not renewed in 1995 the
Company would be required to seek alternative sources of supply of footwear. The
Company is currently developing alternative sources for the footwear it now
obtains from producers in China. The Company's operations could, however, be
materially and adversely affected by a substantial delay in locating such
alternative sources of production.
In March 1994, the European Union ("EU") imposed quotas that restrict the
importation into the EU of footwear manufactured in China. These quotas also
apply to Austria, Finland and Sweden, which on January 1, 1995 became members of
the EU. Such quotas have limited imports of the Company's products manufactured
in China into the EU countries, but the Company has not suffered significant
adverse effects as a result of the quotas to date. The Company is unable to
predict, however, whether additional quotas that would significantly restrict
imports of the Company's products will be imposed by the EU in the future. In
addition, antidumping complaints filed by various European footwear
manufacturers in the EU against footwear imported from China, Indonesia and
Thailand are pending before the EU authorities. The Company is unable to predict
whether these or other antidumping complaints in the EU will lead to the
imposition of duties on any of the Company's footwear imports or whether such
duties, if imposed, would significantly limit imports of the Company's products
into the EU countries. However, the Company believes it is prepared to deal
effectively with any such duties that may arise and that any adverse impact
would be of a short-term nature.
A number of developments have affected the Company's business in Mexico
over the past year and will continue to affect it in the future. In November
1993, Mexico issued a final antidumping order imposing duties on footwear
imported from China. At that time, the provisional duty of 1,105%, which had
been imposed in April 1993, was replaced with varying rates of duty that depend
on the types of footwear imported. These duties, however, were not applicable to
the Company's imports of footwear from China, which met a "minimum normal value"
requirement until August 1994 when changes in the relevant tariff
classifications resulted in the imposition of duties of 232% and 323% on certain
of the Company's imports. Also in August 1994, Mexico modified its certificate
of origin requirements by instituting, among other changes, particularly
stringent procedural requirements for imports of footwear from non-GATT
countries, including China. Although these new procedures and other regulations
limit the Company's ability to import certain footwear from China into Mexico,
the certificate of origin requirements do not apply to certain footwear imported
by the Company because such footwear qualifies for an exemption based on its
price. Finally, the recent reduction in the Mexican peso's value has
significantly increased the cost of imported goods, including the Company's
footwear from China and elsewhere, for all Mexican consumers. Although the
Company intends and expects to continue as a supplier to this market, the
Company is currently reviewing the business plan for its Mexican operations and
is not yet able to determine the impact, if any, the devaluation will have on
its future operations.
In December 1994, the Congress ratified new trade agreements establishing a
new World Trade Organization ("WTO"), which the United States had signed after
negotiations under the General Agreement on Tariffs and Trade ("GATT"), with an
effective date of January 1, 1995. The agreements and the WTO will provide an
unprecedented level of access to new international markets for exports from the
United States and of access to imports for United States consumers. It
contemplates, among other things, sizable tariff reductions on many products,
new commitments to market access for service providers, revised subsidies and
antidumping codes, protection of intellectual property rights, a revised
agreement on government procurement and strengthened dispute settlement
procedures. Also in November 1994, the leaders of the 18 Asia-Pacific Economic
Cooperation member nations, including the United States, China, Taiwan,
Indonesia and South Korea, agreed to achieve free and open trade and investment
in Asia Pacific by no later than 2020.
8
<PAGE> 11
ITEM 2. PROPERTIES
- -------------------
The Company's worldwide headquarters are located in a 97,000 square foot
leased facility in Santa Monica, California. The lease for the Santa Monica
facility expires in October 2003 and the Company has the option to extend such
term for two additional periods of five years each.
The Company's warehouse and distribution operations occupy approximately
410,000 square feet in two leased locations in Ontario, California. These leases
expire in June 1999 and the Company has options to extend each lease term for an
additional five years. The Company also leases other office, retail, storage and
showroom space in various locations.
In fiscal 1994, the Company's wholly-owned foreign subsidiaries and joint
venture collectively leased approximately 122,500 square feet used primarily for
warehouse and office space, including approximately 56,000 square feet leased by
the Company's German subsidiary for office and warehouse space which lease
expired in December 1994. Other leases of foreign subsidiaries expire over
periods ranging from May 1995 through December 1998.
The Company's eight retail stores collectively lease approximately 27,000
square feet. These leases expire over periods ranging from April 1995 through
November 1999.
The Company believes that its existing facilities are adequate to meet its
expected needs and that, if needed, additional or alternative space will be
available on commercially reasonable terms.
ITEM 3. LEGAL PROCEEDINGS
- --------------------------
SETTLEMENTS
- -----------
In July 1994, the Company entered into a settlement agreement with Flouri,
S.A., a former distributor, regarding the previously reported arbitration
proceeding entitled Flouri, S.A. adv. L.A. Gear California, Inc., an arbitration
before the American Arbitration Association, Los Angeles, pursuant to which the
parties dismissed all claims against each other. All terms of the settlement
agreement are confidential.
In October 1994, the Company entered into a settlement agreement pursuant
to which all claims against the Company in a previously reported action,
entitled Sandy Saemann v. L.A. Gear, Inc., Los Angeles Superior Court, Case No.
BC094070, were dismissed. Mr. Saemann is a former officer and director of the
Company. All terms of the settlement agreement are confidential.
In January 1995, all claims against the Company in a previously reported
action, entitled William R. Anderson, et. al. (abbreviated) v. L.A. Gear, Inc.,
Los Angeles Superior Court, Case No. BC086568, were dismissed pursuant to a
settlement agreement with the plaintiffs, seven former sales representatives of
the Company. All terms of the settlement agreement are confidential.
PENDING LITIGATION
- ------------------
Finexpance, S.p.A. v. L.A. Gear, Inc., Tribunal of Chiavari, Italy. On
February 9, 1993, Finexpance S.p.A. ("Finexpance"), the exclusive distributor of
the Company's products in Italy from January 22, 1988 until February 1, 1993,
filed a complaint against the Company alleging, among other things, unfair
competition and loss of customer base and goodwill. Plaintiff is seeking damages
in excess of $22 million. The Company believes Finexpance's claims are without
merit and intends to vigorously defend the action. A hearing in the matter is
presently scheduled for March 15, 1995.
No assurances can be given as to the likelihood of a favorable outcome in
the foregoing legal proceeding or, in the event of an unfavorable outcome, as to
the estimated amount of potential losses that may be incurred by the Company in
connection therewith. Failure by the Company to prevail in the foregoing matter
could have a material adverse effect on the financial condition or results of
operations of the Company.
9
<PAGE> 12
In addition to the foregoing matter, the Company is a party to various
other legal proceedings, none of which, individually or in the aggregate, is
considered by the Company to be material.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
- ------------------------------------------------------------
No matters were submitted to a vote of the Company's shareholders during
the fourth quarter of fiscal 1994.
10
<PAGE> 13
PART II
-------
ITEM 5. MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS
- ----------------------------------------------------------------------------
The information required in this item is incorporated by reference to
"Notes to Consolidated Financial Statements -- Note 16 -- Market for the
Registrant's Common Stock and Related Stockholder Matters; Selected Quarterly
Financial Data" appearing on page 30 in the Annual Report.
ITEM 6. SELECTED FINANCIAL DATA
- --------------------------------
The information required in this item is incorporated by reference to
"Selected Financial Data" appearing on page 1 of the Annual Report.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
- --------------------------------------------------------------------------------
OF OPERATIONS
-------------
The information required in this item is incorporated by reference to
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" appearing on pages 14 through 18 in the Annual Report.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
- ----------------------------------------------------
The information required in this item is incorporated by reference to the
consolidated financial statements, together with the report thereon of Price
Waterhouse LLP dated February 6, 1995, appearing on pages 19 through 30 in the
Annual Report.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
- ------------------------------------------------------------------------
FINANCIAL DISCLOSURE
--------------------
Not applicable.
11
<PAGE> 14
PART III
--------
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
- ------------------------------------------------------------
The information required in this item is incorporated by reference to
"Election of Directors -- Nominees for Election by Holders of Common Stock,
- -- Nominees for Election by Holders of Series A Preferred Stock" and "Executive
Officers of the Company" contained in the Proxy Statement, which will be filed
with the Commission within 120 days of the end of the fiscal year covered by
this report.
ITEM 11. EXECUTIVE COMPENSATION
- --------------------------------
The information required in this item is incorporated by reference to
"Executive Compensation" contained in the Proxy Statement, which will be filed
with the Commission within 120 days of the end of the fiscal year covered by
this report.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
- ------------------------------------------------------------------------
The information required in this item is incorporated by reference to
"Security Ownership of Certain Beneficial Owners and Management" contained in
the Proxy Statement, which will be filed with the Commission within 120 days of
the end of the fiscal year covered by this report.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
- --------------------------------------------------------
The information required in this item is incorporated by reference to
"Certain Relationships and Related Transactions" contained in the Proxy
Statement, which will be filed with the Commission within 120 days of the end of
the fiscal year covered by this report.
12
<PAGE> 15
PART IV
-------
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
- --------------------------------------------------------------------------
(A) THE FOLLOWING DOCUMENTS ARE FILED AS PART OF THIS REPORT:
-------------------------------------------------------------
1. CONSOLIDATED FINANCIAL STATEMENTS:
<TABLE>
<CAPTION>
PAGE IN
ANNUAL REPORT*
--------------
<S> <C>
Report of Independent Accountants.................................. 19
Consolidated Balance Sheets at November 30, 1994 and 1993.......... 20
Consolidated Statements of Operations for the Years Ended November
30, 1994, 1993 and 1992.......................................... 21
Consolidated Statements of Shareholders' Equity for the Years Ended
November 30, 1994, 1993 and 1992................................. 22
Consolidated Statements of Cash Flows for the Years Ended November
30, 1994, 1993 and 1992.......................................... 23
Notes to Consolidated Financial Statements......................... 24-30
</TABLE>
- ------------------------
* Incorporated by reference to the indicated pages in the Annual
Report.
2. FINANCIAL STATEMENT SCHEDULE:
<TABLE>
<CAPTION>
PAGE IN
FORM 10-K
---------
<S> <C>
Report of Independent Accountants on Financial Statement Schedule..... 14
IX -- Valuation and Qualifying Accounts and Reserves.................. 15
</TABLE>
All other schedules are omitted because they are not applicable
or the required information is shown in the consolidated
financial statements or notes thereto.
3. EXHIBITS:
See Index to Exhibits at Page 16 of this Form 10-K.
Management contracts or compensatory plans or
arrangements required to be filed as exhibits to this
report are identified on the Index to Exhibits of this
Form 10-K by an asterisk.
(B) REPORTS ON FORM 8-K:
------------------------
The Company filed the following current report on Form 8-K during
the last quarter of fiscal 1994.
1. The Company filed a Current Report on Form 8-K on September 2,
1994 with respect to Item 5 -- Other Events.
13
<PAGE> 16
REPORT OF INDEPENDENT ACCOUNTANTS
ON FINANCIAL STATEMENT SCHEDULE
To the Board of Directors
of L.A. Gear, Inc.
Our audits of the consolidated financial statements referred to in our
report dated February 6, 1995 appearing on page 19 of the 1994 Annual Report to
Shareholders of L.A. Gear, Inc. (which report and consolidated financial
statements are incorporated by reference in this Annual Report on Form 10-K)
also included an audit of the Financial Statement Schedule for the years ended
November 30, 1994, 1993 and 1992 listed in Item 14(a) of this Form 10-K. In our
opinion, the Financial Statement Schedule presents fairly, in all material
respects, the information set forth therein when read in conjunction with the
related consolidated financial statements.
/s/ Price Waterhouse LLP
- ---------------------------------------------------------
Los Angeles, California
February 6, 1995
14
<PAGE> 17
L.A. GEAR, INC. AND SUBSIDIARIES
SCHEDULE IX
VALUATION AND QUALIFYING ACCOUNTS AND RESERVES
YEARS ENDED NOVEMBER 30, 1994, 1993 AND 1992
(IN THOUSANDS)
<TABLE>
<CAPTION>
BALANCE AT CHARGED TO
BEGINNING COSTS AND BALANCE AT
OF YEAR EXPENSES DEDUCTIONS END OF YEAR
---------- ---------- ---------- -----------
<S> <C> <C> <C> <C>
DEDUCTED FROM ASSETS TO WHICH THEY APPLY:
ALLOWANCE FOR DOUBTFUL ACCOUNTS AND
MERCHANDISE RETURNS:
YEAR ENDED NOVEMBER 30, 1992 $ 7,994 $ 25,919 $ 29,338(1) $ 4,575
YEAR ENDED NOVEMBER 30, 1993 4,575 12,058 10,716(1) 5,917
YEAR ENDED NOVEMBER 30, 1994 5,917 17,283 16,725(1) 6,475
RESERVE FOR INVENTORY OBSOLESCENCE:
YEAR ENDED NOVEMBER 30, 1992 $ 1,200 $ 4,100 $ 2,600 $ 2,700
YEAR ENDED NOVEMBER 30, 1993 2,700 10,700 4,854 8,546
YEAR ENDED NOVEMBER 30, 1994 8,546 11,613 13,089 7,070
COSTS RELATED TO DISCONTINUED OPERATIONS:
YEAR ENDED NOVEMBER 30, 1992 $ 18,000 $ -- $ 13,448(2) $ 4,552
YEAR ENDED NOVEMBER 30, 1993 4,552 -- 3,543(2) 1,009
YEAR ENDED NOVEMBER 30, 1994 1,009 -- 1,009(2) --
</TABLE>
(1) Actual merchandise returns and write-offs of accounts receivable, net of
recoveries.
(2) Costs paid and reclassification of fair market value reserve to reduce
carrying value of property.
15
<PAGE> 18
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NO.
- -------
<S> <C>
2.1 Agreement and Plan of Merger, dated as of January 29, 1995, by and among L.A. Gear,
Inc., Brands Acquisition Corp. and Ryka Inc.(1)
3.1 Registrant's Restated Articles of Incorporation, as amended to date.(2)
3.2 Registrant's Bylaws, as amended to date.(3)
4.1 Form of stock certificate evidencing Registrant's Common Stock.(4)
4.2 Form of stock certificate evidencing the Registrant's Series A Cumulative
Convertible Preferred Stock.(5)
4.3 Indenture, dated as of December 24, 1992, with respect to the Registrant's 7 3/4%
Convertible Debentures due 2002.(6)
4.4 Form of 7 3/4% Convertible Subordinated Debenture due 2002, in Global Form.(7)
4.5 Form of 7 3/4% Convertible Subordinated Debentures due 2002, in Definitive Form.(8)
10.1* L.A. Gear, Inc. 1986 Stock Option Plan, as amended to date.(9)
10.2* Form of L.A. Gear, Inc. 1986 Stock Option Plan Non-qualified Stock Option
Agreement.(10)
10.3* L.A. Gear, Inc. Employee Stock Savings Plan, as amended and restated effective
August 1, 1993.(11)
10.4* Amendment No. 1 to the L.A. Gear, Inc. Employee Stock Savings Plan and Trust, dated
December 29, 1994.
10.5 Master Lease Agreement between Registrant and Hewlett-Packard Company concerning
computer hardware and software and related Operating Lease Equipment Schedule &
Payment Agreements executed on January 4, 1989.(12)
10.6 Amendment, dated as of October 25, 1993, to Master Lease Agreement between
Registrant and Hewlett-Packard Company concerning computer hardware and software and
related Operating Lease Equipment Schedule & Payment Agreements executed on January
4, 1989.(13)
10.7 Master Lease Agreement, as amended, dated as of June 23, 1989 by and between Metlife
Capital Corporation and Registrant.(14)
10.8 Letter Agreement, dated June 8, 1994, between Wal-Mart Stores, Inc. and Registrant.
Portions of this agreement have been omitted and filed separately with the
Commission pursuant to request for confidential treatment.(15)
10.9 Letter Agreement, dated June 14, 1994, between Mark R. Goldston and Registrant.(16)
10.10* Employment Agreement, dated as of December 7, 1993, between William L. Benford and
Registrant.(17)
10.11* Employment Agreement, dated as of December 7, 1993, between Robert H. Landes and
Registrant.(18)
10.12* Employment Agreement, dated as of December 7, 1993, between David F. Gatto and
Registrant.(19)
</TABLE>
16
<PAGE> 19
<TABLE>
<CAPTION>
EXHIBIT
NO.
- -------
<S> <C>
10.13* Employment Agreement, dated as of August 1, 1994, between Christopher M. Walsh and
Registrant.(20)
10.14* Employment Agreement, dated as of February 15, 1994, between Thomas F. Larkins and
Registrant.(21)
10.15* Employment Agreement, dated as of August 1, 1994, between Tracey C. Doi and
Registrant.(22)
10.16* Employment Agreement, dated as of August 1, 1994, between Victor J. Trippetti, Jr.
and Registrant.(23)
10.17 Form of Indemnification Agreement entered into between Registrant and each of its
Directors and Executive Officers.(24)
10.18 Stock Purchase Agreement, dated as of May 27, 1991, by and between Registrant and
Trefoil Capital Investors, L.P., as amended to date.(25)
10.19 Registration Rights Agreement, dated as of May 27, 1991, by and between Registrant
and Trefoil Capital Investors, L.P.(26)
10.20 Management Services Letter Agreement, dated September 12, 1994, by and between
Registrant and Shamrock Capital Advisors, Inc.(27)
10.21 Sourcing Agreement dated April 28, 1992 between Registrant and LASCO Sports Limited.
Portions of this agreement have been omitted and filed separately with the
Commission pursuant to request for confidential treatment.(28)
10.22 Amendment, effective as of December 1, 1993, to Sourcing Agreement, dated April 28,
1992, between Registrant and LASCO Sports Limited. Portions of this amendment have
been omitted and filed separately with the Commission pursuant to request for
confidential treatment.(29)
10.23 Stock Purchase Agreement dated April 28, 1992 between Registrant and Pentland
Ventures Ltd.(30)
10.24 Registration Rights Agreement dated April 28, 1992 between Registrant and Pentland
Ventures Ltd.(31)
10.25 Stock Option Agreement dated April 28, 1992 between Registrant and Pentland
Ventures, Ltd.(32)
10.26 Amendment, dated as of July 20, 1993, to Stock Option Agreement, dated as of April
28, 1992, between Pentland Ventures Ltd. and Registrant, and to Registration Rights
Agreement, dated as of April 28, 1992, between Pentland Ventures Ltd. and
Registrant.(33)
10.27 Lease Agreement dated October 15, 1992 between Registrant and Santa Monica
Associates.(34)
10.28* L.A. Gear, Inc. 1992 Stock Option Plan for Eligible Non-employee Directors.(35)
10.29* Form of L.A. Gear, Inc. 1992 Stock Option Plan for Eligible Non-employee Directors
Non-qualified Stock Option Agreement for Non-employee Directors.(36)
10.30* L.A. Gear, Inc. 1993 Stock Incentive Plan.(37)
10.31* Form of L.A. Gear, Inc. 1993 Stock Incentive Plan Non-qualified Stock Option
Agreement.(38)
10.32* Form of L.A. Gear, Inc. 1993 Stock Incentive Plan Incentive Stock Option
Agreement.(39)
</TABLE>
17
<PAGE> 20
<TABLE>
<CAPTION>
EXHIBIT
NO.
- -------
<S> <C>
10.33* Form of L.A. Gear, Inc. 1993 Stock Incentive Plan Restricted Stock Option
Agreement.(40)
10.34 Registration Rights Agreement, dated as of December 24, 1992, among Registrant and
Kidder, Peabody & Co. Incorporated and Sutro & Co. Incorporated.(41)
10.35* Summary Description of L.A. Gear, Inc. Management Incentive Program.(42)
10.36* Amended and Restated Non-qualified Stock Option Agreement, dated as of October 19,
1993, between Stanley P. Gold and Registrant.(43)
10.37 Loan and Security Agreement, dated as of November 22, 1993, between L.A. Gear
California, Inc. and BankAmerica Business Credit, Inc.(44)
10.38 Patent and Trademark Security Agreement, dated as of November 22, 1993, by L.A. Gear
California, Inc. and Registrant in favor of BankAmerica Business Credit, Inc.(45)
10.39 Guaranty, dated as of November 22, 1993, by Registrant and Raegal Finance Inc. in
favor of BankAmerica Business Credit, Inc.(46)
10.40 Security Agreement, dated as of November 22, 1993, by Registrant in favor of
BankAmerica Business Credit, Inc.(47)
10.41 Pledge Agreement, dated as of November 22, 1993, by Registrant in favor of
BankAmerica Business Credit, Inc.(48)
10.42 Security Agreement, dated as of November 22, 1993, by Raegal Finance Inc. in favor
of BankAmerica Business Credit, Inc.(49)
10.43 Pledge Agreement, dated as of November 22, 1993, by Raegal Finance Inc. in favor of
BankAmerica Business Credit, Inc.(50)
10.44 First Amendment to Loan and Security Agreement, dated as of May 31, 1994, between
L.A. Gear California, Inc. and BankAmerica Business Credit, Inc.(51)
10.45 Second Amendment to Loan and Security Agreement, dated as of August 31, 1994,
between L.A. Gear California, Inc. and BankAmerica Business Credit, Inc.(52)
10.46 Third Amendment to Loan and Security Agreement, dated as of January 25, 1995,
between L.A. Gear California, Inc. and BankAmerica Business Credit, Inc.(53)
10.47 Buying Agent Agreement, dated as of March 12, 1992, between Registrant and BBC
International, as amended by Addendum, dated as of August 29, 1992, Second Addendum
dated as of December 23, 1992, and Third Addendum, dated as of December 3, 1993.
Portions of this agreement have been omitted and filed separately with the
Commission pursuant to request for confidential treatment.(54)
10.48 Standard Industrial Lease-Net, dated as of January 1, 1993, between Registrant and
the Prudential Insurance Company of America.(55)
10.49 First Amendment to Lease (1777 South Vintage Avenue), dated as of February 14, 1994,
between Registrant and the Prudential Insurance Company of America.(56)
10.50 Standard Industrial Lease-Net, dated as of January 1, 1993, between Registrant and
the Prudential Insurance Company of America.(57)
</TABLE>
18
<PAGE> 21
<TABLE>
<CAPTION>
EXHIBIT
NO.
- -------
<S> <C>
10.51 First Amendment to Lease (1661 South Vintage Avenue), dated as of February 14, 1994,
between Registrant and the Prudential Insurance Company of America.(58)
13.1 L.A. Gear, Inc. Annual Report to Shareholders for the fiscal year ended November 30,
1994.
21.1 Subsidiaries of Registrant.
23.1 Consent of Price Waterhouse LLP, independent accountants.
27.1 Financial Data Schedule.
</TABLE>
- ---------------
(1) Previously filed as Exhibit 2.1 to the Company's Current Report on Form 8-K
filed with SEC on January 31, 1995 and incorporated herein by the
reference.
(2) Previously filed as Exhibit 3.1 to the Company's Annual Report on Form 10-K
for fiscal 1993 and incorporated herein by this reference.
(3) Previously filed as Exhibit 3.2 to the Company's Annual Report on Form 10-K
for fiscal 1992 and incorporated herein by this reference.
(4) Previously filed as Exhibit 4.1 to the Company's Annual Report on Form 10-K
for fiscal 1992 and incorporated herein by this reference.
(5) Previously filed as Exhibit 4.1 to the Company's Current Report on Form 8-K
filed with the Securities and Exchange Commission on September 26, 1991 and
incorporated herein by this reference.
(6) Previously filed as Exhibit 4.3 to the Company's Annual Report on Form 10-K
for fiscal 1992 and incorporated herein by this reference.
(7) Previously filed as Exhibit 4.4 to the Company's Annual Report on Form 10-K
for fiscal 1992 and incorporated herein by this reference.
(8) Previously filed as Exhibit 4.5 to the Company's Annual Report on Form 10-K
for fiscal 1992 and incorporated herein by this reference.
(9) Previously filed as Exhibit 10.1 to the Company's Annual Report on Form
10-K for fiscal 1991 and incorporated herein by this reference.
(10) Previously filed as Exhibit 10.2 to the Company's Annual Report on Form
10-K for fiscal 1993 and incorporated herein by this reference.
(11) Previously filed as Exhibit 10.3 to the Company's Annual Report on Form
10-K for fiscal 1993 and incorporated herein by this reference.
(12) Previously filed as Exhibit 10.97 to the Company's Annual Report on Form
10-K for fiscal 1988 and incorporated herein by this reference.
(13) Previously filed as Exhibit 10.5 to the Company's Annual Report on Form
10-K for fiscal 1993 and incorporated herein by this reference.
(14) Previously filed as Exhibit 10.117 to the Company's Quarterly Report on
Form 10-Q for the quarter ended August 31, 1989 and incorporated herein by
this reference.
(15) Previously filed as Exhibit 10.1 to the Company's Quarterly Report on Form
10-Q for the quarter ended May 31, 1994 and incorporated herein by this
reference.
(16) Previously filed as Exhibit 10.2 to the Company's Quarterly Report on Form
10-Q for the quarter ended May 31, 1994 and incorporated herein by this
reference.
(17) Previously filed as Exhibit 10.1 to the Company's Quarterly Report on Form
10-Q for the quarter ended February 28, 1994 and incorporated herein by
this reference.
19
<PAGE> 22
(18) Previously filed as Exhibit 10.4 to the Company's Quarterly Report on Form
10-Q for the quarter ended February 28, 1994 and incorporated herein by
this reference.
(19) Previously filed as Exhibit 10.2 to the Company's Quarterly Report on Form
10-Q for the quarter ended February 28, 1994 and incorporated herein by
this reference.
(20) Previously filed as Exhibit 10.4 to the Company's Quarterly Report on Form
10-Q for the quarter ended August 31, 1994 and incorporated herein by this
reference.
(21) Previously filed as Exhibit 10.5 to the Company's Quarterly Report Form
10-Q for the quarter ended February 28, 1994 and incorporated herein by
this reference.
(22) Previously filed as Exhibit 10.2 to the Company's Quarterly Report on Form
10-Q for the quarter ended August 31, 1994 and incorporated herein by this
reference.
(23) Previously filed as Exhibit 10.3 to the Company's Quarterly Report on Form
10-Q for the quarter ended August 31, 1994 and incorporated herein by this
reference.
(24) Previously filed as Exhibit 10.24 to the Company's Annual Report on Form
10-K for fiscal 1991 and incorporated herein by this reference.
(25) Previously filed as Appendix I to the Company's Proxy Statements in
connection with the Annual Meeting of Shareholders held on September 10,
1991 and incorporated herein by this reference.
(26) Previously filed as Exhibit 28.1(b) to the Company's Current Report on Form
8-K filed with the Securities and Exchange Commission on June 1, 1991 and
incorporated herein by this reference.
(27) Previously filed as Exhibit 10.1 to the Company's Quarterly Report on Form
10-Q for the quarter ended August 31, 1994 and incorporated herein by this
reference.
(28) Previously filed as Exhibit 10.27 to the Company's Annual Report on Form
10-K for fiscal 1992 and incorporated herein by this reference.
(29) Previously filed as Exhibit 10.18 to the Company's Annual Report on Form
10-K for fiscal 1993 and incorporated herein by this reference.
(30) Previously filed as Exhibit 10.28 to the Company's Annual Report on Form
10-K for fiscal 1992 and incorporated herein by this reference.
(31) Previously filed as Exhibit 10.29 to the Company's Annual Report on Form
10-K for fiscal 1992 and incorporated herein by this reference.
(32) Previously filed as Exhibit 10.30 to the Company's Annual Report on Form
10-K for fiscal 1992 and incorporated herein by this reference.
(33) Previously filed as Exhibit 10.22 to the Company's Annual Report on Form
10-K for fiscal 1993 and incorporated herein by this reference.
(34) Previously filed as Exhibit 10.31 to the Company's Annual Report on Form
10-K for fiscal 1992 and incorporated herein by this reference.
(35) Previously filed as Exhibit 10.35 to the Company's Annual Report on Form
10-K for fiscal 1992 and incorporated herein by this reference.
(36) Previously filed as Exhibit 10.25 to the Company's Annual Report on Form
10-K for fiscal 1993 and incorporated herein by this reference.
(37) Previously filed as Appendix I to the Company's Proxy Statement in
connection with the Annual Meeting of Shareholders held on April 13, 1993
and incorporated herein by this reference.
(38) Previously filed as Exhibit 10.27 to the Company's Annual Report on Form
10-K for fiscal 1993 and incorporated herein by this reference.
(39) Previously filed as Exhibit 10.28 to the Company's Annual Report on Form
10-K for fiscal 1993 and incorporated herein by this reference.
(40) Previously filed as Exhibit 10.29 to the Company's Annual Report on Form
10-K for fiscal 1993 and incorporated herein by this reference.
20
<PAGE> 23
(41) Previously filed as Exhibit 10.36 to the Company's Annual Report on Form
10-K for fiscal 1992 and incorporated herein by this reference.
(42) Previously filed as Exhibit 10.31 to the Company's Annual Report on Form
10-K for fiscal 1993 and incorporated herein by this reference.
(43) Previously filed as Exhibit 10.32 to the Company's Annual Report on Form
10-K for fiscal 1993 and incorporated herein by this reference.
(44) Previously filed as Exhibit 99.1 to the Company's Current Report of Form
8-K filed with the Securities and Exchange Commission on November 23, 1993
and incorporated herein by reference.
(45) Previously filed as Exhibit 99.1(a) to the Company's Current Report of Form
8-K filed with the Securities and Exchange Commission on November 23, 1993
and incorporated herein by reference.
(46) Previously filed as Exhibit 99.1(b) to the Company's Current Report of Form
8-K filed with the Securities and Exchange Commission on November 23, 1993
and incorporated herein by reference.
(47) Previously filed as Exhibit 99.1(c) to the Company's Current Report of Form
8-K filed with the Securities and Exchange Commission on November 23, 1993
and incorporated herein by reference.
(48) Previously filed as Exhibit 99.1(d) to the Company's Current Report of Form
8-K filed with the Securities and Exchange Commission on November 23, 1993
and incorporated herein by reference.
(49) Previously filed as Exhibit 99.1(e) to the Company's Current Report of Form
8-K filed with the Securities and Exchange Commission on November 23, 1993
and incorporated herein by reference.
(50) Previously filed as Exhibit 99.1(f) to the Company's Current Report of Form
8-K filed with the Securities and Exchange Commission on November 23, 1993
and incorporated herein by reference.
(51) Previously filed as Exhibit 99.2 to the Company's Current Report of Form
8-K filed with the Securities and Exchange Commission on June 2, 1994 and
incorporated herein by reference.
(52) Previously filed as Exhibit 99.3 to the Company's Current Report of Form
8-K filed with the Securities and Exchange Commission on September 2, 1994
and incorporated herein by reference.
(53) Previously filed as Exhibit 99.5 to the Company's Current Report on Form
8-K filed with the Securities and Exchange Commission on January 26, 1995
and incorporated herein by this reference.
(54) Previously filed as Exhibit 10.40 to the Company's Annual Report on Form
10-K for fiscal 1993 and incorporated herein by this reference.
(55) Previously filed as Exhibit 10.41 to the Company's Annual Report on Form
10-K for fiscal 1993 and incorporated herein by this reference.
(56) Previously filed as Exhibit 10.42 to the Company's Annual Report on Form
10-K for fiscal 1993 and incorporated herein by this reference.
(57) Previously filed as Exhibit 10.43 to the Company's Annual Report on Form
10-K for fiscal 1993 and incorporated herein by this reference.
(58) Previously filed as Exhibit 10.44 to the Company's Annual Report on Form
10-K for fiscal 1993 and incorporated herein by this reference.
21
<PAGE> 24
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the date indicated.
<TABLE>
<S> <C>
/s/ STANLEY P. GOLD /s/ WILLIE D. DAVIS
- ---------------------------------------------- ----------------------------------------------
Stanley P. Gold Willie D. Davis
Director, Chairman of the Board Director
and Chief Executive Officer
/s/ WILLIAM L. BENFORD /s/ STEPHEN A. KOFFLER
- ---------------------------------------------- ----------------------------------------------
William L. Benford Stephen A. Koffler
President and Chief Operating Officer Director
/s/ TRACEY C. DOI /s/ ANN E. MEYERS
- ---------------------------------------------- ----------------------------------------------
Tracey C. Doi Ann E. Meyers
Vice President and Controller Director
/s/ WALTER C. BLADSTROM /s/ CLIFFORD A. MILLER
- ---------------------------------------------- ----------------------------------------------
Walter C. Bladstrom CLIFFORD A. MILLER
Director DIRECTOR
/s/ ALLAN E. DALSHAUG /s/ ROBERT G. MOSKOWITZ
- ---------------------------------------------- ----------------------------------------------
Allan E. Dalshaug Robert G. Moskowitz
Director Director
/s/ VAPPALAK A. RAVINDRAN
----------------------------------------------
Vappalak A. Ravindran
Director
</TABLE>
Dated: FEBRUARY 24, 1995
22
<PAGE> 1
EXHIBIT 10.4
AMENDMENT NO. 1
TO THE
L.A. GEAR, INC.
EMPLOYEE STOCK SAVINGS PLAN AND TRUST
WHEREAS, L.A. Gear, Inc. (the "Company") approved and adopted the L.A.
Gear, Inc. Employee Stock Savings Plan (the "Plan") and Trust Agreement (the
"Trust") which were originally effective December 1, 1985 and most recently
restated effective August 1, 1993;
WHEREAS, Section 19.1 of the Plan and Trust provides that the Company
reserves the right to amend the Plan and Trust;
NOW THEREFORE RESOLVED, that Sections 1, 3, 4, 7, 8, 9, 10, 11, 12,
17, 18 and 19 are amended effective August 1, 1993 and Section 2 is amended
effective February 1, 1995 as follows:
Effective August 1, 1993:
1. Section 1 is amended to restate Subsection 1.11 in its entirety, to
add new Subsections 1.14, 1.16, 1.19, 1.20 and 1.24, to restate
Subsections 1.25, 1.36, 1.37, 1.47, 1.50 and 1.52 (formerly
Subsections 1.20, 1.31, 1.32, 1.42, 1.45 and 1.47) each in its
entirety, and to redesignate each affected Subsections as follows:
1.11 "Compensation". The sum of a Participant's Taxable Income and
salary reductions, if any, pursuant to Code sections 125,
402(e)(3), 402(h), 403(b), 414(h)(2) or 457, but excluding
reimbursements or other expense allowances, cash and non-cash
fringe benefits, moving expenses, deferred compensation and
welfare benefits.
For purposes of determining benefits under this Plan,
Compensation is limited to $200,000 (as indexed for the cost
of living pursuant to Code sections 401(a)(17) and 415(d)) per
Plan Year. For purposes of determining benefits under this
Plan for Plan Years beginning after December 31, 1993,
Compensation is limited to $150,000 (as indexed for the cost
of living pursuant to Code sections 401(a)(17) and 415(d)) per
Plan Year. For purposes of the preceding sentences, in the
case of an HCE who is a 5% Owner or one of the 10 most highly
compensated Employees, (i) such HCE and such HCE's family
group (as defined below) shall be treated as a single employee
and the Compensation of each family group member shall be
aggregated with the Compensation of such HCE, and (ii) the
limitation on Compensation shall be allocated among such HCE
and his or her family group members in proportion to each
individual's Compensation before the application of this
sentence. For purposes of this Section, the term "family
group" shall mean an Employee's spouse and lineal descendants
who have not attained age 19 before the close of the year in
question.
For the purpose of determining HCEs and key employees,
Compensation for the entire Plan Year shall be used. For the
purpose of determining ADP and ACP, Compensation shall be
limited to amounts paid to an Eligible Employee while a
Participant.
1
<PAGE> 2
L.A. GEAR, INC. AMENDMENT NO. 1
EMPLOYEE STOCK SAVINGS PLAN AND TRUST
1.14 "Direct Rollover". A payment from the Plan to an Eligible
Retirement Plan specified by a Distributee.
1.16 "Distributee". An Employee or former Employee, the surviving
spouse of an Employee or former Employee and a spouse or
former spouse of an Employee or former Employee determined to
be an alternate payee under a QDRO.
1.19 "Eligible Retirement Plan". An individual retirement account
described in Code section 408(a), an individual retirement
annuity described in Code section 408(b), an annuity plan
described in Code section 403(a), or a qualified trust
described in Code section 401(a), that accepts a Distributee's
Eligible Rollover Distribution, except that with regard to an
Eligible Rollover Distribution to a surviving spouse, an
Eligible Retirement Plan is an individual retirement account
or individual retirement annuity.
1.20 "Eligible Rollover Distribution". A distribution of all or
any portion of the balance to the credit of a Distributee,
excluding a distribution that is one of a series of
substantially equal periodic payments (not less frequently
than annually) made for the life (or life expectancy) of a
Distributee or the joint lives (or joint life expectancies) of
a Distributee and the Distributee's designated Beneficiary, or
for a specified period of ten years or more; a distribution to
the extent such distribution is required under Code section
401(a)(9); and the portion of a distribution that is not
includible in gross income (determined without regard to the
exclusion for net unrealized appreciation with respect to
Employer securities).
1.24 "Expatriate Employee". A full-time Employee of an Employer
relocated to an international assignment at a location other
than his or her Home country.
1.25 "Forfeiture Account". An account holding amounts forfeited by
Participants who have left the Employer, invested in interest
bearing deposits of the Trustee, pending disposition as
provided in this Plan and Trust and as directed by the
Administrator.
1.36 "Participant". An Eligible Employee who begins to participate
in the Plan after completing the eligibility requirements as
described in Section 2.1. An Eligible Employee who makes a
Rollover Contribution prior to completing the eligibility
requirements as described in Section 2.1 shall also be
considered a Participant except for purposes of provisions
related to Contributions (other than a Rollover Contribution).
A Participant's participation continues until his or her
employment with all Related Companies ends and his or her
Account is distributed or forfeited.
1.37 "Pay". All cash compensation paid to an Eligible Employee by
an Employer while a Participant during the current period,
except that with regard to an Expatriate Employee base pay
shall be substituted for the preceding reference
2
<PAGE> 3
L.A. GEAR, INC. AMENDMENT NO. 1
EMPLOYEE STOCK SAVINGS PLAN AND TRUST
to all cash compensation. Pay excludes reimbursements or
other expense allowances, cash and non-cash fringe benefits,
moving expenses, deferred compensation and welfare benefits.
Pay is neither increased nor decreased by any salary credit or
reduction pursuant to Code sections 125 or 402(e)(3). Pay is
limited to $200,000 (as indexed for the cost of living
pursuant to Code sections 401(a)(17) and 415(d)) per Plan
Year. Pay is limited to $150,000 (as indexed for the cost of
living pursuant to Code sections 401(a)(17) and 415(d)) per
Plan Year effective for Plan Years beginning after December
31, 1993.
For purposes of the Contributions described in Section 5.2,
the limitations as described in the second paragraph of
Section 1.11 shall also apply.
1.47 "Taxable Income". Compensation in the amount reported by the
Employer as "Wages, tips, other compensation" on Form W-2, or
any successor method of reporting under Code section 6041(d).
1.50 "Trust". The legal entity created by those provisions of this
document which relate to the Trustee. The Trust is part of
the Plan and holds the Plan assets which are comprised of the
aggregate of Participants' Accounts, any unallocated funds
invested in deposit or money market type assets pending
allocation to Participants' Accounts or disbursement to pay
Plan fees and expenses and the Forfeiture Account.
1.52 "Year of Vesting Service". A 12 consecutive month period
ending on the last day of a Plan Year in which an Employee is
credited with at least 1,000 Hours of Service. An Employee
shall be credited with a Year of Vesting Service at such time
he or she is credited with 1,000 Hours of Service during such
12 consecutive month period.
2. Section 3 is amended to restate Subsections 3.1, 3.2, 3.6 and 3.7 each
in its entirety as follows:
3.1 Employee 401(k) Contribution Election
Upon becoming a Participant, an Eligible Employee may elect to
reduce his or her Pay by an amount which does not exceed the
Contribution Dollar Limit, within the limits described in the
Contribution Percentage Limits paragraph of this Section 3,
and have such amount contributed to the Plan by the Employer
as an Employee 401(k) Contribution. The election shall be
made as a whole percentage of Pay in such manner and with such
advance notice as prescribed by the Administrator. In no
event shall an Employee's Employee 401(k) Contributions under
the Plan and all other plans, contracts or arrangements of all
Related Companies exceed the Contribution Dollar Limit for the
Employee's taxable year beginning in the Plan Year.
3
<PAGE> 4
L.A. GEAR, INC. AMENDMENT NO. 1
EMPLOYEE STOCK SAVINGS PLAN AND TRUST
3.2 After-Tax Contribution Election
Upon becoming a Participant, an Eligible Employee may elect to
make After-Tax Contributions to the Plan in an amount which
does not exceed the limits described in the Contribution
Percentage Limits paragraph of this Section 3. The election
shall be made as a whole percentage of Pay in such manner and
with such advance notice as prescribed by the Administrator.
3.6 Refunds When Contribution Dollar Limit Exceeded
A Participant who makes Employee 401(k) Contributions for a
calendar year to this and any other qualified defined
contribution plan in excess of the Contribution Dollar Limit
may notify the Administrator in writing by the following March
1 (or as late as April 14 if allowed by the Administrator)
that an excess has occurred. In this event, the amount of the
excess specified by the Participant, adjusted for investment
gain or loss, shall be refunded to him or her by April 15 and
shall not be included as an Annual Addition under Code section
415 for the year contributed. Refunds shall not include
investment gain or loss for the period between the end of the
applicable Plan Year and the date of distribution. However,
for Plan Years ending before December 31, 1993, refunds shall
include investment gain or loss for the period between the end
of the applicable Plan Year and the date of distribution.
3.7 Timing, Posting and Tax Considerations
Participants' Contributions, other than Rollover
Contributions, may only be made through payroll deduction.
Such amounts shall be paid to the Trustee in cash and posted
to each Participant's Account(s) as soon as such amounts can
reasonably be separated from the Employer's general assets and
balanced against the specific amount made on behalf of each
Participant. In no event, however, shall such amounts be paid
to the Trustee more than 90 days after the date amounts are
deducted from a Participant's Pay. Employee 401(k)
Contributions shall be treated as employer contributions in
determining tax deductions under Code section 404(a).
3. Section 4 is amended to restate the first paragraph of Subsection 4.1
in its entirety as follows:
4.1 Rollover
The Administrator may authorize the Trustee to accept a
rollover contribution in cash, within the meaning of Code
section 402(c) or 408(d)(3)(A)(ii), directly from an Eligible
Employee or as a Direct Rollover from another qualified plan
on behalf of the Eligible Employee, even if he or she is not
yet a Participant. The Employee shall be responsible for
furnishing satisfactory evidence, in such manner as prescribed
by the Administrator, that the amount is eligible for
4
<PAGE> 5
L.A. GEAR, INC. AMENDMENT NO. 1
EMPLOYEE STOCK SAVINGS PLAN AND TRUST
rollover treatment. A rollover contribution received directly
from an Eligible Employee must be paid to the Trustee in cash
within 60 days after the date received by the Eligible
Employee from a qualified plan or conduit individual
retirement account. Contributions described in this paragraph
shall be posted to the applicable Employee's Rollover Account
as of the date received by the Trustee.
4. Section 7 is amended to restate Subsection 7.2 and 7.6 each in its
entirety as follows:
7.2 Investment Fund Elections
Each Participant (or Beneficiary) shall direct the investment
of all of his or her Contribution Accounts except for these
Accounts:
Employer Matching Account
ESOP Account
which shall be entirely invested in the Investment Fund
specified by the Administrator, which Investment Fund as of
the Effective Date is set forth in Appendix A. However, a
Participant who has attained age 55 may direct the investment
of the balances in his or her Employer Matching and ESOP
Accounts. Future amounts allocated to his or her Employer
Matching and ESOP Accounts will continue to be entirely
invested in the Investment Fund specified by the
Administrator, until otherwise directed by the Participant.
A Participant (or Beneficiary) shall make his or her
investment election in any combination of one or any number of
the Investment Funds offered in accordance with the procedures
established by the Administrator and Trustee.
7.6 Switching Fees
A reasonable processing fee may be charged directly to a
Participant's Account for investment election changes in
excess of a specified number per Plan Year as determined by
the Administrator. See Appendix B for the processing fee and
specified number as of the Effective Date.
5. Section 8 is amended to restate Subsection 8.4 in its entirety as
follows:
8.4 Forfeitures
A Participant's non-vested Account balance shall be forfeited
as of the Settlement Date following the Sweep Date on which
the Administrator has reported to the Trustee that the
Participant's employment has terminated with all Related
Companies. Forfeitures from all Employer Contribution
Accounts shall be transferred to and maintained in a single
Forfeiture Account, which shall be invested in interest
bearing deposits of the Trustee. Forfeiture Account
5
<PAGE> 6
L.A. GEAR, INC. AMENDMENT NO. 1
EMPLOYEE STOCK SAVINGS PLAN AND TRUST
amounts shall be utilized to restore Accounts, to pay Plan fees
and expenses and to reduce Employer Matching Contributions as
directed by the Administrator.
6. Section 9 is amended to restate Subsection 9.8 in its entirety as
follows:
9.8 Loan Application, Approval, Note and Security
A Participant shall apply for any loan in such manner and with
such advance notice as prescribed by the Administrator. The
Administrator, or the Trustee if otherwise authorized by the
Administrator and agreed to by the Trustee, is responsible for
determining that a loan request conforms to the requirements
described in this Section and granting such request.
All loans shall be evidenced by a promissory note, secured
only by the portion of the Participant's Account from which
the loan is made, and the Plan shall have a lien on this
portion of his or her Account.
7. Section 10 is amended to restate the first four lines of Subsection
10.1(d) and to restate Subsections 10.5 (b), (c) and (e) each in its
entirety and to delete Subsection 10.5 (g) as follows:
10.1 Withdrawals for Hardship
(d) "Demonstrated as Necessary". The Employee's signed
written representation to the Administrator that he
or she is unable to relieve the financial need
(without causing further hardship) through reasonable
efforts to do all of the following:
10.5 Withdrawal Processing
(b) Application and Notice. A Participant shall apply for
any type of withdrawal in such manner and with such
advance notice as prescribed by the Administrator. The
Participant shall be provided the notice prescribed by
Code section 402(f).
If an in-service withdrawal is one to which Code
sections 401(a)(11) and 417 do not apply, such
in-service withdrawal may commence less than 30 days
after the aforementioned notice is provided, if:
(1) the Participant is clearly informed that he
or she has the right to a period of at least
30 days after receipt of such notice to
consider his or her option to elect or not
elect a Direct Rollover for the portion, if
any, of his or her in-service withdrawal
which will constitute an Eligible Rollover
Distribution; and
6
<PAGE> 7
L.A. GEAR, INC. AMENDMENT NO. 1
EMPLOYEE STOCK SAVINGS PLAN AND TRUST
(2) the Participant after receiving such notice,
affirmatively elects a Direct Rollover for
the portion, if any, of his or her in-service
withdrawal which will constitute an Eligible
Rollover Distribution or alternatively elects
to have such portion made payable directly to
him or her, thereby not electing a Direct
Rollover.
(c) Approval. The Administrator, or the Trustee if
otherwise authorized by the Administrator and agreed
to by the Trustee, is responsible for determining
that a withdrawal request conforms to the
requirements described in this Section and granting
such request.
(e) Medium and Form of Payment. With regard to the
portion of a withdrawal representing an Eligible
Rollover Distribution, a Participant may elect a
Direct Rollover. The form of payment for an
in-service withdrawal shall be a single lump sum and
payment shall be made in cash.
(g) In-Service Withdrawals After December 31, 1992.
[DELETED ENTIRE SUBSECTION]
8. Section 11 is amended to restate the Heading thereof, to restate in
its entirety Subsections 11.1, 11.2 and 11.3, to delete Subsection
11.4 and to redesignate all subsequent Subsections as follows:
11 DISTRIBUTIONS ONCE EMPLOYMENT ENDS OR AS REQUIRED BY LAW
11.1 Benefit Information, Notices and Election
A Participant, or his or her Beneficiary in the case
of his or her death, shall be provided with
information regarding all optional times and forms of
distribution available, to include the notices
prescribed by Code section 402(f) and Code section
411(a)(11). Subject to the other requirements of
this Section, a Participant, or his or her
Beneficiary in the case of his or her death, may
elect, in such manner and with such advance notice as
prescribed by the Administrator, to have his or her
vested Account balance paid to him or her beginning
upon any Settlement Date following the Participant's
termination of employment with all Related Companies
or, if earlier, at the time required by law as set
forth in Section 11.5.
If a distribution is one to which Code sections
401(a)(11) and 417 do not apply, such distribution
may commence less than 30 days after the
aforementioned notices are provided, if:
(a) the Participant is clearly informed that he
or she has the right to a period of at least
30 days after receipt of such notices to
consider the decision as to whether to elect
a distribution and if
7
<PAGE> 8
L.A. GEAR, INC. AMENDMENT NO. 1
EMPLOYEE STOCK SAVINGS PLAN AND TRUST
so to elect a particular form of distribution
and to elect or not elect a Direct Rollover
for all or a portion, if any, of his or her
distribution which will constitute an
Eligible Rollover Distribution; and
(b) the Participant after receiving such notice,
affirmatively elects a distribution and a
Direct Rollover for all or a portion, if any,
of his or her distribution which will
constitute an Eligible Rollover Distribution
or alternatively elects to have all or a
portion made payable directly to him or her,
thereby not electing a Direct Rollover for
all or a portion thereof.
11.2 Payment Form and Medium
A Participant may elect to be paid in any of these
forms:
(a) a single lump sum,
(b) a portion paid in a lump sum, and the
remainder paid later, or
(c) periodic installments over a period not to
exceed the life expectancy of the Participant
and his or her Beneficiary.
Distributions shall generally be made in cash.
Alternatively, a lump sum payment may be made in a
combination of cash and whole shares of Company Stock
(to the extent invested in the Company Stock Fund).
With regard to the portion of a distribution
representing an Eligible Rollover Distribution, a
Distributee may elect a Direct Rollover for all or a
portion of such amount.
11.3 Distribution of Small Amounts
If, at the time a Participant's employment with all
Related Companies ends, the Participant's vested
Account balance is $3,500 or less, the Participant's
benefit may be paid as a single lump sum, without his
or her consent, after his or her employment with all
Related Companies ends in accordance with procedures
prescribed by the Administrator.
11.4 Distribution After December 31, 1992. [DELETED
ENTIRE SUBSECTION]
9. Section 12 is amended to restate Subsection 12.1 (e) in its entirety,
to delete Subsection 12.1 (j)(4), to restate Subsections 12.5 and 12.7
each in its entirety as follows:
8
<PAGE> 9
L.A. GEAR, INC. AMENDMENT NO. 1
EMPLOYEE STOCK SAVINGS PLAN AND TRUST
12.1 Contribution Limitation Definitions
(e) "Average Percentage". The average of the calculated
percentages for Participants within the specified
group. The calculated percentage refers to either
the "Deferrals" or "Contributions" (as defined in
this Section) made on each Participant's behalf for
the Plan Year, divided by his or her Compensation for
the portion of the Plan Year in which he or she was
an Eligible Employee while a Participant. (Employee
401(k) Contributions which will be refunded solely
because they exceed the Contribution Dollar Limit are
included in the percentage for the HCE Group but not
for the NHCE Group if such excess Employee 401(k)
Contributions were made to plans of Related
Companies.)
(j) (4) Employees who are eligible..... [DELETED
ENTIRE SUBSECTION]
12.5 Adjustment for Investment Gain or Loss
Any excess Deferrals or Contributions to be refunded to a
Participant or forfeited in accordance with Section 12.3 or
12.4 shall be adjusted for investment gain or loss. Refunds
or forfeitures shall not include investment gain or loss for
the period between the end of the applicable Plan Year and the
date of distribution. However, for Plan Years ending before
December 31, 1993, refunds or forfeitures shall include
investment gain or loss for the period between the end of the
applicable Plan Year and the date of distribution.
12.7 Separate Testing
(a) Multiple Employers: The determination of HCEs,
NHCEs, and the performance of the testing and any
corrective action resulting therefrom shall be made
separately with regard to the Employees of each
Employer (and its Related Companies) that is not a
Related Company with the other Employer(s).
(b) Collective Bargaining Units: The performance of the
ADP Test, and if applicable, the ACP Test and
Multiple Use Test, and any corrective action
resulting therefrom shall be applied separately to
Employees who are eligible to participate in the Plan
as a result of a collective bargaining agreement.
In addition, separate testing may be applied, at the discretion
of the Administrator and to the extent permitted under Treasury
regulations, to any group of Employees for whom separate
testing is permissible.
10. Section 17 is amended to restate Subsection 17.4 (a) in its entirety
and to restate the last sentence of Subsection 17.5 in its entirety as
follows:
9
<PAGE> 10
L.A. GEAR, INC. AMENDMENT NO. 1
EMPLOYEE STOCK SAVINGS PLAN AND TRUST
17.4 Tax Withholding and Payment
(a) Withholding. The Trustee shall calculate and
withhold federal (and, if applicable, state) income
taxes with regard to any Eligible Rollover
Distribution that is not paid as a Direct Rollover in
accordance with the Participant's withholding
election or as required by law if no election is made
or the election is less than the amount required by
law. With regard to any taxable distribution that is
not an Eligible Rollover Distribution, the Trustee
shall calculate and withhold federal (and, if
applicable, state) income taxes in accordance with
the Participant's withholding election or as required
by law if no election is made.
17.5 Trustee Duties and Limitations
The Trustee shall not be liable for the proper application of
any part of the Trust with respect to any disbursement made at
the direction of the Administrator.
11. Section 18 is amended to restate Subsection 18.5 in its entirety as
follows:
18.5 Reallocation of Lost Participant's Accounts
If the Administrator cannot locate a person entitled to
payment of a Plan benefit after a reasonable search, the
Administrator may at any time thereafter treat such person's
Account as forfeited and use such amount to offset any
Employer Contributions or as otherwise provided in Section 8.
If such person subsequently presents the Administrator with a
valid claim for the benefit, such person shall be paid the
amount treated as forfeited, plus the interest that would have
been earned in the Sweep Account to the date of determination.
The Administrator shall pay the amount through an additional
Employer Contribution or direct the Trustee to pay the amount
from the Forfeiture Account.
12. Section 19 is amended to restate the first paragraph and (a) of
Subsection 19.1, to restate Subsection 19.3 in its entirety, to add a
new Subsection 19.4, to redesignate each subsequent Subsection, and to
restate in its entirety Subsection 19.5 (formerly Subsection 19.4) as
follows:
19.1 Amendment
The Company reserves the right to amend this Plan and Trust at
any time, to any extent and in any manner it may deem
necessary or appropriate. The Company (and not the Trustee)
shall be responsible for adopting any amendments necessary to
maintain the qualified status of this Plan and Trust under
Code sections 401(a) and 501(a). If the Committee is acting
as the Administrator in accordance with Section 15.6, it shall
have the authority to
10
<PAGE> 11
L.A. GEAR, INC. AMENDMENT NO. 1
EMPLOYEE STOCK SAVINGS PLAN AND TRUST
adopt Plan and Trust amendments which have no substantial
adverse financial impact upon any Employer or the Plan. All
interested parties shall be bound by any amendment, provided
that no amendment shall:
(a) become effective unless it has been adopted in
accordance with the procedures set forth in Section
19.4;
19.3 Plan Termination
The Company may, at any time and for any reason, terminate the
Plan in accordance with the procedures set forth in Section
19.4, or completely discontinue contributions. Upon either of
these events, or in the event of a partial termination of the
Plan within the meaning of Code section 411(d)(3), the Accounts
of each affected Employee who has not yet incurred a Break in
Service shall be fully vested. Complete distributions or
withdrawals will be made in accordance with the terms of the
Plan as in effect at the time of the Plan's termination or as
thereafter amended provided that a post-termination amendment
will not be effective to the extent that it violates Section
19.1 unless it is required in order to maintain the qualified
status of the Plan upon its termination. The Trustee's and
Employer's authority shall continue beyond the Plan's
termination date until all Trust assets have been liquidated
and distributed.
The Employers hereby agree to indemnify the Trustee against any
and all liabilities resulting from the termination of the Plan
or Trust (1) including (without limitation) any expenses
reasonably attributable to the Company's failure to apply for a
favorable determination from the Internal Revenue Service with
respect to the qualification of the Plan upon its termination,
any other expenses reasonably incurred in the defense of any
claim relating to this Plan's termination, and amounts paid in
any settlement relating to any such liability, but (2)
excluding liability resulting from actions or inactions made in
bad faith, or resulting from the gross negligence or willful
misconduct of the Trustee.
19.4 Amendment and Termination Procedures
The following procedural requirements shall govern the
adoption of any amendment or termination (a "Change") of this
Plan and Trust:
(a) The Company may adopt any Change by action of its
board of directors in accordance with its normal
procedures.
(b) The Committee, if acting as Administrator in
accordance with Section 15.6, may adopt any amendment
within the scope of its authority provided under
Section 19.1 and in the manner specified in Section
15.7(a).
(c) Any Change must be set forth in writing.
11
<PAGE> 12
L.A. GEAR, INC. AMENDMENT NO. 1
EMPLOYEE STOCK SAVINGS PLAN AND TRUST
(d) If the effective date of any Change is not specified
in the document setting forth the Change, it shall be
effective as of the date it is signed by the Company's
board of directors or its designee, except to the
extent that another effective date is necessary to
maintain the qualified status of this Plan and Trust
under Code sections 401(a) and 501(a).
(e) No Change shall become effective until it is accepted
and signed by the Trustee (which acceptance shall not
unreasonably be withheld).
19.5 Termination of Employer's Participation
Any Employer may, at any time and for any reason, terminate
its Plan participation by action of its board of directors in
accordance with its normal procedures. Written notice of such
action shall be signed and dated by an executive officer of
the Employer and delivered to the Company. If the effective
date of such action is not specified, it shall be effective
on, or as soon as reasonably practicable, after the date of
delivery. Upon the Employer's request, the Company may
instruct the Trustee and Administrator to spin off all
affected Accounts and underlying assets into a separate
qualified plan under which the Employer shall assume the
powers and duties of the Company. Alternatively, the Company
may treat the event as a partial termination described above
or continue to maintain the Accounts under the Plan.
Effective February 1, 1995:
1. Section 2 is amended to restate Subsection 2.1 in its entirety as
follows:
2.1 Eligibility
All Participants as of February 1, 1995 shall continue their
eligibility to participate. Each other Eligible Employee
shall become a Participant on February 1, 1995 or thereafter
on the first day of the next payroll period after the date he
or she attains age 21 and completes a 30 day eligibility
period in which he or she is credited with at least 83 Hours
of Service. The initial eligibility period begins on the date
an Employee first performs an Hour of Service. Subsequent
eligibility periods begin with the start of each month
beginning after the first Hour of Service is performed.
Date: December 29, 1994 L.A. GEAR, INC.
By: /s/ Tracey C. Doi
------------------------------------
Title: Vice President and Controller
12
<PAGE> 13
L.A. GEAR, INC. AMENDMENT NO. 1
EMPLOYEE STOCK SAVINGS PLAN AND TRUST
The provisions of the above amendment which relate to the Trustee are hereby
approved and executed.
Date: January 9, 1995 WELLS FARGO BANK, NATIONAL ASSOCIATION
By: /s/ Delores Upton
-----------------------------------
Title: Vice President
Date: January 9, 1995 WELLS FARGO BANK, NATIONAL ASSOCIATION
By: /s/ Gwyn E. Slack
-----------------------------------
Title: Vice President
13
<PAGE> 1
EXHIBIT 13.1
FINANCIAL REVIEW
MANAGEMENT'S DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS 14
REPORT OF INDEPENDENT ACCOUNTANTS 19
CONSOLIDATED BALANCE SHEETS 20
CONSOLIDATED STATEMENTS OF OPERATIONS 21
CONSOLIDATED STATEMENTS OF
SHAREHOLDERS' EQUITY 22
CONSOLIDATED STATEMENTS OF CASH FLOWS 23
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 24
13
<PAGE> 2
L.A. GEAR, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
All references to years are to the fiscal years ended November 30, 1994, 1993
and 1992 as applicable.
1994 COMPARED TO 1993
Net Sales The number of pairs sold worldwide increased by 9.9% to 22.9 million
pairs in 1994 from 20.9 million pairs in 1993. However, the Company's net sales
increased by only 4.4% to $416.0 million from $398.4 million in the prior year
due to a reduction in the average selling prices. Domestic net sales increased
3.9% from the prior year. International net sales, which accounted for
approximately 28.5% of the Company's total net sales, increased by 5.7% from the
previous year.
The increase in net sales was primarily attributable to strong sales of
children's products which experienced a 36.7% increase in the number of pairs
sold worldwide and sales of $39.6 million to Wal-Mart during 1994, partially
offset by a 17.8% reduction in the number of pairs of women's shoes and a
decline in average selling prices. The sales to Wal-Mart consisted of $18.7
million (1.2 million pairs) of selected excess inventory during the first
quarter and $20.9 million (1.3 million pairs) of full priced product in the
fourth quarter, the initial shipment under a multi-year agreement. See Outlook
for Fiscal 1995.
In fiscal 1994, the average selling price per pair domestically and
internationally decreased from fiscal 1993 by $0.88 and $1.12 to $17.98 and
$17.71, respectively. These decreases were primarily due to sales of excess
inventory at reduced prices worldwide and the Company's strategy to provide
value priced products.
Sales of the Company's children's shoes increased from the prior year as a
result of continued customer demand for the Company's L.A. LIGHTS(TM) and Light
GEAR(TM), one of the most successful shoe collections in the Company's history.
The Company sold approximately 8.1 million pairs of children's lighted shoes
during 1994. Sales of children's lighted shoes accounted for 74.2% and 62.3% of
total children's net sales during 1994 and 1993, respectively. Internationally,
sales of children's shoes increased by 63.7% from the prior year primarily due
to increased demand for children's lighted products.
Sales of the Company's women's shoes decreased by $28.7 million or 24.4% from
the prior year primarily due to a drop in the number of pairs sold worldwide
resulting from reduced customer demand, and, to a lesser extent, to a decrease
in the average selling price per pair.
The following table sets forth certain information regarding the Company's
net sales:
<TABLE>
<CAPTION>
NET SALES
-------------------------------------------
1994 1993
------------------- ---------------
$ % $ %
- ---------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
(dollars in thousands)
Domestic Footwear
Children's $165,460 40% $128,458 32%
Women's 63,218 15 82,771 21
Men's 67,186 16 73,132 18
Other 1,721 1 1,959 1
- ---------------------------------------------------------------------------------
Total Domestic Sales 297,585 72 286,320 72
International Footwear and Other 118,381 28 112,038 28
- ---------------------------------------------------------------------------------
Total Net Sales $415,966 100% $398,358 100%
=================================================================================
</TABLE>
The following table sets forth the percentage changes, by Children's,
Women's and Men's categories, in the number of pairs sold during 1994 as
compared to 1993:
<TABLE>
<CAPTION>
CHANGES BETWEEN 1994 AND 1993
-----------------------------------------
VOLUME OF FOOTWEAR SOLD DOMESTIC INTERNATIONAL TOTAL
- -----------------------------------------------------------------------------
<S> <C> <C> <C>
Children's 30.4% 63.7% 36.7%
Women's (17.9)% (17.5)% (17.8)%
Men's 4.1% 0.6% 2.7%
- -----------------------------------------------------------------------------
Total volume increase 9.1% 11.9% 9.9%
</TABLE>
Gross Profit Gross profit increased to 29.7% for 1994 from 28.7% in 1993
primarily due to the improvement in the international gross margin to 30.0% from
25.6% in the prior year. Such improvement was principally due to (i) an increase
of $1.02 per pair in the children's average selling price, (ii) increased
refunds of U.S. import duties primarily arising from international shipments of
excess inventory from the Company's U.S. distribution center, and (iii) the
inclusion for a full year of the Company's foreign subsidiaries acquired or
formed in fiscal 1993 in Germany, Austria, Benelux, Italy and the United
Kingdom, together with the Far East joint venture, formed in December 1993. By
selling through the subsidiaries, the Company realizes a wholesale margin on the
sale to the retailer which is greater than that on the sales to independent
distributors.
The Company's gross margin on domestic sales decreased to 29.5% in 1994 from
29.9% in 1993 as a result of increased sales of excess inventory at lower
margins partially offset by a reduction in air freight costs.
14
<PAGE> 3
L.A. GEAR, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
Selling, General and Administrative Expenses Cost control and containment
efforts continued through 1994. Exclusive of non-recurring charges of (i) $2.5
million in 1994 for costs associated with the realignment of the Company's
senior management and (ii) $2.6 million in 1993 for costs associated with a
workforce reduction, total selling, general and administrative expenses
decreased by $3.4 million or 2.3% to $141.4 million during fiscal 1994 from
$144.8 million during 1993.
Domestic selling, general and administrative expenses (exclusive of
non-recurring charges) decreased by $11.1 million or 9.3% in 1994. This decrease
includes reductions in (i) compensation expenses of $5.8 million, (ii) bad debt
expense of $2.8 million, (iii) advertising and promotional expenses of $1.9
million and (iv) media costs of $1.6 million, partially offset by increases in
(i) legal fees of $1.9 million and (ii) product sourcing fees of $1.1 million.
International expenses increased by $7.3 million in 1994 primarily as a result
of additional operating costs of the Far East joint venture, the Company's
Mexican subsidiary (formed in June 1994) and the inclusion of the European
subsidiaries' expenses for a full year.
As a percentage of net sales, selling, general and administrative expenses
(exclusive of non-recurring charges) decreased to approximately 34% in 1994 from
approximately 36% in 1993. Changes in the Company's selling, general and
administrative expenses cannot be directly related to fluctuations in sales
volume as a substantial portion of 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, advertising and trade show expenses.
Litigation Settlements, Net Fiscal 1994 results include a net credit of $1.3
million representing settlement income primarily in connection with trademark
and patent infringement lawsuits partially offset by expenses relating to the
settlement of employment litigation and a dispute with a former distributor.
Fiscal 1993 results include a credit of $2.7 million relating to the partial
recovery of the fiscal 1992 charges for the settlement by the Company of three
separate consolidated shareholder class action lawsuits and related actions. See
1993 Compared to 1992 and Notes to Consolidated Financial Statements, Note 13 -
Litigation.
Interest Expense/Income Interest expense during 1994 of $4.4 million primarily
related to (i) interest costs on the $50 million, 73/4% convertible subordinated
debentures due 2002 (the "Debentures") issued in December 1992 and (ii)
short-term borrowings of the Company's foreign subsidiaries. Interest expense
increased by $0.5 million in fiscal 1994 compared to fiscal 1993 primarily due
to the inclusion of the foreign subsidiaries' operations for a full year in
1994.
Interest income decreased to $1.4 million in 1994 from $1.9 million in 1993
primarily as a result of lower average cash balances in fiscal 1994. See
Liquidity and Capital Resources.
1993 COMPARED TO 1992
Net Sales Starting in 1992, the Company refocused its distribution channels as
part of its strategy to improve relations with, and increase shelf space at,
full-margin retailers and to reduce deep-discount distribution. The continuation
of this realignment contributed to lower 1993 sales compared to 1992. For the
year ended November 30, 1993, net sales decreased 7.4% to $398.4 million from
$430.2 million in the prior year. Domestic net sales decreased 8.0% from the
prior year. International net sales, which accounted for approximately 28.1% of
the Company's total net sales in 1993, decreased 5.8% from the previous year.
Net sales in the second half of fiscal 1993 increased by 10% over those of the
previous year due, in part, to the inclusion of wholesale sales by the Company's
newly acquired foreign subsidiaries. See Gross Profit.
Net sales were adversely affected, particularly in the women's and men's
categories, by reduced customer demand for the Company's products and lower
price points in the footwear industry, as well as the continuing effects of the
worldwide recession. Furthermore, part of the higher 1992 sales was generated by
the Company's price discount and inventory reduction programs. These factors
primarily account for the drop in the number of pairs sold worldwide. During
1993, the Company sold 20.9 million pairs, a 13.6% decrease from 24.2 million
pairs sold in the prior year.
Although the total pairs sold declined, the average selling price per pair
for domestic and international sales increased by $0.69 and $2.99 to $18.86 and
$18.83, respectively, in 1993 as compared to the prior year. These increases
are primarily due to a greater percentage of 1993 sales consisting of in-line
products that commanded higher average selling prices and the impact in 1992 of
the Company's price discount and inventory reduction programs. Further, the
consolidation of the Company's new foreign subsidiaries, which charge wholesale
prices to their customers, contributed to the increase in the international
average selling price per pair. See Gross Profit.
Sales of the Company's children's shoes increased from the prior year
primarily as a result of customer demand for the Company's L.A.
LIGHTS(TM) and Light GEAR(TM) for children. The Company sold approximately 4.5
million pairs of children's lighted shoes during 1993.
15
<PAGE> 4
L.A. GEAR, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
The following table sets forth certain information regarding the Company's
net sales:
<TABLE>
<CAPTION>
NET SALES
----------------------------------------
1993 1992
---------------- ---------------
$ % $ %
- ---------------------------------------------------------------------------
<S> <C> <C> <C> <C>
(dollars in thousands)
Domestic Footwear
Children's $128,458 32% $ 90,997 21%
Women's 82,771 21 112,990 26
Men's 73,132 18 104,593 24
Other 1,959 1 2,688 1
- ---------------------------------------------------------------------------
Total Domestic Sales 286,320 72 311,268 72
International Footwear and Other 112,038 28 118,926 28
- ---------------------------------------------------------------------------
Total Net Sales $398,358 100% $430,194 100%
===========================================================================
</TABLE>
The following table sets forth the percentage changes, by Children's, Women's
and Men's categories, in the number of pairs sold during 1993 as compared to
1992:
<TABLE>
<CAPTION>
CHANGES BETWEEN 1993 AND 1992
--------------------------------------------
VOLUME OF FOOTWEAR SOLD DOMESTIC INTERNATIONAL TOTAL
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Children's 30.8% 29.9% 30.6%
Women's (26.7)% (28.1)% (27.2)%
Men's (36.4)% (32.9)% (35.1)%
- --------------------------------------------------------------------------------
Total volume decrease (11.2)% (19.9)% (13.6)%
</TABLE>
Gross Profit The Company believes its efforts to improve distribution channels
and to increase support of retail customers is reflected in an increase in the
gross profit margin from 25.3% in 1992 to 28.7% for 1993. Improved margins
resulted from the combination of (i) a greater percentage of sales of in-line
styles with higher average selling prices per pair and (ii) lower 1992 margins
reflecting the impact of the Company's 1992 inventory reduction and discount
pricing programs, and higher air freight charges.
The margin improvement was achieved even though the Company implemented a
promotional pricing program during the first half of 1993 to encourage "at once"
orders for the 1993 Spring season. This pricing program was necessary to
minimize the adverse effect on the Spring "futures" program created by delays in
delivery of footwear samples.
The Company's gross margin on international sales for 1993 increased to 25.6%
from 17.7% in the prior year primarily due to the inclusion of the sales of the
Company's newly acquired foreign subsidiaries. During 1993, the Company began
implementing its new international business strategy through the acquisition of
previously independent distributors in the Netherlands, Luxembourg, Belgium,
Germany, Austria, and the United Kingdom and the formation of a new wholly owned
distribution subsidiary in Italy. In the prior year, products were sold
primarily to distributors at a stated margin over the Company's factory purchase
price and the Company exercised little or no control over the pricing of the
products for resale by the distributor.
Selling, General and Administrative Expenses Cost control and containment
programs continued through 1993. Exclusive of restructuring charges of (i) $2.6
million in 1993 for costs associated with a workforce reduction and (ii) $12.5
million in 1992 primarily for expenses related to realignment and consolidation
efforts, total selling, general and administrative expenses decreased by $13.9
million or 8.7% to $144.8 million during fiscal year 1993 from $158.7 million
during 1992. This decrease includes reductions in (i) advertising and
promotional expenses of $6.7 million, (ii) media costs of $5.4 million and (iii)
compensation expenses of $4.2 million. A reduction in domestic selling, general
and administrative expenses of $28.4 million in 1993 was partially offset by
additional operating costs of the new European subsidiaries and increased
product sourcing and royalty fees.
As a percentage of net sales, selling, general and administrative expenses
(exclusive of restructuring charges) remained at approximately 36% in 1993.
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,
advertising and trade show expenses.
Litigation Settlements, Net Fiscal 1993 results include a credit of $2.7
million relating to the partial recovery of the fiscal 1992 charges for the
settlement by the Company of three separate consolidated shareholder class
action lawsuits and the related actions. See Notes to Consolidated Financial
Statements, Note 13 - Litigation.
Interest Expense/Income Interest expense during 1993 of $4.0 million primarily
related to (i) interest costs on the Debentures issued in December 1992 and (ii)
short-term borrowings of the Company's wholly owned foreign subsidiaries. During
1992, the Company incurred interest expense of $1.4 million related to the prior
revolving bank credit facility.
Interest income increased to $1.9 million for 1993 from $1.2 million in 1992
due to the investment of higher average daily cash balances. See Liquidity and
Capital Resources.
16
<PAGE> 5
L.A. GEAR, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
LIQUIDITY AND CAPITAL RESOURCES
The following table sets forth certain data with respect to the Company's
liquidity and capital resources:
<TABLE>
<CAPTION>
YEAR ENDED NOVEMBER 30,
--------------------------------
1994 1993 1992
- ---------------------------------------------------------------------------------------
<S> <C> <C> <C>
(in thousands, except interest rates)
Cash and cash equivalents $ 49,710 $ 27,790 $ 83,982(A)
Working capital 147,848 161,948 168,049
Cash provided by (used in) operating activities 28,369 (66,763) 91,455
Cash used in investing activities (4,448) (22,377) (4,881)
Cash (used in) provided by financing activities (1,016) 32,999 (4,014)
Outstanding letters of credit 36,699 33,553 28,832
Borrowings under international credit facilities 557 3,737 --
Convertible subordinated debentures 50,000 50,000 --
Mandatorily redeemable preferred stock 100,000 100,000 100,000
Weighted average interest rates on credit facilities 8.3% 9.0% 6.8%
</TABLE>
(A) Included collateralized cash of $29.0 million.
Cash and Cash Equivalents Cash and cash equivalent balances increased by $21.9
million from November 30, 1993 to a balance of $49.7 million at November 30,
1994 primarily due to improved inventory management offset by cash used to fund
operating losses.
Inventory Through sales of selected excess inventory during 1994, the Company
reduced inventory by approximately 3.9 million pairs ($52.2 million), or 41.9%,
to 5.4 million pairs ($57.6 million) at November 30, 1994. The decrease in
inventory was due primarily to improved inventory management throughout the year
and sales of $18.7 million (1.2 million pairs) of selected excess inventory to
Wal-Mart during the first quarter of 1994.
Accounts Receivable, Net Net accounts receivable at November 30, 1994
increased by $4.1 million from the prior year primarily due to the inclusion
of the Company's Mexico subsidiary and Far East joint venture in fiscal 1994.
Borrowing Facilities The Company has a three-year, $75.0 million revolving
line of credit with BankAmerica Business Credit, Inc. 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. Borrowings under
the Revolving Facility bear interest at a rate equal to, at the Company's
option, (i) Bank of America's publicly announced reference rate plus one or two
percent (depending on the outstanding principal balance of loans under the
Revolving Facility) or (ii) the LIBOR rate plus three or four percent (depending
on the outstanding principal balance of loans under the Revolving Facility).
There were no domestic cash borrowings under the Revolving Facility at November
30, 1994. The Company had average borrowings of $0.2 million under the Revolving
Facility during fiscal 1994. At November 30, 1994, approximately $35.9 mill ion
of letters of credit were outstanding and approximately $52.8 million was
available for borrowings under the Revolving Facility.
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
SUBLIMITS NOVEMBER 30, 1994
---------------------- ----------------------
TOTAL LETTERS CASH LETTERS
COUNTRY AVAILABLE BORROWINGS OF CREDIT BORROWINGS OF CREDIT
- -------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
(in millions)
Germany $8.0 $4.0 $4.0 $0.6 $0.6
Netherlands $4.6 -- -- -- $0.1
</TABLE>
The weighted average interest rates for fiscal 1994, as defined in the
respective credit facility agreements and adjusted for current market
conditions, for Germany and the Netherlands were 8.7% and 7.3%, respectively.
Convertible Debentures The Debentures are convertible into shares of the
Company's Common Stock at a conversion rate of $12.30 per share subject to
certain anti-dilution adjustments, and are redeemable by the Company at any time
on or after November 30, 1995, initially at a specified premium to par,
declining to par for redemptions on or after November 30, 2000. The proceeds
from the Debentures were primarily used for the implementation of the Company's
international expansion program.
Series A Cumulative Convertible Preferred Stock As long as shares of Series A
Cumulative Convertible 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.
Investment Policies The Company's cash investment policy allows the investment
of available cash in accordance with certain quality, maturity and
diversification parameters. The basic
17
<PAGE> 6
L.A. GEAR, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
objectives of this policy are: (i) safety and preservation of capital; (ii)
liquidity of investments sufficient to meet cash flow requirements; and (iii)
attainment of an optimal market rate of return on invested funds consistent with
the stated objectives.
Business Combinations In December 1993 the Company formed a joint venture with
Inchcape Pacific Limited ("Inchcape"), a subsidiary of Inchcape plc, to market
and sell L.A. Gear branded products in selected Far East markets. The Company
contributed the rights to distribute L.A. Gear branded products and Inchcape
contributed $9.9 million in cash. In June 1994, the Company acquired certain
assets of the Company's exclusive distributor (and one of its affiliates) in
Mexico for $2.0 million. The purchase price was settled by reducing the balance
on outstanding amounts owed by the distributor to the Company.
Capital Expenditures Capital expenditures of $4.0 million in 1994 included
$1.1 million for leasehold improvements and equipment for the domestic
distribution center and corporate headquarters; $1.1 million in leasehold
improvements and equipment purchases for the international subsidiaries and
joint venture; and $0.9 million for leasehold improvements and computer
equipment for the recently opened retail outlet stores.
Income Taxes At November 30, 1994, the Company had a federal tax net operating
loss ("NOL") carryforward of approximately $32.5 million which will, if unused,
expire in varying amounts in fiscal years 2007 through 2009. The Company also
has a federal alternative minimum tax credit carryforward of approximately $3.2
million (available to offset future regular tax liabilities) which may be
carried forward indefinitely. California franchise tax NOL carryforwards of
approximately $81.8 million will, if unused, expire primarily in fiscal year
1998. In addition, the Company has other state and foreign NOL carryforwards
with varying limitations on future utilization.
Liquidity 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 funding may be necessary and difficult to obtain. The
Company may need to secure additional financing for future acquisitions which
may be difficult to obtain. See Outlook for Fiscal 1995.
OUTLOOK FOR FISCAL 1995
During the last three years, the Company's ongoing restructuring plan has
centered on disciplined expense management, improved product quality and
procurement and focused inventory management. In 1994 the Company recognized the
need to redirect its sales and marketing efforts in order to increase sales and
re-energize the L.A. Gear brand. In 1995 L.A. Gear will return to its heritage
as a women's athletic/lifestyle brand, seek to capitalize on the strength of the
children's business to build sales through styling and innovation in both
lighted and non-lighted product lines and streamline its L.A. Gear(R) and
FLAK(TM) men's product lines.
The Company's marketing and promotional efforts in 1995 will be directed
towards re-establishing the women's brand and capitalizing on the strength of
the children's business. A national television and print campaign will be
launched in the second quarter directed toward women. Children's television
commercials will air throughout the year. In addition, FLAK(TM) will be
supported by a grass roots marketing campaign utilizing print, outdoor and
radio advertising.
The Company is encouraged by the combined domestic and international order
backlog at December 31, 1994 of approximately $171 million, a 37% increase from
December 31, 1993. The backlog includes the minimum $80 million purchase
commitment under the Wal-Mart agreement for fiscal 1995. 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.
As part of a multi-year agreement, Wal-Mart will purchase a minimum of $240
million of L.A Gear branded footwear over the fiscal years 1995, 1996 and 1997
(subject to reduction in 1996 and 1997 if sell-through does not meet designated
targets). The agreement does not provide for the sale of FLAK(TM) or any L.A.
Gear lighted footwear products to Wal-Mart. 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 footwear distribution channels.
The Company believes that the industry is beginning a consolidation phase.
Accordingly, in 1995 the Company will seek to implement its "L.A. Brands"
strategy aimed at recognizing and capitalizing on opportunities to expand its
product lines and distribution channels through the acquisition of other
footwear brands and the licensing of key trade names. In January 1995 the
Company announced an agreement to acquire Ryka Inc., the first step in the
implementation of the "L.A. Brands" strategy. Ryka is a publicly held,
Massachusetts-based company which designs, develops and markets high-performance
athletic footwear specifically for women. The acquisition is subject to the
fulfillment of certain conditions (including approval by Ryka's shareholders)
and is scheduled to be completed in the summer of 1995.
18
<PAGE> 7
L.A. GEAR, INC. AND SUBSIDIARIES
REPORT OF INDEPENDENT ACCOUNTANTS
TO THE BOARD OF DIRECTORS AND SHAREHOLDERS OF L.A. GEAR, INC.
In our opinion, the accompanying consolidated balance sheets and the related
consolidated statements of operations, shareholders' equity and cash flows
present fairly, in all material respects, the financial position of L.A. Gear,
Inc. and its subsidiaries at November 30, 1994 and 1993, and the results of
their operations and their cash flows for each of the three years in the period
ended November 30, 1994, in conformity with generally accepted accounting
principles. These financial statements are the responsibility of the Company's
management; our responsibility is to express an opinion on these financial
statements based on our audits. We conducted our audits of these statements in
accordance with generally accepted auditing standards which require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and significant estimates
made by management, and evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for the opinion expressed
above.
/s/ Price Waterhouse LLP
Los Angeles, California
February 6, 1995
19
<PAGE> 8
L.A. GEAR, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
NOVEMBER 30,
----------------------
1994 1993
- -----------------------------------------------------------------------------------------
<S> <C> <C>
(in thousands, except share data)
ASSETS
Current assets:
Cash and cash equivalents $ 49,710 $ 27,790
Accounts receivable, net 77,284 73,217
Inventories 57,597 109,797
Prepaid expenses and other current assets 9,827 8,960
- -----------------------------------------------------------------------------------------
Total current assets 194,418 219,764
Property and equipment, net 11,951 15,739
Goodwill, net 12,317 11,001
Other assets 5,777 8,109
- -----------------------------------------------------------------------------------------
$224,463 $254,613
=========================================================================================
LIABILITIES, MANDATORILY REDEEMABLE PREFERRED
STOCK AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued liabilities $ 46,013 $ 54,079
Borrowings under international credit facilities 557 3,737
- -----------------------------------------------------------------------------------------
Total current liabilities 46,570 57,816
- -----------------------------------------------------------------------------------------
73/4% convertible subordinated debentures due 2002 50,000 50,000
- -----------------------------------------------------------------------------------------
Minority interest 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' equity:
Common stock, no par value; 80,000,000 shares
authorized; 22,936,433 shares issued and
outstanding at November 30, 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 194 (836)
Accumulated deficit (110,138) (80,443)
- -----------------------------------------------------------------------------------------
Total shareholders' equity 18,149 46,797
- -----------------------------------------------------------------------------------------
Commitments and contingencies -- --
- -----------------------------------------------------------------------------------------
$224,463 $254,613
=========================================================================================
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
20
<PAGE> 9
L.A. GEAR, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEAR ENDED NOVEMBER 30,
--------------------------------
1994 1993 1992
- -------------------------------------------------------------------------------
<S> <C> <C> <C>
(in thousands, except per share data)
Net sales $415,966 $398,358 $430,194
Cost of sales 292,629 284,133 321,174
- -------------------------------------------------------------------------------
Gross profit 123,337 114,225 109,020
Selling, general and administrative expenses 143,913 147,369 171,169
Litigation settlements, net (1,268) (2,700) 23,075
Interest expense 4,437 3,956 1,421
Interest income (1,444) (1,887) (1,159)
- -------------------------------------------------------------------------------
Loss before income taxes and
minority interest (22,301) (32,513) (85,486)
Income tax benefit -- -- (13,585)
Minority interest 106 -- --
- -------------------------------------------------------------------------------
Net loss (22,195) (32,513) (71,901)
Dividends on mandatorily redeemable
preferred stock (7,500) (7,667) (7,746)
- -------------------------------------------------------------------------------
Loss applicable to common stock $(29,695) $(40,180) $(79,647)
===============================================================================
Loss per common share $(1.29) $(1.75) $(3.76)
===============================================================================
Weighted average common shares outstanding 22,937 22,919 21,180
===============================================================================
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
21
<PAGE> 10
L.A. GEAR, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
YEARS ENDED NOVEMBER 30, 1994, 1993 AND 1992
---------------------------------------------------------------
CUMULATIVE RETAINED
COMMON STOCK CURRENCY EARNINGS
-------------------- TRANSLATION (ACCUMULATED
SHARES AMOUNT ADJUSTMENT DEFICIT) TOTAL
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
(in thousands)
BALANCE, NOVEMBER 30, 1991 19,542 $ 92,331 $ -- $ 39,384 $131,715
Exercise of stock options 527 1,986 -- -- 1,986
Issuance of shares to employee stock savings plan 22 233 -- -- 233
Tax benefit arising from the disposition/exercise of stock options -- 2,089 -- -- 2,089
Stock issuance - shareholder litigation settlements 1,563 17,075 -- -- 17,075
Stock issuance - Pentland 1,244 14,000 -- -- 14,000
Dividends on mandatorily redeemable preferred stock -- -- -- (7,746) (7,746)
Net loss -- -- -- (71,901) (71,901)
- -----------------------------------------------------------------------------------------------------------------------------------
BALANCE, NOVEMBER 30, 1992 22,898 127,714 -- (40,263) 87,451
Exercise of stock options 17 121 -- -- 121
Issuance of shares to employee stock savings plan 20 241 -- -- 241
Currency translation adjustment -- -- (836) -- (836)
Dividends on mandatorily redeemable preferred stock -- -- -- (7,667) (7,667)
Net loss -- -- -- (32,513) (32,513)
- -----------------------------------------------------------------------------------------------------------------------------------
BALANCE, NOVEMBER 30, 1993 22,935 128,076 (836) (80,443) 46,797
Exercise of stock options 2 17 -- -- 17
Currency translation adjustment -- -- 1,030 -- 1,030
Dividends on mandatorily redeemable preferred stock -- -- -- (7,500) (7,500)
Net loss -- -- -- (22,195) (22,195)
- -----------------------------------------------------------------------------------------------------------------------------------
BALANCE, NOVEMBER 30, 1994 22,937 $128,093 $194 $(110,138) $18,149
===================================================================================================================================
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
22
<PAGE> 11
L.A. GEAR, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED NOVEMBER 30,
---------------------------------
1994 1993 1992
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
(in thousands)
Operating activities:
Net loss $(22,195) $(32,513) $(71,901)
Adjustments to reconcile net loss to net cash provided by
(used in) operating activities:
Depreciation and amortization 8,818 8,644 7,107
Minority interest in net loss of joint venture (106) -- --
Loss on sale or abandonment of property and equipment 72 317 1,871
Issuance of shares to employee stock savings plan -- 241 233
Shareholder litigation settlements -- -- 17,075
(Increase) decrease, net of effects of acquisitions, in:
Accounts receivable, net (4,676) (7,622) 55,101
Inventories 53,587 (39,927) 79,192
Prepaid expenses and other current assets 58 (9,327) 6,343
Refundable income taxes -- 23,835 10,880
(Decrease), net of effects of acquisitions, in:
Accounts payable and accrued liabilities (6,180) (6,870) (6,103)
Costs related to discontinued operations (1,009) (3,541) (8,343)
- --------------------------------------------------------------------------------------------------------------------------
Net cash provided by (used in) operating activities 28,369 (66,763) 91,455
- --------------------------------------------------------------------------------------------------------------------------
Investing activities:
Capital expenditures (3,969) (5,307) (4,881)
Cash paid for acquisition of subsidiaries, net of cash acquired (479) (17,070) --
- --------------------------------------------------------------------------------------------------------------------------
Net cash used in investing activities (4,448) (22,377) (4,881)
- --------------------------------------------------------------------------------------------------------------------------
Financing activities:
Payment of dividends on mandatorily redeemable preferred stock (7,500) (15,413) --
Proceeds from minority's investment in joint venture 9,850 -- --
Exercise of stock options and warrants 17 121 1,986
Proceeds from issuance of common stock -- -- 14,000
Net proceeds from issuance of convertible subordinated debentures -- 47,689 --
Net repayments under domestic credit facilities -- -- (20,000)
Net (repayments) borrowings under international credit facilities (3,383) 602 --
- --------------------------------------------------------------------------------------------------------------------------
Net cash (used in) provided by financing activities (1,016) 32,999 (4,014)
- --------------------------------------------------------------------------------------------------------------------------
Effect of exchange rate changes on cash and cash equivalents (985) (51) --
- --------------------------------------------------------------------------------------------------------------------------
Net increase (decrease) in cash and cash equivalents 21,920 (56,192) 82,560
Cash and cash equivalents at beginning of year, including collateralized cash 27,790 83,982 1,422
- --------------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of year, including collateralized cash $ 49,710 $ 27,790 $ 83,982
==========================================================================================================================
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
23
<PAGE> 12
L.A. GEAR, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. Background and Organization
L.A. Gear, Inc., incorporated on February 7, 1979 in the State of California,
designs, develops and markets a broad range of quality athletic and lifestyle
footwear for adults and children.
NOTE 2. Summary of Significant Accounting Policies
Basis of Presentation The consolidated financial statements include the
accounts of L.A. Gear, Inc. and its subsidiaries (collectively referred to as
the "Company"). All significant intercompany balances and transactions have
been eliminated in consolidation.
Revenue Recognition Revenues are recognized when title passes based on the
terms of the sale. Sales are recorded net of returns, discounts and allowances.
Cash and Cash Equivalents Cash equivalents are all highly liquid, temporary
cash investments purchased with a maturity of three months or less.
Barter Transactions The Company records barter transactions based on the fair
value of nonmonetary assets, primarily inventory, surrendered. Fair market value
is presumed to be the asset's carrying value, adjusted for any impairment, so
that no gain is recognized on the barter transaction.
Inventories Inventories, substantially all of which consist of purchased
finished goods, are stated at the lower of first-in, first-out (FIFO) cost or
market.
Property and Equipment Property and equipment are recorded at cost and
include improvements that significantly add to the productive capacity or
extend the useful life of the asset. The costs of major remodeling and
improvements relating to leased facilities are capitalized as leasehold
improvements. Upon retirement or other disposal, the asset cost and related
accumulated depreciation are removed from the accounts and the net amount, less
any proceeds, is charged or credited to operations. Costs of maintenance and
repairs are expensed when incurred. Depreciation and amortization are computed
over the estimated useful lives of depreciable assets (three to seven years) on
the straight-line method. Leasehold improvements are amortized using the
straight-line method over the shorter of the remaining term of the applicable
lease or the life of the asset.
Goodwill The excess of the acquisition cost over the fair value of the net
assets of businesses acquired in purchase transactions has been included in
goodwill and is amortized, using the straight-line method, over fifteen years.
Foreign Currency Translation The U.S. dollar is the functional currency for
the Company's consolidated operations except for its foreign subsidiaries which
use the currency of their respective countries. Adjustments resulting from
translating foreign functional currency financial statements into U.S. dollars
are recorded in a separate component of shareholders' equity.
Forward Exchange Contracts The Company enters into forward exchange contracts,
generally with terms of less than one year, as a hedge against certain of its
foreign currency commitments, primarily repayments of U.S. dollar-denominated
liabilities by the Company's foreign subsidiaries. Gains and losses on these
contracts are deferred and recognized in the period in which the transactions
are completed.
Advertising and Promotional Expenditures The Company recognizes advertising
and promotional expenses as incurred, or, in the case of endorsement contracts,
on the straight-line amortization basis over the term of the contract.
Loss Per Common Share Loss per common share has been computed based on the
loss applicable to common stock divided by the weighted average number of
common shares outstanding during each period.
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.
Minority Interest In December 1993, a joint venture was formed with Inchcape
Pacific Limited ("Inchcape"), a wholly owned subsidiary of Inchcape plc, to
engage in marketing, distribution and sales of L.A. Gear(R) branded footwear,
apparel and accessories in selected Far East 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.
Reclassifications Reclassifications have been made to certain 1993 and 1992
amounts in order to conform to the 1994 presentation.
24
<PAGE> 13
L.A. GEAR, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 3. Business Acquisitions
Effective June 8, 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 purchase price over the estimated fair value of net assets
acquired in such transaction, amounting to $1.1 million, has been recorded as
goodwill. The purchase price for the acquisition was settled 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 at their estimated fair value at the
effective date of the acquisition.
Effective March 1, 1993, the Company acquired for $8.3 million in cash all
of the share capital of the exclusive distributor of the Company's products in
Germany. During 1993, the Company also acquired for $8.7 million in cash (i)
all of the share capital of the Company's exclusive distributor in the
Netherlands and (ii) certain assets and assumed certain liabilities of its
exclusive distributors in the United Kingdom, Belgium and Austria. The excess
of the consideration paid over the estimated fair value of net assets acquired
in such transactions, amounting to $11.5 million, has been recorded as
goodwill. Each of these acquisitions was accounted for under the purchase
method and the consolidated results of operations of the Company include those
of the acquired subsidiaries since the effective dates of acquisition.
The pro forma results of operations for the fiscal years ended November 30,
1994 and 1993, assuming the above acquisitions had taken place at the beginning
of the respective periods, would not be materially different from the
historical amounts reported.
NOTE 4. Supplemental Disclosures of Cash Flow Information
<TABLE>
<CAPTION>
1994 1993 1992
- -------------------------------------------------------------------------------
<S> <C> <C> <C>
(in thousands)
Cash paid (received) during the year for:
Interest, net $2,989 $ 1,972 $ (599)
===============================================================================
Income taxes, net $ -- $(24,404) $(24,465)
===============================================================================
Noncash investing activities:
Acquisition of Mexican distributor's
assets $1,953 $ -- $ --
===============================================================================
Write-off of property related to
discontinued operations $ -- $ -- $ 5,105
===============================================================================
Noncash financing activities:
Dividends accrued on mandatorily
redeemable preferred stock $ -- $ -- $ 7,746
===============================================================================
Common stock issuance related
to shareholder litigation
settlements $ -- $ -- $ 17,075
===============================================================================
</TABLE>
NOTE 5. Accounts Receivable
Accounts receivable, net of allowance for doubtful accounts and merchandise
returns, consist of the following:
<TABLE>
<CAPTION>
NOVEMBER 30,
-------------------
1994 1993
- --------------------------------------------------------------------------
<S> <C> <C>
(in thousands)
Trade receivables
Domestic $55,531 $54,434
International 24,552 16,854
- --------------------------------------------------------------------------
80,083 71,288
Other receivables 3,676 7,846
- --------------------------------------------------------------------------
83,759 79,134
Less allowance for doubtful accounts and
merchandise returns (6,475) (5,917)
- --------------------------------------------------------------------------
$77,284 $73,217
==========================================================================
</TABLE>
The Company's domestic customers consist primarily of department, shoe, sporting
goods and athletic footwear stores and wholesale distributors. None of the
Company's customers individually accounted for 10% or more of the Company's net
sales in 1994, 1993 or 1992. The Company's five largest customers worldwide, in
the aggregate, accounted for approximately 26.8%, 20.7% and 26.3% of the
Company's net sales in 1994, 1993 and 1992, respectively. Sales in the United
States represented 71.5%, 71.9%, and 72.4% in 1994, 1993 and 1992, respectively,
of the Company's consolidated net sales. Sales in Europe represented 15.4%,
13.9%, and 13.5% in 1994, 1993 and 1992, respectively, of the Company's
consolidated net sales. In 1994, sales to the Company's foreign subsidiaries'
customers represented 12% of the Company's consolidated net sales. Sales in any
individual geographic region outside the United States or Europe represented
less than 10% of consolidated net sales in 1994, 1993 and 1992.
NOTE 6. Property and Equipment
Property and equipment, net of accumulated depreciation and amortization,
consist of the following:
<TABLE>
<CAPTION>
NOVEMBER 30,
-------------------
1994 1993
- -------------------------------------------------------------------------
<S> <C> <C>
(in thousands)
Computer software and equipment $22,253 $21,486
Furniture and equipment 11,046 8,792
Leasehold improvements 6,722 5,640
- -------------------------------------------------------------------------
40,021 35,918
Less accumulated depreciation and amortization (28,070) (20,179)
- -------------------------------------------------------------------------
$11,951 $15,739
=========================================================================
</TABLE>
25
<PAGE> 14
L.A. GEAR, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 7. Bank Borrowings
The Company has a three-year, $75.0 million revolving line of credit with
BankAmerica Business Credit, Inc. 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. Borrowings under the Revolving Facility bear
interest at a rate equal to, at the Company's option, (i) Bank of America's
publicly announced reference rate plus one or two percent (depending on the
outstanding principal balance of loans under the Revolving Facility) or (ii) the
LIBOR rate plus three or four percent (depending on the outstanding principal
balance of loans under the Revolving Facility).
There were no domestic cash borrowings under the Revolving Facility at
November 30, 1994. The Company had average borrowings of $0.2 million under
the Revolving Facility during fiscal 1994. At November 30, 1994,
approximately $35.9 million of letters of credit were outstanding and
approximately $52.8 million was available for borrowings under the Revolving
Facility.
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
SUBLIMITS NOVEMBER 30, 1994
--------------------- ---------------------
TOTAL LETTERS LETTERS
COUNTRY AVAILABLE BORROWINGS OF CREDIT BORROWINGS OF CREDIT
- -------------------------------------------------------------------------
<S> <C> <S> <S> <S> <S>
(in millions)
Germany $8.0 $4.0 $4.0 $0.6 $0.6
Netherlands $4.6 -- -- -- $0.1
</TABLE>
The weighted average interest rates for fiscal 1994, as defined in the
respective credit facility agreements and adjusted for current market
conditions, for Germany and the Netherlands were 8.7% and 7.3%, respectively.
NOTE 8. Accounts Payable and Accrued Liabilities
Accounts payable and accrued liabilities consist of the following:
<TABLE>
<CAPTION>
NOVEMBER 30,
-------------------
1994 1993
- -------------------------------------------------------------------
<S> <C> <C>
(in thousands)
Accounts payable and other accrued liabilities $32,251 $34,179
Accrued inventory purchases 11,327 16,900
Accrued non-recurring charges 2,435 3,000
- -------------------------------------------------------------------
$46,013 $54,079
===================================================================
</TABLE>
Accounts payable include issued but uncleared checks of $3.0 million and $2.5
million at November 30, 1994 and 1993, respectively.
In 1994, the Company recorded selling, general and administrative charges of
$2.5 million for costs associated with the realignment of the Company's
senior management. In 1993, the Company recorded selling, general and
administrative restructuring charges of $2.6 million for estimated costs
associated with a reduction of its workforce.
NOTE 9. Convertible Subordinated Debentures
On December 24, 1992, the Company completed a private sale of $50 million
aggregate principal amount of the Debentures. On June 18, 1993, the Debentures
were registered under the Securities Act of 1933, as amended. Effective July 1,
1993, the Debentures were accepted for trading on the National Association of
Securities Dealers Automated Quotations (NASDAQ) Small Cap Market. The fair
market value of the Debentures at November 30, 1994 was $34.5 million. The
Debentures are convertible into shares of the Company's Common Stock (the
"Common Stock") at a conversion rate of $12.30 per share, subject to certain
anti-dilution adjustments, and are redeemable by the Company at any time on or
after November 30, 1995, initially at a specified premium to par, declining to
par for redemptions on or after November 30, 2000. Interest is payable
semi-annually on May 31 and November 30.
NOTE 10. Series A Cumulative Convertible Preferred Stock
In September 1991, the Company consummated the sale of one million shares of
Series A cumulative convertible preferred stock (the "Series A Preferred Stock")
to Trefoil Capital Investors, L.P. ("Trefoil") for an aggregate purchase price
of $100 million.
With respect to dividend rights and rights on liquidation, dissolution and
winding up, Series A Preferred Stock ranks senior to the Common Stock and
senior to any other series or class of preferred stock which may be issued by
the Company (collectively, "Junior Securities").
In the event of any liquidation, dissolution or winding up of the Company,
holders of Series A Preferred Stock will be entitled to receive in preference
to holders of Junior Securities an amount equal to $100 per share plus all
accrued but unpaid dividends.
As long as shares of 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.
26
<PAGE> 15
L.A. GEAR, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Each share of Series A Preferred Stock is convertible at the option of the
holder into ten shares of Common Stock at $10.00 per common share, subject to
certain antidilution adjustments (the "Conversion Price").
The Series A Preferred Stock may be redeemed by the Company any time after
the second anniversary of the issuance date (in integral multiples having an
aggregate stated value of at least $15 million) if (i) all quarterly
dividends on the Series A Preferred Stock have been paid in full and (ii) the
market price of the Common Stock is equal to at least 175% of the Conversion
Price for thirty consecutive trading days preceding the notice of redemption.
In any such event, the redemption price per share will be equal to $100, plus
accrued and unpaid dividends to the redemption date.
The Company is required to redeem 350,000 shares of the original issue on
August 31, 1996, and 162,500 shares on each August 31 thereafter until all
remaining shares of Series A Preferred Stock have been redeemed. The number of
shares to be redeemed by the Company on any mandatory redemption date shall be
reduced by the number of shares optionally redeemed by the Company prior to such
date, to the extent such shares have not previously been credited against the
Company's mandatory redemption obligations. If the Company shall fail to redeem
shares of Series A Preferred Stock when required, the annual dividend rate on
the outstanding shares of Series A Preferred Stock will be increased to 10.125%
(compounded quarterly with respect to dividends in arrears at a rate of 11.644%
per annum) of the stated value of such shares plus accrued and unpaid dividends
from the date of failure to redeem through the date of redemption. If less than
all of the outstanding shares of Series A Preferred S tock are to be redeemed,
the shares of Series A Preferred Stock to be redeemed shall be selected pro
rata.
NOTE 11. Stock Options and Employee Benefit Plans
In April 1992, an affiliate of Pentland Group, plc purchased 1,244,445 shares of
the Company's Common Stock for $14 million in cash. At November 30, 1994, such
affiliate held an option to purchase 400,000 shares of Common Stock (200,000 at
$13.50 per share and 200,000 at $16.125 per share), all of which are currently
exercisable and expire on April 28, 1996.
1986 Stock Option Plan The Company has adopted a noncompensatory stock option
plan (the "1986 Plan"), which was approved by the Company's shareholders, for
eligible employees, directors and consultants of the Company. Incentive stock
options and nonqualified stock options may be issued under this stock option
plan to purchase up to 3,500,000 shares of Common Stock and may be exercisable
for a period of up to ten years from the date of grant. Options granted to date
have been granted at prices equal to the fair market value of the Common Stock
at the grant date.
A summary of stock option activities under the 1986 Plan is as follows:
<TABLE>
<CAPTION>
NUMBER OF SHARES OPTION PRICES
- ------------------------------------------------------------------------
<S> <C> <C>
Outstanding at November 30, 1991 2,111,009 $ 2.88 to $33.63
Granted 518,539 $10.38 to $16.00
Exercised (526,840) $ 2.88 to $12.75
Canceled (344,522) $ 6.13 to $31.13
- ------------------------------------------------------------------------
Outstanding at November 30, 1992 1,758,186 $ 3.13 to $33.63
Granted 411,666 $ 9.25 to $11.25
Exercised (16,776) $ 6.13 to $11.25
Canceled (181,185) $ 3.13 to $28.88
- ------------------------------------------------------------------------
Outstanding at November 30, 1993 1,971,891 $ 6.13 to $33.63
Granted 131,000 $ 5.63 to $11.38
Exercised (1,810) $6.13
Canceled (361,983) $ 6.13 to $24.63
- ------------------------------------------------------------------------
Outstanding at November 30, 1994 1,739,098 $ 5.63 to $33.63
========================================================================
</TABLE>
At November 30, 1994, 1,739,098 common shares were reserved for the exercise of
outstanding options, 1,264,158 shares were exercisable and 363,330 shares were
available for grant (1,151,696 shares were exercisable and 132,347 shares were
available for grant at November 30, 1993).
1992 Stock Option Plan In June 1992, the Company adopted, and the shareholders
approved, a separate stock option plan for Eligible Non-Employee Directors (the
"1992 Plan").
The 1992 Plan provides that upon election or appointment to the Company's
Board of Directors, each Eligible Non-Employee Director (as defined in the
1992 Plan) shall receive a one-time grant of an option to purchase 20,000
shares of Common Stock at a price equal to the Fair Market Value (as defined
in the 1992 Plan) of the Common Stock on the date the option is granted. Up
to 400,000 shares of Common Stock may be issued or transferred pursuant to
the 1992 plan.
A summary of stock option activities under the 1992 Plan is as follows:
<TABLE>
<CAPTION>
NUMBER OF SHARES OPTION PRICES
- --------------------------------------------------------------------
<S> <C> <C>
Outstanding at November 30, 1992 40,000 $14.00
Granted 40,000 $9.75
Exercised -- --
Canceled -- --
- --------------------------------------------------------------------
Outstanding at November 30, 1993 80,000 $9.75 to $14.00
Granted -- --
Exercised -- --
Canceled -- --
- --------------------------------------------------------------------
Outstanding at November 30, 1994 80,000 $9.75 to $14.00
====================================================================
</TABLE>
27
<PAGE> 16
L.A. GEAR, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
At November 30, 1994, 80,000 shares were reserved for the exercise of
outstanding options, 50,000 shares were exercisable and 320,000 shares were
available for grant (30,000 shares were exercisable and 320,000 shares were
available for grant at November 30, 1993).
1993 Stock Incentive Plan In April 1993, the Company adopted, and the
shareholders approved, a stock incentive plan (the "1993 Plan") for eligible
employees, directors, officers and consultants of the Company. Incentive stock
options, non-qualified stock options, stock appreciation rights, restricted
stock, performance units and performance shares may be granted under the 1993
Plan. Up to 2,500,000 shares of Common Stock may be issued or transferred
pursuant to the 1993 Plan. Options granted under this plan may be exercisable
for a period of up to ten years from the date of grant. Options granted to date
under the 1993 Plan have been granted at an exercise price equal to the average
closing price of the Common Stock on the New York Stock Exchange composite tape
for each of the five consecutive trading days immediately preceding the grant
date.
A summary of stock option activities under the 1993 Plan is as follows:
<TABLE>
<CAPTION>
NUMBER OF SHARES OPTION PRICES
- -----------------------------------------------------------------------------
<S> <C> <C>
Outstanding at November 30, 1992 -- --
Granted 750,000 $11.55
Exercised -- --
Canceled -- --
- -----------------------------------------------------------------------------
Outstanding at November 30, 1993 750,000 $11.55
Granted 1,423,178 $5.75 to $11.38
Exercised -- --
Canceled (144,403) $6.00 to $7.78
- -----------------------------------------------------------------------------
Outstanding at November 30, 1994 2,028,775 $5.75 to $11.55
=============================================================================
</TABLE>
At November 30, 1994, 2,028,775 shares were reserved for the exercise of
outstanding options, 587,499 shares were exercisable and 471,225 shares were
available for grant (375,000 shares were exercisable and 1,750,000 shares were
available for grant at November 30, 1993).
Employee Stock Savings Plan The Company has a defined contribution employee
stock savings plan covering substantially all employees who are at least 21
years of age and through November 1994 had completed at least ninety days of
employment. The plan was amended in December 1994 to allow eligible employees
participation after thirty days of employment. The Company made matching
contributions of $397,000, $402,000 and $241,000 for 1994, 1993 and 1992,
respectively, in respect to employee contributions to such plan.
NOTE 12. Income Taxes
In fiscal 1994, the Company adopted SFAS No. 109, "Accounting for Income Taxes."
See Note 2 - Summary of Significant Accounting Policies.
Domestic and foreign components of loss from continuing operations before
income taxes and minority interest are as follows:
<TABLE>
<CAPTION>
YEAR ENDED NOVEMBER 30,
--------------------------------
1994 1993 1992
- -------------------------------------------------------------------
<S> <C> <C> <C>
(in thousands)
Domestic $(12,093) $(24,555) $(84,464)
Foreign (10,208) (7,958) (1,022)
- -------------------------------------------------------------------
$(22,301) $(32,513) $(85,486)
===================================================================
</TABLE>
Income tax benefit is summarized as follows:
<TABLE>
<CAPTION>
YEAR ENDED NOVEMBER 30,
--------------------------------
1994 1993 1992
- -------------------------------------------------------------------
<S> <C> <C> <C>
(in thousands)
Current:
Federal $ -- $ -- $(24,741)
State -- -- (110)
- -------------------------------------------------------------------
-- -- (24,851)
- -------------------------------------------------------------------
Deferred:
Federal -- -- 11,266
- -------------------------------------------------------------------
-- -- 11,266
- -------------------------------------------------------------------
$ -- $ -- $(13,585)
===================================================================
</TABLE>
In 1994 and 1993, the difference between the tax benefit computed based on
applying the U.S. statutory income tax rate to the loss before income taxes and
minority interest and the recorded benefit was primarily due to the
nonrecognition of tax benefits for operating losses as evaluated under the
provisions of the relevant tax accounting standard in effect for each year.
Temporary differences and carryforwards which give rise to deferred tax
assets, net of valuation allowance, at November 30, 1994 are as follows:
<TABLE>
<CAPTION>
NOVEMBER 30,
1994
- ------------------------------------------------------------------
<S> <C>
(in thousands)
Loss carryforwards $ 27,986
Tax credit carryforwards 3,226
Reserves and accrued expenses 10,542
Depreciation and amortization 4,004
Other 1,147
- ------------------------------------------------------------------
Total deferred tax assets 46,905
Less valuation allowance (46,905)
- ------------------------------------------------------------------
Net deferred tax assets $ --
==================================================================
</TABLE>
28
<PAGE> 17
L.A. GEAR, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
At November 30, 1994, the Company had a federal tax net operating loss ("NOL")
carryforward of approximately $32.5 million which will, if unused, expire in
varying amounts in fiscal years 2007 through 2009. The Company also has a
federal alternative minimum tax credit carryforward of approxi-mately $3.2
million (available to offset future regular tax liabilities) which may be
carried forward indefinitely. California franchise tax NOL carryforwards of
approximately $81.8 million will, if unused, expire primarily in fiscal year
1998. In addition, the Company has other state and foreign NOLcarryforwards with
varying limitations on future utilization.
The components of the deferred income tax provision are presented for prior
years according to Accounting Principles Board (APB) Opinion No. 11:
<TABLE>
<CAPTION>
YEAR ENDED NOVEMBER 30,
-----------------------
1993 1992
- ------------------------------------------------------------------------
<S> <C> <C>
(in thousands)
Valuation and other reserves $ -- $13,774
Other, net -- (2,508)
- ------------------------------------------------------------------------
$ -- $11,266
========================================================================
</TABLE>
NOTE 13. Litigation
Settlements Fiscal 1994 results include a net credit of $1.3 million
representing settlement income primarily in connection with trademark and patent
infringement lawsuits partially offset by expenses relating to the settlement of
employment litigation and a dispute with a former distributor. Fiscal 1993
results include a credit of $2.7 million relating to the partial recovery of
$23.1 million in fiscal 1992 charges for the settlement by the Company of three
separate consolidated shareholder class action lawsuits and related actions (the
"Settlements"). Pursuant to the Settlements, the Company contributed $5.5
million in cash and 1,562,499 shares of Common Stock into three separate
settlement funds from which members of the plaintiff classes were paid. The
Company recorded a $17.1 million increase in Common Stock in fiscal 1992 which
represented the fair market value of shares of Common Stock issued in connection
with the Settlements.
Pending Litigation The Company is a defendant in certain legal actions. In the
opinion of management, the disposition of these actions is not expected to have
a material adverse effect upon the Company's financial position or results of
operations.
NOTE 14. Commitments and Contingencies
The Company has entered into various agreements for the purpose of obtaining
footwear technology and product sourcing. Such agreements provide for, among
other things, fees and royalties to be paid. At November 30, 1994, the aggregate
amount of future commitments under such contracts totaled $9.2 million and are
to be paid as follows: $7.2 million in 1995, $1.0 million in 1996, $0.3 million
in 1997, $0.4 million in 1998, and $0.3 million in 1999.
The Company has entered into various agreements with professional athletes
and professional basketball teams for endorsements of the Company's products.
Such agreements provide for, among other things, fees and royalties to be paid.
At November 30, 1994, the aggregate amount of future commitments under such
contracts totaled $5.0 million and are to be paid as follows: $2.2 million in
1995, $1.1 million in 1996, $1.0 million in 1997, $0.5 million in 1998 and $0.2
million in 1999.
In September 1994, the Company entered into a one-year management and
consulting agreement with Shamrock Capital Advisors, Inc. ("SCA"), a company
which provides management and consulting services to Trefoil. This agreement
shall be automatically renewed for an additional one year period if not
terminated by either party prior to July 14, 1995. Pursuant to the agreement,
compensation for SCA's future services through the expiration of such
agreement will be $0.5 million per year. Selling, general and administrative
expenses included $0.7 million in 1994, $0.6 million in 1993 and $0.5 million
in 1992 for fees to SCA. SCA is an affiliate of Trefoil.
The Company enters into forward exchange contracts as a hedge against certain
of its foreign currency commitments, primarily repayments of U.S.
dollar-denominated liabilities by the Company's foreign subsidiaries. At
November 30, 1994, the aggregate amount of such forward currency exchange
contracts totaled $11.9 million. These contracts all mature on or before
September 30, 1995.
The Company occupies certain facilities, including corporate offices and
distribution centers, and rents certain equipment under operating leases.
Rental expense for 1994, 1993 and 1992 amounted to approximately $8.4
million, $8.1 million and $10.9 million, respectively.
29
<PAGE> 18
L.A. GEAR, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
At November 30, 1994, the minimum rental commitments under noncancelable
operating leases with an initial or remaining term in excess of one year were
as follows:
<TABLE>
<CAPTION>
YEAR ENDED NOVEMBER 30:
- ----------------------------------------------------------------------------
<S> <C>
(in thousands)
1995 $6,455
1996 5,497
1997 5,339
1998 4,012
1999 3,079
Thereafter 5,833
- ----------------------------------------------------------------------------
$30,215
============================================================================
</TABLE>
NOTE 15. Subsequent Event
On January 29, 1995, the Company and Ryka Inc. ("Ryka") entered into a
definitive merger agreement, providing for the acquisition of all of the issued
and outstanding shares of the common stock of Ryka by the Company. The merger
transaction is anticipated to close during the summer of 1995 and is subject to
certain conditions, including the effectiveness of a registration statement to
be filed with the Securities and Exchange Commission and the approval by
regulatory authorities and the shareholders of Ryka.
NOTE 16. Market for the Registrant's Common Stock and Related Stockholder
Matters; Selected Quarterly Financial Data (Unaudited)
The Company's Common Stock is listed on the New York Stock Exchange under the
symbol "LA". The following table presents summarized unaudited quarterly results
and the range of high and low closing sales prices on the New York Stock
Exchange for the indicated fiscal quarters.
<TABLE>
<CAPTION>
FIRST QUARTER SECOND QUARTER
-------------------- -------------------
1994 1993 1994(1) 1993
- -----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
(in thousands, except per share data)
Net sales $ 120,436 $ 76,327 $ 84,248 $ 84,572
Gross profit 34,909 20,376 23,657 24,457
Net income (loss) (2,027) (11,562) (11,765) (13,159)
Income (loss) per common share:
Primary $ (0.17) $ (0.59) $ (0.59) $ (0.66)
=========================================================================================
Fully diluted $ (0.17) $ (0.59) $ (0.59) $ (0.66)
=========================================================================================
Price range of Common Stock:
High $ 11.38 $ 11.88 $ 7.50 $ 13.00
Low 7.00 9.38 5.63 8.25
<CAPTION>
THIRD QUARTER FOURTH QUARTER
------------------ ---------------------
1994(2) 1993(2) 1994(1)(2) 1993(1)
- -------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
(in thousands, except per share data)
Net sales $126,550 $142,967 $ 84,732 $ 94,492
Gross profit 42,180 47,204 22,591 22,188
Net income (loss) 6,526 7,222 (14,929) (15,014)
Income (loss) per common share:
Primary $ 0.20 $ 0.23 $ (0.73) $ (0.74)
===========================================================================================
Fully diluted $ 0.20 $ 0.22 $ (0.73) $ (0.74)
===========================================================================================
Price range of Common Stock:
High $ 7.00 $ 13.00 $ 8.25 $ 11.88
Low 5.63 9.13 5.37 9.13
</TABLE>
(1) The Company incurred charges of $2.3 million and $0.2 million for costs
associated with the realignment of the senior management of the Company in
the second and fourth quarter of 1994, respectively. In the fourth quarter
of 1993, a non-recurring charge of $2.6 million was recorded in selling,
general and administrative expenses. See Note 8 - Accounts Payable and
Accrued Liabilities.
(2) In the second and third quarters of 1994, the Company entered into various
settlement agreements primarily in connection with trademark and patent
infringement actions pursuant to which it recorded net litigation settlement
income of $0.3 million and $2.9 million, respectively. In the fourth quarter
of 1994, the Company recorded $1.9 million of expenses primarily related to
the settlement of employment litigation and a dispute with a former
distributor. In June 1993, the Company received $2.7 million as a recovery
of part of the cost of the settlement by the Company of three separate
shareholder class action lawsuits and related actions. See Note 13 -
Litigation.
At February 6, 1995, the Company had approximately 19,400 holders of record of
its Common Stock. To date, the Company has not paid cash dividends on its Common
Stock. The terms of the Series A Preferred Stock place restrictions on the
ability of the Company to pay dividends on the Common Stock. The Company does
not anticipate paying any dividends on the Common Stock in the foreseeable
future.
30
<PAGE> 1
EXHIBIT 21.1
SUBSIDIARIES OF REGISTRANT
<TABLE>
<CAPTION>
Subsidiary Jurisdiction
- ---------- ------------
<S> <C>
L.A. Gear California, Inc. California
L.A.Gear Licensing, Corp. California
Raegal Finance, Inc. Texas
Brands Acquisition Corp. Delaware
L.A. Gear (Benelux) B.V. Netherlands
L.A. Gear (Deutschland) GmbH Germany
L.A. Gear (Far East) Limited British Virgin Islands
L.A. Gear (France) SARL France
L.A. Gear (Italia) SRL Italy
L.A. Gear (Mexico), S.A. de C.V. Mexico
L.A. Gear (UK) Limited United Kingdom
L.A. Gear - Inchcape Limited British Virgin Islands
L.A. Gear H.K. Ltd. Hong Kong
L.A. Gear Korea Korea
L.A. Gear Sportswear, Ltd. Hong Kong
Servicios Markland, S.A. de C.V. Mexico
</TABLE>
<PAGE> 1
EXHIBIT 23.1
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the incorporation by reference in the Prospectus
constituting part of Post-Effective Amendment No. 1 to the Registration
Statement on Form S-3 (No. 33-59360) and in the Registration Statements on Form
S-8 (Nos. 33-37408, 33-53122 and 33-64678) of L.A. Gear, Inc. of our report
dated February 6, 1995 appearing on page 19 of the Annual Report to Shareholders
which is incorporated in this Annual Report on Form 10-K. We also consent to the
incorporation by reference of our report on the Financial Statement Schedule,
which appears on page 14 of this Form 10-K.
Price Waterhouse LLP
Los Angeles, California
February 21, 1995
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED BALANCE SHEETS, THE CONSOLIDATED STATEMENTS OF OPERATIONS AND
ACCUMULATED DEFICIT, AND CONSOLIDATED 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-30-1994
<PERIOD-START> DEC-01-1993
<PERIOD-END> NOV-30-1994
<EXCHANGE-RATE> 1
<CASH> 49,710
<SECURITIES> 0
<RECEIVABLES> 83,759
<ALLOWANCES> 6,475
<INVENTORY> 57,597
<CURRENT-ASSETS> 194,418
<PP&E> 40,021
<DEPRECIATION> 28,070
<TOTAL-ASSETS> 224,463
<CURRENT-LIABILITIES> 46,570
<BONDS> 50,000
<COMMON> 128,093
100,000
0
<OTHER-SE> (109,944)
<TOTAL-LIABILITY-AND-EQUITY> 224,463
<SALES> 415,966
<TOTAL-REVENUES> 415,966
<CGS> 292,629
<TOTAL-COSTS> 292,629
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 404
<INTEREST-EXPENSE> 4,437
<INCOME-PRETAX> (22,301)
<INCOME-TAX> 0
<INCOME-CONTINUING> (22,195)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (22,195)
<EPS-PRIMARY> (1.29)
<EPS-DILUTED> 0
</TABLE>
