LA GEAR INC, PRES14A, 1995-12-13

LA GEAR INC
PRES14A, 1995-12-13
RUBBER & PLASTICS FOOTWEAR

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SCHEDULE 14A INFORMATION

PROXY STATEMENT PURSUANT TO SECTION 14(A) OF THE SECURITIES
EXCHANGE ACT OF 1934 (AMENDMENT NO. )

Filed by the Registrant /X/

Filed by a Party other than the Registrant / /

Check the appropriate box:

<TABLE>
<S> <C>
/X/ Preliminary Proxy Statement / / Confidential, for Use of the Commission Only
(as permitted by Rule 14a-6(e)(2))
/ / Definitive Proxy Statement
/ / Definitive Additional Materials
/ / Soliciting Material Pursuant to sec.240.14a-11(c) or sec.240.14a-12
</TABLE>

L.A. GEAR, INC.
- --------------------------------------------------------------------------------
(Name of Registrant as Specified In Its Charter)

- --------------------------------------------------------------------------------
(Name of Person(s) Filing Proxy Statement, if other than the Registrant)

Payment of Filing Fee (Check the appropriate box):

/X/ $125 per Exchange Act Rules 0-11(c)(1)(ii), or 14a-6(i)(1), or 14a-6(i)(2)
or Item 22(a)(2) of Schedule 14A.

/ / $500 per each party to the controversy pursuant to Exchange Act Rule
14a-6(i)(3).

/ / Fee computed on table below per Exchange Act Rules 14a-6(i)(4) and 0-11.

(1) Title of each class of securities to which transaction applies:

------------------------------------------------------------------------

(2) Aggregate number of securities to which transaction applies:

------------------------------------------------------------------------

(3) Per unit price or other underlying value of transaction computed
pursuant to Exchange Act Rule 0-11 (Set forth the amount on which the
filing fee is calculated and state how it was determined):

------------------------------------------------------------------------

(4) Proposed maximum aggregate value of transaction:

------------------------------------------------------------------------

(5) Total fee paid:

------------------------------------------------------------------------

/ / Fee paid previously with preliminary materials.

/ / Check box if any part of the fee is offset as provided by Exchange Act Rule
0-11(a)(2) and identify the filing for which the offsetting fee was paid
previously. Identify the previous filing by registration statement number,
or the Form or Schedule and the date of its filing.

(1) Amount Previously Paid:

------------------------------------------------------------------------

(2) Form, Schedule or Registration Statement No.:

------------------------------------------------------------------------

(3) Filing Party:

------------------------------------------------------------------------

(4) Date Filed:

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[LOGO]

December __, 1995

To the Shareholders of L.A. Gear, Inc.:

You are cordially invited to attend a Special Meeting of Shareholders
(the "Meeting") of L.A. Gear, Inc. (the "Company") to be held [DAY], [DATE] at
[TIME], Los Angeles time, at [PLACE]. The formal notice of meeting and proxy
statement are attached to this letter.

At the Meeting you will be asked to consider and vote on a proposal
(the "Share Exchange Proposal" or the "Exchange") to approve the exchange of
all of the Company's outstanding redeemable cumulative convertible preferred
stock (the "Series A Preferred Stock") held by Trefoil Capital Investors, L.P.
("Trefoil"), and all accrued and unpaid dividends thereon, for shares of a new
series of perpetual cumulative convertible preferred stock (the "Series B
Preferred Stock") to be issued by the Company. The terms of the Share Exchange
Proposal are set forth in detail in the enclosed proxy statement.

The Company's principal reason for seeking the Exchange is the
elimination of the Company's obligation, over four years beginning in August
1996, to redeem all of the Series A Preferred Stock. Without the Exchange, in
August 1996 the Company will be required to make a redemption payment of $35
million plus accrued and unpaid dividends in respect of the Series A Preferred
Stock. The mandatory redemption obligation of the Series A Preferred Stock
would be a severe drain on the Company's cash reserves and cash flow from
operations, all of which are essential to the Company's efforts to return to
profitability and enhance shareholder value, and it is unlikely that the Company
would be able to satisfy the redemption obligation from its cash reserve, cash
flow from operations and its existing bank facility. In addition, the mandatory
redemption obligation causes the Series A Preferred Stock to be treated for a
variety of purposes as debt rather than equity. The elimination of the
mandatory redemption obligation and the conversion of the Series A Preferred
Stock to a security that is treated solely as equity will strengthen the
Company's financial condition, which should provide greater flexibility as the
Company implements its corporate reorganization plan and other efforts to return
to profitability.

In negotiating the Exchange, the Company has obtained other terms that
it believes will be beneficial to the Company and its shareholders. In an
effort to conserve the Company's cash resources, the Company has not paid
dividends required under the terms of the Series A Preferred Stock during
fiscal 1995. The terms of the Exchange provide that all unpaid dividends
accrued to the date of the Exchange and, at the Company's option, dividends
accruing through
<PAGE> 3

the end of fiscal 1996, will be paid in additional shares of the Series B
Preferred Stock instead of in cash, enabling the Company to further conserve
cash for use in its operations.

The terms of the Exchange also alter the voting rights currently held
by Trefoil. The holder of the Series A Preferred Stock is entitled to select
three members of the Board of Directors without the vote of the common stock,
and the Series A Preferred Stockholder's vote is required to approve or
authorize a wide variety of day-to-day business matters, in addition to voting
with the common stock on all other matters submitted to the common stock for
its approval. As a result of the Company's failure during fiscal 1995 to pay
the Series A Preferred Stock dividends, the holder of the Series A Preferred
Stock now has the right to select four additional members of the Company's
Board of Directors (expanding the Board from ten to fourteen directors), as
well as the three members it previously had the right to select. Upon
consummation of the Exchange, as a result of a decrease in the conversion price
for the Series B Preferred Stock to $6.75 per share from $10.00 per share for
the Series A Preferred Stock, the percentage of voting power of the Company's
Common Stock held by Trefoil on an as converted basis would be approximately
45% constituting a significant increase from the percentage of voting power
(approximately 33%) currently held by Trefoil. However, the separate voting
rights of the Series A Preferred Stock would be eliminated, all as described
more fully in the attached proxy statement.

The anti-dilution provisions in the Series B Preferred Stock provide
for a decrease from the Series A Preferred Stock in the price at which common
stock may be issued by the Company without triggering an adjustment to the
conversion price of the Series B Preferred Stock, thereby reducing the
potential dilution to common shareholders and improving the Company's ability
to raise capital by selling new shares of common stock. In addition, the right
of the Series A Preferred Stock to an adjustment in the conversion price upon
certain public offerings of the Company's securities would be eliminated in the
Series B Preferred Stock, further enhancing the Company's ability to raise
additional capital.

THE MEMBERS OF THE BOARD OF DIRECTORS OF THE COMPANY (OTHER THAN THE
DIRECTORS DESIGNATED BY TREFOIL), UPON THE RECOMMENDATION OF A SPECIAL
COMMITTEE OF THE BOARD OF DIRECTORS OF THE COMPANY FORMED TO REVIEW, EVALUATE,
NEGOTIATE AND TAKE SUCH OTHER ACTION AS IT DEEMED IN THE BEST INTERESTS OF THE
COMPANY WITH RESPECT TO THE SHARE EXCHANGE PROPOSAL, HAVE APPROVED THE SHARE
EXCHANGE PROPOSAL AND HAVE DETERMINED THAT IT IS FAIR TO, AND IN THE BEST
INTERESTS OF, THE COMPANY AND THE COMMON SHAREHOLDERS, AND URGE YOU TO VOTE
"FOR" THE SHARE EXCHANGE PROPOSAL. All of the terms of the Share Exchange
Proposal and the Series B Preferred Stock, as well as the impact of the Share
Exchange Proposal on existing common shareholders, are set forth in detail in
the attached proxy statement.

All shareholders are invited to attend the Meeting in person. The
approval of the Share Exchange Proposal requires the affirmative vote of a
majority of the issued and outstanding shares of the Company's Common Stock
present and voting at a meeting at which a quorum is present; provided,
however, that Interested Shares, as defined below, will not be counted for
purposes of quorum or as part of the shares represented and voting. Interested
Shares means all of the shares of Series A Preferred Stock, voting separately
as a class or on an as converted basis,

<PAGE> 4

and any shares of Common Stock owned by Trefoil, or any interested director of
the Company ("Interested Director"), as the term is used in or construed
under Section 310 of the California General Corporation Law.

Sincerely,

William L. Benford
President

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L.A. GEAR, INC.
2850 OCEAN PARK BOULEVARD
SANTA MONICA, CALIFORNIA 90405

NOTICE OF SPECIAL MEETING OF SHAREHOLDERS
TO BE HELD [DATE]

TO THE SHAREHOLDERS OF L.A. GEAR, INC.:

NOTICE IS HEREBY GIVEN that, pursuant to its Bylaws and the call of
its Board of Directors, a special meeting of the shareholders (the "Meeting")
of L.A. Gear, Inc. (the "Company") will be held at [PLACE], on [DAY], [DATE] at
[TIME], Los Angeles time, for the following purposes, as set forth in the
attached Proxy Statement:

1. Share Exchange Proposal. To consider and vote upon the
exchange (the "Share Exchange Proposal") of all outstanding shares of the
Company's Series A Cumulative Convertible Preferred Stock ("Series A Preferred
Stock") and all accrued and unpaid dividends thereon, for up to 1,108,311
shares of a new series of preferred stock, entitled Series B Cumulative
Preferred Stock ("Series B Preferred Stock") to be issued by the Company
pursuant to the terms of a Share Exchange Agreement, dated as of December __,
1995, between the Company and Trefoil Capital Investors, L.P. ("Trefoil").

2. Other Business. To transact such other business incident to
the conduct of the Meeting that may properly come before the Meeting or at any
adjournments or postponements thereof.

The accompanying Proxy Statement provides a summary of the Share
Exchange Proposal. Shareholders are encouraged to give this information their
careful attention. The summary does not purport to be complete and is
qualified in its entirety by reference to the Appendices to the Proxy
Statement.

The approval of the Share Exchange Proposal requires the affirmative
vote of a majority of the issued and outstanding shares of the Company's Common
Stock present and voting at a meeting at which a quorum is present; provided,
however, that Interested Shares, as defined below, will not be counted for the
purpose of determining a quorum or as part of the shares present and voting.
Interested Shares means all of the shares of Series A Preferred Stock, voting
separately as a class or on an as converted basis, and any shares of Common
Stock owned by Trefoil, or any interested director of the Company, as the term
is used in or construed under Section 310 of the California General Corporation
Law ("Interested Director"). Accordingly, the vote of each shareholder is
important, and it should be recognized that failure to timely return a properly
executed proxy card or to vote in person at the Meeting has the same effect as
an

1
<PAGE> 6

abstention, not counting either for or against the Share Exchange Proposal and
will not be counted for the purpose of quorum.

Only those shareholders of record at the close of business on
January 4, 1996 shall be entitled to notice of and to vote at the Meeting.

BY ORDER OF THE BOARD OF DIRECTORS

____________________
Secretary

Dated: ________, 199_

YOUR BOARD OF DIRECTORS HAS REVIEWED AND CONSIDERED THE TERMS AND
CONDITIONS OF THE SHARE EXCHANGE PROPOSAL. THE MEMBERS OF THE BOARD OF
DIRECTORS OF THE COMPANY (OTHER THAN THE DIRECTORS DESIGNATED BY TREFOIL), UPON
THE RECOMMENDATION OF A SPECIAL COMMITTEE OF THE BOARD OF DIRECTORS OF THE
COMPANY FORMED TO REVIEW, EVALUATE, NEGOTIATE AND TAKE SUCH OTHER ACTION AS IT
DEEMED TO BE IN THE BEST INTERESTS OF THE COMPANY WITH RESPECT TO THE SHARE
EXCHANGE PROPOSAL, HAVE APPROVED THE SHARE EXCHANGE PROPOSAL AND HAVE
DETERMINED THAT IT IS FAIR TO, AND IN THE BEST INTERESTS OF, THE COMPANY AND
THE COMMON SHAREHOLDERS, AND URGE YOU TO VOTE "FOR" THE SHARE EXCHANGE
PROPOSAL.

IT IS IMPORTANT THAT ALL SHAREHOLDERS VOTE. WE URGE YOU TO SIGN AND
RETURN THE ENCLOSED PROXY AS PROMPTLY AS POSSIBLE, WHETHER OR NOT YOU PLAN TO
ATTEND THE MEETING IN PERSON. IF YOU DO ATTEND THE MEETING, YOU MAY WITHDRAW
YOUR PROXY AND VOTE IN PERSON. THE PROXY MAY BE REVOKED AT ANY TIME PRIOR TO
ITS EXERCISE. IN ORDER TO FACILITATE THE PROVIDING OF ADEQUATE ACCOMMODATIONS,
PLEASE INDICATE ON THE PROXY WHETHER YOU PLAN TO ATTEND THE MEETING.

2
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TABLE OF CONTENTS

<TABLE>
<CAPTION>
Page
<S> <C>
INTRODUCTION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1

Matters to be Considered . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
Revocability of Proxies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
Costs of Solicitation of Proxies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
Outstanding Securities and Voting Rights . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2

BACKGROUND OF AND REASONS FOR THE TRANSACTION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3

Background of the Transaction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
Original Issuance of the Series A Preferred Stock . . . . . . . . . . . . . . . . . . . 3
Dividends on Series A Preferred Stock . . . . . . . . . . . . . . . . . . . . . . . . . 3
Mandatory Redemption of Series A Preferred Stock . . . . . . . . . . . . . . . . . . . . 4
Initiation of Discussions with Trefoil . . . . . . . . . . . . . . . . . . . . . . . . . 4
Special Committee . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
Reasons for the Transaction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
Fairness Opinion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8

SHARE EXCHANGE PROPOSAL . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9

The Share Exchange Proposal . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
Principal Terms of the Series B Preferred Stock . . . . . . . . . . . . . . . . . . . . . . . . 10
Dividends . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
Voting
Conversion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
Material Differences between the Series A Preferred Stock and the
Series B Preferred Stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
Redemption . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
Voting Rights . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
Conversion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
Dividend Rights . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
Registration Rights . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
Certain Restrictions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
The Exchange Agreement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
Election of Additional Directors . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
Certain Anti-Dilution Adjustments . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
Sale of Series A Preferred Stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
Voting Agreement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
</TABLE>

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<TABLE>
<S> <C>
Meeting of Shareholders . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18
Conditions to Closing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18
Representations and Warranties . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19
Amendment, Termination and Waiver . . . . . . . . . . . . . . . . . . . . . . . . . . . 19
Expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19
Certain Relationships . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19
Registration Rights Amendment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19
Reasons for Seeking Shareholder Approval . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20
Effect on Holders of the Common Stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20
Requisite Vote . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21
Interests of Certain Persons in the Transaction . . . . . . . . . . . . . . . . . . . . . . . . 21
Anti-takeover Effects of the Exchange . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22

SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT . . . . . . . . . . . . . . . . . . . . . 23
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS FOR INTERIM PERIOD . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26
CONSOLIDATED CONDENSED INTERIM FINANCIAL STATEMENTS . . . . . . . . . . . . . . . . . . . . . . . . . . . 31
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS FOR FISCAL YEARS 1994, 1993 AND 1992 . . . . . . . . . . . . . . . . . . . . . . . 39
CONSOLIDATED FINANCIAL STATEMENTS FOR FISCAL YEARS 1994, 1993 AND 1992 . . . . . . . . . . . . . . . . . 46
ACCOUNTANTS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 64
PROPOSALS OF SHAREHOLDERS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 64
OTHER BUSINESS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 64
</TABLE>

<PAGE> 9

APPENDICES

APPENDIX I -- Share Exchange Agreement, dated as
of December 12, 1995 between the
Company and Trefoil

APPENDIX II -- Certificate of Determination for
Series B Preferred Stock

APPENDIX III -- Form of Registration Rights Amendment
between the Company and Trefoil

APPENDIX IV -- Opinion of Sutro & Co. Incorporated

APPENDIX V -- Company's Restated Articles of
Incorporation

iii

<PAGE> 10

L.A. GEAR, INC.
2850 OCEAN PARK BOULEVARD
SANTA MONICA, CALIFORNIA 90405
(310) 452-4327

PROXY STATEMENT
SPECIAL MEETING OF SHAREHOLDERS
[DATE]

INTRODUCTION

This Proxy Statement is furnished to the shareholders of L.A. Gear,
Inc. (the "Company") in connection with the solicitation of proxies by the
Board of Directors of the Company for use at its special meeting of
shareholders to be held at [PLACE], on [DAY], [DATE], at [TIME], Los Angeles
time, or at any adjournments or postponements thereof (the "Meeting"). It is
expected that this Proxy Statement and the accompanying Notice of Special
Meeting of Shareholders and Proxy (the "Proxy Materials") will first be mailed
to shareholders on or about December__, 1995.

MATTERS TO BE CONSIDERED

The matters to be considered and voted upon at the Meeting will be:

1. Share Exchange Proposal. To consider and vote upon a proposal
for the exchange (the "Share Exchange Proposal" or the "Exchange"), pursuant to
a Share Exchange Agreement (the "Exchange Agreement"), dated as of December __,
1995 by and between the Company and Trefoil Capital Investors, L.P.
("Trefoil"), of 1,000,000 shares of the Company's Series A Cumulative
Convertible Preferred Stock, stated value $100 per share ("Series A Preferred
Stock") and all accrued and unpaid dividends thereon for (i) 1,000,000 shares
of a new series of preferred stock to be issued by the Company, entitled Series
B Cumulative Convertible Preferred Stock, stated value $100 per share ("Series
B Preferred Stock") plus (ii) an additional number of shares of Series B
Preferred Stock equal to the dollar amount of accrued and unpaid dividends in
respect of the Series A Preferred Stock through the Closing (the "Arrearage
Amount") divided by 100.

2. Other Business. To transact such other business incident to
the conduct of the Meeting as may properly come before the Meeting or any
adjournments or postponements thereof.

YOUR BOARD OF DIRECTORS HAS REVIEWED AND CONSIDERED THE TERMS AND
CONDITIONS OF THE SHARE EXCHANGE PROPOSAL. THE MEMBERS OF THE BOARD OF
DIRECTORS OF THE COMPANY (OTHER THAN THE DIRECTORS DESIGNATED BY TREFOIL), UPON
THE RECOMMENDATION OF A SPECIAL COMMITTEE OF THE BOARD OF DIRECTORS OF THE
COMPANY FORMED TO REVIEW, EVALUATE, NEGOTIATE AND TAKE SUCH OTHER ACTIONS AS IT
DEEMED TO BE IN THE BEST INTERESTS OF THE COMPANY WITH RESPECT TO THE SHARE
EXCHANGE PROPOSAL, HAVE APPROVED THE SHARE EXCHANGE PROPOSAL AND

<PAGE> 11

HAVE DETERMINED THAT IT IS FAIR TO, AND IN THE BEST INTERESTS OF, THE COMPANY
AND THE COMMON SHAREHOLDERS, AND URGE YOU TO VOTE "FOR" THE SHARE EXCHANGE
PROPOSAL.

REVOCABILITY OF PROXIES

A form of proxy (the "Proxy") for use at the Meeting is enclosed. Any
shareholder who executes and delivers the Proxy has the right to revoke it at
any time before it is voted by filing with the Secretary of the Company an
instrument revoking it or a duly executed proxy bearing a later date. It also
may be revoked by attendance at the Meeting and voting in person. Subject to
such revocation, all shares represented by a properly executed Proxy received
prior to or at the Meeting will be voted by the proxy holders whose names are
set forth in the accompanying Proxy (the "Proxy Holders") in accordance with
the instructions on the Proxy. If no instruction is specified with respect to
the matter to be acted upon, the shares represented by the Proxy will be voted
"FOR" the Share Exchange Proposal.

COSTS OF SOLICITATION OF PROXIES

The solicitation of Proxies is made by the Board of Directors of the
Company, and the Company will bear the costs of this solicitation, including
the expense of preparing, assembling, printing and mailing this Proxy Statement
and the material used in this solicitation of Proxies. It is contemplated that
Proxies will be solicited principally through the mails, but directors,
officers and regular employees of the Company may solicit Proxies personally or
by telephone. Although there is no formal agreement to do so, the Company may
reimburse banks, brokerage houses and other custodians, nominees and
fiduciaries for their reasonable expenses in forwarding these proxy materials
to their principals. In addition, the Company has retained Georgeson & Co.,
Inc. to assist in the solicitation of Proxies for a fee of approximately
$7,500, plus reimbursement of reasonable out-of-pocket expenses incurred in
connection with this solicitation. The Company may pay for and use the
services of other individuals or companies not regularly employed by the
Company in connection with the solicitation of Proxies if the Board of
Directors of the Company determines that this is advisable.

OUTSTANDING SECURITIES AND VOTING RIGHTS

Pursuant to the Exchange Agreement, approval of the Share Exchange
Proposal requires the affirmative vote of a majority of the issued and
outstanding shares of the Company's Common Stock present and voting at a
meeting at which a quorum is present; provided, however, that Interested
Shares, as defined below, will not be counted for the purpose of determining a
quorum or as part of the shares present and voting. Interested Shares means
all of the shares of Series A Preferred Stock, voting separately as a class or
on an as converted basis, and any shares of Common Stock owned by Trefoil, or
any interested director, as the term is used in or construed under Section 310
of the California General Corporation Law ("Interested Director").

<PAGE> 12

There were issued and outstanding [22,936,433] shares of the Company's
Common Stock, no par value (the "Common Stock"), on January 4, 1996, the date
set as the record date (the "Record Date") for the purpose of determining the
shareholders entitled to notice of and to vote at the Meeting and any
adjournment or postponement thereof. For the purpose of approval of the Share
Exchange Proposal, the quorum is equal to a majority of the total number of
shares of Common Stock less those shares of Common Stock owned by Trefoil, or
any Interested Director ([1,132,000] shares in the aggregate as of the Record
Date). Therefore, as of the Record Date, the number of shares required for
quorum is equal to a majority of [21,804,433], or [10,902,218] shares. The
minimum vote required for approval is a majority of quorum, or [5,451,110]
shares.

Each holder of Common Stock will be entitled to one vote, in person or
by proxy, for each share of Common Stock (excluding Interested Shares) standing
in his name on the books of the Company as of the Record Date.

BACKGROUND OF AND REASONS FOR THE TRANSACTION

BACKGROUND OF THE TRANSACTION

Original Issuance of the Series A Preferred Stock

In September 1991, the Company consummated the sale of 1,000,000
shares of Series A Preferred Stock to Trefoil for an aggregate purchase price
of $100 million. Prior to consummation of the sale of the Series A Preferred
Stock to Trefoil, Merrill, Lynch, Pierce, Fenner & Smith Incorporated issued an
opinion that the sale was fair to the shareholders of the Company from a
financial point of view. The transaction was then unanimously approved by the
Board of Directors of the Company and subsequently approved by a majority of
the then outstanding shares of the Company's common stock.

Dividends on Series A Preferred Stock

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 therefore,
cumulative cash dividends at an annual rate of 7.5% payable quarterly in
arrears. In the event any regular dividends are unpaid when due, the Series A
Preferred Stock bears additional dividends on unpaid and due dividends at a
rate of 8.625% per annum, through the date of payment of all unpaid and due
dividends.

The Company determined it was in its best interests not to, and it did
not, pay the $1.875 million dividend on the Series A Preferred Stock due on
each of February 28, 1995, May 31, 1995, August 31, 1995 and November 30, 1995
to Trefoil, the holder of all of the issued and outstanding shares of Series A
Preferred Stock. As of November 30, 1995, such accrued and unpaid dividends
amounted to [$7,745,920]. As a result of the non-payment of dividends for
three full quarters on the Series A Preferred Stock, commencing on August 31,
1995 the holders of the Series A Preferred Stock (voting as a separate class)
have had the right to elect four additional members of the Board of Directors
of the Company. The holders of the Series A

<PAGE> 13

Preferred Stock have not yet exercised this right, and pursuant to the terms of
the Exchange Agreement have agreed not to exercise it until the termination of
the Exchange Agreement.

Mandatory Redemption of Series A Preferred Stock

The Company is required to redeem 350,000 shares of the Series A
Preferred Stock on August 31, 1996, and 165,500 shares on August 31st of each
year thereafter until all remaining shares of Series A Preferred Stock have
been redeemed, in each case in an amount equal to $100 per share plus accrued
and unpaid dividends thereon. If the Company fails 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 accrued and not paid when due at a rate of
11.644% per annum from the date of failure to redeem through the date of
redemption).

The Company believes it is unlikely that it will be able to satisfy
the mandatory $35 million (plus accrued and unpaid dividends) redemption
obligation with respect to the Series A Preferred Stock on August 31, 1996 from
its cash flow from operations and its existing bank facility.

Under California law, in the event the Company did not meet certain
retained earnings and assets requirements as specified in Section 500 of the
California General Corporation Law at the time it is obligated to make any
mandatory redemption payment, the Company would be lawfully unable to make such
mandatory redemption payment when due. The Company believes that, despite its
cash flow problems, it will meet the requirements of Section 500 on August 31,
1996, and thus the Company would be required to satisfy the mandatory
redemption obligation due at that time.

Initiation of Discussions with Trefoil

In view of its mandatory redemption and dividend obligations in
respect of the Series A Preferred Stock, and its overall financial position,
the Company has evaluated its options, including examining the availability of
new capital to satisfy such mandatory redemption obligation and exchanging the
Series A Preferred Stock for a new Series B Preferred Stock. In September
1995, representatives of the Company initiated discussions with Trefoil
regarding the possibility of exchanging the Series A Preferred Stock for a new
series of preferred stock without mandatory redemption features. Trefoil
indicated a willingness to consider such a proposal and discussions ensued,
culminating in the Exchange Agreement.

SPECIAL COMMITTEE

On October 18, 1995, the Company's Board of Directors established a
Special Committee of Directors (the "Special Committee") consisting of Allan E.
Dalshaug, Willie D. Davis, Stephen A. Koffler (Chairman) and Ann E. Meyers, to
review, evaluate, negotiate and take whatever actions it deemed to be in the
best interests of the Company in connection with a proposed issuance of a new
Series B Preferred Stock having those rights, preferences, privileges

<PAGE> 14

and restrictions as the Special Committee determined, and the exchange of all
outstanding shares of Series A Preferred Stock for shares of the Series B
Preferred Stock.

The Special Committee met seven times (on October 20, 24, 30, 31,
November 7, December 6 and 12, 1995) to review, discuss and evaluate the Share
Exchange Proposal and the feasibility of other alternatives.

On October 20, 1995 the Special Committee held its first meeting. The
Committee reviewed and discussed certain terms proposed to be included in
the Series B Preferred Stock including elimination of the mandatory redemption
obligation, and modifying the conversion price, voting rights and coupon rate.
The Committee considered the dividends due in respect of the Series A Preferred
Stock and the treatment of such dividends, and also considered the mandatory
redemption obligations of the Series A Preferred Stock, and the likelihood of
the Company's inability to meet those obligations. The Special Committee
considered the retention of financial and legal advisors, and then retained
Sutro & Co. Incorporated ("Sutro") to assist it in its deliberations (including
analyzing alternatives to the Share Exchange Proposal) and, assuming the
Special Committee determined to recommend the Share Exchange Proposal, to
render a fairness opinion with respect to the Share Exchange Proposal. The
Special Committee also retained Gibson, Dunn & Crutcher as its legal counsel.

On October 24, 1995, the members of the Special Committee met and
discussed a general outline of the terms of a potential Series B Preferred
Stock proposed to be exchanged for all of the issued and outstanding shares of
the Series A Preferred Stock. The Special Committee reviewed and discussed
certain key elements of the proposed exchange, including modifying the nature
of the preferred stock from a mandatorily redeemable security to a perpetual
security, other concessions from Trefoil regarding anti-dilution and remedy
provisions, and as a quid pro quo for such Trefoil concessions, a reduction in
the conversion price per share of the preferred stock. The Special Committee
also reviewed and discussed the severe cash flow problems expected to be faced
by the Company as a result of the Company's obligation to make a required
redemption payment on the Series A Preferred Stock in August 1996 of
$35 million plus accrued and unpaid dividends. The Special Committee
requested Sutro to consider the feasibility of available alternatives which
the Company might consider in order to solve its financial problems, and
delayed any determinations or decisions regarding the Share Exchange Proposal
until Sutro could report to the Special Committee.

On October 30, 1995, the Special Committee met to discuss a report
from Sutro regarding an analysis of transactions similar to the Share Exchange
Proposal. Sutro presented to the Special Committee a matrix comparing the
terms of similar transactions, including the financial condition and rationale
behind each transaction, the corporate voting policy of each company and a
description of the key terms of each transaction. Sutro also advised the
Special Committee that, in its view, obtaining outside financing for the
Company (including raising new capital in the equity or debt markets) to
resolve the cash flow problems caused by the impending mandatory redemption of
the Series A Preferred Stock would be extremely difficult and very unlikely.

On October 31, 1995, the Special Committee met to discuss and review a
proposed term sheet with respect to the Share Exchange Proposal. The Committee
considered a number of factors including terms of similar transactions, values
which the common shareholders could

<PAGE> 15

reasonably expect to receive in the event the Company was liquidated, and the
impact on current common shareholders which a reduction in the conversion price
would have in regard to voting power and equity ownership in the Company (both
on a fully diluted basis). As a result of the October 31 meeting, counsel for
the Special Committee sent to representatives of Trefoil a proposed term sheet
for the issuance of Series B Preferred Stock and the Share Exchange Proposal.

On November 7, 1995, the Special Committee met again and received a
report from its chairman and its counsel with regard to negotiations held
between representatives of the Special Committee and Trefoil and its counsel.
A discussion regarding the terms of the proposed transaction took place and the
Committee asked its counsel to further revise the term sheet and requested that
its chairman and counsel continue to negotiate with Trefoil regarding the Share
Exchange Proposal.

On December 6, 1995, the Special Committee met once again and received
a report from its Chairman and its counsel with regard to the status of
negotiations between representatives of the Special Committee and Trefoil and
its counsel. Negotiations were stalled during a portion of the period from the
Special Committee's last meeting held on November 7 due to a number of open
issues between the parties. The Special Committee reviewed an updated term
sheet for the proposed Share Exchange Proposal and a lengthy discussion
regarding the terms of the proposed transaction took place. A representative
of Sutro provided the Special Committee with an update regarding the status of
their analysis concerning the Share Exchange Proposal. The Special Committee
then asked its counsel and its Chairman to discuss and attempt to resolve the
remaining open issues with Trefoil.

The Special Committee has considered the feasibility and possibility of
obtaining a significant equity investment from a third party, or of refinancing
the Company's obligations in respect of the Series A Preferred Stock, and has
determined, based in part on its several discussions with representatives of
its financial advisor, Sutro, as well as on discussions with management of the
Company, that it is extremely unlikely that the Company could successfully
complete either type of transaction on terms that would be more attractive,
taken as a whole, to the holders of Common Stock than the Share Exchange
Proposal. Therefore, the Special Committee ultimately concluded that the Share
Exchange Proposal is the most acceptable, if not the only, viable alternative
available to the Company.

At a meeting held on December 12, 1995, after a review of all factors
it deemed relevant and based, in part, on the fairness opinion received from
Sutro, the Special Committee unanimously approved the Share Exchange Proposal.

REASONS FOR THE TRANSACTION

The Special Committee believes that the Share Exchange Proposal, taken
as a whole, is fair to, and in the best interest of, the Company and its common
shareholders. In arriving at its decision, the Special Committee considered,
among other things, the following factors:

<PAGE> 16

(1) The Company has failed to make its last four scheduled
dividend payments on the Series A Preferred Stock, and is obligated to make a
required redemption payment on the Series A Preferred Stock in August 1996. It
is unlikely that the Company will be able to generate sufficient funds from the
equity or debt markets to satisfy its redemption obligations under the Series A
Preferred Stock on terms which are likely to be more acceptable to the Company
and its common shareholders than those contained in the Share Exchange
Proposal. Therefore, if the Share Exchange Proposal is not consummated, and if
Trefoil were to seek to enforce the mandatory redemption obligation (and it has
given the Company no assurances that it will not do so), the Company may be
required to seek protection under federal or state or similar bankruptcy laws.
In such a case, while the ultimate recovery by existing common shareholders is
uncertain, the Company believes that it is likely that existing common
shareholders would be significantly diluted or possibly lose all of their
existing investment in the Company. The Share Exchange Proposal, in addition
to preserving the Company's cash and cash equivalents balances, offers existing
common shareholders the ability to maintain an ongoing equity investment in the
Company at a level of ownership that may be, but is not necessarily, in excess
of that available if the Company were to seek protection in a bankruptcy
proceeding;

(2) The Special Committee reviewed information concerning the
Company's business and operations, prospects, financial performance, financial
condition and value (including a discussion regarding likely liquidation values
of the Company's assets), and evaluated the impact of the Share Exchange
Proposal, on a pro forma basis, on the Company's consolidated income statement
and consolidated balance sheet. In addition, the mandatory redemption feature
of the Series A Preferred Stock results in the Series A Preferred Stock being
treated for a variety of purposes as debt rather than equity. The exchange of
the Series A Preferred Stock for a security that is treated solely as equity
will improve the Company's balance sheet, and should improve its ability to
obtain credit;

(3) The fact that the Company is currently in arrears in respect
of its dividend obligations regarding the Series A Preferred Stock, and the
concern over the Company's ability to meet its mandatory redemption
obligations, fosters negative speculation regarding the financial status of the
Company, which may have an adverse impact on the Company's relationships with
suppliers and customers, and on the market price of the Company's publicly
traded securities;

(4) Eliminating certain financial obligations to the holders of
the Series A Preferred Stock may have a positive impact on the Company's
ability to successfully grow its operations;

(5) The Company's current capital structure may be having an
adverse affect on the market price of the Company's publicly traded securities;

(6) The conversion price per share ($6.75) of the Series B
Preferred Stock represents a substantial premium over the current market value
of the common stock, which was traded at $1-5/8 per share on December 11, 1995
(closing price on the New York Stock Exchange (the "NYSE"));

<PAGE> 17

(7) Accrued dividends on the Series A Preferred Stock must be paid
by the Company in cash, whereas dividends on the Series B Preferred Stock will
be payable for the quarters ending on or before November 30, 1996, at the
Company's option, in additional shares of Series B Preferred Stock. This will
help preserve the Company's cash balances, and in the event such Series B
Preferred Stock is converted, it will be at a price of $6.75 per share, which
is substantially in excess of the current market price. In addition, because
the Company is in arrears on its dividend obligations in respect of the Series
A Preferred Stock, the Company is currently accruing an increased rate of
interest of 8.625% on all accrued and unpaid dividends. If the Exchange is
consummated, the rate of interest on those dividends would reduce to 7.5% per
annum during the period beginning December 1, 1995 and ending on the date of
closing of the Exchange. Moreover, upon consummation of the Share Exchange
Proposal, the Company will have satisfied its dividend obligations with respect
to the Series A Preferred Stock and will be current in its payments of
dividends on the Series B Preferred Stock;

(8) Alternatives for creation of common shareholder value by a
sale of the Company to third parties, or by obtaining a significant equity
investment from third parties, appear to be severely limited by the Company's
significant outstanding liabilities and obligations to the holders of the
Series A Preferred Stock;

(9) The need for management to address the Company's current
failure to pay dividends on the Series A Preferred Stock, and its likely
inability to satisfy the mandatory redemption obligations, continues to be a
significant diversion of management time and attention which could be better
utilized for the operations of the Company and the corporate restructuring
program;

(10) The opinion of Sutro as to the fairness of the terms of the
Share Exchange Proposal, from a financial point of view, to the common
shareholders of the Company (other than Trefoil); and

(11) The terms and conditions of the proposed Share Exchange
Proposal, taken as a whole, and the agreements contemplated thereby, represent
the most acceptable available alternative for the Company.

In view of the wide variety of factors considered in connection with
its evaluation of the Share Exchange Proposal, the Special Committee did not
find it practicable to, and generally did not, quantify or otherwise assign
relative weights to the individual factors considered in reaching its
determinations.

FAIRNESS OPINION

On December 12, 1995 Sutro issued its opinion to the Special Committee
to the effect that, as of such date and based upon its analysis and review, and
subject to certain assumptions, the consideration to be provided by the Company
pursuant to the terms of the Share Exchange Proposal is, from a financial point
of view, fair to the common shareholders of the Company (other than Trefoil)
(the "Fairness Opinion").

In connection with rendering its Fairness Opinion, Sutro reviewed and
analyzed the financial and other information that was publicly available or
furnished by the Company including information provided during discussions with
management. The Fairness Opinion is reproduced in full as Appendix IV to this
Proxy Statement and should be read in its entirety for information with respect
to Sutro's background and experience, the procedures it followed, the

<PAGE> 18

assumptions it made and the matters it considered in rendering such opinion.
No limitations were imposed by the Special Committee on the scope of Sutro's
investigation. The Company has paid Sutro a fee of $100,000 for its services
as financial advisor ($25,000 upon retention and $75,000 upon delivery of its
fairness opinion). The Company has also agreed to reimburse Sutro for its out-
of-pocket expenses, including counsel fees, and to indemnify Sutro against
certain liabilities.

SHARE EXCHANGE PROPOSAL

Certain aspects of the Share Exchange Proposal, including the terms of
the Series B Preferred Stock and the Exchange Agreement, are summarized below.
The summary does not purport to be complete and is qualified in its entirety by
reference to the Exchange Agreement which is attached as Appendix I to this
Proxy Statement, to the Certificate of Determination for the Series B Preferred
Stock annexed hereto as Appendix II (the "Certificate of Determination"), and
to the Registration Rights Amendment (as defined below) attached as Appendix
III, the full text of each of which is incorporated herein by reference.
Shareholders are urged to read the Exchange Agreement, the Certificate of
Determination and the Registration Rights Amendment, in their entirety.

THE SHARE EXCHANGE PROPOSAL

The shareholders of the Company will be asked at the Meeting to
consider and act upon the Share Exchange Proposal. Pursuant to the Exchange
Agreement, in exchange for 1,000,000 shares of Series A Preferred Stock
(constituting all of the authorized and outstanding shares of the Series A
Preferred Stock) and all accrued and unpaid dividends thereon, the Company will
issue and deliver to the holders of Series A Preferred Stock (i) 1,000,000
shares of Series B Preferred Stock, plus (ii) an additional number of shares of
Series B Preferred Stock equal to the Arrearage Amount divided by 100. For
purposes of determining the Arrearage Amount, the amount of accrued and unpaid
dividends shall be equal to the sum of (i) dividends accrued and unpaid through
November 30, 1995, plus (ii) additional dividends, accruing at a rate of 7.5%
per annum during the period beginning December 1, 1995 and ending on the
Closing Date (the "Interim Period"), on any dividends on the Series A Preferred
Stock which were accrued and unpaid as of November 30, 1995, plus (iii) current
dividends accruing and becoming payable on the Series A Preferred Stock during
the Interim Period, which shall accrue at the rate of 7.5% per annum during the
Interim Period. As of the date hereof, the parties anticipate consummating the
Share Exchange Proposal (the "Closing") approximately three business days after
the Meeting, assuming the prior satisfaction or waiver of all of the other
conditions to Closing set forth in the Exchange Agreement.

The Series B Preferred Stock will provide for powers, rights and
preferences which differ from those of the Series A Preferred Stock in a number
of important respects, including but not limited to, elimination of the
mandatory redemption obligation, changes in voting rights with respect to
elections of directors and other matters, and revisions to the anti-dilution
adjustment provisions. See "--Material Differences Between the Series A
Preferred Stock and the Series B Preferred Stock" in this section.

<PAGE> 19

PRINCIPAL TERMS OF THE SERIES B PREFERRED STOCK

Set forth below is a brief summary of the principal terms of the
Series B Preferred Stock. The summary is qualified in its entirety by
reference to the full description of the rights, preferences and privileges of
the Series B Preferred Stock set forth in the Certificate of Determination
annexed hereto as Appendix II.

Dividends

The Certificate of Determination of the Series B Preferred Stock will
provide for the issuance of up to 1,107,952 shares of the Series B Preferred
Stock, on the terms set forth therein. The Series B Preferred Stock will have
a liquidation preference of $100 per share plus accrued and unpaid dividends
and will accrue dividends, on a cumulative basis, at a rate of 7.5% per year
(compounding at 8.625% per year on dividends accrued and unpaid when due, if
any). Dividends payable for the quarterly periods ending on or before November
30, 1996 will be payable, at the Company's option, in either cash or additional
shares of Series B Preferred Stock valued at $100 per share (the "Stated
Value"); thereafter, dividends on the Series B Preferred Stock will be payable
in cash. The Series B Preferred Stock is not entitled to any dividends or
other distributions except as provided in the Certificate of Determination.
The Series B Preferred Stock will rank senior to the Common Stock and, except
as approved by the vote of the Series B Preferred Stock, voting separately as a
class, to any other class or series of the Company's capital stock.

The Series B Preferred Stock will be perpetual, with no mandatory
redemption requirement. The Company may, at its option, redeem, in whole or in
part, shares of the Series B Preferred Stock, at a redemption price equal to
the Stated Value, at any time provided that dividends payable on the Series B
Preferred Stock have been paid in full and the then Current Market Price (as
defined in the Certificate of Determination for the Series B Preferred Stock,
which definition is the same as that used in the Restated Articles of
Incorporation with respect to the Series A Preferred Stock) of the Common Stock
is equal to at least 150% of the then current Series B conversion price for
thirty consecutive Trading Days (as defined in the Certificate of
Determination).

Whenever quarterly dividends payable on shares of Series B Preferred
Stock are not paid in full, until all unpaid dividends payable shall have been
paid in full, or if, prior to June 1, 1997, the affirmative vote of the holders
of at least a majority of the outstanding shares of Series B Preferred Stock
voting as a class shall not have been obtained, the Company may not (A) declare
or pay dividends or make any other distributions (the "Junior/Parity
Distributions") on any shares of (i) Common Stock and any other capital stock
of the corporation which ranks junior as to dividends to the Series B Preferred
Stock (the "Junior Dividend Stock"), other than dividends or distributions
payable in Junior Dividend Stock or (ii) any capital stock of the corporation
ranking on a parity as to dividends with the Series B Preferred Stock (the
"Parity Dividend Stock"), except dividends or distributions payable in Junior
Dividend Stock and dividends or distributions paid ratably on the Series B
Preferred Stock and all Parity Dividend Stock on which dividends are payable or
in arrears, in proportion to the total amounts to which the holders of all
shares of the Series B Preferred Stock and such Parity Dividend Stock are then
entitled, and (B) redeem,

<PAGE> 20

purchase or make any other acquisition (the "Junior/Parity/Series B Preferred
Stock Acquisition") of (i) any shares of Junior Dividend Stock or the Common
Stock and any other capital stock of the corporation which ranks junior upon
liquidation, dissolution or winding up to the Series B Preferred Stock or
Parity Dividend Stock or any capital stock of the corporation ranking on a
parity upon liquidation, dissolution or winding up with the Series B Preferred
Stock, subject to certain exceptions, or (ii) any shares of Series B Preferred
Stock, except those surrendered for conversion or redeemed in accordance with
the provisions of the Certificate of Determination.

Voting

The Series B Preferred Stock will vote together with the Common Stock
on all matters submitted to a vote of the holders of the Common Stock, with
voting power equal to the number of shares of Common Stock into which the
Series B Preferred Stock is then convertible. In addition, the Series B
Preferred Stock will have the right to vote as a separate class with respect to
the authorization or issuance of any additional shares of Series B Preferred
Stock or the creation of any class or series of the Company's capital stock
which would rank senior to or on a par with the Series B Preferred Stock, or
with respect to any other action that would adversely affect the rights,
preferences and privileges of the Series B Preferred Stock.

Conversion

The Series B Preferred Stock will be convertible into shares of the
Common Stock at an initial conversion ratio of 14.815 shares of Common Stock
per share of Series B Preferred Stock (the "Series B Conversion Ratio") (an
effective conversion price of $6.75 per share), subject to adjustment upon the
occurrence of certain dilutive events, including, but not limited to, (i) the
issuance of shares of the Company's Common Stock at a price or for property
with a fair market value of less than the then Current Market Price (calculated
as provided in the Certificate of Determination) of the Common Stock, (ii) the
payment of a dividend or the making of a distribution on the outstanding shares
of Common Stock in shares of Common Stock, (iii) the subdivision of the
outstanding shares of Common Stock, or (iv) the issuance by reclassification of
the shares of Common Stock any shares of capital stock of the corporation.
Accrued and unpaid dividends on the Series B Preferred Stock will be payable at
the time of conversion of shares of Series B Preferred Stock during the period
ending on November 30, 1996, at the Company's option, in either cash or in
additional shares of Common Stock valued at the Series B Conversion Price, and
thereafter in cash; provided, however, that if the Company is required to pay
such accrued and unpaid dividends in cash and fails to do so, such dividends
will continue to be treated as accrued and unpaid dividends until paid.

MATERIAL DIFFERENCES BETWEEN THE SERIES A PREFERRED STOCK AND THE SERIES B
PREFERRED STOCK

Set forth below is a summary of the material differences between the
Series A Preferred Stock and the Series B Preferred Stock. The description of
the rights, preferences and privileges of the Series A Preferred Stock and the
Series B Preferred Stock are qualified in their entirety by reference to the
Certificate of Determination annexed hereto as Appendix II and to Article Four
of the Company's Restated Articles of Incorporation annexed hereto as Appendix
V which

<PAGE> 21

contains the terms and conditions of the Series A Preferred Stock, the full
text of each of which is incorporated herein by reference.

Redemption

Mandatory. The Series A Preferred Stock is subject to
mandatory redemption, requiring the Company to redeem 350,000 shares on August
31, 1996 and 162,500 shares on August 31st of each year thereafter until all
shares have been redeemed. The Series B Preferred Stock has no rights to
mandatory redemption.

Optional. The Company has the option to redeem shares of the
Series A Preferred Stock, in whole or in part, in integral multiples having an
aggregate Stated Value of at least $15,000,000, at any time provided that all
dividends payable on the Series A Preferred Stock have been paid in full and
the then Current Market Price of the Common Stock is equal to at least 175%
(currently $17.50 per share) of the conversion price of the Series A Preferred
Stock (the "Series A Conversion Price") for thirty consecutive Trading Days.
The terms of the Series B Preferred Stock provide that the Company may, at its
option, redeem shares of the Series B Preferred Stock, in integral multiples
having an aggregate Stated Value of at least $5,000,000, at any time provided
that all dividends payable on the Series B Preferred Stock have been paid in
full and the then Current Market Price of the Common Stock is equal to at least
150% (currently $10.125) of the conversion price of the Series B Preferred
Stock (the "Series B Conversion Price") for thirty consecutive Trading Days.

Voting Rights

Voting Together with the Common Stock and Election of
Directors. The Series A Preferred Stock is entitled to vote with the Common
Stock, on an as converted basis, on all matters other than the election of
directors. The Series A Preferred Stock, voting as a separate class, is
entitled to elect three directors of the Company, as long as an aggregate value
of at least $25,000,000 in shares of Series A Preferred Stock are issued and
outstanding and as long as Trefoil owns beneficially or of record no less than
a majority of the then outstanding shares of Series A Preferred Stock. In
addition, if the dividends payable on the Series A Preferred Stock are accrued
and unpaid in an amount equal to three full quarterly dividends or if the
mandatory redemption obligations are not satisfied, the holders of Series A
Preferred Stock, voting as a separate class, are entitled to elect four
additional directors of the Company (expanding the Board from ten directors to
fourteen, and entitling the holders of Series A Preferred Stock to elect seven
of the fourteen directors). The holders of the Series A Preferred Stock are
entitled to such additional directors until all unpaid dividends are paid or
the mandatory redemption obligations are satisfied, as the case may be.
Dividend payments for the last four full quarters have not been paid on the
Series A Preferred Stock, and the holders of the Series A Preferred Stock
currently have the right to elect four additional directors. The holders of
the Series A Preferred Stock have not yet exercised this right, and pursuant to
the terms of the Exchange Agreement have agreed not to exercise it as long as
the Exchange Agreement is not terminated.

The Series B Preferred Stock, voting as a separate class, will
not be entitled to elect any directors of the Company. Instead, the Series B
Preferred Stock would vote together

<PAGE> 22

with the Common Stock, on an as converted basis, on all matters submitted to a
vote of the holders of the Common Stock (including the election of directors),
with voting power equal to the number of shares of Common Stock into which the
Series B Preferred Stock is then convertible.

The percentage of voting power of the Company's Common Stock
represented by the Series A Preferred Stock, on an as converted basis, is
approximately 33.4%. As a result of the Exchange, and in particular the
decrease in the conversion price, the percentage of voting power of the Common
Stock represented by Trefoil as the holder of the Series B Preferred Stock, on
an as converted basis ((i) including 1,000,000 shares of Common Stock currently
held by Trefoil and assuming Trefoil does not sell its shares of Common Stock,
or purchase additional shares, (ii) giving effect to the exchange for shares of
Series B Preferred Stock of all accrued and unpaid dividends on the Series A
Preferred Stock through the closing date and (iii) assuming that all dividends
in respect of the Series B Preferred Stock until November 1996 are paid in
additional shares of stock) will be approximately 45.3%. This represents a
significant increase in voting power from the Series A Preferred Stock to the
Series B Preferred Stock. As stated above, the Series B Preferred Stock will
have the right to vote with the Common Stock on all matters submitted to the
Common Stock for voting, including the election of directors. Accordingly, the
holders of the Series B Preferred Stock will effectively have the right to
determine the outcome of all matters submitted to the Common Stock for voting,
including the election of directors. Pursuant to California's cumulative
voting provisions for directors, the holders of the Series B Preferred Stock
would be able to elect at least four directors of the Company's ten directors,
and Trefoil due to its ownership of the additional 1,000,000 shares of common
stock would, as a practical matter, be able to elect at least five of the
Company's ten directors (assuming Trefoil does not sell its shares of Common
Stock, or purchase additional shares).

Rights to Vote as a Separate Class on Matters Other than the
Election of Directors. The Series A Preferred Stock has the right, voting as a
separate class, to vote with respect to many business decisions typically
within the sole discretion of the Board of Directors of the Company. The
matters upon which the Series A Preferred Stock currently has the right to
vote, as long as shares of Series A Preferred Stock having an aggregated Stated
Value of $25,000,000 remain outstanding and with respect to certain of the
matters, as long as Trefoil owns beneficially or of record no less than a
majority of the then outstanding shares of the Series A Preferred Stock,
include, among other matters: (i) engaging in or consummating any
extraordinary transaction, including, without limitation, any reorganization,
recapitalization, liquidation, dissolution or winding up of the Company or any
merger of the Company with or into any other corporation where the surviving
corporation would have stock ranking prior to, or on a parity with, the Series
A Preferred Stock; (ii) any material change in the nature of the business of
the Company and its subsidiaries; (iii) any material alteration, amendment or
modification of its credit facility providing for working capital borrowings
and letters and credit; and (iv) the adoption and any material amendment or
modification of the Operating Plan (as defined in the Company's Restated
Articles of Incorporation) for each fiscal year of the Company and its
subsidiaries.

See the Company's Restated Articles of Incorporation, attached hereto
as Appendix V, Article III, Section 3 for a complete list of the matters upon
which the Series A Preferred Stock is entitled to vote.

<PAGE> 23

The Series B Preferred Stock will have the right to vote as a separate
class only with respect to the authorization or issuance of any additional
shares of Series B Preferred Stock or the creation of any class or series of
the Company's capital stock which would rank senior to or on a parity with the
Series B Preferred Stock, with respect to any other action that would adversely
affect the rights, preferences and privileges of the Series B Preferred Stock,
and until June 1, 1997, with respect to the declaration or payment of any
Junior/Parity Distributions or the making of any Junior/Parity/Series B
Preferred Stock Acquisitions.

Conversion

Conversion Price. The Series A Preferred Stock currently is
convertible into shares of Common Stock at its initial Series A Conversion
Ratio of 10 shares of Common Stock per share of Series A Preferred Stock (an
effective Series A Conversion Price of $10.00 per share), subject to adjustment
upon the occurrence of certain dilutive events. The Series B Preferred Stock
would be convertible into shares of the Common Stock at an initial Series B
Conversion Ratio of 14.815 shares of Common Stock per share of Series B
Preferred Stock (an effective Series B Conversion Price of $6.75 per share),
subject to adjustment upon the occurrence of certain dilutive events.

Anti-Dilution Adjustments. The Series A Conversion Ratio and
the Series B Conversion Ratio are each subject to adjustment upon the
occurrence of certain events, including the payment of any dividend or
distribution, subdivision, combination or reclassification resulting in a
change in the number of shares of Common Stock outstanding. The conversion
ratios of the preferred stock are also subject to adjustment upon the issuance
of new shares of Common Stock (or rights, warrants or other securities
convertible into or exchangeable for shares of Common Stock) for cash or
property with a fair market value per share, in the case of the Series A
Preferred Stock, equal to less than the Series A Conversion Price or, in the
case of the Series B Preferred Stock, equal to less than the then Current
Market Price. Currently, under the terms of the Series A Preferred Stock, if
the Company were to issue new Common Stock for less than $10 per share (the
Series A Conversion Price), with certain exceptions, an anti-dilution
adjustment would be made. After the exchange of the Series A Preferred Stock
for Series B Preferred Stock, the Company would be able to issue new Common
Stock at the Current Market Price ($___ per share as of the date hereof), with
certain exceptions, without triggering an anti-dilution adjustment.

In addition, pursuant to the terms of the Series B Preferred
Stock, the issuance by the Company of (i) Common Stock or convertible
securities in connection with an arm's length acquisition from an unaffiliated
third party of all or any portion of a business as a going concern, or (ii)
Common Stock or convertible securities issued in a bona fide public offering
pursuant to a firm commitment underwriting, will not entitle the holders of the
Series B Preferred Stock to an anti-dilution adjustment in the Series B
Conversion Price.

In the event of a merger, consolidation or reorganization of
the Company in which the Company is not the surviving corporation, the terms of
the Series A Preferred Stock provide that the holders of the Series A Preferred
Stock can demand to receive consideration different

<PAGE> 24

from the holders of the Common Stock, provided that if the consideration
receivable by the holders of Common Stock is equal to at least 175% of the
conversion price for the Series A Preferred Stock, the Series A Preferred Stock
will receive the same consideration, on an as converted basis, as the Common
Stock (the "Equal Consideration Exception"). The holders of Series B Preferred
Stock will continue to have the same right as the holders of Series A Preferred
Stock to demand different consideration, however the Equal Consideration
Exception is triggered when the consideration receivable is equal to at least
125% of the conversion price for the Series B Preferred Stock. Despite the
foregoing rights, given the voting power held by the holders of the Series B
Preferred Stock, it is extremely unlikely that any such transaction could occur
without the approval of the holders of the Series B Preferred Stock upon terms
agreeable to such holders. See "--Anti-Takeover Effects of the Exchange."

Payment of Accrued and Unpaid Dividends upon Conversion. The
terms of the Series A Preferred Stock and the Series B Preferred Stock each
provide that upon the conversion of preferred stock into Common Stock, the
holder of the shares of preferred stock being converted is entitled to receive
cash in an amount, or shares of Common Stock valued at the conversion price,
equal to the accrued and unpaid dividends on such shares of preferred stock.
The Series A Preferred Stock provides that the decision to accept cash or
shares of Common Stock shall be made by the holder of the Series A Preferred
Stock, and that if cash is elected but the Company fails to pay such amounts
because funds are not legally available, that the Company must pay suchamounts
promptly upon such funds becoming legally available. The Series B Preferred
Stock provides that the decision to pay such accrued and unpaid dividends in
cash or shares of Common Stock shall be at the Company's option during the
period ending on November 30, 1996 and thereafter at the holder's option in the
event the Company fails to make any such cash payment when due. During any
period after a conversion of Series B Preferred Stock when the Company has not
paid any such dividends in cash after the holder has elected a cash payment,
such unpaid dividends are treated as dividends in arrears for all purposes,
including compounding at the default rate, until paid.

Conversion Premium at time of Acquisition. At the time
Trefoil entered into the agreement pursuant to which it initially acquired the
shares of Series A Preferred Stock, the Series A Conversion Price represented a
discount to the then current market price of the Common Stock of 5%, and at the
time the acquisition of the Series A Preferred Stock was consummated by
Trefoil, the Series A Conversion Price represented a discount to the then
current market price of the Common Stock of 20%. The Series B Conversion Price
represented a conversion premium of [______]% over the closing price of the
Common Stock on the NYSE on the date of the Exchange Agreement.

Dividend Rights

Form of Payment. All dividends on the Series A Preferred
Stock are payable in cash. Dividends payable on the Series B Preferred Stock
for the quarterly periods ending on or before November 30, 1996 are payable, at
the Company's option, in cash or in additional shares of Series B Preferred
Stock, valued at $100 per share. After November 30, 1996, dividends on the
Series B Preferred Stock will be payable in cash.

<PAGE> 25

Registration Rights

The Series A Preferred Stock is not publicly listed on any securities
exchange and the holders thereof do not have any rights to request registration
of the Series A Preferred Stock. The Series B Preferred Stock would not be
publicly listed on any securities exchange. However, pursuant to the proposed
amendments to the Registration Rights Agreement, dated May 27, 1991, between
the Company and Trefoil, the holders of Series B Preferred Stock may request
registration under the Securities Act of 1933, as amended (the "Securities
Act") of all or part of such holder's shares of the Series B Preferred Stock,
which requests shall count against the total allowable number of requests for
registration of the shares of common stock issuable upon conversion of the
Series B Preferred Stock.

Certain Restrictions

The Series A Preferred Stock provides that whenever quarterly
dividends have not been paid in full in respect to the Series A Preferred
Stock, the Company may not redeem, purchase or otherwise acquire for
consideration any shares of any capital stock ("Parity Liquidation Stock") of
the Company ranking on a parity upon liquidation, dissolution or winding up
with the Series A Preferred Stock, with certain exceptions, including that the
Company may redeem, purchase or otherwise acquire shares of Parity Liquidation
Stock pursuant to any mandatory redemption, put, sinking fund or other similar
obligation (the "Put Exception"). Because the Series B Preferred Stock will be
perpetual and not redeemable, the Put Exception for mandatory redemptions,
puts, sinking funds or similar obligations is inapplicable to the Series B
Preferred Stock, and has not been included in the terms of the Certificate of
Determination with respect to the Series B Preferred Stock.

THE EXCHANGE AGREEMENT

Set forth below are certain material terms of the Exchange Agreement
and the Registration Rights Amendment. The following discussion is qualified
in its entirety by reference to the Exchange Agreement which is attached as
Appendix I hereto and the Registration Rights Amendment which is attached as
Appendix III hereto, each of which is incorporated herein by such reference.

<PAGE> 26

Election of Additional Directors

Trefoil has agreed that until termination of the Exchange Agreement,
it will not exercise the right, as set forth in Article Three, Section 3.d.(i)
of the Company's Restated Articles of Incorporation and triggered by the
non-payment of dividends payable in an amount equal to three full quarterly
dividends, to elect four directors in addition to the three directors to which
the Series A Preferred Stockholders are currently entitled.

Certain Anti-Dilution Adjustments

The Company has agreed that if, at any time during the period between
the date of execution of the Exchange Agreement and the Closing (the
"Adjustment Period"), the Company shall issue any shares of Common Stock (or
rights, warrants or other securities convertible into Common Stock) or make any
distributions to holders of Common Stock under circumstances which would have
required an adjustment to the Conversion Price and the Conversion Ratio (as
such terms are defined in the Certificate of Determination) pursuant to Section
8.g.(2) of the Certificate of Determination if the Series B Preferred Stock had
been issued at the beginning of the Adjustment Period, then the Conversion
Price and the Conversion Ratio in the Certificate of Determination as filed
with the Secretary of State of the State of California shall be adjusted, prior
to the Closing, in respect of such issuance as if the Series B Preferred Stock
had been outstanding at the beginning of the Adjustment Period.

Sale of Series A Preferred Stock

Under the terms of the Exchange Agreement, Trefoil has agreed that,
other than the transfer contemplated by the Exchange Agreement, Trefoil will
not, until termination of the Exchange Agreement, directly or indirectly sell,
transfer, assign or otherwise dispose of, or pledge, grant any option or
security interest with respect to, or otherwise encumber its shares of Series A
Preferred Stock. However, Trefoil may sell or enter into an agreement to sell
its shares of Series A Preferred Stock at any time prior to the twentieth day
prior to [the date scheduled for Shareholders' Meeting] (a "Transfer") if: (i)
the person so acquiring shares of Series A Preferred Stock (the "Transferee")
agrees in writing to be bound by the terms of the Exchange Agreement, (ii) the
Transfer will not impede or delay in any material respect consummation of the
transactions contemplated under the Exchange Agreement, and (iii) Trefoil
agrees in writing to remain liable hereunder for any breach of its obligations
or the obligations of the Transferee under the Exchange Agreement. Trefoil has
also agreed that it will reimburse the Company for all additional expenses
incurred by the Company in connection with, or resulting from a Transfer, up to
an aggregate amount of $50,000.

Voting Agreement

Trefoil has agreed that, during the time the Exchange Agreement is in
effect, it will, if and as requested to do so by the Company, (a) appear at any
annual or special meeting of shareholders of the Company (including, without
limitation, the Meeting) for the purpose of obtaining a quorum; (b) vote in
person or by irrevocable proxy, all of the shares of Common

<PAGE> 27

Stock now owned or with respect to which Trefoil has or shares voting power and
all shares of Series A Preferred Stock (collectively, the "Shares") in favor of
the Exchange Agreement and the Exchange; (c) vote the Shares against any
action, proposal or agreement that could reasonably be expected to result in a
breach in any material respect of any covenant, representation or warranty or
any other obligation of the Company under the Exchange Agreement, or which
could reasonably be expected to result in any of the conditions to the
Company's obligations under this Agreement not being fulfilled; and/or (d)
irrevocably waive its rights to vote in any manner (whether separately as a
class or together with the Common Stock) with respect to the Exchange Agreement
and the Exchange.

Meeting of Shareholders

The Company has agreed to take all action necessary in accordance with
California Law and its Restated Articles of Incorporation and Bylaws to convene
a meeting of the Company's shareholders to act on the Exchange Agreement and
the Exchange (the "Shareholders' Meeting") not later than April 10, 1996, and
to use its reasonable best efforts to solicit from shareholders of the Company
proxies in favor of the approval of the Exchange by the Requisite Vote, as
defined below, of the shareholders of the Company.

Conditions to Closing

The obligations of the Company and Trefoil to consummate the Exchange
are conditioned upon receipt of shareholder approval of the Share Exchange
Proposal and the Fairness Opinion not having been modified, rescinded or
otherwise withdrawn. In addition, the Exchange Agreement provides that the
obligations of the Company and Trefoil to consummate the Exchange are subject
to customary conditions including the performance of all agreements and
covenants and the continued accuracy of representations and warranties therein,
the absence of any injunction or other court order restraining or prohibiting
the consummation of the Exchange, the obtaining of all required consents,
waivers, approvals and authorizations, and compliance with all requirements of
any applicable foreign, federal, state or local law, statute, treaty,
ordinance, rule, regulation, order, writ, injunction, decree, judgment or
decree.

The obligations of Trefoil to consummate the Exchange are also
conditioned upon (i) acceptance by the Secretary of State of California for
filing of the Certificate of Determination for the Series B Preferred Stock;
(ii) receipt by Trefoil of a legal opinion from counsel to the Company; (iii)
execution and delivery of the amendment to the Registration Rights Agreement,
dated as of May 27, 1991 between the Company and Trefoil (the "Registration
Rights Amendment"); and (iv) approval of the shares of Common Stock issuable
upon conversion of the Series B Preferred Stock for listing on the NYSE. The
obligations of the Company to consummate the Exchange are also conditioned upon
the Company obtaining a consent and waiver to the transactions contemplated by
the Exchange Agreement from its bank pursuant to the Company's revolving credit
agreement.

<PAGE> 28

Representations and Warranties

The Exchange Agreement contains customary representations and
warranties of the Company and Trefoil, including, among others, by the Company
as to due organization and standing; corporate power and authority;
enforceability of the Exchange Agreement; capitalization; title to shares;
consents, approvals, and filings; the absence of violations of the Articles of
Incorporation, Bylaws or material agreements; absence of litigation; and
receipt of the Fairness Opinion; and by Trefoil as to corporate and partnership
power and authority; the absence of violations of Trefoil's certificate of
limited partnership or agreement of limited partnership or material agreements;
consents, approvals and filings; absence of litigation; title to shares; and
certain investment representations.

Amendment, Termination and Waiver

The Exchange Agreement provides that it may be amended or modified in
writing, provided that any condition so amended, modified or waived shall not
be effective unless approved by the Special Committee of the Company's Board of
Directors, and by a majority of the holders of the Series A Preferred Stock.

The Exchange Agreement provides that it may be terminated at any time
prior to Closing (i) by mutual consent of the Company and Trefoil; (ii) by
Trefoil, upon a material breach of any representation, warranty, covenant or
agreement on the part of the Company set forth in the Exchange Agreement, or if
any representation or warranty of the Company shall have become untrue in any
material respect; (iii) by the Company, upon a material breach of any
representation, warranty, covenant or agreement on the part of Trefoil set
forth in the Exchange Agreement, or if any representation or warranty of the
Trefoil shall have become untrue in any material respect; (iv) by either
Trefoil or the Company, if there shall be any final, non-appealable order or
injunction imposed by a court of competent jurisdiction preventing the
consummation of the Exchange; or (v) by either Trefoil or the Company, if the
Exchange shall not have been consummated on or before April 15, 1996; provided,
however, Trefoil shall have no right to terminate this Agreement pursuant to
this clause (v) prior to May 15, 1996 if the Exchange shall not have been
consummated prior to April 15, 1996 as a direct or indirect result of a
Transfer.

Expenses

In addition to bearing its own expenses in connection with the
Exchange contemplated by the Exchange Agreement, the Company has agreed to pay
the reasonable out of pocket expenses incurred by Trefoil in connection with
the Exchange contemplated by the Exchange Agreement, up to an aggregate amount
of $17,500.

Certain Relationships

From time to time, Stephen A. Koffler and investment banking firms
employing Mr. Koffler have been retained to provide investment banking and
related services to the Company, Shamrock Capital Advisors, Inc. ("SCA"),
Shamrock Holdings of California, Inc. ("Shamrock") and their respective
affiliates. SCA is the investment manager for Trefoil and provides advisory
services to the Company. Trefoil was organized by the senior executive
officers of Shamrock.

During fiscal 1995, Ann E. Myers served as consultant to the Company
with respect to its women's athletic product line.

REGISTRATION RIGHTS AMENDMENT

The Registration Rights Agreement, dated May 27, 1991, between the
Company and Trefoil, will be amended by the parties to (i) change all
references to Series A Preferred Stock to Series B Preferred Stock and (ii)
permit holders of Series B Preferred Stock to request registration under the
Securities Act of all or part of

<PAGE> 29

such holder's shares of the Series B Preferred Stock, which requests shall
count against the total allowable number of requests.

REASONS FOR SEEKING SHAREHOLDER APPROVAL

Approval of the Share Exchange Proposal by the Company's shareholders
is not required under California law. However, because the Share Exchange
Proposal involves the Company and Trefoil, an entity with which several of the
Company's directors are affiliated, approval of the Share Exchange Proposal is
being placed before the shareholders so that the shareholders may exercise
their independent judgment upon the reasonableness to the Company of the Share
Exchange Proposal, and as to whether the Share Exchange Proposal is in the best
interests of the Company. Approval of the Share Exchange Proposal by
shareholders would meet the requirements of Section 310 of the California
General Corporation Law relating to transactions with Interested Directors.

The Company's listing agreement with the New York Stock Exchange
("NYSE") with respect to the outstanding Common Stock requires shareholder
approval for the issuance of the Series B Preferred Stock. Shareholder
approval of the Share Exchange Proposal will constitute shareholder approval
for NYSE purposes.

Under the Company's Restated Articles of Incorporation, the approval
of the holders of a majority of the Series A Preferred Stock, voting separately
as a class is required for any proposal to issue any series of any class of the
Company's capital stock ranking pari passu with the Series A Preferred Stock or
to take any other corporate action that would alter, change or otherwise
adversely affect in any way the powers, preferences or rights of the Series A
Preferred Stock is proposed. However, because the holders of the Series A
Preferred Stock may be deemed to be interested persons, they have agreed not to
vote and not to have their shares counted for purposes of determining the
presence of a quorum. Because California law requires that approval of the
Share Exchange Agreement, if sought, be obtained by the affirmative vote of a
majority of shares represented and voting at a duly held meeting at which a
quorum is present (excluding the vote of the Series A Preferred Stock and any
shares of Common Stock held by Interested Directors), the votes of the holders
of Series A Preferred Stock will not be counted for purposes of determining
whether the Share Exchange Proposal has been approved by shareholders.

EFFECT ON HOLDERS OF THE COMMON STOCK

The principal effects of the Share Exchange Proposal on the holders of
Common Stock will result from (i) elimination of the mandatory redemption
obligation of the Series A Preferred Stock and (ii) the differences in voting
rights between the Series A Preferred Stock and the Series B Preferred Stock,
with Trefoil, the holder of the Series A Preferred Stock currently having
approximately 33% of the voting power of the Company, on an as converted
basis, and after the Exchange, as holder of the Series B Preferred Stock having
approximately 45% of the voting power of the Company, on an as converted basis.
Each of these effects is described in detail elsewhere in this Proxy Statement.
See "-- Principal Terms of the Series B Preferred Stock," "-- Material
Differences Between the Series A Preferred Stock and the Series B Preferred
Stock" and "-- Anti-takeover Effects of the Exchange" in this section.

<PAGE> 30

The Company believes that the benefits to shareholders of the
elimination of the mandatory redemption obligation, as described under
"Background of and Reasons for the Transaction -- Reasons for the
Transaction" and the elimination of the rights of the holders of the Series A
Preferred Stock to vote with respect to certain enumerated management
decisions, should outweigh the impact on the Common Stock of the increase in
equity ownership and voting power of the Series B Preferred Stock (on a
converted basis) resulting from the lowered conversion price. The Company
further believes that the benefit to the Company and the holders of Common
Stock of the conservation of cash resulting from the agreement of the holders
of the Series A Preferred Stock to accept additional shares of Series B
Preferred stock in satisfaction of (i) dividends arrearages on the Series A
Preferred Stock and (ii) dividend payments on the Series B Preferred Stock
through November 30, 1996, outweighs the additional increase in voting power of
the Series B Preferred Stock associated with the receipt of such additional
shares.

REQUISITE VOTE

The approval of the Share Exchange Proposal requires the affirmative
vote of a majority of the issued and outstanding shares of the Company's Common
Stock present and voting at a meeting at which a quorum is present; provided,
however, that Interested Shares, as defined below, will not be counted for the
purpose of quorum or as part of the shares present and voting. Interested
Shares means all of the shares of Series A Preferred Stock, voting separately
as a class or on an as converted basis, and any shares of Common Stock owned by
Trefoil, or any Interested Director. Those shares abstaining from voting
(other than those already excluded) will not count as part of the affirmative
vote required, but will count for the purpose of determining the presence of a
quorum.

INTERESTS OF CERTAIN PERSONS IN THE TRANSACTION

Stanley P. Gold, a director, Chairman of the Board and Chief Executive
Officer of the Company, is a director elected by the holders of Series A
Preferred Stock, and is President and Managing Director of Trefoil Investors,
Inc. ("TII"), the General Partner of Trefoil.

Robert G. Moskowitz, a director of the Company, is a director elected
by the holders of Series A Preferred Stock and a Managing Director of TII.

Vappalak A. Ravindran, a director of the Company, is a director
elected by the holders of Series A Preferred Stock.

Walter C. Bladstrom, a director of the Company, owns a 0.1% limited
partnership interest in Trefoil.

Clifford A. Miller, a director of the Company, is a Senior Consultant
to Shamrock Holdings, Inc. ("SHI"). TII was organized by the Senior Executives
of Shamrock Holdings of California, Inc. Mr. Miller, in his position as
Senior Consultant, provides consulting services to Shamrock Capital Advisors
and other Shamrock entities.

<PAGE> 31

The Company has agreed to pay the reasonable out-of-pocket expenses
incurred by Trefoil in connection with the exchange contemplated by the
Exchange Agreement, up to an aggregate amount of $17,500.

ANTI-TAKEOVER EFFECTS OF THE EXCHANGE

The percentage of voting power of the Company's Common Stock
represented by Trefoil, including its shares of Series A Preferred Stock, on an
as converted basis, and 1,000,000 shares of Common Stock currently held by
Trefoil, is approximately 33.4%. As a result of the Exchange, and in
particular the decrease in the conversion price, the percentage of voting power
of the Common Stock represented by Trefoil as the holder of the Series B
Preferred Stock, on an as converted basis ((i) including 1,000,000 shares of
Common Stock currently held by Trefoil and assuming Trefoil does not sell its
shares of Common Stock, or purchase additional shares, (ii) giving effect to
the exchange for shares of Series B Preferred Stock of all accrued and unpaid
dividends on the Series A Preferred Stock through the closing date and (iii)
assuming that all dividends in respect of the Series B Preferred Stock until
November 1996 are paid in additional shares of stock) will be approximately
45.3%. This represents a significant increase in voting power from the Series
A Preferred Stock to the Series B Preferred Stock. As stated above, the Series
B Preferred Stock will have the right to vote with the Common Stock on all
matters submitted to the Common Stock for voting, including the election of
directors. Accordingly, the holders of the Series B Preferred Stock will
effectively have the right to determine the outcome of all matters submitted to
the Common Stock for voting, including the election of directors. As long as
all of the shares of Series B Preferred Stock are held by a single holder or a
group of holders acting together, any person or entity seeking to acquire
control of the Company will almost certainly require the agreement of such
holder or group, thereby making it more difficult, if not impossible, as a
practical matter, for any potential acquirer to acquire control of the Company
without the approval of such holder or group of holders. Further such holders
of the Series B Preferred Stock may seek to negotiate terms different from (and
possibly more advantageous than) the terms available to holders of the Common
Stock.

THE BOARD OF DIRECTORS RECOMMENDS A VOTE "FOR"
APPROVAL OF THE SHARE EXCHANGE PROPOSAL

<PAGE> 32

SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

The following table sets forth certain information regarding the
shares of Common Stock beneficially owned as of December 1, 1995 by each person
or entity who, insofar as the Company has been able to ascertain, beneficially
owned more than 5% of the Company's Common Stock as of such date. The table
also reflects the ownership of the issued and outstanding shares of Series A
Preferred Stock.

<TABLE>
<CAPTION>
Amount and
Title Name and Address Nature of Percent
of Class of Beneficial Owners Beneficial Ownership (1) of Class
-------- -------------------- ------------------------ --------
<S> <C> <C> <C>
Common Trefoil Capital Investors, L.P. 11,000,000(2) 33.40%
c/o Trefoil Investors, Inc.
4444 Lakeside Drive
Burbank, CA 91505

Common Pentland Ventures Ltd. 1,644,445(3) 7.05%
c/o Pentland Group plc.
The Pentland Centre
Lakeside, Squires Lane
Finchley N3 2QL
England

Preferred Trefoil Capital Investors, L.P. 1,000,000 100.00%
c/o Trefoil Investors, Inc.
4444 Lakeside Drive
Burbank, CA 91505
</TABLE>

(1) Unless otherwise indicated, each named entity has sole voting and
investment power over the shares beneficially owned by it.

(2) Includes 10,000,000 shares that represent the shares of the Company's
Common Stock issuable upon conversion of the shares of Series A
Preferred Stock.

(3) Includes 400,000 shares which Pentland Ventures Ltd. presently has the
right to acquire by the exercise of options granted pursuant to the
Stock Option Agreement, dated as of April 28, 1992, between L.A. Gear,
Inc. and Pentland Ventures Ltd.

OWNERSHIP OF COMMON STOCK BY DIRECTORS AND OFFICERS

The following table sets forth certain information regarding the
shares of Common Stock beneficially owned by (a) each director of the Company,
(b) the Company's Chief Executive Officer, and the four other most highly
compensated executive officers of the Company for the fiscal year ended
November 30, 1995 (collectively, the "Named Executive Officers") and (c) all
current directors and executive officers of the Company as a group (15
persons). [This information has been provided by each of the directors and
executive officers as of December _____, 1995 at the request of the Company,
and] includes the number of shares which such persons have the right to acquire
within 60 days of such date by the exercise of stock options vested pursuant to
the Company's 1986 Stock Option Plan (the "1986 Stock Option Plan"), 1992 Stock
Option Plan for Eligible Non-employee Directors (the "1992 Stock Option Plan
for Eligible Non-employee Directors"), and 1993 Stock Incentive Plan (the "1993
Stock Incentive Plan"). No shares of the Company's outstanding Preferred Stock
are held by such individuals.

<PAGE> 33

Amount and Nature of Percent
Name Beneficial Ownership (1) of Class (2)
---- ------------------------ ------------
<S> <C> <C>
Directors Elected by Holders of Common Stock:
William L. Benford . . . . . . . . . . . . . . . . . . . . . . . . 248,847(3) 1.07%
Stephen A. Koffler . . . . . . . . . . . . . . . . . . . . . . . . 45,000(4) *
Allan E. Dalshaug . . . . . . . . . . . . . . . . . . . . . . . . . 25,000(4) *
Clifford A. Miller . . . . . . . . . . . . . . . . . . . . . . . . 30,000(5) *
Ann E. Meyers . . . . . . . . . . . . . . . . . . . . . . . . . . . 26,000(6) *
Walter C. Bladstrom . . . . . . . . . . . . . . . . . . . . . . . . 20,000(7) *
Willie D. Davis . . . . . . . . . . . . . . . . . . . . . . . . . . 25,000(8) *

Series A Directors
Stanley P. Gold . . . . . . . . . . . . . . . . . . . . . . . . . . 890,000(9) 3.75%
Robert G. Moskowitz . . . . . . . . . . . . . . . . . . . . . . . . 20,000(4) *
Vappalak A. Ravindran . . . . . . . . . . . . . . . . . . . . . . . 22,000(10) *

Named Executive Officers**
David F. Gatto . . . . . . . . . . . . . . . . . . . . . . . . . . 142,766(11) *
Thomas F. Larkins . . . . . . . . . . . . . . . . . . . . . . . . 39,743(12) *
Tracey C. Doi . . . . . . . . . . . . . . . . . . . . . . . . . . . 25,657(13) *
All directors and executive officers
as a group (15 persons) . . . . . . . . . . . . . . . . . . . . 1,560,013(14) 6.50%
</TABLE>

* Less than 1%.
** Messrs. Gold and Benford are also Named Executive Officers.

(1) All shares held are Common Stock. Unless otherwise indicated, each named
individual has sole voting and investment power over the shares
beneficially owned by him or her.

(2) Shares which the person (or group) has the right to acquire within 60
days after December 1, 1995 are deemed to be outstanding in calculating
the percentage ownership of the person (or group), but are not deemed to
be outstanding as to any other person (or group).

(3) Includes 177,317 shares which Mr. Benford has the right to acquire within
60 days after December 1, 1995 by exercise of stock options vested
pursuant to the 1993 Stock Incentive Plan, and 70,000 shares which Mr.
Benford has the right to acquire within 60 days after December 1, 1995 by
exercise of stock options vested pursuant to the Company's 1986 Stock
Option Plan.

(4) Consists of shares which the individual has the right to acquire within
60 days after December 1, 1995 by the exercise of stock options vested
pursuant to the Company's 1986 Stock Option Plan.

(5) Includes 15,000 shares which Mr. Miller has the right to acquire within
60 days after December 1, 1995 by the exercise of stock options vested
pursuant to the Company's 1992 Stock Option Plan for Eligible
Non-employee Directors, and 5,000 shares which Mr. Miller has the right
to acquire within 60 days after December 1, 1995 by exercise of stock
options vested pursuant to the Company's 1986 Stock Option Plan.

(6) Includes 20,000 shares which Ms. Meyers has the right to acquire within
60 days after December 1, 1995 by the exercise of stock options vested
pursuant to the Company's 1992 Stock Option Plan for Eligible
Non-employee Directors, and 5,000 shares which Ms. Meyers has the right
to acquire within 60 days after December 1, 1995 by exercise of stock
options vested pursuant to the Company's 1986 Stock Option Plan.

(7) Consists of 15,000 shares which Mr. Bladstrom has the right to acquire
within 60 days after December 1, 1995 by exercise of stock options
pursuant to the 1992 Stock Option Plan for Eligible Non-employee

<PAGE> 34

Directors, and 5,000 shares which Mr. Bladstrom has the right to acquire
within 60 days after December 1, 1995 by exercise of stock options vested
pursuant to the Company's 1986 Stock Option Plan.

(8) Consists of 20,000 shares which Mr. Davis has the right to acquire within
60 days after December 1, 1995 by exercise of stock options pursuant to
the 1992 Stock Option Plan for Eligible Non-employee Directors, and 5,000
shares which Mr. Davis has the right to acquire within 60 days after
December 1, 1995 by exercise of stock options vested pursuant to the
Company's 1986 Stock Option Plan.

(9) Includes 750,000 shares which Mr. Gold has the right to acquire within 60
days after December 1, 1995 by exercise of stock options vested pursuant
to the 1993 Stock Incentive Plan, and 20,000 shares which Mr. Gold has
the right to acquire within 60 days after December 1, 1995 by exercise of
stock options vested pursuant to the Company's 1986 Stock Option Plan.

(10) Includes 20,000 shares which Mr. Ravindran has the right to acquire
within 60 days after December 1, 1995 by exercise of stock options vested
pursuant to the 1986 Stock Option Plan.

(11) Includes 71,486 shares which Mr. Gatto has the right to acquire within 60
days after December 1, 1995 by exercise of stock options vested pursuant
to the 1993 Stock Incentive Plan, and 70,000 shares which Mr. Gatto has
the right to acquire within 60 days after December 1, 1995 by exercise of
stock options vested pursuant to the 1986 Stock Option Plan.

(12) Consists of 9,743 shares which Mr. Larkins has the right to acquire
within 60 days after December 1, 1995 by exercise of stock options vested
pursuant to the 1993 Stock Incentive Plan, and 30,000 shares which Mr.
Larkins has the right to acquire within 60 days after December 1, 1995 by
exercise of stock options vested pursuant to the Company's 1986 Stock
Option Plan.

(13) Includes 19,176 shares which Ms. Doi has the right to acquire within 60
days after December 1, 1995 by exercise of stock options vested pursuant
to the 1993 Stock Incentive Plan, and 5,000 shares which Ms. Doi has the
right to acquire within 60 days after December 1, 1995 by exercise of
stock options vested pursuant to the 1986 Stock Option Plan.

(14) Includes 1,451,001 shares which the members of the group have the right
to acquire within 60 days after December 1, 1995, by the exercise of
stock options vested pursuant to the Company's 1986 Stock Option Plan,
1992 Stock Option Plan for Eligible Non-employee Directors and 1993 Stock
Incentive Plan. Does not include shares or options held by Mr. Goldston.

<PAGE> 35

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS FOR INTERIM PERIOD

All references to years are to fiscal years ending November 30, 1995 or 1994,
as applicable.

NET SALES

In the third quarter of 1995 the Company's net sales decreased 25.4% to
$94.4 million compared to $126.6 million in the third quarter of 1994. For the
nine months ended August 31, 1995, the Company's net sales decreased 26.7% to
$242.8 million compared to $331.2 million in the year earlier period. The
sales decline during the first nine months of 1995 is primarily due to a 22.9%
drop in the number of pairs sold worldwide. Domestic net sales in the third
quarter and nine months ended August 31, 1995 decreased by 26.9% and 33.5% from
the comparable 1994 periods, respectively. Net international sales, which
accounted for approximately 28.6% and 33.9% of the Company's total net sales
for the quarter and nine months ended August 31, 1995, respectively, decreased
by 21.5% and 8.7% from the comparable 1994 periods.

The following tables set forth certain information regarding the
Company's net sales:

<TABLE>
<CAPTION>
THREE MONTHS ENDED AUGUST 31, NET SALES
----------------------------- --------------------------------------------
1995 1994
---------------- ------------------
<S> <C> <C> <C> <C>
(DOLLARS IN THOUSANDS)
DOMESTIC FOOTWEAR
CHILDREN'S $ 39,323 42% $ 58,286 46%
WOMEN'S 14,497 15 15,649 12
MEN'S 12,390 13 17,927 14
OTHER 1,139 1 304 1
-------- --- -------- ---
TOTAL DOMESTIC SALES 67,349 71 92,166 73
INTERNATIONAL FOOTWEAR AND OTHER 27,005 29 34,384 27
-------- --- -------- ---
TOTAL NET SALES $ 94,354 100% $126,550 100%
======== === ======== ===
</TABLE>

<TABLE>
<CAPTION>
NINE MONTHS ENDED AUGUST 31, NET SALES
---------------------------- ------------------------------------------
1995 1994
---------------- -----------------
<S> <C> <C> <C> <C>
(DOLLARS IN THOUSANDS)
DOMESTIC FOOTWEAR
CHILDREN'S $ 94,717 39% $138,084 2%
WOMEN'S 34,571 14 49,358 15
MEN'S 28,925 12 52,327 15
OTHER 2,165 1 1,277 1
-------- --- -------- ---
TOTAL DOMESTIC SALES 160,378 66 241,051 73
INTERNATIONAL FOOTWEAR AND OTHER 82,382 34 90,183 27
-------- --- -------- ---
TOTAL NET SALES $242,760 100% $331,234 100%
======== === ======== ===
</TABLE>

The following tables set forth the percentage changes, by Children's,
Women's and Men's categories, in the number of pairs sold during the 1995
period as compared to the same period of 1994:

<TABLE>
<CAPTION>
THREE MONTHS ENDED AUGUST 31, VOLUME OF FOOTWEAR SOLD
----------------------------- -----------------------
INCREASE/(DECREASE) BETWEEN 1995 AND 1994
----------------------------------------------------
DOMESTIC INTERNATIONAL TOTAL
---------- ------------- -------
<S> <C> <C> <C>
CHILDREN'S (23.8%) 35.6% (14.4%)
WOMEN'S 1.1% (45.6%) (14.7%)
MEN'S (16.1%) (69.9%) (41.9%)

TOTAL VOLUME DECREASE (17.8%) (28.4%) (20.7%)
</TABLE>

<PAGE> 36

<TABLE>
<CAPTION>
NINE MONTHS ENDED AUGUST 31, VOLUME OF FOOTWEAR SOLD
---------------------------- -----------------------
INCREASE/(DECREASE) BETWEEN 1995 AND 1994
-------------------------------------------------------
DOMESTIC INTERNATIONAL TOTAL
--------------- ---------------- -----------
<S> <C> <C> <C>
CHILDREN'S (24.4%) 28.6% (13.8%)
WOMEN'S (24.2%) (33.2%) (27.1%)
MEN'S (34.6%) (47.0%) (39.5%)

TOTAL VOLUME DECREASE (26.2%) (14.0%) (22.9%)
</TABLE>

The year to date decrease in domestic net sales resulted principally
from (1) approximately $47.3 million in lower domestic sales of children's
lighted product, (2) an overall drop in the total number of pairs sold of the
Company's children's, women's and men's shoes, (3) sales of approximately $12.0
million of a newly introduced men's lighted LEAP GEAR(TM) product line in the
first quarter of 1994 without a comparable introduction in the first quarter of
1995, and (4) a decrease of $1.91 in the average selling price per pair.

The year to date decrease in international net sales resulted
principally from reduced sales in Mexico and Central and South America
partially offset by increased sales in Europe and by the Company's Far East
joint venture. Internationally there was strong demand for children's lighted
shoes which was more than offset by reduced demand for the Company's adult
products.

Total sales of the Company's children's lighted shoes decreased by
$29.1 million and $19.7 million to $99.6 million and $34.1 million during the
nine months and three months ended August 31, 1995, respectively, compared to
the same periods in 1994. Domestic sales of children's lighted product
decreased by $47.3 million and $25.8 million in the nine months and three
months ended August 31, 1995, respectively, compared to the same periods in
1994 due to heavy inventory levels at retailers, lower priced lighted shoes
offered by competitors and the possible effect of adverse publicity regarding
selected children's lighted shoes manufactured prior to 1994 which utilized
motion-activated switches containing mercury. However, internationally sales
of children's lighted product increased, particularly in Europe and Asia, as
sales grew by $18.2 million and $6.1 million in the nine months and three
months ended August 31, 1995, respectively, compared to the same periods in
1994.

GROSS MARGIN

The gross margins for the third quarter and the nine months ended
August 31, 1995 increased to 34.5% and 32.2% from 33.3% and 30.4% during the
comparable periods in 1994. The improvement resulted primarily from an increase
in international gross margins to 39.2% and 35.8% in the third quarter and nine
months ended August 31, 1995, respectively, from 29.4% and 30.3% in the
comparable 1994 periods primarily as a result of the increased demand for
children's lighted product. Domestically, gross margins for the third quarter
of 1995 decreased to 32.6% from 34.8% during the comparable period in 1994
primarily due to the sale of selected discontinued men's styles in 1995 and,
for the nine months ended August 31, 1995, remained constant at 30.4%. Although
the average domestic selling price decreased by $1.91 per pair during the first
nine months of 1995 in comparison to the prior year period, the average
domestic unit cost dropped by $1.35 per pair. To date, the Company has
realized strong margins in 1995 on its children's lighted product sold
internationally and on its value priced shoes and partially offset losses on
any discontinued product against previously established reserves.

SELLING, GENERAL AND ADMINISTRATIVE EXPENSES

Exclusive of a $2.3 million non-recurring charge incurred in May 1994,
total selling, general and administrative expenses decreased by $9.1 million or
8.6% to $97.6 million in the nine months ended August 31, 1995 and decreased by
$5.7 million or 15.0% to $32.2 million in the third quarter of 1995 compared to
the respective prior year periods. Domestic selling, general and administrative
expenses declined by $14.9 million or 17.3% to $71.0 million in the nine months
ended August 31, 1995 and by $7.6 million or 24.9% to $23.0 million in the
third quarter of 1995 from the comparable prior year periods. For the quarter
and nine months ended August 31, 1995 the reduction in domestic expenses was
primarily due to: (1) a reduction in product sourcing fees and distribution
expenses largely as a result of lower sales, and (2) general cost control and
containment efforts.

<PAGE> 37

The decreases in domestic operating expenses were partially offset by
increases in international operating expenses of $5.7 million and $2.0 million
for the nine months and quarter ended August 31, 1995, respectively. These
increases were primarily due to expenses of the Far East joint venture, which
was in the start-up phase during the first nine months of fiscal 1994, expenses
of the Company's Mexico subsidiary which was not formed until the second
quarter of fiscal 1994 and higher expenses of the European subsidiaries as a
result of the increase in the volume of their business.

Despite the overall decreases in selling, general and administrative
expenses, such expenses (exclusive of non-recurring charges) as a percentage of
net sales increased to 34.2% in the third quarter of 1995 and 40.2% for the
nine months ended August 31, 1995 from 30.0% and 32.2% in the comparable 1994
periods as a result of lower sales. Changes in the Company's selling, general
and administrative expenses cannot be directly related to fluctuations in sales
volume as a substantial portion of such expenses are (i) fixed in nature, such
as compensation and benefits for management and administrative personnel, rent,
insurance, depreciation and other overhead charges or (ii) incurred to benefit
future periods, such as media, advertisement and trade show expenses.

INTEREST EXPENSE (INCOME), NET

Interest expense of $1.0 million and $3.0 million for the three months
and nine months ended August 31, 1995, respectively, and $1.0 million and $3.4
million for the three months and nine months ended August 31, 1994,
respectively, primarily related to interest costs on the $50 million, 7-3/4%
convertible subordinated debentures due 2002 (the "Debentures") issued in
December 1992.

Interest income decreased to $0.2 million and increased to $1.5 million
for the three months and nine months ended August 31, 1995, respectively,
compared to $0.5 million and $0.9 million in the comparable year earlier
periods. The decrease for the quarter was due to a reduction in the average
cash balances and the increase for the nine months was primarily due to higher
interest rates on approximately the same average cash balances.

LIQUIDITY AND CAPITAL RESOURCES

The following table sets forth certain information regarding the
Company's liquidity and capital resources:

<TABLE>
<CAPTION>
AUGUST 31, NOVEMBER 30,
1995 1994
---------------- ---------------
<S> <C> <C>
(DOLLARS IN THOUSANDS)
CASH AND CASH EQUIVALENTS $ 25,083 $ 49,710
WORKING CAPITAL 132,340 147,848

OUTSTANDING LETTERS OF CREDIT 14,991 36,699
CONVERTIBLE SUBORDINATED DEBENTURES 50,000 50,000
MANDATORILY REDEEMABLE PREFERRED STOCK 100,000 100,000
</TABLE>

<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
AUGUST 31, AUGUST 31,
-------------------- --------------------
1995 1994 1995 1994
-------- ------- ------- ---------
<S> <C> <C> <C> <C>
AVERAGE DAILY SHORT-TERM BORROWINGS $ 138 $2,278 $ 493 $ 4,756
WEIGHTED AVERAGE INTEREST RATES 8.2% 7.9% 8.2% 8.4%
</TABLE>

Cash and cash equivalent balances decreased by $24.6 million from
November 30, 1994 to a balance of $25.1 million at August 31, 1995 primarily
due to the funding of the operating loss for the nine months ended August 31,
1995. During the nine months ended August 31, 1995 inventory increased from
$57.6 million (5.4 million pairs) at November 30, 1994 to $65.5 million (6.3
million pairs) at August 31, 1995 due primarily to increased inventory in
Europe as a result of the higher volume of business and the seasonality of the
Company's business. Although sales were greater in the last two months of the
1995 third quarter compared to the last two months of the 1994 fourth quarter,
net accounts receivable at August 31, 1995 decreased by $8.4 million from

<PAGE> 38

November 30, 1994 primarily as a result of the sale of $20.9 million of product
to Wal-Mart at the end of November 1994.

The Company has a $75 million revolving line of credit with BankAmerica
Business Credit, Inc. ("BABC") for loans and letters of credit which is
scheduled to expire in November 1996 (the "Revolving Facility"). The Revolving
Facility is secured primarily by the Company's domestic assets and is subject
to certain financial covenants. The Company may incur cash borrowings up to $10
million. There were no domestic cash borrowings under the Revolving Facility
at any time during the nine months ended August 31, 1995 and as of that date,
approximately $14.4 million of letters of credit were outstanding.

The Company's German subsidiary has a $1.4 million credit facility which is
denominated in local currency and converted to United States dollars at the end
of the period exchange rate. During the nine months ended August 31, 1995 the
maximum borrowing at any time amounted to approximately $1.4 million and the
balance outstanding at August 31, 1995 was approximately $0.8 million. The
weighted average interest rates, as defined in the agreement and adjusted for
current market conditions, were 8.4% for both the quarter and nine months ended
August 31, 1995. The Company believes that it has the ability to meet the
financing needs, if any, of its German subsidiary for the foreseeable future.

The Company determined it was in its best interest not to, and it did
not, pay the $1.875 million dividend on the Series A Preferred Stock due on
each of February 28, 1995, May 31, 1995 and August 31, 1995 to Trefoil Capital
Investors, L.P. ("Trefoil"), the holder of all of the issued and outstanding
shares of Series A Preferred Stock. As of October 13, 1995, such dividend
arrearage amounted to a total of $5.809 million.

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. 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) from the date of failure to redeem
through the date of redemption. The Company believes that it is unlikely that
it will be able to satisfy the mandatory $35 million redemption obligation with
respect to the Series A Preferred Stock on August 31, 1996 from its cash flow
from operations and its existing bank facility. Accordingly, the Company is
currently evaluating all available options, including, without limitation,
restructuring the terms of the Series A Preferred Stock and the availability of
new capital to satisfy such mandatory redemption obligation.

The short-term and long-term liquidity of the Company is contingent
primarily on the Company's future operating results, its ability to restructure
the Series A Preferred Stock 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 (other than with respect
to the initial $35 million mandatory redemption obligation on August 31, 1996
under the Series A Preferred Stock). These needs are based on a number of
factors including the size of the business and related working capital needs,
the extent of the international subsidiaries' funding requirements, the extent
to which the Company seeks to acquire or license other footwear brands and the
level of domestic operating costs. In the event that the Company's future
operating results fall below management's expectations, additional sources of
working capital funding may be necessary and difficult to obtain. The Company
may also need additional financing for future acquisitions which may be
difficult to secure.

FUTURE OUTLOOK

In September 1995, the Company announced a corporate reorganization plan
designed to reengineer key business processes, streamline the Company's
organizational structure and substantially reduce operating expenses. The
reorganization is designed to maximize the Company's continued efforts to
re-establish the women's brand and capitalize on the strength of its children's
business. One of the key priorities of the Company's reengineering efforts is
to enhance the Company's ability to get the right product to market in the
shortest possible time. The Company hopes to reduce product cycle time
significantly by improving design capabilities, better utilizing product
development resources, strengthening relationships with factories and sourcing
agents, and maintaining disciplined inventory management practices.

<PAGE> 39

As part of the reorganization the Company announced the hiring of James
V. Moodhe as Senior Vice President - Design, Development and Marketing. In
addition, David F. Gatto was promoted to Executive Vice President to oversee
the Company's sales, merchandising and operations functions and Thomas F.
Larkins was promoted to Chief Administrative Officer to oversee the Company's
finance, legal and administrative functions.

Prior to its November 30 fiscal year end, the Company will implement
cost reduction measures targeted to reduce operating expenses in fiscal 1996 by
approximately $25 million. Among these measures is the elimination of 135-160
full time positions, representing approximately 30% of the Company's domestic
workforce, and the possible closure of all or some of its seven retail outlet
stores. The Company expects to record a one-time restructuring charge
estimated at between $3.0 million and $5.0 million for severance and other
costs associated with the corporate reorganization in the fourth quarter of
fiscal 1995.

At September 30, 1995 the Company had a combined domestic and
international order backlog of $108.2 million, $38.0 million of which is
scheduled to ship in the October and November period and $58.1 million of which
is scheduled to ship in the Company's first quarter of fiscal 1996. The
combined backlog at September 30, 1994 was $126.6 million, $51.9 million of
which was scheduled to ship in the October and November 1994 period and $60.3
million of which was scheduled to ship in the first quarter of fiscal 1995.
Approximately 19.2% of the September 30, 1995 backlog was for children's
lighted shoes compared to 38.2% at September 30, 1994. Shipments and sales for
future periods depend on, among other things, the combination of "futures" and
"at-once" orders. Accordingly, the comparison of backlog from period to period
may not be indicative of eventual actual shipments.

In June 1994, the Company entered into an agreement with Wal-Mart for the
anticipated purchase of a minimum of $80 million of L.A. Gear branded footwear
for each of the 1995, 1996 and 1997 fiscal years (subject to reduction or
elimination in 1996 and 1997 if sell-through does not meet designated targets).
It is unlikely that the designated sell-through targets for fiscal 1995 will be
met. Accordingly, Wal-Mart would not be subject to a minimum purchase
commitment in the Company's fiscal 1996. Wal-Mart has agreed to fulfill its
$80 million minimum purchase commitment with respect to fiscal 1995 by the end
of the first quarter of the Company's fiscal 1996. The backlog at September 30,
1995 includes $43.7 million for Wal-Mart, as compared to $35.2 million at
September 30, 1994. The Company's agreement with Wal-Mart does not provide for
the sale of L.A. Gear lighted footwear products to Wal-Mart.

<PAGE> 40

CONSOLIDATED CONDENSED INTERIM FINANCIAL STATEMENTS

L.A. GEAR, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)

<TABLE>
<CAPTION>
August 31, November 30,
1995 1994
------------- -------------
(unaudited)
ASSETS
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 25,083 $ 49,710
Accounts receivable, net 68,869 77,284
Inventories 65,522 57,597
Prepaid expenses and other current assets 8,928 9,827
-------- --------

Total current assets 168,402 194,418

Property and equipment and other assets, net 14,732 17,728
Goodwill, net 12,192 12,317
-------- --------

$195,326 $224,463
======== ========

LIABILITIES, MANDATORILY REDEEMABLE PREFERRED
STOCK AND SHAREHOLDERS' (DEFICIT) EQUITY

Current liabilities:
Accounts payable and accrued liabilities $ 35,256 $ 46,013
Borrowings under international credit facilities 806 557
-------- --------

Total current liabilities 36,062 46,570

7-3/4% convertible subordinated debentures due 2002 50,000 50,000

Minority interest 8,337 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
plus accrued and unpaid dividends 105,747 100,000

Shareholders' (deficit) equity:
Common stock, no par value; 80,000,000 shares authorized;
22,936,433 shares issued and outstanding at August 31,
1995 and November 30, 1994 128,093 128,093
Preferred stock, no stated value; 9,000,000 shares
authorized; no shares issued -- --
Cumulative currency translation adjustment 110 194
Accumulated deficit (133,023) (110,138)
-------- --------

Total shareholders' (deficit) equity (4,820) 18,149
-------- --------

$195,326 $224,463
======== ========
</TABLE>

See accompanying Notes to Consolidated Condensed Interim Financial Statements.

<PAGE> 41

L.A. GEAR, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
AND ACCUMULATED DEFICIT
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)

<TABLE>
<CAPTION>
Three months ended August 31,
-------------------------------------
1995 1994
-------- --------
<S> <C> <C>
Net sales $ 94,354 $126,550
Cost of sales 61,812 84,370
--------- --------

Gross profit 32,542 42,180

Selling, general and administrative expenses 32,223 37,909
Litigation settlement income (430) (2,900)
Interest expense, net 747 516
--------- --------

Income before income taxes and minority interest 2 6,655

Income taxes -- --
Minority interest 414 (129)
--------- --------

Net income 416 6,526

Dividends on mandatorily
redeemable preferred stock (1,957) (1,875)
--------- ---------

Income (loss) applicable to common stock (1,541) 4,651

Accumulated deficit, beginning of period (131,482) (97,985)
---------

Accumulated deficit, end of period $(133,023) $(93,334)
========= ========

Income (loss) per common share $ (0.07) $ 0.20
========= ========

Weighted average common shares outstanding 22,937 22,936
========= ========
</TABLE>

See accompanying Notes to Consolidated Condensed Interim Financial Statements.

<PAGE> 42

L.A. GEAR, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
AND ACCUMULATED DEFICIT
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)

<TABLE>
<CAPTION>
Nine months ended August 31
--------------------------------------
1995 1994
--------- ---------
<S> <C> <C>
Net sales $ 242,760 $331,234
Cost of sales 164,509 230,488
--------- ---------

Gross profit 78,251 100,746

Selling, general and administrative expenses 97,610 109,050
Litigation settlement income (2,305) (3,200)
Interest expense, net 1,490 2,489
--------- ---------

Loss before income taxes and minority interest (18,544) (7,593)

Income taxes -- --
Minority interest 1,406 327
--------- ---------

Net loss (17,138) (7,266)

Dividends on mandatorily
redeemable preferred stock (5,747) (5,625)
--------- ---------

Loss applicable to common stock (22,885) (12,891)

Accumulated deficit, beginning of period (110,138) (80,443)
--------- ---------

Accumulated deficit, end of period $(133,023) $ (93,334)
========= =========

Loss per common share $ (1.00) $ (0.56)
========= =========

Weighted average common shares outstanding 22,937 22,936
========= =========
</TABLE>

See accompanying Notes to Consolidated Condensed Interim Financial Statements.

<PAGE> 43

L.A. GEAR, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)

<TABLE>
<CAPTION>
Nine months ended August 31,
--------------------------------------
1995 1994
----------- ------------
<S> <C> <C>
Net cash (used in) provided by operating activities $(22,596) $ 19,358
-------- --------
Investing activities:
Capital expenditures (2,613) (2,839)
-------- --------
Financing activities:
Net borrowings (repayments) under international credit
facilities 218 (913)
Proceeds from minority's investment in joint venture -- 4,850
Payment of dividends on mandatorily redeemable
preferred stock -- (5,625)
Proceeds from the exercise of stock options -- 17
-------- --------
Net cash provided by (used in) financing activities 218 (1,671)
-------- --------
Effect of exchange rate changes on cash and
cash equivalents 364 132
-------- --------

Net (decrease) increase in cash and cash equivalents (24,627) 14,980

Cash and cash equivalents at beginning of period 49,710 27,790
-------- --------

Cash and cash equivalents at end of period $ 25,083 $ 42,770
======== ========
</TABLE>

See accompanying Notes to Consolidated Condensed Interim Financial Statements.

<PAGE> 44

L.A. GEAR, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED INTERIM FINANCIAL STATEMENTS
(UNAUDITED)

NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Basis of Presentation

In the opinion of management, the accompanying unaudited consolidated
condensed financial statements contain all adjustments, which consist only of
normal recurring adjustments necessary to present fairly the consolidated
financial position of L.A. Gear, Inc. and its subsidiaries (collectively
referred to as the "Company") at August 31, 1995, the results of operations for
the three months and nine months ended August 31, 1995 and 1994 and the cash
flows for the nine months ended August 31, 1995 and 1994. This interim
financial information and notes thereto should be read in conjunction with the
Company's Annual Report on Form 10-K for the fiscal year ended November 30,
1994. The Company's results of operations and cash flows for interim periods
are not necessarily indicative of the results to be expected for any other
interim period or the full year.

NOTE 2. LITIGATION SETTLEMENT INCOME

For the quarter and nine months ended August 31, 1995, the Company
recorded net settlement income of $0.4 million and $2.3 million, substantially
all of which was in connection with the settlement of certain patent
infringement actions.

NOTE 3. SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION

<TABLE>
<CAPTION>
NINE MONTHS ENDED AUGUST 31,
------------------------------
1995 1994
------ ------
<S> <C> <C>
(IN THOUSANDS)
CASH PAID DURING THE PERIOD FOR:
INTEREST, NET $ 539 $3,205
====== ======
INCOME TAXES, NET $ 23 $1,244
====== ======

NONCASH INVESTING ACTIVITY:
DIVIDENDS ACCRUED ON MANDATORILY
REDEEMABLE PREFERRED STOCK $5,747 $ --
====== ======
ACQUISITION OF MEXICAN DISTRIBUTOR'S ASSETS $ -- $1,953
====== ======
</TABLE>

<PAGE> 45

NOTE 4. ACCOUNTS RECEIVABLE, NET

Accounts receivable, net of allowance for doubtful accounts and
merchandise returns, consist of the following:

<TABLE>
<CAPTION>
AUGUST 31, NOVEMBER 30,
1995 1994
---------- ------------
<S> <C> <C>
(IN THOUSANDS)
TRADE RECEIVABLES
DOMESTIC $43,461 $55,531
INTERNATIONAL 29,413 24,552
------- -------
TOTAL TRADE RECEIVABLES 72,874 80,083

OTHER RECEIVABLES 3,495 3,676
------- -------
76,369 83,759
LESS ALLOWANCE FOR DOUBTFUL ACCOUNTS
AND MERCHANDISE RETURNS (7,500) (6,475)
------- -------

$68,869 $77,284
======= =======
</TABLE>

NOTE 5. INCOME TAXES

At August 31, 1995 deferred tax assets totaled approximately $53.3
million. A valuation allowance has been established against the entire
deferred tax asset balance.

For the period ended August 31, 1995, the difference between the tax
benefit computed based on applying the U.S. statutory income tax rate to the
loss before income taxes, minority interest and the recorded benefit was
primarily due to the nonrecognition of tax benefits for operating losses as
evaluated under the provisions of SFAS No. 109.

NOTE 6. ACCOUNTS PAYABLE AND ACCRUED LIABILITIES

Accounts payable and accrued liabilities consist of the following:

<TABLE>
<CAPTION>
AUGUST 31, NOVEMBER 30,
1995 1994
---------- ------------
<S> <C> <C>
(IN THOUSANDS)
ACCOUNTS PAYABLE AND OTHER ACCRUED LIABILITIES $23,360 $32,251
ACCRUED INVENTORY PURCHASES 11,896 11,327
ACCRUED NON-RECURRING CHARGES -- 2,435
------- -------

$35,256 $46,013
======= =======
</TABLE>

Accounts payable include issued but uncleared checks of $1.8 million and
$3.0 million at August 31, 1995 and November 30, 1994, respectively.

NOTE 7. BANK BORROWINGS

The Company has $75 million revolving line of credit with BankAmerica
Business Credit, Inc. ("BABC") for loans and letters of credit which is
scheduled to expire in November 1996 (the "Revolving Facility"). The Revolving
Facility is secured primarily by the Company's domestic

<PAGE> 46

assets and is subject to certain financial covenants. The Company may incur
cash borrowings up to $10 million. There were no domestic cash borrowings
under the Revolving Facility at any time during the nine months ended August
31, 1995 and as of that date, approximately $14.4 million of letters of credit
were outstanding.

The Company's German subsidiary has a $1.4 million credit facility which
is denominated in local currency and converted to United States dollars at the
end of the period exchange rate. During the nine months ended August 31, 1995
the maximum borrowing at any time amounted to approximately $1.4 million and
the balance outstanding at August 31, 1995 was approximately $0.8 million. The
weighted average interest rates, as defined in the agreement and adjusted for
current market conditions, were 8.4% for both the quarter and nine months ended
August 31, 1995.

NOTE 8. SERIES A CUMULATIVE CONVERTIBLE PREFERRED STOCK

As long as shares of Series A Cumulative Convertible Preferred Stock
("Series A Preferred Stock") remain outstanding, the holders of such shares are
entitled to receive, when, as and if declared by the Board of Directors out of
assets of the Company legally available therefor, cumulative cash dividends at
an annual rate of 7.5% (if in arrears, compounded quarterly at a rate of 8.625%
per annum with respect to dividends in arrears, through the date of payment of
such arrearages), payable quarterly in arrears on the last business day of
February, May, August and November.

On September 1, 1995, the date on which an amount equal to three full
quarterly dividends with respect to the Series A Preferred Stock became in
arrears, Trefoil became entitled to elect four additional members to the
Company's Board of Directors. Such additional directors would continue in
office and the holders of Series A Preferred Stock will continue to have such
additional voting rights until such time as all accrued and unpaid dividends on
the Series A Preferred Stock have been paid in full, at which time the terms of
such additional directors will expire. The Company has not received any
notification from Trefoil as to its intention to exercise its option to elect
four additional members to the Board of Directors.

<PAGE> 47

1996 from its cash flow from operations and its existing bank facility.
Accordingly, the Company is currently evaluating all available options,
including, without limitation, restructuring the terms of the Series A
Preferred Stock and the availability of new capital to satisfy such mandatory
redemption obligation.

NOTE 9. SUBSEQUENT EVENT

In September 1995, the Company announced a corporate reorganization plan
designed to reengineer key business processes, streamline the Company's
organizational structure and substantially reduce operating expenses. The
Company expects to record a one-time restructuring charge estimated at between
$3.0 million and $5.0 million for severance and other costs associated with the
corporate reorganization in the fourth quarter of fiscal 1995.

<PAGE> 48

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS

All references to years are to the fiscal years ended on 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 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 "Future
Outlook."

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.

<PAGE> 49

The following table sets forth certain information regarding the
Company's net sales:

<TABLE>
<CAPTION>
NET SALES
--------------------------------------------
1994 1993
------------ ------------
$ % $ %
----- ----- ----- -----
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
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,
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
the 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 airfreight costs.

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 year 1994 from $144.8 million during 1993.

<PAGE> 50

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, 7-3/4 % 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.

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.

<PAGE> 51

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 product 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.

The following table sets forth certain information regarding the
Company's net sales.

<TABLE>
<CAPTION>
NET SALES
---------------------------------------------
1993 1992
------------ ------------
$ % $ %
----- ----- ----- -----
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
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 Women's, Men's
and Children'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>

<PAGE> 52

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 profit 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 tradeshow 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.

<PAGE> 53

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.

<PAGE> 54

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.

Price Waterhouse LLP

Los Angeles, California
February 6, 1995

<PAGE> 55

CONSOLIDATED FINANCIAL STATEMENTS

L.A. GEAR, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
(in thousands, except share data)

<TABLE>
<CAPTION>
NOVEMBER 30,
----------------------------------------
1994 1993
-------- ---------
<S> <C> <C>
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
-------- --------

7-3/4% 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.

<PAGE> 56

L.A. GEAR, INC. AND SUBSIDIARIES
Consolidated Statements of Operations
(in thousands, except per share data)

<TABLE>
<CAPTION>
YEAR ENDED NOVEMBER 30,
------------------------------------------------------------
1994 1993 1992
-------- -------- --------
<S> <C> <C> <C>
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.

<PAGE> 57

L.A. GEAR, INC. AND SUBSIDIARIES
Consolidated Statements of Shareholders' Equity
Years ended November 30, 1994, 1993 and 1992
(in thousands)

CUMULATIVE RETAINED
COMMON STOCK CURRENCY EARNINGS
------------------------- TRANSLATION (ACCUMULATED
SHARES AMOUNT ADJUSTMENT DEFICIT) TOTAL
-------- -------- ---------- ----------- ----------
<S> <C> <C> <C> <C> <C>
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.

<PAGE> 58

L.A. GEAR, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
(in thousands)

<TABLE>
<CAPTION>
YEAR ENDED NOVEMBER 30,
-----------------------------------------------
1994 1993 1992
-------- -------- --------
<S> <C> <C> <C>
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 -- -- 7,075
(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.

<PAGE> 59

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

<PAGE> 60

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

<PAGE> 61

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.

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.

<PAGE> 62

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
------ -------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
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
------- -------
(IN THOUSANDS)
<S> <C> <C>
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 and 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%

<PAGE> 63

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 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
-------- --------
(IN THOUSANDS)
<S> <C> <C>
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>

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:

<PAGE> 64

<TABLE>
<CAPTION>
AMOUNT OF FACILITY
------------------------------------------- OUTSTANDING AT
SUBLIMITS NOVEMBER 30, 1994
-------------------------- ----------------------------------
(IN MILLIONS)
TOTAL LETTERS LETTERS
COUNTRY AVAILABLE BORROWINGS OF CREDIT BORROWINGS OF CREDIT
------- --------- ---------- --------- ---------- ---------
<S> <C> <C> <C> <C> <C>
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
------- -------
(IN THOUSANDS)
<S> <C> <C>
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.

<PAGE> 65

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.

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

<PAGE> 66

redemption. If less than all of the outstanding shares of Series A Preferred
Stock 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).

<PAGE> 67

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>

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.

<PAGE> 68

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
-------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
DOMESTIC $(12,093) $(24,555) $(84,464)
FOREIGN (10,208) (7,958) (1,022)
-------- -------- --------

$(22,301) $(32,513) $(85,486)
======== ======== ========
</TABLE>

<PAGE> 69

Income tax benefit is summarized as follows:

YEAR ENDED NOVEMBER 30,
-----------------------
1994 1993 1992
---------- --------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
CURRENT:
FEDERAL $ -- $ -- $(24,741)
STATE -- -- (110)
---------- --------- --------
-- -- (24,851)
---------- --------- --------
DEFERRED:
FEDERAL -- -- 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
------------
(IN THOUSANDS)
<S> <C>
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>

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.

<PAGE> 70

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
-------------------------
1993 1992
---------- -------
(IN THOUSANDS)
<S> <C> <C>
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

<PAGE> 71

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.

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:
-----------------------
(IN THOUSANDS)
<S> <C>
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.

<PAGE> 72

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 THIRD QUARTER FOURTH QUARTER
---------------------- ----------------------- ---------------------- ----------------------
1994 1993 1994(1) 1993 1994(2) 1993(2) 1994(1)(2) 1993(1)
-------- -------- --------- -------- --------- --------- ---------- ---------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
NET SALES $120,436 $ 76,327 $ 84,248 $ 84,572 $126,550 $142,967 $ 84,732 $ 94,492

GROSS PROFIT 34,909 20,376 23,657 24,457 42,180 47,204 22,591 22,188

NET INCOME (LOSS) (2,027) (11,562) (11,765) (13,159) 6,526 7,222 (14,929) (15,014)

INCOME (LOSS) PER
COMMON SHARE:
PRIMARY $ (0.17) $ (0.59) $ (0.59) $ (0.66) $ 0.20 $ 0.23 $ (0.73) $ (0.74)
======== ======== ======== ======== ======== ======= ======== ========
FULLY DILUTED $ (0.17) $ (0.59) $ (0.59) $ (0.66) $ 0.20 $ 0.22 $ (0.73) $ (0.74)
======== ======== ======== ======== ======== ======= ======== ========

PRICE RANGE OF
COMMON STOCK:
HIGH $11.38 $11.88 $7.50 $13.00 $7.00 $13.00 $8.25 $11.88
LOW 7.00 9.38 5.63 8.25 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.

<PAGE> 73

ACCOUNTANTS

Representatives of the Company's independent accountants for the
current fiscal year, Price Waterhouse LLP, are expected to be present at the
Meeting, will have the opportunity, if they so desire, to make a statement and
will be available to respond to appropriate questions.

PROPOSALS OF SHAREHOLDERS

No other business than that for which a special meeting of
shareholders has been called may be transacted at that meeting. Under certain
circumstances, shareholders are entitled to present proposals at annual
shareholder meetings. Any such proposal to be included in the Proxy Statement
for the Company's 1996 Annual Meeting of Shareholders was required to have been
submitted to the Company prior to November 1, 1995 in a form that complied with
applicable regulations.

OTHER BUSINESS

The Board of Directors knows of no other business which will be
presented for consideration at the Meeting other than as stated in the
accompanying Notice of Special Meeting of Shareholders. If, however, other
matters are properly brought before the Meeting, it is the intention of the
persons named in the accompanying form of Proxy to vote the shares represented
thereby on such matters in accordance with their best judgment and in their
discretion, and authority to do so is included in the Proxy.

BY ORDER OF THE BOARD OF DIRECTORS

Thomas F. Larkins
Secretary

_________________ ________, 1995

<PAGE> 74
APPENDIX I

SHARE EXCHANGE AGREEMENT

AGREEMENT, dated as of December 12, 1995 (the "Agreement"), by and
---------
between L.A. Gear, Inc., a California corporation (the "Company") and Trefoil
--------
Capital Investors, L.P., a Delaware limited partnership ("Trefoil"), the holder
-------
of all of the shares of Series A cumulative convertible preferred stock
("Series A Preferred Stock") of the Company.
------------------------

WHEREAS, the Company and Trefoil desire to exchange the Series A
Preferred Stock for newly issued Series B cumulative convertible preferred
stock ("Series B Preferred Stock"), having the terms set forth in the
------------------------
Certificate of Determination (the "Certificate of Determination") attached
hereto as Exhibit A. ----------------------------

NOW, THEREFORE, in consideration of the foregoing and the respective
representations, warranties, covenants and agreements set forth in this
Agreement, the parties hereto agree as follows:

ARTICLE I - THE EXCHANGE

SECTION 1.01. The Exchange.

Upon the terms and subject to the conditions set forth in this
Agreement, at the Closing (as defined in Section 1.02 hereof),

(a) Trefoil shall assign, transfer, and convey to the Company one
million (1,000,000) shares of Series A Preferred Stock and all accrued and
unpaid dividends thereon. Trefoil shall deliver at the Closing certificates
representing such shares duly endorsed in blank or accompanied by stock powers
duly endorsed in blank in exchange for and against delivery by the Company of
certificates representing the number of shares of Series B Preferred Stock to
which Trefoil is entitled pursuant to Section 1.01(b) hereof.

(b) The Company shall issue and deliver to Trefoil (i) one million
(1,000,000) shares of Series B Preferred Stock, plus (ii) an additional number
of shares of Series B Preferred Stock (rounded up to the next whole number)
equal to a certain amount of accrued and unpaid dividends in respect of the
Series A Preferred Stock through the Closing (the "Arrearage Amount") divided
----------------
by 100, in exchange for and against delivery by Trefoil of certificates
evidencing one million (1,000,000) shares of Series A Preferred Stock, and in
satisfaction of all accrued and unpaid dividends thereon. For purposes of
determining the Arrearage Amount, the amount of accrued and unpaid dividends
shall be equal to the sum of (i) dividends accrued and unpaid through November
30, 1995, plus (ii) additional dividends, accruing at a rate of 7.5% per annum
during the period beginning December 1, 1995 and ending on the Closing Date
(the "Interim Period"), on any dividends on the Series A Preferred Stock which
--------------
were accrued and unpaid as of November 30, 1995, plus (iii) current dividends
accruing and becoming payable on the Series A Preferred Stock during the
Interim Period, which shall accrue at the rate of 7.5% per annum during the
Interim Period. The Company shall deliver to Trefoil one or more certificates
representing the aggregate number of shares of Series B Preferred Stock Trefoil
is entitled to in
<PAGE> 75
accordance with this Section 1.01(b) (the transactions contemplated by this
Section 1.01 being referred to herein as the "Exchange") and the Registration
Rights Amendment (as defined in Section 5.02(d)).

SECTION 1.02 Consummation of the Exchange.

The Exchange will be consummated (the "Closing") at the
-------
offices of Fried, Frank, Harris, Shriver & Jacobson, 725 South Figueroa Street,
Los Angeles, California at 10:00 a.m. on the third business day after
satisfaction or waiver of all conditions in Article V (or such other time and
place as the parties may mutually agree) (the "Closing Date"), unless this
------------
Agreement has been earlier terminated in accordance with its terms.

ARTICLE II - REPRESENTATIONS AND WARRANTIES OF TREFOIL

Trefoil hereby represents and warrants to the Company as
follows:

SECTION 2.01. Authority; Approval.

Trefoil has all requisite power and authority to execute and
deliver this Agreement, to perform its obligations hereunder and to consummate
the transactions contemplated hereby. The execution and delivery of this
Agreement by Trefoil and the consummation by Trefoil of the transactions
contemplated hereby has been duly authorized by all necessary corporate or
partnership action and no other proceedings on the part of Trefoil are
necessary to authorize the execution, delivery or performance of this Agreement
or the consummation of the transactions contemplated hereby. This Agreement
has been duly and validly executed and delivered by Trefoil and, assuming the
due authorization, execution and delivery thereof by the Company, constitutes
the legal, valid and binding obligations of Trefoil, enforceable against
Trefoil in accordance with its terms, except that such enforceability may be
limited by applicable bankruptcy, insolvency, moratorium or other similar laws
affecting or relating to enforcement of creditors' rights generally.

SECTION 2.02. No Conflict.

(a) The execution and delivery of this Agreement by
Trefoil and consummation of the Exchange contemplated hereby does not, and the
performance of this Agreement and the Exchange by Trefoil will not: (i)
conflict with or violate the Certificate of Limited Partnership or Agreement of
Limited Partnership, in each case as amended or restated, of Trefoil, (ii)
result in any breach of or constitute a default (or an event that with notice
or lapse of time or both would become a default) under, or give to others any
rights of termination, amendment, acceleration or cancellation of, or result in
the creation of any Encumbrance (as defined in Section 7.03) on any of the
properties or assets of Trefoil pursuant to, any note, bond, mortgage,
indenture, contract, agreement, lease, license, permit, franchise, or other
instrument or obligation to which Trefoil is a party or by which Trefoil is
bound or affected.

2
<PAGE> 76

(b) The execution and delivery of this Agreement by
Trefoil and consummation of the Exchange contemplated hereby does not, and the
performance of this Agreement and the Exchange by Trefoil will not, require any
consent, approval, authorization or permit of, or filing with or notification
to, any governmental or regulatory authority, either domestic or foreign
("Governmental Entities").
---------------------
SECTION 2.03. Absence of Litigation.

There is no claim, action, suit, litigation, proceeding, legal
administrative or arbitration or investigation of any kind, at law or in equity
(including actions or proceedings seeking injunctive relief, collectively,
"Litigation"), pending or threatened against, affecting or involving Trefoil
----------
which seek to challenge the record or beneficial ownership of the Series A
Preferred Stock by Trefoil, or, as of the date hereof, which seek to prevent or
challenge the transactions contemplated hereby.

SECTION 2.04. Title.

Trefoil is the record and beneficial owner of 1,000,000 shares
of Series A Preferred Stock. Trefoil has good and marketable title to the
Series A Preferred Stock proposed to be exchanged by Trefoil hereunder and full
right, power and authority to assign, transfer and deliver such Series A
Preferred Stock hereunder, free and clear of all voting trust arrangements,
liens, encumbrances, equities, security interests, restrictions and claims
whatsoever (other than those imposed by the Securities Act of 1933, as amended
(the "Securities Act") and the state securities or "blue sky" laws of certain
--------------
jurisdictions); and upon delivery of Series B Preferred Stock in exchange for
such Series A Preferred Stock hereunder, the Company will acquire title to such
Series A Preferred Stock, free and clear of all liens, encumbrances, equities,
claims, restrictions, security interests, voting trusts or other defects of
title whatsoever. Except as provided in this Agreement, Trefoil has not
appointed or granted any proxy, which appointment or grant is still effective,
with respect to the Series A Preferred Stock, nor has Trefoil granted or
assigned any rights to receive any accrued and unpaid dividends on the Series A
Preferred Stock.

SECTION 2.05. Investment Purposes.

Trefoil is acquiring the Series B Preferred Stock for its own
account and not with a view to or for sale in connection with any distribution
of the Series B Preferred Stock.

3
<PAGE> 77

ARTICLE III - REPRESENTATIONS AND
WARRANTIES OF THE COMPANY

The Company hereby represents and warrants to Trefoil as
follows:

SECTION 3.01. Organization and Qualification.

The Company is a corporation duly organized, validly existing
and in good standing under the laws of California ("California Law"), has all
--------------
requisite corporate power and authority to own, lease and operate its
properties and to carry on its business as is now being conducted.

SECTION 3.02. Articles of Incorporation and Bylaws.

The Company has heretofore furnished to Trefoil complete and
correct copies of the Articles of Incorporation and the Bylaws, in each case as
amended or restated, of the Company, which are in full force and effect.

SECTION 3.03. Capitalization; Title to Shares and Notes.

(a) The authorized capital stock of the Company consists of:
(1) 80,000,000 shares of common stock, no par value (the "Common Stock"), of
------------
which, as of the date hereof 22,936,433 shares of Common Stock were issued and
outstanding, and (2) 10,000,000 shares of Preferred Stock, 1,000,000 of which
shares are designated as the Series A Preferred Stock, par value $100 per
share. 1,000,000 shares of the Series A Preferred Stock are issued and
outstanding. None of the issued and outstanding shares of capital stock are
subject to preemptive rights created by statute, the Company's Articles of
Incorporation or Bylaws or any agreement to which the Company is a party or is
bound. Each of the outstanding shares of capital stock of the Company is duly
authorized, validly issued, fully paid and nonassessable.

(b) Upon consummation of the Exchange, all shares of the
Series B Preferred Stock (the "Series B Shares") will be duly authorized,
---------------
validly issued, fully paid and nonassessable, will be convertible into Common
Stock of the Company in accordance with the terms of the Certificate of
Determination and will be entitled to all of the powers, preferences and rights
set forth therein. The shares of Common Stock initially issuable upon
conversion of the Series B Shares (the "Conversion Shares") have been duly
-----------------
authorized and on the Closing Date will be reserved for issuance upon such
conversion, and when issued upon conversion will be validly issued, fully paid
and nonassessable.

SECTION 3.04. Authority; Approval.

The Company has all requisite corporate power and authority to
execute and deliver this Agreement, to perform its obligations hereunder and to
consummate the transactions contemplated hereby. The execution and delivery of
this Agreement and the Registration Rights Amendment by the Company, the
approval of the Certificate of Determination by the Board of

4
<PAGE> 78

Directors of the Company, and the consummation by the Company of the
transactions contemplated in this Agreement have been duly authorized by all
necessary action by the Board of Directors and no other corporate proceedings
on the part of the Company other than approval by the Company's shareholders as
contemplated herein are necessary to authorize this Agreement, the Registration
Rights Amendment, or the Certificate of Determination, or to consummate the
transactions contemplated by this Agreement. This Agreement has been, and the
Registration Rights Amendment upon execution and delivery pursuant hereto will
be, duly and validly executed and delivered by the Company and, assuming the
due authorization, execution and delivery thereof by Trefoil, constitutes, and
the Registration Rights Amendment upon execution and delivery pursuant hereto
will constitute, the legal, valid and binding obligations of the Company,
enforceable against the Company in accordance with its terms, except that such
enforceability may be limited by applicable bankruptcy, insolvency, moratorium
or other similar laws affecting or relating to enforcement of creditors' rights
generally.

SECTION 3.05. No Conflict.

(a) The execution and delivery of this Agreement by the
Company and consummation of the Exchange contemplated hereby does not, and the
performance of this Agreement and the Exchange by the Company will not: (i)
conflict with or violate the Articles of Incorporation or Bylaws, in each case
as amended or restated, of the Company, (ii) except for terms of the Credit
Agreement as to which consents or waivers will be obtained prior to the Closing
Date, result in any breach of or constitute a default (or an event that with
notice or lapse of time or both would become a default) under, or give to
others any rights of termination, amendment, acceleration or cancellation of,
or result in the creation of any Encumbrance (as defined in Section 7.03) on
any of the properties or assets of the Company pursuant to, any note, bond,
mortgage, indenture, contract, agreement, lease, license, permit, franchise, or
other instrument or obligation to which the Company is a party or by which the
Company is bound or affected.

(b) The execution and delivery of this Agreement by the
Company and consummation of the Exchange contemplated hereby does not, and the
performance of this Agreement and the Exchange by the Company will not (other
than the required filing of the Certificate of Determination and filings
required under the federal and the state securities or "blue sky" laws of
certain jurisdictions, all of which filings will have been made on or prior to
the Closing Date) require any consent, approval, authorization or permit of, or
filing with or notification to, any Governmental Entity.

SECTION 3.06. Absence of Litigation.

As of the date hereof, there is no Litigation pending or
threatened against, affecting or involving the Company or any of its
subsidiaries or any properties or rights of the Company or any of its
subsidiaries which seek to prevent or challenge the transactions contemplated
hereby.

5
<PAGE> 79

SECTION 3.07. Opinion of Financial Advisor.

The Company and the Special Committee have received the
written opinion (the "Fairness Opinion") of Sutro & Co. Incorporated, dated as
----------------
of the date of this Agreement to the effect that the Exchange is fair, from a
financial point of view, to the shareholders of the Company (other than
Trefoil).

ARTICLE IV - ADDITIONAL AGREEMENTS

SECTION 4.01. Meeting of Shareholders.

The Company, acting through its Board of Directors, shall take
all action necessary in accordance with California Law and its Articles of
Incorporation and Bylaws to convene a meeting of the Company's shareholders to
act on this Agreement and the Exchange (the "Shareholders' Meeting") not later
---------------------
than April 10, 1996. The Company, acting through its Board of Directors, shall
use its reasonable best efforts to solicit from shareholders of the Company
proxies in favor of the approval of the Exchange and issuance of the Series B
Preferred Stock by the Requisite Vote, as defined in Section 7.03 below, of the
shareholders of the Company.

SECTION 4.02. Best Efforts; Consents; Filings.

Subject to the terms and conditions of this Agreement, the
Company and Trefoil shall each use their reasonable best efforts to (i) take
promptly, or cause to be taken, all appropriate action, and to do promptly, or
cause to be done, all things necessary, proper or advisable under applicable
foreign, federal, state or local law, statute, treaty, ordinance, rule,
regulation, order, writ, injunction, decree, judgment or decree (collectively,
"Laws") or otherwise to consummate and make effective the transactions
----
contemplated by this Agreement; (ii) obtain from any Governmental Entities any
consents, licenses, permits, waivers, approvals, authorizations or orders
required to be obtained or made by the Company or Trefoil or any of their
subsidiaries in connection with the authorization, execution and delivery of
this Agreement and the consummation of the transactions contemplated herein,
including, without limitation, the Exchange; (iii) make any necessary filings
and thereafter make any other required submissions, notifications and filings
with respect to this Agreement and the Exchange required under (A) the
Securities Act and the Securities Exchange Act of 1934 ("Exchange Act") and the
------------
rules and regulations thereunder, and any other applicable Law, including,
without limitation, any other federal or state securities laws and (B) the
Hart-Scott-Rodino Antitrust Improvements Act of 1976, if applicable, provided,
however, that Trefoil and the Company shall cooperate with each other in
connection with the making of all such filings, including, without limitation,
providing copies of all such documents to the non-filing party and its advisors
prior to any filing and, if requested, to accept all reasonable additions,
deletions or changes suggested by the non-filing party in connection therewith;
and (iv) remove any injunctions or other impediments or delays, legal or
otherwise, in order to consummate and make effective the transactions
contemplated by this Agreement for the purpose of securing to the parties
hereto all benefits contemplated by this Agreement. The Company and Trefoil
shall furnish all information required for any application

6
<PAGE> 80

or other filing to be made pursuant to the rules and regulations of any
applicable Law in connection with the transactions contemplated by this
Agreement. Prior to the Closing, the Company shall file the Certificate of
Determination with the Secretary of State of California.

SECTION 4.03. NYSE Listing.

The Company shall use its reasonable best efforts to cause the
Conversion Shares to be approved for listing on the New York Stock Exchange,
Inc. ("NYSE") as of the Closing Date.
----
SECTION 4.04. Voting Agreement.

Trefoil hereby agrees, during the time this Agreement is in
effect, at any meeting of the shareholders of the Company (including, without
limitation, the Shareholders' Meeting) and in any action by written consent of
the shareholders of the Company or the Series A Preferred Stockholders as a
class, if and as requested to do so by the Company, to: (a) appear at any
annual or special meeting of shareholders of the Company (including, without
limitation, the Shareholders' Meeting) for the purpose of obtaining a quorum;
(b) vote in person or by proxy, all of the shares of Common Stock now owned or
with respect to which Trefoil has or shares voting power and all shares of
Series A Preferred Stock (collectively, the "Shares") in favor of this
------
Agreement and the Exchange; (c) vote the Shares against any action, proposal or
agreement that could reasonably be expected to result in a breach in any
material respect of any covenant, representation or warranty or any other
obligation of the Company under this Agreement, or which could reasonably be
expected to result in any of the conditions to the Company's obligations under
this Agreement not being fulfilled; and/or (d) waive its rights to vote in any
manner (whether separately as a class or together with the Common Stock) with
respect to this Agreement and the Exchange.

SECTION 4.05. Sale of Series A Preferred Stock.

Trefoil hereby agrees that, other than the transfer
contemplated by this Agreement, Trefoil shall not, until termination of this
Agreement, directly or indirectly sell, transfer, assign or otherwise dispose
of, or pledge, grant any option or security interest with respect to, or
otherwise encumber shares of Series A Preferred Stock; provided, however, that
Trefoil may sell or enter into an agreement to sell its shares of Series A
Preferred Stock at any time prior to the twentieth day prior to the date
scheduled for the Shareholders' Meeting and in connection therewith assign
rights hereunder with respect thereto (a "Transfer") if: (i) the person so
acquiring shares of Series A Preferred Stock (the "Transferee") agrees in
writing to be bound by the terms of this Agreement, (ii) the Transfer will not
impede or delay in any material respect consummation of the transactions
contemplated under this Agreement (it being understood and agreed that
compliance by the Company with any requirement that any proxy or other
solicitating material for use in connection with the Shareholders' Meeting be
supplemented, modified, recirculated, and/or redistributed, or filed, cleared
or declared effective with or by any governmental entity or the NYSE, on
account of a Transfer shall not be deemed to impede or delay in any material
respect consummation of the transactions contemplated under this

7
<PAGE> 81

Agreement within the meaning of this clause (ii) provided that Trefoil and the
Transferee cooperate with the Company in connection therewith), and (iii)
Trefoil agrees in writing to remain liable hereunder for any breach of its
obligations or the obligations of the Transferee under this Agreement.
Notwithstanding anything to the contrary herein, if Trefoil Transfers any
Series A Preferred Stock, Trefoil shall reimburse the Company for all
additional out of pocket expenses incurred by the Company in complying with its
obligations under this Agreement directly or indirectly as a result of a
Transfer up to an aggregate amount of $50,000.

SECTION 4.06. Election of Directors.

Trefoil hereby agrees that, until termination of this
Agreement, it shall not exercise the right, as set forth in Article III,
Section 3.d.(i) of the Articles of Incorporation and triggered by the
non-payment of dividends payable in an amount equal to three full quarterly
dividends, to elect four directors in addition to the three directors to which
the Series A Preferred Stockholders are currently entitled.

SECTION 4.07 Certain Anti-Dilution Adjustments.

If, at any time during the period between the date hereof and
the Closing Date (the "Adjustment Period"), the Company shall issue any shares
of Common Stock (or rights, warrants or other securities convertible into
Common Stock) or make any distributions to holders of Common Stock under
circumstances which would have required an adjustment to the Conversion Price
and the Conversion Ratio (as such terms are defined in the Certificate of
Determination) pursuant to Section 8.g.(2) of the Certificate of Determination
if the Series B Preferred Stock had been issued at the beginning of the
Adjustment Period, then the Conversion Price and the Conversion Ratio in the
Certificate of Determination as filed with the Secretary of State of the State
of California shall be adjusted, prior to the Closing Date, in respect of such
issuance as if the Series B Preferred Stock had been outstanding at the
beginning of the Adjustment Period.

ARTICLE V - CLOSING CONDITIONS

SECTION 5.01. Conditions to Obligations of Each Party Under
This Agreement.

The respective obligations of each party to effect the
Exchange shall be subject to the satisfaction at or prior to the Closing Date
of the following conditions, any or all of which may be waived, in whole or in
part, to the extent permitted by applicable law:

(a) No Order. No Governmental Entity or federal or state
court of competent jurisdiction shall have enacted, issued, promulgated,
enforced or entered any statute, rule, regulation, executive order, decree,
injunction or other order (whether temporary, preliminary or permanent) which
is in effect and which restricts, prevents or prohibits consummation of the
Exchange.

8
<PAGE> 82

(b) Government Consents. All consents, waivers,
approvals and authorizations required to be obtained, and all filings or
notices required to be made, by the Company and Trefoil prior to consummation
of the transactions contemplated in this Agreement shall have been obtained
from and made with all required Governmental Entities, and all requirements of
any Law.

(c) Shareholder Vote. This Agreement and the Exchange
shall have been approved and adopted by the Requisite Vote of the shareholders
of the Company.

(d) Fairness Opinion. The Fairness Opinion described in
Section 3.07 shall not have been modified, rescinded or otherwise withdrawn.

SECTION 5.02. Additional Conditions to Obligations of Trefoil.

The obligations of Trefoil to effect the Exchange shall be
subject to the satisfaction at or prior to the Closing Date of the following
conditions, any or all of which may be waived, in whole or in part, to the
extent permitted by applicable law:

(a) Representations and Warranties. Each of the
representations and warranties of the Company contained in this Agreement shall
be true and correct in all material respects (except that where any statement
in a representation or warranty expressly includes a standard of materiality,
such statement shall be true and correct in all respects giving effect to such
standard) when made and as of the Closing Date as though made on and as of the
Closing Date, except that those representations and warranties which address
matters only as of a particular date shall remain true and correct in all
material respects (except that where any statement in a representation or
warranty expressly includes a standard of materiality, such statement shall be
true and correct in all respects giving effect to such standard) as of such
date. Trefoil shall have received a certificate of an executive officer of the
Company, as of the Closing Date, to such effect.

(b) Agreements and Covenants. The Company shall have
performed or complied in all material respects with all agreements and
covenants required by this Agreement to be performed or complied with by it on
or prior to the Closing Date. Trefoil shall have received a certificate of an
executive officer of the Company, as of the Closing Date, to that effect.

(c) Legal Opinion. Trefoil shall have received the
written legal opinion, dated the Closing Date, of Fried, Frank, Harris, Shriver
& Jacobson substantially in the form of Exhibit B.

(d) Registration Rights Amendment. The amendment to the
Registration Rights Agreement, dated as of May 27, 1991, between the Company
and Trefoil (the "Registration Rights Amendment") shall have been executed and
-----------------------------
delivered by the Company at or prior to the Closing Date, substantially in the
form attached hereto as Exhibit C.

9
<PAGE> 83

(e) NYSE Listing. The shares of the Common Stock
issuable upon conversion of the Series B Preferred Stock shall have been
approved for listing on the NYSE as of the Closing Date.

SECTION 5.03. Additional Conditions to Obligations of the
Company.

The obligations of the Company to effect the Exchange shall be
subject to the satisfaction at or prior to the Closing Date of the following
conditions, any or all of which may be waived, in whole or in part, to the
extent permitted by applicable law:

(a) Representations and Warranties. Each of the
representations and warranties of Trefoil contained in this Agreement shall be
true and correct in all material respects (except that where any statement in a
representation or warranty expressly includes a standard of materiality, such
statement shall be true and correct in all respects giving effect to such
standard) when made and as of the Closing Date as though made on and as of the
Closing Date, except that those representations and warranties which address
matters only as of a particular date shall remain true and correct in all
material respects (except that where any statement in a representation or
warranty expressly includes a standard of materiality, such statement shall be
true and correct in all respects giving effect to such standard) as of such
date. The Company shall have received a certificate of an executive officer of
the general partner of Trefoil, as of the Closing Date, to such effect.

(b) Agreements and Covenants. Trefoil shall have
performed or complied in all material respects with all agreements and
covenants required by this Agreement to be performed or complied with by it on
or prior to the Closing Date. The Company shall have received a certificate of
an executive officer of the general partner of Trefoil, as of the Closing Date,
to that effect.

(c) Consent. The Company shall have obtained the consent
of the Bank (as defined in Section 7.03 below) pursuant to the Credit Agreement
to the transactions contemplated herein, including but not limited to the
Exchange, and the waiver of any provisions of the Credit Agreement which may be
deemed to prohibit such transactions.

ARTICLE VI - TERMINATION, AMENDMENT AND WAIVER

SECTION 6.01. Termination.

This Agreement may be terminated at any time prior to the
Closing Date:

(a) by mutual consent of the Company and Trefoil;

(b) by Trefoil, upon a material breach of any
representation, warranty, covenant or agreement on the part of the Company set
forth in this Agreement, or if any representation or warranty of the Company
shall have become untrue in any material respect;

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<PAGE> 84

(c) by the Company, upon a material breach of any
representation, warranty, covenant or agreement on the part of Trefoil set
forth in this Agreement, or if any representation or warranty of the Trefoil
shall have become untrue in any material respect;

(d) by either Trefoil or the Company, if there shall be
any final, non-appealable order or injunction imposed by a court of competent
jurisdiction preventing the consummation of the Exchange;

(e) by either Trefoil or the Company, if the Exchange
shall not have been consummated on or before April 15, 1996; provided, however,
Trefoil shall have no right to terminate this Agreement pursuant to this clause
(e) prior to May 15, 1996 if the Exchange shall not have been consummated prior
to April 15, 1996 as a direct or indirect result of a Transfer; and

(f) by Trefoil at any time prior to the Mailing Date if
Trefoil shall have theretofore received a bona fide offer to acquire from
Trefoil, or Trefoil shall have entered into an agreement or agreements to sell,
or sold, not less than a majority of the outstanding shares of Series A
Preferred Stock.

SECTION 6.02. Amendment.

This Agreement may not be amended except by an instrument in
writing signed by the parties hereto.

SECTION 6.03. Early Termination.

If Trefoil terminates this Agreement pursuant to clause (f) of
Section 6.01, Trefoil and the Transferee shall (i) irrevocably consent and
agree to extend each mandatory redemption date contained in Section 5(b) of
Article 3 of the Company's Restated Articles of Incorporation for a period of
an additional 16 months from the date so specified, (ii) if and as requested by
the Company take all the actions specified in Section 4.04 hereof with respect
to all shares of Common Stock and the Series A Preferred Stock held by Trefoil
or such Transferee in connection with the adoption or approval of an amendment
of such Section 5(b) effecting the extension described in clause (i) of this
Section 6.03 and (iii) if and as requested by the Company take all other
actions reasonably necessary to effect such extension. This Section 6.03 shall
survive termination of the Agreement pursuant to Section 6.01(f).

ARTICLE VII - GENERAL PROVISIONS

SECTION 7.01. Company Approval.

Any waiver, consent or amendment of this Agreement by the
Company shall not be effective unless approved by the Special Committee, as
defined in Section 7.03 below, of the Company's Board of Directors, and by the
holders of a majority of the Series A Preferred Stock.

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SECTION 7.02. Notices.

All notices and other communications given or made pursuant
hereto shall be in writing and shall be deemed to have been duly given or made
as of the date delivered, mailed or transmitted, and shall be effective upon
receipt, if delivered personally, mailed by registered or certified mail
(postage prepaid, return receipt requested) to the parties at the following
addresses (or at such other address for a party as shall be specified by like
changes of address) or sent by electronic transmission (provided that a
confirmation copy is sent by another approved means) to the telecopier number
specified below:

(a) If to the Company:

L.A. Gear, Inc.
2850 Ocean Park Boulevard
Santa Monica, California 90405
Attention: Thomas F. Larkins, Esq.
Telecopier No.: (310) 581-7737

Stephen A. Koffler, Chairman of the Special Committee
c/o Smith Barney Inc.
10877 Wilshire Boulevard, Suite 1500
Los Angeles, California 90024
Telecopier No.: (310) 443-8266

with a copy to each of:

Fried, Frank, Harris, Shriver & Jacobson
725 South Figueroa Street, Suite 3890
Los Angeles, California 90017-5438
Attention: David Robbins, Esq.
Telecopier No.: (213) 689-1646

Gibson, Dunn & Crutcher
333 South Grand Avenue, 49th Floor
Los Angeles, California 90071
Attention: Jonathan K. Layne, Esq.
Telecopier No.: (213) 229-7012

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<PAGE> 86

(b) If to Trefoil Capital Investors, L.P.:

Trefoil Capital Investors, L.P.:
4444 Lakeside Drive, 2nd Floor
Burbank, California 91505-4054
Attention: Robert G. Moskowitz
Telecopier No.: (818) 842-3142

with a copy to:

Sanders, Barnet, Goldman, Simons & Mosk
1901 Avenue of the Stars, Suite 850
Los Angeles, California 90067
Attention: Irwin G. Barnet, Esq.
Telecopier No.: (310) 553-2435

SECTION 7.03. Certain Definitions.

For purposes of this Agreement, the term:

"Affiliate" means, with respect to any Person, a Person,
directly or indirectly, through one or more intermediaries, controlling,
controlled by, or under common control with such Person; the term
"control," as used in this definition, means, with respect to a Person,
the possession, directly or indirectly, of the power to direct or cause
the direction of the management or policies of the Person.

"business day" means any day other than a day on which banks
in the State of California are authorized or obligated to be closed.

"Bank" means BankAmerica Business Credit, Inc.

"Credit Agreement" means the Loan and Security Agreement
between L.A. Gear California, Inc. and the Bank, dated as of November
22, 1993, as amended to date.

"Encumbrance" means, with respect to any real or personal,
tangible or intangible property, any lien, charge, reservation, right of
entry, possibility of reverter, encroachment, easement, right of way,
restrictive covenant, lease, security interest (whether based on common
law, statute or contract and, including without limitation, any interest
arising from any capitalized lease, conditional sale, trust receipt or
deposit interest), option, right of first refusal, right of first offer
or any other imperfection of title or right by any person to assert a
claim with respect to such property.

"Interested Director" shall mean a director of the Company
within the meaning given to the term "Interested Director" used in or
construed under Section 310 of the California Corporations Code.

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"Mailing Date" means the date on which the Company first mails
or distributes to its shareholders a proxy statement with respect to the
Shareholders' Meeting.

"Person" means an individual, partnership, joint venture,
corporation, trust, unincorporated association or other entity or
association.

"Requisite Vote" means the affirmative vote of a majority of
the shares of Common Stock present and voting (excluding any rights of
Series A Preferred Stock to vote together with the Common Stock, and
excluding any shares of Common Stock owned by Trefoil or any Interested
Director) at a meeting duly held for approval of the Exchange, at which
a quorum is present (excluding any rights of Series A Preferred Stock to
vote together with the Common Stock, and excluding any shares of Common
Stock owned by Trefoil or any Interested Director).

"Special Committee" means the committee established by the
Company's Board of Directors in connection with the transactions
contemplated herein, whose members, as of the date hereof, are Messrs.
Dalshaug, Davis, Koffler and Ms. Meyers.

SECTION 7.04. Legend.

On the date hereof, certificates representing all shares of
the Series A Preferred Stock have been delivered to the Company and shall
promptly hereafter be returned to Trefoil bearing the following legend:

THE SHARES OR INTERESTS REPRESENTED BY THIS CERTIFICATE AND THE
TRANSFER OF SUCH SHARES OR INTERESTS ARE RESTRICTED BY THE TERMS
AND CONDITIONS OF A SHARE EXCHANGE AGREEMENT DATED AS OF DECEMBER
12, 1995 AMONG TREFOIL CAPITAL INVESTORS, L.P. AND L.A. GEAR,
INC., A COPY OF WHICH IS AVAILABLE UPON REQUEST AT THE OFFICES OF
THE COMPANY.

SECTION 7.05. Headings.

The headings contained in this Agreement are for reference
purposes only and shall not affect in any way the meaning or interpretation of
this Agreement.

SECTION 7.06. Severability.

If any term or other provision of this Agreement is invalid,
illegal or incapable of being enforced by any rule of law or public policy, all
other conditions and provisions of this Agreement shall nevertheless remain in
full force and effect so long as the economic or legal substance of the
transactions contemplated hereby is not affected in any manner materially

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<PAGE> 88

adverse to any party. Upon such determination that any term or other provision
is invalid, illegal or incapable of being enforced, the parties hereto shall
negotiate in good faith to modify this Agreement so as to effect the original
intent of the parties as closely as possible in an acceptable manner to the end
that transactions contemplated hereby are fulfilled to the extent possible.

SECTION 7.07. Entire Agreement.

This Agreement, together with the Exhibits hereto, constitute
the entire agreement of the parties and supersede all prior agreements and
undertakings, both written and oral, between the parties, or any of them, with
respect to the subject matter hereof.

SECTION 7.08. Assignment.

Except as expressly permitted hereunder, this Agreement shall
not be assigned by any party hereto.

SECTION 7.09. Parties in Interest.

This Agreement shall be binding upon and inure solely to the
benefit of each party hereto, its successors and permitted assignees and
nothing in this Agreement, express or implied, is intended to or shall confer
upon any other person any right, benefit or remedy of any nature whatsoever
under or by reason of this Agreement.

SECTION 7.10. Failure or Indulgence Not Waiver; Remedies
Cumulative.

No failure or delay on the part of any party hereto in the
exercise of any right hereunder shall impair such right or be construed to be a
waiver of, or acquiescence in, any breach of any representation, warranty or
agreement herein, nor shall any single or partial exercise of any such right
preclude other or further exercise thereof or of any other right. All rights
and remedies existing under this Agreement are cumulative to, and not exclusive
of, any rights or remedies otherwise available.

SECTION 7.11. Governing Law.

This Agreement shall be governed by, and construed in
accordance with, California Law without regard to rules respecting conflicts of
law.

SECTION 7.12. Counterparts.

This Agreement may be executed in one or more counterparts,
and by the different parties hereto in separate counterparts, each of which
when executed shall be deemed to be an original but all of which taken together
shall constitute one and the same agreement.

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<PAGE> 89

SECTION 7.13. Construction.

All section and article references are to this Agreement,
unless otherwise expressly provided. As used in this Agreement, (a) "hereof",
"hereunder", "herein" and words of like import shall be deemed to refer to this
Agreement in its entirety and not just a particular section of this Agreement
and (b) unless the context otherwise requires, words in the singular number or
in the plural number shall each include the singular number or the plural
number, words of the masculine gender shall include the feminine and neuter,
and, when the sense so indicates, words of the neuter gender shall refer to any
gender.

SECTION 7.14. Expenses.

Except as otherwise provided in Section 4.05 hereof, each
party hereto shall bear its own expenses in connection with the Exchange
contemplated by this Agreement; provided, however, that unless this Agreement
is terminated pursuant to Section 6.01(f) hereof, the Company shall pay the
reasonable out of pocket expenses incurred by Trefoil in connection with the
Exchange contemplated by this Agreement, up to an aggregate amount of $17,500.

SECTION 7.15. Specific Enforcement.

The Company and Trefoil acknowledge and agree that irreparable
damage would occur in the event that any of the provisions of this Agreement
were not performed in accordance with their specific terms or were otherwise
breached. It is accordingly agreed that the parties shall be entitled to an
injunction or injunctions to prevent or cure breaches of the provisions of this
Agreement and to enforce specifically the terms and provisions hereof in any
court of the United States or any court of the State of California located in
Los Angeles, California, having jurisdiction, this being in addition to any
other remedy to which they may be entitled by law or equity.

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<PAGE> 90

IN WITNESS WHEREOF, the Company and Trefoil have caused this
Agreement to be executed as of the date first written above by their respective
officers and representatives thereunto duly authorized.

L.A. GEAR, INC.

By: /s/ WILLIAM L. BENFORD
---------------------------------
Name: William L. Benford
Title: President

TREFOIL CAPITAL INVESTORS, L.P.
By: TREFOIL INVESTORS, INC., its
general partner

By: /s/ ROBERT G. MOSKOWITZ
---------------------------------
Name: Robert G. Moskowitz
Title: Managing Director

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APPENDIX II

L.A. GEAR, INC.

CERTIFICATE OF DETERMINATION OF SERIES B CONVERTIBLE PREFERRED STOCK
SETTING FORTH THE RIGHTS, PREFERENCES, PRIVILEGES AND RESTRICTIONS
OF SUCH SERIES OF PREFERRED STOCK

The undersigned, William L. Benford and Thomas F. Larkins, President
and Secretary, respectively, of L.A. Gear, Inc., a California corporation, do
hereby certify:

FIRST: The Restated Articles of Incorporation of the corporation
authorize the issuance of Ten Million (10,000,000) shares of stock designated
"Preferred Stock," of which Nine Million (9,000,000) are issuable from time to
time in one or more series, and authorized the Board of Directors to determine
or alter the rights, preferences, privileges and restrictions granted to or
imposed on any wholly unissued series of such Preferred Stock, and the number
of shares constituting any such series and the designation thereof, of any or
all of them.

SECOND: The Board of Directors of the corporation, pursuant to the
authority of Section 401 of the California General Corporation Law, did duly
adopt the resolution attached hereto as Exhibit A and incorporated herein by
this reference, authorizing and providing for the creation of a series of
Preferred Stock to be known as "Series B Preferred Stock," consisting of One
Million _____________ (_________) shares, none of the shares of such series
having been issued.

We further declare under penalty of perjury under the laws of the
State of California that the matters set forth in this certificate are true and
correct of our own knowledge.

IN WITNESS WHEREOF, the undersigned have executed this Certificate this _____
day of _________, 1996.

________________________________________
Name: William L. Benford
Title: President

________________________________________
Name: Thomas F. Larkins
Title: Secretary
<PAGE> 92

EXHIBIT A

RESOLUTION OF THE BOARD OF DIRECTORS OF L.A. GEAR, INC. ESTABLISHING A SERIES
OF PREFERRED STOCK TO BE KNOWN AS SERIES B PREFERRED STOCK

NOW, THEREFORE, BE IT RESOLVED, that pursuant to the authority
conferred upon the Board of Directors by Article Four of the Restated Articles
of Incorporation of this corporation, there is hereby established a series of
the authorized Preferred Stock of the corporation, which series shall be
designated as "Series B Preferred Stock" and which series shall consist of One
Million __________ (______) shares and shall have the following rights,
preferences, privileges and restrictions:

Section 1. Stated Value.

The Series B Preferred Stock shall have a stated
value of $100 per share (the "Stated Value").

Section 2. Dividends and Distributions.

a. The holders of shares of Series B Preferred Stock, in
preference to the holders of shares of Junior Dividend Stock (as defined in
Section 11 hereof), shall be entitled to receive, when, as and if declared by
the Board of Directors, out of the assets of the corporation legally available
therefor, cumulative dividends at an annual rate of 7.50% (arrearages of
dividends shall bear additional dividends compounded quarterly at a rate of
8.625% per annum, through the date of payment of such arrearages) from and
after the Issue Date (as defined in Section 11 hereof) as long as the shares of
Series B Preferred Stock remain outstanding, and subject to paragraph (b) of
this Section 2, no more. Dividends shall be payable in cash or additional
shares of Series B Preferred Stock, as provided in paragraph (c) of this
Section 2. Dividends shall be computed on the basis of the Stated Value, and
shall accrue and be payable quarterly, in arrears, on the last Business Day (as
defined in Section 11) of February, May, August and November in each year (each
such date being referred to herein as a "Quarterly Dividend Payment Date"),
commencing on the first Quarterly Dividend Payment Date after the Issue Date.

b. Dividends payable pursuant to paragraph (a) of this Section 2
shall begin to accrue and be cumulative from the Issue Date, whether or not
earned or declared. The amount of dividends so payable shall be determined on
the basis of twelve 30-day months and a 360-day year. Dividends paid on the
shares of Series B Preferred Stock in an amount less than the total amount of
such dividends at the time accrued and payable on such shares shall be
allocated pro rata on a share-by-share basis among all such shares at the time
outstanding. The Board of Directors may fix a record date for the
determination of holders of shares of Series B Preferred Stock entitled to
receive payment of a dividend declared thereon, which record date shall be no
more than sixty days prior to the date fixed for the payment thereof.

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c. With respect to dividends paid on or prior to November 30,
1996, dividends on the Series B Preferred Stock shall be payable, at the option
of the Company, in whole shares of Series B Preferred Stock valued at $100 per
share or in cash; thereafter, dividends on the Series B Preferred Stock shall
be payable in cash.

d. The holders of shares of Series B Preferred Stock shall not be
entitled to receive any dividends or other distributions except as provided
herein.

Section 3. Voting Rights. In addition to any voting rights
provided by law, the holders of shares of Series B Preferred Stock shall have
the following voting rights:

a. In addition to voting rights provided elsewhere in this
Section 3, and as long as any of the Series B Preferred Stock is outstanding,
each share of Series B Preferred Stock shall entitle the holder thereof to vote
on all matters, including with respect to the election of directors, voted on
by holders of the Company's Common Stock, no par value (the "Common Stock")
voting together as a single class with other shares entitled to vote at all
meetings of the shareholders of the corporation. With respect to any such
vote, each share of Series B Preferred Stock shall entitle the holder thereof
to cast the number of votes equal to the number of votes which could be cast in
such vote by a holder of the shares of capital stock of the corporation into
which such share of Series B Preferred Stock is convertible on the record date
for such vote; provided, however, that if more than one share of Series B
Preferred Stock shall be held by any holder of shares of Series B Preferred
Stock, the total number of votes which such holder shall be entitled to cast
pursuant to this Section 3(a) shall be computed on the basis of conversion of
the total number of shares of Series B Preferred Stock held by such holder,
with any then remaining fractional share disregarded for the purposes of this
Section 3(a).

b. In addition to the voting rights provided elsewhere in this
Section 3, the affirmative vote of the holders of at least a majority of the
outstanding shares of Series B Preferred Stock, voting separately as a single
series, in person or by proxy, at a special or annual meeting of shareholders
called for the purpose, shall be necessary to (A) authorize, increase the
authorized number of shares of, or issue (including on conversion or exchange
of any convertible or exchangeable securities or by reclassification), any
shares of any class or classes, or any series of any class or classes, of the
corporation's capital stock ranking pari passu with or prior to (either as to
dividends or upon voluntary or involuntary liquidation, dissolution or winding
up) the Series B Preferred Stock, (B) except as contemplated pursuant to
Section 2(c), increase the authorized number of shares of, or issue (including
on conversion or exchange of any convertible or exchangeable securities or by
reclassification) any shares of, Series B Preferred Stock or (C) alter, amend
or repeal any of the provisions of the Restated Articles of Incorporation (as
defined in Section 11 hereof) of the corporation which in any manner would
alter, change or otherwise adversely affect in any way the powers, preferences
or rights of the Series B Preferred Stock.

c. (1) The rights of holders of shares of Series B Preferred
Stock to take any actions as provided in this Section 3 may be exercised,
subject to the CGCL (as defined in Section 11 hereof), at any annual meeting of
shareholders or at a special meeting of shareholders

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<PAGE> 94

held for such purpose as hereinafter provided or at any adjournment or
postponement thereof, or by the written consent, delivered to the Secretary of
the corporation, of the holders of the minimum number of shares required to
take such action.

As long as such right to vote continues (and unless such right has
been exercised by written consent of the minimum number of shares required to
take such action), the Chairman of the Board of the corporation may call, and
upon the written request of holders of record of 20% of the outstanding shares
of Series B Preferred Stock, addressed to the Secretary of the corporation at
the principal office of the corporation, shall call, a special meeting of the
holders of shares entitled to vote as provided herein. The corporation shall
use its best efforts to hold such meeting within thirty-five, but in any event
not later than sixty, days after delivery of such request to the Secretary of
the corporation, at the place and upon the notice provided by law and in the
By-laws of the corporation for the holding of meetings of shareholders.

(2) At each meeting of shareholders at which the holders
of shares of Series B Preferred Stock shall have the right, voting separately
as a single series, to take any action, the presence in person or by proxy of
the holders of record of a majority of the total number of shares of Series B
Preferred Stock then outstanding and entitled to vote on the matter shall be
necessary and sufficient to constitute a quorum. At any such meeting or at any
adjournment or postponement thereof, in the absence of a quorum of the holders
of shares of Series B Preferred Stock, holders of a majority of such shares
present in person or by proxy shall have the power to adjourn the meeting as to
the actions to be taken by the holders of shares of Series B Preferred Stock
from time to time and place to place without notice other than announcement at
the meeting until a quorum shall be present.

For the taking of any action as provided in paragraph (b) of this
Section 3 by the holders of shares of Series B Preferred Stock, each such
holder shall have one vote for each share of Series B Preferred Stock standing
in his name on the transfer books of the corporation as of any record date
fixed for such purpose or, if no such date be fixed, at the close of business
on the Business Day next preceding the day on which notice is given, or if
notice is waived, at the close of business on the Business Day next preceding
the day on which the meeting is held.

Section 4. Certain Restrictions.

a. Whenever quarterly dividends payable on shares of Series B
Preferred Stock as provided in Section 2 hereof are not paid in full,
thereafter and until all unpaid dividends payable, whether or not declared, on
the outstanding shares of Series B Preferred Stock shall have been paid in
full, or prior to June 1, 1997 without the affirmative vote of the holders of
at least a majority of the outstanding shares of Series B Preferred Stock,
voting separately as a single series, in person or by proxy, at a special or
annual meeting of shareholders, the corporation shall not: (A) declare or pay
dividends, or make any other distributions, on any shares of Junior Dividend
Stock other than dividends or distributions payable in Junior Dividend Stock;
or (B) declare or pay dividends, or make any other distributions, on any shares
of Parity Dividend Stock (as defined in Section 11 hereof), except (1)
dividends or distributions payable in Junior Dividend Stock and (2) dividends
or distributions paid ratably on the Series B Preferred

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<PAGE> 95

Stock and all Parity Dividend Stock on which dividends are payable or in
arrears, in proportion to the total amounts to which the holders of all shares
of the Series B Preferred Stock and such Parity Dividend Stock are then
entitled.

b. Whenever quarterly dividends payable on shares of Series B
Preferred Stock as provided in Section 2 hereof are not paid in full,
thereafter and until all unpaid dividends payable, whether or not declared, on
the outstanding shares of Series B Preferred Stock shall have been paid in
full, or prior to June 1, 1997 without the affirmative vote of the holders of
at least a majority of the outstanding shares of Series B Preferred Stock,
voting separately as a single series, in person or by proxy, at a special or
annual meeting of shareholders, the corporation shall not: (A) redeem, purchase
or otherwise acquire for consideration any shares of Junior Dividend Stock or
Junior Liquidation Stock (as defined in Section 11 hereof) or Parity Dividend
Stock or Parity Liquidation Stock (as defined in Section 11 hereof); provided,
however, that (1) the corporation may at any time redeem, purchase or otherwise
acquire shares of Junior Liquidation Stock or Parity Liquidation Stock in
exchange for any shares of capital stock of the corporation that rank junior to
the Series B Preferred Stock as to dividends and upon liquidation, dissolution
and winding up; (2) the corporation may accept shares of any Parity Liquidation
Stock for conversion into shares of capital stock of the corporation that rank
junior to the Series B Preferred Stock as to dividends and upon liquidation,
dissolution and winding up; and (3) the corporation may at any time redeem,
purchase or otherwise acquire shares as may be required pursuant to the
corporation's 1986 Stock Option Plan, 1992 Stock Option Plan For Eligible Non
Employee Directors, 1993 Stock Incentive Plan or Employee Stock Savings Plan,
as they may be amended from time to time, or similar employee stock plans
hereafter adopted; or (B) redeem or purchase or otherwise acquire for
consideration any shares of Series B Preferred Stock; provided, however, that
the corporation (1) may accept shares of Series B Preferred Stock surrendered
for conversion into shares of capital stock of the corporation pursuant to
Section 8 hereof, and (2) may elect to redeem all outstanding shares of Series
B Preferred Stock pursuant to Section 5(a) hereof.

c. The corporation shall not permit any Subsidiary (as defined in
Section 11 hereof) of the corporation to purchase or otherwise acquire for
consideration any shares of capital stock of the corporation unless the
corporation could, pursuant to paragraph (b) of this Section 4, purchase such
shares at such time and in such manner.

Section 5. Redemption.

a. The corporation shall have the right, at its sole option and
election made in accordance with paragraph (d) of this Section 5, to redeem,
out of funds legally available therefor, shares of Series B Preferred Stock, in
whole or in part, in integral multiples having an aggregate Stated Value of at
least $5,000,000, at any time and from time to time, at a redemption price
equal to the Stated Value, plus an amount per share equal to all accrued and
unpaid dividends, whether or not declared, to the date of redemption (the
"Redemption Price"); provided, however, that the corporation shall not have any
such right unless (A) all quarterly dividends payable on shares of Series B
Preferred Stock pursuant to Section 2 hereof shall have been paid in full and
(B) the Current Market Price (as defined in Section 11 hereof) of the

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<PAGE> 96

Common Stock is equal to at least 150% of the Conversion Price (as defined in
Section 11 hereof) for thirty consecutive Trading Days (as defined in Section
11 hereof).

b. If less than all shares of Series B Preferred Stock at the
time outstanding are to be redeemed, the shares to be redeemed shall be
selected pro rata.

c. Notice of any redemption of shares of Series B Preferred Stock
pursuant to this Section 5 shall be mailed at least forty-five, but not more
than seventy-five, days prior to the date fixed for redemption to each holder
of shares of Series B Preferred Stock to be redeemed, at such holder's address
as it appears on the transfer books of the corporation. In order to facilitate
the redemption of shares of Series B Preferred Stock, the Board of Directors
may fix a record date for the determination of Series B Preferred Stock to be
redeemed, or may cause the transfer books of the corporation for the Series B
Preferred Stock to be closed, not more than sixty days or less than thirty days
prior to the date fixed for such redemption.

d. On the date of any redemption being made pursuant to this
Section 5 which is specified in a notice given pursuant to paragraph (c) of
this Section 5, the corporation shall, and at any time after such notice shall
have been mailed and before the date of redemption the corporation may, deposit
for the benefit of the holders of shares of Series B Preferred Stock to be
redeemed the funds necessary for such redemption, including the amount
necessary to pay all accrued and unpaid dividends to the date of redemption,
with a bank or trust company in the City of Los Angeles having a capital and
surplus of at least $1,000,000,000. Any moneys so deposited by the corporation
and unclaimed at the end of one year from the date designated for such
redemption shall revert to the general funds of the corporation. After such
reversion, any such bank or trust company shall, upon demand, pay over to the
corporation such unclaimed amounts and thereupon such bank or trust company
shall be relieved of all responsibility in respect thereof and any holder of
shares of Series B Preferred Stock to be redeemed shall look only to the
corporation for the payment of the Redemption Price. In the event that moneys
are deposited pursuant to this paragraph (d) in respect of shares of Series B
Preferred Stock that are converted in accordance with the provisions of Section
8, such moneys shall, upon such conversion, revert to the general funds of the
corporation and, upon demand, such bank or trust company shall pay over to the
corporation such moneys and shall be relieved of all responsibility to the
holders of such converted shares in respect thereof. Any interest accrued on
funds deposited pursuant to this paragraph (d) shall be paid from time to time
to the corporation for its own account.

e. Notice of redemption having been given as aforesaid, upon the
deposit of funds pursuant to paragraph (d) in respect of shares of Series B
Preferred Stock to be redeemed pursuant to this Section 5, notwithstanding that
any certificates for such shares shall not have been surrendered for
cancellation, from and after the date of redemption designated in the notice of
redemption (i) the shares represented thereby shall no longer be deemed
outstanding, (ii) the rights to receive dividends thereon shall cease to
accrue, and (iii) all rights of the holders of shares of Series B Preferred
Stock to be redeemed shall cease and terminate, excepting only the right to
receive the Redemption Price therefor, and the right to convert such shares
into shares of

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Common Stock until the close of business on the Business Day next preceding the
date of redemption, in accordance with Section 8 hereof.

Section 6. Reacquired Shares. Any shares of Series B Preferred
Stock converted, redeemed, purchased or otherwise acquired by the corporation
in any manner whatsoever shall be retired and cancelled promptly after the
acquisition thereof. All such shares of Series B Preferred Stock shall upon
their cancellation, in accordance with the CGCL, become authorized but unissued
shares of Preferred Stock of the corporation and may be reissued as part of
another series of Preferred Stock of the corporation, subject to the conditions
or restrictions on issuance set forth herein.

Section 7. Liquidation, Dissolution or Winding Up.

a. If the corporation shall commence a voluntary case under the
Federal bankruptcy laws or any other applicable Federal or state bankruptcy,
insolvency or similar law, or consent to the entry of an order for relief in an
involuntary case under such law or to the appointment of a receiver,
liquidator, assignee, custodian, trustee, sequestrator (or other similar
official) of the corporation or of any substantial part of its property, or
make an assignment for the benefit of its creditors, or admit in writing its
inability to pay its debts generally as they become due, or if a decree or
order for relief in respect of the corporation shall be entered by a court
having jurisdiction in the premises in an involuntary case under the Federal
bankruptcy laws or any other applicable Federal or state bankruptcy, insolvency
or similar law, or appointing a receiver, liquidator, assignee, custodian,
trustee, sequestrator (or other similar official) of the corporation or of any
substantial part of its property, or ordering the winding up or liquidation of
its affairs, and any such decree or order shall be unstayed and in effect for a
period of ninety consecutive days and on account of any such event the
corporation shall liquidate, dissolve or wind up, or if the corporation shall
otherwise liquidate, dissolve or wind up, no distribution shall be made (i) to
the holders of shares of Junior Liquidation Stock unless, prior thereto, the
holders of shares of Series B Preferred Stock, subject to Section 8, shall have
received the Liquidation Preference (as defined in Section 11 hereof) with
respect to each share, or (ii) to the holders of shares of Parity Liquidation
Stock, except distributions made ratably to the holders of the Series B
Preferred Stock and the Parity Liquidation Stock in proportion to the total
amounts to which the holders of all such shares of Series B Preferred Stock and
Parity Liquidation Stock would be entitled upon such liquidation, dissolution
or winding up. Upon any such liquidation, dissolution or winding up, the
holders of shares of Series B Preferred Stock shall be entitled to receive the
Liquidation Preference with respect to each such share and no more.

b. Neither the merger or other business combination of the
corporation with or into any other Person (as defined in Section 11 hereof) or
Persons nor the sale of all or substantially all the assets of the corporation
shall be deemed to be a liquidation, dissolution or winding up of the
corporation for purposes of this Section 7.

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Section 8. Conversion.

a. Subject to the provisions for adjustment hereinafter set
forth, each share of Series B Preferred Stock shall be convertible at the
option of the holder thereof into fully paid and nonassessable shares of Common
Stock. The number of shares of Common Stock deliverable upon conversion of a
share of Series B Preferred Stock, adjusted as hereinafter provided, is
referred to herein as the "Conversion Ratio." The Conversion Ratio shall
initially be 14.815 and the Conversion Price shall initially be $6.75. The
Conversion Ratio and the Conversion Price are subject to adjustment from time
to time pursuant to paragraph (g) of this Section 8.

b. Conversion of the Series B Preferred Stock may be effected by
any such holder upon the surrender to the corporation at the principal office
of the corporation in the State of California (the "Transfer Agent") or at the
office of any agent or agents of the corporation, as may be designated by the
Board of Directors of the corporation, of the certificate for such Series B
Preferred Stock to be converted accompanied by a written notice stating that
such holder elects to convert all or a specified whole number of such shares in
accordance with the provisions of this Section 8 and specifying the name or
names in which such holder wishes the certificate or certificates for shares of
Common Stock to be issued. In case such notice shall specify a name or names
other than that of such holder, such notice shall be accompanied by payment of
all transfer taxes payable upon the issuance of shares of Common Stock in such
name or names. Other than such taxes, the corporation will pay any and all
issue and other taxes (other than taxes based on income) that may be payable in
respect of any issue or delivery of shares of Common Stock on conversion of
Series B Preferred Stock pursuant hereto. As promptly as practicable, and in
any event within five Business Days after the surrender of such certificate or
certificates and the receipt of such notice relating thereto and, if
applicable, payment of all transfer taxes (or the demonstration to the
satisfaction of the corporation that such taxes have been paid), the
corporation shall deliver or cause to be delivered (i) certificates
representing the number of validly issued, fully paid and nonassessable full
shares of Common Stock to which the holder of shares of Series B Preferred
Stock being converted shall be entitled and (ii) if less than the full number
of shares of Series B Preferred Stock evidenced by the surrendered certificate
or certificates is being converted, a new certificate or certificates, of like
tenor, for the number of shares evidenced by such surrendered certificate or
certificates less the number of shares being converted. Such conversion shall
be deemed to have been made at the close of business on the date of giving such
notice and of such surrender of the certificate or certificates representing
the shares of Series B Preferred Stock to be converted (the "Conversion Date")
so that the rights of the holder thereof as to the shares being converted shall
cease except for the right to receive shares of Common Stock in accordance
herewith, and the Person entitled to receive the shares of Common Stock shall
be treated for all purposes as having become the record holder of such shares
of Common Stock at such time. The corporation shall not be required to
convert, and no surrender of shares of Series B Preferred Stock shall be
effective for that purpose, while the transfer books of the corporation for the
Common Stock are closed for any purpose (but not for any period in excess of
five days); but the surrender of shares of Series B Preferred Stock for
conversion during any period while such books are so closed shall become
effective for conversion immediately upon the reopening of such books, as if
the conversion had been made

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<PAGE> 99

on the date such shares of Series B Preferred Stock were surrendered, and at
the Conversion Ratio in effect at the date of such surrender.

c. In case any shares of Series B Preferred Stock are to be
redeemed pursuant to Section 5, such right of conversion shall cease and
terminate as to the shares of Series B Preferred Stock to be redeemed at the
close of business on the Business Day next preceding the date fixed for
redemption unless the corporation shall default in the payment of the
Redemption Price.

d. The Conversion Ratio shall be subject to adjustment from time
to time in certain instances as hereinafter provided. Upon conversion, the
holder of shares of Series B Preferred Stock shall be entitled to receive any
accrued and unpaid dividends on the shares of Series B Preferred Stock
surrendered for conversion to the Conversion Date. Such accrued and unpaid
dividends shall be payable by the corporation if the Conversion Date is (i) on
or prior to November 30, 1996, then, at the option of the Corporation, in cash
or in shares of Common Stock valued at the Conversion Price; or (ii) after
November 30, 1996, in cash (to the extent funds are legally available
therefor); provided, however, that if any such required cash payment in respect
of accrued and unpaid dividends is not paid on the Conversion Date, the holder
shall thereafter have the option to (i) convert such unpaid dividends into
shares of Common Stock at a per share price equal to the Conversion Price in
effect on the Conversion Date (adjusted for any changes in the Conversion Ratio
after the Conversion Date pursuant to Section 8(g)(1)) of the shares of Series
B Preferred Stock in respect of which such dividends accrued or (ii) permit
such unpaid funds to continue to be treated as accrued and unpaid dividends for
all purposes hereunder (including the accrual of additional dividends thereon
in accordance with Section 2(a) hereof and the restrictions of Section 4
hereof) until paid by the Corporation or converted in accordance herewith.

e. In connection with the conversion of any shares of Series B
Preferred Stock, no fractions of shares of Common Stock shall be issued, but in
lieu thereof the corporation shall pay a cash adjustment in respect of such
fractional interest in an amount equal to such fractional interest multiplied
by the Current Market Price per share of Common Stock on the Trading Day on
which such shares of Series B Preferred Stock are deemed to have been
converted. If more than one share of Series B Preferred Stock shall be
surrendered for conversion by the same holder at the same time, the number of
full shares of Common Stock issuable on conversion thereof shall be computed on
the basis of the total number of shares of Series B Preferred Stock so
surrendered.

f. The corporation shall at all times reserve and keep available
for issuance upon the conversion of the Series B Preferred Stock, free from any
preemptive rights, such number of its authorized but unissued shares of Common
Stock as will from time to time be sufficient to permit the conversion of all
outstanding shares of Series B Preferred Stock, and shall take all action
required to increase the authorized number of shares of Common Stock if
necessary to permit the conversion of all outstanding shares of Series B
Preferred Stock.

g. The Conversion Ratio will be subject to adjustment from time
to time as follows:

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<PAGE> 100

(1) In case the corporation shall at any time or from
time to time after the Issue Date (A) pay a dividend, or make a distribution,
on the outstanding shares of Common Stock in shares of Common Stock, (B)
subdivide the outstanding shares of Common Stock, (C) combine the outstanding
shares of Common Stock into a smaller number of shares or (D) issue by
reclassification of the shares of Common Stock any shares of capital stock of
the corporation, then, and in each such case, the Conversion Ratio in effect
immediately prior to such event or the record date therefor, whichever is
earlier, shall be adjusted so that the holder of any shares of Series B
Preferred Stock thereafter surrendered for conversion shall be entitled to
receive the number of shares of Common Stock or other securities of the
corporation which such holder would have owned or have been entitled to receive
after the happening of any of the events described above, had such shares of
Series B Preferred Stock been surrendered for conversion immediately prior to
the happening of such event or the record date therefor, whichever is earlier.
An adjustment made pursuant to this clause (i) shall become effective (x) in
the case of any such dividend or distribution, immediately after the close of
business on the record date for the determination of holders of shares of
Common Stock entitled to receive such dividend or distribution, or (y) in the
case of such subdivision, reclassification or combination, at the close of
business on the day upon which such corporate action becomes effective. No
adjustment shall be made pursuant to this clause (i) in connection with any
transaction to which paragraph (h) applies.

(2) In case the corporation shall issue shares of Common
Stock (or rights, warrants or other securities convertible into or exchangeable
for shares of Common Stock) after the Issue Date at a price per share (or
having a conversion price per share) less than the Current Market Price as of
the date of issuance of such shares or of such convertible securities, then,
and in each such case, the Conversion Ratio shall be adjusted so that the
holder of each share of Series B Preferred Stock shall be entitled to receive,
upon the conversion thereof, the number of shares of Common Stock determined by
multiplying (A) the applicable Conversion Ratio on the day immediately prior to
such date by (B) a fraction, the numerator of which shall be the sum of (1) the
number of shares of Common Stock outstanding on such date and (2) the number of
additional shares of Common Stock issued (or into which the convertible
securities may convert), and the denominator of which shall be the sum of (x)
the number of shares of Common Stock outstanding on such date and (y) the
number of shares of Common Stock which the aggregate consideration receivable
by the corporation for the total number of shares of Common Stock so issued (or
into which the rights, warrants or other convertible securities may convert)
would purchase at the Current Market Price on such date. An adjustment made
pursuant to this clause (2) shall be made on the next Business Day following
the date on which any such issuance is made and shall be effective
retroactively immediately after the close of business on such date. For
purposes of this clause (2), the aggregate consideration receivable by the
corporation in connection with the issuance of shares of Common Stock or of
rights, warrants or other securities convertible into shares of Common Stock
shall be deemed to be equal to the sum of the aggregate offering price (before
deduction of underwriting discounts or commissions and expenses payable to
third parties) of all such Common Stock, rights, warrants and convertible
securities plus the minimum aggregate amount, if any, payable upon exercise or
conversion of any such, rights, warrants and convertible securities into shares
of Common Stock. The issuance

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<PAGE> 101

of any shares of Common Stock pursuant to (a) a dividend or distribution on, or
subdivision, combination or reclassification of, the outstanding shares of
Common Stock requiring an adjustment in the Conversion Ratio pursuant to clause
(1) of this paragraph (g), or (b) any employee benefit or stock option plan or
program of the corporation, or (c) any employment or option agreement with an
officer of the corporation (or any of its Subsidiaries) hired after the Issue
Date and approved by the Board of Directors or (d) any option, warrant, right,
or convertible security outstanding as of the date hereof, or (e) the terms of
a joint venture agreement approved by the Board of Directors, if immediately
after such issuance, the aggregate number of shares of Common Stock issued
pursuant to this subclause (e) does not exceed 600,000 shares, shall not be
deemed to constitute an issuance of Common Stock or convertible securities by
the corporation to which this clause (2) applies. In addition, (A) Common
Stock or convertible securities issued to acquire, or in the acquisition of,
all or any portion of a business as a going concern, in an arm's length
transaction between the Company and a third party which is not an Affiliate of
the Company, whether such acquisition shall be effected by purchase of assets,
exchange of securities, merger, consolidation or otherwise, or (B) Common Stock
or convertible securities issued in a bona fide public offering pursuant to a
firm commitment underwriting, shall not be deemed to constitute an issuance of
Common Stock or convertible securities by the corporation to which this clause
(2) applies. Upon the expiration unexercised of any options, warrants or
rights to convert any convertible securities for which an adjustment has been
made pursuant to this clause (2), the adjustments shall forthwith be reversed
to effect such rate of conversion as would have been in effect at the time of
such expiration or termination had such options, warrants or rights or
convertible securities, to the extent outstanding immediately prior to such
expiration or termination, never been issued. No adjustment shall be made
pursuant to this clause (2) in connection with any transaction to which
paragraph (h) applies.

(3) In case the corporation shall at any time or from
time to time after the Issue Date declare, order, pay or make a dividend or
other distribution (including, without limitation, any distribution of stock or
other securities or property or rights or warrants to subscribe for securities
of the corporation or any of its Subsidiaries by way of dividend or spinoff),
on its Common Stock, other than dividends or distributions of shares of Common
Stock which are referred to in clause (1) of this paragraph (g) or cash
dividends declared pursuant to a regular dividend policy adopted by the Board
of Directors of the Company and paid out of Current Retained Earnings, as
defined in Section 11 hereof, then the Conversion Ratio shall be adjusted so
that the holder of each share of Series B Preferred Stock shall be entitled to
receive, upon the conversion thereof, the number of shares of Common Stock
determined by multiplying (1) the applicable Conversion Ratio on the day
immediately prior to the record date fixed for the determination of
shareholders entitled to receive such dividend or distribution by (2) a
fraction, the numerator of which shall be the Current Market Price per share of
Common Stock for the period of twenty Trading Days preceding such record date,
and the denominator of which shall be such Current Market Price per share of
Common Stock less the Fair Market Value (as defined in Section 11 hereof) per
share of Common Stock (as determined in good faith by the Board of Directors of
the corporation, a certified resolution with respect to which shall be mailed
to each holder of shares of Series B Preferred Stock) of such dividend or
distribution; provided, however, that in the event of a distribution of capital
stock of a Subsidiary of the corporation (a "Spin-Off") made to holders of
shares of Common Stock, the numerator of such fraction shall be the

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<PAGE> 102

sum of the Current Market Price per share of Common Stock for the period of
twenty Trading Days preceding the thirty-fifth Trading Day after the effective
date of such Spin-Off and the Current Market Price of the number of shares (or
the fraction of a share) of capital stock of the Subsidiary which is
distributed in such Spin-Off in respect of one share of Common Stock for the
period of twenty Trading Days preceding such thirty-fifth Trading Day and the
denominator of which shall be the Current Market Price per share of Common
Stock for the period of twenty Trading Days preceding such thirty-fifth Trading
Day. An adjustment made pursuant to this clause (3) shall be made upon the
opening of business on the next Business Day following the date on which any
such dividend or distribution is made and shall be effective retroactively
immediately after the close of business on the record date fixed for the
determination of shareholders entitled to receive such dividend or
distribution; provided, however, that if the proviso to the preceding sentence
applies, then such adjustment shall be made and be effective as of such
thirty-fifth Trading Day after the effective date of such Spin-Off. No
adjustment shall be made pursuant to this clause (3) in connection with any
transaction to which paragraph (h) applies.

(4) For purposes of this paragraph (g), the number of
shares of Common Stock at any time outstanding shall not include any shares of
Common Stock then owned or held by or for the account of the corporation.

(5) The term "dividend," as used in this paragraph (g)
shall mean a dividend or other distribution upon Common Stock of the
corporation.

(6) Anything in this paragraph (g) to the contrary
notwithstanding, the corporation shall not be required to give effect to any
adjustment in the Conversion Ratio unless and until the net effect of one or
more adjustments (each of which shall be carried forward), determined as above
provided, shall have resulted in a change of the Conversion Ratio by at least
one one-hundredth of one share of Common Stock, and when the cumulative net
effect of more than one adjustment so determined shall be to change the
Conversion Ratio by a least one one-hundredth of one share of Common Stock,
such change in Conversion Ratio shall thereupon be given effect.

(7) The certificate of any firm of independent public
accountants of recognized standing selected by the Board of Directors of the
corporation (which may be the firm of independent public accountants regularly
employed by the corporation) shall be presumptively correct for any computation
made under this paragraph (g).

(8) If the corporation shall take a record of the holders
of its Common Stock for the purpose of entitling them to receive a dividend or
other distribution, and shall thereafter and before the distribution to
stockholders thereof legally abandon its plan to pay or deliver such dividend
or distribution, then thereafter no adjustment in the number of shares of
Common Stock issuable upon exercise of the right of conversion granted by this
paragraph (g) or in the Conversion Ratio then in effect shall be required by
reason of the taking of such record.

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(9) There shall be no adjustment of the Conversion Ratio
in case of the issuance of any stock of the corporation in a merger,
reorganization, acquisition or other similar transaction except as set forth in
paragraphs (g)(1), (g)(2) and (h) of this Section 8.

h. In case of any capital reorganization or reclassification of
outstanding shares of Common Stock (other than a reclassification covered by
paragraph (g)(1) of this Section 8), or in case of any merger of the
corporation with or into another corporation, or in case of any sale or
conveyance to another corporation of all or substantially all of the assets or
property of the corporation (each of the foregoing being referred to as a
"Transaction"), at the option of the holder of any shares of Series B Preferred
Stock (i) each share of Series B Preferred Stock then outstanding shall
thereafter be convertible into, in lieu of the Common Stock issuable upon such
conversion prior to consummation of such Transaction, the kind and amount of
shares of stock and other securities and property receivable (including cash or
securities of the Surviving Person (as defined in Section 11 hereof)) upon the
consummation of such Transaction by a holder of that number of shares of Common
Stock into which one share of Series B Preferred Stock was convertible
immediately prior to such Transaction (including, on a pro rata basis, the
cash, securities or property received by holders of Common Stock in any tender
or exchange offer that is a step in such Transaction), or (ii) each share of
Series B Preferred Stock shall entitle the holder thereof to receive, upon
presentation of the certificate therefor to the Surviving Person (as defined in
Section 11 hereof) at any time subsequent to the consummation of such
Transaction (1) if the Surviving Person is a Qualified Person (as defined in
Section 11 hereof), that number of shares of Survivor Common Stock (as defined
in Section 11 hereof) of the Surviving Person determined by multiplying the
number of shares of Common Stock into which such share of Series B Preferred
Stock was convertible immediately prior to the consummation of such Transaction
by a fraction, the numerator of which is the Current Market Price of the Common
Stock immediately prior to the consummation of such Transaction and the
denominator of which is the Current Market Price of the Survivor Common Stock
of the Surviving Person for the twenty Trading Days preceding the consummation
of the Transaction giving rise to the adjustment in this paragraph (h) or (2)
if the Surviving Person is not a Qualified Person, cash equal to the Fair
Market Value, as of the consummation of such Transaction (computed with
interest), of the securities or other property to which it would have been
entitled under clause (i) above, as determined by an independent investment
banking firm (with an established national reputation as a valuer of equity
securities); provided, however, that in the event that the per share
consideration receivable by the holders of Common Stock upon the consummation
of such Transaction is equal to at least 125% of the Conversion Price, each
share of Series B Preferred Stock then outstanding shall be convertible in
accordance with clause (i) of this Section 8(h), whether or not the Surviving
Person is a Qualified Person. In any such case, if necessary, appropriate
adjustment (as determined by the Board of Directors) shall be made in the
application of the provisions set forth in this Section 8 with respect to
rights and interests thereafter of the holders of shares of Series B Preferred
Stock to the end that the provisions set forth herein for the protection of the
conversion rights of the Series B Preferred Stock shall thereafter be
applicable, as nearly as reasonably may be, to any such other shares of stock
and other securities and property deliverable upon conversion of the shares of
Series B Preferred Stock remaining outstanding (with such adjustments in the
conversion price and number of shares issuable upon conversion and such other
adjustments in the provisions hereof as the Board

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<PAGE> 104

of Directors shall determine to be appropriate). In case securities or
property other than Common Stock shall be issuable or deliverable upon
conversion as aforesaid, then all references in this Section 8 shall be deemed
to apply, so far as appropriate and as nearly as may be, to such other
securities or property.

i. In case at any time or from time to time the corporation shall
pay any dividend or make any other distribution to the holders of its Common
Stock, or shall offer for subscription pro rata to the holders of its Common
Stock any additional shares of stock of any class or any other right, or there
shall by any capital reorganization or reclassification of the Common Stock of
the corporation or merger of the corporation with or into another corporation,
or any sale or conveyance to another corporation of the property of the
corporation as an entirety or substantially as an entirety, or there shall be a
voluntary or involuntary dissolution, liquidation or winding up of the
corporation, then, in any one or more of said cases the corporation shall give
at least twenty days prior written notice (the time of mailing of such notice
shall be deemed to be the time of giving thereof) to the registered holders of
the Series B Preferred Stock at the addresses of each as shown on the books of
the corporation maintained by the transfer agent thereof as of the date on
which (i) the books of the corporation shall close or a record shall be taken
for such stock dividend, distribution or subscription rights or (ii) such
reorganization, reclassification, merger, sale or conveyance, dissolution,
liquidation or winding up shall take place, as the case may be, provided that
in the case of any Transaction to which paragraph (h) applies the corporation
shall give at least thirty days prior written notice as aforesaid. Such notice
shall also specify the date as of which the holders of the Common Stock of
record shall participate in said dividend, distribution or subscription rights
or shall be entitled to exchange their Common Stock for securities or other
property deliverable upon such reorganization, reclassification, merger, sale
or conveyance or participate in such dissolution, liquidation or winding up, as
the case may be. Failure to give such notice shall not invalidate any action
so taken.

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shown on the books of the corporation maintained by the Transfer Agent thereof,
which notice shall state the Conversion Ratio then in effect, as adjusted, and
the increased or decreased number of shares issuable upon the exercise of the
right of conversion granted by Section 8 hereof, and shall set forth in
reasonable detail the method of calculation of each and a brief statement of
the facts requiring such adjustment. Where appropriate, such notice to holders
of the Series B Preferred Stock may be given in advance and included as part of
the notice required under the provisions of Section 8(i) hereof.

Section 10. Certain Covenants. Any registered holder of Series B
Preferred Stock may proceed to protect and enforce its rights and the rights of
such holders by any available remedy by proceeding at law or in equity to
protect and enforce any such rights, whether for the specific enforcement of
any provision in this Article Three, or in aid of the exercise of any power
granted herein, or to enforce any other proper remedy.

Section 11. Definitions. The following terms shall have the
meanings indicated:

"Adjustment Period" shall mean the period of five consecutive Trading
Days preceding the date as of which the Fair Market Value of a security is to
be determined.

"Affiliate" of any specified Person means any other Person directly or
indirectly controlling or controlled by or under direct or indirect common
control with such specified person. For the purposes of this definition,
"control" (including, with correlative meanings, the terms "controlled by" and
"under common control with"), as used with respect to any Person, shall mean
the possession, directly or indirectly, of the power to direct or cause the
direction of the management or policies of such Person, whether through the
ownership of voting securities or by agreement or otherwise.

"Business Day" shall mean any day other than Saturday, Sunday or a day
on which banking institutions in the State of California are authorized or
obligated by law or executive order to close.

"CGCL" shall mean the California General Corporation Law, as amended.

"Conversion Price" shall mean an amount equal to the Stated Value
divided by the Conversion Ratio (as adjusted pursuant to paragraph (g) of
Section 8 hereof).

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to trading on the New York Stock Exchange or, if the Common Stock or such other
securities are not listed or admitted to trading on the New York Stock
Exchange, as reported in the principal consolidated transaction reporting
system with respect to securities listed on the principal national securities
exchange on which the Common Stock or such other securities are listed or
admitted to trading. If the Common Stock is not listed or admitted to trading
on any national securities exchange, the last quoted sale price or, if not so
quoted, the average of the high bid and low asked prices in the
over-the-counter market, as reported by the National Association of Securities
Dealers, Inc. Automated Quotation System or such other system then in use, or,
if on any such date the Common Stock or such other securities are not quoted by
any such organization, the average of the closing bid and asked prices are
furnished by a professional market maker making a market in the Common Stock or
such other securities selected by the Board of Directors of the corporation.
If the Common Stock or such other securities are not publicly held or so listed
or publicly traded, "Current Market Price" shall mean the Fair Market Value per
share of Common Stock or of such other securities as determined in good faith
by the Board of Directors of the corporation based on an opinion of an
independent investment banking firm with an established national reputation as
a valuer of securities, which opinion may be based on such assumptions as such
firm shall deem to be necessary and appropriate.

"Current Retained Earnings" means cumulative retained earnings earned
in the four fiscal quarters immediately preceding the quarter in which the
dividend is paid to the extent such earnings have not previously been paid as
dividends.

"Exchange Act" shall mean the Securities Exchange Act of 1934, as
amended, or any similar Federal statute, and the rules and regulations of the
Securities and Exchange Commission thereunder, all as the same shall be in
effect at the time. Reference to a particular section of the Exchange Act
shall include reference to the comparable section, if any, of any such similar
Federal statute.

"Fair Market Value" shall mean, as to shares of Common Stock or any
other class of capital stock or securities of the corporation or any other
issue which are publicly traded, the average of the Current Market Prices of
such shares or securities for each day of the Adjustment Period. The "Fair
Market Value" of any security which is not publicly traded or of any other
property shall mean the fair value thereof as determined by an independent
investment banking or appraisal firm experienced in the valuation of such
securities or property selected in good faith by the Board of Directors of the
corporation or a committee thereof, or, if no such investment banking or
appraisal firm is in the good faith judgment of the Board of Directors or such
committee available to make such determination, as determined in good faith by
the Board of Directors of the corporation or such committee.

"Issue Date" shall mean the first date on which shares of Series B
Preferred Stock are issued.

"Junior Dividend Stock" shall mean (i) the Common Stock and (ii) any
other capital stock of the corporation which ranks junior as to dividends to
the Series B Preferred Stock.

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"Junior Liquidation Stock" shall mean (i) the Common Stock and (ii)
any other capital stock of the corporation which ranks junior upon liquidation,
dissolution or winding up to the Series B Preferred Stock.

"Liquidation Preference" with respect to a share of Series B Preferred
Stock shall mean the Stated Value per share, plus an amount equal to all
accrued but unpaid dividends.

"Parity Dividend Stock" shall mean any capital stock of the
corporation ranking on a parity as to dividends with the Series B Preferred
Stock.

"Parity Liquidation Stock" shall mean any capital stock of the
corporation ranking on a parity upon liquidation, dissolution or winding up
with the Series B Preferred Stock.

"Person" shall mean any individual, firm, corporation or other entity,
and shall include any successor (by merger or otherwise) of such entity.

"Qualified Person" shall mean any Person that, immediately after
giving effect to the applicable Transaction, (i) is a solvent corporation or
other entity organized under the laws of any State of the United States of
America having its common stock or, in the case of an entity other than a
corporation, equivalent equity securities, listed on the New York Stock
Exchange or the American Stock Exchange or quoted by the NASDAQ National Market
System or any successor thereto or comparable system, and such common stock or
equivalent equity security continues to meet the requirements for such listing
or quotation and (ii) is required to file, and in each of its three fiscal
years immediately preceding the consummation of the applicable Transaction (or
since its inception) has filed, reports with the Securities and Exchange
Commission pursuant to Section 13 or 15(d) of the Exchange Act.

"Restated Articles of Incorporation" shall mean the Restated Articles
of Incorporation of the corporation, as amended from time to time.

"Subsidiary" of any Person means any corporation or other entity of
which a majority of the voting power of the voting equity securities or equity
interest is owned, directly or indirectly, by such Person.

"Surviving Person" shall mean the continuing or surviving Person of a
merger or other business combination, the Person receiving a transfer of all or
a substantial part of the properties and assets of the corporation, or the
Person merging into the corporation in a merger or other business combination
in which the corporation is the continuing or surviving Person, but in
connection with which the Series B Preferred Stock or Common Stock of the
corporation is exchanged or converted into the securities of any other Person
or cash or any other property; provided, however, if such surviving Person is a
direct or indirect Subsidiary of a Qualified Person, the parent entity that is
a Qualified Person shall be the Surviving Person.

"Survivor Common Stock" with respect to any Surviving Person shall
mean any shares of such Surviving Person of any class or series which has no
preference or priority in the payment

17
<PAGE> 108

of dividends or in the distribution of assets upon any voluntary or involuntary
liquidation, dissolution or winding up of such Surviving Person and which is
not subject to redemption by such Surviving Person; provided, however, that if
at any time there shall be more than one such class or series, the shares of
each such class and series issuable upon conversion of the Series B Preferred
Stock then being converted shall be substantially in the proportion to the
total number of shares of each such class and series.

"Trading Day" means a day on which the principal national securities
exchange on which the Common Stock is listed or admitted to trading is open for
the transaction of business or, if the Common Stock is not listed or admitted
to trading on any national securities exchange, a Business Day.

18
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APPENDIX III

AMENDMENT TO REGISTRATION RIGHTS AGREEMENT

THIS AMENDMENT TO REGISTRATION RIGHTS AGREEMENT ("Amendment") is
entered into as of _________, 1996, by and between L.A. Gear, Inc., a
California corporation (the "Company"), and Trefoil Capital Investors, L.P., a
Delaware limited partnership (the "Investor").

WHEREAS, the Company and the Investor entered into a certain
Registration Rights Agreement, dated as of May 27, 1991 (the "Agreement").

WHEREAS, the Company and the Investor mutually desire to amend the
Agreement to facilitate the exchange of all of the Investor's shares of Series
A cumulative convertible preferred stock ("Series A Preferred Stock") and any
accrued and unpaid dividends thereon, for shares of Series B cumulative
convertible preferred stock ("Series B Preferred Stock") in accordance with the
Share Exchange Agreement, dated as of December __, 1995, between the Company
and the Investor (the "Exchange Agreement").

NOW, THEREFORE, in consideration of the mutual covenants contained
herein and in the Exchange Agreement and intending to be legally bound, the
parties agree as follows:

SECTION ONE - BACKGROUND

1.1 The Background Section is hereby amended in its entirety to
read as follows:

Background. Pursuant to a Stock Purchase Agreement dated as
of May 27, 1991, as amended (the "Purchase Agreement"), between the
Company and the Investor, the Investor, subject to the terms and
conditions contained therein, purchased from the Company 1,000,000
shares of the Company's Series A Cumulative Convertible Preferred
Stock, no par value. Pursuant to a Share Exchange Agreement, dated as
of December __, 1995, between the Company and the Investor, the
Investor has, subject to the terms and conditions contained therein,
agreed to exchange its shares of the Series A Preferred Stock for one
million ______________ (__________) shares of Series B Cumulative
Convertible Preferred Stock (the "Preferred Stock"). The Preferred
Stock is convertible into shares of the Company's common stock, no par
value (the "Common Stock").

SECTION TWO - DEFINITIONS

2.1 The definition of "Certificate of Determination" in Section
Two is hereby amended in its entirety to read as follows:

"Certificate of Determination" means the Certificate of
Determination of Rights and Preferences of Series B Cumulative
Convertible Preferred Stock of the Company.
<PAGE> 110

2.2 The definition of "Conversion Shares" in Section Two is hereby
amended in its entirety to read as follows:

"Conversion Shares" means the shares of Common Stock issued or
issuable upon conversion of the Preferred Stock or upon conversion of
accrued dividends on Preferred Stock.

2.3 The definition of "Registrable Securities" in Section Two is
hereby amended in its entirety to read as follows:

"Registrable Securities" means (i) any Conversion Shares, (ii)
shares of Common Stock acquired by the Investor after the Closing Date
(as defined in the Purchase Agreement) and (iii) any shares of the
Preferred Stock. As to any particular Registrable Securities, once
issued such securities shall cease to be Registrable Securities when
(a) a registration statement with respect to the sale of such
securities shall have become effective under the Securities Act (as
defined below) and such securities shall have been disposed of in
accordance with such registration statement, (b) they shall have been
sold as permitted by, and in compliance with, the Securities Act, (c)
they shall have been otherwise transferred, new certificates for them
not bearing a legend restricting further transfer shall have been
delivered by the Company and subsequent public distribution of them
shall not require registration of them under the Securities Act, or
(d) they shall have ceased to be outstanding.

2.4 Section Two of the Agreement is hereby amended by the addition
of the following definition:

"Preferred Stock" means the Series B Cumulative Convertible
Preferred Stock.

SECTION THREE - REGISTRATION UNDER SECURITIES ACT, ETC.

3.1 Section 3.2(c) is hereby amended in its entirety to read as
follows:

Special Meaning of "Registrable Security". For purposes of
this Section 3.2, the term "Registrable Security" shall mean all
Conversion Shares and any other shares of Common Stock acquired by the
Investor prior to the third anniversary of the Closing Date (as
defined in the Purchase Agreement).

2
<PAGE> 111

SECTION EIGHT-ASSIGNMENT; CALCULATION OF PERCENTAGE
INTERESTS IN REGISTRABLE SECURITIES

4.1 Section 8(a) is hereby amended in its entirety to read as
follows:

(a) This Agreement shall be binding upon and inure to the
benefit of and be enforceable by the parties hereto and, with respect
to the Company, its respective successors and assigns and, with
respect to the Investor, its respective successors and assigns, and
any holder of any Registrable Securities, subject to the provisions
respecting the minimum numbers of percentages of shares of Registrable
Securities required in order to be entitled to certain rights, or take
certain actions, contained herein. The Investor named in the first
paragraph of this Agreement (and not any other holder of Registrable
Securities or any other Person) shall be permitted, in connection with
a transfer or disposition of Registrable Securities, to impose
conditions or constraints on the ability of the transferee, as a
holder of Registrable Securities, to request a registration pursuant
to Section 3.1 and shall provide the Company with copies of such
conditions or constraints and the identity of such transferees.

3
<PAGE> 112

IN WITNESS WHEREOF, the parties have executed this Amendment as of the
day and year first above written.

L.A. GEAR, INC.

By: _________________________________
Name:
Title:

TREFOIL CAPITAL INVESTORS, L.P.
By: TREFOIL INVESTORS, INC., its
general partner

By: _________________________________
Name:
Title:

4
<PAGE> 113
APPENDIX IV

[Letterhead of Sutro & Co. Incorporated]

December 12, 1995

The Special Committee of the Board of Directors
and the Board of Directors of L.A. Gear, Inc.
2850 Ocean Park Boulevard
Santa Monica, California 90405

Gentlemen and Madam:

You, the Special Committee of the Board of Directors of L.A. Gear, Inc. (the
"Company"), have requested our opinion (the "Opinion") as to the fairness to
the common shareholders (other than Trefoil Capital Investors, L.P.
("Trefoil")), from a financial point of view, of the consideration in a
proposed exchange of the 1,000,000 shares of Series A Cumulative Convertible
Preferred Stock owned by Trefoil for Series B Convertible Preferred Stock (the
"Transaction") pursuant to a draft of the Share Exchange Agreement circulated
December 5, 1995 by and between the Company and Trefoil (the "Exchange
Agreement").

We understand that the Transaction, as more specifically set forth in the
Exchange Agreement, provides for the exchange of $100,000,000, plus 100% of
accrued but unpaid dividends on the Series A Cumulative Convertible Preferred
Stock existing as of the closing date of the Transaction; provided, however,
subsequent to November 30, 1995 dividends on the Series A Cumulative
Convertible Preferred Stock shall accrue at a rate of 7.5% per annum
("Arrearage Amount") for 1,000,000 shares of Series B Convertible Preferred
Stock ("Preferred Stock") plus a number of shares of Preferred Stock equal to
the Arrearage Amount divided by 100. The Coupon Rate for the Preferred Stock
will be 7.5% per annum (the "Coupon Rate").

We understand that the Preferred Stock shall be entitled to cumulative
quarterly dividends. Dividends payable through November 30, 1996 may be paid,
at the option of the Company, in cash or by payment-in-kind (additional
Preferred Stock)(the "PIK Amount"). Thereafter, dividends shall be payable in
cash. Default provisions for dividends in arrears entitle the holders of the
Preferred Stock to additional dividends on accumulation of accrued but unpaid
dividends at a rate equal to 115% of the Coupon Rate. The Preferred Stock shall
rank senior to the Common Stock and, except for the creation of a senior or
pari passu class of preferred stock with the consent of the holders of at least
a majority of holders of Preferred Stock, senior to any other series or class
of preferred stock which may be issued by the Company. In the event of any
liquidation of the Company, the Preferred Stock will be entitled to receive in
preference to Common Stock an aggregate amount equal to $100 million plus the
Arrearage Amount, plus the PIK Amount plus accrued but unpaid dividends.

We understand that each share of the Preferred Stock will be convertible into
an appropriate number of common shares at a conversion price of $6.75 per
common share ("Conversion Price") at any time, at the

<PAGE> 114

option of the holder. At the time of conversion, accumulations of accrued but
unpaid dividends shall be payable by, and at the option of, the Company in
shares of common stock (at the Preferred Stock Conversion Price) or in cash
through November 30, 1996 and thereafter, in cash (and if such cash payment is
not timely paid, the holder shall have the option to convert such unpaid
dividends into shares of common stock (at the Preferred Stock Conversion Price)
or allow such unpaid dividends to stay in arrears). The Preferred Stock shall
not have a mandatory redemption provision. The Preferred Stock may be called
for redemption at $100 per share (in whole at any time or in part from time to
time) (minimum $5 million) if dividends on the Preferred Stock are current and
the closing price of the Common Stock is equal to at least 150% of the
conversion price for thirty consecutive trading days.

We understand that the Preferred Stock will contain antidilution protection
provisions in which the conversion price will be subject to proportional
adjustments for capital reorganization, stock dividends, reclassifications or
other changes. The conversion price will be automatically reduced to reflect
share issuance of Common Stock or convertible securities at less than then
current market values with exceptions for option plans, issuances in
acquisition transactions, public offerings and issuance for employees.

We understand that holders of Preferred Stock will, on all matters, including
with respect to the election of Directors, have the right to the number of
votes equal to the number of shares of Common Stock issuable upon conversion of
the Preferred Stock and shall be entitled to vote with the Common Stock on all
such matters. Other protective provisions include requiring the consent of at
least a majority vote of the holders of Preferred Stock for the creation of a
senior or pari passu class of preferred stock, an increase in the authorized
number of Preferred Stock, any other action that adversely affects the rights,
preferences and privileges of the Preferred Stock and the payment of cash
dividends on, or the repurchase of, Common Stock prior to June 1, 1997.

We understand that the Preferred Stockholders' right to receive stock of an
acquiror in lieu of cash is inapplicable if the holders of Common Stock receive
a price per share in an acquisition of at least 125% (down from 175% in the
Series A Cumulative Convertible Stock) of the Conversion Price.

We understand that pursuant to an amendment to the Registration Rights
Agreement dated May 27, 1991 between the Company and Trefoil, Trefoil will
maintain the same registration rights except that Trefoil may also request
registration of the Preferred Stock with each such request counting against
total permissible registrations. The Transaction must be approved by
shareholders with the shares of the Company's securities owned by Trefoil not
being entitled to vote. We also understand the outside closing date of the
Transaction is April 15, 1996.

Sutro & Co. Incorporated ("Sutro"), as part of its investment banking business,
is regularly engaged in the valuation of businesses and their securities in
connection with mergers and acquisitions, negotiated underwritings, secondary
distributions of securities, private placements and valuations. We have acted
as financial advisors to the Special Committee of the Board of Directors of the
Company in connection with the transaction described above and we will receive
a fee for rendering this Opinion.

In arriving at our Opinion, we have: (i) reviewed and analyzed certain audited
financial statements and other financial and other information relating to the
Company; (ii) reviewed and analyzed certain internal financial statements and
other financial and operating data concerning the Company prepared by
management; (iii) reviewed and analyzed certain financial forecasts and
projections prepared by management; (iv) discussed the past and current
operations and financial condition and the prospects of the Company with
management; (v) compared certain financial data of the Company with that of
various other comparable companies whose securities are publicly traded; (vi)
reviewed the financial terms, to the extent

page 2 of 3
<PAGE> 115

publicly available, of certain similar transactions; (vii) considered potential
alternatives to the proposed Transaction; (viii) had discussions with legal
counsel for the Company and the Special Committee to the Board of Directors;
and (ix) performed and/or considered such other studies and analyses as we
deemed appropriate for purposes of this Opinion.

In rendering this Opinion, we have relied upon and assumed, without independent
verification, the accuracy, completeness and fairness of all of the financial
and other information available to us from public sources, that was provided to
us by the Company, or that was otherwise reviewed by us. With respect to the
financial projections supplied to us, we have assumed that they have been
reasonably prepared on the basis reflecting the best currently available
estimates and judgments of the management of the Company as to the future
operating and financial performance of the Company. We have not made an
independent evaluation or appraisal of L.A. Gear, Inc.'s assets nor did we
verify any of the information reviewed by us.

Our Opinion is necessarily based on economic, market, financial, precedent
transactions and other conditions as they exist and can be evaluated as of the
date of this letter and change in such conditions would require a re-evaluation
of this Opinion. We disclaim any obligation to update, revise or reaffirm this
Opinion.

It is understood that this letter may be included in any communication by the
Company to its shareholders, provided that Sutro has a prior opportunity to
review and approve any disclosure relating to Sutro and our Opinion. In
addition, Sutro may not be otherwise publicly referred to in connection with
the Proposed Transaction or the Opinion without Sutro's prior written approval.

Based upon and subject to the foregoing and such other factors as we deemed
relevant, it is our opinion that the consideration to be provided by the
Company pursuant to the terms of the proposed Transaction is, from a financial
point of view, fair to the common shareholders of L.A. Gear, Inc. (other than
Trefoil).

Sincerely,

SUTRO & CO. INCORPORATED

page 3 of 3
<PAGE> 116

APPENDIX V

RESTATED
ARTICLES OF INCORPORATION
OF
L.A. GEAR, INC.
a California corporation

ONE

The name of this corporation is L.A. Gear, Inc.

TWO

The purpose of this corporation is to engage in any lawful act or
activity for which a corporation may be organized under the General Corporation
Law of California other than the banking business, the trust company business
or the practice of a profession permitted to be incorporated by the California
Corporations Code.

THREE

This corporation is authorized to issue two classes of shares
designated, respectively, "Common Stock" and "Preferred Stock." The number of
shares of Common Stock authorized to be issued is 80,000,000 and the number of
shares of Preferred Stock authorized to be issued is 10,000,000, all of which
shall be without par value. Subject to Section 6 of this Article Three, the
Preferred Stock shall be divided initially into (a) 1,000,000 shares of Series
A Cumulative Convertible Preferred Stock (the "Series A Preferred Stock") with
the voting rights, preferences and relative, participating, optional and other
special rights of the shares of such series, and the restrictions thereof, set
forth below in this Article Three and (b) 9,000,000 shares of Preferred Stock
with the rights, preferences, privileges and restrictions thereof, as set forth
in Article Four.

Section 1. Stated Value.

The Series A Preferred Stock shall have a stated value of
$100 per share (the "Stated Value").

Section 2. Dividends and Distributions.

a. The holders of shares of Series A Preferred Stock, in preference
to the holders of shares of Junior Dividend Stock (as defined in Section 11
hereof), shall be entitled to

<PAGE> 117

receive, when, as and if declared by the Board of Directors, out of the assets
of the corporation legally available therefor, cumulative cash dividends at an
annual rate of 7.50% (if in arrears, compounded quarterly at a rate of 8.625%
per annum, through the date of payment of such arrearages) from and after the
Issue Date (as defined in Section 11 hereof) as long as the shares of Series A
Preferred Stock remain outstanding, and subject to paragraph (c) of this
Section 2, no more. Dividends shall be computed on the basis of the Stated
Value, and shall accrue and be payable quarterly, in arrears, on the last
business day of February, May, August and November in each year (each such date
being referred to herein as a "Quarterly Dividend Payment Date"), commencing on
the first Quarterly Dividend Payment Date after the Issue Date.

b. Dividends payable pursuant to paragraph (a) of this Section 2
shall begin to accrue and be cumulative from the Issue Date, whether or not
earned or declared. The amount of dividends so payable shall be determined on
the basis of twelve 30-day months and a 360-day year. Dividends paid on the
shares of Series A Preferred Stock in an amount less than the total amount of
such dividends at the time accrued and payable on such shares shall be
allocated pro rata on a share-by-share basis among all such shares at the time
outstanding. The Board of Directors may fix a record date for the
determination of holders of shares of Series A Preferred Stock entitled to
receive payment of a dividend declared thereon, which record date shall be no
more than sixty days prior to the date fixed for the payment thereof.

c. In the event that the corporation shall have failed to redeem
shares of Series A Preferred Stock pursuant to Section 5(b) hereof, whether or
not by reason of the absence of legally available funds, the dividend rate
shall be 10.125% per annum (compounded quarterly, with respect to dividends in
arrears on and after the date of failure to redeem through the date of
redemption, at a rate of 11.644% per annum) from the date of failure to redeem
through the date of redemption.

d. The holders of shares of Series A Preferred Stock shall not be
entitled to receive any dividends or other distributions except as provided
herein.

Section 3. Voting Rights. In addition to any voting rights provided
by law, the holders of shares of Series A Preferred Stock shall have the
following voting rights:

a. Except as otherwise provided in paragraphs (c) and (d) of this
Section 3, and in addition to voting rights provided elsewhere in this Section
3, and so long as any of the Series A Preferred Stock is outstanding, each
share of Series A Preferred Stock shall entitle the holder thereof to vote on
all matters voted on by holders of Common Stock voting together as a single
class with other shares entitled to vote at all meetings of the shareholders of
the corporation. With respect to any such vote, each share of Series A
Preferred Stock shall entitle the holder thereof to cast the number of votes
equal to the number of votes which could be cast in such vote by a holder of
the shares of capital stock of the corporation into which such share of Series
A Preferred Stock is convertible on the record date for such vote; provided,
however, that if more than one share of Series A Preferred Stock shall be held
by

2
<PAGE> 118

any holder of shares of Series A Preferred Stock, the total number of votes
which such holder shall be entitled to cast pursuant to this Section 3(a) shall
be computed on the basis of conversion of the total number of shares of Series
A Preferred Stock held by such holder, with any then remaining fractional share
disregarded for the purposes of this Section 3(a).

b. In addition to the voting rights provided elsewhere in this
Section 3:

(i) The affirmative vote of the holders of at least a majority
of the outstanding shares of Series A Preferred Stock, voting separately as a
single series, in person or by proxy, at a special or annual meeting of
shareholders called for the purpose, shall be necessary to (A) authorize,
increase the authorized number of shares of, or issue (including on conversion
or exchange of any convertible or exchangeable securities or by
reclassification), any shares of any class or classes, or any series of any
class or classes, of the corporation's capital stock ranking pari passu with or
prior to (either as to dividends or upon voluntary or involuntary liquidation,
dissolution or winding up) the Series A Preferred Stock, (B) increase the
authorized number of shares of, or issue (including on conversion or exchange
of any convertible or exchangeable securities or by reclassification) any
shares of, Series A Preferred Stock, or (C) alter, amend or repeal any of the
provisions of the Restated Articles of Incorporation of the corporation or take
any other corporate action, which in any manner would alter, change or
otherwise adversely affect in any way the powers, preferences or rights of the
Series A Preferred Stock.

(ii) In addition to the voting rights provided in clause (i)
above, so long as shares of Series A Preferred Stock having an aggregate Stated
Value of at least $25,000,000 are issued and outstanding, subject to the
provisions of Section 3(g) hereof, the affirmative vote of at least a majority
of the outstanding shares of Series A Preferred Stock, voting separately as a
single series, in person or by proxy, at a special or annual meeting of
shareholders called for the purpose, shall be necessary to (A) authorize, adopt
or approve any alteration, amendment or repeal of any provision of the Restated
Articles of Incorporation of the corporation or the Bylaws of the corporation
(other than Article I, Sections 2.1 and 2.2 of Article II, and Article IV of
the Bylaws, provided that any alterations or amendments of such enumerated Bylaw
provisions pertain solely to the specific subject matter contained therein as
of the date hereof), including any such alteration, amendment or repeal
effected by any merger or other business combination in which the corporation
is the surviving or resulting corporation, (B) sell, assign, lease, convey or
otherwise dispose of a material portion of the assets, business or property of
the corporation in one transaction or a series of related transactions, or (C)
engage in or consummate any extraordinary transaction (other than any
redemption of shares of Series A Preferred Stock pursuant to Section 5 hereof),
including, without limitation, any reorganization, recapitalization,
liquidation, dissolution or winding up of the corporation or any merger of the
corporation with or into any other corporation; provided, however, that, solely
for purposes of this subclause (C), no separate vote of the holders of the
outstanding shares of Series A Preferred Stock as a single series under this
subclause (C) shall be required in the case of a reorganization,
recapitalization or merger if (x) the resulting or surviving corporation will
have after such reorganization, recapitalization or merger no stock either
authorized or outstanding ranking prior to, or on a parity with, the

<PAGE> 119

Series A Preferred Stock or the stock of the resulting or surviving corporation
issued in exchange therefor (other than stock of this corporation issued and
outstanding immediately prior to the effectiveness of such reorganization,
recapitalization or merger ranking prior to, or on a parity with, the Series A
Preferred Stock; provided, however that the terms of such stock of this
corporation are not changed, altered or amended in any respect in such
reorganization, recapitalization or merger), (y) the terms of such
reorganization, recapitalization or merger do not alter, change or otherwise
adversely affect in any way the powers, preferences or rights of the Series A
Preferred Stock, and (z) the resulting or surviving corporation will have
immediately after such reorganization, recapitalization or merger (1) a
Consolidated Tangible Net Worth (as defined in Section 11 hereof) not less than
the greater of the Consolidated Tangible Net Worth of the corporation
immediately prior to the consummation of such reorganization, recapitalization
or merger and $240,000,000 and (2) a Leverage Ratio (as defined in Section 11
hereof) not exceeding the lesser of the Leverage Ratio of the corporation
immediately prior to the consummation of such reorganization, recapitalization
or merger and 1:1.

c. So long as shares of Series A Preferred Stock having an
aggregate Stated Value of at least $25,000,000 are issued and outstanding, and
subject to the provisions of Section 3(g) hereof, the holders of the
outstanding shares of Series A Preferred Stock, voting separately as a single
series, in person or by proxy, shall be entitled to elect three directors of
the corporation, and the holders of the outstanding shares of Common Stock
shall be entitled to elect the remaining directors of the corporation, subject
to any rights to elect directors contained in the terms of any series of
Preferred Stock created pursuant to Article Four.

d. If on any date (i) dividends payable on the Series A Preferred
Stock shall be in arrears and not paid, whether or not by reason of the absence
of legally available funds therefor, in an amount equal to three full quarterly
dividends, whether or not consecutive, or (ii) the corporation shall have
failed to satisfy its obligation to redeem shares of Series A Preferred Stock
pursuant to Section 5(b) hereof, whether or not by reason of the absence of
legally available funds therefor, and such redemption obligation is not
satisfied by the corporation within five business days following the date fixed
for such redemption, then the holders of shares of Series A Preferred Stock
shall have, in addition to the other voting rights set forth herein, the
exclusive right, voting separately as a single series, to elect four directors
of the corporation, in addition to the three Series A Directors (as defined in
Section 11 hereof), the remaining directors to be elected by the other classes
of stock entitled to vote therefor at each meeting of shareholders held for the
purpose of electing directors; provided, however, that if the aggregate Stated
Value of the issued and outstanding shares of Series A Preferred Stock is less
than $25,000,000 on the date of the occurrence of any of the events specified
in clause (i) or (ii) of this Section 3(d), the holders of shares of Series A
Preferred Stock shall have, in addition to the other voting rights set forth
herein, the exclusive right, voting separately as a single series, to elect two
directors of the corporation, the remaining directors to be elected by the
other classes of stock entitled to vote therefor. To further the effectuation
of this voting shift, such directors elected by the holders of shares of Series
A Preferred Stock pursuant to this Section 3(d) shall continue as directors and
such additional voting right pursuant to this Section 3(d) shall continue until
such time as (A) all dividends

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<PAGE> 120

accumulated on the Series A Preferred Stock shall have been paid in full or (B)
any mandatory redemption obligation provided in Section 5(b) hereof which has
become due shall have been satisfied, as the case may be, at which time the
terms of such directors elected by the holders of shares of Series A Preferred
Stock pursuant to this Section 3(d) shall expire, such directors shall cease to
be directors and such voting right of the holders of Series A Preferred Stock
pursuant to this Section 3(d) shall terminate subject to revesting in the event
of each and every subsequent event of the character indicated above. In no
event shall the holders of Series A Preferred Stock, voting separately as a
single series, be entitled to elect a total of more than seven directors to the
Board of Directors of the corporation pursuant to paragraphs (c) and (d) of
this Section 3.

e. (1) The rights of holders of shares of Series A Preferred Stock
to take any actions as provided in this Section 3 may be exercised, subject to
the CGCL (as defined in Section 11 hereof), at any annual meeting of
shareholders or at a special meeting of shareholders held for such purpose as
hereinafter provided or at any adjournment or postponement thereof, or by the
written consent, delivered to the Secretary of the corporation, of the holders
of the minimum number of shares required to take such action.

So long as such right to vote continues (and unless such right has been
exercised by written consent of the minimum number of shares required to take
such action), the Chairman of the Board of the corporation may call, and upon
the written request of holders of record of 20% of the outstanding shares of
Series A Preferred Stock, addressed to the Secretary of the corporation at the
principal office of the corporation, shall call, a special meeting of the
holders of shares entitled to vote as provided herein. The corporation shall
use its best efforts to hold such meeting within thirty-five, but in any event
not later than sixty, days after delivery of such request to the Secretary of
the corporation, at the place and upon the notice provided by law and in the
By- laws of the corporation for the holding of meetings of shareholders.

To the extent permitted by the CGCL, cumulative voting shall not be
permitted with respect to the election of directors by holders of Series A
Preferred Stock pursuant to paragraphs (c) and (d) of this Section 3.

(2) At each meeting of shareholders at which the holders of
shares of Series A Preferred Stock shall have the right, voting separately as a
single series, to elect directors of the corporation as provided in this
Section 3 or to take any action, the presence in person or by proxy of the
holders of record of one-third of the total number of shares of Series A
Preferred Stock then outstanding and entitled to vote on the matter shall be
necessary and sufficient to constitute a quorum. At any such meeting or at any
adjournment or postponement thereof:

(a) the absence of a quorum of the holders of shares of Series A
Preferred Stock shall not prevent the election of directors other than those to
be elected by the holders of shares of Series A Preferred Stock and the absence
of a quorum of the holders of shares of any other class or series of capital
stock shall not prevent the election of directors to be

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<PAGE> 121

elected by the holders of shares of Series A Preferred Stock or the taking of
any action as provided in this Section 3; and

(b) in the absence of a quorum of the holders of shares of Series A
Preferred Stock, holders of a majority of such shares present in person or by
proxy shall have the power to adjourn the meeting as to the actions to be taken
by the holders of shares of Series A Preferred Stock from time to time and
place to place without notice other than announcement at the meeting until a
quorum shall be present.

For the taking of any action as provided in paragraphs (b), (c), (d) and
(f) of this Section 3 by the holders of shares of Series A Preferred Stock each
such holder shall have one vote for each share of Series A Preferred Stock
standing in his name on the transfer books of the corporation as of any record
date fixed for such purpose or, if no such date be fixed, at the close of
business on the Business Day (as defined in Section 11) next preceding the day
on which notice is given, or if notice is waived, at the close of business on
the Business Day next preceding the day on which the meeting is held.

Each director elected by the holders of shares of Series A Preferred
Stock pursuant to paragraphs (c) and (d) of this Section 3 shall, unless his
term shall expire earlier, hold office until the annual meeting of shareholders
next succeeding his election or until his successor, if any, is elected and
qualified.

In case any vacancy shall occur among the directors elected by the
holders of shares of Series A Preferred Stock pursuant to paragraphs (c) and
(d) of this Section 3, such vacancy may be filled for the unexpired portion of
the term, to the extent permitted by the CGCL, by the Board, provided such
Board action must include the vote of a majority of the remaining directors
theretofore elected by such holders (if there is a remaining director) or such
directors' successors in office. If any such vacancy is not so filled within
twenty days after the creation thereof or if all of the directors so elected by
the holders of Series A Preferred Stock shall cease to serve as directors
before their terms shall expire, the holders of the Series A Preferred Stock
then outstanding and entitled to vote for such directors may, by written
consent as herein provided, or at a special meeting of such holders called as
provided herein, elect successors to hold office for the unexpired terms of the
directors whose places shall be vacant. Any vacancy which shall occur among
the directors elected by the holders of the outstanding shares of any other
class or series of capital stock shall be filled in accordance with the Bylaws
of the corporation and the CGCL; provided, however, that the holders of shares
of Series A Preferred Stock shall not be entitled to vote their shares of
Series A Preferred Stock in the election of directors to fill any such vacancy.

To the extent permitted by the CGCL, any director elected by the holders
of shares of Series A Preferred Stock, voting separately as a single series,
may be removed from office with or without cause by the vote or written consent
of the holders of at least a majority of the outstanding shares of Series A
Preferred Stock. A special meeting of the holders of shares of Series A
Preferred Stock may be called in accordance with the procedures set forth in
subparagraph (e)(1) of this Section 3.

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<PAGE> 122

f. In addition to the voting rights provided elsewhere in this
Section 3 and in addition to board approval or any shareholder approval
requirements set forth in the Restated Articles of Incorporation or Bylaws, as
amended, of the corporation or as otherwise required by law, and so long as
shares of Series A Preferred Stock having an aggregate Stated Value of at least
$25,000,000 are issued and outstanding, and subject to the provisions of
Section 3(g) hereof, the affirmative vote of the holders of at least a majority
of the outstanding shares of Series A Preferred Stock, in person or by proxy,
at an annual meeting of shareholders or at a special meeting of shareholders
held for such purpose as provided above in Section 3(e), or the written
consent, delivered to the Secretary of the corporation, of the holders of at
least a majority of the outstanding shares of Series A Preferred Stock, shall
be necessary to approve the following:

(1) any material change in the nature of the business of the
corporation and its Subsidiaries,

(2) any material acquisition by the corporation or any of its
Subsidiaries of the stock, assets, property or business of any corporation,
partnership, association or other business organization or division thereof,

(3) any mortgage or pledge of any of the assets or properties
of the corporation and its Subsidiaries or the subjection of any of the assets
or properties of the corporation and its Subsidiaries to any liens, charges
encumbrances, imperfections of title, security interests, options or rights or
claims of others with respect thereto; provided that such assets and properties
have a book value in excess of $3,000,000 in the aggregate,

(4) any purchase, redemption or other acquisition by the
corporation or any of its Subsidiaries of any shares of capital stock of the
corporation or any of its Subsidiaries, except (x) as required pursuant to any
stock option plan for employees of the corporation (including, without
limitation, the corporation's 1986 Stock Option Plan, as amended) and (y) with
respect to any redemption of shares of Series A Preferred Stock pursuant to
Section 5 hereof,

(5) any material alteration, amendment or modification of the
Loan Agreement, dated as of December 17, 1990, by and among the corporation,
L.A. Gear California, Inc., Raegal Finance, Inc. and the Banks listed therein,
and Bank of America, as Agent (the "Credit Agreement"), or any establishment
of, or any material alteration, amendment or modification of a replacement
credit facility therefor providing for working capital borrowings and letters
of credit (a "Replacement Facility"),

(6) any incurrence of indebtedness for borrowed money by the
corporation or any of its Subsidiaries if immediately thereafter the aggregate
principal amount of such indebtedness outstanding is in excess of $15,000,000,
except (A) pursuant to the Credit Agreement or a Replacement Facility or (B) to
permit the corporation to fulfill its mandatory redemption obligation pursuant
to Section 5(b) hereof on any specified redemption date (as

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<PAGE> 123

set forth in Section 5(b) hereof), provided that such indebtedness is limited
to the amount necessary for, and used by the corporation solely for the purpose
of fulfilling such mandatory redemption obligation on such date, and is
incurred not more than thirty days prior to such date,

(7) any assumption or guaranty by the corporation or any of its
Subsidiaries of the indebtedness of any other person or entity in an aggregate
principal amount at any one time outstanding in excess of $100,000 for all such
persons or entities,

(8) any payment to or other transaction with any affiliate of
the corporation or any of its Subsidiaries other than (A) in an amount not in
excess of $500,000 in the aggregate for all such payments or transactions in
any twelve month period following the Issue Date, (B) pursuant to any
employment contract between the corporation and Robert Y. Greenberg existing on
the date hereof or approved in accordance with the provisions of clause (x) of
this Section 3(f), (C) pursuant to the Services Agreement (as defined in
Section 11 hereof), or (D) pursuant to the terms hereof,

(9) any declaration of or payment of any dividend or other
distribution (whether in cash, stock or property) with respect to any shares of
Junior Dividend Stock by the corporation or any of its Subsidiaries,

(10) the entry into, adoption, amendment or termination by the
corporation or any of its Subsidiaries of (A) any employment contract,
severance contract or consulting contract (other than the Services Agreement)
requiring payments (other than compensation consisting of customary commission
payments to corporation employees and salespersons) in excess of $100,000
individually, or (B) any bonus, profit-sharing, pension or other employee
benefit or special compensation plans or programs (other than such amendments
thereto as required by law, to the minimum extent so required by law) by the
corporation or any of its Subsidiaries,

(11) any issuance of any equity securities of the corporation or
any of its Subsidiaries (including, without limitation, any securities
convertible into, or options with respect to, or warrants to purchase or rights
to subscribe to, any such equity securities) other than an issuance of equity
securities pursuant to (A) the corporation's 1986 Stock Option Plan, as
amended, or Employee Stock Savings Plan, as amended, or (B) any options or
warrants outstanding as of November 30, 1990; provided, however, that no such
approval shall be required to approve the issuance of equity securities issued
pursuant to the terms of Approved Securities (as defined in Section 11 hereof)
(whether upon conversion thereof pursuant to the terms contained therein or
upon exercise of option, warrant, purchase or subscription rights contained
therein),

(12) any entry into, early termination of, or material amendment
to or modification of, any material contract or agreement (other than the
Services Agreement) to which the corporation or any of its Subsidiaries is a
party, except in the ordinary course of business consistent with past practice;
provided, however, that for purposes of this clause

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<PAGE> 124

(xii), the entry into, early termination of, or material amendment or
modification to, any endorsement or sponsorship agreement to which the
corporation is a party and which provides for payments thereunder by the
corporation in an aggregate amount in excess of $100,000 shall not be deemed to
be in the ordinary course of business, or

(13) the adoption and any material amendment or modification of
the Operating Plan for each fiscal year of the corporation and its Subsidiaries
beginning after the Issue Date.

Any vote or consent by the holders of the Series A Preferred Stock
pursuant to this Section 3.f. may, by its terms, be made irrevocable, in which
case it shall be binding on any and all subsequent holders of Series A
Preferred Stock.

g. Notwithstanding the foregoing, (i) holders of shares of Series A
Preferred Stock shall not be entitled to exercise the rights granted to them
pursuant to subparagraph (ii) of paragraph (b) and paragraph (c) of this
Section 3, and (ii) the requirement to obtain the affirmative vote or consent
of the holders of at least a majority of the outstanding shares of Series A
Preferred Stock as set forth in paragraph (f) of this Section 3, shall
terminate, if less than a majority of the then outstanding shares of Series A
Preferred Stock are owned, beneficially or of record, by Trefoil Capital
Investors, L.P., a Delaware limited partnership ("Trefoil") (or any successor
thereto which Trefoil has advised the corporation in writing is a successor
controlled, directly or indirectly, by the officers or directors of SCA).

Section 4. Certain Restrictions.

a. Whenever quarterly dividends payable on shares of Series A
Preferred Stock as provided in Section 2 hereof are not paid in full,
thereafter and until all unpaid dividends payable, whether or not declared, on
the outstanding shares of Series A Preferred Stock shall have been paid in
full, or whenever the corporation shall not have redeemed shares of Series A
Preferred Stock at a time required by Section 5(b) hereof, thereafter and until
all mandatory redemption obligations provided in Section 5(b) hereof which have
come due shall have been satisfied, the corporation shall not: (A) declare or
pay dividends, or make any other distributions, on any shares of Junior
Dividend Stock other than dividends or distributions payable in Junior Dividend
Stock; or (B) declare or pay dividends, or make any other distributions, on any
shares of Parity Dividend Stock (as defined in Section 11 hereof), except (1)
dividends or distributions payable in Junior Dividend Stock and (2) dividends
or distributions paid ratably on the Series A Preferred Stock and all Parity
Dividend Stock on which dividends are payable or in arrears, in proportion to
the total amounts to which the holders of all shares of the Series A Preferred
Stock and such Parity Dividend Stock are then entitled.

b. Whenever quarterly dividends payable on shares of Series A
Preferred Stock as provided in Section 2 hereof are not paid in full,
thereafter and until all unpaid dividends payable, whether or not declared, on
the outstanding shares of Series A Preferred Stock shall have been paid in
full, or whenever the corporation shall not have redeemed shares of Series

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<PAGE> 125

A Preferred Stock at a time required by Section 5(b) hereof, thereafter and
until all mandatory redemption obligations provided in Section 5(b) hereof
which have come due shall have been satisfied, the corporation shall not: (A)
redeem, purchase or otherwise acquire for consideration any shares of Junior
Dividend Stock or Junior Liquidation Stock (as defined in Section 11 hereof) or
Parity Dividend Stock or Parity Liquidation Stock (as defined in Section 11
hereof); provided, however, that (1) the corporation may at any time redeem,
purchase or otherwise acquire shares of Junior Liquidation Stock or Parity
Liquidation Stock in exchange for any shares of capital stock of the
corporation that rank junior to the Series A Preferred Stock as to dividends
and upon liquidation, dissolution and winding up, (2) the corporation may
accept shares of any Parity Liquidation Stock for conversion into shares of
capital stock of the corporation that rank junior to the Series A Preferred
Stock as to dividends and upon liquidation, dissolution and winding up, (3) the
corporation may at any time redeem, purchase or otherwise acquire shares of any
Parity Liquidation Stock pursuant to any mandatory redemption, put, sinking
fund or other similar obligation, pro rata with the Series A Preferred Stock in
proportion to the total amount then required to be applied by it to redeem,
repurchase or otherwise acquire shares of Series A Preferred Stock and shares
of such Parity Liquidation Stock; and (4) the corporation may at any time
redeem, purchase or otherwise acquire shares as may be required pursuant to the
corporation's 1986 Stock Option Plan, as amended, or Employee Stock Savings
Plan, as amended, or similar employee stock plans hereafter adopted; or (B)
redeem or purchase or otherwise acquire for consideration any shares of Series
A Preferred Stock; provided, however, that the corporation (1) may accept
shares of Series A Preferred Stock surrendered for conversion into shares of
capital stock of the corporation pursuant to Section 8 hereof, (2) may elect to
redeem all outstanding shares of Series A Preferred Stock pursuant to Section
5(a) hereof, (3) may redeem shares of Series A Preferred Stock pursuant to
Section 5(b) hereof, or (4) may redeem shares of Series A Preferred Stock
pursuant to Section 5(a) or (b) hereof pro rata.

Section 5. Redemption.

a. The corporation shall not have any right to redeem any shares of
Series A Preferred Stock prior to the second anniversary of the Issue Date;
provided, however, that if, prior to the second anniversary of the Issue Date,
a merger of the corporation with or into another corporation is approved by the
Board of Directors of the corporation in which the per share consideration to
be received by the holders of shares of Common Stock upon the consummation
thereof is payable solely in cash and in an amount equal to at least 175% of
the Conversion Price, the corporation may redeem, concurrently with the
consummation of such merger, all, but not less than all, of the issued and
outstanding shares of Series A Preferred Stock at a redemption price per share
of Series A Preferred Stock equal to the product of (i) the per share
consideration to be received by the holders of Common Stock upon the
consummation of such merger or consolidation and (ii) the Conversion Ratio (as

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<PAGE> 126

defined in Section 8(a) hereof). On and after such date, subject to the
restrictions contained in Section 4 hereof, the corporation shall have the
right, at its sole option and election made in accordance with paragraph (e) of
this Section 5, to redeem, out of funds legally available therefor, shares of
Series A Preferred Stock, in whole or in part, in integral multiples having an
aggregate Stated Value of at least $15,000,000, at any time and from time to
time, at a redemption price equal to the Stated Value, plus an amount per share
equal to all accrued and unpaid dividends payable in cash, whether or not
declared, to the date of redemption (the "Redemption Price"); provided,
however, that the corporation shall not have any such right unless (A) all
quarterly dividends payable on shares of Series A Preferred Stock pursuant to
Section 2 hereof shall have been paid in full and (B) the Current Market Price
of the Common Stock is equal to at least 175% of the Conversion Price (as
defined in Section 11 hereof) for thirty consecutive Trading Days (as defined
in Section 11 hereof).

b. On each August 31 commencing on August 31, 1996 and ending on
August 31, 2000 (so long as any shares of Series A Preferred Stock remain
outstanding), the corporation shall redeem, out of funds legally available
therefor, the number of shares set forth below (or, if fewer than said number
of shares of Series A Preferred Stock are then outstanding, the number of
shares then outstanding) by paying therefor in cash the Redemption Price.

<TABLE>
<CAPTION>
Number of Shares
Redemption Date to be Redeemed
--------------- --------------
<S> <C>
August 31, 1996 350,000

August 31, 1997 162,500

August 31, 1998 162,500

August 31, 1999 162,500

August 31, 2000 Any and all then outstanding shares of
Series A Preferred Stock
</TABLE>

The number of shares of Series A Preferred Stock to be redeemed by the
corporation on any date fixed for redemption pursuant to its mandatory
redemption obligation as set forth in this paragraph (b) of Section 5 shall be
reduced by the number of shares, if any, of Series A Preferred Stock redeemed
by the corporation, at its sole option and election, pursuant to Section 5(a)
hereof, prior to such date fixed for redemption, to the extent such number of
shares has not previously been credited against any mandatory redemption
obligation of the corporation pursuant to this Section 5(b).

c. If less than all shares of Series A Preferred Stock at the
time outstanding are to be redeemed, the shares to be redeemed shall be
selected pro rata.

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<PAGE> 127

d. Notice of any redemption of shares of Series A Preferred Stock
pursuant to paragraph (a) or (b) of this Section 5 shall be mailed at least
forty-five, but not more than seventy-five, days prior to the date fixed for
redemption to each holder of shares of Series A Preferred Stock to be redeemed,
at such holder's address as it appears on the transfer books of the
corporation. In order to facilitate the redemption of shares of Series A
Preferred Stock, the Board of Directors may fix a record date for the
determination of Series A Preferred Stock to be redeemed, or may cause the
transfer books of the corporation for the Series A Preferred Stock to be
closed, not more than sixty days or less than thirty days prior to the date
fixed for such redemption.

e. On the date of any redemption being made pursuant to paragraph
(a) or (b) of this Section 5 which is specified in a notice given pursuant to
paragraph (d) of this Section 5, the corporation shall, and at any time after
such notice shall have been mailed and before the date of redemption the
corporation may, deposit for the benefit of the holders of shares of Series A
Preferred Stock to be redeemed the funds necessary for such redemption,
including the amount necessary to pay all accrued and unpaid dividends to the
date of redemption, with a bank or trust company in the City of Los Angeles
having a capital and surplus of at least $1,000,000,000. Any moneys so
deposited by the corporation and unclaimed at the end of one year from the date
designated for such redemption shall revert to the general funds of the
corporation. After such reversion, any such bank or trust company shall, upon
demand, pay over to the corporation such unclaimed amounts and thereupon such
bank or trust company shall be relieved of all responsibility in respect
thereof and any holder of shares of Series A Preferred Stock to be redeemed
shall look only to the corporation for the payment of the Redemption Price. In
the event that moneys are deposited pursuant to this paragraph (e) in respect
of shares of Series A Preferred Stock that are converted in accordance with the
provisions of Section 8, such moneys shall, upon such conversion, revert to the
general funds of the corporation and, upon demand, such bank or trust company
shall pay over to the corporation such moneys and shall be relieved of all
responsibility to the holders of such converted shares in respect thereof. Any
interest accrued on funds deposited pursuant to this paragraph (e) shall be
paid from time to time to the corporation for its own account.

f. Notice of redemption having been given as aforesaid, upon the
deposit of funds pursuant to paragraph (e) in respect of shares of Series A
Preferred Stock to be redeemed pursuant to paragraph (a) or (b) of this Section
5, notwithstanding that any certificates for such shares shall not have been
surrendered for cancellation, from and after the date of redemption designated
in the notice of redemption (i) the shares represented thereby shall no longer
be deemed outstanding, (ii) the rights to receive dividends thereon shall cease
to accrue, and (iii) all rights of the holders of shares of Series A Preferred
Stock to be redeemed shall cease and terminate, excepting only the right to
receive the Redemption Price therefor, and the right to convert such shares
into shares of Common Stock until the close of business on the Business Day
next preceding the date of redemption, in accordance with Section 8 hereof.

Section 6. Reacquired Shares. Any shares of Series A Preferred
Stock converted, redeemed, purchased or otherwise acquired by the corporation
in any manner whatsoever

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<PAGE> 128

shall be retired and cancelled promptly after the acquisition thereof. All
such shares of Series A Preferred Stock shall upon their cancellation, in
accordance with the CGCL, become authorized but unissued shares of Preferred
Stock of the corporation and may be reissued as part of another series of
Preferred Stock of the corporation, subject to the conditions or restrictions
on issuance set forth herein.

Section 7. Liquidation, Dissolution or Winding Up.

a. If the corporation shall commence a voluntary case under the
Federal bankruptcy laws or any other applicable Federal or state bankruptcy,
insolvency or similar law, or consent to the entry of an order for relief in an
involuntary case under such law or to the appointment of a receiver,
liquidator, assignee, custodian, trustee, sequestrator (or other similar
official) of the corporation or of any substantial part of its property, or
make an assignment for the benefit of its creditors, or admit in writing its
inability to pay its debts generally as they become due, or if a decree or
order for relief in respect of the corporation shall be entered by a court
having jurisdiction in the premises in an involuntary case under the Federal
bankruptcy laws or any other applicable Federal or state bankruptcy, insolvency
or similar law, or appointing a receiver, liquidator, assignee, custodian,
trustee, sequestrator (or other similar official) of the corporation or of any
substantial part of its property, or ordering the winding up or liquidation of
its affairs, and any such decree or order shall be unstayed and in effect for a
period of ninety consecutive days and on account of any such event the
corporation shall liquidate, dissolve or wind up, or if the corporation shall
otherwise liquidate, dissolve or wind up, no distribution shall be made (i) to
the holders of shares of Junior Liquidation Stock unless, prior thereto, the
holders of shares of Series A Preferred Stock, subject to Section 8, shall have
received the Liquidation Preference with respect to each share, or (ii) to the
holders of shares of Parity Liquidation Stock, except distributions made
ratably to the holders of the Series A Preferred Stock and the Parity
Liquidation Stock in proportion to the total amounts to which the holders of
all such shares of Series A Preferred Stock and Parity Liquidation Stock would
be entitled upon such liquidation, dissolution or winding up. Upon any such
liquidation, dissolution or winding up, the holders of shares of Series A
Preferred Stock shall be entitled to receive the Liquidation Preference with
respect to each such share and no more.

b. Neither the merger or other business combination of the
corporation with or into any other Person or Persons nor the sale of all or
substantially all the assets of the corporation shall be deemed to be a
liquidation, dissolution or winding up of the corporation for purposes of this
Section 7.

Section 8. Conversion.

a. Subject to the provisions for adjustment hereinafter set
forth, each share of Series A Preferred Stock shall be convertible at the
option of the holder thereof into fully paid and nonassessable shares of Common
Stock. The number of shares of Common Stock deliverable upon conversion of a
share of Series A Preferred Stock, adjusted as hereinafter provided, is
referred to herein as the "Conversion Ratio." The Conversion Ratio shall

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<PAGE> 129

initially be 10 and the Conversion Price shall initially be $10.00. The
Conversion Ratio and the Conversion Price are subject to adjustment from time
to time pursuant to paragraph (g) of this Section 8.

b. Conversion of the Series A Preferred Stock may be effected by
any such holder upon the surrender to the corporation at the principal office
of the corporation in the State of California (the "Transfer Agent") or at the
office of any agent or agents of the corporation, as may be designated by the
Board of Directors of the corporation, of the certificate for such Series A
Preferred Stock to be converted accompanied by a written notice stating that
such holder elects to convert all or a specified whole number of such shares in
accordance with the provisions of this Section 8 and specifying the name or
names in which such holder wishes the certificate or certificates for shares of
Common Stock to be issued. In case such notice shall specify a name or names
other than that of such holder, such notice shall be accompanied by payment of
all transfer taxes payable upon the issuance of shares of Common Stock in such
name or names. Other than such taxes, the corporation will pay any and all
issue and other taxes (other than taxes based on income) that may be payable in
respect of any issue or delivery of shares of Common Stock on conversion of
Series A Preferred Stock pursuant hereto. As promptly as practicable, and in
any event within five Business Days after the surrender of such certificate or
certificates and the receipt of such notice relating thereto and, if
applicable, payment of all transfer taxes (or the demonstration to the
satisfaction of the corporation that such taxes have been paid), the
corporation shall deliver or cause to be delivered (i) certificates
representing the number of validly issued, fully paid and nonassessable full
shares of Common Stock to which the holder of shares of Series A Preferred
Stock being converted shall be entitled and (ii) if less than the full number
of shares of Series A Preferred Stock evidenced by the surrendered certificate
or certificates is being converted, a new certificate or certificates, of like
tenor, for the number of shares evidenced by such surrendered certificate or
certificates less the number of shares being converted. Such conversion shall
be deemed to have been made at the close of business on the date of giving such
notice and of such surrender of the certificate or certificates representing
the shares of Series A Preferred Stock to be converted so that the rights of
the holder thereof as to the shares being converted shall cease except for the
right to receive shares of Common Stock in accordance herewith, and the person
entitled to receive the shares of Common Stock shall be treated for all
purposes as having become the record holder of such shares of Common Stock at
such time. The corporation shall not be required to convert, and no surrender
of shares of Series A Preferred Stock shall be effective for that purpose,
while the transfer books of the corporation for the Common Stock are closed for
any purpose (but not for any period in excess of five days); but the surrender
of shares of Series A Preferred Stock for conversion during any period while
such books are so closed shall become effective for conversion immediately upon
the reopening of such books, as if the conversion had been made on the date
such shares of Series A Preferred Stock were surrendered, and at the Conversion
Ratio in effect at the date of such surrender.

c. In case any shares of Series A Preferred Stock are to be
redeemed pursuant to Section 5, such right of conversion shall cease and
terminate as to the shares of Series A Preferred Stock to be redeemed at the
close of business on the Business Day next preceding

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<PAGE> 130

the date fixed for redemption unless the corporation shall default in the
payment of the Redemption Price.

d. The Conversion Ratio shall be subject to adjustment from time
to time in certain instances as hereinafter provided. Upon conversion, the
holder of shares of Series A Preferred Stock shall be entitled to receive any
accrued and unpaid dividends on the shares of Series A Preferred Stock
surrendered for conversion to the date of such conversion. Such accrued and
unpaid dividends shall be payable by the corporation in cash (to the extent
funds are legally available therefor) or, at the option and election of the
holder of such shares, shall be convertible into Common Stock at a per share
price equal to the Conversion Price; provided, however, that if funds are not
legally available for the payment by the corporation of any such accrued and
unpaid dividends in cash, the holder of the shares of Series A Preferred Stock
surrendered for conversion may elect to (i) convert such accrued and unpaid
dividends into shares of Common Stock at a per share price equal to the
Conversion Price or (ii) receive payment in cash with respect to such accrued
and unpaid dividends promptly at such time as the funds therefor are legally
available.

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<PAGE> 131

e. In connection with the conversion of any shares of Series A
Preferred Stock, no fractions of shares of Common Stock shall be issued, but in
lieu thereof the corporation shall pay a cash adjustment in respect of such
fractional interest in an amount equal to such fractional interest multiplied
by the Current Market Price per share of Common Stock on the Trading Day on
which such shares of Series A Preferred Stock are deemed to have been
converted. If more than one share of Series A Preferred Stock shall be
surrendered for conversion by the same holder at the same time, the number of
full shares of Common Stock issuable on conversion thereof shall be computed on
the basis of the total number of shares of Series A Preferred Stock so
surrendered.

f. The corporation shall at all times reserve and keep available
for issuance upon the conversion of the Series A Preferred Stock, free from any
preemptive rights, such number of its authorized but unissued shares of Common
Stock as will from time to time be sufficient to permit the conversion of all
outstanding shares of Series A Preferred Stock, and shall take all action
required to increase the authorized number of shares of Common Stock if
necessary to permit the conversion of all outstanding shares of Series A
Preferred Stock.

g. The Conversion Ratio will be subject to adjustment from time
to time as follows:

(1) In case the corporation shall at any time or from time
to time after the Issue Date (A) pay a dividend, or make a distribution, on the
outstanding shares of Common Stock in shares of Common Stock, (B) subdivide the
outstanding shares of Common Stock, (C) combine the outstanding shares of
Common Stock into a smaller number of shares or (D) issue by reclassification
of the shares of Common Stock any shares of capital stock of the corporation,
then, and in each such case, the Conversion Ratio in effect immediately prior
to such event or the record date therefor, whichever is earlier, shall be
adjusted so that the holder of any shares of Series A Preferred Stock
thereafter surrendered for conversion shall be entitled to receive the number
of shares of Common Stock or other securities of the corporation which such
holder would have owned or have been entitled to receive after the happening of
any of the events described above, had such shares of Series A Preferred Stock
been surrendered for conversion immediately prior to the happening of such
event or the record date therefor, whichever is earlier. An adjustment made
pursuant to this clause (i) shall become effective (x) in the case of any such
dividend or distribution, immediately after the close of business on the record
date for the determination of holders of shares of Common Stock entitled to
receive such dividend or distribution, or (y) in the case of such subdivision,
reclassification or combination, at the close of business on the day upon which
such corporate action becomes effective. No adjustment shall be made pursuant
to this clause (i) in connection with any transaction to which paragraph (h)
applies.

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<PAGE> 132

share of Series A Preferred Stock shall be entitled to receive, upon the
conversion thereof, the number of shares of Common Stock determined by
multiplying (A) the applicable Conversion Ratio on the day immediately prior to
such date by (B) a fraction, the numerator of which shall be the sum of (1) the
number of shares of Common Stock outstanding on such date and (2) the number of
additional shares of Common Stock issued (or into which the convertible
securities may convert), and the denominator of which shall be the sum of (x)
the number of shares of Common Stock outstanding on such date and (y) the
number of shares of Common Stock which the aggregate consideration receivable
by the corporation for the total number of shares of Common Stock so issued (or
into which the rights, warrants or other convertible securities may convert)
would purchase at such Conversion Price on such date. An adjustment made
pursuant to this clause (ii) shall be made on the next Business Day following
the date on which any such issuance is made and shall be effective
retroactively immediately after the close of business on such date. For
purposes of this clause (ii), the aggregate consideration receivable by the
corporation in connection with the issuance of shares of Common Stock or of
rights, warrants or other securities convertible into shares of Common Stock
shall be deemed to be equal to the sum of the aggregate offering price (before
deduction of underwriting discounts or commissions and expenses payable to
third parties) of all such Common Stock, rights, warrants and convertible
securities plus the minimum aggregate amount, if any, payable upon exercise or
conversion of any such, rights, warrants and convertible securities into shares
of Common Stock. The issuance of any shares of Common Stock pursuant to (a) a
dividend or distribution on, or subdivision, combination or reclassification
of, the outstanding shares of Common Stock requiring an adjustment in the
Conversion Ratio pursuant to clause (i) of this paragraph (g), or (b) any
employee benefit or stock option plan or program of the corporation, or (c) any
option, warrant, right, or convertible security outstanding as of the date
hereof, or (d) the terms of a joint venture agreement approved in accordance
with the provisions of Section 3(f) hereof, if immediately after such issuance,
the aggregate number of shares of Common Stock issued pursuant to this
subclause (d) does not exceed 600,000 shares, shall not be deemed to constitute
an issuance of Common Stock or convertible securities by the corporation to
which this clause (ii) applies. Upon the expiration unexercised of any
options, warrants or rights to convert any convertible securities for which an
adjustment has been made pursuant to this clause (ii), the adjustments shall
forthwith be reversed to effect such rate of conversion as would have been in
effect at the time of such expiration or termination had such options, warrants
or rights or convertible securities, to the extent outstanding immediately
prior to such expiration or termination, never been issued. No adjustment
shall be made pursuant to this clause (ii) in connection with any transaction
to which paragraph (h) applies.

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<PAGE> 133

multiplying (1) the applicable Conversion Ratio on the day immediately prior to
the record date fixed for the determination of shareholders entitled to receive
such dividend or distribution by (2) a fraction, the numerator of which shall
be the Current Market Price per share of Common Stock for the period of twenty
Trading Days preceding such record date, and the denominator of which shall be
such Current Market Price per share of Common Stock less the Fair Market Value
(as defined in Section 11 hereof) per share of Common Stock (as determined in
good faith by the Board of Directors of the corporation, a certified resolution
with respect to which shall be mailed to each holder of shares of Series A
Preferred Stock) of such dividend or distribution; provided, however, that in
the event of a distribution of capital stock of a Subsidiary of the corporation
(a "Spin-Off") made to holders of shares of Common Stock, the numerator of such
fraction shall be the sum of the Current Market Price per share of Common Stock
for the period of twenty Trading Days preceding the thirty-fifth Trading Day
after the effective date of such Spin-Off and the Current Market Price of the
number of shares (or the fraction of a share) of capital stock of the
Subsidiary which is distributed in such Spin-Off in respect of one share of
Common Stock for the period of twenty Trading Days preceding such thirty-fifth
Trading Day and the denominator of which shall be the Current Market Price per
share of Common Stock for the period of twenty Trading Days preceding such
thirty-fifth Trading Day. An adjustment made pursuant to this clause (iii)
shall be made upon the opening of business on the next Business Day following
the date on which any such dividend or distribution is made and shall be
effective retroactively immediately after the close of business on the record
date fixed for the determination of shareholders entitled to receive such
dividend or distribution; provided, however, that if the proviso to the
preceding sentence applies, then such adjustment shall be made and be effective
as of such thirty-fifth Trading Day after the effective date of such Spin-Off.
No adjustment shall be made pursuant to this clause (iii) in connection with
any transaction to which paragraph (h) applies.

(4) For purposes of this paragraph (g), the number of
shares of Common stock at any time outstanding shall not include any shares of
Common Stock then owned or held by or for the account of the corporation.

(5) The term "dividend," as used in this paragraph (g)
shall mean a dividend or other distribution upon Common Stock of the
corporation.

(7) The certificate of any firm of independent public
accountants of recognized standing selected by the Board of Directors of the
corporation (which may be the firm of

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<PAGE> 134

independent public accountants regularly employed by the corporation) shall be
presumptively correct for any computation made under this paragraph (g).

h. In case of any capital reorganization or reclassification of
outstanding shares of Common Stock (other than a reclassification covered by
paragraph (g)(i) of this Section 8), or in case of any merger of the
corporation with or into another corporation, or in case of any sale or
conveyance to another corporation of all or substantially all of the assets or
property of the corporation (each of the foregoing being referred to as a
"Transaction"), at the option of the holder of any shares of Series A Preferred
Stock (i) each share of Series A Preferred Stock then outstanding shall
thereafter be convertible into, in lieu of the Common Stock issuable upon such
conversion prior to consummation of such Transaction, the kind and amount of
shares of stock and other securities and property receivable (including cash)
upon the consummation of such Transaction by a holder of that number of shares
of Common Stock into which one share of Series A Preferred Stock was
convertible immediately prior to such Transaction (including, on a pro rata
basis, the cash, securities or property received by holders of Common Stock in
any tender or exchange offer that is a step in such Transaction), or (ii) each
share of Series A Preferred Stock shall entitle the holder thereof to receive,
upon presentation of the certificate therefor to the Surviving Person (as
defined in Section 11 hereof) at any time subsequent to the consummation of
such Transaction (1) if the Surviving Person is a Qualified Person (as defined
in Section 11 hereof), that number of shares of Survivor Common Stock (as
defined in Section 11 hereof) of the Surviving Person determined by multiplying
the number of shares of Common Stock into which such share of Series A
Preferred Stock was convertible immediately prior to the consummation of such
Transaction by a fraction, the numerator of which is the Current Market Price
of the Common Stock immediately prior to the consummation of such Transaction
and the denominator of which is the Current Market Price of the Survivor Common
Stock of the Surviving Person for the twenty Trading Days preceding the
consummation of the Transaction giving rise to the adjustment in this paragraph
(h) or (2) if the Surviving Person is not a Qualified Person, cash equal to the
Fair Market Value, as of the consummation of such Transaction (computed with
interest), of the securities or other property to which it would have been
entitled under clause (i) above, as determined by an independent investment
banking firm (with an established national reputation as a valuer of equity
securities); provided, however, that in the event that the per share
consideration receivable by the holders of Common Stock upon the

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<PAGE> 135

consummation of such Transaction is equal to at least 175% of the Conversion
Price, each share of Series A Preferred Stock then outstanding shall be
convertible in accordance with clause (i) of this Section 8(h), whether or not
the Surviving Person is a Qualified Person. In any such case, if necessary,
appropriate adjustment (as determined by the Board of Directors) shall be made
in the application of the provisions set forth in this Section 8 with respect
to rights and interests thereafter of the holders of shares of Series A
Preferred Stock to the end that the provisions set forth herein for the
protection of the conversion rights of the Series A Preferred Stock shall
thereafter be applicable, as nearly as reasonably may be, to any such other
shares of stock and other securities and property deliverable upon conversion
of the shares of Series A Preferred Stock remaining outstanding (with such
adjustments in the conversion price and number of shares issuable upon
conversion and such other adjustments in the provisions hereof as the Board of
Directors shall determine to be appropriate). In case securities or property
other than Common Stock shall be issuable or deliverable upon conversion as
aforesaid, then all references in this Section 8 shall be deemed to apply, so
far as appropriate and as nearly as may be, to such other securities or
property.

Notwithstanding anything contained herein to the contrary, the
corporation will not effect any Transaction unless, prior to the consummation
thereof, the Surviving Person thereof shall assume, by written instrument
mailed to each holder of shares of Series A Preferred Stock, the obligation to
deliver to such holder such cash, shares of Survivor Common Stock or other
securities to which, in accordance with the foregoing provisions, such holder
is entitled and such Surviving Person shall have mailed to each holder of
shares of Series A Preferred Stock an opinion of independent counsel for such
Surviving Person stating that such assumption agreement is a valid, binding and
enforceable agreement of the Surviving Person, subject to general principles of
equity and applicable bankruptcy, insolvency, reorganization, moratorium and
other similar laws relating to or affecting creditors' rights generally.

i. In case at any time or from time to time the corporation shall
pay any dividend or make any other distribution to the holders of its Common
Stock, or shall offer for subscription pro rata to the holders of its Common
Stock any additional shares of stock of any class or any other right, or there
shall by any capital reorganization or reclassification of the Common Stock of
the corporation or merger of the corporation with or into another corporation,
or any sale or conveyance to another corporation of the property of the
corporation as an entirety or substantially as an entirety, or there shall be a
voluntary or involuntary dissolution, liquidation or winding up of the
corporation, then, in any one or more of said cases the corporation shall give
at least twenty days prior written notice (the time of mailing of such notice
shall be deemed to be the time of giving thereof) to the registered holders of
the Series A Preferred Stock at the addresses of each as shown on the books of
the corporation maintained by the Transfer Agent thereof as of the date on
which (i) the books of the corporation shall close or a record shall be taken
for such stock dividend, distribution or subscription rights or (ii) such
reorganization, reclassification, merger, sale or conveyance, dissolution,
liquidation or winding up shall take place, as the case may be, provided that
in the case of any Transaction to which paragraph (h) applies the corporation
shall give at least thirty days prior written notice as aforesaid. Such notice
shall also specify

20
<PAGE> 136

the date as of which the holders of the Common Stock of record shall
participate in said dividend, distribution or subscription rights or shall be
entitled to exchange their Common Stock for securities or other property
deliverable upon such reorganization, reclassification, merger, sale or
conveyance or participate in such dissolution, liquidation or winding up, as
the case may be. Failure to give such notice shall not invalidate any action
so taken.

Section 9. Reports as to Adjustments. Upon any adjustment of the
Conversion Ratio then in effect and any increase or decrease in the number of
shares of Common Stock issuable upon the operation of the conversion set forth
in Section 8 hereof, then, and in each such case, the corporation shall
promptly deliver to the transfer agent of the Series A Preferred Stock and
Common Stock, a certificate signed by the President or a Vice President and by
the Treasurer or an Assistant Treasurer or the Secretary or an Assistant
Secretary of the corporation setting forth in reasonable detail the event
requiring the adjustment and the method by which such adjustment was calculated
and specifying the Conversion Ratio then in effect following such adjustment
and the increased or decreased number of shares issuable upon the conversion
set forth in Section 8 hereof. The corporation shall also promptly after the
making of such adjustment give written notice to the registered holders of the
Series A Preferred Stock at the address of each holder as shown on the books of
the corporation maintained by the Transfer Agent thereof, which notice shall
state the Conversion Ratio then in effect, as adjusted, and the increased or
decreased number of shares issuable upon the exercise of the right of
conversion granted by Section 8 hereof, and shall set forth in reasonable
detail the method of calculation of each and a brief statement of the facts
requiring such adjustment. Where appropriate, such notice to holders of the
Series A Preferred Stock may be given in advance and included as part of the
notice required under the provisions of Section 8(i) hereof.

Section 10. Certain Covenants. Any registered holder of Series A
Preferred Stock may proceed to protect and enforce its rights and the rights of
such holders by any available remedy by proceeding at law or in equity to
protect and enforce any such rights, whether for the specific enforcement of
any provision in this Article Three, or in aid of the exercise of any power
granted herein, or to enforce any other proper remedy.

Section 11. Definitions. For the purposes of this Article Three,
the following terms shall have the meanings indicated:

"Adjustment Period" shall mean the period of five consecutive Trading
Days (as defined below) preceding the date as of which the Fair Market Value
(as defined below) of a security is to be determined.

"Approved Securities" shall mean securities the issuance of which was
approved by the requisite vote of the holders of Series A Preferred Stock
pursuant hereto.

"Business Day" shall mean any day other than Saturday, Sunday or a day
on which banking institutions in the State of California are authorized or
obligated by law or executive order to close.

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<PAGE> 137

"CGCL" shall mean the California General Corporation Law, as amended.

"Consolidated Liabilities" with respect to any Person (as defined
below) shall mean the total liabilities of such Person and its Subsidiaries (as
defined below), on a consolidated basis determined in accordance with GAAP (as
defined below).

"Consolidated Net Worth" of a Person (as defined below) shall mean the
sum of its capital stock (including, with respect to the corporation, its
Series A Preferred Stock issued pursuant to the Stock Purchase Agreement (as
defined below) and any other Preferred Stock) and additional paid in capital
plus retained earnings (or minus accumulated deficit) of such Person and its
Subsidiaries (as defined below), on a consolidated basis calculated in
conformity with GAAP (as defined below).

"Consolidated Tangible Net Worth" of a Person (as defined below) shall
mean such Person's Consolidated Net Worth minus the intangible assets
(including franchises, patents, patent applications, trademarks, brand names,
goodwill and research and development expenses) of such Person and its
Subsidiaries (as defined below), on a consolidated basis calculated in
accordance with GAAP (as defined below).

"Conversion Price" shall mean an amount equal to the Stated Value
divided by the Conversion Ratio (as adjusted pursuant to paragraph (g) of
Section 8 hereof).

"Current Market Price," when used with reference to shares of Common
Stock or other securities on any date, shall mean the closing price per share
of Common Stock or such other securities on such date and, when used with
reference to shares of Common Stock or other securities for any period shall
mean the average of the daily closing prices per share of Common Stock or such
other securities for such period. The closing price for each day shall be the
last sale price, regular way, or, in case no such sale takes place on such day,
the average of the closing bid and asked prices, regular way, in either case as
reported in the principal consolidated transaction reporting system with
respect to securities listed or admitted to trading on the New York Stock
Exchange or, if the Common Stock or such other securities are not listed or
admitted to trading on the New York Stock Exchange, as reported in the
principal consolidated transaction reporting system with respect to securities
listed on the principal national securities exchange on which the Common Stock
or such other securities are listed or admitted to trading. If the Common
Stock is not listed or admitted to trading on any national securities exchange,
the last quoted sale price or, if not so quoted, the average of the high bid
and low asked prices in the over-the-counter market, as reported by the
National Association of Securities Dealers, Inc. Automated Quotation System or
such other system then in use, or, if on any such date the Common Stock or such
other securities are not quoted by any such organization, the average of the
closing bid and asked prices are furnished by a professional market maker
making a market in the Common Stock or such other securities selected by the
Board of Directors of the corporation. If the Common Stock or such other
securities are not publicly held or so listed or publicly traded, "Current
Market Price" shall mean the Fair Market Value per share of Common Stock or of
such other

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<PAGE> 138

securities as determined in good faith by the Board of Directors of the
corporation based on an opinion of an independent investment banking firm with
an established national reputation as a valuer of securities, which opinion may
be based on such assumptions as such firm shall deem to be necessary and
appropriate.

"GAAP" shall mean generally accepted accounting principles set forth in
the opinions and pronouncements of the Accounting Principles Board of the
American Institute of Certified Public Accountants and statements and
pronouncements of the Financial Accounting Standards Board or in such other
statements by such other entity as may be approved by a significant segment of
the accounting profession.

"Issue Date" shall mean the first date on which shares of Series A
Preferred Stock are issued.

"Junior Dividend Stock" shall mean (i) the Common Stock and (ii) any
other capital stock of the corporation which ranks junior as to dividends to
the Series A Preferred Stock.

"Junior Liquidation Stock" shall mean (i) the Common Stock and (ii) any
other capital stock of the corporation which ranks junior upon liquidation,
dissolution or winding up to the Series A Preferred Stock.

"Leverage Ratio" with respect to any Person (as defined below) shall
mean the ratio of (i) the sum of (a) the Consolidated Liabilities of such
Person plus (b) the aggregate outstanding amount of letters of credit issued on
behalf of such Person and its Subsidiaries minus (c) the book value of
in-transit inventory of such Person and its Subsidiaries which is supported by
one or more outstanding letters of credit to (ii) the Consolidated Tangible Net
Worth of such Person.

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<PAGE> 139

"Liquidation Preference" with respect to a share of Series A Preferred
Stock shall mean the Stated Value per share, plus an amount equal to all
accrued but unpaid dividends.

"Operating Plan" shall mean the annual operating plan for the
corporation and its Subsidiaries, and shall include an annual operating budget
in reasonable detail.

"Parity Dividend Stock" shall mean any capital stock of the corporation
ranking on a parity as to dividends with the Series A Preferred Stock.

"Parity Liquidation Stock" shall mean any capital stock of the
corporation ranking on a parity upon liquidation, dissolution or winding up
with the Series A Preferred Stock.

"Person" shall mean any individual, firm, corporation or other entity,
and shall include any successor (by merger or otherwise) of such entity.

"Qualified Person" shall mean any Person that, immediately after giving
effect to the applicable Transaction, (i) is a solvent corporation or other
entity organized under the laws of any State of the United States of America
having its common stock or, in the case of an entity other than a corporation,
equivalent equity securities, listed on the New York Stock Exchange or the
American Stock Exchange or quoted by the NASDAQ National Market System or any
successor thereto or comparable system, and such common stock or equivalent
equity security continues to meet the requirements for such listing or
quotation and (ii) is required to file, and in each of its three fiscal years
immediately preceding the consummation of the applicable Transaction (or since
its inception) has filed, reports with the Securities and Exchange Commission
pursuant to Section 13 or 15(d) of the Exchange Act.

"Restated Articles of Incorporation" shall mean the Restated Articles
of Incorporation of the corporation, as amended from time to time.

"SCA" means Shamrock Capital Advisors, Inc., a Delaware corporation.

"Series A Director" shall mean a director of the corporation appointed
or elected to the Board of Directors of the corporation pursuant to Section
3(c) hereof.

"Services Agreement" shall mean the letter agreement, dated as of May
27, 1991, between the corporation and SCA, a copy of which is maintained at the
corporation's principal executive offices.

"Stock Purchase Agreement" shall mean the Stock Purchase Agreement,
dated as of May 27, 1991, between the corporation and Trefoil, as amended, a
copy of which is maintained at the corporation's principal executive offices.

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<PAGE> 140

"Surviving Person" shall mean the continuing or surviving Person of a
merger or other business combination, the Person receiving a transfer of all or
a substantial part of the properties and assets of the corporation, or the
Person merging into the corporation in a merger or other business combination
in which the corporation is the continuing or surviving Person, but in
connection with which the Series A Preferred Stock or Common Stock of the
corporation is exchanged or converted into the securities of any other Person
or cash or any other property; provided, however, if such Surviving Person is a
direct or indirect Subsidiary of a Qualified Person, the parent entity that is
a Qualified Person shall be the Surviving Person.

"Survivor Common Stock" with respect to any Surviving Person shall mean
any shares of such Surviving Person of any class or series which has no
preference or priority in the payment of dividends or in the distribution of
assets upon any voluntary or involuntary liquidation, dissolution or winding up
of such Surviving Person and which is not subject to redemption by such
Surviving Person; provided, however, that if at any time there shall be more
than one such class or series, the shares of each such class and series
issuable upon conversion of the Series A Preferred Stock then being converted
shall be substantially in the proportion to the total number of shares of each
such class and series.

FOUR

The Board of Directors of this corporation, without further action by
the holders of the outstanding shares of Common Stock or Preferred Stock, if
any, may issue the Preferred Stock from time to time in one or more series, may
fix the number of shares and the designation of any wholly unissued series of
Preferred Stock, may determine or alter the rights, preferences, privileges and
restrictions granted to or imposed upon any such series and, within the limits
and restrictions stated in any resolution or resolutions of the Board of
Directors originally fixing the number of shares constituting any series of
Preferred Stock, may increase or decrease (but not below the number of shares
of such series then outstanding) the number of shares of such series subsequent
to the issue of shares of that series.

FIVE

Section 1. Elimination of Directors' Liability. The liability of the
directors of this corporation for monetary damages shall be eliminated to the
fullest extent permissible under California law.

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<PAGE> 141

Section 2. Indemnification of Corporate Agents. This corporation is
authorized to provide indemnification of agents (as defined in Section 317 of
the California General Corporation Law) through bylaw provisions, agreements
with agents, vote of shareholders or disinterested directors or otherwise, in
excess of the indemnification otherwise permitted by Section 317 of the
California General Corporation Law, subject only to the applicable limits set
forth in Section 204 of the California General Corporation Law with respect to
actions for breach of duty to the corporation and its shareholders.

Section 3. Insurance from a Subsidiary. This corporation is
authorized to purchase and maintain insurance on behalf of its agents against
any liability asserted against or incurred by the agent in such capacity or
arising out of the agent's status as such from a company, the shares of which
are owned in whole or in part by this corporation, provided that any policy
issued by such company is limited to the extent required by applicable law.

Section 4. Repeal or Modification. Any repeal or modification
of the foregoing provisions of this Article Five by the shareholders of this
corporation shall not adversely affect any right or protection of an agent of
this corporation existing at the time of that repeal or modification.

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<PAGE> 142

L.A. GEAR, INC.
PROXY FOR THE SPECIAL MEETING OF SHAREHOLDERS
TO BE HELD [DATE]
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS

The undersigned holder(s) of Common Stock of L.A. Gear, Inc. (the
"Company") hereby nominate(s), constitute(s) and appoint(s) Stephen A. Koffler,
Allan E. Dalshaug, Willie D. Davis and Ann E. Meyers and each of them, the
attorneys, agents and proxies of the undersigned, with full powers of
substitution to each, to attend and act as proxy or proxies of the undersigned
at the special meeting of shareholders (the "Meeting") of the Company to be
held at [PLACE], on [DATE] at [TIME], Pacific Daylight Time, or at any and all
adjournments and postponements thereof, and to vote as specified herein the
number of shares which the undersigned, if personally present, would be
entitled to vote.

1. APPROVAL OF SHARE EXCHANGE PROPOSAL.
[ ] FOR [ ] AGAINST [ ] ABSTAIN

2. OTHER BUSINESS. In their discretion, the Proxy Holders are authorized to
vote upon such other business incident to the conduct of the Meeting and at
any and all adjournments and postponements thereof. The Board of Directors
at present knows of no other business to be presented by or on behalf of the
Company or the Board of Directors at the Meeting.

The undersigned hereby ratifies and confirms all that the Proxy
Holders, or any of them, or their substitutes, shall lawfully do or cause to be
done by virtue hereof, and hereby revokes any and all proxies heretofore given
by the undersigned to vote at the Meeting. The undersigned acknowledges
receipt of the Notice of Special Meeting of Shareholders, the Proxy Statement
accompanying said Notice and all appendices thereto.

(I) [ ] (WE) [ ] WILL NOT ATTEND THE MEETING IN PERSON

<TABLE>
<S> <C>
DATED: , 199_
------------------------- ------------------------------
(NUMBER OF SHARES)

- -------------------------------------- ------------------------------
(PLEASE PRINT NAME) (PLEASE PRINT NAME)

- -------------------------------------- ------------------------------
(SIGNATURE OF HOLDER OF COMMON (SIGNATURE OF HOLDER OF COMMON
STOCK) STOCK)
</TABLE>

(Please date this Proxy and sign above as your name(s) appear(s) on this card.
Joint owners each should sign personally. Corporate proxies should be signed
by an authorized officer. Executors, administrators, trustees, etc. should
give their full titles).

THE BOARD OF DIRECTORS RECOMMENDS A VOTE "FOR" THE SHARE EXCHANGE PROPOSAL.
THE PROXY WHEN PROPERLY EXECUTED SHALL BE VOTED IN ACCORDANCE AS DIRECTED. IF
NO DIRECTION IS MADE FOR THE SHARE EXCHANGE PROPOSAL, THE PROXY WILL BE VOTED
"FOR" THE SHARE EXCHANGE PROPOSAL.