<PAGE>
SCHEDULE 14A INFORMATION
Proxy Statement Pursuant to Section 14(a) of the Securities
Exchange Act of 1934 (Amendment No. 4)
Filed by the Registrant [X]
Filed by a Party other than the Registrant [_]
Check the appropriate box:
[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 Section 240.14a-11(c) or Section 240.14a-12
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):
[_] $125 per Exchange Act Rules 0-11(c)(1)(ii), 14a-6(i)(1), 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:
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(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:
-------------------------------------------------------------------------
[X] 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.:
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(3) Filing Party:
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(4) Date Filed:
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Notes:
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[LOGO]
February __, 1996
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 Tuesday, April 9, 1996
at 10:00 a.m., Los Angeles time, at the Ritz-Carlton Hotel, 4375 Admiralty Way,
Marina del Rey, California 90292. 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 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. As a result of the increase in its voting power, Trefoil will
effectively have the right to determine the outcome of substantially all matters
submitted for a vote of the Shareholders, including the election of a majority
of the directors. However, the separate voting rights of the Series A Preferred
Stock would be eliminated, all as described more fully in the attached proxy
statement.
<PAGE>
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.
A SPECIAL COMMITTEE OF THE BOARD OF DIRECTORS OF THE COMPANY WAS 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.
THE SPECIAL COMMITTEE, AFTER REVIEWING AND CONSIDERING THE TERMS AND CONDITIONS
OF THE SHARE EXCHANGE PROPOSAL, DETERMINED THAT IT IS FAIR TO, AND IN THE BEST
INTERESTS OF, THE COMPANY AND THE COMMON SHAREHOLDERS AND RECOMMENDED THE BOARD
OF DIRECTORS APPROVE THE SHARE EXCHANGE PROPOSAL. ACTING UPON THE
RECOMMENDATION OF THE SPECIAL COMMITTEE, THE BOARD OF DIRECTORS HAS APPROVED THE
SHARE EXCHANGE PROPOSAL, AND URGES 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, 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.
Your vote is very important. We urge you to vote in favor of the Share
Exchange Proposal.
Sincerely,
William L. Benford
President
<PAGE>
L.A. GEAR, INC.
2850 OCEAN PARK BOULEVARD
SANTA MONICA, CALIFORNIA 90405
NOTICE OF SPECIAL MEETING OF SHAREHOLDERS
TO BE HELD APRIL 9, 1996
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 the Ritz-Carlton Hotel, 4375
Admiralty Way, Marina del Rey, California 90292, on Tuesday, April 9, 1996 at
10:00 a.m., 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, stated value $100 per share ("Series A
Preferred Stock") and all accrued and unpaid dividends thereon, for
approximately 1,108,000 shares of a new series of preferred stock, entitled
Series B Cumulative Preferred Stock, stated value $100 per share ("Series B
Preferred Stock") to be issued by the Company pursuant to the terms of a Share
Exchange Agreement, dated as of December 12, 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
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 February 20,
1996 shall be entitled to notice of and to vote at the Meeting.
By Order of the Board of Directors
Secretary
Dated: February __, 1996
A SPECIAL COMMITTEE OF THE BOARD OF DIRECTORS OF THE COMPANY WAS 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.
THE SPECIAL COMMITTEE, AFTER REVIEWING AND CONSIDERING THE TERMS AND CONDITIONS
OF THE SHARE EXCHANGE PROPOSAL, DETERMINED THAT IT IS FAIR TO, AND IN THE BEST
INTERESTS OF, THE COMPANY AND THE COMMON SHAREHOLDERS AND RECOMMENDED THE BOARD
OF DIRECTORS APPROVE THE SHARE EXCHANGE PROPOSAL. ACTING UPON THE
RECOMMENDATION OF THE
<PAGE>
SPECIAL COMMITTEE, THE BOARD OF DIRECTORS HAS APPROVED THE SHARE EXCHANGE
PROPOSAL, AND URGES 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.
<PAGE>
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......................... 2
Background of the Transaction....................................... 2
Original Issuance of the Series A Preferred Stock................. 2
Dividends on Series A Preferred Stock............................. 2
Mandatory Redemption of Series A Preferred Stock.................. 3
Initiation of Discussions with Trefoil............................ 3
Special Committee................................................... 3
Reasons for the Transaction......................................... 6
Fairness Opinion.................................................... 7
SHARE EXCHANGE PROPOSAL............................................... 11
The Share Exchange Proposal......................................... 11
Principal Terms of the Series B Preferred Stock..................... 12
Dividends......................................................... 12
Voting............................................................ 13
Conversion........................................................ 13
Material Differences Between the Series A Preferred Stock and the
Series B Preferred Stock............................................ 13
Redemption........................................................ 13
Voting Rights..................................................... 14
Conversion........................................................ 15
Dividend Rights................................................... 16
Registration Rights............................................... 16
Certain Restrictions.............................................. 17
The Exchange Agreement.............................................. 17
Election of Additional Directors.................................. 17
Certain Anti-Dilution Adjustments................................. 17
Sale of Series A Preferred Stock.................................. 17
Voting Agreement.................................................. 18
</TABLE>
i
<PAGE>
<TABLE>
<CAPTION>
Page
<S> <C>
Meeting of Shareholders........................................... 18
Conditions to Closing............................................. 18
Representations and Warranties.................................... 18
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
Risk Factors........................................................ 21
Anti-takeover Effects of the Exchange............................. 21
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT........ 22
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS................................................. 25
ACCOUNTANTS........................................................... 51
PROPOSALS OF SHAREHOLDERS............................................. 51
OTHER BUSINESS........................................................ 51
</TABLE>
ii
<PAGE>
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
APPENDIX VI -- Form of Opinion of Counsel
APPENDIX VII -- Sutro & Co. Analyses of Other Transactions
iii
<PAGE>
L.A. GEAR, INC.
2850 OCEAN PARK BOULEVARD
SANTA MONICA, CALIFORNIA 90405
(310) 452-4327
PROXY STATEMENT
SPECIAL MEETING OF SHAREHOLDERS
APRIL 9, 1996
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 the Ritz-Carlton Hotel, 4375 Admiralty Way, Marina del Rey, California
90292, on Tuesday, April 9, 1996, at 10:00 a.m., 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 February, 1996.
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 12, 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. The Company estimates that the Arrearage Amount will be approximately
$10,800,000 at the Closing and that approximately 108,000 shares of Series B
Preferred Stock will be exchanged in respect thereof.
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.
A SPECIAL COMMITTEE OF THE BOARD OF DIRECTORS OF THE COMPANY WAS 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.
THE SPECIAL COMMITTEE, AFTER REVIEWING AND CONSIDERING THE TERMS AND CONDITIONS
OF THE SHARE EXCHANGE PROPOSAL, DETERMINED THAT IT IS FAIR TO, AND IN THE BEST
INTERESTS OF, THE COMPANY AND THE COMMON SHAREHOLDERS AND RECOMMENDED THE BOARD
OF DIRECTORS APPROVE THE SHARE EXCHANGE PROPOSAL. ACTING UPON THE
RECOMMENDATION OF THE SPECIAL COMMITTEE, THE BOARD OF DIRECTORS HAS APPROVED THE
SHARE EXCHANGE PROPOSAL, AND URGES 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.
1
<PAGE>
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").
There were issued and outstanding 22,936,433 shares of the Company's
common stock, no par value (the "Common Stock"), on February 20, 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. Abstentions will be
treated as shares that are present and entitled to vote for purposes of
determining the presence of a quorum but will not count as a vote either for or
against any matter submitted to the shareholders for a vote. If a broker
indicates on the Proxy that it does not have discretionary authority as to
certain shares to vote on a particular matter, those shares will not be
considered as present and entitled to vote with respect to that matter.
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
2
<PAGE>
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 $7,746,084. 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 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 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.
3
<PAGE>
On October 20, 1995 the Special Committee held its first meeting. The
Special 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 Special 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. For
the selection of legal counsel and financial advisor, members of senior
management of the Company contacted a number of law firms and investment banks,
for consideration by the Special Committee. The Company informed the Special
Committee it had the option to choose any law firm and investment bank,
including ones that the Company had not contacted. The Special Committee
reviewed written proposals from several financial advisors and descriptions of
several law firms and their proposed lead attorneys. After deliberation, the
Special Committee 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. Established in 1858, Sutro, a subsidiary of John Hancock
Financial Services, is a San Francisco-based full service investment banking and
securities firm specializing in serving emerging growth-and-middle-market
companies. Sutro's investment banking services include public offerings, with
ongoing equity research and market making support, private placements and
financial advisory assignments, including restructurings, valuations and other
strategic services. With the exception of the Share Exchange Proposal, the
Company and Sutro have not been involved in any financial transactions or any
other material relationship in the last two years. Sutro & Co. Incorporated
served as a co-manager of a 7 1/4% Convertible Subordinated Debentures offering
for the Company which was completed on December 17, 1992. The Special Committee
also retained Gibson, Dunn & Crutcher to serve as its legal counsel. Gibson,
Dunn & Crutcher is a nationally recognized law firm with approximately 635
attorneys. The Los Angeles office of the firm is known for its expertise in
corporate law and securities matters, and has represented special committees of
boards of directors in numerous transactions. Gibson, Dunn & Crutcher acted as
special counsel for the Board of Directors of the Company in connection with the
sale of the Series A Preferred Stock to Trefoil in 1991, and the Company has
from time to time retained Gibson, Dunn & Crutcher for representation in matters
involving litigation brought by employees or former employees of the Company.
Gibson, Dunn & Crutcher was also retained as litigation counsel to defend the
Company, outside Directors of the Company, and a former employee of the Company
with respect to three related class action suits and one derivative suit
alleging violations of federal securities laws and state common law, that were
filed in 1990 and 1991 and settled in 1993.
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 focused its discussion on variations of
certain attributes (and combinations thereof) of a new preferred stock,
including the liquidation amount, coupon rate, dividend provisions, liquidation
preferences, seniority in relation to other securities of the Company,
conversion features, redemption features, voting rights, antidilution
protections, other protective provisions, registration rights and board
representation. The Special Committee highlighted 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 then reviewed and discussed such key
elements in relation to all of the attributes of the potential Series B
Preferred Stock and the outstanding Series A 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 an oral 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 certain securities transactions of ten financially troubled companies which
Sutro believed would assist the Committee in evaluating the Share Exchange
Proposal. The matrix summarized for each company the amount of dilution common
shareholders suffered as a result of the transaction, the voting policies of the
company and the voting rights of the new securities. The matrix also presented
additional comments, where applicable, on dividends, conversion features and
liquidation preferences. With respect to the transactions, Sutro also discussed
the type of transaction, the rationale for the transaction, and the financial
condition of the Company prior to and after the transaction. Sutro indicated to
the Special Committee that while it was unable to locate any publicly available
information regarding a transaction which was identical in nature to the Share
Exchange Proposal (and, therefore, none of the transactions listed on the matrix
were identical to the Share Exchange Proposal), it believed the information
presented in the matrix and the oral report would be useful to the Committee.
See - "Fairness Opinion" below, for a more detailed discussion of the analysis
performed by Sutro.
Sutro also advised the Special Committee that, in its view, obtaining
outside financing for the Company 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 terms which were more favorable to the
common shareholders of the Company than the Share Exchange Proposal. Sutro
concluded that raising new capital in the equity or debt markets, pursuing a
sale of the Company to third parties or obtaining a significant equity
investment from third parties, would be less advantageous to the common
shareholders of the Company than the Share Exchange Proposal,
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considering the current depressed value of the Company's common stock, its
outstanding liabilities and its obligations to the holders of the Series A
Preferred Stock.
On October 31, 1995, the Special Committee met to discuss and review a
proposed term sheet with respect to the Share Exchange Proposal. The Special
Committee focused its discussion on variations in the treatment of accrued but
unpaid dividends, coupon rate, liquidation preferences, seniority in relation to
other securities of the Company, conversion features and prices, redemption
options, voting rights, antidilution protection, other protective provisions,
registration rights and board representation. The Special Committee also
considered: (i) the terms of certain other transactions as presented by Sutro at
its meeting of October 30, 1995 (see above), (ii) the likelihood that common
shareholders would not recoup any of their investment in the Company in the
event of liquidation due to the level of the Company's existing liabilities, its
obligations to holders of Series A Preferred Stock and its assets, and (iii) 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). See--Share Exchange Proposal, Material Differences
Between the Series A Preferred Stock and the Series B Preferred Stock,
Conversion. 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. The term
sheet sent to Trefoil proposed issuing Series B Convertible Preferred Stock in
the liquidation amount of $100,000,000, plus 33% of the accrued but unpaid
dividends as of December 1, 1995, with cumulative quarterly cash dividends at a
coupon rate of 0% for the first two years and 7.5% per annum thereafter. The
term sheet also proposed a per share conversion price of $7.75, optional not
mandatory redemption, voting rights without any special privileges, anti-
dilution protection, registration rights, the right to elect three directors, a
liquidation preference and senior ranking to the Common Stock.
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. Their
report focused on the status of the ongoing negotiation with Trefoil, and
reviewed the open issues including payment of accrued but unpaid dividends,
coupon rate, method and timing of future dividend payments, conversion price,
voting rights and board representation. 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. The term sheet
sent to Trefoil proposed issuing Series B Convertible Preferred Stock in the
liquidation amount of $100,000,000, plus 100% of the accrued but unpaid
dividends as of the closing of the transaction, with cumulative quarterly
dividends at a coupon rate of 7.5% per annum payable in cash or by payment in
kind ("PIK") through November 30, 1996 and in cash thereafter. The term sheet
also proposed a per share conversion price of $6.75, optional not mandatory
redemption, voting rights without any special privileges, anti-dilution
protection, registration rights, preferred stockholders to vote with the common
stockholders for the election of directors, a liquidation preference and senior
ranking to the Common Stock.
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, particularly restrictions on the Company paying
dividends on or repurchasing common stock, antidilution protections, treatment
in the case of extraordinary transactions, registration rights, restrictions on
Trefoil selling shares of Series A Preferred Stock prior to closing, Trefoil's
assessment of what would be the effective date of acquisition under the
federal securities laws, termination rights, date of the special shareholders
meeting, payment of expenses associated with the transactions, voluntary
redemption and payment of dividends by PIK or cash. 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 informed the Special Committee that its analysis of the
Share Exchange Proposal had not changed since its presentation at the October
30, 1995 meeting. The Special Committee then asked its counsel and its Chairman
to discuss and attempt to resolve the remaining open issues with Trefoil, which
included the amount and method of payment for accrued but unpaid dividends, the
conversion price, voting rights and timing and method for voluntary redemption.
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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. See--
"Reasons for the Transaction" below, for a detailed discussion of all relevant
factors considered by the Special Committee. On December 12, 1995, Trefoil and
the Company agreed upon and accepted the terms of the proposed exchange.
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:
(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"));
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(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
The Special Committee retained Sutro to provide a fairness opinion on
the proposed issuance of Series B Convertible Preferred Stock in exchange for
all issued and outstanding shares of Series A Cumulative Convertible Preferred
Stock based on Sutro's qualifications, experience and reputation.
Sutro has rendered to the Committee, its written Fairness Opinion, dated
December 12, 1995, that 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 stockholders of the Company (other than Trefoil) (the
"Fairness Opinion").
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The full text of the Fairness Opinion, which sets forth assumptions made,
matters considered, and limitations on the review undertaken 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, procedures
followed, as well as assumptions made in rendering such Fairness Opinion.
In rendering the Fairness Opinion, Sutro performed its due diligence to
fully estimate the Company's financial and operational position. As part of
its due diligence activities Sutro (i) interviewed senior management of the
Company to discuss past, current and future operations and financial conditions,
(ii) visited the Company's headquarters in Santa Monica, California, (iii)
engaged in the review of available public industry and economic information,
(iv) held discussions with legal counsel for the Company and the Special
Committee, and (v) reviewed and analyzed certain audited financial statements
and other information relating to the Company.
In rendering the Fairness Opinion, Sutro also performed financial analysis
to determine the Company's current and future valuation based on financial
projections provided by the Company. With regard to the financial projections,
Sutro assumed that they were reasonably prepared reflecting the best currently
available estimates and good faith judgments of the Company's management as to
the future performance of the Company. The valuation of the Company was
developed using several approaches including comparing the Company to publicly
traded companies which Sutro deemed most comparable and discounting the
Company's projected cash flows by multiples and discount rates applicable in the
economic and financial environment prevailing as of the valuation date.
In rendering the Fairness Opinion, Sutro's analysis of the fairness of the
Share Exchange Proposal for common stockholders also included the review of the
financial terms, to the extent publicly available, of certain transactions
containing comparable aspects and the consideration of the potential
alternatives to the proposed transaction.
The following is a summary description of the analysis performed on the
matters considered by Sutro in determining its opinion. The following does not
purport to be a complete description of the analysis performed. The preparation
of a fairness opinion involves various determinations as to the most appropriate
and relevant methods of financial analysis and the application of those methods
to particular circumstances. Therefore, such an opinion is not readily
susceptible to summary description. Furthermore, in determining its opinion,
Sutro did not attribute any particular weight to any analysis or factor
considered by it, but rather made qualitative
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judgments as to the significance and relevance of each analysis and factor.
Therefore, Sutro's analysis must be considered as a whole.
Analysis of Comparable Publicly Traded Companies
This valuation approach examines the market value of publicly traded
comparable companies as a multiple of their latest twelve months and projected
performance to derive an implied valuation of the equity of the Company. Sutro
examined the universe of public companies which could be considered similar to
the Company. However, there are no companies with exactly the same investment
risks, and financial and operating characteristics of the Company. Comparable
companies were identified based on similar business characteristics, product
lines, customer bases, and operating strategies which would be construed by the
investment community to be in the same industry class for analytical purposes.
Sutro identified eleven (11) companies which an investor could consider to be
comparable and are the basis for the valuation multiple analysis.
The eleven companies were the following: Converse, Inc., Fila Holdings,
S.p.A., Florsheim Shoe Co., Hyde Athletic Industries, Inc., K-Swiss, Inc.,
Lacrosse Footwear, Inc., NIKE, Inc., Penobscot Shoe Co., Reebok International
Ltd., Stride Rite Corporation and Vans, Inc.
The price to latest twelve month's earnings (P/E) ratio for comparable
companies showed a low of 6.7x earnings, a high of 47.8x earnings, with an
average and median of 17.4x and 12.9x earnings respectively. With respect to
estimated 1995 P/E at the time of the analysis, the low was 8.6x earnings, the
high was 68.8x earnings, average and median were 22.1x and 15.3x earnings,
respectively. With respect to estimated 1996 earnings, the P/E ratios resulted
in a low of 7.5x earnings, a high of 22.0x earnings, and an average and median
of 11.8x and 9.3x earnings, respectively. It is not possible to generate any
meaningful valuation for L.A. Gear based upon these P/E ratios because the
Company has not been profitable in the recent past.
Discounted Cash Flow Analysis
Discounted cash flow ("DCF") analysis estimates a company's value based on
its ability to generate cash (its "free cash flow"). The DCF method determines
the value of the company based upon discounting the future free cash flows at an
estimated cost of capital. The three key variables that are used when
determining the valuation are (i) projected free cash flows, (ii) terminal
values representing the sum of the present value of tax effected operating free
cash flow, and (iii) cost of capital as approximated by examining the cost of
equity capital of comparable public companies through the use of the Capital
Asset Pricing Model. Sutro analyzed the sum of (i) the present value of tax-
effected, unleveraged free cash flow for the projected years 1995 and 1996,
using discount rates of 8.0% to 12.0% plus (ii) the estimated terminal value
(discounted to present value) based on EBITDA exit multiples of 9x to 11x less
(iii) net debt (including credit facility, subordinated debt, and convertible
preferred stock). The discounted cash flow analysis implied a non-meaningful
(negative) value for the Company based on all multiples and discount rate
sensitivities used to determine the approximate value of the Company.
Analysis of Other Transactions
In order to analyze the fairness of the Share Exchange Proposal, Sutro
researched and analyzed the financial terms, to the extent possible, of
transactions which contained similar characteristics of the proposed
transaction. While none of these transactions are truly comparable to the Share
Exchange Proposal with the same financial and operating characteristics of the
entities
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involved in these precedent transactions, they provided a useful background for
evaluating the Share Exchange Proposal.
Research
- --------
In order to find a representative universe of transactions, Sutro's
research was done utilizing established sources including the research resources
of the Securities and Exchange Commission based on the following parameters:
(i) transactions which involved a recapitalization of the whole company or
specific securities, (ii) transactions which involved preferred securities which
were exchanged, given, or totally eliminated, (iii) transactions involving
restructurings which specifically involved a reduction in conversion price in
the creation of a new security and (iv) transactions which occurred in the last
seven years.
After extensive research, Sutro did not find a "pure" comparable
transaction which involved the same situation or terms contemplated in the
Transaction. However, Sutro identified a universe of ten (10) transactions
which had similar characteristics to the terms of the Share Exchange Proposal.
The transactions involved companies in different industries with distinct
capital structures, capital needs, and in most cases, facing the possibility or
certainty of bankruptcy or default if the transaction was not consummated.
The structure of the identified transactions involved the exchange,
elimination, and in some cases, the creation of new preferred securities.
See--Appendix VII for a summary description of each of these transaction.
Among the results of the identified restructurings were the following:
Dilution of Common Stockholders
- -------------------------------
In all transactions reviewed, except one, the proposed transaction created
dilution as reflected in the significant percentage change in the equity
ownership of the common stockholders. The transactions resulted in an average
change in ownership of 80% for the group. After the consummation of the
Exchange, common stockholders of the Company would experience 14% dilution to
their equity ownership as a result of the reduced conversion price. This
dilution represents significantly less dilution than observed for the comparable
transactions analyzed.
Other Characteristics
- ---------------------
In some transactions, arrearage, redemption, and anti-dilution provisions
were eliminated altogether. In the Share Exchange Proposal, mandatory
redemption, super anti-dilution provisions and super voting rights will be
eliminated to the benefit of the common stockholder. Some of the transactions
examined also included changing the method of payment of dividends ranging from
cash and payment in kind ("PIK") arrangements to temporary elimination of the
payment of dividends for one to two years. In the proposed Exchange, a
one-year PIK is created in lieu of cash payment providing an additional benefit
to the common stockholder.
As indicated by the results of the transaction search, companies
have tailored their restructuring to address their particular capital liquidity
and stockholders needs. In most cases, the possibility of bankruptcy, lack of
cash flow, or default on debt or other liability, dictated the outcomes and
structures of new or exchanged securities in order to ensure the entity remained
an ongoing concern.
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Sutro advised the Special Committee that the negotiated terms of the
Exchange being proposed to Trefoil in exchange for Series A Cumulative
Convertible Preferred Stock are consistent with the outcomes and restructurings
observed by Sutro in the ten transactions reviewed, with the exception of
dilution to the Company's stockholders which is significantly less in the
proposed transaction than in substantially all of the transactions reviewed.
Potential Alternatives
In rendering this opinion, Sutro also considered other capital raising
alternatives. Sutro concluded that based on the Company's current and projected
financial condition, with the impending mandatory redemption of the Series A
Cumulative Convertible Preferred Stock, it would be extremely difficult to raise
new capital in the equity debt markets, pursue a sale of the Company, or obtain
significant equity investment from a private investor at more favorable terms
than those proposed in the Share Exchange Proposal.
Other Matters
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.
BOARD OF DIRECTORS
Exercising its own judgment, the Board considered the recommendation of the
Special Committee and the Fairness Opinion and acting thereon, without
undertaking a separate analysis of the proposed transaction, approved the Share
Exchange Proposal. All of the factors considered by the Special Committee and
the weight given to those factors are set forth in detail above under "Reasons
for the Transaction."
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 amendment to the Registration Rights Amendment, dated as of May 27, 1991
between the Company and Trefoil (the "Registration Rights Amendment") 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
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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.
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 approximately 1,108,000 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 Company 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, purchase
or make any other acquisition (the "Junior/Parity/Series B Preferred Stock
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Acquisition") of (i) any shares of Junior Dividend Stock or the Common Stock and
any other capital stock of the Company 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 Company 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, of any shares of capital stock of the Company. 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 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
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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 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
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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.
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 close of
market as of two business days prior to the date hereof), with certain
exceptions, without triggering an anti-dilution adjustment.
The exceptions to the anti-dilution provisions for the Series A
Preferred Stock and the Series B Preferred Stock are very similar and would
allow the Company to issue new stock without triggering anti-dilution
adjustments where shares are issued (i) which require an adjustment in the
Conversion Ratio, in connection with a stock distribution or stock dividend,
(ii) pursuant to employee benefit or stock option plans or programs (or, in the
case of the Series B Preferred Stock, any employment or option agreement with an
officer hired after the issue date of the Series B Preferred Stock and approved
by the Board of Directors), (iii) under any option, warrant, right or
convertible security outstanding at the time of issuance of the Series A or
Series B Preferred Stock, as the case may be, or (iv) pursuant to the
establishment of a joint venture. The Series B Preferred Stock would also allow
the Company to issue new stock without triggering an anti-dilution adjustment
where shares are issued to (a) effect an acquisition or (b) as part of a public
offering .
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.
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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 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 315% over the closing price of the Common Stock on the
NYSE on December 11, 1995, the day prior to the signing 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.
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. Pursuant to a Registration Rights Agreement
dated May 27, 1991 between the Company and Trefoil (the "Registration Rights
Agreement"), the holders of the Series A Preferred Stock have the right to
request registration of the underlying shares of Common Stock issued or issuable
upon conversion of the Series A Preferred Stock. The Series B Preferred Stock
would also not be publicly listed on any securities exchange. However, pursuant
to the proposed amendments to the Registration Rights Agreement the holders of
Series B Preferred Stock (in addition to having the right to request
registration of the underlying shares of Common Stock issued or issuable upon
conversion of the 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
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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 the 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.
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 April 9, 1996 (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.
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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 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 the Exchange 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 the
California General Corporation 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 described 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 attached as Appendix VI;
(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.
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.
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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, the Chairman of the Special Committee, 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 Investors, Inc. ("TII"), the
General Partner of Trefoil, was organized by the senior executive officers of
Shamrock. Mr. Koffler acted as an employee of and consultant to Merrill Lynch
in connection with the sale of the Series A Preferred Stock by the Company to
Trefoil. Mr. Koffler received approximately $600,000, which represents
approximately 30% of the completion fees paid to Merrill Lynch. In addition,
on November 11, 1991, Mr. Koffler was granted stock options for 20,000 shares of
Common Stock at an exercise price of $11.63 per share, the closing price of the
Common Stock on the date of the grant. During 1995, Mr. Koffler was paid $1,250
per month by the Company for serving as a Director, along with $1,000 for each
Board meeting attended and, as Chairman of the Special Committee, $1,250 for
each meeting of the Special Committee attended and for each significant
negotiation session.
During fiscal 1995, Ann E. Meyers, a member of the Special Committee served
as consultant to the Company with respect to its women's athletic product line.
Ms. Meyers is paid $1,250 per month by the Company for serving as a Director,
along with $1,000 for each Board meeting attended and $1,000 for each meeting of
the Special Committee attended. In addition, Ms. Meyers was paid $75,000 in
each of fiscal 1994 and fiscal 1995 for serving as a consultant to the Company
in connection with the establishment of a woman's basketball promotion
program.
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, in addition to requesting registration of the
underlying Common Stock issued or issuable upon conversion of the Series B
Preferred Stock, request registration under 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. The total allowable number of
requests is three. In addition, the holder of the Series B Preferred Stock will
have (as do the holders of the Series A Preferred Stock) an unlimited number of
"piggyback" registration rights in the event the Company registers any
securities under the Securities Act on Form S-3.
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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.
Section 310 provides that no transaction between a corporation and any
corporation in which one or more of its directors has a material financial
interest is either void or voidable for this reason alone or because such
director or directors are present at the board or committee meeting at which the
transaction is approved if the material facts as to the transaction and as to
such director's interest are fully disclosed or known to the shareholders and
such transaction is approved by the shareholders in good faith, with the shares
owned by the interested director or directors not being entitled to vote
thereon. The material facts as to the interested directors have been disclosed
under "Interests of Certain Persons in the Transaction." The shares owned by
these interested directors will not not vote and will not be counted towards the
vote required. Accordingly, a shareholder vote in favor of the Exchange would
bring the Exchange under the protection of Section 310.
The Company's listing agreement with the 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.
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.
20
<PAGE>
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. Abstentions will be treated as shares that are present and
entitled to vote for purposes of determining the presence of a quorum but will
not count as a vote either for or against any matter submitted to the
shareholders for a vote. If a broker indicates on the Proxy that it does not
have discretionary authority as to certain shares to vote on a particular
matter, those shares will not be considered as present and entitled to vote with
respect to that matter.
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 TII.
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"). Mr. Miller, in his position as Senior
Consultant, provides consulting services to SCA and other Shamrock
entities.
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
RISK FACTORS
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
21
<PAGE>
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 January 22, 1996 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. Unless otherwise indicated, the address for all natural persons listed in
the table below is 4444 Lakeside Drive, Burbank, California 91505.
<TABLE>
<CAPTION>
AMOUNT AND
TITLE NAME AND ADDRESS NATURE OF PERCENT
OF CLASS OF BENEFICIAL OWNER 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
Roy E. Disney 11,000,000(3) 33.40%
Patricia A. Disney 11,000,000(3) 33.40%
Stanley P. Gold 11,890,000(4) 37.15%
Common Pentland Ventures Ltd. 1,644,445(5) 7.05%
c/o Pentland Group plc.
The Pentland Centre
Lakeside, Squires Lane
Finchley N3 2QL
England
Robert Stephen Rubin 1,644,445(6) 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
Roy E. Disney 1,000,000(7) 100.00%
Patricia A. Disney 1,000,000(7) 100.00%
Stanley P. Gold 1,000,000(7) 100.00%
</TABLE>
(1) Unless otherwise indicated, each named entity has sole voting and
investment power over the shares beneficially owned by it.
(2) These shares include 10,000,000 shares representing the shares of the
Company's Common Stock issuable upon conversion of the shares of Series A
Preferred Stock owned by Trefoil Capital Investors, L.P.
(3) These shares are owned by Trefoil Capital Investors, L.P., the General
Partner of which is Trefoil Investors, Inc., and include 10,000,000 shares
representing the shares of the Company's Common Stock issuable upon
conversion of the shares of Series A Preferred Stock owned by Trefoil
Capital Investors, L.P. Roy E. Disney, Patricia A. Disney and Stanley P.
Gold collectively control more than 50% of the voting stock of Trefoil
Investors, Inc.
(4) Includes (i) 750,000 shares which Mr. Gold has the right to acquire within
60 days after December 5, 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 5, 1995 by exercise of stock
options vested pursuant to the Company's 1986 Stock Option Plan and (ii)
the shares owned by Trefoil Capital Investors, L.P., the General Partner of
which is Trefoil Investors, Inc., including 10,000,000 shares representing
the shares of the Company's Common Stock issuable upon conversion of the
shares of Series A Preferred Stock owned by Trefoil Capital Investors, L.P.
Roy E. Disney, Patricia A. Disney and Stanley P. Gold collectively control
more than 50% of the voting stock of Trefoil Investors, Inc.
(5) 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.
(6) These shares are owned by Pentland Ventures Ltd., all of the outstanding
stock of which, based on a 13D filed by Pentland Ventures Ltd. on April 28,
1992, is owned by Pentland Group plc. The 1992 13D also disclosed that Mr.
Rubin owned 56.49% of the outstanding shares of Pentland Group plc, and
therefore Mr. Rubin may be deemed to be a beneficial owner of Pentland
Ventures Ltd.
(7) These shares are owned by Trefoil Capital Investors, L.P., the General
Partner of which is Trefoil Investors, Inc. Roy E. Disney, Patricia A.
Disney and Stanley P. Gold collectively control more than 50% of the voting
stock of Trefoil Investors, Inc.
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 five other most highly compensated
executive officers of the Company for the fiscal year ended November 30, 1995,
including a former executive officer who left the Company in fiscal 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 5,
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.
22
<PAGE>
<TABLE>
<CAPTION>
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 250,594(3) 1.08%
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 24,000(10) *
Named Executive Officers**
David F. Gatto 144,513(11) *
Thomas F. Larkins 39,743(12) *
Tracey C. Doi 27,640(13) *
Christopher M. Walsh 0 *
All current directors and executive officers
as a group (15 persons) 1,599,443(14) 6.62%
</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 5, 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 5, 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 5, 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 5, 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 5, 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 5, 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 5, 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 5, 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 5, 1995 by exercise of stock options pursuant
to the 1992 Stock Option Plan for Eligible Non-employee Directors, and
5,000 shares which Mr. Bladstrom has the right to acquire within 60 days
after December 5, 1995 by exercise of stock options vested pursuant to the
Company's 1986 Stock Option Plan.
23
<PAGE>
(8) Consists of 20,000 shares which Mr. Davis has the right to acquire within
60 days after December 5, 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 5, 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 5, 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 5, 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 5, 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 5, 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 5, 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 5, 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 5, 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 5, 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 5, 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 5, 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. Walsh.
24
<PAGE>
L.A. GEAR, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
- --------------------------------------------------------------------------
OPERATIONS
- ----------
All references to years are to the fiscal years ended November 30, 1995, 1994
and 1993 as applicable.
1995 COMPARED TO 1994
Net Sales In 1995 the Company's net sales decreased by 28.7% to $296.6 million
from $416.0 million in 1994 primarily due to (i) a 23.8% decrease in the total
number of pairs sold to 17.5 million pairs in 1995 from 22.9 million pairs in
1994 and (ii) a decrease of $1.36 in the overall average selling price per pair.
Domestic net sales decreased by 35.3% from the prior year. International net
sales, which accounted for approximately 35.1% of the Company's total net sales,
decreased by 12.1% from the previous year.
The following table sets forth certain information regarding the Company's net
sales:
<TABLE>
<CAPTION>
NET SALES
---------------------------------
1995 1994
--------------- ---------------
$ % $ %
- ---------------------------------------------------------------------
<S> <C> <C> <C> <C>
(DOLLARS IN THOUSANDS)
DOMESTIC FOOTWEAR
CHILDREN'S $107,570 36% $165,460 40%
WOMEN'S 46,422 16 63,218 15
MEN'S 35,842 12 67,186 16
OTHER 2,659 1 1,721 1
- ---------------------------------------------------------------------
TOTAL DOMESTIC SALES 192,493 65 297,585 72
INTERNATIONAL FOOTWEAR
CHILDREN'S 57,623 19 48,340 11
WOMEN'S 22,500 8 25,431 6
MEN'S 18,810 6 40,643 10
OTHER 5,125 2 3,967 1
- ---------------------------------------------------------------------
TOTAL INTERNATIONAL SALES 104,058 35 118,381 28
TOTAL NET SALES $296,551 100% $415,966 100%
======== === ======== ===
</TABLE>
The following table sets forth the percentage changes, by Children's, Women's
and Men's categories, in the number of pairs sold during 1995 as compared to
1994:
<TABLE>
<CAPTION>
CHANGES BETWEEN 1995 AND 1994
-----------------------------
VOLUME OF FOOTWEAR SOLD DOMESTIC INTERNATIONAL TOTAL
- ----------------------------------------------------------------------
<S> <C> <C> <C>
CHILDREN'S (26.2)% 14.1 % (17.0)%
WOMEN'S (19.5)% (28.4)% (22.2)%
MEN'S (35.4)% (51.1)% (41.4)%
- ----------------------------------------------------------------------
TOTAL VOLUME (DECREASE) (26.3)% (17.6)% (23.8)%
</TABLE>
The decrease in 1995 domestic net sales principally represents (i) a 26.2%
drop in the number of pairs of children's shoes sold primarily due to a $49.4
million decrease in domestic sales of children's lighted product, (ii) a 35.4%
decrease in the number of pairs of men's shoes sold in 1995 compared to 1994
primarily due to 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 lower sales of the
FLAK(TM) product line in 1995 compared to 1994, (iii) a 19.5% decrease in the
number of pairs of women's shoes sold in 1995 compared to 1994 primarily due to
overall reduced demand and (iv) a decrease of $2.33 in the average selling price
per pair to $15.65 in 1995 from $17.98 in 1994. Due to the long lead times
required to introduce new footwear products to market, the Company was unable to
offer more women's shoe styles in 1995 despite its refocussed efforts on the
women's and children's markets. A greater number of styles will be introduced
in 1996. The decrease in the average selling price per pair was principally due
to the Company's focus on offering more value-priced products for men and women,
a reduced emphasis on more expensive performance athletic footwear and sales of
a product line developed for Wal-Mart. Sales to Wal-Mart amounted to $45.3
million and $39.6 million in 1995 and 1994, respectively.
25
<PAGE>
Total sales of the Company's children's lighted shoes decreased by $36.4
million to $122.3 million in 1995 from $158.7 million in 1994. Sales of
children's lighted shoes accounted for 74.0% and 74.2% of total children's net
sales in 1995 and 1994, respectively. Domestic sales of children's lighted
product decreased by $49.4 million in 1995 compared to 1994 primarily due to a
drop in both volume (4.3 million pairs from 6.2 million pairs) and average
selling price per pair ($16.99 from $19.73) as a result of excess inventory at
retailers, lower priced lighted shoes offered by competitors and the possible
effect of adverse publicity regarding selected styles of its children's lighted
shoes manufactured prior to May 1994 which utilized motion-activated switches
containing mercury. Internationally, sales of children's lighted product grew by
$13.0 million in 1995 compared to 1994, particularly in Europe and Asia.
Sales by the Company's European subsidiaries and Far East joint venture
increased by 23.7% compared to 1994 principally due to increased demand for
children's lighted products. Overall, the average selling price per pair
internationally increased by $0.87 from $17.71 in 1994 to $18.58 in 1995. Total
international net sales in 1995 decreased by approximately $14.3 million from
the prior year primarily due to reduced sales in Mexico, Central and South
America and Poland. Sales in Mexico, Central and South America were adversely
affected by poor economic conditions in those regions. In 1994 the Company sold
approximately $6.5 million in excess inventory into Poland with no corresponding
sale in 1995. The number of pairs of men's shoes sold internationally decreased
by 51.1% from the prior year primarily due to lower sales of the FLAK(TM)
product line in Germany and the impact of the lower sales in Mexico, Central and
South America and Poland. The number of pairs of women's shoes sold
internationally decreased by 28.4% primarily due to overall reduced demand.
Gross Profit Gross profit increased to 29.9% for 1995 from 29.7% in 1994
primarily due to the improvement in the international gross margin to 36.0% from
30.0% in the prior year as a result of the increased demand for children's
lighted products and reduced international sales of excess inventory in 1995.
The increase in the international margin was partially offset by a decrease in
the domestic gross margin to 26.7% in 1995 from 29.5% in 1994 primarily as a
result of domestic sales of selected discontinued men's styles in 1995 and an
increase in inventory obsolescence reserves in the fourth quarter.
Selling, General and Administrative Expenses 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 plan resulted in a restructuring
charge of $5.1 million in 1995 primarily relating to the elimination of
approximately 160 full time jobs, the closure of the Company's retail outlet
division and office space consolidation at the corporate headquarters. In
addition, during the fourth quarter of 1995 the Company incurred non-recurring
charges of $5.6 million in connection with (i) a $4.6 million increase in the
reserve for unused barter credits and (ii) a $1.0 million write off of goodwill
related to the acquisition of certain assets of the Company's exclusive
distributor (and one of its affiliates) in Mexico in June 1994. In 1994 the
Company incurred non-recurring charges of $2.5 million for payments due under
contractual obligations to certain individuals upon realignment of senior
management. Exclusive of restructuring and non-recurring charges of $10.7
million and $2.5 million in 1995 and 1994 respectively, total selling, general
and administrative expenses decreased by $10.5 million or 7.4% to $130.9 million
during 1995 from $141.4 million during 1994.
Domestic selling, general and administrative expenses (exclusive of
restructuring and non-recurring charges of $10.2 million) decreased by $15.4
million or 14.1% in 1995. This decrease includes reductions in (i) compensation
expenses of $4.1 million, (ii) sourcing fees of $3.1 million, (iii) depreciation
of $2.0 million, (iv) advertising and promotional expenses of $1.9 million, (v)
legal fees of $1.5 million, (vi) sales commissions of $1.3 million, and (vii)
other net variable expenses of $3.9 million. These overall expense reductions
were offset by an increase of $2.4 million in bad debt expense primarily due to
increased reserves to cover the Company's exposure to its customers importing
product into Mexico and a general deterioration in the retail environment.
International selling, general and administrative expenses, exclusive of
restructuring charges of $0.5 million in 1995, increased by $4.9 million
primarily due to higher expenses of the European subsidiaries and Far East joint
venture as a result of the increase in volume of their business. The joint
venture, which was formed in December 1993 with Inchcape Pacific Limited to
engage in marketing, sales and distribution of L.A. Gear(R) branded footwear,
apparel and accessories in selected Far East markets, was still in the start-up
phase in 1994.
As a result of the devaluation of the peso in fiscal 1995, the Company's
Mexican subsidiary incurred a foreign exchange loss of $0.5 million related to
the partial repayment of intercompany indebtedness. There were no other
significant exchange gains or losses in 1995 or 1994.
26
<PAGE>
As a percentage of net sales, selling, general and administrative expenses
(exclusive of restructuring and non-recurring charges) increased to
approximately 44% in 1995 from approximately 34% in 1994. 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. The benefits of the corporate reorganization plan are
expected to be realized in fiscal 1996.
Litigation Settlements, Net Fiscal 1995 results include net settlement income
of $2.3 million, substantially all of which was in connection with the
settlement of certain patent and trademark infringement actions. Fiscal 1994
results included 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. See Notes to Consolidated Financial
Statements, Note 14-Litigation.
Interest Expense/Income Interest expense of $4.2 million and $4.4 million in
1995 and 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 increased to $2.0 million in 1995 from $1.4 million in 1994
primarily as a result of higher interest rates on approximately the same average
cash balances. See Liquidity and Capital Resources.
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.
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(R) 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.
27
<PAGE>
The following table sets forth certain information regarding the Company's net
sales.
<TABLE>
<CAPTION>
NET SALES
-----------------------------------
1994 1993
--------------- ---------------
$ % $ %
- -------------------------------------------------------------------------
<S> <C> <C> <C> <C>
(DOLLARS IN THOUSANDS)
DOMESTIC FOOTWEAR
CHILDREN'S $165,460 40% $128,458 32%
WOMEN'S 63,218 15 82,771 21
MEN'S 67,186 16 73,132 18
OTHER 1,721 1 1,959 1
-------- ---- -------- ---
TOTAL DOMESTIC SALES 297,585 72 286,320 72
INTERNATIONAL FOOTWEAR AND OTHER 118,381 28 112,038 28
- ------------------------------------------------------------------------
TOTAL NET SALES $415,966 100% $398,358 100%
======== ==== ======== ===
</TABLE>
The following table sets forth the percentage changes, by Children's, Women's
and Men's categories, in the number of pairs sold during 1994 as compared to
1993:
<TABLE>
<CAPTION>
CHANGES BETWEEN 1994 AND 1993
------------------------------
VOLUME OF FOOTWEAR SOLD DOMESTIC INTERNATIONAL TOTAL
- ---------------------------------------------------------------------------
<S> <C> <C> <C>
CHILDREN'S 30.4 % 63.7 % 36.7 %
WOMEN'S (17.9)% (17.5)% (17.8)%
MEN'S 4.1 % 0.6 % 2.7 %
- ---------------------------------------------------------------------------
TOTAL VOLUME INCREASE 9.1 % 11.9 % 9.9 %
</TABLE>
Gross Profit Gross profit increased to 29.7% for 1994 from 28.7% in 1993
primarily due to the improvement in the international gross margin to 30.0% from
25.6% in the prior year. Such improvement was principally due to (i) an
increase of $1.02 per pair in the children's average selling price, (ii)
increased refunds of U.S. import duties primarily arising from international
shipments of excess inventory from the Company's U.S. distribution center, and
(iii) the inclusion for a full year of the Company's foreign subsidiaries
acquired or formed in fiscal 1993 in Germany, Austria, Benelux, Italy and the
United Kingdom, together with the Far East joint venture, formed in December
1993. By selling through the subsidiaries, the Company realizes a wholesale
margin on the sale to the retailer which is greater than that on the sales to
independent distributors.
The Company's gross margin on domestic sales decreased to 29.5% in 1994 from
29.9% in 1993 as a result of increased sales of excess inventory at lower
margins partially offset by a reduction in air freight costs.
Selling, General and Administrative Expenses Cost control and containment
efforts continued through 1994. Exclusive of restructuring charges of (i) $2.5
million in 1994 for payments due under contractual obligations to certain
individuals upon realignment of the Company's senior management and (ii) $2.6
million in 1993 for severance payments, benefits and outplacement costs
associated with a workforce reduction of approximately 120 employees, total
selling, general and administrative expenses decreased by $3.4 million or 2.3%
to $141.4 million during fiscal 1994 from $144.8 million during 1993.
Domestic selling, general and administrative expenses (exclusive of non-
recurring charges) decreased by $11.1 million or 9.3% in 1994. This decrease
includes reductions in (i) compensation expenses of $5.8 million, (ii) bad debt
expense of $2.8 million, (iii) advertising and promotional expenses of $1.9
million and (iv) media costs of $1.6 million, partially offset by increases in
(i) legal fees of $1.9 million for litigation, general corporate and
intellectual property issues 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. There were no significant exchange
gains or losses in 1994 or 1993 as a result of the Company's foreign operations.
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
28
<PAGE>
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 Notes to Consolidated Financial Statements, Note 14 - Litigation.
Interest Expense/Income Interest expense during 1994 of $4.4 million primarily
related to (i) interest costs on the Debentures issued in December 1992 and (ii)
short-term borrowings of the Company's foreign subsidiaries. Interest expense
increased by $0.5 million in fiscal 1994 compared to fiscal 1993 primarily due
to the inclusion of the foreign subsidiaries' operations for a full year in
1994.
Interest income decreased to $1.4 million in 1994 from $1.9 million in 1993
primarily as a result of lower average cash balances in fiscal 1994. See
Liquidity and Capital Resources.
LIQUIDITY AND CAPITAL RESOURCES
The following table sets forth certain data with respect to the Company's
liquidity and capital resources.
<TABLE>
<CAPTION>
YEAR ENDED NOVEMBER 30,
-----------------------
1995 1994 1993
- -------------------------------------------------------------------------------------------
<S> <C> <C> <C>
(IN THOUSANDS, EXCEPT INTEREST RATES)
CASH AND CASH EQUIVALENTS $ 35,956 $ 49,710 $ 27,790
WORKING CAPITAL 103,999 147,848 161,948
CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES (11,212) 28,369 (66,763)
CASH USED IN INVESTING ACTIVITIES (3,256) (4,448) (22,377)
CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES 622 (1,016) 32,999
OUTSTANDING LETTERS OF CREDIT 24,440 36,699 33,553
BORROWINGS UNDER INTERNATIONAL CREDIT FACILITIES 1,233 557 3,737
CONVERTIBLE SUBORDINATED DEBENTURES 50,000 50,000 50,000
MANDATORILY REDEEMABLE PREFERRED STOCK
PLUS ACCRUED AND UNPAID DIVIDENDS 107,746 100,000 100,000
WEIGHTED AVERAGE INTEREST RATES ON CREDIT FACILITIES 8.2% 8.3% 9.0%
</TABLE>
Cash and Cash equivalents Cash and cash equivalent balances decreased by $13.8
million from November 30, 1994 to a balance of $36.0 million at November 30,
1995 primarily due to cash used to fund operating losses offset by reduced
working capital requirements.
Inventory Although inventory decreased by $5.9 million from $57.6 million at
November 30, 1994 to $51.7 million at November 30, 1995, the number of pairs
increased by 0.3 million pairs at November 30, 1995. The increase in the number
of pairs was primarily due to inventory purchased in anticipation of sales that
did not materialize during the Company's fourth quarter. The decrease in the
value of the inventory was due to a reduction in the average cost per pair as a
result of the Company's focus on offering more value priced products for men and
women, a reduced emphasis on more expensive performance athletic footwear and
sales of a product line developed for Wal-Mart.
Accounts Receivable, Net Net accounts receivable at November 30, 1995 decreased
by $30.7 million from the prior year primarily due to reduced domestic sales
during October and November 1995 (including a $13.7 million reduction in sales
to Wal-Mart) compared to the same period in 1994.
Borrowing Facilities The Company has a $75 million revolving line of credit
with BankAmerica Business Credit, Inc. ("BABC") for loans and letters of credit
(the "Revolving Facility"). The Revolving Facility is secured primarily by the
Company's domestic assets and is subject to certain financial covenants.
Borrowings under the
29
<PAGE>
Revolving Facility bear interest at a rate equal to Bank of America's publicly
announced reference rate plus one and one-half percent. The Company may incur
cash borrowings up to $10 million. There were no domestic cash borrowings under
the Revolving Facility at any time during fiscal 1995. At November 30, 1995
approximately $23.6 million of domestic letters of credit were outstanding under
the Revolving Facility. The Revolving Facility is scheduled to expire in
November 1996, but will automatically be renewed for an additional one-year
period unless either the Company or BABC delivers written notice to the contrary
to the other party on or before September 23, 1996. The Company is currently
evaluating all available options regarding sources of working capital. There can
be no assurance, however, that such funding can be obtained on terms acceptable
to the Company.
The Company's German subsidiary had a $1.4 million credit facility in 1995
which was denominated in local currency and converted to U.S. dollars at the
end-of-period exchange rate. The facility expired in December 1995 and the
balance outstanding was repaid in January 1996. In fiscal 1995 the maximum
borrowing under the facility at any time amounted to $1.4 million and the
balance outstanding at November 30, 1995 was $1.2 million. The weighted average
interest rate, as defined in the agreement and adjusted for current market
conditions, was 8.3% as of November 30, 1995. The Company's Dutch subsidiary had
a $4.9 million credit facility for the first seven months of fiscal 1995. At no
time during fiscal 1995 did borrowings under this facility exceed $0.6 million.
The Company believes that it has the ability to meet the financing needs, if
any, of its foreign subsidiaries for the foreseeable future. See Short and
Long-Term Liquidity.
Convertible Debentures The $50 million Debentures are convertible into shares
of the Company's Common Stock at a conversion rate of $12.30 per share, and are
redeemable by the Company at any time, initially at a specified premium to par,
declining to par for redemptions on or after November 30, 2000. The proceeds
from the Debentures were primarily used for the implementation of the Company's
international expansion program.
Series A Cumulative Convertible Preferred Stock The Company determined that it
was in its best interests not to, and it did not, pay the $1.875 million
dividend on the Series A Cumulative Convertible Preferred Stock ("Series A
Preferred Stock") due on each of February 28, 1995, May 31, 1995, August 31,
1995 and November 30, 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 November 30, 1995, such dividend arrearage amounted to a total of $7.746
million.
The Company is required to redeem 350,000 shares of the original issue of one
million shares of Series A Preferred Stock on August 31, 1996, and 162,500
shares on each August 31 thereafter until all remaining shares of the Series A
Preferred Stock have been redeemed. If the Company fails to redeem shares of
the 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 from the date of failure to redeem
through the date of redemption. The Company believes that it is unlikely it will
be able to satisfy the mandatory $35 million redemption obligation plus the
accrued and unpaid dividends with respect to the Series A Preferred Stock from
its cash flow from operations and its existing bank facility.
Accordingly, in December 1995 the Company entered into an agreement with
Trefoil providing for the exchange of all $100 million of the Company's Series A
Preferred Stock, together with all accrued and unpaid dividends thereon, for a
new issue of Series B Preferred Stock (the "Share Exchange Transaction"). The
terms of the Series B Preferred Stock provide for, among other things, the
elimination of the entire mandatory redemption feature of the Series A
Preferred Stock and a reduction in the conversion price from $10.00 to $6.75 per
common share. In addition, under the terms of the Series B Preferred Stock, the
Company would be entitled, at its option, to pay dividends during the fiscal
year ending November 30, 1996 in either additional shares of Series B Preferred
Stock or in cash. The coupon rate of 7.5% per annum for dividends with respect
to the Series B Preferred Stock remains unchanged from that of the Series A
Preferred Stock.
The proposed Share Exchange Transaction has been recommended by a Special
Committee of independent members of the Board of Directors and has been approved
by the Board of Directors. The Share Exchange Transaction, which is subject to
certain conditions including the receipt of shareholder approval, will be
considered at a special meeting of shareholders to be held in April 1996. If
the proposed Share Exchange Transaction is not approved by the shareholders, the
Company will explore the availability of new capital to satisfy the initial $35
million mandatory redemption obligation plus the accrued and unpaid dividends
with respect to the Series A Preferred Stock due on August 31, 1996. The
Company believes that it would be difficult to secure such funding on terms
acceptable to the Company.
30
<PAGE>
Investment Policies The Company's cash investment policy allows the
investment of available cash in accordance with certain quality, maturity and
diversification parameters. The basic objectives of this policy are: (i) safety
and preservation of capital; (ii) liquidity of investments sufficient to meet
cash flow requirements; and (iii) attainment of an optimal market rate of return
on invested funds consistent with the stated objectives.
Forward Exchange Contracts The Company enters into forward exchange contracts,
with terms of less than one year, to offset the effects of exchange rate changes
on cash flow exposures denominated in foreign currencies. These exposures are
primarily repayments of U.S. dollar denominated liabilities by the Company's
foreign subsidiaries. These contracts are marked to market and realized and
unrealized gains and losses are recognized in the consolidated statement of
operations.
Capital Expenditures Capital expenditures of $3.3 million in 1995 included $1.0
million for leasehold improvements and equipment for the domestic distribution
center, $0.7 million in leasehold improvements and equipment purchases for the
international subsidiaries and joint venture; and $0.5 million in computer
equipment for the field sales force. The remaining $1.1 million primarily
related to domestic expenditures.
Commitments In the normal course of business the Company enters into various
agreements for obtaining footwear technology, product sourcing, endorsements and
sponsorships. In addition, the Company occupies certain facilities, including
corporate offices and distribution centers and rents certain equipment under
operating leases. Agreements and lease commitments with terms extending through
the year 2002 contain provisions for future guaranteed minimum payments
aggregating approximately $35 million. There were no commitments for any
material capital expenditures at November 30, 1995.
Income Taxes At November 30, 1995, the Company had a federal tax net operating
loss ("NOL") carryforward of approximately $73.5 million which will, if unused,
expire in varying amounts in fiscal years 2007 through 2010. 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 $76.2 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.
Short and Long-Term Liquidity The short-term and long-term liquidity of the
Company is contingent primarily on the Company's future operating results,
shareholder approval of the proposed Share Exchange Transaction 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 plus the accrued and unpaid dividends on August 31, 1996
under the Series A Preferred Stock, which obligation will be eliminated if the
proposed Share Exchange Transaction is approved). 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.
EFFECT OF NEW ACCOUNTING PRONOUNCEMENTS
In March 1995, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards ("SFAS") No. 121, Accounting for the Impairment
of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of. SFAS No. 121
is required to be implemented by the Company for the fiscal year beginning
December 1, 1996 and is not expected to have a material impact on the Company's
financial position or results of operations.
In October 1995, the Financial Accounting Standards Board issued SFAS No. 123,
Accounting for Stock-Based Compensation. The Company will adopt only the
disclosure provisions of SFAS No. 123 beginning in the year ending November 30,
1996. The adoption of SFAS No. 123 will not have a material impact on the
Company's financial position or results of operations.
31
<PAGE>
OUTLOOK FOR FISCAL 1996
The Company's greatest challenge is to increase revenue and sales velocity in
an intensely competitive branded athletic footwear market. Toward that end, one
of the key priorities of the corporate reorganization plan adopted by the
Company in September 1995 is to bring on-trend products to market in a reduced
amount of time. The Company plans to accomplish quicker product introductions
by, among other things, improving design capabilities, better utilizing product
development resources and strengthening relationships with factories and
sourcing agents.
With its 1996 product lines and advertising campaigns, the Company continues
its efforts to focus upon its heritage as a premier designer and marketer of
women's and children's footwear. In March 1996, the Company will launch a
worldwide print campaign featuring its 1996 women's collection, which
communicates an "L.A." attitude of fun, fashion and fitness. The 1996 men's
collection will offer a "Comfort Zone" package featuring anatomically adjusted
lasts, a comfort-flex forefoot, ABS(TM) shock absorption and an "Impact
Sensor(TM)" sock liner.
During 1996, the Company is introducing two innovative children's product
lines in an effort to expand its significant presence in the under 12 year old
segment of the athletic footwear market. The Company continues to believe in the
viability of lighted footwear, the best selling product category in the
Company's history. The NEONZ(TM) collection (scheduled for introduction in late
second quarter of fiscal 1996) represents the Company's next generation of
lighted footwear. For the first time, lighted panels on the shoe's upper will
illuminate when the foot moves. The Company also plans to introduce GRAf/x(TM),
a new non-lighted technology for the Back-to-School season. GRAf/x(TM) is a
temperature sensitive collection that allows children to change the color of the
upper, reveal a pattern or personalize their footwear by writing on their shoes.
The Company has implemented cost reduction measures targeted to reduce
operating expenses by approximately $25 million on an annualized basis. Such
measures included a 30% reduction in the Company's workforce in September 1995
and the closure of its seven retail outlet stores. The Company's efforts to
maintain tight overhead and working capital controls have been enhanced by,
among other things, the elimination of underutilized sponsorships and licenses,
in-house production of sales catalogs and selected initial footwear prototypes,
the simplification of customer discount programs and office space consolidation.
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
in each of the Company's 1995, 1996 and 1997 fiscal years (subject to reduction
or elimination in 1996 and 1997 if sell-through did not meet certain designated
sell-through targets.) Under the terms of the contract Wal-Mart is not subject
to a minimum purchase commitment for the Company's fiscal 1996. The Company
believes that it has established a better working relationship with Wal-Mart
which should allow the Company to provide a product mix which better satisfies
the footwear needs of the Wal-Mart customer.
The Company had a combined domestic and international order backlog of $88.0
million and $170.5 million at December 31, 1995 and 1994, respectively. The
lower backlog at December 31, 1995 is primarily due to (i) the inclusion in the
backlog at December 31, 1994 of the entire $80 million minimum purchase
commitment for fiscal 1995 under the Company's agreement with Wal-Mart, (ii) an
approximate $19.6 million decrease in orders for children's lighted product and
(iii) the institution of an early futures discount program for orders scheduled
to ship in the third quarter of fiscal 1995. The backlog at December 31, 1995
includes the balance of Wal-Mart's $80 million minimum purchase commitment for
fiscal 1995 ($29.5 million), substantially all of which the Company expects
Wal-Mart to fulfill in the first quarter of the Company's fiscal 1996.
Approximately 27.3% of the December 31, 1995 backlog was for children's lighted
shoes compared to 25.3% at December 31, 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.
The Company believes that the athletic footwear market is facing a major
consolidation at the wholesale level. The Company will continue to seek to
recognize and capitalize on opportunities to expand its product lines and
distribution channels through the licensing of key trade names and the
acquisition of other footwear brands.
32
<PAGE>
L.A. GEAR, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
(in thousands, except share data)
<TABLE>
<CAPTION>
NOVEMBER 30,
-----------------------
1995 1994
---------- ----------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 35,956 $ 49,710
Accounts receivable, net 46,630 77,284
Inventories 51,677 57,597
Prepaid expenses and other current assets 3,773 9,827
-------- --------
Total current assets 138,036 194,418
Property and equipment, net 8,290 11,951
Goodwill, net 11,191 12,317
Other assets 2,058 5,777
-------- --------
$159,575 $224,463
======== ========
LIABILITIES, MANDATORILY REDEEMABLE PREFERRED
STOCK AND SHAREHOLDERS' (DEFICIT) EQUITY
Current liabilities:
Accounts payable and accrued liabilities $ 32,804 $ 46,013
Borrowings under international credit facilities 1,233 557
-------- --------
Total current liabilities 34,037 46,570
-------- --------
7 3/4% convertible subordinated debentures due
2002 50,000 50,000
-------- --------
Minority interest 8,419 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 107,746 100,000
-------- --------
Shareholders' (deficit) equity:
Common stock, no par value; 80,000,000 shares
authorized; 22,936,433 shares issued and
outstanding at November 30, 1995 and 1994 128,093 128,093
Preferred stock, no stated value; 9,000,000
shares authorized; no shares issued -- --
Cumulative currency translation adjustment 561 194
Accumulated deficit (169,281) (110,138)
-------- --------
Total shareholders' (deficit) equity (40,627) 18,149
-------- --------
Commitments and contingencies -- --
-------- --------
$159,575 $224,463
======== ========
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
33
<PAGE>
L.A. GEAR, INC. AND SUBSIDIARIES
Consolidated Statements of Operations
(in thousands, except per share data)
<TABLE>
<CAPTION>
YEAR ENDED NOVEMBER 30,
---------------------------------
1995 1994 1993
-------- -------- --------
<S> <C> <C> <C>
Net sales $296,551 $415,966 $398,358
Cost of sales 207,802 292,629 284,133
-------- -------- --------
Gross profit 88,749 123,337 114,225
Selling, general and administrative expenses 141,603 143,913 147,369
Litigation settlements, net (2,323) (1,268) (2,700)
Interest expense 4,174 4,437 3,956
Interest income (1,984) (1,444) (1,887)
-------- -------- --------
Loss before income taxes and minority interest (52,721) (22,301) (32,513)
Income tax benefit -- -- --
Minority interest 1,324 106 --
-------- -------- --------
Net loss (51,397) (22,195) (32,513)
Dividends on mandatorily
redeemable preferred stock (7,746) (7,500) (7,667)
-------- -------- --------
Loss applicable to common stock $(59,143) $(29,695) $(40,180)
======== ======== ========
Loss per common share $ (2.58) $ (1.29) $ (1.75)
======== ======== ========
Weighted average common shares outstanding 22,937 22,937 22,919
======== ======== ========
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
34
<PAGE>
L.A. GEAR, INC. AND SUBSIDIARIES
Consolidated Statements of Shareholders' (Deficit) Equity
(in thousands)
<TABLE>
<CAPTION>
YEARS ENDED NOVEMBER 30, 1995, 1994 AND 1993
------------------------------------------------------------
CUMULATIVE
COMMON STOCK CURRENCY
----------------- TRANSLATION ACCUMULATED
SHARES AMOUNT ADJUSTMENT DEFICIT TOTAL
------ -------- ------------ ------------ ----------
<S> <C> <C> <C> <C> <C>
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
Currency translation adjustment -- -- 367 -- 367
Dividends on mandatorily redeemable
preferred stock -- -- -- (7,746) (7,746)
Net loss -- -- -- (51,397) (51,397)
------ -------- ----------- --------- --------
BALANCE, NOVEMBER 30, 1995 22,937 $128,093 $ 561 $(169,281) $(40,627)
====== ======== =========== ========= ========
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
35
<PAGE>
L.A. GEAR, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
(in thousands)
<TABLE>
<CAPTION>
YEAR ENDED NOVEMBER 30,
--------------------------------
1995 1994 1993
--------- -------- ---------
<S> <C> <C> <C>
Operating activities:
Net loss $(51,397) $(22,195) $(32,513)
Adjustments to reconcile
net loss to net cash
provided by (used in)
operating activities:
Depreciation and
amortization 7,266 8,818 8,644
Minority interest in net
loss of joint venture (1,324) (106) --
Loss on sale or
abandonment of property
and equipment 417 72 317
Increase in reserve for
unused barter credits 4,568 -- --
Write off of goodwill 1,012 -- --
Issuance of shares to
employee stock
savings plan -- -- 241
Unrealized exchange gain (570) -- --
(Increase) decrease, net
of effects of
acquisitions, in:
Accounts receivable, net 30,603 (4,676) (7,622)
Inventories 6,100 53,587 (39,927)
Prepaid expenses and
other current assets 3,320 58 (9,327)
Refundable income taxes -- -- 23,835
Other assets 1,624 -- --
Decrease, net of effects
of acquisitions, in:
Accounts payable and
accrued liabilities (12,831) (6,180) (6,870)
Costs related to
discontinued operations - (1,009) (3,541)
-------- ------- --------
Net cash provided by
(used in) operating
activities (11,212) 28,369 (66,763)
-------- ------- --------
Investing activities:
Capital expenditures (3,256) (3,969) (5,307)
Cash paid for acquisition
of subsidiaries, net of
cash acquired -- (479) (17,070)
-------- ------- --------
Net cash used in
investing activities (3,256) (4,448) (22,377)
-------- ------- --------
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
Net proceeds from issuance
of convertible
subordinated debentures -- -- 47,689
Net borrowings (repayments)
under international
credit facilities 622 (3,383) 602
-------- ------- --------
Net cash provided by
(used in) financing
activities 622 (1,016) 32,999
-------- ------- --------
Effect of exchange rate
changes on cash and cash
equivalents 92 (985) (51)
-------- ------- --------
Net increase
(decrease) in cash
and cash equivalents (13,754) 21,920 (56,192)
Cash and cash equivalents at
beginning of year, including
collateralized cash 49,710 27,790 83,982
-------- ------- --------
Cash and cash equivalents at
end of year $ 35,956 $49,710 $ 27,790
======== ======= ========
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
36
<PAGE>
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, primarily
institutional money market funds.
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. Impairment losses on the barter credits
are recognized when the fair value of remaining barter credits is less than the
carrying amount or it is probable that the barter credits will not be used.
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. The
Company establishes inventory obsolescence reserves adjusting the inventory for
any impairment in carrying cost to the estimated net realizable value.
PROPERTY AND EQUIPMENT
- ----------------------
Property and equipment are recorded at cost and include improvements that
significantly add to the productive capacity or extend the useful life of the
asset. The costs of major remodeling and improvements relating to leased
facilities are capitalized as leasehold improvements. Upon retirement or other
disposal, the asset cost and related accumulated depreciation are removed from
the accounts and the net amount, less any proceeds, is charged or credited to
operations. Costs of maintenance and repairs are expensed when incurred.
Depreciation and amortization are computed over the estimated useful lives of
depreciable assets (three to seven years) on the straight-line method.
Leasehold improvements are amortized using the straight-line method over the
shorter of the remaining term of the applicable lease or the life of the asset.
37
<PAGE>
L.A. GEAR, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
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 the period of expected
benefit of 15 years.
The carrying value of goodwill is assessed for any permanent impairment by
evaluating the operating performance and future undiscounted cash flows of the
underlying businesses. Adjustments are made if the sum of the expected future
net cash flows is less than carrying value. Statement of Financial Accounting
Standard ("SFAS") No. 121, Accounting for the Impairment of Long-Lived Assets
and for Long-Lived Assets to Be Disposed Of, requires that long-lived assets be
reviewed for impairment whenever events or changes in circumstances indicate
that the carrying amount of assets may not be recoverable. SFAS No. 121 is
required to be implemented by the Company for the fiscal year beginning December
1, 1996 and is not expected to have a significant impact on the Company's
financial position or results of operations.
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, with terms of less than
one year, to offset the effects of exchange rate changes on cash flow exposures
denominated in foreign currencies. These exposures are primarily repayments of
U.S. dollar denominated liabilities by the Company's foreign subsidiaries. These
contracts are marked to market and realized and unrealized gains and losses are
recognized in the consolidated statement of operations.
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 (net loss plus dividends on mandatorily redeemable preferred stock)
divided by the weighted average number of common shares outstanding during each
period.
INCOME TAXES
- ------------
In December 1993, the Company adopted SFAS No. 109, Accounting for Income
Taxes, which mandates the liability method of accounting for income taxes.
Under SFAS No. 109, 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 financial position or results of
operations.
38
<PAGE>
L.A. GEAR, INC. AND SUBSIDIARIES
Notes to 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 the
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.
CONCENTRATION OF CREDIT RISK
- ----------------------------
The Company sells its products to retailers and other customers and extends
credit based on an evaluation of the customer's financial condition, generally
without requiring collateral. Exposure to losses on receivables is principally
dependent on each customer's financial condition. The Company closely monitors
its exposure to credit risk and maintains allowances for anticipated losses.
See Note 5 - Accounts Receivable.
STOCK OPTIONS
- -------------
In October 1995, the Financial Accounting Standards Board issued SFAS No.
123, Accounting for Stock-Based Compensation. The Company will adopt only the
disclosure provisions of SFAS No. 123 beginning in the year ending November 30,
1996. The adoption of SFAS No. 123 will not have a material impact on the
Company's financial position or results of operations.
RECLASSIFICATIONS
- -----------------
Certain reclassifications have been made to 1994 and 1993 amounts in order to
conform to the 1995 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, was 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.
As a result of the economic crisis and the devaluation of the peso in Mexico,
there is uncertainty as to the volume of business which can be achieved in the
future. Accordingly, in 1995 the remaining goodwill balance of approximately
$1.0 million was written off.
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.
39
<PAGE>
L.A. GEAR, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
The pro forma results of operations for the 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>
1995 1994 1993
- ---------------------------------------------------------------------------------------
<S> <C> <C> <C>
(IN THOUSANDS)
CASH PAID (RECEIVED) DURING THE YEAR FOR:
INTEREST PAID $ 4,186 $ 4,433 $ 4,037
======= ======= =======
INTEREST RECEIVED $(1,984) $(1,444) $ (2,065)
======= ======= ========
INCOME TAXES, NET $ -- $ -- $(24,404)
======= ======= ========
NONCASH INVESTING ACTIVITIES:
ACQUISITION OF MEXICAN DISTRIBUTOR'S ASSETS $ -- $ 1,953 $ --
======= ======= ========
NONCASH FINANCING ACTIVITIES:
DIVIDENDS ACCRUED AND UNPAID ON MANDATORILY
REDEEMABLE PREFERRED STOCK $ 7,746 $ -- $ --
======= ======= ========
</TABLE>
NOTE 5. ACCOUNTS RECEIVABLE
- ------ -------------------
Accounts receivable, net of allowance for doubtful accounts and merchandise
returns, consist of the following:
<TABLE>
<CAPTION>
NOVEMBER 30,
-------------------
1995 1994
- -----------------------------------------------------------------
<S> <C> <C>
(IN THOUSANDS)
TRADE RECEIVABLES
DOMESTIC $23,125 $55,531
INTERNATIONAL 28,291 24,552
------- -------
51,416 80,083
OTHER RECEIVABLES 2,767 3,676
------- -------
54,183 83,759
LESS ALLOWANCE FOR DOUBTFUL ACCOUNTS AND
MERCHANDISE RETURNS (7,553) (6,475)
------- -------
$46,630 $77,284
======= =======
</TABLE>
Domestic accounts receivable include $7.2 million and $20.9 million for Wal-
Mart at November 30, 1995 and 1994, respectively.
NOTE 6. PROPERTY AND EQUIPMENT
- ------ ----------------------
Property and equipment, net of accumulated depreciation and amortization,
consist of the following:
<TABLE>
<CAPTION>
NOVEMBER 30,
------------------------
1995 1994
- -------------------------------------------------------------
<S> <C> <C>
(IN THOUSANDS)
COMPUTER SOFTWARE AND EQUIPMENT $ 15,949 $ 22,253
FURNITURE AND EQUIPMENT 6,384 11,046
LEASEHOLD IMPROVEMENTS 3,683 6,722
-------- --------
26,016 40,021
LESS ACCUMULATED DEPRECIATION
AND AMORTIZATION (17,726) (28,070)
-------- --------
$ 8,290 $ 11,951
======== ========
</TABLE>
40
<PAGE>
L.A. GEAR, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
NOTE 7. BANK BORROWINGS AND LIQUIDITY
- ------ -----------------------------
The Company has a $75 million revolving line of credit with BankAmerica
Business Credit, Inc. ("BABC") for loans and letters of credit (the "Revolving
Facility"). The Revolving Facility is secured primarily by the Company's
domestic assets and is subject to certain financial covenants. Borrowings under
the Revolving Facility bear interest at a rate equal to Bank of America's
publicly announced reference rate plus one and one-half percent. The Company
may incur cash borrowings up to $10 million. There were no domestic cash
borrowings under the Revolving Facility at any time during fiscal 1995. At
November 30, 1995 approximately $23.6 million of domestic letters of credit were
outstanding under the Revolving Facility. The Revolving Facility is scheduled
to expire in November 1996, but will automatically be renewed for an additional
one-year period unless either the Company or BABC delivers written notice to the
contrary to the other party on or before September 23, 1996. The Company is
currently evaluating all available options regarding sources of working capital.
There can be no assurance, however, that such funding can be obtained on terms
acceptable to the Company.
The Company's German subsidiary had a $1.4 million credit facility in 1995
which was denominated in local currency and converted to U.S. dollars at the
end-of-period exchange rate. The facility expired in December 1995 and the
balance outstanding was repaid in January 1996. In fiscal 1995 the maximum
borrowing under the facility at any time amounted to $1.4 million and the
balance outstanding at November 30, 1995 was $1.2 million. The weighted average
interest rate, as defined in the agreement and adjusted for current market
conditions, was 8.3% as of November 30, 1995. The Company's Dutch subsidiary had
a $4.9 million credit facility for the first seven months of fiscal 1995. At no
time during fiscal 1995 did borrowings under this facility exceed $0.6 million.
The Company believes that it has the ability to meet the financing needs, if
any, of its foreign subsidiaries for the foreseeable future.
The short-term and long-term liquidity of the Company is contingent primarily
on the Company's future operating results, shareholder approval of a proposed
share exchange transaction (see Note 11 - Series A Cumulative Convertible
Preferred Stock/Proposed Share Exchange Transaction) 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 redemption obligation plus the accrued
and unpaid dividends on August 31, 1996 under the Series A Preferred Stock,
which obligation will be eliminated if the proposed share exchange transaction
is approved). 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.
NOTE 8. FINANCIAL INSTRUMENTS
- ------- ---------------------
The Company enters into forward contracts, with terms of less than one year,
to offset the effects of exchange rate changes on cash flow exposures
denominated in foreign currencies.
The Company's foreign currency forward contracts at November 30, 1995 are
listed below. All of the contracts mature no later than September 30, 1996. The
currencies listed are in relation to the U.S. dollar and are converted at year-
end market exchange rates.
41
<PAGE>
L.A. GEAR, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
<TABLE>
<CAPTION>
FOREIGN CURRENCY CONTRACTS SOLD BOUGHT
- -----------------------------------------------------------
<S> <C> <C>
(IN MILLIONS)
GERMAN MARK $ 3.5 $ 0.2
FRENCH FRANC 3.3 --
BRITISH POUND 3.9 --
DUTCH GUILDER 1.2 --
ITALIAN LIRA 4.7 --
------- -------
$ 16.6 $ 0.2
======= =======
</TABLE>
NOTE 9. ACCOUNTS PAYABLE AND ACCRUED LIABILITIES
- ------ ----------------------------------------
Accounts payable and accrued liabilities consist of the following:
<TABLE>
<CAPTION>
NOVEMBER 30,
-----------------
1995 1994
- ------------------------------------------------------------------------
<S> <C> <C>
(IN THOUSANDS)
ACCOUNTS PAYABLE $ 5,249 $ 7,146
OTHER ACCRUED LIABILITIES 15,388 22,490
ACCRUED INVENTORY PURCHASES 7,111 11,327
ACCRUED RESTRUCTURING AND NON-RECURRING CHARGES 2,755 2,435
ACCRUED ADVERTISING 2,301 2,615
------- -------
$32,804 $46,013
======= =======
</TABLE>
Accounts payable include issued but uncleared checks of $3.0 million at
November 30, 1994.
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 plan resulted in a restructuring charge of $5.1 million in 1995
primarily related to the elimination of approximately 160 full time jobs, the
closure of the Company's retail outlet division and office space consolidation
at the corporate headquarters. In addition, in 1995 the Company incurred non-
recurring charges of $5.6 million in connection with (i) a $4.6 million increase
in the reserve for unused barter credits and (ii) a $1.0 million write off of
goodwill related to the acquisition of the Company's Mexican business. In 1994,
the Company incurred non-recurring charges of $2.5 million for payments due
under contractual obligations to certain individuals upon realignment of senior
management.
NOTE 10. CONVERTIBLE SUBORDINATED DEBENTURES
- ------- -----------------------------------
On December 24, 1992, the Company completed a private sale of $50 million
aggregate principal amount of 7 3/4% Convertible subordinated debentures due
2002, ("the Debentures"). On June 18, 1993, the Debentures were registered
under the Securities Act of 1933, as amended.
The fair market value of the Debentures at November 30, 1995 was $17.5
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
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.
The Debentures were delisted from the NASDAQ Small Cap Market, effective
November 21, 1995, as a result of the Company's failure to comply with NASDAQ's
capital and surplus requirements. The Company's $100 million of Series A
mandatorily redeemable preferred stock is not included in the NASDAQ calculation
of capital and surplus. Upon completion of the proposed share exchange
transaction (see Note 11 - Series A Cumulative
42
<PAGE>
L.A. GEAR, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Convertible Preferred Stock/Proposed Share Exchange Transaction), the Company
will exceed NASDAQ's capital and surplus requirements and expects the
Debentures to be reinstated on the Small Cap Market.
NOTE 11. SERIES A CUMULATIVE CONVERTIBLE PREFERRED STOCK/PROPOSED SHARE
- ------- ---------------------------------------------------------------
EXCHANGE TRANSACTION
- --------------------
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.
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.
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 to Trefoil on
each of February 28, 1995, May 31, 1995, August 31, 1995 and November 30, 1995.
As of November 30, 1995, such dividend arrearage amounted to a total of $7.746
million.
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 of one
million shares of Series A Preferred Stock 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 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 in arrears at a rate of 11.644%
per annum) of the stated value of such shares plus accrued and unpaid dividends
from the date of failure to redeem through the date of redemption. The Company
believes that it is unlikely that it will be able to satisfy the mandatory $35
million redemption obligation plus the accrued and unpaid dividends with respect
to the Series A Preferred Stock on August 31, 1996 from its cash flow from
operations and its existing bank facility.
Accordingly, in December 1995, the Company entered into an agreement with
Trefoil providing for the exchange of all $100 million of the Company's Series A
Preferred Stock, together with all accrued and unpaid dividends, for a new issue
of Series B Preferred Stock (the "Share Exchange Transaction"). The terms of
the Series B Preferred Stock provide for, among other things, the elimination of
the mandatory redemption feature of the Series A Preferred Stock and a reduction
in the conversion price from $10.00 to $6.75 per common share. In addition,
under the terms of the Series B Preferred Stock, the Company would be entitled,
at its option, to pay dividends during the fiscal year ending November 30, 1996
in either additional shares of Series B Preferred Stock or in cash. The coupon
rate of 7.5% per annum for dividends with respect to the Series B Preferred
Stock remains unchanged from that of the Series A Preferred Stock.
The proposed Share Exchange Transaction has been recommended by a Special
Committee of independent members of the Board of Directors, and has been
approved by the Board of Directors. The Share Exchange Transaction, which is
subject to certain conditions including the receipt of shareholder approval,
will be considered
43
<PAGE>
L.A. GEAR, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
at a special meeting of shareholders to be held in April 1996. If the proposed
Share Exchange Transaction is not approved by the shareholders, the Company will
explore the availability of new capital to satisfy the initial $35 million
mandatory redemption obligation plus accrued and unpaid dividends with respect
to the Series A Preferred Stock due on August 31, 1996. The Company believes
that it would be difficult to secure such funding on terms acceptable to the
Company.
The Series A Preferred Stock has the right, voting as a separate class, to
elect three of the Company's ten directors. Trefoil also currently has the right
to elect an additional four members of an expanded board of fourteen as a result
of the Company's decision not to pay dividends on the Series A Preferred Stock
for the past four quarters. The Company has not received any notification from
Trefoil as to its intent to exercise such right. Upon completion of the Share
Exchange Transaction, those voting rights will terminate and the Series B
Preferred Stock will vote with the Common Stock in all matters submitted to the
vote of the holders of Common Stock, including the election of directors.
NOTE 12. 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, 1995,
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, 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
GRANTED 293,500 $2.60 TO $ 5.38
EXERCISED -- --
CANCELED (522,080) $4.38 TO $23.38
- ------------------------------------------------------------------------
OUTSTANDING AT NOVEMBER 30, 1995 1,510,518 $2.60 TO $33.63
========================================================================
</TABLE>
44
<PAGE>
L.A. GEAR, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
At November 30, 1995, 1,510,518 common shares were reserved for the exercise
of outstanding options, 1,096,348 shares were exercisable and 591,910 shares
were available for grant (1,264,158 shares were exercisable and 363,330 shares
were available for grant at November 30, 1994).
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
GRANTED -- --
EXERCISED -- --
CANCELED -- --
- ---------------------------------------------------------------------
OUTSTANDING AT NOVEMBER 30, 1995 80,000 $9.75 TO $14.00
=====================================================================
</TABLE>
At November 30, 1995, 80,000 shares were reserved for the exercise of
outstanding options, 70,000 shares were exercisable and 320,000 shares were
available for grant (50,000 shares were exercisable and 320,000 shares were
available for grant at November 30, 1994).
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.
45
<PAGE>
L.A. GEAR, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
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
GRANTED 367,387 $ 2.66 TO $ 5.83
EXERCISED -- --
CANCELED (340,700) $ 5.18 TO $11.38
- -------------------------------------------------------------------
OUTSTANDING AT NOVEMBER 30, 1995 2,055,462 $ 2.66 TO $11.55
===================================================================
</TABLE>
At November 30, 1995, 2,055,462 shares were reserved for the exercise of
outstanding options, 1,333,198 shares were exercisable and 444,538 shares were
available for grant (587,499 shares were exercisable and 471,225 shares were
available for grant at November 30, 1994).
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 have completed
at least thirty days of employment. The Company made matching contributions of
$289,000, $397,000 and $402,000 for 1995, 1994 and 1993, respectively, in
respect to employee contributions to such plan.
NOTE 13. INCOME TAXES
- ------- ------------
Domestic and foreign components of loss before income taxes and minority
interest are as follows:
<TABLE>
<CAPTION>
YEAR ENDED NOVEMBER 30,
- ------------------------------------------------------
(IN THOUSANDS) 1995 1994 1993
---------- --------- ---------
<S> <C> <C> <C>
DOMESTIC $(43,466) $(12,093) $(24,555)
FOREIGN (9,255) (10,208) (7,958)
-------- -------- --------
$(52,721) $(22,301) $(32,513)
======== ======== ========
</TABLE>
No income tax benefit has been recorded in 1995, 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 SFAS No. 109.
Temporary differences and carryforwards which give rise to deferred tax
assets, net of valuation allowance, at November 30, 1995 and 1994 are as
follows:
46
<PAGE>
L.A. GEAR, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
<TABLE>
<CAPTION>
NOVEMBER 30,
- --------------------------------------------------------------------------
(IN THOUSANDS) 1995 1994
-------- --------
<S> <C> <C>
LOSS CARRYFORWARDS $ 46,011 $ 27,986
TAX CREDIT CARRYFORWARDS 3,226 3,226
RESERVES AND ACCRUED EXPENSES 8,520 10,542
DEPRECIATION AND AMORTIZATION 5,444 4,004
OTHER 907 1,147
-------- --------
TOTAL DEFERRED TAX ASSETS 64,108 46,905
LESS VALUATION ALLOWANCE (64,108) (46,905)
-------- --------
NET DEFERRED TAX ASSETS $ -- $ --
======== ========
</TABLE>
At November 30, 1995, the Company had a federal tax net operating loss ("NOL")
carryforward of approximately $73.5 million which will, if unused, expire in
varying amounts in fiscal years 2007 through 2010. 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 $76.2 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.
NOTE 14. LITIGATION
- ------- ----------
SETTLEMENTS
- -----------
In 1995, the Company recorded net settlement income of $ 2.3 million,
substantially all of which was in connection with the settlement of certain
patent and trademark infringement actions. Results for 1994 include net
settlement income of $1.3 million in connection with trademark and patent
infringement lawsuits partially offset by expenses relating to the settlement of
employee 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.
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 15. 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, 1995, the
aggregate amount of future commitments under such contracts totaled $11.5
million and are to be paid as follows: $5.5 million in 1996, $5.5 million in
1997 and $0.5 million in 1998.
The Company has entered into various endorsement and sponsorship agreements
with professional athletes, Universal Studios and other parties. Such
agreements provide for, among other things, fees and royalties to be paid. At
November 30, 1995, the aggregate amount of future commitments under such
contracts totaled $4.8 million and are to be paid as follows: $1.1 million in
1996, $1.3 million in 1997, $1.2 million in 1998 and $1.2 million in 1999.
In September 1994, the Company entered into a new one year management and
consulting agreement with Shamrock Capital Advisors, Inc. ("SCA"), a company
which provides management and consulting services to Trefoil. Selling, general
and administrative expenses included $0.4 million, $0.7 million and $0.6
million,
47
<PAGE>
L.A. GEAR, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
respectively, in 1995, 1994 and 1993 for fees to SCA. The agreement
was not renewed and expired according to its terms in September 1995.
The Company occupies certain facilities, including corporate offices and
distribution centers, and rents certain equipment under operating leases. The
Company is in the process of trying to sublease approximately 23,000 square feet
at its corporate facility. Rental expense for 1995, 1994 and 1993 amounted to
approximately $8.7 million, $8.4 million and $8.1 million, respectively.
At November 30, 1995, 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 ENDING NOVEMBER 30
- ------------------------------------------------------------
<S> <C>
(IN THOUSANDS)
1996 $ 4,921
1997 3,467
1998 3,055
1999 2,321
2000 1,578
THEREAFTER 2,903
-------
$18,245
=======
</TABLE>
NOTE 16. SEGMENT REPORTING
- ------- -----------------
The Company's principal business is the design, development and marketing of
quality athletic and lifestyle footwear. The Company is a multinational
corporation with operations in 10 countries. Transfers between geographic areas
primarily represent intercompany export sales from the United States and are
accounted for based upon established sales prices between the related companies.
In computing results from operations for foreign subsidiaries, no allocation of
general corporate expenses, interest or income taxes has been made.
<TABLE>
<CAPTION>
1995 1994
- -----------------------------------------------------------
<S> <C> <C>
(IN THOUSANDS)
NET SALES
UNITED STATES
DOMESTIC $192,493 $298,489
EXPORT CUSTOMERS 33,656 59,240
SALES TO OVERSEAS SUBSIDIARIES 37,848 29,020
- -----------------------------------------------------------
TOTAL UNITED STATES 263,997 386,749
EUROPE 59,996 50,104
OTHER 10,406 8,133
ELIMINATIONS (37,848) (29,020)
- -----------------------------------------------------------
TOTAL $296,551 $415,966
===========================================================
OPERATING PROFIT (LOSS)
UNITED STATES (50,537) (18,428)
EUROPE 3,161 (726)
OTHER (2,990) (1,174)
ELIMINATIONS (165) 1,020
- -----------------------------------------------------------
(50,531) (19,308)
INTEREST EXPENSE, NET (2,190) (2,993)
- -----------------------------------------------------------
TOTAL $(52,721) $(22,301)
===========================================================
IDENTIFIABLE ASSETS
UNITED STATES 111,656 176,321
EUROPE 38,389 36,134
OTHER 11,433 13,745
ELIMINATIONS (1,903) (1,737)
- -----------------------------------------------------------
TOTAL $159,575 $224,463
===========================================================
</TABLE>
48
<PAGE>
L.A. GEAR, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
The Company's domestic customers consist primarily of department, shoe,
sporting goods and athletic footwear stores and wholesale distributors. In
1995, sales to Wal-Mart accounted for 15.3% of the Company's net sales. In 1994
and 1993 none of the Company's customers individually accounted for 10% or more
of the Company's net sales. The Company's five largest customers worldwide, in
the aggregate, accounted for approximately 27.8%, 26.8% and 20.7% of the
Company's net sales in 1995, 1994 and 1993, respectively.
NOTE 17. 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
-------------------- ---------------------- ------------------- -------------------------
1995 1994 1995(2) 1994(1) 1995 1994(2) 1995(1) 1994(1)(2)
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
(IN THOUSANDS, EXCEPT
PER SHARE DATA)
NET SALES $ 69,392 $120,436 $79,014 $ 84,248 $94,354 $126,550 $ 53,791 $ 84,732
GROSS PROFIT $ 20,740 $ 34,909 $24,970 $ 23,657 $32,542 $ 42,180 $ 10,497 $ 22,591
NET INCOME (LOSS) $(11,642) $ (2,027) $(5,911) $(11,765) $ 416 $ 6,526 $(34,260) $ (14,929)
INCOME (LOSS) PER
COMMON SHARE:
PRIMARY $ (0.59) $ (0.17) $ (0.34) $ (0.59) $ (0.07) $ 0.20 $ (1.58) $ (0.73)
======== ======== ======= ======== ======= ======== ======== ===========
FULLY DILUTED $ (0.59) $ (0.17) $ (0.34) $ (0.59) $ (0.07) $ 0.20 $ (1.58) $ (0.73)
======== ======== ======= ======== ======= ======== ======== ===========
PRICE RANGE OF
COMMON STOCK:
HIGH $ 5.87 $ 11.38 $ 4.37 $ 7.50 $ 4.12 $ 7.00 $ 3.12 $ 8.25
LOW $ 3.87 $ 7.00 $ 3.00 $ 5.63 $ 2.25 $ 5.63 $ 1.62 $ 5.37
</TABLE>
(1) In the fourth quarter of 1995, a restructuring charge of $5.1 million and
non-recurring charges of $5.6 million were recorded in selling, general and
administrative expenses. The restructuring charge primarily related to the
elimination of approximately 160 full time jobs, the closure of the
Company's retail outlet stores and office space consolidation at the
corporate headquarters. The non-recurring charges were in connection with a
$4.6 million increase in the reserve for unused barter credits and a $1.0
million write-off of goodwill related to the acquisition of the Company's
Mexican business in June 1994. In the second and fourth quarters of 1994,
the Company incurred charges of $2.3 million and $0.2 million respectively
for costs associated with the realignment of the senior management of the
Company. See Note 9-Accounts Payable and Accrued Liabilities.
(2) In the second quarter of 1995, the Company recorded net litigation
settlement income of $1.9 million as part of a settlement agreement in
connection with patent infringement litigation. In the third quarter 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 $2.9 million. In the fourth
quarter of 1994, the Company recorded $1.9 million of litigation settlement
expense primarily related to the settlement of employment litigation and a
dispute with a former distributor. See Note 14-Litigation.
At January 22, 1996, the Company had approximately 12,601 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.
SELECTED FINANCIAL DATA
<TABLE>
<CAPTION>
FOR THE FISCAL YEAR ENDED NOVEMBER 30,
--------------------------------------
1995 1994 1993 1992 1991
- ---------------------------------------------------------------------------------------------------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
NET SALES $296,551 $415,966 $398,358 $430,194 $619,175
LOSS FROM CONTINUING OPERTIONS (51,397) (22,195) (32,513) (71,901) (44,996)
NET LOSS (51,397) (22,195) (32,513) (71,901) (66,200)
LOSS APPLICABLE TO COMMON STOCK (59,143) (29,695) (40,180) (79,647) (67,825)
PER COMMON SHARE:
LOSS FROM CONTINUING OPERATIONS
BEFORE PREFERRED DIVIDENDS $ (2.24) $ (0.97) $ (1.42) $ (3.39) $ (2.31)
LOSS FROM CONTINUING OPERATIONS (2.58) (1.29) (1.75) (3.76) (2.40)
LOSS APPLICABLE TO COMMON STOCK (2.58) (1.29) (1.75) (3.76) (3.49)
<CAPTION>
AT NOVEMBER 30,
---------------
1995 1994 1993 1992 1991
- ---------------------------------------------------------------------------------------------------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
CASH AND CASH EQUIVALENTS $ 35,956 $ 49,710 $ 27,790 $ 83,982(A) $ 1,422
INVENTORIES 51,677 57,597 109,797 61,923 141,115
WORKING CAPITAL 103,999 147,848 161,948 168,049 203,215
TOTAL ASSETS 159,575 224,463 254,613 250,144 327,751
CONVERTIBLE SUBORDINARTED DEBENTURES 50,000 50,000 50,000 -- --
MANDATORILY REDEEMABLE PREFERRED STOCK
PLUS ACCRUED AND UNPAID DIVIDENDS 107,746 100,000 100,000 100,000 100,000
SHAREHOLDERS' (DEFICIT) EQUITY (40,627) 18,149 46,797 87,451 131,715
</TABLE>
(A) Cash and cash equivalents included $29.0 million of collateralized cash.
49
<PAGE>
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' (deficit) equity and cash
flows present fairly, in all material respects, the financial position of L.A.
Gear, Inc. and its subsidiaries at November 30, 1995 and 1994, and the results
of their operations and their cash flows for each of the three years in the
period ended November 30, 1995, in conformity with generally accepted accounting
principles. These financial statements are the responsibility of the Company's
management; our responsibility is to express an opinion on these financial
statements based on our audits. We conducted our audits of these statements in
accordance with generally accepted auditing standards which require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and significant estimates
made by management, and evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for the opinion expressed
above.
/s/ Price Waterhouse LLP
PRICE WATERHOUSE LLP
Los Angeles, California
January 22, 1996
50
<PAGE>
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
, 1996
51
<PAGE>
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>
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>
(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>
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>
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.
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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
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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
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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.
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(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.
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(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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(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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(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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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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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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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>
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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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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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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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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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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(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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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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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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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 B Preferred Stock, the obligation to deliver to such
holder such cash, property or securities to which, in accordance with the
foregoing provisions, such holder is entitled.
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.
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 B 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 B
Preferred Stock at the address of each holder as
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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).
"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
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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
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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.
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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 12, 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 12, 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.
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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).
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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.
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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
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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
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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
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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
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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
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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
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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
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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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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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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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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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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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(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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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.
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 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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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.
11
<PAGE>
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
12
<PAGE>
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
13
<PAGE>
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
14
<PAGE>
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.
15
<PAGE>
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.
(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 Conversion 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
16
<PAGE>
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.
(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 (i) of this paragraph (g), then the Conversion Ratio shall
be adjusted so that the holder of each share of Series A Preferred Stock shall
be entitled to receive, upon the conversion thereof, the number of shares of
Common Stock determined by
17
<PAGE>
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.
(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
18
<PAGE>
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.
(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)(i), (g)(ii) 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)(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
19
<PAGE>
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>
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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"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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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.
"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.
"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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"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.
"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.
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"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.
"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.
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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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.
26
<PAGE>
APPENDIX VI
FORM OF OPINIONS TO BE RENDERED BY
FRIED, FRANK, HARRIS, SHRIVER & JACOBSON
----------------------------------------
1. The Company is a corporation validly existing and in good standing
under the laws of the State of California and has the corporate power and
authority to own, lease and operate its properties and to carry on its business
as now conducted.
2. The Certificate of Determination for the Series B Preferred Stock has
been duly authorized and filed with the Secretary of State of California. Upon
issuance and delivery of the shares of Series B Preferred Stock in accordance
with the Share Exchange Agreement, the holder of such shares shall be entitled
to the powers, preferences and rights set forth in the Certificate of
Determination.
3. The Company has full corporate power and authority to execute and
deliver the Registration Rights Amendment, and to execute, deliver and perform
the Agreement and to consummate the transactions contemplated by the Agreement.
4. The execution and delivery of the Registration Rights Amendment, and
the execution, delivery and performance of the Agreement and the consummation of
the transactions contemplated by the Agreement, have been duly and validly
authorized by the Board of Directors of the Company and, as to the Exchange, by
the shareholders of the Company, and no other corporate proceedings on the part
of the Company are necessary to authorize the Agreement or to consummate the
transactions contemplated by the Agreement.
5. The Agreement and the Registration Rights Amendment have been duly and
validly executed and delivered by the Company and each of the Agreement and the
Registration Rights Amendment is enforceable against the Company in accordance
with its respective terms (subject to (a) applicable bankruptcy, insolvency,
reorganization, fraudulent transfer, moratorium or similar laws from time to
time in effect affecting creditors' rights generally and (b) general principles
of equity (including, without limitation, standards of materiality, good faith,
fair dealing and reasonableness and limits on the availability of equitable
remedies), whether such principles are considered in a proceeding at law or in
equity).
6. The shares of Series B Preferred Stock being issued to Trefoil
pursuant to the Agreement are duly authorized and, when issued and delivered in
accordance with the Agreement, will be validly issued, fully paid and
nonassessable.
7. The number of shares of Common Stock initially issuable upon
conversion of the shares of Series B Preferred Stock to be issued pursuant to
the Agreement at the initial conversion price set forth in the Certificate of
Determination have been duly and validly authorized and reserved for issuance
and, when issued upon such conversion in accordance with the Certificate of
Determination, will be validly issued, fully paid and nonassessable.
<PAGE>
APPENDIX VII
SUTRO & CO. ANALYSES OF OTHER TRANSACTION
The following is a brief description of the other transactions analyzed by
Sutro:
In May 1995, Furr's/Bishop's, Inc. convered outstanding convertible preferred
stock into shares of new common stock and new warrants. The company required
this transaction because it was in default on debt payment and facing bankruptcy
risk.
In February 1995, Trans World Airlines, Inc. completed a conversion of the
company's preferred stock and all accrued dividends into common stock, equity
rights and warrants. In addition, senior secured notes were also converted into
common stock, senior preferred stock, equity rights, and airline ticket
vouchers. There was also an exchange for senior secured notes convertible to
senior subordinated notes, contingent equity notes, common stock, equity rights
and warrants. The company was reorganized in 1993 but was experiencing severe
liquidity problems and needed to reduce debt to satisfy certain of the company's
current and future financial obligations.
In August 1994, Grubb & Ellis Company entered into an amendment to the
instrument setting forth the terms of the company's preferred stock including
the elimination of the mandatory redemption feature and the anti-dilution
protection under certain circumstances. The transaction was required to
alleviate the cash flow burden of the Company and avoid having to seek
bankruptcy protection.
In June 1994, Universal Medical Buildings exchanged the company's 8% Notes and
Series C Preferred Units for cash and newly issued shares of Series A Preferred
Redeemable Shares Limited Partnership Units. The company also converted Series A
and B Preferred Units to common stock. The company's lack of working capital
raised questions as to its ability to continue as an ongoing concern and created
a need for the transactions.
In June 1994, OESI Power Group exchanged preferred stock for a new series of
non-cumulative securities. The company was facing a liquidity crisis and
needed to improve resource development and repay indebtedness.
In June 1994, Monitrend Investment Management issued shares of the company's
common stock, preferred stock and specified shares of a new series of preferred
stock. The issuance was considered essential to the company's ability to
consummate a transaction which could provide capital to the company.
In June 1994, UAL Corporation reclassified the company's common stock to
include ownership in a portion of Series D Preferred stock. In addition, the
company offered preferred stock with $765 million in liquidation preference of
its Series B Preferred Stock, and Series A and Series B Debentures. The company
needed the reorganization to reduce labor expense in order to compete more
effectively.
In September 1993, Carolco Pictures, Inc. engaged in a recapitalization
transaction including the exchange of 10% debentures and 8,000 shares of Series
D Preferred Stock for common stock. The imminent prospect of bankruptcy prompted
the company to enter into the transaction.
In June 1993, Spinnaker Software Corp. converted $3,000,000 of outstanding
indebtedness into 3,000,000 shares of newly designated preferred stock.
Recapitalization was the best alternative available to the company in order to
maintain its listing on NASDAQ and maintain an open market for resale of the
company's securities.
In October 1992, Lamonts Corporation eliminated all of the company's authorized
cumulative preferred stock outstanding, issued common stock, and created a class
of blank check preferred stock. The transaction was the only viable alternative
to seeking protection from its creditors under bankruptcy laws.
The descriptions contained in this Appendix VII are based entirely upon
publicly available information. Sutro did not act as a financial advisor to any
of the companies in any of the above transactions.
<PAGE>
PROXY
L.A. GEAR, INC.
PROXY FOR THE SPECIAL MEETING OF SHAREHOLDERS TO BE HELD APRIL 9, 1996
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 the Ritz-Carlton
Hotel, 4375 Admiralty Way, Marina del Rey, California 90292, on April 9, 1996
at 10:00 a.m., 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.
(CONTINUED, AND TO BE MARKED, DATED AND SIGNED, ON THE OTHER SIDE)
- --------------------------------------------------------------------------------
* FOLD AND DETACH HERE *
<PAGE>
- -------------------------------------------------------------------------------
Please mark
your votes as [X]
indicated in
this example
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.
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.
I/WE WILL NOT ATTEND
THE MEETING IN PERSON [_]
I/WE WILL ATTEND 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 accompany-ing said Notice
and all appendices thereto.
-----------------------------------
(NUMBER OF SHARES)
-----------------------------------
(PLEASE PRINT NAME)
DATED: ______________________, 1996
SIGNATURE(S) OF HOLDER(S) OF
COMMON STOCK __________________________________________________________________
NOTE: 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.
- -------------------------------------------------------------------------------
* FOLD AND DETACH HERE *
YOUR VOTE IS IMPORTANT TO THE COMPANY
PLEASE SIGN AND RETURN YOUR PROXY BY TEARING OFF
THE TOP PORTION OF THE SHEET AND RETURNING IT IN
THE ENCLOSED POSTAGE-PAID ENVELOPE
