<PAGE>
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(MARK ONE)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED MAY 31, 1996
Or
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM TO
------------ ---------
Commission file number 1-10157
L.A. GEAR, INC.
(Exact name of registrant as specified in its charter)
CALIFORNIA 95-3375118
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
2850 OCEAN PARK BOULEVARD, SANTA MONICA, CALIFORNIA 90405
(Address of principal executive offices)(Zip code)
(310) 452-4327
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
--------- ----------
The number of shares outstanding of the registrant's Common Stock, no par value,
at July 11, 1996 was 22,936,433 shares.
THIS FORM 10-Q CONTAINS 25 PAGES.
THE EXHIBIT INDEX APPEARS ON PAGE 19.
<PAGE>
L.A. GEAR, INC.
TABLE OF CONTENTS
FORM 10-Q FOR THE QUARTERLY PERIOD ENDED MAY 31, 1996
<TABLE>
<CAPTION>
PART I. FINANCIAL INFORMATION Page
- ------- --------------------- ----
<S> <C> <C>
Item 1. Financial Statements
Consolidated Condensed Balance Sheets at
May 31, 1996 and November 30, 1995 3
Consolidated Condensed Statements of Operations
and Accumulated Deficit for the three months
ended May 31, 1996 and May 31, 1995 4
Consolidated Condensed Statements of Operations
and Accumulated Deficit for the six months
ended May 31, 1996 and May 31, 1995 5
Consolidated Condensed Statements of Cash Flows
for the six months ended May 31, 1996 and
May 31, 1995 6
Notes to Consolidated Condensed Financial
Statements 7
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 10
</TABLE>
<TABLE>
<CAPTION>
PART II. OTHER INFORMATION
- -------- -----------------
<S> <C> <C>
Item 1. Legal Proceedings 16
Item 2. Changes in Securities 16
Item 3. Defaults Upon Senior Securities 16
Item 4. Submission of Matters to a Vote of Security Holders 16
Item 5. Other Information 16
Item 6. Exhibits and Reports on Form 8-K 17
Signature 18
Exhibit Index 19
</TABLE>
<PAGE>
L.A. GEAR, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
May 31, November 30,
1996 1995
---------- ----------
(unaudited)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 46,337 $ 35,956
Accounts receivable, net 34,595 46,630
Inventories 37,169 51,677
Prepaid expenses and other current assets 3,414 3,773
--------- ---------
Total current assets 121,515 138,036
Property and equipment and other assets, net 8,181 10,348
Goodwill, net 10,171 11,191
--------- ---------
$ 139,867 $ 159,575
========= =========
LIABILITIES, MANDATORILY REDEEMABLE PREFERRED
STOCK AND SHAREHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Accounts payable and accrued liabilities $ 24,470 $ 32,804
Borrowings under international credit facilities -- 1,233
--------- ---------
Total current liabilities 24,470 34,037
7 3/4% convertible subordinated debentures due 2002 50,000 50,000
Minority interest 5,960 8,419
Mandatorily redeemable preferred stock:
7.5% Series A cumulative convertible preferred stock,
$100 stated value; no shares issued at May 31, 1996;
1,000,000 shares authorized, issued and outstanding at
November 30, 1995; redemption value of $100 per share
plus accrued and unpaid dividends at November 30, 1995 -- 107,746
Shareholders' equity (deficit):
7.5% Series B cumulative convertible preferred stock,
$100 stated value; 1,161,822 shares authorized;
1,118,982 shares issued and outstanding at May 31, 1996;
no shares issued at November 30, 1995 111,277 --
Preferred stock, no stated value; 8,838,178 shares authorized
and unissued at May 31, 1996; 9,000,000 shares authorized
and unissued at November 30, 1995 -- --
Common stock, no par value; 80,000,000 shares authorized;
22,936,433 shares issued and outstanding at May 31,
1996 and November 30, 1995 128,093 128,093
Cumulative currency translation adjustment (119) 561
Accumulated deficit (179,814) (169,281)
--------- ---------
Total shareholders' equity (deficit) 59,437 (40,627)
--------- ---------
$ 139,867 $ 159,575
========= =========
</TABLE>
See accompanying Notes to Consolidated Condensed Financial Statements.
3
<PAGE>
L.A. GEAR, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
AND ACCUMULATED DEFICIT
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
<TABLE>
<CAPTION>
Three months ended May 31,
---------------------------------
1996 1995
--------- ---------
<S> <C> <C>
Net sales $ 38,472 $ 79,014
Cost of sales 28,774 54,044
--------- ---------
Gross profit 9,698 24,970
Selling, general and administrative expenses 20,517 32,544
Litigation settlement income, net (1,955) (1,775)
Interest expense, net 521 415
--------- ---------
Loss before minority interest (9,385) (6,214)
Minority interest 1,905 303
--------- ---------
Net loss (7,480) (5,911)
Dividends on mandatorily
redeemable Series A Preferred Stock (1,002) (1,916)
Dividends on Series B Preferred Stock (1,108) --
--------- ---------
Loss applicable to common stock (9,590) (7,827)
Accumulated deficit, beginning of period (170,224) (123,655)
--------- ---------
Accumulated deficit, end of period $(179,814) $(131,482)
========= =========
Loss per common share $ (0.42) $ (0.34)
========= =========
Weighted average common shares outstanding 22,937 22,937
========= =========
</TABLE>
See accompanying Notes to Consolidated Condensed Financial Statements.
4
<PAGE>
L.A. GEAR, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
AND ACCUMULATED DEFICIT
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
<TABLE>
<CAPTION>
Six months ended May 31,
-------------------------------------
1996 1995
--------- ---------
<S> <C> <C>
Net sales $ 117,138 $ 148,406
Cost of sales 82,886 102,696
--------- ---------
Gross profit 34,252 45,710
Selling, general and administrative expenses 43,913 65,382
Litigation settlement income, net (1,955) (1,869)
Interest expense, net 1,134 742
--------- ---------
Loss before minority interest (8,840) (18,545)
Minority interest 2,459 992
--------- ---------
Net loss (6,381) (17,553)
Dividends on mandatorily
redeemable Series A Preferred Stock (3,044) (3,791)
Dividends on Series B Preferred Stock (1,108) --
--------- ---------
Loss applicable to common stock (10,533) (21,344)
Accumulated deficit, beginning of period (169,281) (110,138)
--------- ---------
Accumulated deficit, end of period $(179,814) $(131,482)
========= =========
Loss per common share $ (0.46) $ (0.93)
========= =========
Weighted average common shares outstanding 22,937 22,937
========= =========
</TABLE>
See accompanying Notes to Consolidated Condensed Financial Statements.
5
<PAGE>
L.A. GEAR, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
Six months ended May 31,
------------------------
1996 1995
-------- --------
<S> <C> <C>
Net cash provided by (used in) operating activities $12,866 $(23,336)
------- --------
Investing activities:
Capital expenditures (694) (2,464)
------- --------
Financing activities:
Net (repayments) borrowings under international credit facilities (1,218) 266
Other (622) --
------- --------
Net cash (used in) provided by financing activities (1,840) 266
------- --------
Effect of exchange rate changes on cash and
cash equivalents 49 (407)
------- --------
Net increase (decrease) in cash and cash equivalents 10,381 (25,941)
Cash and cash equivalents at beginning of period 35,956 49,710
------- --------
Cash and cash equivalents at end of period $46,337 $ 23,769
======= ========
</TABLE>
See accompanying Notes to Consolidated Condensed Financial Statements.
6
<PAGE>
L.A. GEAR, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
- ------- ------------------------------------------
Basis of Presentation. In the opinion of management, the accompanying unaudited
consolidated condensed financial statements contain all adjustments, which
consist only of normal recurring adjustments, necessary to present fairly the
consolidated financial position of L.A. Gear, Inc. and its subsidiaries
(collectively referred to as the "Company") at May 31, 1996, the results of
operations for the three months and six months ended May 31, 1996 and 1995 and
the cash flows for the six months ended May 31, 1996 and 1995. This interim
financial information and notes thereto should be read in conjunction with the
Company's Annual Report on Form 10-K for the fiscal year ended November 30,
1995. The Company's results of operations and cash flows for interim periods are
not necessarily indicative of the results to be expected for any other interim
period or the full year.
Certain reclassifications have been made to 1995 amounts in order to conform
to the 1996 presentation.
NOTE 2. SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
- ------- -------------------------------------------------
<TABLE>
<CAPTION>
SIX MONTHS ENDED MAY 31,
-------------------------
1996 1995
-------- -------
(IN THOUSANDS)
<S> <C> <C>
CASH PAID (RECEIVED) DURING THE PERIOD FOR:
INTEREST PAID $ 2,099 $ 2,050
======== =======
INTEREST RECEIVED $ (950) $(1,283)
======== =======
NONCASH FINANCING ACTIVITY:
DIVIDENDS ACCRUED ON MANDATORILY
REDEEMABLE SERIES A PREFERRED STOCK $ -- $ 3,791
======== =======
EXCHANGE OF SERIES A PREFERRED STOCK
PLUS ACCRUED AND UNPAID DIVIDENDS
FOR SERIES B PREFERRED STOCK $110,790 $ --
======== =======
SERIES B PREFERRED STOCK ISSUED
IN PAYMENT OF DIVIDENDS DUE
ON SERIES B PREFERRED STOCK $ 1,108 $ --
======== =======
</TABLE>
7
<PAGE>
L.A. GEAR, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 3. ACCOUNTS RECEIVABLE, NET
- ------- ------------------------
Accounts receivable, net of allowance for doubtful accounts and merchandise
returns, consist of the following:
<TABLE>
<CAPTION>
MAY 31, NOVEMBER 30,
1996 1995
-------- ------------
(IN THOUSANDS)
<S> <C> <C>
TRADE RECEIVABLES
DOMESTIC $16,231 $23,125
INTERNATIONAL 21,784 28,291
------- -------
TOTAL TRADE RECEIVABLES 38,015 51,416
OTHER RECEIVABLES 1,669 2,767
------- -------
39,684 54,183
LESS ALLOWANCE FOR DOUBTFUL ACCOUNTS
AND MERCHANDISE RETURNS (5,089) (7,553)
------- -------
$34,595 $46,630
======= =======
</TABLE>
Domestic accounts receivable include $0.4 million and $7.2 million from
Wal-Mart at May 31, 1996 and November 30, 1995, respectively.
NOTE 4. INCOME TAXES
- ------- ------------
At May 31, 1996, deferred tax assets totaled approximately $66.3 million. A
valuation allowance has been established against the entire deferred tax asset
balance.
NOTE 5. ACCOUNTS PAYABLE AND ACCRUED LIABILITIES
- ------- ----------------------------------------
Accounts payable and accrued liabilities consist of the following:
<TABLE>
<CAPTION>
MAY 31, NOVEMBER 30,
1996 1995
------- ------------
(IN THOUSANDS)
<S> <C> <C>
ACCOUNTS PAYABLE AND OTHER ACCRUED
LIABILITIES $13,555 $22,938
ACCRUED INVENTORY PURCHASES 10,210 7,111
ACCRUED RESTRUCTURING CHARGES 705 2,755
------- -------
$24,470 $32,804
======= =======
</TABLE>
NOTE 6. BANK BORROWINGS
- ------- ---------------
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. The Company may
incur cash borrowings up to $10 million. There were no domestic cash borrowings
under the Revolving Facility at any time during the six months ended May 31,
1996 and, as of that date, approximately $24.3 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
8
<PAGE>
L.A. GEAR, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(UNAUDITED)
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.
NOTE 7. SERIES A CUMULATIVE CONVERTIBLE PREFERRED STOCK / SHARE EXCHANGE
- ------ ----------------------------------------------------------------
TRANSACTION
- -----------
On April 9, 1996, the Company's shareholders approved the exchange (the
"Share Exchange Transaction") of all of the issued and 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 (i) 1,000,000 shares of a new series of preferred stock to be issued by the
Company, entitled Series B 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 to the Series A Preferred Stock through the closing of the Share
Exchange Transaction. The Share Exchange Transaction was completed on April 12,
1996 and, as a result, Trefoil Capital Investors, L.P. ("Trefoil"), the holder
of all the Series A Preferred Stock, was issued 1,107,902 shares of Series B
Preferred Stock and the Series A Preferred Stock was retired.
The terms of the Series B Preferred Stock provide for, among other things,
(i) the elimination of the mandatory redemption feature of the Series A
Preferred Stock (including the initial $35 million mandatory redemption
obligation, plus accrued and unpaid dividends on the Series A Preferred Stock,
in August 1996), (ii) a reduction in the conversion price from $10.00 to $6.75
per share and (iii) the voting of shares of Series B Preferred Stock (on an as
converted basis) together with shares of the Company's Common Stock on all
matters, including the election of directors. 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. During the fiscal year ending
November 30, 1996, the Company is entitled, at its option, to pay dividends on
the Series B Preferred Stock in either additional shares of Series B Preferred
Stock or in cash. Thereafter, dividends on the Series B Preferred Stock will be
payable only in cash. The Company elected to pay the dividend of $1.1 million
due on May 31, 1996 in additional shares of Series B Preferred Stock.
9
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
- ------- -----------------------------------------------------------------------
OF OPERATIONS
- -------------
All references to years are to fiscal years ending November 30, 1996 or 1995, as
applicable.
NET SALES
- -------------------------------------------------------------------------------
In the second quarter of 1996, the Company's net sales decreased 51.3% to
$38.5 million compared to $79.0 million in the second quarter of 1995. For the
six months ended May 31, 1996, the Company's net sales decreased 21.1% to $117.1
million compared to $148.4 million in the year earlier period. Domestic net
sales in the second quarter and six months ended May 31, 1996 decreased by 51.0%
and 8.5% from the comparable 1995 periods, respectively. Net international
sales, which accounted for approximately 32.5% and 27.3% of the Company's total
net sales for the quarter and six months ended May 31, 1996, respectively,
decreased by 51.9% and 42.3% from the comparable 1995 periods.
The following tables set forth certain information regarding the Company's
net sales:
<TABLE>
<CAPTION>
THREE MONTHS ENDED MAY 31, NET SALES
- -------------------------- -----------------------------------
1996 1995
---------------- ----------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
DOMESTIC FOOTWEAR
CHILDREN'S $ 13,357 35% $ 26,020 33%
WOMEN'S 8,785 23 14,203 18
MEN'S 3,109 8 12,133 15
OTHER 721 2 676 1
-------- --- -------- ---
TOTAL DOMESTIC SALES 25,972 68 53,032 67
-------- --- -------- ---
INTERNATIONAL FOOTWEAR
CHILDREN'S $ 5,775 15% $ 14,572 18%
WOMEN'S 2,869 7 4,910 6
MEN'S 1,621 4 5,260 7
OTHER 2,235 6 1,240 2
-------- --- -------- ---
TOTAL INTERNATIONAL SALES 12,500 32 25,982 33
-------- --- -------- ---
TOTAL NET SALES $ 38,472 100% $ 79,014 100%
======== === ======== ===
<CAPTION>
SIX MONTHS ENDED MAY 31, NET SALES
- ------------------------ -----------------------------------
1996 1995
---------------- ----------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
DOMESTIC FOOTWEAR
CHILDREN'S $ 40,200 35% $ 55,397 37%
WOMEN'S 28,487 24 20,074 14
MEN'S 15,437 13 16,531 11
OTHER 1,044 1 1,027 1
-------- --- -------- ---
TOTAL DOMESTIC SALES 85,168 73 93,029 63
-------- --- -------- ---
INTERNATIONAL FOOTWEAR
CHILDREN'S $ 16,478 14% $ 29,448 20%
WOMEN'S 7,280 6 11,145 7
MEN'S 4,908 4 12,968 9
OTHER 3,304 3 1,816 1
-------- --- -------- ---
TOTAL INTERNATIONAL SALES 31,970 27 55,377 37
-------- --- -------- ---
TOTAL NET SALES $117,138 100% $148,406 100%
======== === ======== ===
</TABLE>
10
<PAGE>
The following tables set forth the percentage changes, by Children's, Women's
and Men's categories, in the number of pairs sold during the 1996 period as
compared to the same period of 1995:
<TABLE>
<CAPTION>
THREE MONTHS ENDED MAY 31, VOLUME OF FOOTWEAR SOLD
- ----------------------------- ---------------------------
DECREASE BETWEEN 1996 AND 1995
----------------------------------------
DOMESTIC INTERNATIONAL TOTAL
--------- ------------- -----
<S> <C> <C> <C>
CHILDREN'S (33.0%) (65.6%) (44.5%)
WOMEN'S (18.2%) (38.8%) (22.9%)
MEN'S (69.8%) (66.7%) (68.9%)
TOTAL VOLUME DECREASE (35.9%) (60.3%) (43.4%)
</TABLE>
<TABLE>
<CAPTION>
SIX MONTHS ENDED MAY 31, VOLUME OF FOOTWEAR SOLD
- -------------------------- -------------------------
INCREASE (DECREASE) BETWEEN 1996 AND 1995
-----------------------------------------
DOMESTIC INTERNATIONAL TOTAL
-------- --------------- -------
<S> <C> <C> <C>
CHILDREN'S (5.6%) (45.2%) (18.5%)
WOMEN'S 68.6% (34.8%) 33.5%
MEN'S -- (58.2%) (23.1%)
TOTAL VOLUME INCREASE (DECREASE) 13.6% (45.4%) (6.6%)
</TABLE>
The decrease in overall net sales for the quarter was primarily attributable
to (i) reduced demand, domestically and internationally, for the Company's
children's lighted footwear and adult products and (ii) domestically, a $10.6
million reduction in sales to Wal-Mart (from $13.5 million to $2.9 million) from
the comparable prior year period.
The decrease in overall net sales for the first six months of fiscal 1996 was
primarily attributable to (i) reduced worldwide demand for the Company's
children's lighted footwear and, to a lesser extent, adult products, partially
offset domestically by an increase in sales of adult product to Wal-Mart and
(ii) a $2.81 per pair decrease in the average domestic selling price.
Total sales of the Company's children's lighted shoes decreased by $20.6
million and $32.7 million to $12.4 million and $32.8 million during the second
quarter and first half of 1996, respectively, compared to the same periods in
1995. Domestic sales of children's lighted product decreased by $10.9 million
in the second quarter of 1996 with a decrease in volume of 0.6 million pairs and
a decrease of $2.28 in the average selling price per pair from the same quarter
in 1995. For the first six months of 1996, domestic sales of children's lighted
product decreased by $20.1 million with a decrease in volume of 1.0 million
pairs and a decrease in the average selling price per pair of $2.57 from the
prior year period. Internationally, children's lighted sales decreased by $9.7
million and $12.6 million, primarily in Europe and Asia, in the three months
and six months ended May 31, 1996, respectively, compared to the same periods in
1995. The decreases in volume and price per pair for the three and six months
ended May 31, 1996 were a result of reduced overall demand for children's
lighted product primarily due to heavy inventory levels at retailers, increased
sales of discontinued lighted styles and, domestically, new product offerings by
the Company at lower average wholesale prices compared to the same periods in
1995.
GROSS MARGIN
- -------------------------------------------------------------------------------
The gross margin for the second quarter and the first half of 1996 decreased
to 25.2% and 29.2% from 31.6% and 30.8% during the comparable periods in 1995,
respectively. The decrease principally resulted from a decline in international
gross margins to 18.4% and 26.6% in the second quarter and first half of 1996,
11
<PAGE>
respectively, from 39.3% and 34.1% in the comparable 1995 periods primarily as a
result of an increase in reserves for slow moving and discontinued lighted
inventory recorded in the second quarter of fiscal 1996.
Domestically, gross margins increased to 28.5% and 30.2% for the second
quarter and first half of 1996, respectively, from 27.8% and 28.9% during the
comparable periods in 1995. In the second quarter of fiscal 1996, the Company
settled a number of outstanding claims against factories for defective product,
which settlements were partially offset by liabilities to such factories for
unamortized molds and tooling. The net settlement amounts had a favorable
impact on the Company's domestic margin of 4.3% and 2.1% for the quarter and six
months ended May 31, 1996, respectively. Losses on domestic sales of
discontinued products sold below cost were offset against previously established
inventory reserves.
Sales to Wal-Mart increased by $14.9 million (1.5 million pairs) in the first
half of 1996 due to sales in the first quarter to fulfill substantially all of
the remaining balance of Wal-Mart's $80 million minimum purchase commitment for
fiscal 1995. Such sales contributed to a decrease of $2.81 per pair in the
average domestic selling price and a decrease of $2.35 in the average domestic
unit cost in the first six months of fiscal 1996 compared to the same period in
1995.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
- -------------------------------------------------------------------------------
Total selling, general and administrative expenses decreased by $12.0 million,
or 36.9%, to $20.5 million in the second quarter of 1996 and decreased by $21.5
million, or 32.9%, to $43.9 million in the first half of 1996 compared to the
respective prior year periods. Domestic selling, general and administrative
expenses declined by $9.6 million, or 39.5%, to $14.7 million in the second
quarter of 1996 and by $17.0 million, or 34.6%, to $32.2 million in the first
half of 1996 from the comparable prior year periods. In the first half of
fiscal 1996, the reduction in domestic expenses was primarily due to the
benefits realized from the implementation of the Company's 1995 corporate
reorganization plan which reduced (i) advertising and promotional expenses by
$5.3 million, (ii) compensation and benefit expenses by $2.6 million, (iii)
professional and consulting fees by $1.6 million, (iv) depreciation by $1.5
million and (v) other expenses by $2.7 million on a net basis. Approximately
$2.0 million in restructuring costs incurred in the first half of 1996 was
applied against the restructuring reserve established in fiscal 1995. In
addition, bad debt expense decreased by $2.0 million as a result of lower sales
and a $0.9 million recovery of bad debt in the first quarter of 1996. Sales
commissions also decreased by $1.3 million due to reduced sales in the first six
months of 1996 compared to the prior year period. International operating
expenses decreased by $4.5 million, or 27.8%, to $11.7 million compared to $16.2
million in the first half of 1995 primarily due to lower advertising and
promotional expenses, compensation and benefits and bad debt expense.
Despite the overall decrease in selling, general and administrative expenses,
as a percentage of net sales, such expenses in the second quarter of 1996
increased to approximately 53.3% from approximately 41.2% in the prior year
quarter as a result of reduced sales. Total selling, general and administrative
expenses, as a percentage of net sales, decreased in the first half of 1996 to
approximately 37.5% from 44.1% in the comparable prior year period. Changes in
the Company's selling, general and administrative expenses cannot be directly
related to fluctuations in sales volume as a substantial portion of such
expenses are (i) fixed in nature, such as compensation and benefits for
management and administrative personnel, rent, insurance, depreciation and other
overhead charges or (ii) incurred to benefit future periods, such as media,
advertising and trade show expenses.
OTHER
- -------------------------------------------------------------------------------
Interest Expense Interest expense of $1.0 million and $2.1 million for the
three months and six months ended May 31, 1996, respectively, and $1.0 million
and $2.0 million for the three months and six months ended May 31, 1995,
respectively, was 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 Interest income decreased to $0.5 million and $1.0 million
for the three months and six months ended May 31, 1996, respectively, compared
to $0.6 million and $1.3 million in the comparable prior year periods primarily
as a result of lower interest rates earned on average cash balances.
12
<PAGE>
Minority Interest Minority interest increased by $1.6 million and $1.5 million
for the quarter and six months ended May 31, 1996, respectively. These increases
relate to losses incurred by the Company's Far East joint venture with Inchcape
Pacific Limited ("Inchcape") primarily as a result of markdowns given to its
customers and to reduced sales of children's lighted product. Minority interest
represents the share of the joint venture's losses allocated to Inchcape
pursuant to the terms of the joint venture agreement.
LIQUIDITY AND CAPITAL RESOURCES
- -------------------------------------------------------------------------------
The following table sets forth certain information regarding the Company's
liquidity and capital resources:
<TABLE>
<CAPTION>
MAY 31, NOVEMBER 30,
1996 1995
--------- ------------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
CASH AND CASH EQUIVALENTS $ 46,337 $ 35,956
WORKING CAPITAL 97,045 103,999
OUTSTANDING LETTERS OF CREDIT 24,358 24,440
CONVERTIBLE SUBORDINATED DEBENTURES 50,000 50,000
MANDATORILY REDEEMABLE SERIES A PREFERRED STOCK
PLUS ACCRUED AND UNPAID DIVIDENDS -- 107,746
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
MAY 31, MAY 31,
------------------ ----------------
1996 1995 1996 1995
---- ---- ----- ----
<S> <C> <C> <C> <C>
AVERAGE DAILY SHORT-TERM BORROWINGS $ -- $232 $4 $402
WEIGHTED AVERAGE INTEREST RATES -- 7.8% 8.25% 8.1%
</TABLE>
Cash and Cash Equivalents Cash and cash equivalent balances increased by $10.4
million from November 30, 1995 to $46.3 million at May 31, 1996 primarily due to
a reduction in accounts receivable and inventory from the fiscal 1995 year end
partially offset by a decrease in accounts payable and accrued liabilities and
the funding of the fiscal 1996 first half operating loss.
Accounts Receivable, Net and Inventory Accounts receivable decreased from
$46.6 million at November 30, 1995 to $34.6 million at May 31, 1996 primarily
due to reduced sales in April and May 1996 compared to October and November
1995. Inventory decreased from $51.7 million (5.3 million pairs) at November 30,
1995 to $37.2 million (3.9 million pairs) at May 31, 1996 due to the shipment of
substantially all of the balance of Wal-Mart's 1995 purchase commitment in the
first half of fiscal 1996 and the Company's continuing efforts to effectively
manage inventory levels.
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. The
Company may incur cash borrowings up to $10 million. There were no domestic
cash borrowings under the Revolving Facility at any time during the six months
ended May 31, 1996 and, as of that date, approximately $24.3 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.
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.
13
<PAGE>
Share Exchange Transaction On April 9, 1996, the Company's shareholders
approved the exchange (the "Share Exchange Transaction") of all of the issued
and 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 (i) 1,000,000 shares of a new
series of preferred stock to be issued by the Company, entitled Series B
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 to the Series A
Preferred Stock through the closing of the Share Exchange Transaction. The Share
Exchange Transaction was completed on April 12, 1996 and, as a result, Trefoil
Capital Investors, L.P. ("Trefoil"), the holder of all the Series A Preferred
Stock, was issued 1,107,902 shares of Series B Preferred Stock and the Series A
Preferred Stock was retired.
The terms of the Series B Preferred Stock provide for, among other things,
(i) the elimination of the mandatory redemption feature of the Series A
Preferred Stock (including the initial $35 million mandatory redemption
obligation, plus accrued and unpaid dividends on the Series A Preferred Stock,
in August 1996), (ii) a reduction in the conversion price from $10.00 to $6.75
per share and (iii) the voting of shares of Series B Preferred Stock (on an as
converted basis) together with shares of the Company's Common Stock on all
matters, including the election of directors. 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. During the fiscal year ending
November 30, 1996, the Company is entitled, at its option, to pay dividends on
the Series B Preferred Stock in either additional shares of Series B Preferred
Stock or in cash. Thereafter, dividends on the Series B Preferred Stock will be
payable only in cash. The Company elected to pay the dividend of $1.1 million
due on May 31, 1996 in additional shares of Series B Preferred Stock.
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 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, provided the Revolving Facility is extended or replaced. These
needs are based on a number of factors including the size of the business and
related working capital needs, the extent of the international subsidiaries'
funding requirements, the extent to which the Company seeks to acquire or
license other footwear brands and the level of domestic operating costs. In the
event that the Company's future operating results fall below management's
expectations, additional sources of working capital funding may be necessary and
difficult to obtain. The Company may also need additional financing for future
acquisitions which may be difficult to secure.
FUTURE OUTLOOK
- --------------------------------------------------------------------------------
Although the Company has effectively implemented cost reduction measures
which are expected to reduce fiscal 1996 operating expenses by more than $25
million compared to the prior year, it continues to face the serious challenge
of generating revenue and increasing sales velocity in an intensely competitive
and consolidating branded athletic footwear market. First and foremost among the
Company's efforts to meet this challenge are (i) the introduction of two new
children's technology-based footwear collections, GRAf/x/TM/ and Neonz/TM/, in
the second half of 1996, (ii) a continued focus on a women's product line which
communicates the "L.A." attitude of fun, fashion and fitness and (iii) the
introduction in Europe of Fatmox/TM/, a new fashion footwear line for women and
men.
GRAf/x/TM/ is a temperature sensitive product line which allows children to
change the color of the upper panel, reveal a pattern or personalize their
footwear by "writing" on their shoes. NEONZ/TM/ features lighted panels on the
shoe's upper for the first time and represents the next generation of children's
lighted footwear. The GRAf/x/TM/ line will be featured in a unique animated
commercial to be aired on Nickelodeon and Fox domestically and other children's
television channels in Europe during the Back-to-School season. In addition, the
Company will launch domestic Back-to-School promotional tie-ins with Thermos,
Kool-Aid and Knowledge Adventure products to stimulate sell-in and sell-through
of the GRAf/x/TM/ and NEONZ/TM/ lines at the retail level. A worldwide print
advertising campaign was launched in March 1996 to support the Company's women's
product line and will continue throughout the year, with a separate print
campaign to be run in key European markets to augment the launch of the
Fatmox/TM/ line.
At June 30, 1996, the Company had a combined domestic and international order
backlog of $51.8 million, $37.4 million of which is primarily for new in-line
products scheduled to ship in the July and August period and $14.0 million of
which is scheduled to ship in the Company's fourth quarter. The backlog at June
30,
14
<PAGE>
1996 includes $1.5 million for Wal-Mart which represents the remaining balance
of Wal-Mart's $80 million minimum purchase commitment for fiscal 1995. Wal-Mart
is not subject to any minimum purchase commitment for fiscal 1996. The combined
backlog at June 30, 1995 was $102.9 million, $68.0 million of which was
scheduled to ship in the July and August 1995 period and $32.7 million of which
was scheduled to ship in the fourth quarter of 1995.
The lower backlog at June 30, 1996 is primarily due to (i) the inclusion in
the backlog of June 30, 1995 of $21.1 million of orders under the Company's
agreement with Wal-Mart, (ii) an approximate $19.5 million decrease in orders
for children's lighted product and (iii) reduced overall demand for the
Company's adult products. Children's lights as a percentage of the total June
30, 1996 and 1995 backlog, excluding Wal-Mart orders, were 32.0% and 43.5%,
respectively. The Company's agreement with Wal-Mart does not provide for the
sale of L.A. Gear lighted footwear products to Wal-Mart. 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.
Management believes that increased competition at lower price points and
excess inventory at retailers have reduced the overall volume of the Company's
"futures" orders and may create increased pricing pressure with respect to "at-
once" orders for the balance of the year. The Company's results of operations
for fiscal 1996 are primarily dependent upon its ability to generate a
significant level of "at-once" orders for the Company's Back-to-School and
Holiday product lines, including the new GRAf/x/TM/, NEONZ/TM/ and Fatmox/TM/
collections. The Company is currently experiencing production delays with
respect to initial orders of NEONZ/TM/ products which will result in increased
freight costs due to the need to make air shipments of such products and could
result in the cancellation of certain NEONZ/TM/ orders in the event of prolonged
delays.
Following the departure of David Gatto, Executive Vice President, from the
Company at the end of June 1996, the sales, merchandising and operations
functions are now overseen by Jim Moodhe, Senior Vice President - Marketing,
Design and Development and Charlie Beery, Vice President - Sales, Customer
Service and Retail Support, each of whom reports directly to Bill Benford, the
Company's President and Chief Operating Officer.
The Company believes that the branded 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.
15
<PAGE>
PART II - OTHER INFORMATION
ITEM 1 - LEGAL PROCEEDINGS
- ------ -----------------
- Not applicable.
ITEM 2 - CHANGES IN SECURITIES
- ------ ---------------------
- On April 9, 1996, the Company's shareholders approved the exchange (the
"Share Exchange Transaction") of all of the issued and 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 (i) 1,000,000 shares of a new series of preferred stock
to be issued by the Company, entitled Series B 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 to the Series A Preferred Stock through the
closing of the Share Exchange Transaction. The Share Exchange Transaction
was completed on April 12, 1996 and, as a result, Trefoil Capital Investors,
L.P. ("Trefoil"), the holder of all the Series A Preferred Stock, was issued
1,107,902 shares of Series B Preferred Stock and the Series A Preferred Stock
was retired.
The terms of the Series B Preferred Stock provide for, among other things,
(i) the elimination of the mandatory redemption feature of the Series A
Preferred Stock (including the initial $35 million mandatory redemption
obligation, plus accrued and unpaid dividends on the Series A Preferred
Stock, in August 1996), (ii) a reduction in the conversion price from $10.00
to $6.75 per share and (iii) the voting of shares of Series B Preferred Stock
(on an as converted basis) together with shares of the Company's Common Stock
on all matters, including the election of directors. 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. During the fiscal year
ending November 30, 1996, the Company is entitled, at its option, to pay
dividends on the Series B Preferred Stock in either additional shares of
Series B Preferred Stock or in cash. Thereafter, dividends on the Series B
Preferred Stock will be payable only in cash. The Company elected to pay the
dividend of $1.1 million due on May 31, 1996 in additional shares of Series B
Preferred Stock.
ITEM 3 - DEFAULTS UPON SENIOR SECURITIES
- ------ -------------------------------
- Upon completion of the Share Exchange Transaction on April 12, 1996,
accrued and unpaid dividends on the Series A Preferred Stock totaling
approximately $10.8 million were exchanged for 107,902 shares of Series B
Preferred Stock and the arrearage on the Series A Preferred Stock was
extinguished.
ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
- ------ ---------------------------------------------------
(a) A Special Meeting of Shareholders of the Company was held on April 9,
1996.
(b) Not applicable.
(c) SHARE EXCHANGE PROPOSAL: Approval of the Share Exchange Proposal to
exchange all outstanding shares of the Company's Series A Cumulative
Convertible Preferred Stock, together with accrued and unpaid dividends,
for a new issue of Series B Preferred Stock.
For: 10,057,810
Against: 582,810
Abstain: 567,770
(d) Not applicable.
ITEM 5 - OTHER INFORMATION
- ------ -----------------
- Not applicable.
16
<PAGE>
ITEM 6 - EXHIBITS AND REPORTS ON FORM 8-K
- ------ --------------------------------
(a) Exhibits:
10.1 Letter Agreement, dated as of June 1, 1996, by and between the
Company and Shamrock Capital Advisors, Inc.
27 Financial Data Schedule.
(b) Reports on Form 8-K:
1. The Company filed a current report on Form 8-K on April 16, 1996
under Item 5--Other Events, with respect to the completion of
the Share Exchange Transaction on April 12, 1996.
17
<PAGE>
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Dated: July 15, 1996 L.A. GEAR, INC.
--------------------------
By: /s/ William L. Benford
----------------------
William L. Benford
President and
Chief Operating Officer
18
<PAGE>
EXHIBIT INDEX
-------------
<TABLE>
<CAPTION>
Exhibit No. Document Page No.
- -------------- -------------------------------------------------- --------
<S> <C> <C>
10.1 Letter Agreement, dated as of June 1, 1996, by and
between the Company and Shamrock Capital Advisors,
Inc. 20
27 Financial Data Schedule 25
19
</TABLE>
<PAGE>
EXHIBIT 10.1
SHAMROCK CAPITAL ADVISORS, INC.
4444 Lakeside Drive
Burbank, CA 91505
Dated as of June 1, 1996
L.A. Gear, Inc.
2850 Ocean Park Boulevard
Santa Monica, CA 90405
Gentlemen and Ladies:
This letter will confirm that L.A. Gear, Inc. (the "Company") has
engaged Shamrock Capital Advisors, Inc. ("SCA"), on a non-exclusive basis, to
render financial advisory services to the Company. SCA's engagement hereunder
shall extend from June 1, 1996 through May 31, 1997, unless earlier terminated
in accordance with the terms of this letter agreement. This letter agreement
confirms the terms of our engagement.
On the terms and subject to the conditions hereof, SCA will assist the
Company with respect to the identification, negotiation and/or structuring of
acquisition opportunities. The services to be provided by SCA hereunder shall
include, without limitation, identifying appropriate candidates to be acquired
by the Company, contacting such candidates and arranging for introductions to
the Company, performing financial analyses with respect to such candidate's
business and prospects, furnishing advice on pricing and structural matters, and
assisting (where requested) in the negotiation of, and furnishing assistance in
raising capital to complete, proposed acquisitions.
If the Company shall desire SCA to perform services other than or in
addition to the services contemplated under this letter agreement, the Company
and SCA agree to negotiate in good faith with respect to the furnishing of such
services by SCA and appropriate compensation therefor.
A fee in the amount and on the terms set forth below (a "Transaction
Fee") shall be payable by the Company to SCA if the Company shall consummate any
transaction during the term of this letter agreement in which it or a subsidiary
of it shall acquire a controlling interest in any company or business, through
the purchase or exchange of capital stock or assets or any combination thereof,
merger, tender offer or otherwise (a "Transaction"). Upon the consummation of
any Transaction with respect to which SCA acts as the sole financial advisor to
the Company, SCA shall, upon such consummation, be entitled to receive a
Transaction Fee equal to 1 1/2% of the Aggregate Value (as hereinafter defined)
of such Transaction up to $50 million, plus 1% of the Aggregate Value of such
Transaction in excess of $50 million. Upon the consummation of any Transaction
with respect to which
<PAGE>
the Company retains a financial or investment advisor or valuation firm other
than or in addition to SCA, SCA shall, upon such consummation, be entitled to
receive a Transaction Fee equal to 1% of the Aggregate Value of such Transaction
up to $50 million, plus 1/2% of the Aggregate Value of such Transaction in
excess of $50 million. For purposes hereof, "Aggregate Value" of a Transaction
shall mean the value of the consideration paid per share of common stock
acquired times the total number of shares of common stock (including the number
of shares which would be outstanding upon the exercise of any in-the-money
options, convertible debt, convertible preferred stock or warrants) of the
acquired company (or, in the case of a purchase of assets, the consideration
paid for such assets), plus the value of any debt, capitalized lease obligations
and preferred stock redemption obligations of the target company assumed by the
Company in connection with the Transaction.
SCA shall be entitled to receive a Transaction Fee hereunder in
connection with any Transaction consummated either (i) during the term of SCA's
engagement hereunder, regardless of whether the party or parties to the
Transaction were identified by SCA, or (ii) at any time during a period of six
months after the effective date of termination or expiration of SCA's engagement
hereunder if the Transaction involves a party or parties introduced to the
Company by SCA.
In addition to the Transaction Fee, the Company agrees to reimburse
SCA from time to time, upon submission to the Company of appropriate supporting
documentation, for SCA's reasonable out-of-pocket expenses payable to third
parties incurred in connection with SCA's services hereunder; provided, however,
that SCA shall not employ or retain third party professionals in connection with
the engagement without the prior written consent of the Company.
It is understood that SCA is being engaged hereunder to provide the
services described above by, and that SCA is providing such services to, the
Company on a non-exclusive basis.
The Company agrees to the indemnification and other agreements set
forth in the Indemnification Agreement attached hereto, the provisions of which
are incorporated herein by reference and shall survive the termination or
expiration of this letter agreement.
SCA's services hereunder may be terminated by the Company at any time,
upon written notice to SCA, from and after the date upon which any person or
entity other than Trefoil Capital Investors, L.P. ("Trefoil") or any person or
entity who or which is currently a partner of Trefoil, shall acquire, directly
or indirectly in one or more transactions, securities of the Company
representing 20% or more of the total voting power of the Company's securities
entitled to vote generally in elections of directors and on other matters
submitted to the Company's shareholders for their approval; provided, however,
-------- -------
that provisions of this letter agreement relating to the payment of the
Transaction Fees, the reimbursement of expenses, and indemnification shall
survive any such termination.
2
<PAGE>
Please confirm that the foregoing sets forth our understanding by
signing and returning to SCA the enclosed duplicate copy of this letter.
Sincerely,
SHAMROCK CAPITAL ADVISORS, INC.
By: /s/ Robert G. Moskowitz
------------------------
Name: Robert G. Moskowitz
Title: Managing Director
Acknowledged and agreed to as of the date set forth above:
L.A. GEAR, INC.
By: /s/ Thomas F. Larkins
----------------------------
Name: Thomas F. Larkins
Title: Senior Vice President
and Chief Administrative Officer
3
<PAGE>
Indemnification Agreement
As part of the consideration for the agreement of Shamrock Capital
Advisors, Inc., a Delaware corporation ("SCA"), to furnish its services, L.A.
Gear, Inc., a California corporation (the "Company"), agrees to indemnify and
hold harmless SCA and its affiliates and the respective partners, officers,
directors, employees and agents of, and persons controlling, SCA or any of its
affiliates within the meaning of either Section 15 of the Securities Act of
1933, as amended, or Section 20 of the Securities Exchange Act of 1934, as
amended, and each of their respective successors and assigns (collectively, the
"indemnified persons") from and against all claims, liabilities, expenses,
losses or damages (or actions in respect thereof) related to or arising out of
actions taken (or omitted to be taken) by SCA pursuant to the terms of the
letter agreement, dated as of June 1, 1996, between SCA on the one hand and the
Company on the other (the "Letter Agreement"), or SCA's role in connection
therewith; provided, however, that the Company shall not be responsible for any
claims, liabilities, expenses, losses and damages to the extent that it is
finally judicially determined that they result primarily from actions taken or
omitted to be taken by SCA in bad faith or due to SCA's gross negligence or
willful misconduct. If for any reason (other than the bad faith, gross
negligence or willful misconduct of SCA as provided above) the foregoing
indemnity is unavailable to SCA or insufficient to hold SCA harmless, then the
Company shall contribute to the amount paid or payable by SCA as a result of
such claim, liability, expense, loss or damage in such proportion as is
appropriate to reflect not only the relative benefits received by the Company on
the one hand and SCA on the other but also the relative fault of the Company and
SCA, as well as any relevant equitable considerations, subject to the
limitations that in any such event SCA's aggregate contribution to all losses,
claims, expenses, liabilities and damages shall not exceed the amount of fees
actually received by SCA pursuant to the Letter Agreement. Promptly after
receipt by SCA of notice of any complaint or the commencement of any action or
proceeding with respect to which indemnification may be sought against the
Company, SCA will notify the Company in writing of the receipt or commencement
thereof, but failure to notify the Company will relieve the Company from any
liability which it may have hereunder only if, and to the extent that, such
failure results in the forfeiture of substantial rights and defenses, and will
not in any event relieve the Company from any other obligation to any
indemnified person other than under this indemnification agreement. The Company
shall assume the defense of such action (including payment of fees and
disbursements of counsel) insofar as such action shall relate to any alleged
liability in respect of which indemnity may be sought against the Company. SCA
shall have the right to employ separate counsel in any such action and to
participate in the defense thereof, but the fees and disbursements of such
counsel shall be at the expense of SCA unless employment of such counsel has
been specifically authorized by the Company in writing. The Company shall pay
the fees and expenses of one separate counsel for SCA and any other indemnified
persons if the named parties to any such action (including any impleaded
parties) include the Company (or any of the directors of the Company) and SCA
and (i) in the good faith judgment of SCA the use of joint counsel would present
such counsel with an actual or potential conflict of interest or
A-1
<PAGE>
(ii) SCA shall have been advised by counsel that there may be one or more legal
defenses available to it which are different from or additional to those
available to the Company (or the director(s)). The Company shall not be liable
to indemnify any person for any settlement of any claim or action effected
without the Company's written consent, which consent shall not be unreasonably
withheld. In addition, the Company agrees to reimburse SCA and each other
indemnified person for all expenses (including reasonable fees and disbursements
of counsel if the Company does not assume the defense of such action) as they
are incurred by SCA, or any indemnified person in connection with investigating,
preparing or defending any such action or claim. SCA shall have no liability to
the Company or any other person in connection with the services which they
render pursuant to the Letter Agreement, except for SCA's bad faith, gross
negligence or willful misconduct judicially determined as aforesaid. The
indemnification, contribution and expense reimbursement obligation the Company
has under this paragraph shall be in addition to any liability the Company may
otherwise have.
A-2
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM CONSOLIDATED
BALANCE SHEETS, CONSOLIDATED STATEMENTS OF INCOME AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> NOV-30-1996
<PERIOD-START> DEC-01-1995
<PERIOD-END> MAY-31-1996
<CASH> 46,337
<SECURITIES> 0
<RECEIVABLES> 39,684
<ALLOWANCES> 5,089
<INVENTORY> 37,169
<CURRENT-ASSETS> 3,414
<PP&E> 25,283
<DEPRECIATION> 18,973
<TOTAL-ASSETS> 139,867
<CURRENT-LIABILITIES> 24,470
<BONDS> 50,000
0
111,277
<COMMON> 128,093
<OTHER-SE> (179,933)
<TOTAL-LIABILITY-AND-EQUITY> 139,867
<SALES> 117,138
<TOTAL-REVENUES> 117,138
<CGS> 82,886
<TOTAL-COSTS> 126,508
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 919
<INTEREST-EXPENSE> 2,084
<INCOME-PRETAX> (8,840)
<INCOME-TAX> 0
<INCOME-CONTINUING> (6,381)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (6,381)
<EPS-PRIMARY> (0.46)
<EPS-DILUTED> 0
</TABLE>
