<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
FEBRUARY 29, 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 April 11, 1996 was 22,936,433 shares.
THIS FORM 10-Q CONTAINS 23 PAGES.
THE EXHIBIT INDEX APPEARS ON PAGE 17.
<PAGE>
L.A. GEAR, INC.
TABLE OF CONTENTS
FORM 10-Q FOR THE QUARTERLY PERIOD ENDED FEBRUARY 29, 1996
<TABLE>
<CAPTION>
PART I. FINANCIAL INFORMATION Page
- ------ --------------------- --------
<S> <C> <C>
Item 1. Financial Statements
Consolidated Condensed Balance Sheets at
February 29, 1996 and November 30, 1995 3
Consolidated Condensed Statements of Operations and Accumulated Deficit
for the three months ended February 29, 1996 and February 28, 1995 4
Consolidated Condensed Statements of Cash Flows for the
three months ended February 29, 1996 and February 28, 1995 5
Notes to Consolidated Condensed Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 9
<CAPTION>
PART II. OTHER INFORMATION
- -------- -----------------
<S> <C> <C>
Item 1. Legal Proceedings 14
Item 2. Changes in Securities 14
Item 3. Defaults Upon Senior Securities 14
Item 4. Submission of Matters to a Vote of Security Holders 14
Item 5. Other Information 14
Item 6. Exhibits and Reports on Form 8-K 15
Signature 16
Exhibit Index 17
</TABLE>
2
<PAGE>
L.A. GEAR, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
February 29, November 30,
1996 1995
------------- ------------
(unaudited)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 27,341 $ 35,956
Accounts receivable, net 62,231 46,630
Inventories 38,979 51,677
Prepaid expenses and other current assets 4,155 3,773
------- --------
Total current assets 132,706 138,036
Property and equipment and other assets, net 8,980 10,348
Goodwill, net 10,795 11,191
------- --------
$ 152,481 $ 159,575
======= ========
LIABILITIES, MANDATORILY REDEEMABLE PREFERRED
STOCK AND SHAREHOLDERS' DEFICIT
Current liabilities:
Accounts payable and accrued liabilities $ 26,619 $ 32,804
Borrowings under international credit facilities -- 1,233
------- --------
Total current liabilities 26,619 34,037
7 3/4% convertible subordinated debentures due 2002 50,000 50,000
Minority interest 7,865 8,419
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 109,788 107,746
Shareholders' deficit:
Common stock, no par value; 80,000,000 shares authorized;
22,936,433 shares issued and outstanding at February 29,
1996 and November 30, 1995 128,093 128,093
Preferred stock, no stated value; 9,000,000 shares
authorized; no shares issued -- --
Cumulative currency translation adjustment 340 561
Accumulated deficit (170,224) (169,281)
--------- --------
Total shareholders' deficit (41,791) (40,627)
--------- --------
$ 152,481 $ 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 February 29 and 28,
--------------------------------------
1996 1995
--------- --------
<S> <C> <C>
Net sales $ 78,666 $ 69,392
Cost of sales 54,112 48,652
--------- ----------
Gross profit 24,554 20,740
Selling, general and administrative expenses 23,396 32,744
Interest expense, net 613 328
--------- ----------
Income (loss) before income taxes and minority interest 545 (12,322)
Income taxes -- --
Minority interest 554 690
--------- ----------
Net income (loss) 1,099 (11,642)
Dividends on mandatorily
redeemable preferred stock (2,042) (1,875)
--------- ----------
Loss applicable to common stock (943) (13,517)
Accumulated deficit, beginning of period (169,281) (110,138)
--------- ----------
Accumulated deficit, end of period $ (170,224) $ (123,655)
========= ==========
Loss per common share $ (0.04) $ (0.59)
========= ==========
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 CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
Three months ended February 29 and 28,
----------------------------------------
1996 1995
----------- -----------
<S> <C> <C>
Net cash used in operating activities $ (7,081) $ (10,067)
---------- -----------
Investing activities:
Capital expenditures (484) (975)
---------- -----------
Financing activities:
Net repayments under international credit facilities (1,218) (76)
---------- -----------
Effect of exchange rate changes on cash and
cash equivalents 168 (674)
---------- -----------
Net decrease in cash and cash equivalents (8,615) (11,792)
Cash and cash equivalents, beginning of the period 35,956 49,710
---------- -----------
Cash and cash equivalents, end of period $ 27,341 $ 37,918
========== ===========
</TABLE>
See accompanying Notes to Consolidated Condensed Financial Statements.
5
<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 February 29, 1996 and the results of operations
and cash flows for the three months ended February 29, 1996 and February 28,
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.
NOTE 2. SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
- ------- -------------------------------------------------
<TABLE>
<CAPTION>
THREE MONTHS ENDED FEBRUARY 29 AND 28,
--------------------------------------
1996 1995
---------- ----------
<S> <C> <C>
(IN THOUSANDS)
CASH PAID (RECEIVED) DURING THE PERIOD FOR:
INTEREST PAID $ 82 $ 87
======== =========
INTEREST RECEIVED $ (434) $ (709)
======== =========
NONCASH FINANCING ACTIVITY:
DIVIDENDS ACCRUED AND UNPAID ON
MANDATORILY REDEEMABLE PREFERRED STOCK $ 2,042 $ 1,875
======== =========
</TABLE>
NOTE 3. ACCOUNTS RECEIVABLE, NET
- ------- ------------------------
Accounts receivable, net of allowance for doubtful accounts and merchandise
returns, consist of the following:
<TABLE>
<CAPTION>
FEBRUARY 29, NOVEMBER 30,
1996 1995
------------ ------------
(IN THOUSANDS)
<S> <C> <C>
TRADE RECEIVABLES
DOMESTIC $ 38,637 $ 23,125
INTERNATIONAL 27,938 28,291
-------- --------
TOTAL TRADE RECEIVABLES 66,575 51,416
OTHER RECEIVABLES 2,210 2,767
-------- --------
68,785 54,183
LESS ALLOWANCE FOR DOUBTFUL ACCOUNTS
AND MERCHANDISE RETURNS (6,554) (7,553)
-------- --------
$ 62,231 $ 46,630
======== ========
</TABLE>
Domestic accounts receivable include $16.3 million and $7.2 million from Wal-
Mart at February 29, 1996 and November 30, 1995, respectively.
6
<PAGE>
L.A. GEAR, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 4. INCOME TAXES
- ------- ------------
At February 29, 1996, deferred tax assets totaled approximately $63.3
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>
FEBRUARY 29, NOVEMBER 30,
1996 1995
------------ ------------
<S> <C> <C>
(IN THOUSANDS)
ACCOUNTS PAYABLE AND OTHER ACCRUED LIABILITIES $ 20,323 $ 22,938
ACCRUED INVENTORY PURCHASES 5,495 7,111
ACCRUED RESTRUCTURING CHARGES 801 2,755
------- -------
$ 26,619 $ 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 quarter ended
February 29, 1996 and, as of that date, approximately $11.5 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. The Company believes that it
has the ability to meet the financing needs, if any, of its subsidiary for the
foreseeable future.
NOTE 7. SERIES A CUMULATIVE CONVERTIBLE PREFERRED STOCK / SHARE EXCHANGE
- ------ ----------------------------------------------------------------
TRANSACTION
-----------
In December 1995, the Company entered into an agreement with Trefoil
Capital Investors, L.P. ("Trefoil") providing for the exchange of all $100
million of the Company's Series A Cumulative Convertible Preferred Stock
("Series A Preferred Stock"), together with accrued and unpaid dividends of
approximately $9.8 million (including the $2.042 million dividend due February
29, 1996), 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 (including the initial $35 million mandatory redemption
obligation, plus accrued and unpaid dividends on the Series A Preferred Stock,
in August 1996) 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 is 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.
7
<PAGE>
L.A. GEAR, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(UNAUDITED)
The Share Exchange Transaction was recommended by a Special Committee of
independent members of the Board of Directors, was ratified by the Board of
Directors and was approved by the shareholders at a special meeting held on
April 9, 1996. The Share Exchange Transaction is scheduled to be completed no
later than April 15, 1996.
8
<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 and 1995,
as applicable.
NET SALES
- --------------------------------------------------------------------------------
In the first quarter of 1996, the number of pairs sold worldwide increased
by 39.3% to 5.5 million pairs compared to 3.9 million pairs in the first quarter
of 1995. The Company's net sales increased by 13.4% to $78.7 million compared
to $69.4 million in the prior year period. Domestic net sales in the first
quarter of 1996 increased by 48.0% compared to the same period in 1995.
International net sales, which accounted for approximately 24.8% of the
Company's total net sales in the first quarter of 1996, decreased by 33.8%
compared to the same period in 1995.
The following table sets forth certain information regarding the Company's
net sales:
<TABLE>
<CAPTION>
THREE MONTHS ENDED FEBRUARY 29 AND 28, NET SALES
- -------------------------------------- --------------------------------------------------
1996 1995
--------------------- ---------------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
DOMESTIC FOOTWEAR
CHILDREN'S $ 26,819 34% $ 29,109 42%
WOMEN'S 19,698 25 6,004 9
MEN'S 12,356 16 4,533 7
OTHER 323 - 351 -
------ --- ------ ---
TOTAL DOMESTIC SALES 59,196 75 39,997 58
INTERNATIONAL FOOTWEAR
CHILDREN'S $ 9,985 13% $ 14,936 21%
WOMEN'S 5,395 7 6,258 9
MEN'S 3,009 4 7,750 11
OTHER 1,081 1 451 1
------ --- ------ ---
TOTAL INTERNATIONAL SALES 19,470 25 29,395 42
------ --- ------ ---
TOTAL NET SALES $ 78,666 100% $ 69,392 100%
====== === ====== ===
</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 the 1996 period
as compared to the same period of 1995:
<TABLE>
<CAPTION>
THREE MONTHS ENDED FEBRUARY 29 AND 28, VOLUME OF FOOTWEAR SOLD
- ---------------------------------------- -------------------------
CHANGES BETWEEN 1996 AND 1995
-------------------------------------------------
DOMESTIC INTERNATIONAL TOTAL
------------- ----------------- --------
<S> <C> <C> <C>
CHILDREN'S 22.0% (19.3%) 9.7%
WOMEN'S 291.8% (33.3%) 123.2%
MEN'S 166.3% (53.3%) 43.1%
TOTAL VOLUME INCREASE (DECREASE) 84.3% (31.4%) 39.3%
</TABLE>
The increase in domestic net sales was primarily attributable to sales of
$30.2 million (2.4 million pairs) to Wal-Mart to fulfill substantially all of
the remaining balance of Wal-Mart's $80 million minimum purchase commitment for
fiscal 1995. In the first quarter of fiscal 1995, sales to Wal-Mart amounted to
$4.6 million. The average selling price per pair decreased domestically by
$3.21 primarily due to increased sales to Wal-Mart compared to the prior year
period and an overall decrease in the average selling price per pair of the
Company's children's lighted product lines. The decrease in international net
sales was due to the negative impact of poor economic conditions in Mexico and
Central and South America and a decrease of $1.41 in the average selling price
per pair primarily due to the reduced average selling price per pair for
children's lights..
9
<PAGE>
Total sales of the Company's children's lighted shoes decreased by $12.2
million to $20.3 million in the first quarter of 1996 from $32.5 million in the
comparable prior year period. Sales of children's lighted shoes accounted for
47.3% and 83.1% of total children's net sales in the first quarter of 1996 and
1995, respectively. Domestic sales of children's lighted product decreased by
$9.2 million in the first quarter of 1996 compared to the comparable prior
period due to a drop in both volume (0.7 million pairs from 1.1 million pairs)
and average selling price per pair ($15.24 from $18.46) as a result of an
increase in sales of discontinued lighted styles and product offerings at lower
average wholesale prices in the first quarter of 1996 from the first quarter of
1995. International sales of children's lighted product also decreased by $2.9
million in the first quarter of 1996 from the comparable 1995 period. While the
number of pairs of children's lighted shoes sold internationally remained
constant, the average selling price per pair decreased by $3.61 from the first
quarter of 1995 to the first quarter of 1996 due to sales of selected styles of
children's discontinued lighted product.
GROSS MARGIN
- --------------------------------------------------------------------------------
The gross margin for the first quarter of 1996 improved to 31.2% from 29.9%
for the same period in the prior year. The improvement resulted from an
increase in both domestic and international margins to 31.0% and 31.9%,
respectively, compared to 30.2% and 29.4% in the prior year quarter. Although
the average domestic selling price decreased by $3.21 per pair during the first
quarter of 1996 in comparison to the comparable prior year period (see Net
Sales), the average domestic unit cost dropped by $2.35 per pair primarily due
to increased sales to Wal-Mart compared to the prior year period. The Company
realized strong domestic margins in the first quarter on sales of its Spring
1996 product lines. Losses on sales of discontinued products sold below cost
were offset against previously established inventory reserves. The increase in
international margins was primarily due to improved inventory planning resulting
in a decrease of $0.8 million in air freight incurred in the first quarter of
1996 compared to 1995 partially offset by reduced margins on sales of children's
lighted product.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
- --------------------------------------------------------------------------------
Total selling, general and administrative expenses decreased by $9.3
million, or 28.4%, to $23.4 million in the first quarter of 1996 compared to
$32.7 million for the comparable prior year period. Domestic selling, general
and administrative expenses decreased by $6.7 million, or 27.8%, to $17.4
million in the first quarter of 1996 compared to $24.1 million for the
comparable prior year period. This decrease is largely due to expense
reductions realized from implementation of the Company's 1995 corporate
reorganization plan and includes reductions in (i) compensation and benefit
expenses of $1.5 million, (ii) bad debt expense of $1.3 million partially as a
result of a $0.9 million recovery of bad debt, (iii) depreciation of $0.7
million, (iv) advertising and promotional expenses of $0.7 million, (v) sales
commissions of $0.5 million and (vi) other net expenses of $2.0 million.
Approximately $2.0 million in restructuring costs incurred in the first quarter
of 1996 were applied against the restructuring charge recorded in 1995.
International operating expenses decreased by $2.6 million, or 30.2%, to $6.0
million compared to $8.6 million in the first quarter of 1995 primarily due to
lower sales volume at the Company's European and Mexican subsidiaries.
As a percentage of net sales, selling, general and administrative expenses
decreased to approximately 29.7% in the first quarter of 1996 from
approximately 47.2% in the 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.
INTEREST EXPENSE (INCOME), NET
- --------------------------------------------------------------------------------
Interest expense of $1.0 million for the three months ended February 29,
1996 and February 28, 1995 primarily related to interest costs on the $50
million, 7 3/4% convertible subordinated debentures due 2002 (the "Debentures")
issued in December 1992. Interest income decreased by $0.3 million to $0.4
million in the first quarter of 1996 compared to $0.7 million in the first
quarter of 1995 primarily as a result of lower interest rates on decreased
average cash balances.
10
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
- --------------------------------------------------------------------------------
The following table sets forth certain information regarding the Company's
liquidity and capital resources:
<TABLE>
<CAPTION>
FEBRUARY 29, NOVEMBER 30,
1996 1995
------------ ------------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
CASH AND CASH EQUIVALENTS $ 27,341 $ 35,956
WORKING CAPITAL 106,087 103,999
OUTSTANDING LETTERS OF CREDIT 11,513 24,440
CONVERTIBLE SUBORDINATED DEBENTURES 50,000 50,000
MANDATORILY REDEEMABLE PREFERRED STOCK PLUS
ACCRUED AND UNPAID DIVIDENDS 109,788 107,746
</TABLE>
<TABLE>
<CAPTION>
THREE MONTHS ENDED
------------------
FEBRUARY 29, FEBRUARY 28,
1996 1995
------------ ------------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
AVERAGE DAILY SHORT-TERM BORROWINGS $ 9 $ 281
WEIGHTED AVERAGE INTEREST RATES 8.25% 8.20%
</TABLE>
Cash and Cash Equivalents Cash and cash equivalent balances decreased by $8.6
million from November 30, 1995 to a balance of $27.3 million at February 29,
1996 primarily due to $7.1 million in net cash used in operating activities.
Accounts Receivable, Net and Inventory Accounts receivable increased from $46.6
million at November 30, 1995 to $62.2 million at February 29, 1996 predominantly
as a result of the sales to Wal-Mart. Inventory decreased from $51.7 million
(4.4 million pairs) at November 30, 1995 to $39.0 million (3.5 million pairs) at
February 29, 1996 primarily due to the shipment of substantially all of the
balance of Wal-Mart's 1995 purchase commitment in the first quarter of fiscal
1996.
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 quarter
ended February 29, 1996 and, as of that date, approximately $11.5 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. The Company believes that it has
the ability to meet the financing needs, if any, of its subsidiary for the
foreseeable future.
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.
11
<PAGE>
Proposed Share Exchange Transaction In December 1995, the Company entered into
an agreement with Trefoil Capital Investors, L.P. ("Trefoil") providing for the
exchange of all $100 million of the Company's Series A Cumulative Convertible
Preferred Stock ("Series A Preferred Stock"), together with accrued and unpaid
dividends of approximately $9.8 million (including the $2.042 million dividend
due February 29, 1996), 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 (including the initial $35 million mandatory redemption
obligation, plus accrued and unpaid dividends on the Series A Preferred Stock,
in August 1996) 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 is entitled, at its option, to pay dividends during the fiscal year
ending November 30, 1996 either in 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 Share Exchange Transaction was recommended by a Special Committee of
independent members of the Board of Directors, was ratified by the Board of
Directors and was approved by the shareholders at a special meeting held on
April 9, 1996. The Share Exchange Transaction is scheduled to be completed no
later than April 15, 1996.
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
- --------------------------------------------------------------------------------
The Company will continue its efforts to increase revenue and sales
velocity in the intensely competitive branded athletic footwear market.
Marketing and promotional efforts throughout 1996 are directed toward the
women's brand and the launch of the Company's NEONZ(TM) and GRAf/x(TM)
collections for children. NEONZ(TM) represents the Company's next generation of
children's lighted footwear and is scheduled for introduction late in the second
quarter of fiscal 1996. GRAf/x(TM), to be introduced for the Back-to-School
("BTS") season, 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. In March 1996, the Company launched a worldwide print
advertising campaign featuring its women's footwear, communicating the "L.A."
attitude of fun, fashion and fitness. Children's television commercials will
air later in the year in support of the Company's new children's products.
The Company has begun to realize the benefits of its cost reduction
measures implemented in fiscal 1995. These benefits are expected to continue as
the Company maintains its tight overhead and working capital controls as part of
its continuing effort to return to long-term profitability.
Demand from retailers for the Company's 1996 BTS products, which will ship
primarily in the second and third fiscal quarters, will be critical to the
Company's financial performance during the balance of the year. Management
believes that increased competition in the marketplace may create increased
pricing pressure which could result in reductions in selling prices and lower
gross margins.
At March 31, 1996, the combined domestic and international backlog of
orders for shipments scheduled primarily during the April through August 1996
period was $64.2 million, which represents "future orders" for the new BTS
product scheduled to ship during the Company's second and third fiscal quarters
of 1996. The backlog at March 31, 1996 includes $2.4 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 March 31, 1995 for the
12
<PAGE>
comparable prior year shipping period was $166.2 million. The lower backlog at
March 31, 1996 is primarily due to (i) the inclusion in the backlog at March 31,
1995 of $73.5 million of the $80 million minimum purchase commitment under the
Company's agreement with Wal-Mart and (ii) an approximate $21.2 million decrease
in orders for children's lighted product. Children's lights as a percentage of
the total March 31, 1996 and 1995 backlog, excluding Wal-Mart orders, were 31.7%
and 44.0%, 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.
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.
13
<PAGE>
PART II - OTHER INFORMATION
ITEM 1 - LEGAL PROCEEDINGS
- ------ -----------------
- Not applicable
ITEM 2 - CHANGES IN SECURITIES
- ------ ---------------------
- Not applicable.
ITEM 3 - DEFAULTS UPON SENIOR SECURITIES
- ------ -------------------------------
- The Company determined it was in its best interest not to, and it did
not, pay cash dividends on the Series A Preferred Stock ("Series A
Preferred Stock") due on each of February 28, 1995, May 31, 1995, August
31, 1995, December 31, 1995 and February 29, 1996 to Trefoil Capital
Investors, L.P. ("Trefoil"), the holder of all of the issued and
outstanding shares of Series A Preferred Stock. As of February 29, 1996,
such dividend arrearage amounted to $9.788 million.
In December 1995, the Company entered into an agreement with Trefoil
Capital Investors, L.P. ("Trefoil") providing for the exchange of all
$100 million of the Company's Series A Cumulative Convertible Preferred
Stock ("Series A Preferred Stock"), together with accrued and unpaid
dividends of approximately $9.8 million (including the $2.042 million
dividend due February 29, 1996), 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 (including
the initial $35 million mandatory redemption obligation, plus accrued and
unpaid dividends on the Series A Preferred Stock, in August 1996) 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
is 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 Share Exchange Transaction was recommended by a Special Committee of
independent members of the Board of Directors, was ratified by the Board
of Directors and was approved by the shareholders at a special meeting
held on April 9, 1996. The Share Exchange Transaction is scheduled to be
completed no later than April 15, 1996.
ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
- ------ ---------------------------------------------------
- Not applicable.
ITEM 5 - OTHER INFORMATION
- ------ -----------------
- Not applicable.
14
<PAGE>
PART II - OTHER INFORMATION (cont.)
ITEM 6 - EXHIBITS AND REPORTS ON FORM 8-K
- ------ --------------------------------
(a) Exhibits:
10.1 Buying Agency Agreement, dated March 6, 1996, by and between the Company
and BBC International, Ltd. Portions of this Agreement have been
omitted and filed separately with the Commission pursuant to a request
for confidential treatment.
27.1 Financial Data Schedule
(b) Reports on Form 8-K:
1. The Company filed a current report on Form 8-K on February 9, 1996,
under Item 5. - Other Events, with respect to the Sixth Amendment to
Loan and Security Agreement entered into between the Company and
BankAmerica Business Credit Inc. which amends the terms of the
existing revolving line of credit.
15
<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: April 11, 1996 L.A. GEAR, INC.
----------------------
By: /s/ William L. Benford
--------------------------------
William L. Benford
President and
Chief Operating Officer
16
<PAGE>
EXHIBIT INDEX
-------------
<TABLE>
<CAPTION>
Exhibit No. Document Page No.
- ----------- ---------------------------------- --------
<S> <C> <C>
10.1 Buying Agency Agreement, dated March 6, 1996, by 18
and between the Company and BBC International,
Ltd. Portions of this Agreement have been omitted
and filed separately with the Commission pursuant to
a request for confidential treatment.
27.1 Financial Data Schedule 23
</TABLE>
17
<PAGE>
EXHIBIT 10.1
------------
BUYING AGENCY AGREEMENT
-----------------------
This agreement is entered into between LA Gear, Inc. located at 2850 Ocean
Park Blvd., Santa Monica, Ca. 90404 (a California Corporation) hereinafter
referred to as the Principal, and BBC International, Ltd., located at 19 West
34th Street, New York New York 10001, hereinafter referred to as the Agent.
WHEREAS, the Principal is engaged in the importation of footwear for sale
in the United States, and
WHEREAS, the Agent acts as a representative in various countries for
interested parties in the United States, and
WHEREAS, the parties hereto are desirous of entering into written agreement
which incorporates all understandings with regard to the agency relationship
between the parties,
NOW THEREFORE, in consideration of the mutual promises and covenants
between the parties herein, it is agreed as follows:
(1) The Agent will act as a non-exclusive Buying Agent for the Principal
in connection with the purchase of merchandise in various countries (hereinafter
called the Territory).
2) The Agent agrees to perform the following services on behalf of the
Principal:
(a) The Agent will assist in the negotiation of the most favorable
prices for the Principal. In this connection, the Agent shall visit
manufacturers, obtain samples of merchandise, submit samples to the
Principal, quoting prices at which the merchandise can be purchased.
(b) The Agent shall familiarize itself with the Principal 's needs
and survey the potential markets to obtain the best available
merchandise. The Agent will advise Principal of new developments in
the Territory which may be of interest to the Principal.
<PAGE>
2
-
(c) The Agent shall place orders with manufacturers on behalf of the
Principal. The Agent shall act only upon the explicit instructions of
the Principal, and in no case shall the Agent act without such
explicit instructions from the Principal.
(d) The Agent shall quote "FOB Port of Shipment" prices which shall
not include or other suppliers pursuant to the explicit instructions
the buying agent's commission. The Agent shall arrange for payment
terms to the manufacturer of the Principal.
(e) The Agent shall facilitate the acquisition of documentation
necessary for the importation into the United States.
(f) The Agent shall visit manufacturers where orders are placed in
order to inspect the quality of the merchandise shipped for the
account of the Principal. In the event that such merchandise does not
conform to quality specifications, or any other requirement of the
purchase order, the Agent shall immediately notify the Principal.
(g) The Agent shall assist the Principal in the return of any
merchandise deemed to be defective. In addition, the Agent shall
assist in the recovery of any monies due the Principal from the
manufacturer as a result of defective merchandise, shortages, etc.
Such action will be taken only after consultation with the Principal.
(h) The Agent shall never act as a seller in any transaction
involving the Principal, and shall provide the manufacturer 's
invoices as required by the Principal
(i) The Agent shall provide inspection certificates for each shipment
as required by the Principal.
(j) In the event merchandise is refused by the Principal or not
shipped, the Agent shall endeavor to prevent the supplier from
disposing of such merchandise without the removal of any labels, brand
names or marking identifying the Principal.
(k) The Agent shall maintain records of products ordered, products in
progress, finished product and product in transit for the account of
the Principal, and from time to time, at the request of the Principal,
shall provide the Principal with written reports thereof.
<PAGE>
3
-
(3) The Principal agrees to compensate the Agent with a *
buying commission based on the total FOB value of the merchandise which is
purchased pursuant to this agreement. In the event the Agent discovers products
prior to shipment that it determines to be * , it shall so
designate such products.
*
In the event that the Agent
discovers products prior to shipment that it determines to be * it shall
so designate such products.
*
(4) The Principal shall make direct payment by letter of credit or open
account to the sellers of the merchandise purchased under this agreement in
accordance with the terms of the purchase orders of the Principal. In the event
that the Principal elects to pay the Agent for the cost of merchandise, then
such sum shall be paid in full to the seller of the merchandise by the Agent for
the cost for the account of the Principal.
(5) The Agent shall provide the Principal with a separate invoice for
payment for buying commissions.
(6) The Agent shall accept no remuneration for its services on any
merchandise purchased by the Principal pursuant to this agreement other than the
commission paid hereunder by the Principal and will not share such commissions
in any manner with the manufacturer or others. No part of the Agent s
compensation shall be paid, directly or indirectly, to the manufacturer/seller
of inure to the benefit of the manufacturer/seller in any way.
_____________________
* Material omitted and filed separately with the SEC pursuant to request
for confidential treatment.
<PAGE>
4
-
(7) The Agent, in executing this agreement, certifies that it has no
ownership or financial interest in, nor any control of, the factories making the
commodities purchased with the assistance of the Agent; that it does not, for
its own account, sell raw materials to the factories making such merchandise;
and that the factories have no ownership or financial interest in, or any
control, over the Agent. In the event that any such interest is consummated,
then the Agent will immediately inform the Principal.
(8) The Agent shall only procure products on behalf of the Principal from
manufacturers which have entered into the Principal's standard written Footwear
Manufacturing Agreement. The Agent shall assist the Principal in the collection
of any and all monies or credits due the Principal, and the enforcement of any
and all of the Principal 's rights, under any and all Footwear Manufacturing
Agreements entered into by the principal with the manufacturers of products
sourced by the Agent; provided, however. that the Principal shall not contact
-------------------
such manufacturers directly with respect to product sourced by the Agent
hereunder, but shall only make such contact in conjunction with (or with the
prior approval of) the Agent, except that the Principal shall be entitled to
------------
communicate directly with, and to proceed directly against, any such
manufacturer with whom it has a dispute in the event that the Agent has not been
able to fully resolve such dispute to the complete satisfaction of the Principal
within ninety (90) days of being notified of the existence of such dispute by
the Principal.
(9) The Agent shall pay all costs of conducting his agency and all taxes
including assessments, which may be made against the salary or wages of those
directly or indirectly employed by the Agent.
(10) The Agent shall not assign his rights nor designate the performance of
his duties under this Agreement without the prior written consent of the
Principal.
<PAGE>
5
-
(11) This Agreement expresses fully the understanding of the parties and
incorporates all previous understandings. No future changes in this Agreement
shall be valid except when and if reduced to writing and signed by both
Principal and Agent.
(12) The Agreement will remain in effect until cancellation by either party
upon giving written notification at least ninety (90) days prior to the date of
such cancellation. Should such notice be given, all existing orders will be
executed and all outstanding commissions shall be paid.
(13) Any notices required to be given under this Agreement shall be deemed
given sufficiently if a notice in writing is mailed by registered mail.
(14) The Agreement shall be construed and liabilities of the parties
hereunder shall be determined in accordance with the laws of the State of New
York USA.
Date this 6th day of March, 1996.
---- ------ ----
LA GEAR, INC. BBC INTERNATIONAL, LTD.
Signature Signature
/s/ W.L. BENFORD /s/ BOB B. CAMPBELL
- ---------------- --------------------------
William Benford Robert B. Campbell
President Chairman Of The Board
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> NOV-30-1996
<PERIOD-START> DEC-01-1995
<PERIOD-END> FEB-29-1996
<CASH> 27,341
<SECURITIES> 0
<RECEIVABLES> 68,785
<ALLOWANCES> 6,553
<INVENTORY> 38,979
<CURRENT-ASSETS> 4,155
<PP&E> 25,140
<DEPRECIATION> 18,125
<TOTAL-ASSETS> 152,481
<CURRENT-LIABILITIES> 26,619
<BONDS> 50,000
109,788
0
<COMMON> 128,093
<OTHER-SE> 169,884
<TOTAL-LIABILITY-AND-EQUITY> 152,481
<SALES> 78,666
<TOTAL-REVENUES> 78,666
<CGS> 54,112
<TOTAL-COSTS> 78,384
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 654
<INTEREST-EXPENSE> 1,046
<INCOME-PRETAX> 545
<INCOME-TAX> 0
<INCOME-CONTINUING> 1,099
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<NET-INCOME> 1,099
<EPS-PRIMARY> (0.04)
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