-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, E7jN9UAcpuYkeYrdniFSWqW0Is70cEfm/Ed/hYogXVu0xKKi+TrgRjzMsDsWo+YI N0mnd2V21/OMAQZ3zYuEBQ== 0000898430-96-000688.txt : 19960531 0000898430-96-000688.hdr.sgml : 19960531 ACCESSION NUMBER: 0000898430-96-000688 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 9 CONFORMED PERIOD OF REPORT: 19951130 FILED AS OF DATE: 19960228 SROS: NYSE FILER: COMPANY DATA: COMPANY CONFORMED NAME: LA GEAR INC CENTRAL INDEX KEY: 0000793937 STANDARD INDUSTRIAL CLASSIFICATION: 3021 IRS NUMBER: 953375118 STATE OF INCORPORATION: CA FISCAL YEAR END: 1130 FILING VALUES: FORM TYPE: 10-K SEC ACT: 1934 Act SEC FILE NUMBER: 001-10157 FILM NUMBER: 96527716 BUSINESS ADDRESS: STREET 1: 2850 OCEAN PARK BLVD CITY: SANTA MONICA STATE: CA ZIP: 90405 BUSINESS PHONE: 3104524327 MAIL ADDRESS: STREET 1: 2850 OCEAN PARK BLVD CITY: SANTA MONICA STATE: CA ZIP: 90405 10-K 1 FORM 10-K As filed with the Securities and Exchange Commission on February 28, 1996 - - -------------------------------------------------------------------------------- UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-K (MARK ONE) [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 (FEE REQUIRED) FOR THE FISCAL YEAR ENDED NOVEMBER 30, 1995 OR [_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 (NO FEE REQUIRED) For the transition period from _________________ to __________________ Commission file number 1-10157 L.A. GEAR, INC. (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER) 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) Registrant's telephone number, including area code: (310) 452-4327 Securities registered pursuant to Section 12(b) of the Act: Common Stock, No Par Value The New York Stock Exchange Securities registered pursuant to Section 12(g) of the Act: 7 3/4% Convertible Subordinated Debentures due 2002 INDICATE BY CHECK MARK WHETHER THE REGISTRANT (1) HAS FILED ALL REPORTS REQUIRED TO BE FILED BY SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 DURING THE PRECEDING 12 MONTHS (OR FOR SUCH SHORTER PERIOD THAT THE REGISTRANT WAS REQUIRED TO FILE SUCH REPORTS), AND (2) HAS BEEN SUBJECT TO FILING REQUIREMENTS FOR THE PAST 90 DAYS. YES X NO --- --- INDICATE BY CHECK MARK IF DISCLOSURE OF DELINQUENT FILERS PURSUANT TO ITEM 405 OF REGULATION S-K IS NOT CONTAINED HEREIN, AND WILL NOT BE CONTAINED, TO THE BEST OF THE REGISTRANT'S KNOWLEDGE, IN DEFINITIVE PROXY OR INFORMATION STATEMENTS INCORPORATED BY REFERENCE IN PART III OF THIS FORM 10-K OR ANY AMENDMENT TO THIS FORM 10-K. _____ AS OF FEBRUARY 20, 1996, THE AGGREGATE MARKET VALUE OF THE COMMON STOCK HELD BY NON-AFFILIATES OF THE REGISTRANT WAS APPROXIMATELY $49,022,982 BASED UPON THE CLOSING SALES PRICE OF THE COMMON STOCK ON THAT DATE. NUMBER OF SHARES OF COMMON STOCK OF THE REGISTRANT OUTSTANDING AS OF FEBRUARY 20, 1996: 22,936,433. DOCUMENTS INCORPORATED BY REFERENCE: THE ANNUAL REPORT TO SHAREHOLDERS FOR THE YEAR ENDED NOVEMBER 30, 1995 HAS BEEN INCORPORATED PARTIALLY IN PART II HEREOF. - - -------------------------------------------------------------------------------- L.A. GEAR, INC. Table of Contents Annual Report on Form 10-K For the Fiscal Year Ended November 30, 1995
Part I Page - - ------ ---- Item 1. Business 1 Item 2. Properties 8 Item 3. Legal Proceedings 8 Item 4. Submission of Matters to a Vote of Security Holders 8 Item 4 (a). Executive Officers of the Registrant 9 Part II - - ------- Item 5. Market for the Registrant's Common Stock and Related Stockholder Matters * Item 6. Selected Financial Data * Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations * Item 8. Financial Statements and Supplementary Data * Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure Part III - - -------- Item 10. Directors and Executive Officers of the Registrant 12 Item 11. Executive Compensation 14 Item 12. Security Ownership of Certain Beneficial Owners and Management 26 Item 13. Certain Relationships and Related Transactions 30 Part IV - - ------- Item 14. Exhibits, Financial Statement Schedules and Reports 34 on Form 8-K Signatures 44
* Incorporated by reference to L.A. Gear's 1995 Annual Report to Shareholders. PART I ------ ITEM 1. BUSINESS - - ------ -------- GENERAL - - ------- L. A. Gear, Inc. (L.A. Gear, Inc. and its subsidiaries are collectively referred to herein as "L.A. Gear" or the "Company") is a California corporation which was organized on February 7, 1979. The Company is a holding company that, through its principal subsidiary, L.A. Gear California, Inc., designs, develops and markets a broad range of quality athletic and lifestyle footwear for adults and children worldwide. The Company believes that the athletic footwear market is facing a major consolidation at the wholesale level. According to a report published in Sporting Goods Intelligence on January 15, 1996, Nike and Reebok collectively had over 57% of the United States branded athletic footwear market in 1995, with the Company ranking sixth with approximately a 3% domestic market share. While certain of its products compete directly with Nike and Reebok, the Company seeks to differentiate itself by focusing on its heritage as a women's and children's brand, offering fun, innovative, high-quality, fashionable footwear at affordable prices. 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. The Company's greatest challenge in 1996 and beyond is to increase revenue and sales velocity in a maturing branded athletic footwear market. To address this challenge, the Company announced a corporate reorganization plan in September 1995 designed to reengineer key business processes, streamline the Company's organizational structure and substantially reduce operating expenses. A key priority of the corporate reorganization plan is to bring on-trend products to market in a reduced amount of time. The Company plans to accomplish quicker product introductions by, among other things, improving design capabilities, better utilizing product development resources and strengthening relationships with factories and sourcing agents. The Company has implemented cost reduction measures targeted to reduce operating expenses by approximately $25 million on an annualized basis. Such measures included a 30% reduction in the Company's workforce in September 1995 and the closure of its retail outlet store division. The Company's efforts to maintain tight overhead and working capital controls have been enhanced by, among other things, the elimination of underutilized sponsorships and licenses, in-house production of sales catalogs and selected initial footwear prototypes, the simplification of customer discount programs and office space consolidation. PRODUCTS - - -------- L.A. Gear's women's product lines continue to emphasize a return to the Company's heritage as a women's athletic/lifestyle brand. The Company's women's footwear collection seeks to fill the gap between casual and strictly performance footwear at retail prices designed to make the brand attractive to both style and value conscious consumers. Product offerings are divided into three categories: L.A. Fitness includes value priced cross-training and walking shoes priced to retail between $40 and $60; L.A. Basics features updated classic sporty and casual wear priced to retail below $50; and L.A. Style provides athletic/outdoor inspired fashion footwear priced to retail between $35 and $55. The Company continues to seek to expand its significant presence in the under 12 year old segment of the athletic footwear market through innovation and styling in its lighted and non-lighted product lines. An updated girls' line of fashion-athletic shoes featuring feminine touches and bright colors was featured in 1995. Retail acceptance of a new Street Hockey product category launched by the Company in the second quarter of 1995 has been disappointing to date and the Company is evaluating the demand for new style introductions in this category in fiscal 1996. 1 Despite a 23% decrease in sales of its children's L.A. Lights(R) and Light Gear(TM) the Company continues to believe in the viability of lighted footwear, the best selling product category in the Company's history. The NEONZ(TM) collection (scheduled for introduction in late second quarter of fiscal 1996) represents the Company's next generation of lighted footwear. For the first time, lighted panels on the shoe's upper will illuminate when the foot moves. The Company also plans to introduce GRAf/x(TM), a new non-lighted technology, for the 1996 Back-to-School season. GRAf/x(TM) is a temperature sensitive collection that allows children to change the color of the upper, reveal a pattern or personalize their footwear by writing on their shoes. The Company's streamlined men's product lines offer stylish athletic and outdoor looks at value prices. Consistent with its plan to move away from high- priced, technical performance athletic footwear, the Company discontinued its FLAK(TM) product line in 1995. In 1996 the Company will introduce a full comfort package for every shoe in its men's line, utilizing anatomically adjusted lasts and featuring a comfort-flex forefoot, ABS(TM) shock absorption and an "Impact Sensor(TM)" sock liner. Approximately ninety-five percent of the Company's footwear styles available domestically in 1996 will carry a suggested retail price below $50 in line with the Company's strategy to provide value priced footwear. For the 1996 Back-To- School ("BTS") season the Company will introduce approximately 110 new styles which reflect the Company's emphasis on fun, fashion and fitness. MARKETING - - --------- Advertising, promotional and merchandising activities are the principal elements in the Company's selling and marketing strategies. The Company's marketing plan will continue to focus on the women's and children's markets. In March 1996 a worldwide print advertising campaign aimed at women will appear in publications such as Cosmopolitan, Glamour, Mademoiselle, Self, Elle, Seventeen and Shape. Children's television commercials featuring the Company's new GRAf/x(TM) collection will air on Fox, Nickelodeon and the Cartoon Network. The Company has promotional contracts with professional athletes (Joe Montana, Wayne Gretzky, Brett Hull, Mark Messier and Karl Malone) which provide for endorsement fees as well as the payment of royalties based on sales of selected footwear styles and apparel. The Company entered into a multi-year sponsorship agreement during 1995 with Universal Studios Hollywood. Both Universal Studios Hollywood and the Company's professional athlete endorsers can be featured in the Company's advertising and promotional campaigns and in point of sale materials. Participation in major international, national and regional sporting goods and footwear trade shows is also an important part of the Company's sales, marketing and promotional activities. The Company believes that enhancing brand recognition through the use of distinctive, readily identifiable trademarks and logos is an important factor in (i) creating a market for its products, (ii) distinguishing its products from the products of others in a very competitive market place and (iii) licensing its trademarks for non-footwear products. DISTRIBUTION - - ------------ The Company's footwear products are sold in the United States to approximately 2,900 accounts that include department, shoe, sporting goods and athletic footwear stores, mass market department stores and mass merchandisers. In 1995, as part of its reorganization plan, the Company decided to close all eight of its retail outlet stores. The Company sells its footwear products domestically through its direct employee sales force. Internationally, the Company's footwear products are sold in approximately 53 countries, primarily through independent distributors, wholly-owned subsidiaries and its Far East joint venture. See "- International Sales". 2 The following table sets forth certain information regarding the Company's net sales.
NET SALES ---------------------------------------------------- 1995 1994 1993 --------------- -------------- --------------- $ % $ % $ % -------- ----- -------- ---- -------- ---- (DOLLARS IN THOUSANDS) DOMESTIC FOOTWEAR CHILDREN'S $107,570 36% $165,460 40% $128,458 32% WOMEN'S 46,422 16 63,218 15 82,771 21 MEN'S 35,842 12 67,186 16 73,132 18 OTHER 2,659 1 1,721 1 1,959 1 -------- --- -------- --- -------- --- TOTAL DOMESTIC NET SALES 192,493 65 297,585 72 286,320 72 INTERNATIONAL FOOTWEAR AND OTHER 104,058 35 118,381 28 112,038 28 -------- --- -------- --- -------- --- TOTAL NET SALES $296,551 100% $415,966 100% $398,358 100% ======== === ======== === ======== ===
In 1995, sales to Wal-Mart accounted for 15.3% of the Company's net sales. In 1994 and 1993 none of the Company's customers individually accounted for 10% or more of the Company's net sales. The Company's five largest customers worldwide, in the aggregate, accounted for approximately 27.8%, 26.8% and 20.7% of the Company's net sales in 1995, 1994 and 1993, respectively. ORDERING PROGRAMS - - ----------------- The Company has a combination of "at once" and "futures" ordering programs. In contrast to an "at once" ordering program, in which shoes are shipped in immediate response to the placement of orders, a formal "futures" ordering program requires retailers and international distributors to place orders from four to six months in advance of delivery. The "futures" program therefore reduces the Company's need to purchase inventory in anticipation of customer demand. To encourage "futures" orders, the Company offers certain discounts and incentives, subject to minimum order requirements. The Company's goal is to achieve a balance between its "futures" and "at once" programs in which the "at once" program is used primarily for "fill-in" orders and for products that remain relatively unchanged from season to season while the "futures" program is used for new introductions. The mix of "futures" and "at once" orders varies significantly from quarter to quarter and year to year, and, therefore, current "futures" order levels are not necessarily indicative of sales for subsequent periods. See "- Inventory Levels". INTERNATIONAL SALES - - ------------------- Internationally, the Company's products are sold through (i) its subsidiaries which sell in The Netherlands, Luxembourg, Belgium, Germany, Austria, United Kingdom, Italy, France and Mexico, (ii) its Far East joint venture with Inchcape Pacific Limited in selected Far East markets, including Hong Kong, Singapore, Malaysia, Indonesia, Thailand, Taiwan and The People's Republic of China and (iii) independent distributors. By selling through its foreign subsidiaries, the Company realizes a wholesale margin on the sale to the retailer that is greater than that on sales to independent distributors. Prior to selling directly to retailers through its subsidiaries and joint venture, products were sold primarily to distributors at a stated margin over the Company's factory purchase price. The Company exercised little or no control over the pricing of products for resale by the distributor. In 1995 and 1994, sales to the Company's foreign subsidiaries' customers represented 20.6% and 12.6%, respectively, of the Company's consolidated net sales. Although the Company realizes higher margins on sales made by its subsidiaries, it also incurs greater operating costs, including the cost of holding inventory. In addition, the Company is increasingly exposed to the other customary risks of doing business abroad. See "- Manufacturing" and "- Trade Legislation". Segment information in regard to geographical areas and export sales are included in "Note 16 - Segment Information" in the Notes to Consolidated Financial Statements. 3 The Company's international operations are subject to currency fluctuations over which it has no control. As a result of the economic crisis and the devaluation of the peso in Mexico, there is uncertainty as to the volume of business which can be achieved in Mexico in the future. The Company enters into forward exchange contracts, with terms of less than one year, to offset the effects of exchange rate changes on cash flow exposures denominated in foreign currencies. These exposures are primarily repayments of U.S. dollar denominated liabilities by the Company's foreign subsidiaries. These contracts are marked to market realized and unrealized gains and losses recognized in the consolidated statement of operations. MANUFACTURING - - ------------- The Company's footwear is manufactured to its specifications by independent producers located primarily in The People's Republic of China, Indonesia and Portugal. During fiscal 1995, manufacturers located in these countries supplied 80%, 19% and 1%, respectively of total pairs of footwear purchased by the Company. The large percentage of the Company's product currently developed and produced in China is due to the technical complexity of the product, additional quota allocated to the Company's European subsidiaries for shoes manufactured in China and an increase in the number of shoes which meet the European Union's definition of carve out under legislation restricting the importation of footwear manufactured in China. The Company is presently seeking alternate capacity production outside of China. See "- Trade Legislation". The Company selects its footwear manufacturing plants based upon its ability to realize procurement efficiencies, achieve product quality objectives and lower product costs. In addition, since 1992 the Company has engaged an affiliate of Pentland Group plc ("Pentland") to act as its sourcing agent in the Far East. The responsibilities of the sourcing agent include inspecting finished goods prior to shipment by the manufacturer, supervising development, production and management and facilitating the shipment of goods from foreign ports. All manufacturing of footwear is performed in accordance with specifications furnished by the Company, subject to quality control standards which include the right to reject products that do not meet such specifications. Pentland provides similar sourcing services to other footwear companies. Improved product quality has resulted in a decrease in the percentage of defective returns from customers. In fiscal 1995, as part of its corporate reorganization plan, the Company reviewed its product design and development programs and determined that efficiencies could be gained by bringing certain functions in-house. The Company established a model shop at its worldwide headquarters to produce selected initial footwear prototypes which allow for more accurate design specifications and quicker turnaround in the preparation of confirmation samples. The Company also utilizes a state-of-the-art Computer-Aided-Design and Manufacturing System to reduce the time it takes to introduce new products to market by shortening the design and development stages. As the Company is able to reduce product cycle time, it should be able to respond more quickly to changing consumer preferences and exercise better control over production costs. The principal materials used in the Company's footwear products are leather, rubber and synthetic fabrics. The Company's suppliers buy raw materials in bulk. Most raw materials are available in the countries where manufacturing takes place. Although the Company's suppliers have thus far experienced little difficulty in satisfying their raw materials requirements, a loss of supply of any one of the major component materials could temporarily disrupt production. The footwear products imported into the United States by the Company are subject to customs duties. Under the Harmonized Tariff System, duties on the footwear products imported by the Company range from 6% to 37.5% of production costs (plus a unit charge in some cases of approximately 90 cents). Duty rates depend on the construction and gender of the shoe, as well as whether the principal component is leather or other materials. In fiscal 1995 these duties averaged approximately 10.2% on the cost of the Company's footwear. The Company is unable to predict whether additional United States customs duties may be imposed upon the importation of its products in the future. As a result of the Company's use of foreign manufacturing facilities, the Company is subject to the customary risks of doing business abroad, including fluctuations in the value of currencies, export duties, import controls and 4 trade barriers (including quotas), restrictions on the transfer of funds, work stoppages and, in certain parts of the world, political instability. To date, these factors have not had a material adverse impact on the Company's operations. The Company competes with other shoe companies, such as Nike, Reebok, Fila, Converse and adidas, for production capacity. Management believes that its present sources of supply are adequate and that, if existing production capacities become unavailable or inadequate, the Company has the ability to develop alternative sources over time for the footwear obtained from its current producers. The Company's operations could, however, be materially and adversely affected by a substantial delay in locating alternative sources of production. See "- Trade Legislation". Although all of the Company's inventory purchases and product sales (and the prices of most of the raw materials used in the manufacture of its products) are denominated in U.S. dollars, the Company's product costs, pricing structure and profit margins depend, in part, on the currency exchange rates between the United States and the countries where its products are manufactured. The currencies of these countries have, from time to time, increased in value against the U.S. dollar and may experience further increases in the future as a result of various economic and political factors. Although the Company believes that such fluctuations in exchange rates have not had a material impact on its operations to date, such fluctuations could, depending upon their extent and duration, materially increase the Company's future cost of goods, resulting in higher product prices or lower profits unless alternative manufacturing arrangements can be implemented. INVENTORY LEVELS - - ---------------- Although inventory decreased by $5.9 million from $57.6 million at November 30, 1994 to $51.7 million at November 30, 1995, the number of pairs increased by 0.3 million pairs at November 30, 1995. The increase in the number of pairs was primarily due to inventory purchased in anticipation of sales that did not materialize during the Company's fourth quarter. The decrease in the value of the inventory was due to a reduction in the average cost per pair as a result of the Company's focus on offering more value priced products for men and women, a reduced emphasis on more expensive performance athletic footwear and sales of a product line developed for Wal-Mart. The Company continually monitors its inventory levels and, when necessary, reduces excess inventory primarily through utilization of selected segments of the mass market discount channel. TRADEMARKS AND PATENTS - - ---------------------- The Company regards its intellectual property among its most valuable assets. It is the policy of the Company to defend vigorously its trademarks and patents against infringement to the fullest extent practicable under the laws of the United States and other countries in which its products are manufactured or sold. L.A. Gear(R) and L.A. Lights(R) are federally registered trademarks of the Company in the United States. L.A. Gear(R) is also a registered trademark in 101 foreign countries for footwear, apparel and other products. The Company has numerous other trademarks that are registered in the United States, many of which are also registered in foreign countries. The Company has more than 450 foreign trademark registrations and more than 170 foreign trademark applications pending. The Company has obtained utility and design patents for numerous footwear technologies and ornamental aspects of its shoes and has numerous patent applications pending for other footwear technologies and designs. The Company has also acquired licensed rights for certain footwear technologies and trademarks from third parties for use in its products. EMPLOYEES - - --------- At November 30, 1995, the Company had 369 full-time domestic and 140 full-time international employees compared to 565 full-time domestic and 161 full-time international employees at November 30, 1994. The Company's employees are not covered by any collective bargaining agreement, and the Company considers its relations with its employees to be satisfactory. 5 SEASONALITY - - ----------- The Company believes that sales of its footwear products tend to be seasonal in nature, with the highest level of sales generally occurring in the third quarter of its fiscal year (representing shipments for the Back-to-School season). The Company plans to have, on a continuing basis, new products specifically designed for a Spring season (which will ship in the second fiscal quarter), a Back-to-School season and a limited Holiday season (which will ship in the fourth fiscal quarter). BACKLOG - - ------- The Company had a combined domestic and international order backlog of $88.0 million and $170.5 million at December 31, 1995 and 1994, respectively. The lower backlog at December 31, 1995 is primarily due to (i) the inclusion in the backlog at December 31, 1994 of the entire $80 million minimum purchase commitment for fiscal 1995 under the Company's agreement with Wal-Mart and (ii) an approximate $19.6 million decrease in orders for children's lighted product. The backlog at December 31, 1995 includes the balance of Wal-Mart's $80 million minimum purchase commitment for fiscal 1995 ($29.5 million), substantially all of which the Company expects Wal-Mart to fulfill in the first quarter of the Company's fiscal 1996. Approximately 27.3% of the December 31, 1995 backlog was for children's lighted shoes compared to 25.3% at December 31, 1994. In June 1994, the Company entered into an agreement with Wal-Mart for the anticipated purchase of a minimum of $80 million of L.A. Gear branded footwear in each of the Company's 1995, 1996 and 1997 fiscal years (subject to reduction or elimination in 1996 and 1997 if sell-through did not meet certain designated sell-through targets.) The designated sell-through targets were not met for fiscal 1995, and accordingly, Wal-Mart is not subject to a minimum purchase commitment for the Company's fiscal 1996. The Company believes that it has established a better working relationship with Wal-Mart which should allow the Company to provide a product mix which better satisfies the footwear needs of the Wal-Mart customer. Shipments and sales for future periods depend on, among other things, the combination of "futures" and "at once" orders. See "Ordering Programs". Accordingly, the comparison of backlog from period to period may not be indicative of eventual actual shipments. Although orders are generally not cancelable by their terms, in the past the Company has, at its option in exceptional circumstances, allowed orders to be canceled by customers. COMPETITION - - ----------- The athletic and athletic-style footwear industry is highly competitive in the United States and on a worldwide basis. The Company's competitors include both specialized athletic shoe companies and companies with diversified footwear product lines. The principal elements of competition in the athletic and athletic-style footwear market include brand awareness, product quality, performance, design, pricing, marketing and distribution. The Company's products compete primarily on the basis of recognition of the Company's trademarks, innovative design, value, quality, fashion, style and incorporation of the latest technological advances. The Company's primary competitors in domestic and international athletic and athletic-style markets - Nike, Reebok, Fila, Converse and adidas - are more established and have greater financial, distribution and marketing resources, as well as greater brand awareness, than the Company. According to a report published in Sporting Goods Intelligence on January 15, 1996, Nike and Reebok collectively had over 57% of the United States branded athletic footwear market in 1995, with the Company ranking sixth with an approximate 3% domestic market share. The casual and lifestyle footwear market is also highly competitive but is more fragmented than the athletic and athletic-style footwear market. As the Company attempts to expand its share of the casual footwear market, the Company faces competition from a number of other companies which produce and market casual footwear products (including other marketers of athletic and athletic- style footwear that are also expanding into the casual footwear market). The principal elements of competition in the casual footwear market are similar to those in the athletic footwear market, and include brand identity, price, product quality, fashionable designs, product marketing and distribution. 6 The intensity of the competition faced by the Company, as well as the rapid changes in fashion, technology and consumer preferences that can occur in the footwear markets, are significant risk factors in the Company's operations. There can be no assurance that the Company will be able to (i) respond in a timely manner to changing consumer preferences, (ii) maintain or increase the Company's current share of the total athletic and casual footwear markets it has established to date, or (iii) penetrate new markets. TRADE LEGISLATION - - ----------------- The Company's practice of overseas manufacturing to specification, with subsequent importation into the United States, exposes it to the possibility of product supply disruptions and increased costs in the event of administrative developments adverse to continued trade or the enactment of protectionist legislation. The "special 301" provisions of the Trade Act of 1974, as amended, require the United States Trade Representative ("USTR") to determine whether the acts, policies and practices of foreign countries deny adequate and effective protection of intellectual property rights or fair and equitable access for U.S. persons who rely on intellectual property protections. "Special 301" was amended in the Uruguay Round Agreements Act, effective January 1, 1995, to state specifically that a country can be found to deny adequate and effective intellectual property protection even if it is in compliance under the World Trade Organization Agreement on Trade-Related Aspects of Intellectual Property Rights. Special 301 provisions require the identification of countries that fail to provide the rights or access described in its provisions. On April 29, 1995, USTR placed Argentina, Brazil, China, Indonesia, and Taiwan on the "priority watch list" or the "watch list" for 1995. USTR announced on November 13, 1995 that Brazil would remain on the priority watch list. In the case of China, the Clinton administration's position is that China's implementation of Agreement on the Enforcement of Intellectual Property Rights, entered into on February 26, 1995, currently falls far short of the requirements of the Agreement. Unless implementation of the Agreement is "sharply improved" by the one-year anniversary of the Agreement, the Administration has stated that it will "take decisive action". The Company is unable to predict whether the United States will retaliate against any of these countries for their practices or whether such retaliation will result in increases in cost, or reductions in supply, of footwear generally, or the Company's footwear in particular. In March 1994, the European Union (the "EU") imposed quotas that restrict the importation into the EU of footwear manufactured in China. Such quotas have limited imports of the Company's products manufactured in China into the EU countries, but the Company has not suffered significant adverse effects as a result of the quotas to date. The European Commission has prepared a draft proposal to increase footwear quotas by 2%. It is not yet possible to predict whether this proposal will be adopted by the EU member states. The Company is not aware of any other significant proposed changes. In addition, antidumping complaints filed by various European footwear manufacturers in the EU against footwear imported from China, Indonesia and Thailand are pending before the EU authorities. The Company is unable to predict whether these or other antidumping complaints in the EU will lead to the imposition of duties on any of the Company's footwear imports or whether such duties, if imposed, would significantly limit imports of the Company's products into the EU countries. In addition, extension of "most favored nation" ("MFN") status for China must be approved by the President in order for Chinese exports to continue to have favorable duty rates. If China's MFN status is not renewed in 1996, the Company would be required to seek alternative sources of supply of footwear. The Company is currently developing alternative sources for the footwear it now obtains from producers in China. The Company's operations could, however, be materially and adversely affected by a substantial delay in locating such alternative sources of production. A number of developments have affected the Company's business in Mexico over recent years and will continue to affect it in the future. In November 1993, Mexico issued a final antidumping order imposing duties on footwear imported from China. The final order imposed a duty of varying rates depending on the type of footwear imported. These duties were not applicable to the Company's imports of footwear from China, which met a "minimum normal value" requirement until August 1994 when changes in the relevant tariff classifications resulted in the imposition of duties of 232% and 323% on certain of the Company's imports. In August 1994, Mexico modified its certificate of origin requirements by instituting, among other changes, particularly stringent procedural requirements for imports of 7 footwear from non-GATT countries, including China. Although these procedures and other regulations limit the Company's ability to import certain footwear from China into Mexico, the certificate of origin requirements do not apply to certain footwear imported by the Company because such footwear qualifies for an exemption based on its price. In December 1994, the Company filed a petition with the Ministry of Commerce requesting a review of the antidumping duties, and subsequently filed additional materials in support of the petition. The Company is waiting for a preliminary resolution and public hearing on the matter by the Ministry of Commerce and is presently unable to determine whether its petition ultimately will result in the elimination or lowering of antidumping duties on products that the Company sells in the Mexican market. ITEM 2. PROPERTIES - - ------- ---------- The Company's worldwide headquarters are located in a 97,000 square foot leased facility in Santa Monica, California. The lease for the Santa Monica facility expires in October 2003 and the Company has the option to extend such term for two additional periods of five years each. The Company is in the process of trying to sublease approximately 23,000 square feet of this facility in connection with its consolidation efforts. The Company's warehouse and distribution operations occupy approximately 410,000 square feet in two leased locations in Ontario, California. These leases expire in June 1999 and the Company has options to extend each lease term for an additional five years. In 1995 the Company's wholly-owned foreign subsidiaries and joint venture collectively leased approximately 80,000 square feet used primarily for warehouse and office space. These leases expire over periods ranging from May 1996 through December 2000. In fiscal 1995, the Company decided to close its eight retail outlet stores and by February 1996 had completed the termination of seven of the outlet stores lease agreements and subleased the remaining outlet store to a third party. The Company believes that its existing facilities are adequate to meet its expected needs and that, if needed, additional or alternative space will be available on commercially reasonable terms. ITEM 3. LEGAL PROCEEDINGS - - ------- ----------------- Finexpance S.p.A.v.L.A. Gear, Inc. Tribunal of Chiavari, Italy. On February --------------------------------- 9, 1993, Finexpance S.p.A. ("Finexpance"), the exclusive distributor of the Company's products in Italy from January 22, 1988 until February 1, 1993, filed a complaint against the Company alleging, among other things, unfair competition and loss of customer base and goodwill. Plaintiff is seeking damages in excess of $22 million. The Company believes Finexpance's claims are without merit and intends to vigorously defend the action. The next hearing in this matter is presently scheduled for late May 1996. No assurances can be given as to the likelihood of a favorable outcome in the foregoing legal proceeding or, in the event of an unfavorable outcome, as to the estimated amount of potential losses that may be incurred by the Company in connection therewith. Failure by the Company to prevail in the foregoing matter could have a material adverse effect on the financial condition or results of operations of the Company. In addition to the foregoing matter, the Company is a party to various other legal proceedings, none of which, individually or in the aggregate, is considered by the Company to be material. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS - - ------- --------------------------------------------------- No matters were submitted to a vote of the Company's shareholders during the fourth quarter of fiscal 1995. 8 ITEM 4(a). EXECUTIVE OFFICERS OF THE REGISTRANT - - --------- ------------------------------------ Set forth below is certain information regarding each of the current executive officers of the Company. Officers are appointed by and serve at the discretion of the Board.
Name Age Position - - ---- --- -------- Stanley P. Gold 53 Chairman of the Board and Chief Executive Officer William L. Benford 53 President and Chief Operating Officer David F. Gatto 34 Executive Vice President - Sales, Merchandising and Operations Thomas F. Larkins 34 Senior Vice President, Chief Administrative Officer, General Counsel and Secretary James V. Moodhe 48 Senior Vice President - Marketing, Design and Development Tracey C. Doi 34 Vice President and Controller Victor J. Trippetti, Jr. 47 Vice President and Treasurer
Stanley P. Gold was appointed Chairman of the Board and Chief Executive Officer of the Company in January 1992. Mr. Gold has served since 1987 as President, Chief Executive Officer and a director of Shamrock Holdings, Inc. ("Shamrock"), a holding company engaged primarily in real estate development and the making of investments. Since January 1, 1990, Mr. Gold has also served as President and Managing Director of Trefoil Investors, Inc. ("TII"), the general partner of Trefoil Capital Investors, L.P. ("Trefoil"), as well as President and Managing Director of Shamrock Capital Advisors, Inc. ("SCA"), a company which provides management and consulting services, including services to Trefoil and companies in which Trefoil invests. Mr. Gold is also a director of The Walt Disney Company, an international company engaged in family entertainment, and Koor Industries Limited ("Koor Industries"), Israel's largest industrial group engaged primarily in telecommunications equipment, agricultural chemicals, building materials, energy and food. William L. Benford was appointed President and Chief Operating Officer in June 1994, and prior to that served as Executive Vice President and Chief Financial Officer from January 1993 to June 1994. He joined the Company in September 1991 as Senior Vice President and Chief Financial Officer. Prior to joining the Company, Mr. Benford served as a Vice President of Shamrock Holdings of California, Inc. from January 1991 to September 1991. From September 1985 to December 1990, he was Senior Vice President, Chief Financial Officer and Treasurer of Central Soya Company, Inc., an international agri-business operation. Mr. Benford has also served as Vice President and Treasurer of Dekalb Agresearch, Inc. from 1981 to 1984 and Vice President and Assistant Treasurer of The Firestone Tire & Rubber Company in Akron Ohio from 1978 to 1981. David F. Gatto was appointed Executive Vice President - Sales, Merchandising and Operations in September 1995. He joined the Company in September 1991 as Senior Vice President - Strategic Planning, and served as Senior Vice President - International from January 1993 to September 1995. Prior to joining the Company, he was a Manager of the L/E/K Partnership, a Boston-based management consulting firm, since July 1988. 9 Thomas F. Larkins was appointed Chief Administrative Officer of the Company in September 1995. He has served as Senior Vice President, General Counsel and Secretary since February 1994. Prior to joining the Company, he was associated with the law firm of Fried, Frank, Harris, Shriver & Jacobson from June 1989 to January 1994. James V. Moodhe was appointed Senior Vice President - Marketing, Design and Development in September 1995. From May 1995 to September 1995 he served as a consultant to the Company. From May 1991 to July 1992, he was the President of Guess Athletic, a new athletic shoe division of Guess? Inc. From July 1992 to April 1995, he was the President of Pan Pacific Designs, Inc., the exclusive licensee of the Guess Athletic brand. From October 1988 to May 1991, Mr. Moodhe was with K-Swiss Inc., an athletic shoe company, serving in the capacities of Vice President of Sales, Domestic and Vice President of Sales, International. Prior to that, he was a founding member of the management of Nike Inc. Tracey C. Doi was appointed Vice President and Controller of the Company in January 1994. She joined the Company in April 1990 as General Accounting Manager, and served as Assistant Controller from July 1990 to December 1993. Prior to that, Ms. Doi was Director of Financial Reporting of Management Company Entertainment Group, Inc., a diversified, international entertainment company, from July 1988 to April 1990. Victor J. Trippetti, Jr. was appointed Vice President and Treasurer of the Company in January 1994. He joined the Company as Manager - Budgets in October 1989, served as Director - Financial Planning from April 1990 to June 1992 and has served as Treasurer from July 1992. Prior to that, Mr. Trippetti was Director - Financial Planning of Host Marriott Corporation, an international hospitality corporation, from June 1986 to October 1989. 10 PART II ------- ITEM 5. MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS - - ------ ------------------------------------------------------------ ------- The information required in this item is incorporated by reference to "Notes to Consolidated Financial Statements - Note 17- Market for the Registrant's Common Stock and Related Stockholder Matters; Selected Quarterly Financial Data" appearing on page 22 in the Annual Report to Shareholders. ITEM 6. SELECTED FINANCIAL DATA - - ------ ----------------------- The information required in this item is incorporated by reference to "Selected Financial Data" appearing on page 5 of the Annual Report to Shareholders. ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND - - ------ --------------------------------------------------------------- RESULTS OF OPERATIONS --------------------- The information required in this item is incorporated by reference to "Management's Discussion and Analysis of Financial Condition and Results of Operations" appearing on pages 6 through 11 in the Annual Report to Shareholders. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA - - ------ ------------------------------------------- The information required in this item is incorporated by reference to the consolidated financial statements, together with the report thereon of Price Waterhouse LLP dated January 22, 1996, appearing on pages 12 through 23 in the Annual Report to Shareholders. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND - - ------ --------------------------------------------------------------- FINANCIAL DISCLOSURE -------------------- Not applicable. 11 PART III -------- ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT - - -------- ---------------------------------------------------- The Company's Bylaws give the Board the power to set the number of directors at no less than eight nor more than fifteen. The size of the Company's Board is currently set at ten. The Restated Articles provide for the holders of Series A Preferred Stock, voting separately as a series, to elect three of the directors and for the holders of outstanding Common Stock to elect the balance. Trefoil also currently has the right to elect an additional four members of an expanded board of fourteen as a result of the Company's decision not to pay dividends on the Series A Preferred Stock for the past four quarters. The Company has not received any notification from Trefoil as to its intent to exercise such right. As of February 28, 1996, the directors of the Company were as follows: Directors Elected by Holders of Common Stock - - -------------------------------------------- WILLIAM L. BENFORD was appointed President and Chief Operating Officer in June 1994, and prior to that served as Executive Vice President and Chief Financial Officer from January 1993 to June 1994. He joined the Company in September 1991 as Senior Vice President and Chief Financial Officer. Age: 53. Further information about Mr. Benford is presented in "Item 4 (a) - Executive Officers of the Registrant". WALTER C. BLADSTROM was elected to the Board in April 1993. Mr. Bladstrom has served as an advisor to Fulcrum International, Ltd. ("Fulcrum"), an investment and financial advisory firm specializing in mergers and acquisitions, since 1991. Prior to that time, Mr. Bladstrom served as the Chairman of the Board and Chief Executive Officer of Fulcrum since 1987. Mr. Bladstrom has also served as a member of the Advisory Board of the Snider Entrepreneurial Center at The Wharton School since 1989. Mr. Bladstrom owns a 0.1 percent limited partnership interest in Trefoil. Age: 63. ALLAN E. DALSHAUG has served as a Director of the Company since May 1986. Mr. Dalshaug has been Chairman of the Board, President and Chief Executive Officer of Sterling West Bancorp, a publicly held bank holding company, and Chief Executive Officer of its subsidiary, Sterling Bank, since 1980. He also serves as a director of Jalate, Ltd., a manufacturer of women's clothing. Age: 64. WILLIE D. DAVIS was elected to the Board in June 1992. Mr. Davis has served as President and Chief Executive Officer of All Pro Broadcasting, Inc., a Los Angeles broadcasting company, since 1977. Mr. Davis played professional football for ten years with the Green Bay Packers and for two years with the Cleveland Browns and was inducted into The Professional Football Hall of Fame in 1981. Mr. Davis also serves as a director of Wicor, Inc., Sara Lee Corporation, Alliance Bank, MGM Grand Company, Kmart Corporation, Dow Chemical Company, Johnson Controls Inc., Strong Capital Management Fund and Rally's Inc. Age: 61. STEPHEN A. KOFFLER has served as a Director of the Company since September 1991. Mr. Koffler has served as Managing Director, Investment Banking of Smith Barney, Inc., a brokerage and investment banking firm, since July 1994. Prior to that, he was Executive Vice President and Director of Investment Banking of Sutro & Co., Inc., a brokerage and investment banking firm, since October 1991. From May 1981 until September 1991, Mr. Koffler was employed by Merrill Lynch & Co. ("Merrill Lynch") and predecessor companies, and, until March 1991, was a Managing Director in the Investment Banking Division of Merrill Lynch. Mr. Koffler resigned as an officer of Merrill Lynch in March 1991 and acted as an employee and consultant to Merrill Lynch through September 1991. Age: 53. ANN E. MEYERS was elected to the Board in June 1992. Ms. Meyers has worked for various network and cable television stations (including CBS, ESPN, WTBS and Prime Network) as a broadcaster and sports commentator since 1983. Ms. Meyers played both amateur and professional women's basketball and participated in the Pan Am Games in 1975 and 1979 and the 1976 Olympic Games. Ms. Meyers was inducted into the Basketball Hall of Fame in 1993. Age: 40. 12 CLIFFORD A. MILLER was first elected to the Board by Trefoil (as the holder of all of the issued and outstanding shares of Series A Preferred Stock) in September 1992, with a term of service which expired on February 26, 1993. On February 17, 1993, Mr. Miller was re-appointed to the Board, effective February 26, 1993, to fill a vacancy on the Board. Mr. Miller has continued to serve as a director of the Company since that date. Mr. Miller has served as Chairman of The Clifford Group, Inc., a national business consulting organization, since January 1992. From December 1986 through December 1991, Mr. Miller was an Executive Vice President and a Director of Great Western Financial Corporation and Great Western Bank. Mr. Miller has also served as a Senior Consultant to Shamrock since 1978 and is a director of First American Corporation and First American Bankshares, Inc. Age: 67. Directors elected by Holders of Series A Preferred Stock - - --------------------------------------------------------- STANLEY P. GOLD has served as a Director since September 1991 and has held the positions of Chairman of the Board and Chief Executive Officer of the Company since January 1992. Age: 53. Further information about Mr. Gold is presented in "Item 4 (a) - Executive Officers of the Registrant". ROBERT G. MOSKOWITZ has served as a Director since September 1991. Since January 1990, Mr. Moskowitz has served as a Managing Director of TII and SCA. Mr. Moskowitz has also served as Executive Vice President of Shamrock since March 1989 and is a Director of Koor Industries. Age: 43. VAPPALAK A. RAVINDRAN was first elected to the Board by Trefoil (as the holder of all of the issued and outstanding Shares of Series A Preferred Stock) in September 1992, with a term of service which expired on February 26, 1993. Effective February 26, 1993, Mr. Ravindran was appointed as one of the three directors elected by Trefoil. Mr. Ravindran has continued to serve as a director of the Company since that date. Mr. Ravindran has served as the Managing Director and President of Paracor Finance Inc. ("Paracor Finance"), a merchant bank and investment company, since July 1987. Paracor Finance is an indirect wholly-owned subsidiary of Fosters Brewing Group Ltd. of Australia. An affiliate of Paracor Finance is a limited partner in Trefoil. Mr. Ravindran is a director of Northwest Airlines, Inc., a commercial airline. Age: 48. Executive Officers - - ------------------ Information regarding the Company's executive officers is included in Item 4(a) of Part I of this report under the caption "Executive Officers of the Registrant". 13 ITEM 11. EXECUTIVE COMPENSATION - - ------- ------------------------ Summary Compensation Table. The following table sets forth the -------------------------- compensation (cash and non-cash, plan and non-plan) paid to the Company's Chief Executive Officer, and the five other most highly compensated executive officers of the Company for the fiscal year ended November 30, 1995, including a former executive officer who left the Company in fiscal 1995 (collectively, the "Named Executive Officers") for services rendered in all capacities to the Company during the three fiscal years ended November 30, 1995, 1994 and 1993. SUMMARY COMPENSATION TABLE
Long Term Compensation Annual ----------------------------------------- Compensation Awards Payouts ------------ ------ ------- Other Annual Restricted Securities All Other Name and Principal Fiscal Compensation Stock Underlying LTIP Compensation Position Year Salary($) Bonus($) ($) (2) Awards($) Options(#) Payouts($) ($) - - ---------------------------- ------ --------- -------- ----------- ---------- ---------- ---------- ------------ Stanley P. Gold 1995 23,250 (1) 0 0 0 0 0 0 Chairman of the Board 1994 21,000 (1) 0 0 0 0 0 0 and Chief Executive 1993 25,750 (1) 0 0 0 750,000 0 0 Officer William L. Benford 1995 500,000 0 0 0 28,199 0 4,500(4) President and Chief 1994 401,058 0 0 0 319,118 0 4,620(4) Operating Officer 1993 325,000 0 0 0 0 0 4,497(4) David F. Gatto 1995 279,863 0 0 0 45,310 0 4,500(4) Executive Vice President- 1994 275,000 0 0 0 76,176 0 4,992(4) Sales, Merchandising and 1993 275,000 0 0 0 0 0 4,125(4) Operations Thomas F. Larkins 1995 213,231 0 0 0 59,743 0 0 Sr. Vice President and 1994 169,231 0 0 0 30,000 0 0 Chief Administrative 1993 0 0 0 0 0 0 0 Officer Tracey C. Doi 1995 141,981 0 0 0 27,981 0 4,085(4) Vice President and 1994 130,110 0 0 0 14,029 0 3,903(4) Controller 1993 102,306 0 0 0 0 0 3,000(4) Christopher M. Walsh 1995 214,628 15,000 0 0 12,248 0 0 Former Senior Vice 1994 220,000 0 0 0 72,941 0 0 President-Operations 1993 220,000 0 2,447(3) 0 0 0 0
(1) In fiscal 1995, 1994 and 1993, Mr. Gold earned $23,250, $21,000 and $25,750 respectively, for his service as a director of the Company. The fees paid to Mr. Gold for his service as a director are the customary fees paid to nonemployee directors. See "Director Compensation". (2) Perquisites and other personal benefits paid to each Named Executive Officer (other than Mr. Walsh, as disclosed under "Other Annual Compensation") in each instance aggregated less than the lesser of $50,000 and ten percent (10%) of the total of annual salary and bonus reported for such Named Executive Officer under 14 "Salary" and "Bonus". Accordingly, such information is omitted from the Summary Compensation Table as permitted by the rules and regulations of the Securities and Exchange Commission. (3) These amounts were reimbursed by the Company during fiscal 1993 for the payment of taxes. (4) Each of Mr. Benford, Mr. Gatto and Ms. Doi deferred a portion of his or her annual salary pursuant to the 401(k) portion of the Company's Employee Stock Savings Plan. The amount shown for fiscal 1995 represents a contribution, valued at $4,500, $4,500 and $4,085, respectively, for Mr. Benford, Mr. Gatto, and Ms. Doi made by the Company pursuant to the employee stock ownership plan portion of its Employee Stock Savings Plan. The Matching Contribution is held in shares of the Company's Common Stock. Messrs. Benford and Gatto will be fully vested under the Employee Stock Savings Plan on November 30, 1996 and Ms. Doi is currently fully vested under the Employee Stock Savings Plan. Stock Options Granted in Fiscal 1995. The following table sets forth ------------------------------------- information concerning individual grants of stock options made by the Company during the fiscal year ended November 30, 1995 to each of the Named Executive Officers. The Company did not grant any stock appreciation rights during fiscal 1995. OPTION GRANTS IN THE FISCAL YEAR ENDED NOVEMBER 30, 1995
Potential Realizable Value at Assumed Annual Rates of Stock Price Appreciation Individual Grants For Option Term (9) --------------------------------------------- ---------------------- Number of % of Total Securities Options/SAR's Exercise Underlying Granted to Or Base OPTIONS/SAR's Employees in Price Expiration Name Granted (#) Fiscal Year(6) ($/Share) Date 5% ($) 10% ($) ---- ------------- --------------- --------- ---------- ------ --------- Stanley P. Gold 0 0 0 N/A 0 0 William L. Benford 28,199 (1) 5.76% $5.18 (7) 12/13/04 77,688 210,111 David F. Gatto 15,310 (1) 3.13% $5.18 (7) 12/13/04 42,179 114,075 30,000 (2) 6.13% $2.66 (7) 09/12/05 54,600 134,250 Thomas F. Larkins 30,000 (3) 6.13% $4.75 (8) 12/13/04 95,550 236,430 9,743 (1) 1.99% $5.18 (7) 12/13/04 26,842 72,595 20,000 (2) 4.09% $2.66 (7) 09/12/05 36,400 89,500 Tracey C. Doi 9,500 (4) 1.94% $5.18 (7) 12/13/04 26,173 70,785 5,481 (1) 1.12% $5.18 (7) 12/13/04 15,100 40,839 13,000 (2) 2.66% $2.66 (7) 09/12/05 23,660 58,175 Christopher M. Walsh 12,248 (5) 2.50% $5.18 (7) 01/06/96 33,743 91,260 - - --------------------
(1) These options were granted pursuant to the Company's 1993 Stock Incentive Plan on December 13, 1994. The total number of options granted were exercisable on and after December 1, 1995. 15 (2) These options were granted pursuant to the Company's 1993 Stock Incentive Plan on September 12, 1995. One-third of the total number of options granted are exercisable on and after each of September 12, 1996, 1997 and 1998. Vesting may be accelerated in the event of a change in control (as defined in the Company's 1993 Stock Incentive Plan) of the Company. (3) These options were granted pursuant to the Company's 1986 Stock Option Plan on December 13, 1994. One-third of the total number of options granted became exercisable on and after December 13, 1995 and an additional one- third of the options are exercisable on and after each of December 13, 1996 and 1997. Vesting may be accelerated in the event of a change in control (as defined in the Company's 1986 Stock Option Plan) of the Company. (4) These options were granted pursuant to the Company's 1993 Stock Incentive Plan on December 13, 1994. One-third of the total number of options granted became exercisable on and after December 13, 1995 and an additional one-third of the options are exercisable on and after each of December 13, 1996 and December 13, 1997. Vesting may be accelerated in the event of a change in control (as defined in the Company's 1993 Stock Incentive Plan) of the Company. (5) These options were granted pursuant to the Company's 1993 Stock Incentive Plan on December 13, 1994. These options expired on January 6, 1996. (6) In fiscal 1995, the Company granted options to purchase an aggregate of 489,417 shares of Common Stock to employees. (7) Exercise price is equal to the fair market value (determined by the average price, for each of the five consecutive trading days immediately preceding the grant date, of the last sales price of a share, regular way, on the New York Stock Exchange (NYSE) Composite Tape) of such stock on the date the options were granted. The exercise price and tax withholding obligations related to exercise may be paid by delivery of already owned shares or by offset of the underlying shares, subject to certain conditions. (8) Exercise price is equal to the fair market value of the Company's common stock, based upon the last reported sales price, regular way, for the Corporation's common stock on the New York Stock Exchange at the close of business on the date of grant. The exercise price and tax withholding obligations related to exercise may be paid by delivery of already owned shares or by offset of the underlying shares, subject to certain conditions. (9) Potential realizable value is based upon the per share fair market value of options on the date of grant and an annual appreciation of such fair market value through the expiration date of such option at the stated rate. These amounts represent assumed rates of appreciation only and may not necessarily be achieved. Actual gains, if any, are dependent on the future performance of the Common Stock, as well as upon the option holder's continued employment through the vesting period. The potential realizable values indicated have not taken into account amounts required to be paid as income tax under the Internal Revenue Code of 1986, as amended, and any applicable state laws. 16 Aggregated Option Exercises. The following table sets forth information --------------------------- (on an aggregated basis) concerning each exercise of stock options during the fiscal year ended November 30, 1995 by each of the Named Executive Officers and the fiscal year-end value of unexercised options. The Company has no outstanding stock appreciation rights, either freestanding or in tandem with options. AGGREGATED OPTION EXERCISES IN THE FISCAL YEAR ENDED NOVEMBER 30, 1995 AND FISCAL YEAR-END OPTION VALUES
Number of Securities Underlying Value of Exercised Unexercised Options/SAR's at "In-the-Money" Shares Value Fiscal Year-End (#) Options at Acquired on Realized Exercisable ("E")/ Fiscal Year-End ($)(1) Name Exercise(#) $ Unexercisable ("U") Exercisable/Unexercisable ---- ----------- -------- ------------------------------- ------------------------- Stanley P. Gold 0 0 770,000(E) / 0(U) $0 / $0 William L. Benford 0 0 189,118(E) / 228,199(U) $0 / $0 David F. Gatto 0 0 106,176(E) / 85,310(U) $0 / $0 Thomas F. Larkins 0 0 10,000(E) / 79,743(U) $0 / $0 Tracey C. Doi 0 0 12,029(E) / 34,981(U) $0 / $0 Christopher M. Walsh 0 0 0(E) / 125,189(U) $0 / $0
- - ------------ (1) Options are "in-the-money" at the fiscal year end if the fair market value of the underlying securities on such date exceeds the exercise price of the option. The closing price of the Company's Common Stock on November 30, 1995 did not exceed the exercise price of the any of the reported options. DIRECTOR COMPENSATION During fiscal 1995, the Company paid to Mr. Gold and each nonemployee director $1,250 per month, $1,000 for each Board meeting attended and $1,000 ($1,250 for the committee chairperson) for each committee meeting attended and reimbursed such person for all expenses incurred by him or her in his or her capacity as a director of the Company. In light of Mr. Gold not receiving any salary or other cash compensation for services rendered as an officer of the Company, the Board authorized the payment to Mr. Gold of directors' fees in the amount customarily paid to the Company's nonemployee directors. During fiscal 1995, Mr. Gold earned $23,250 in directors' fees. Pursuant to a one-year management agreement, dated September 12, 1994, between the Company and SCA (the "Services Agreement"), SCA consulted with, and provided advice to, the officers and employees of the Company. The Services Agreement expired by its terms in September 1995. See "CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS". Mr. Gold is a member of the Board of Directors of SCA and Mr. Moskowitz is an executive officer of SCA. Mr. Gold's services to the Company are provided in his capacity as Chairman of the Board and Chief Executive Officer and he is separately compensated for such services. The Company also (i) reimbursed SCA for all of its reasonable out-of-pocket costs and expenses (including, without limitation, the fees and disbursements of its counsel) incurred in connection with the performance of its services under the Services Agreement and (ii) paid customary directors' fees to the officers and directors of SCA serving as directors of the Company. 17 Under the 1992 Stock Option Plan for Eligible Nonemployee Directors (the "1992 Stock Option Plan"), each eligible nonemployee director automatically receives a one-time grant of an option to purchase 20,000 shares of Common Stock upon his or her (i) initial election to the Board or (ii) appointment by the Board to fill a vacancy left by the termination of the directorship (for any reason) of any director who had previously been elected to the Board by vote of the holders of shares of Common Stock of the Company. No options were granted under the 1992 Stock Option Plan in fiscal 1995. Indemnification Agreements. The Company has entered into indemnification -------------------------- agreements with each of its directors and executive officers pursuant to which the Company has agreed to indemnify such persons against expenses, judgments, fines, penalties or amounts paid in settlement actually and reasonably incurred by such person in connection with legal proceedings in which the person was involved by reason of being a director or officer of the Company. The indemnification generally is available if such person acted in good faith and in a manner he or she reasonably believed to be in the best interests of the Company and, with respect to criminal proceedings, had no reasonable cause to believe his or her conduct was unlawful. Such person is not indemnified in respect of matters as to which he or she has been adjudged liable to the Company unless a court determines that, under the circumstances, he or she is reasonably entitled to such indemnification. EMPLOYMENT CONTRACTS AND TERMINATION OF EMPLOYMENT AND CHANGE-IN-CONTROL ARRANGEMENTS Pursuant to an employment agreement, dated as of December 7, 1993 (as amended), William L. Benford serves as President and Chief Operating Officer of the Company. The agreement has a three-year term expiring on November 30, 1996. Under the agreement, Mr. Benford receives an annual base salary of $500,000 and is eligible to participate in the Company's management bonus plan based on excess return on capital (the "MIP"). No cash bonus was paid by the Company for the fiscal years ended November 30, 1993, 1994 and 1995. Pursuant to an employment agreement, dated as of December 7, 1993 (as amended), David F. Gatto serves as Executive Vice President - Sales, Merchandising and Operations of the Company. The agreement has a three-year term, expiring on November 30, 1996. Under the agreement, Mr. Gatto receives an annual base salary of $300,000 and is eligible to participate in the MIP. No cash bonus was paid by the Company for the fiscal years ended November 30, 1993, 1994 and 1995. Pursuant to an employment agreement, dated as of February 15, 1994, Thomas F. Larkins serves as Senior Vice President and Chief Administrative Officer of the Company. The agreement has a three-year term, expiring on February 28, 1997. Under the agreement, Mr. Larkins receives an annual base salary of $245,000 and is eligible to participate in the MIP. No cash bonus was paid by the Company for the fiscal years ended November 30, 1994 and 1995. Pursuant to an employment agreement, dated as of February 1, 1996, Tracey C. Doi serves as Vice President and Controller of the Company. The agreement has a one year term, but will renew automatically from year to year unless the Company gives Ms. Doi notice of non-renewal at least six months prior to the end of its term. Under the agreement, Ms. Doi receives an annual base salary of not less than $150,000 during each year of her employment term and is eligible to participate in the MIP. No cash bonus was paid by the Company for the fiscal years ended November 30, 1993, 1994 and 1995. 18 COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION The Compensation Committee of the Board consists of Stephen A. Koffler, Walter C. Bladstrom, Allan E. Dalshaug and Willie D. Davis. The Stock Option Committee consists of Stanley P. Gold and Robert G. Moskowitz. Mr. Gold also serves as a Director and member of the Remuneration Committee of Koor Industries. Ann Meyers, a member of the Stock Option Committee until April 1995, served as a consultant for the Company in connection with the establishment of a woman's basketball promotion program pursuant to a consulting agreement effective as of November 1, 1993. She was compensated in the aggregate amount of $75,000 during fiscal 1995 for such services. Her consulting agreement expired in November 1995 and was not renewed. REPORT OF THE COMPENSATION AND STOCK OPTION COMMITTEES ON EXECUTIVE COMPENSATION GENERAL The Compensation Committee is currently comprised of Stephen A. Koffler (chair), Walter C. Bladstrom, Allan E. Dalshaug and Willie D. Davis, four non- employee directors. The primary duties of the Compensation Committee include (i) reviewing the compensation levels of the Company's principal executive officers and certain other members of senior management, (ii) administering the Company's incentive bonus plans, (iii) consulting with and making recommendations to the Company's Stock Option Committee regarding the Company's overall stock option grant policy and/or awards to be granted under the Company's 1986 Stock Option Plan and 1993 Stock Incentive Plan and (iv) related matters. The Chairman of the Board and the President may jointly approve the employment of individuals (other than executive officers) with an annual base compensation between $150,000 and $250,000, provided they give prompt notice of such approval to the Compensation Committee. Decisions regarding annual compensation levels of $250,000 or greater (and the annual compensation levels of all executive officers) are subject to Compensation Committee approval. The Stock Option Committee consists of Stanley Gold (chair) and Robert Moskowitz. The primary duties of the Stock Option Committee are to (i) determine individuals to whom stock options will be granted under the Company's 1986 Stock Option Plan and the terms on which such options will be granted, (ii) determine individuals to whom options, stock appreciation rights, restricted stock, performance units and performance shares (collectively, "Awards") will be granted under the 1993 Stock Incentive Plan and the terms and conditions on which such Awards will be made and (iii) make periodic reports to the Board as to the status of the Company's 1986 Stock Option Plan and 1993 Stock Incentive Plan. Section 162(m) of the Internal Revenue Code generally places restrictions on the deductibility of compensation paid to specified executive officers in excess of $1 million per year (on a per person basis), with certain exceptions. The Company has not adopted a policy with respect to qualifying compensation paid to its executive officers for deductibility under Section 162(m) as it does not believe such a policy will be necessary for fiscal 1996 based on the fact that none of its executive officers is expected to receive compensation in excess of $1 million during fiscal 1996. 19 COMPENSATION PHILOSOPHY The key objectives of the Company's executive compensation programs are to: . Attract and retain qualified management. . Provide substantial incentives for management to maximize the value of the Company. . Limit the shareholder cost of management incentive compensation to a reasonable percentage of incremental shareholder value. In fiscal 1993, the Company retained an independent compensation consulting firm (the "Consultant") to assist the Compensation Committee in reviewing the Company's executive compensation programs for fiscal 1993 and in accomplishing any modifications of existing programs, or the establishment of new programs, which would better enable the Company to achieve the overall objectives of its executive compensation philosophy. The Company has continued the policies adopted based on the Consultant's report as the goals and objectives of its executive compensation program have remained the same. The Company's executive compensation program consists of three basic elements -- base salaries, cash and deferred incentive bonuses and stock options. Base Salaries. The Compensation Committee believes that the Company's ------------- base salaries for management employees reflect competitive salary levels for positions of similar responsibility, individual experience and the riskiness of the Company's total compensation program. The Consultant's report used the compensation levels of consumer products companies, apparel companies and footwear companies, adjusted for differences in company size and position responsibility, to determine competitive compensation levels (the "Compensation Peer Group"). Most of the companies in the Compensation Peer Group are in the S&P 500 and some are in the S&P Shoes Index, each of which indices has been used for purposes of comparison in the Stock Performance Graph at page 24. The Compensation Committee did not survey the Compensation Peer Group in connection with salary decisions in fiscal 1995. The Compensation Committee believes that its incentive bonus plan and fixed share stock option grant guidelines allow for substantially greater compensation risk than typical competitive bonus and stock option plans and that it is therefore appropriate to provide base salaries that exceed median competitive levels. In fiscal 1993, the level of base salaries paid by the Company to its management employees (other than Mr. Gold) was approximately 18% above the median level relative to the Compensation Peer Group. As part of its expense reduction efforts and in light of the loss experienced by the Company in 1995, the Company did not implement any across-the-board salary increases for management employees in fiscal 1995. In fact, the overall management payroll significantly decreased during fiscal 1995 as the number of Vice Presidents employed by the Company decreased by 39% (from 18 to 11) in line with the Company's efforts to streamline its organizational structure. Although the Compensation Committee believes that modest salary increases were made among the Compensation Peer Group, it continues to believe that the Company's salary levels for management employees remain above the median level among the Compensation Peer Group (although not to the same extent as fiscal 1993 and 1994), and that such position is necessary for the Company to continue to attract and retain qualified executives. 20 Executive salaries are reviewed by the Compensation Committee on an annual basis and may be increased at that time. Salary increases, if any, are based primarily on the overall performance of the Company during the preceding fiscal year, as measured in terms of roughly equally-weighted criteria such as (i) annual long-term sales and earnings growth, (ii) market share gains, (iii) progress toward achieving the Company's long-term objectives (principally a return to profitability on an annual basis) and (iv) return to shareholders. The Compensation Committee also considers the individual performance of the executive, measured in terms of (i) the executive's business results (i.e., ---- divisional or departmental results as appropriate), (ii) the achievement of various managerial objectives and personal development goals, and (iii) the assumption of increased responsibilities by the executive (whether by reason of promotion or otherwise). In September 1995, the Company underwent a corporate reorganization pursuant to which it, among other expense reduction measures, reduced its workforce by 30% and realigned senior management such that certain individuals were required to assume additional responsibilities (the "1995 Corporate Reorganization"). In connection with the 1995 Corporate Reorganization: (i) David Gatto was appointed Executive Vice President - Sales, Merchandising and Operations and his base salary was increased from $275,000 to $300,000, (ii) Thomas Larkins was appointed Senior Vice President and Chief Administrative Officer and his base salary was increased from $210,000 to $245,000, and (iii) Tracey Doi's responsibilities as Vice President and Controller were expanded and broadened and her base salary was increased from $140,000 to $150,000. No other salary increases were granted to the Named Executive Officers of the Company in fiscal 1995. For purposes of this report, the "Named Executive Officers" include the Company's Chief Executive Officer, the next four highest paid executive officers in fiscal 1995, and the Company's former Senior Vice President--Operations, who left the Company in fiscal 1995. No other discretionary salary increases were granted to executive officers during fiscal 1995 due to the Company's failure to meet the foregoing criteria. Cash and Deferred Incentive Bonuses. Management employees (other than the ----------------------------------- Chief Executive Officer) participate in a management incentive program (the "MIP") implemented in fiscal 1994 and administered by the Compensation Committee which provides generally for bonus awards based on improvements in economic value added ("EVA"). EVA is a measure of economic profit after all costs including the cost of the Company's equity and equity related capital. The MIP is based on three key concepts: a target bonus; a fixed share of EVA improvement in excess of expected EVA improvement ("excess EVA improvement"); and a bonus bank. The EVA bonus earned is equal to the sum of the target bonus plus the fixed share of excess EVA improvement (which may be negative). The bonus earned is credited to the bonus bank, and the bonus paid is equal to the amount of the bonus bank balance, up to the amount of the target bonus, plus 1/3 of the bonus bank balance in excess of the target bonus. No bonus is paid when the bonus bank balance is negative (or when the Company has a net operating loss after tax), and negative bonus bank balances are carried forward to offset future bonuses earned; provided, however, that negative bank balances cannot exist until contributions are initially made to the bonus bank and a bonus bank balance is thus established. There is no cap on the bonus awards that can be achieved for superior levels of excess EVA improvement. The Compensation Committee believes that excess EVA improvement provides the best operating performance measure of shareholder returns in excess of the cost of equity and equity related capital. The plan is designed to provide strong performance incentives for the Company's management by aligning management compensation with increases in shareholder value represented by excess EVA improvement. It is generally the Compensation Committee's intention that management's share of excess EVA improvement will not be increased to offset the effects of poor performance nor reduced to offset the effects of superior performance. However, the Compensation Committee believed it was necessary to increase management's share of excess EVA improvement for fiscal 1996 to enable the MIP to provide a meaningful performance incentive to management and to allow the Company to retain qualified management employees, particularly in light of (i) the significant level of expected EVA improvement required to be reached prior to management commencing to share in excess EVA improvement, and (ii) the failure of the MIP to pay cash bonuses to management in either fiscal 1994 or fiscal 1995. Target bonuses for plan participants reflect a premium above median competitive bonus opportunities. The Compensation Committee believes that the premium is appropriate in light of the risk of the MIP. The Compensation Committee believes that the MIP provides very strong performance incentives as well as a reasonable balance between the Company's retention objectives and acceptable shareholder cost. 21 In addition, if the operating performance objectives are met, the MIP also provides that a portion of an individual's target bonus may be excluded from the bonus calculation based on EVA improvement and be allocated to bonus awards based on individual performance objectives to be determined by the Compensation Committee in consultation with senior management. Bonus awards based on individual performance objectives would be subject to caps. STOCK OPTIONS The Company uses stock option grants to attract and retain qualified managers and to provide incentives for management to increase shareholder value. The Company also uses stock option grants as a way to provide incentives to management during years in which cash bonuses are not paid. The Company's stock option grant policy with respect to senior management is aimed at inducing qualified candidates to accept offers of employment and to retaining such candidates once employed (including in connection with any required relocations). Pursuant to the 1986 Stock Option Plan and the 1993 Stock Incentive Plan, the Stock Option Committee has sole discretion regarding the grant of options. Triennial Stock Option Grant Program. In fiscal 1994, the Compensation ------------------------------------ Committee adopted a stock option grant policy (the "Triennial Stock Option Grant Program") to help ensure equity between recently hired and longer tenured employees and to continue to provide strong performance incentives to increase shareholder value Under the Triennial Stock Option Grant Program, a fixed number of stock options are granted to senior management once every three years, pursuant to option grant guidelines established for each level of the Company's management employees. The options are granted at an exercise price equal to the fair market value of the Company's Common Stock on the grant date, and vest in thirds on each of the first, second and third anniversaries of the grant date. The first round of grants under the Triennial Stock Option Grant Program were made in fiscal 1994 at an exercise price of $7.78 per share. The vesting schedule for the initial award of grants under the Triennial Stock Option Grant Program was accelerated so that options would vest one-third upon grant and one- third upon each of the first and second anniversaries of the grant date. The Compensation Committee determined that such accelerated vesting schedule would more effectively accomplish the Company's retention objectives. It is the Compensation Committee's intention to maintain the proposed stock option grant guidelines on a fixed share basis and not make adjustments to maintain the expected value of the triennial grant at a targeted competitive level. It is the Compensation Committee's belief that competitive adjustments substantially weaken management's performance incentive because they offset poor performance by increasing the number of shares granted and penalize superior performance by reducing the number of shares granted. The recommended grant guidelines were established at share levels that initially provided options with an expected value in excess of the median long-term incentive values of the Compensation Peer Group. However, the expected value of the proposed grant guidelines relative to competitive long-term incentive values has, and will continue to, fluctuate based on the performance of the Company's stock. 1996 Shared Success Award. As an additional incentive separate from the ------------------------- Triennial Stock Option Grant Program, in December 1995 the Compensation Committee and Stock Option Committee adopted and approved the 1996 Shared Success Award for all employees of the Company. In contrast to the MIP, under which only certain management level employees are eligible to receive options, all employees of the Company received options under the 1996 Shared Success Award. The purpose of the 1996 Shared Success Award is to: (i) instill a sense of ownership in the Company in all employees; (ii) assist the Company in retaining qualified employees; (iii) recognize the contributions of the Company's employees during the past year and the increased demands placed on such employees in light of the reduction in workforce effected by the Company pursuant to the 1995 Corporate Reorganization in September 1995; and (iv) provide added performance incentive to increase shareholder value with a minimum dilutive effect on earnings per share of common stock. The Compensation Committee and Stock Option Committee believe the Shared Success Award can assist the Company in achieving the foregoing objectives at a reasonable cost and without requiring the Company to make any additional cash payout. Under the 1996 Shared Success Award, the number of options received by management employees was set by first assuming that each participant earned a theoretical payout at 100% of his or her bonus opportunity under the 1995 MIP. This amount was then divided by the daily average closing price of the Common Stock during fiscal 1995 ($3.15) to determine the number of options to be granted, with each management employee being granted options to purchase a minimum of 2,000 shares. Options to purchase an aggregate of approximately 482,384 shares were granted to management employees under the 1996 Shared Success Award. All 22 options were issued at the fair market value of the Company's Common Stock on December 19, 1995, the date of grant ($1.75), and vest in full on December 1, 1996, the first day of the Company's 1997 fiscal year. CHIEF EXECUTIVE OFFICER At Mr. Gold's request, he did not receive any salary or other cash compensation during fiscal 1995 for his services as Chief Executive Officer of the Company. In light of the foregoing, the Board authorized the payment to Mr. Gold of directors' fees in the amount customarily paid only to non-employee directors of the Company. During fiscal 1995, Mr. Gold earned $23,250 in directors' fees. During fiscal 1993, the Compensation Committee sought to create a compensation arrangement for Mr. Gold which (i) is equitable in relation to the fair (i.e., risk adjusted expected) value of compensation packages offered to ---- chief executive officers in other turnaround situations and (ii) provides the entire fair value in the form of stock options without any guaranteed compensation (thereby honoring Mr. Gold's request that he not receive any cash compensation (other than directors' fees) from the Company). In order to analyze the competitive market, the Consultant identified seventeen "turnaround" companies, each of which met two or more of the following criteria: (i) chief executive officer hired from outside the company, (ii) deteriorating performance prior to the hiring of a new chief executive officer, (iii) consumer products industries, and (iv) similar size to the Company. In reaching its recommendations, the Compensation Committee also reviewed Mr. Gold's performance since his appointment to the post of Chief Executive Officer in January 1992 and the progress the Company was making in achieving its turnaround objectives. The Compensation Committee also evaluated whether Mr. Gold's compensation should be adjusted in view of the Services Agreement between the Company and SCA. See "CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS - Services Agreement". Mr. Gold is a director, shareholder and president of SCA. The Compensation Committee reviewed with members of senior management the services provided by SCA under the Services Agreement and the payments made to SCA by the Company with respect thereto and concluded that Mr. Gold's services as Chief Executive Officer were unrelated to, and not duplicative of, the management services provided under the Services Agreement. The Compensation Committee also noted that the Services Agreement was entered into simultaneously with Trefoil's $100 million investment in September 1991 and at a time when Mr. Gold was not an employee of the Company. Accordingly, the Compensation Committee concluded that the compensation to be awarded to Mr. Gold as Chief Executive Officer should not be reduced by virtue of the Services Agreement. However, the Compensation Committee did conclude that an adjustment to the indicated compensation based on peer group analysis should be made in light of Mr. Gold's outside business commitments which would preclude him from devoting his exclusive business energies on behalf of the Company. The Compensation Committee also concluded that an adjustment to Mr. Gold's compensation should not be made to account for the September 1991 grant to Mr. Gold of 20,000 stock options (with an exercise price equal to the fair market value of a share of the Company's Common Stock on the grant date) upon Mr. Gold's appointment to the Board. The Compensation Committee believed that such grant was unrelated to the services Mr. Gold was performing as the Company's Chief Executive Officer and that similar grants are made to non-employee directors upon their first election or appointment to the Board. In arriving at the number of options to be granted to Mr. Gold, the Compensation Committee relied on the Consultant's estimate of a competitive four year total compensation package for a newly hired chief executive officer of a turnaround company of similar size. The Consultant's estimate was based on a regression analysis which related the hire date expected value of such chief executive officer's four year total compensation package to the market value of the turnaround company at the hire date. The competitive compensation value, adjusted for Mr. Gold's partial time commitment to the Company as described above, was converted into a one-time stock option grant based on a Black-Scholes ratio value of .625, and a vesting discount factor of .940. The 750,000 options were granted to Mr. Gold pursuant to the Company's 1993 Stock Incentive Plan on October 19, 1993. All of such options are currently exercisable, and remain exercisable for two years following termination of Mr. Gold's service as a director of the Company. The exercise price of the options is $11.55 per share, the average fair market value of the Company's Common Stock for the five trading days immediately preceding the date of grant. 23 The Compensation Committee reconsidered Mr. Gold's compensation package in fiscal 1995 and determined that no adjustments were required to be made, as it concluded that the compensation granted in 1993 (excluding director fees) was designed to compensate Mr. Gold for services in 1995 as well. The Company believes that Mr. Gold's compensation arrangement reflects the above-described executive compensation philosophy of the Company designed to align management compensation closely with improved financial performance and increased shareholder value. COMPENSATION COMMITTEE Stephen A. Koffler, Chairman Walter C. Bladstrom Allan E. Dalshaug Willie D. Davis STOCK OPTION COMMITTEE Stanley P. Gold, Chairman Robert G. Moskowitz February 21, 1996 The Report of the Compensation and Stock Option Committees on Executive Compensation shall not be deemed incorporated by reference by any general statement incorporating by reference this Annual Report on Form 10-K into any filing under the Securities Act of 1933, as amended (the "Securities Act") or under the Exchange Act and shall not otherwise be deemed filed under such Acts. PERFORMANCE GRAPH FOR L.A. GEAR COMMON STOCK ("PERFORMANCE GRAPH") The Performance Graph compares the cumulative total return (assuming reinvestment of dividends) on the Company's Common Stock with (i) the Standard & Poor's 500 Stock Index and (ii) the Standard & Poor's Shoes Index which is comprised of Reebok, Nike, Stride Rite Corporation and Brown Group, Inc., and assumes an investment of $100 on December 1, 1990 in each of the Common Stock, the stocks comprising the Standard & Poor's 500 Stock Index and the Standard & Poor's Shoes Index. The historical stock price performance of the Common Stock shown on the Performance Graph set forth below is not necessarily indicative of future price performance. The Performance Graph which is set forth below shall not be deemed incorporated by reference by any general statement incorporating by reference this Annual Report on Form 10-K into any filing under the Securities Act or under the Exchange Act and shall not otherwise be deemed filed under such Acts. 24 PERFORMANCE GRAPH FOR L.A. GEAR COMMON STOCK TOTAL SHAREHOLDER RETURNS (DIVIDENDS REINVESTED) [PERFORMANCE GRAPH APPEARS HERE] TOTAL SHAREHOLDER RETURNS - DIVIDENDS REINVESTED
NOVEMBER INDEXED RETURNS ------------------------ COMPANY/INDEX 1990 1991 1992 1993 1994 1995 - - ------------- ---- ------ ------ ------ ------ ------ S&P 500 INDEX 100 120.34 142.57 156.97 158.61 217.27 L.A. GEAR, INC. ....... 100 91.40 105.38 97.85 46.24 13.98 S&P SHOE INDEX......... 100 190.79 247.39 179.53 216.19 275.67
25 ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT - - ------- -------------------------------------------------------------- The following table sets forth certain information regarding the shares of Common Stock beneficially owned as of February 21, 1996 by each person or entity who, insofar as the Company has been able to ascertain, beneficially owned more than 5% of the Company's Common Stock as of such date. The table also reflects the ownership of the issued and outstanding shares of Series A Preferred Stock. Unless otherwise indicated, the address for all natural persons listed in the table below is 4444 Lakeside Drive, Burbank, California 91505.
Amount and Title Name and Address Nature of Percent of Class of Beneficial Owners Beneficial Ownership (1) of Class -------- ------------------------------- --------------------------- --------- Common Trefoil Capital Investors, L.P. 11,000,000(2) 33.40% c/o Trefoil Investors, Inc. 4444 Lakeside Drive Burbank, CA 91510 Roy E. Disney 11,000,000(3) 33.40% Patricia A. Disney 11,000,000(3) 33.40% Stanley P. Gold 11,890,000(4) 37.15% Common Pentland Ventures Ltd. 1,644,445(5) 7.05% c/o Pentland Group plc. The Pentland Centre Lakeside, Squires Lane Finchley N3 2QL England Robert Stephen Rubin 1,644,445(6) 7.05% c/o Pentland Group plc. The Pentland Centre Lakeside, Squires Lane Finchley N3 2QL England Preferred Trefoil Capital Investors, L.P. 1,000,000 100.00% c/o Trefoil Investors, Inc. 4444 Lakeside Drive Burbank, CA 91510 Roy E. Disney 1,000,000(7) 100.00% Patricia A. Disney 1,000,000(7) 100.00% Stanley P. Gold 1,000,000(7) 100.00%
- - ------------ (1) Unless otherwise indicated, each named entity has sole voting and investment power over the shares beneficially owned by it. 26 (2) These shares include 10,000,000 shares representing the shares of the Company's Common Stock issuable upon conversion of the shares of Series A Preferred Stock owned by Trefoil Capital Investors, L.P., is Trefoil Investors, Inc. (3) These shares are owned by Trefoil Capital Investors, L.P., the General Partner of which is Trefoil Investors, Inc., and include 10,000,000 shares representing the shares of the Company's Common Stock issuable upon conversion of the shares of Series A Preferred Stock owned by Trefoil Capital Investors, L.P. Roy E. Disney and Stanley P. Gold collectively control more than 50% of the voting stock of Trefoil Investors, Inc. (4) Includes (i) 750,000 shares which Mr. Gold has the right to acquire within 60 days after February 21, 1996 by exercise of stock options vested pursuant to the 1993 Stock Incentive Plan, and 20,000 shares which Mr. Gold has the right to acquire within 60 days after February 21, 1996 by exercise of stock options vested pursuant to the Company's 1986 Stock Option Plan and (ii) the shares owned by Trefoil Capital Investors, L.P., the General Partner of which is Trefoil Investors, Inc., including 10,000,000 shares representing the shares of the Company's Common Stock issuable upon conversion of the shares of Series A Preferred Stock owned by Trefoil Capital Investors, L.P. Roy E. Disney, Patricia A. Disney and Stanley P. Gold collectively control more that 50% of the voting stock of Trefoil Investors, Inc. (5) Includes 400,000 shares which Pentland Ventures Ltd. presently has the right to acquire by the exercise of options granted pursuant to the Stock Option Agreement, dated as of April 28, 1992, between L.A. Gear, Inc. and Pentland Ventures Ltd. (6) These shares are owned by Pentland Ventures Ltd., all of the outstanding stock of which, based on a 13D filed by Pentland Ventures, Ltd. on April 28, 1992, is owned by Pentland Group plc. The 1992 13D also disclosed that Mr. Rubin owned 56.49% of the outstanding shares of Pentland Group plc., and therefore Mr. Rubin may be deemed to be a beneficial owner of Pentland Ventures Ltd. (7) These shares are owned by Trefoil Capital Investors, L.P., the General Partner of which is Trefoil Investors, Inc. Roy E. Disney, Patricia A. Disney and Stanley P. Gold collectively control more than 50% of the voting stock of Trefoil Investors, Inc. 27 OWNERSHIP OF COMMON STOCK BY DIRECTORS AND OFFICERS The following table sets forth certain information regarding the shares of Common Stock beneficially owned by the Named Executive Officers and all current directors and executive officers of the Company as a group (15 persons). This information has been provided by each of the directors and executive officers as of February 21, 1996 at the request of the Company, and includes the number of shares which such persons have the right to acquire within 60 days of such date by the exercise of stock options vested pursuant to the Company's 1986 Stock Option Plan (the "1986 Stock Option Plan"), 1992 Stock Option Plan for Eligible Non-employee Directors (the "1992 Stock Option Plan for Eligible Non-employee Directors"), and 1993 Stock Incentive Plan (the "1993 Stock Incentive Plan"). No shares of the Company's outstanding Series A Preferred Stock are held by such individuals.
Amount and Nature of Percent Name Beneficial Ownership (1) of Class (2) - - ---- ------------------------- ------------ Directors Elected by Holders of Common Stock: William L. Benford.............................. 250,594 (3) 1.08% Stephen A. Koffler.............................. 45,000 (4) * Allan E. Dalshaug............................... 25,000 (4) * Clifford A. Miller.............................. 35,000 (5) * Ann E. Meyers................................... 26,000 (6) * Walter C. Bladstrom............................. 25,000 (7) * Willie D. Davis................................. 25,000 (8) * Series A Directors Stanley P. Gold................................. 890,000 (9) 3.75% Robert G. Moskowitz............................. 20,000 (4) * Vappalak A. Ravindran........................... 29,000 (10) * Named Executive Officers** David F. Gatto.................................. 144,513 (11) * Thomas F. Larkins............................... 39,743 (12) * Tracey C. Doi................................... 27,640 (13) * Christopher M. Walsh............................ 0 (14) * All current directors and executive officers as a group (15 persons)...................... 1,614,443 (15) 6.62% - - --------------
* Less than 1%. ** Messrs. Gold and Benford are also Named Executive Officers. (1) All shares held are Common Stock. Unless otherwise indicated, each named individual has sole voting and investment power over the shares beneficially owned by him or her. (2) Shares which the person (or group) has the right to acquire within 60 days after February 21, 1996 are deemed to be outstanding in calculating the percentage ownership of the person (or group), but are not deemed to be outstanding as to any other person (or group). (3) Includes 177,317 shares which Mr. Benford has the right to acquire within 60 days after February 21, 1996 by exercise of stock options vested pursuant to the 1993 Stock Incentive Plan, and 70,000 shares which Mr. Benford has the right to acquire within 60 days after February 21, 1996 by exercise of stock options vested pursuant to the Company's 1986 Stock Option Plan. (4) Consists of shares which the individual has the right to acquire within 60 days after February 21, 1996 by the exercise of stock options vested pursuant to the Company's 1986 Stock Option Plan. 28 (5) Includes 20,000 shares which Mr. Miller has the right to acquire within 60 days after February 21, 1996 by the exercise of stock options vested pursuant to the Company's 1992 Stock Option Plan for Eligible Non-employee Directors, and 5,000 shares which Mr. Miller has the right to acquire within 60 days after February 21, 1996 by exercise of stock options vested pursuant to the Company's 1986 Stock Option Plan. (6) Includes 20,000 shares which Ms. Meyers has the right to acquire within 60 days after February 21, 1996 by the exercise of stock options vested pursuant to the Company's 1992 Stock Option Plan for Eligible Non-employee Directors, and 5,000 shares which Ms. Meyers has the right to acquire within 60 days after February 21, 1996 by exercise of stock options vested pursuant to the Company's 1986 Stock Option Plan. (7) Consists of 20,000 shares which Mr. Bladstrom has the right to acquire within 60 days after February 21, 1996 by exercise of stock options pursuant to the 1992 Stock Option Plan for Eligible Non-employee Directors, and 5,000 shares which Mr. Bladstrom has the right to acquire within 60 days after February 21, 1996 by exercise of stock options vested pursuant to the Company's 1986 Stock Option Plan. (8) Consists of 20,000 shares which Mr. Davis has the right to acquire within 60 days after February 21, 1996 by exercise of stock options pursuant to the 1992 Stock Option Plan for Eligible Non-employee Directors, and 5,000 shares which Mr. Davis has the right to acquire within 60 days after February 21, 1996 by exercise of stock options vested pursuant to the Company's 1986 Stock Option Plan. (9) Includes 750,000 shares which Mr. Gold has the right to acquire within 60 days after February 21, 1996 by exercise of stock options vested pursuant to the 1993 Stock Incentive Plan, and 20,000 shares which Mr. Gold has the right to acquire within 60 days after February 21, 1996 by exercise of stock options vested pursuant to the Company's 1986 Stock Option Plan. (10) Includes 25,000 shares which Mr. Ravindran has the right to acquire within 60 days after February 21, 1996 by exercise of stock options vested pursuant to the 1986 Stock Option Plan. (11) Includes 71,486 shares which Mr. Gatto has the right to acquire within 60 days after February 21, 1996 by exercise of stock options vested pursuant to the 1993 Stock Incentive Plan, and 70,000 shares which Mr. Gatto has the right to acquire within 60 days after February 21, 1996 by exercise of stock options vested pursuant to the 1986 Stock Option Plan. (12) Consists of 9,743 shares which Mr. Larkins has the right to acquire within 60 days after February 21, 1996 by exercise of stock options vested pursuant to the 1993 Stock Incentive Plan, and 30,000 shares which Mr. Larkins has the right to acquire within 60 days after February 21, 1996 by exercise of stock options vested pursuant to the Company's 1986 Stock Option Plan. (13) Includes 19,176 shares which Ms. Doi has the right to acquire within 60 days after February 21, 1996 by exercise of stock options vested pursuant to the 1993 Stock Incentive Plan, and 5,000 shares which Ms. Doi has the right to acquire within 60 days after February 21, 1996 by exercise of stock options vested pursuant to the 1986 Stock Option Plan. (14) Mr. Walsh's options expired on or prior to January 6, 1996. (15) Includes 1,466,001 shares which the members of the group have the right to acquire within 60 days after February 21, 1996 by the exercise of stock options vested pursuant to the Company's 1986 Stock Option Plan, 1992 Stock Option Plan for Eligible Non-employee Directors and 1993 Stock Incentive Plan. 29 Relying solely on (i) its review of Forms 3, 4 and 5 (and any amendments thereto) furnished to the Company pursuant to Section 16 of the Securities Exchange Act of 1934 (the "Exchange Act") by individuals who served as an executive officer or director of the Company, and persons who beneficially owned more than ten percent of a registered class of stock of the Company, during fiscal 1995, and (ii) written representations of the officers and directors of the Company, the Company believes that all of such Forms required to be filed by the foregoing reporting persons were filed on a timely basis in fiscal 1995, with the following exception: The Form 3 required to be filed by James Moodhe upon becoming an executive officer of the Company was inadvertently filed more than ten days following his appointment to such position. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS - - ------- ---------------------------------------------- Transactions in Connection with the Sale of Series A Preferred Stock; Share - - ---------------------------------------------------------------------------- Exchange Transaction - - -------------------- The Company's Series A Cumulative Convertible Preferred Stock (the "Series A Preferred Stock") was sold to Trefoil pursuant to the Stock Purchase Agreement, dated as of May 27, 1991 and amended as of July 25, 1991 (the "Stock Purchase Agreement"). Mr. Gold serves as President and Managing Director of TII, the general partner of Trefoil, and Mr. Moskowitz is an executive officer of TII. Pursuant to the Stock Purchase Agreement, Trefoil has agreed to deliver to the Company or its nominee an irrevocable proxy to vote all of the then outstanding shares of Series A Preferred Stock owned by Trefoil in favor of any merger of the Company with or into another corporation if all of the following conditions are satisfied: (i) a definitive agreement of merger has been signed, (ii) the market price of the Common Stock for the twenty consecutive trading days immediately prior to execution of a definitive agreement of merger is at least 175% of the conversion price (which is $10.00, subject to certain antidilution provisions (the "Conversion Price")), (iii) the per share merger consideration to be received by the holders of Common Stock is at least 175% of the Conversion Price, and (iv) the per share merger consideration to be received by the holders of Series A Preferred Stock is at least equal to the per share consideration payable to the holders of Common Stock multiplied by the conversion ratio which is the Stated Value divided by the Conversion Price. The Company has entered into a Registration Rights Agreement, dated as of May 27, 1991, with Trefoil (the "Trefoil Registration Rights Agreement"), pursuant to which the Company has agreed that upon the request of one or more holders of shares of Common Stock issued or issuable upon conversion of the Series A Preferred Stock or shares of Common Stock acquired by Trefoil after September 12, 1991, (collectively, the "Registrable Securities"), the Company will effect registration under the Securities Act of all or part of such holders' Registrable Securities. The Company is only obligated to effect three such registrations. The Company may not include in any such registration shares issued for its own account. Whenever the Company shall effect a registration pursuant to the Trefoil Registration Rights Agreement, the Company will be required to pay the costs of any such registration of securities, other than underwriting discounts or commissions. In addition, if the Company is registering securities for sale of its own account, at the request of holders of Registrable Securities, the Company must, subject to certain limitations, include such securities in any such registration. In the event the Share Exchange Transaction described below is approved by the shareholders of the Company the Trefoil Registration Rights Agreement will be amended to (i) change all references to Series A Preferred Stock to Series B Preferred Stock, and (ii) expand Trefoil's registration rights to include the right to require the registration of the Series B Preferred Stock in addition to the registration of the Common Stock into which the Series B Preferred Stock is convertible. The Company is required to redeem 350,000 shares of the original issue of one million shares of Series A Preferred Stock on August 31, 1996, and 162,500 shares on each August 31 thereafter until all remaining shares of Series A Preferred Stock have been redeemed. If the Company fails to redeem shares of Series A Preferred Stock when required, the annual dividend rate on the outstanding shares of Series A Preferred Stock will be increased to 10.125% (compounded quarterly with respect to dividends in arrears at a rate of 11.644% per annum) of the stated value of such shares plus accrued and unpaid dividends from the date of failure to redeem through the date of redemption. The Company believes that it is unlikely that it will be able to satisfy the mandatory $35 million redemption obligation plus the accrued and unpaid dividends with respect to the Series A Preferred Stock on August 31, 1996 from its cash flow from operations and its existing bank facility. 30 Accordingly, in December 1995, the Company entered into an agreement with Trefoil providing for the exchange of all $100 million of the Company's Series A Preferred Stock, together with all accrued and unpaid dividends, for a new issue of Series B Preferred Stock (the "Share Exchange Transaction"). The terms of the Series B Preferred Stock provide for, among other things, the elimination of the mandatory redemption feature of the Series A Preferred Stock and a reduction in the conversion price from $10.00 to $6.75 per common share. In addition, under the terms of the Series B Preferred Stock, the Company would be entitled, at its option, to pay dividends during the fiscal year ending November 30, 1996 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 proposed Share Exchange Transaction was recommended by a Special Committee of independent members of the Board of Directors and has been approved by the Board of Directors. The Share Exchange Transaction, which is subject to certain conditions including the receipt of shareholder approval, will be considered at a special meeting of shareholders to be held in April 1996. If the proposed Share Exchange Transaction is not approved by the shareholders, the Company will explore the availability of new capital to satisfy the initial $35 million mandatory redemption obligation plus accrued and unpaid dividends with respect to the Series A Preferred Stock due on August 31, 1996. The Company believes that it would be difficult to secure such funding on terms acceptable to the Company. Services Agreement - - ------------------ Pursuant to a one-year management services agreement, dated September 12, 1994, between the Company and SCA (the "Services Agreement"), SCA consulted with, and provided advice to, the officers and employees of the Company concerning matters (i) relating to the Company's financial policies and the development and implementation of the Company's business plans and (ii) generally arising out of the business affairs of the Company. The Services Agreement expired by its terms in September 1995. Mr. Gold is a member of the Board of Directors of SCA and Mr. Moskowitz is an executive officer of SCA. The Services Agreement replaced a prior three-year agreement entered into between the Company and SCA for substantially similar management services. SCA's compensation for such management and consulting services under the Services Agreement was $500,000. The Company also (i) reimbursed SCA for all of its reasonable out-of-pocket costs and expenses incurred in connection with the performance of its services under the Services Agreement and (ii) paid customary directors' fees to the officers and directors of SCA serving as directors of the Company. See "DIRECTOR COMPENSATION". The Company also agreed to indemnify SCA 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 Services Agreement; provided that such liabilities did not 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. The Company's obligations to indemnify SCA survive the expiration of the Services Agreement. Transactions in Connection with the Sale of Common Stock - - -------------------------------------------------------- The Company sold 1,244,445 newly issued shares of Common Stock for an aggregate purchase price of approximately $14 million to Pentland Ventures, Ltd. ("Ventures"), an affiliate of Pentland Group plc, pursuant to a Stock Purchase Agreement, dated as of April 28, 1992, between the Company and Ventures (the "Pentland Stock Purchase Agreement"). Under the Pentland Stock Purchase Agreement, until the earlier of (i) April 28, 1997 and (ii) the date 60 days after Trefoil or any Affiliate (as defined in the Stock Purchase Agreement) or Associate (as defined in the Stock Purchase Agreement) of Trefoil or any successor to Trefoil that is directly or indirectly controlled by the directors or executive officers of SCA (collectively, the "Trefoil Group"), collectively cease to own at least 10% of the outstanding Common Stock of the Company on a fully diluted basis, Ventures and its Affiliates and Associates shall not, directly or indirectly, alone or in concert with others: (1) effect or seek, offer or propose to effect, or cause or participate in, (V) any acquisition of any securities (or beneficial ownership thereof) or assets of the Company or any of its subsidiaries (except by way of distribution made available to holders of Common Stock generally and except for acquisitions of Common Stock if, after giving effect to such acquisition, Ventures together with its Affiliates and Associates beneficially own no more than 9.9% of the outstanding Common Stock at the time of such acquisition); (W) any tender or exchange offer, merger or 31 other business combination involving the Company or any of its subsidiaries; (X) any recapitalization, restructuring, liquidation, dissolution or other extraordinary transaction with respect to the Company or any of its subsidiaries; (Y) any "solicitation" of "proxies" (as such terms are used in the proxy rules of the Securities and Exchange Commission (the "SEC")) or consents to vote any voting securities of the Company; or (Z) any sale, transfer, pledge, or disposal of any shares of Common Stock to a person who, after giving effect to such transaction, would, together with its Affiliates and Associates, to the knowledge of Ventures after reasonable inquiry, beneficially own 10% or more of the outstanding shares of Common Stock (subject to certain exceptions); (2) take any other action to seek to control the management, Board of Directors or policies of the Company; (3) take any action which might force the Company to make a public announcement regarding any of the types of matters set forth in clause 1 above; (4) solicit the Company to repurchase any of the shares of Common Stock that are subject to the Pentland Stock Purchase Agreement or shares of Common Stock that are the subject of the Stock Option Agreement (defined below); or (5) enter into any discussions or arrangements with any third party with respect to any of the foregoing. In the event of a breach of the Pentland Stock Purchase Agreement by Ventures, in addition to its remedies at law or in equity, the Company shall be entitled to terminate the Sourcing Agreement (defined below) without liability thereunder. The Pentland Stock Purchase Agreement also provides that for a period of four years from April 28, 1992, neither Pentland nor any of its Subsidiaries (as defined in the Pentland Stock Purchase Agreement) shall solicit to employ any executive, senior management or other key employee of the Company or any of its Affiliates. Pursuant to a Stock Option Agreement, dated as of April 28, 1992 (as amended to date), between the Company and Ventures (the "Stock Option Agreement"), the Company has granted to Ventures an irrevocable option (the "Option") to purchase up to 400,000 additional shares of Common Stock at exercise prices of $13.50 (for 200,000 of such shares) and $16.125 (for the remaining 200,000 shares of Common Stock subject to the Option). The number of shares subject to the Option and the exercise price therefore are subject to adjustment in certain circumstances. The Options became exercisable by Ventures on October 28, 1992, and may be exercised from time to time until April 28, 1996. Pursuant to a Registration Rights Agreement, dated as of April 28, 1992 (as amended to date), between the Company and Ventures (the "Pentland Registration Rights Agreement"), Ventures has been granted the right (i) to require, subject to certain limitations, the Company to register the shares of Common Stock issued to Ventures under the Securities Act ("Demand Registration") and (ii) to include, subject to certain limitations, such shares of Common Stock in certain other registrations of the Company's shares of Common Stock under the Securities Act ("Incidental Registration"). Ventures is entitled to one Demand Registration which must be made in respect of no more than 400,000 and no less than 300,000 shares of Common Stock. The Company is not required to effect any Demand Registration prior to the earlier of October 28, 1994 and the date the Trefoil Group ceases to own 10% of the Common Stock then outstanding on a fully- diluted basis (the "Sale Date") and after April 28, 1996. The Company is not required to effect the Incidental Registration of more than 200,000 shares of Common Stock in any twelve-month period. The Company is not required to effect any Incidental Registration prior to the earlier of April 28, 1993 and the Sale Date or after April 28, 1996. The Company is obligated to pay certain registration expenses in connection with a Demand Registration. The Company and Ventures have agreed to indemnify each other against certain liabilities and claims arising from or based upon certain violations of applicable securities laws or regulations. The Company may terminate the Pentland Registration Rights Agreement without liability if Ventures has breached the Pentland Stock Purchase Agreement, the Stock Option Agreement or the Sourcing Agreement (defined below). Sourcing Agreement - - ------------------ Pursuant to the Sourcing Agreement, dated as of April 28, 1992 (the "Sourcing Agreement"), a Pentland affiliate was appointed as the sourcing representative of the Company with respect to certain footwear manufacturers located in various countries in the Far East. In consideration of its services under the Sourcing Agreement, the Pentland affiliate will receive a sourcing fee based on the aggregate U.S. dollar price of certain products manufactured for the Company by manufacturers sourced by the Pentland affiliate. Unless otherwise terminated in accordance with its terms, the Sourcing Agreement shall remain in force until December 31, 1997 32 and shall continue in force thereafter unless terminated by either the Company or the Pentland affiliate on six months' prior written notice. The Sourcing Agreement may be terminated by the Company prior to its expiration (i) if defective products exceed certain agreed percentages, (ii) upon certain bankruptcy events with respect to the Pentland affiliate or an affiliate thereof, or (iii) upon the breach of the Stock Option agreement and the Pentland Registration Rights Agreement. The Sourcing Agreement also may be terminated by the Pentland affiliate prior to its expiration (i) upon certain bankruptcy events with respect to the Company, (ii) upon the sale or transfer of all or substantially all of the Company's assets, or (iii) upon certain consolidations or mergers involving the Company. Consulting Agreements - - --------------------- Pursuant to a Consulting Agreement, dated as of May 30, 1995 (the "Moodhe Agreement"), James Moodhe served as a consultant to the Company on an exclusive, full-time basis, providing advice on operational and organizational matters. Although the term of the Moodhe Agreement ran through November 30, 1995, Mr. Moodhe was appointed Senior Vice President, Marketing, Design and Development in September 1995 and the Moodhe Agreement was terminated at that time. Under the Moodhe Agreement, Mr. Moodhe was paid a monthly consulting fee of $20,833, for an aggregate of $78,577, and was reimbursed for reasonable out-of-pocket expenses incurred in performing his consulting services. Ann E. Meyers, a member of the Board of Directors, served as a consultant for the Company in connection with the establishment of a women's basketball promotion program pursuant to a consulting agreement effective as of November 1, 1993. She was compensated in the aggregate amount of $75,000 during fiscal 1995 for such services. 33 PART IV ------- ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K - - -------- ---------------------------------------------------------------- (a) The following documents are filed as part of this report: -------------------------------------------------------- 1. CONSOLIDATED FINANCIAL STATEMENTS: Page in Annual Report* -------------- Report of Independent Accountants................ 23 Consolidated Balance Sheets at November 30, 1995 and 1994.................................. 12 Consolidated Statements of Operations for the Years Ended November 30, 1995, 1994 and 1993... 13 Consolidated Statements of Shareholders' (Deficit) Equity for the Years Ended November 30, 1995, 1994 and 1993............... 14 Consolidated Statements of Cash Flows for the Years Ended November 30, 1995, 1994 and 1993... 15 Notes to Consolidated Financial Statements....... 16-22 -------------------- * Incorporated by reference to the indicated pages in the Annual Report to shareholders. 2. FINANCIAL STATEMENT SCHEDULE: Page in Form 10-K ---------- Report of Independent Accountants on Financial Statement Schedule II............................ 35 Valuation and Qualifying Accounts and Reserves..... 36 All other schedules are omitted because they are not applicable or the required information is shown in the consolidated financial statements or notes thereto. 3. EXHIBITS: See Index to Exhibits at Page 37 of this Form 10-K. Management contracts or compensatory plans or arrangements required to be filed as exhibits to this report are identified on the Index to Exhibits of this Form 10-K by an asterisk. (b) REPORTS ON FORM 8-K: ------------------- The Company filed the following current report on Form 8-K during the last quarter of fiscal 1995. 1. The Company filed a Current Report on Form 8-K on September 14, 1995 with respect to Item 5 - Other Events. 34 REPORT OF INDEPENDENT ACCOUNTANTS ON FINANCIAL STATEMENT SCHEDULE To the Board of Directors of L.A. Gear, Inc. Our audits of the consolidated financial statements referred to in our report dated January 22, 1996 appearing in the 1995 Annual Report to Shareholders of L.A. Gear, Inc. (which report and consolidated financial statements are incorporated by reference in this Annual Report on Form 10-K) also included an audit of the Financial Statement Schedule for the years ended November 30, 1995, 1994, and 1993 listed in Item 14(a) of this Form 10-K. In our opinion, the Financial Statement Schedule presents fairly, in all material respects, the information set forth therein when read in conjunction with the related consolidated financial statements. /s/ Price Waterhouse LLP - - ------------------------ Los Angeles, California January 22, 1996 35 L.A. GEAR, INC. AND SUBSIDIARIES Schedule II Valuation and Qualifying Accounts and Reserves Years ended November 30, 1995, 1994 and 1993 (in thousands)
BALANCE AT CHARGED TO BEGINNING COSTS AND BALANCE AT OF YEAR EXPENSES DEDUCTIONS END OF YEAR ---------- ------------ ---------- ------------ DEDUCTED FROM ASSETS TO WHICH THEY APPLY: ALLOWANCE FOR DOUBTFUL ACCOUNTS AND MERCHANDISE RETURNS: YEAR ENDED NOVEMBER 30, 1993 $ 4,575 $12,058 $10,716 (1) $ 5,917 YEAR ENDED NOVEMBER 30, 1994 5,917 17,283 16,725 (1) 6,475 YEAR ENDED NOVEMBER 30, 1995 6,475 7,653 6,575 (1) 7,553 RESERVE FOR INVENTORY OBSOLESCENCE: YEAR ENDED NOVEMBER 30, 1993 $ 2,700 $10,700 $ 4,854 $ 8,546 YEAR ENDED NOVEMBER 30, 1994 8,546 11,613 13,089 7,070 YEAR ENDED NOVEMBER 30, 1995 7,070 10,647 10,645 7,072 DEFERRED TAX VALUATION ALLOWANCE: YEAR ENDED NOVEMBER 30, 1993 $ -- $ -- $ -- $ -- YEAR ENDED NOVEMBER 30, 1994 -- 46,905 (2) -- 46,905 YEAR ENDED NOVEMBER 30, 1995 46,905 17,203 (2) -- 64,108 RESERVE FOR UNUSED BARTER CREDITS: YEAR ENDED NOVEMBER 30, 1993 $ -- $ 2,000 $ -- $ 2,000 YEAR ENDED NOVEMBER 30, 1994 2,000 -- -- 2,000 YEAR ENDED NOVEMBER 30, 1995 2,000 4,568 -- 6,568 COSTS RELATED TO DISCONTINUED OPERATIONS: YEAR ENDED NOVEMBER 30, 1993 $ 4,552 $ -- $ 3,543 (3) $ 1,009 YEAR ENDED NOVEMBER 30, 1994 1,009 -- 1,009 (3) -- YEAR ENDED NOVEMBER 30, 1995 -- -- -- --
(1) Actual merchandise returns and write-offs of accounts receivable, net of recoveries. (2) Represents primarily the non-recognition of tax benefits for operating losses. (3) Costs paid and reclassification of fair market value reserve to reduce carrying value of property. 36 EXHIBIT INDEX ------------- EXHIBIT NO. - - ----------- 3.1 Registrant's Restated Articles of Incorporation, as amended to date. (1) 3.2 Registrant's Bylaws, as amended to date. (2) 4.1 Form of stock certificate evidencing Registrant's Common Stock. (3) 4.2 Form of stock certificate evidencing the Registrant's Series A Cumulative Convertible Preferred Stock. (4) 4.3 Indenture, dated as of December 24, 1992, with respect to the Registrant's 7 3/4% Convertible Debentures due 2002. (5) 4.4 Form of 7 3/4% Convertible Subordinated Debenture due 2002, in Global Form. (6) 4.5 Form of 7 3/4% Convertible Subordinated Debentures due 2002, in Definitive Form. (7) 10.1* L.A. Gear, Inc. 1986 Stock Option Plan, as amended to date. (8) 10.2* Form of L.A. Gear, Inc. 1986 Stock Option Plan Non-qualified Stock Option Agreement. (9) 10.3* L.A. Gear, Inc. Employee Stock Savings Plan, as amended and restated effective August 1, 1993. (10) 10.4* Second Complete Amendment and Restatement to the L.A. Gear, Inc. Employee Stock Savings Plan and Trust, dated November 1, 1995. 10.5 Master Lease Agreement between Registrant and Hewlett-Packard Company concerning computer hardware and software and related Operating Lease Equipment Schedule & Payment Agreements executed on January 4, 1989. (11) 10.6 Amendment, dated as of October 25, 1993, to Master Lease Agreement between Registrant and Hewlett-Packard Company concerning computer hardware and software and related Operating Lease Equipment Schedule & Payment Agreements executed on January 4, 1989. (12) 10.7 Master Lease Agreement, as amended, dated as of June 23, 1989 by and between Metlife Capital Corporation and Registrant. (13) 10.8 Letter Agreement, dated June 8, 1994, between Wal-Mart Stores, Inc. and Registrant. Portions of this agreement have been omitted and filed separately with the Commission pursuant to request for confidential treatment. (14) 10.9 Letter Agreement, dated June 14, 1994, between Mark R. Goldston and Registrant. (15) 10.10* Employment Agreement, dated as of December 7, 1993, between William L. Benford and Registrant. (16) 10.11* Employment Agreement, dated as of December 7, 1993, between David F. Gatto and Registrant. (17) 10.12* Employment Agreement, dated as of September 11, 1995, between James V. Moodhe and Registrant. (18) 10.13* Employment Agreement, dated as of February 15, 1994, between Thomas F. Larkins and Registrant. (19) 10.14* Employment Agreement, dated as of February 1, 1996, between Tracey C. Doi and Registrant. 10.15* Employment Agreement, dated as of February 1, 1996, between Victor J. Trippetti, Jr. and Registrant. 37 10.16 Form of Indemnification Agreement entered into between Registrant and each of its Directors and Executive Officers. (20) 10.17 Stock Purchase Agreement, dated as of May 27, 1991, by and between Registrant and Trefoil Capital Investors, L.P., as amended to date. (21) 10.18 Registration Rights Agreement, dated as of May 27, 1991, by and between Registrant and Trefoil Capital Investors, L.P. (22) 10.19 Management Services Letter Agreement, dated September 12, 1994, by and between Registrant and Shamrock Capital Advisors, Inc. (23) 10.20 Sourcing Agreement dated April 28, 1992 between Registrant and LASCO Sports Limited. Portions of this agreement have been omitted and filed separately with the Commission pursuant to request for confidential treatment. (24) 10.21 Amendment, effective as of December 1, 1993, to Sourcing Agreement, dated April 28, 1992, between Registrant and LASCO Sports Limited. Portions of this amendment have been omitted and filed separately with the Commission pursuant to request for confidential treatment. (25) 10.22 Supplemental, dated as of January 1, 1995, to Sourcing Agreement, dated April 28, 1992, between the Registrant and LASCO Sports Limited, Portions of this Supplemental and the underlying agreement have been omitted and filed separately with the Commission pursuant to request for confidential information. (26) 10.23 Stock Purchase Agreement dated April 28, 1992 between Registrant and Pentland Ventures Ltd. (27) 10.24 Registration Rights Agreement dated April 28, 1992 between Registrant and Pentland Ventures Ltd. (28) 10.25 Stock Option Agreement dated April 28, 1992 between Registrant and Pentland Ventures, Ltd. (29) 10.26 Amendment, dated as of July 20, 1993, to Stock Option Agreement, dated as of April 28, 1992, between Pentland Ventures Ltd. and Registrant, and to Registration Rights Agreement, dated as of April 28, 1992, between Pentland Ventures Ltd. and Registrant. (30) 10.27 Lease Agreement dated October 15, 1992 between Registrant and Santa Monica Associates. (31) 10.28* L.A. Gear, Inc. 1992 Stock Option Plan for Eligible Non-employee Directors. (32) 10.29* Form of L.A. Gear, Inc. 1992 Stock Option Plan for Eligible Non- employee Directors Non-qualified Stock Option Agreement for Non- employee Directors. (33) 10.30* L.A. Gear, Inc. 1993 Stock Incentive Plan. (34) 10.31* Form of L.A. Gear, Inc. 1993 Stock Incentive Plan Non-qualified Stock Option Agreement. (35) 10.32* Form of L.A. Gear, Inc. 1993 Stock Incentive Plan Incentive Stock Option Agreement. (36) 10.33* Form of L.A. Gear, Inc. 1993 Stock Incentive Plan Restricted Stock Option Agreement. (37) 10.34 Registration Rights Agreement, dated as of December 24, 1992, among Registrant and Kidder, Peabody & Co. Incorporated and Sutro & Co. Incorporated. (38) 10.35* Summary Description of L.A. Gear, Inc. Management Incentive Program. 10.36* Amended and Restated Non-qualified Stock Option Agreement, dated as of October 19, 1993, between Stanley P. Gold and Registrant. (39) 38 10.37 Loan and Security Agreement, dated as of November 22, 1993, between L.A. Gear California, Inc. and BankAmerica Business Credit, Inc. (40) 10.38 Patent and Trademark Security Agreement, dated as of November 22, 1993, by L.A. Gear California, Inc. and Registrant in favor of BankAmerica Business Credit, Inc. (41) 10.39 Guaranty, dated as of November 22, 1993, by Registrant and Raegal Finance Inc. in favor of BankAmerica Business Credit, Inc. (42) 10.40 Security Agreement, dated as of November 22, 1993, by Registrant in favor of BankAmerica Business Credit, Inc. (43) 10.41 Pledge Agreement, dated as of November 22, 1993, by Registrant in favor of BankAmerica Business Credit, Inc. (44) 10.42 Security Agreement, dated as of November 22, 1993, by Raegal Finance Inc. in favor of BankAmerica Business Credit, Inc. (45) 10.43 Pledge Agreement, dated as of November 22, 1993, by Raegal Finance Inc. in favor of BankAmerica Business Credit, Inc. (46) 10.44 First Amendment to Loan and Security Agreement, dated as of May 31, 1994, between L.A. Gear California, Inc. and BankAmerica Business Credit, Inc. (47) 10.45 Second Amendment to Loan and Security Agreement, dated as of August 31, 1994, between L.A. Gear California, Inc. and BankAmerica Business Credit, Inc. (48) 10.46 Third Amendment to Loan and Security Agreement, dated as of January 25, 1995, between L.A. Gear California, Inc. and BankAmerica Business Credit, Inc. (49) 10.47 Fourth Amendment to Loan and Security Agreement, dated as of February 28, 1995, between L.A. Gear California, Inc. and BankAmerica Business Credit, Inc. (50) 10.48 Fifth Amendment to Loan and Security Agreement, dated as of July 14, 1995, between L.A. Gear California, Inc. and BankAmerica Business Credit, Inc. (51) 10.49 Sixth Amendment to Loan and Security Agreement, dated as of November 30, 1995, between L.A. Gear California, Inc. and BankAmerica Business Credit, Inc. (52) 10.50 Buying Agent Agreement, dated as of March 12, 1992, between Registrant and BBC International, as amended by Addendum, dated as of August 29, 1992, Second Addendum dated as of December 23, 1992, and Third Addendum, dated as of December 3, 1993. Portions of this agreement have been omitted and filed separately with the Commission pursuant to request for confidential treatment. (53) 10.51 Standard Industrial Lease-Net, dated as of January 1, 1993, between Registrant and the Prudential Insurance Company of America. (54) 10.52 First Amendment to Lease (1777 South Vintage Avenue), dated as of February 14, 1994, between Registrant and the Prudential Insurance Company of America. (55) 10.53 Standard Industrial Lease-Net, dated as of January 1, 1993, between Registrant and the Prudential Insurance Company of America. (56) 10.54 First Amendment to Lease (1661 South Vintage Avenue), dated as of February 14, 1994, between Registrant and the Prudential Insurance Company of America. (57) 39 10.55 Agreement, dated March 14, 1995, between Mark R. Goldston and the Registrant. (58) 10.56 Share Exchange Agreement, dated as of December 12, 1995, between L.A. Gear, Inc. and Trefoil Capital Investors, L.P. (59) 13.1 L.A. Gear, Inc. Annual Report to Shareholders for the fiscal year ended November 30, 1995. 21.1 Subsidiaries of Registrant. 23.1 Consent of Price Waterhouse LLP, independent accountants. 27.1 Financial Data Schedule. - - --------------- 1 Previously filed as Exhibit 3.1 to the Company's Annual Report on Form 10-K for fiscal 1993 and incorporated herein by this reference. 2 Previously filed as Exhibit 3.2 to the Company's Annual Report on Form 10-K for fiscal 1992 and incorporated herein by this reference. 3 Previously filed as Exhibit 4.1 to the Company's Annual Report on Form 10-K for fiscal 1992 and incorporated herein by this reference. 4 Previously filed as Exhibit 4.1 to the Company's Current Report on Form 8-K filed with the Securities and Exchange Commission on September 26, 1991 and incorporated herein by this reference. 5 Previously filed as Exhibit 4.3 to the Company's Annual Report on Form 10-K for fiscal 1992 and incorporated herein by this reference. 6 Previously filed as Exhibit 4.4 to the Company's Annual Report on Form 10-K for fiscal 1992 and incorporated herein by this reference. 7 Previously filed as Exhibit 4.5 to the Company's Annual Report on Form 10-K for fiscal 1992 and incorporated herein by this reference. 8 Previously filed as Exhibit 10.1 to the Company's Annual Report on Form 10-K for fiscal 1991 and incorporated herein by this reference. 9 Previously filed as Exhibit 10.2 to the Company's Annual Report on Form 10-K for fiscal 1993 and incorporated herein by this reference. 10 Previously filed as Exhibit 10.3 to the Company's Annual Report on Form 10-K for fiscal 1993 and incorporated herein by this reference. 11 Previously filed as Exhibit 10.97 to the Company's Annual Report on Form 10- K for fiscal 1988 and incorporated herein by this reference. 12 Previously filed as Exhibit 10.5 to the Company's Annual Report on Form 10-K for fiscal 1993 and incorporated herein by this reference. 13 Previously filed as Exhibit 10.117 to the Company's Quarterly Report on Form 10-Q for the quarter ended August 31, 1989 and incorporated herein by this reference. 14 Previously filed as Exhibit 10.1 to the Company's Quarterly Report on Form 10-Q for the quarter ended May 31, 1994 and incorporated herein by this reference. 40 15 Previously filed as Exhibit 10.2 to the Company's Quarterly Report on Form 10-Q for the quarter ended May 31, 1994 and incorporated herein by this reference. 16 Previously filed as Exhibit 10.1 to the Company's Quarterly Report on Form 10-Q for the quarter ended February 28, 1994 and incorporated herein by this reference. 17 Previously filed as Exhibit 10.2 to the Company's Quarterly Report on Form 10-Q for the quarter ended February 28, 1994 and incorporated herein by this reference. 18 Previously filed as Exhibit 10.4 to the Company's Quarterly Report on Form 10-Q for the quarter ended August 31, 1995 and incorporated herein by this reference. 19 Previously filed as Exhibit 10.5 to the Company's Quarterly Report Form 10-Q for the quarter ended February 28, 1994 and incorporated herein by this reference. 20 Previously filed as Exhibit 10.24 to the Company's Annual Report on Form 10- K for fiscal 1991 and incorporated herein by this reference. 21 Previously filed as Appendix I to the Company's Proxy Statements in connection with the Annual Meeting of Shareholders held on September 10, 1991 and incorporated herein by this reference. 22 Previously filed as Exhibit 28.1(b) to the Company's Current Report on Form 8-K filed with the Securities and Exchange Commission on June 1, 1991 and incorporated herein by this reference. 23 Previously filed as Exhibit 10.1 to the Company's Quarterly Report on Form 10-Q for the quarter ended August 31, 1994 and incorporated herein by this reference. 24 Previously filed as Exhibit 10.27 to the Company's Annual Report on Form 10- K for fiscal 1992 and incorporated herein by this reference. 25 Previously filed as Exhibit 10.18 to the Company's Annual Report on Form 10- K for fiscal 1993 and incorporated herein by this reference. 26 Previously filed as Exhibit 10.1 to the Company's Quarterly Report on Form 10-Q for the quarter ended May 3l, 1995 and incorporated herein by this reference. 27 Previously filed as Exhibit 10.28 to the Company's Annual Report on Form 10-K for fiscal 1992 and incorporated herein by this reference. 28 Previously filed as Exhibit 10.29 to the Company's Annual Report on Form 10-K for fiscal 1992 and incorporated herein by this reference. 29 Previously filed as Exhibit 10.30 to the Company's Annual Report on Form 10-K for fiscal 1992 and incorporated herein by this reference. 30 Previously filed as Exhibit 10.22 to the Company's Annual Report on Form 10-K for fiscal 1993 and incorporated herein by this reference. 31 Previously filed as Exhibit 10.31 to the Company's Annual Report on Form 10-K for fiscal 1992 and incorporated herein by this reference. 32 Previously filed as Exhibit 10.35 to the Company's Annual Report on Form 10-K for fiscal 1992 and incorporated herein by this reference. 33 Previously filed as Exhibit 10.25 to the Company's Annual Report on Form 10-K for fiscal 1993 and incorporated herein by this reference. 41 34 Previously filed as Appendix I to the Company's Proxy Statement in connection with the Annual Meeting of Shareholders held on April 13, 1993 and incorporated herein by this reference. 35 Previously filed as Exhibit 10.27 to the Company's Annual Report on Form 10-K for fiscal 1993 and incorporated herein by this reference. 36 Previously filed as Exhibit 10.28 to the Company's Annual Report on Form 10-K for fiscal 1993 and incorporated herein by this reference. 37 Previously filed as Exhibit 10.29 to the Company's Annual Report on Form 10-K for fiscal 1993 and incorporated herein by this reference. 38 Previously filed as Exhibit 10.36 to the Company's Annual Report on Form 10-K for fiscal 1992 and incorporated herein by this reference. 39 Previously filed as Exhibit 10.32 to the Company's Annual Report on Form 10-K for fiscal 1993 and incorporated herein by this reference. 40 Previously filed as Exhibit 99.1 to the Company's Current Report of Form 8-K filed with the Securities and Exchange Commission on November 23, 1993 and incorporated herein by reference. 41 Previously filed as Exhibit 99.1(a) to the Company's Current Report of Form 8-K filed with the Securities and Exchange Commission on November 23, 1993 and incorporated herein by reference. 42 Previously filed as Exhibit 99.1(b) to the Company's Current Report of Form 8-K filed with the Securities and Exchange Commission on November 23, 1993 and incorporated herein by reference. 43 Previously filed as Exhibit 99.1(c) to the Company's Current Report of Form 8-K filed with the Securities and Exchange Commission on November 23, 1993 and incorporated herein by reference. 44 Previously filed as Exhibit 99.1(d) to the Company's Current Report of Form 8-K filed with the Securities and Exchange Commission on November 23, 1993 and incorporated herein by reference. 45 Previously filed as Exhibit 99.1(e) to the Company's Current Report of Form 8-K filed with the Securities and Exchange Commission on November 23, 1993 and incorporated herein by reference. 46 Previously filed as Exhibit 99.1(f) to the Company's Current Report of Form 8-K filed with the Securities and Exchange Commission on November 23, 1993 and incorporated herein by reference. 47 Previously filed as Exhibit 99.2 to the Company's Current Report of Form 8-K filed with the Securities and Exchange Commission on June 2, 1994 and incorporated herein by reference. 48 Previously filed as Exhibit 99.3 to the Company's Current Report of Form 8-K filed with the Securities and Exchange Commission on September 2, 1994 and incorporated herein by reference. 49 Previously filed as Exhibit 99.5 to the Company's Current Report on Form 8-K filed with the Securities and Exchange Commission on January 26, 1995 and incorporated herein by this reference. 50 Previously filed as Exhibit 99.7 to the Company's Current Report on Form 8-K filed with the Securities and Exchange Commission on March 3, 1995 and incorporated herein by this reference. 51 Previously filed as Exhibit 99.8 to the Company's Current Report on Form 8-K filed with the Securities and Exchange Commission on July 17, 1995 and incorporated herein by this reference. 42 52 Previously filed as Exhibit 99.10 to the Company's Current Report on Form 8-K filed with the Securities and Exchange Commission on February 9, 1996 and incorporated herein by this reference. 53 Previously filed as Exhibit 10.40 to the Company's Annual Report on Form 10-K for fiscal 1993 and incorporated herein by this reference. 54 Previously filed as Exhibit 10.41 to the Company's Annual Report on Form 10-K for fiscal 1993 and incorporated herein by this reference. 55 Previously filed as Exhibit 10.42 to the Company's Annual Report on Form 10-K for fiscal 1993 and incorporated herein by this reference. 56 Previously filed as Exhibit 10.43 to the Company's Annual Report on Form 10- K for fiscal 1993 and incorporated herein by this reference. 57 Previously filed as Exhibit 10.44 to the Company's Annual Report on Form 10-K for fiscal 1993 and incorporated herein by this reference. 58 Previously filed as Exhibit 10.1 to the Company's Quarterly Report on Form 10-Q for the quarter ended February 28, 1995 and incorporated herein by this reference. 59 Previously filed as Exhibit 10.1 to the Company's Current Report on Form 8-K filed with the Securities and Exchange Commission on December 12, 1995 and incorporated herein by this reference. 43 Pursuant to the requirements of Section 13 or 15(d) 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. L.A. GEAR, INC By: /s/ William L. Benford ----------------------- William L. Benford President and Chief Operating Officer Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the date indicated. /s/ Stanley P. Gold - - ---------------------------------- Stanley P. Gold Director, Chairman of the Board and Chief Executive Officer (Principal Executive Officer) /s/ William L. Benford - - ---------------------------------- William L. Benford President and Chief Operating Officer /s/ Thomas F. Larkins - - ---------------------------------- Thomas F. Larkins Chief Administrative Officer (Principal Financial Officer) /s/ Tracey C. Doi - - ---------------------------------- Tracey C. Doi Vice President and Controller (Principal Accounting Officer) /s/ Walter C. Bladstrom - - ---------------------------------- Walter C. Bladstrom Director /s/ Allan E. Dalshaug - - ---------------------------------- Allan E. Dalshaug Director /s/ Willie D. Davis - - ---------------------------------- Willie D. Davis Director /s/ Stephen A. Koffler - - ---------------------------------- Stephen A. Koffler Director /s/ Ann E. Meyers - - ---------------------------------- Ann E. Meyers Director /s/ Clifford A. Miller - - ---------------------------------- Clifford A. Miller Director /s/ Robert G. Moskowitz - - ---------------------------------- Robert G. Moskowitz Director /s/ Vappalak A. Ravindran - - ---------------------------------- Vappalak A. Ravindran Director Dated: February 26, 1996 ----------------- 44 EX-10.4 2 PLAN & TRUST AGREEMENT Exhibit 10.4 ------------ L.A. GEAR, INC. EMPLOYEE STOCK SAVINGS PLAN PLAN AND TRUST AGREEMENT SECOND COMPLETE AMENDMENT AND RESTATEMENT GENERALLY EFFECTIVE AUGUST 1, 1993 L.A. Gear, Inc. Employee Stock Savings Plan and Trust Second Complete Amendment and Restatement Generally Effective August 1, 1993 L.A. Gear, Inc. established the Retirement Plan for Employees of L.A. Gear, effective December 1, 1985, intended to constitute a qualified profit sharing plan, as described in Code section 401(a), for the benefit of eligible employees of the Company and its participating affiliates. The Retirement Plan for Employees of L.A. Gear was renamed the L.A. Gear, Inc. Employee Stock Savings Plan effective December 1, 1986, and concurrently amended and restated to add a qualified cash or deferred arrangement, as described in Code section 401(k) and provisions to provide for a qualified stock bonus plan, as described in Code section 401(a), designated as an employee stock ownership plan, as described in Code section 4975(e)(7). The provisions related to the employee stock ownership plan are discontinued, which provisions were never effected. The Plan, as amended and restated generally effective August 1, 1993, is intended to constitute a qualified profit sharing plan, as described in Code section 401(a), which includes a qualified cash or deferred arrangement, as described in Code section 401(k). The provisions of this Plan and Trust relating to the Trustee constitute the trust agreement which is entered into by and between L.A. Gear, Inc. and Wells Fargo Bank, National Association. The Trust is intended to be tax exempt as described under Code section 501(a). The L.A. Gear, Inc. Employee Stock Savings Plan and Trust, as set forth in this document, is hereby amended and restated generally effective as of August 1, 1993. This constitutes the second complete amendment and restatement generally effective August 1, 1993. Date: November 9, 1995 L.A. Gear, Inc. By: /s/ Victor J. Trippetti, Linda Burakof -------------------------------------- Title: 401(k) committee members ----------------------------------- The trust agreement set forth in those provisions of this Plan and Trust which relate to the Trustee is hereby executed. Date: November 9, 1995 Wells Fargo Bank, National Association By: /s/ Gwen Slack --------------------------------------- Title: ----------------------------------- Date: November 9, 1995 Wells Fargo Bank, National Association By: /s/ Dolores Upton --------------------------------------- Title: ----------------------------------- TABLE OF CONTENTS 1 DEFINITIONS....................................................... 1 ----------- 2 ELIGIBILITY....................................................... 10 ----------- 2.1 Eligibility................................................. 10 2.2 Ineligible Employees........................................ 10 2.3 Ineligible or Former Participants........................... 11 3 PARTICIPANT CONTRIBUTIONS......................................... 12 ------------------------- 3.1 Employee 401(k) Contribution Election....................... 12 3.2 After-Tax Contribution Election............................. 12 3.3 Changing a Contribution Election............................ 12 3.4 Revoking and Resuming a Contribution Election............... 12 3.5 Contribution Percentage Limits.............................. 13 3.6 Refunds When Contribution Dollar Limit Exceeded............. 13 3.7 Timing, Posting and Tax Considerations...................... 14 4 ROLLOVERS AND TRANSFERS FROM AND TO OTHER QUALIFIED PLANS......... 15 --------------------------------------------------------- 4.1 Rollovers................................................... 15 4.2 Transfers From and To Other Qualified Plans................. 15 5 EMPLOYER CONTRIBUTIONS............................................ 16 ---------------------- 5.1 Employer Matching Contributions............................. 16 5.2 Matching Stock Contributions................................ 17 5.3 Matching Cash Contributions................................. 17 5.4 Qualifying Contributions.................................... 18 6 ACCOUNTING........................................................ 19 ---------- 6.1 Individual Participant Accounting........................... 19 6.2 Sweep Account is Transaction Account........................ 19 6.3 Trade Date Accounting and Investment Cycle.................. 19 6.4 Accounting for Investment Funds............................. 19 6.5 Payment of Fees and Expenses................................ 19 6.6 Accounting for Participant Loans............................ 20 6.7 Error Correction............................................ 20 6.8 Participant Statements...................................... 21 6.9 Special Accounting During Conversion Period................. 21 6.10 Accounts for QDRO Beneficiaries............................. 21 7 INVESTMENT FUNDS AND ELECTIONS.................................... 22 ------------------------------ 7.1 Investment Funds............................................ 22 7.2 Investment Fund Elections................................... 22 7.3 Responsibility for Investment Choice........................ 23 7.4 Default if No Election...................................... 23 7.5 Timing...................................................... 23 7.6 Investment Fund Election Change Fees........................ 23
i 8 VESTING & FORFEITURES............................................ 24 --------------------- 8.1 Fully Vested Contribution Accounts......................... 24 8.2 Full Vesting upon Certain Events........................... 24 8.3 Vesting Schedule........................................... 24 8.4 Forfeitures................................................ 25 8.5 Rehired Employees.......................................... 25 9 PARTICIPANT LOANS................................................ 26 ----------------- 9.1 Participant Loans Permitted................................ 26 9.2 Loan Application, Note and Security........................ 26 9.3 Spousal Consent............................................ 26 9.4 Loan Approval.............................................. 26 9.5 Loan Funding Limits, Account Sources and Funding Order..... 26 9.6 Maximum Number of Loans.................................... 27 9.7 Source and Timing of Loan Funding.......................... 27 9.8 Interest Rate.............................................. 27 9.9 Loan Payment............................................... 27 9.10 Loan Payment Hierarchy..................................... 28 9.11 Repayment Suspension....................................... 28 9.12 Loan Default............................................... 28 9.13 Call Feature............................................... 28 10 IN-SERVICE WITHDRAWALS............................................ 29 ---------------------- 10.1 In-Service Withdrawals Permitted........................... 29 10.2 In-Service Withdrawal Application and Notice............... 29 10.3 Spousal Consent............................................ 29 10.4 In-Service Withdrawal Approval............................. 29 10.5 Minimum Amount, Payment Form and Medium.................... 29 10.6 Source and Timing of In-Service Withdrawal Funding......... 30 10.7 Hardship Withdrawals....................................... 30 10.8 After-Tax Account Withdrawals.............................. 32 10.9 Over Age 59 1/2 Withdrawals................................ 32 11 DISTRIBUTIONS ONCE EMPLOYMENT ENDS OR AS REQUIRED BY LAW.......... 34 -------------------------------------------------------- 11.1 Benefit Information, Notices and Election.................. 34 11.2 Spousal Consent............................................ 34 11.3 Payment Form and Medium.................................... 34 11.4 Distribution of Small Amounts.............................. 35 11.5 Source and Timing of Distribution Funding.................. 35 11.6 Deemed Distribution........................................ 35 11.7 Latest Commencement Permitted.............................. 36 11.8 Payment Within Life Expectancy............................. 36 11.9 Incidental Benefit Rule.................................... 36 11.10 Payment to Beneficiary..................................... 37 11.11 Beneficiary Designation.................................... 37
ii 12 ADP AND ACP TESTS.................................................. 38 ----------------- 12.1 Contribution Limitation Definitions......................... 38 12.2 ADP and ACP Tests........................................... 41 12.3 Correction of ADP and ACP Tests............................. 41 12.4 Multiple Use Test........................................... 43 12.5 Correction of Multiple Use Test............................. 43 12.6 Adjustment for Investment Gain or Loss...................... 43 12.7 Testing Responsibilities and Required Records............... 44 12.8 Separate Testing............................................ 44 13 MAXIMUM CONTRIBUTION AND BENEFIT LIMITATIONS....................... 45 -------------------------------------------- 13.1 "Annual Addition" Defined................................... 45 13.2 Maximum Annual Addition..................................... 45 13.3 Avoiding an Excess Annual Addition.......................... 45 13.4 Correcting an Excess Annual Addition........................ 45 13.5 Correcting a Multiple Plan Excess........................... 46 13.6 "Defined Benefit Fraction" Defined.......................... 46 13.7 "Defined Contribution Fraction" Defined..................... 46 13.8 Combined Plan Limits and Correction......................... 46 14 TOP HEAVY RULES.................................................... 47 --------------- 14.1 Top Heavy Definitions....................................... 47 14.2 Special Contributions....................................... 48 14.3 Adjustment to Combined Limits for Different Plans........... 49 15 PLAN ADMINISTRATION................................................ 50 ------------------- 15.1 Plan Delineates Authority and Responsibility................ 50 15.2 Fiduciary Standards......................................... 50 15.3 Company is ERISA Plan Administrator......................... 50 15.4 Administrator Duties........................................ 51 15.5 Advisors May be Retained.................................... 51 15.6 Delegation of Administrator Duties.......................... 52 15.7 Committee Operating Rules................................... 52 16 MANAGEMENT OF INVESTMENTS.......................................... 53 ------------------------- 16.1 Trust Agreement............................................. 53 16.2 Investment Funds............................................ 53 16.3 Authority to Hold Cash...................................... 54 16.4 Trustee to Act Upon Instructions............................ 54 16.5 Administrator Has Right to Vote Registered Investment Company Shares.............................................. 54 16.6 Custom Fund Investment Management........................... 54 16.7 Authority to Segregate Assets............................... 55 16.8 Maximum Permitted Investment in Company Stock............... 55 16.9 Participants Have Right to Vote and Tender Company Stock.... 55 16.10 Registration and Disclosure for Company Stock............... 56
iii 17 TRUST ADMINISTRATION....................................... 57 -------------------- 17.1 Trustee to Construe Trust........................... 57 17.2 Trustee To Act As Owner of Trust Assets............. 57 17.3 United States Indicia of Ownership.................. 57 17.4 Tax Withholding and Payment......................... 58 17.5 Trust Accounting.................................... 58 17.6 Valuation of Certain Assets......................... 58 17.7 Legal Counsel....................................... 59 17.8 Fees and Expenses................................... 59 17.9 Trustee Duties and Limitations...................... 59 18 RIGHTS, PROTECTION, CONSTRUCTION AND JURISDICTION.......... 60 ------------------------------------------------- 18.1 Plan Does Not Affect Employment Rights.............. 60 18.2 Limited Return of Contributions..................... 60 18.3 Assignment and Alienation........................... 60 18.4 Facility of Payment................................. 61 18.5 Reallocation of Lost Participant's Accounts......... 61 18.6 Claims Procedure.................................... 61 18.7 Construction........................................ 62 18.8 Jurisdiction and Severability....................... 62 18.9 Indemnification by Employer......................... 62 19 AMENDMENT, MERGER, DIVESTITURES AND TERMINATION............ 63 ----------------------------------------------- 19.1 Amendment........................................... 63 19.2 Merger.............................................. 63 19.3 Divestitures........................................ 63 19.4 Plan Termination.................................... 64 19.5 Amendment and Termination Procedures................ 64 19.6 Termination of Employer's Participation............. 64 19.7 Replacement of the Trustee.......................... 65 19.8 Final Settlement and Accounting of Trustee.......... 65 APPENDIX A - INVESTMENT FUNDS................................... 66 APPENDIX B - PAYMENT OF PLAN FEES AND EXPENSES.................. 67 APPENDIX C - LOAN INTEREST RATE................................. 68
iv 1 DEFINITIONS ----------- When capitalized, the words and phrases below have the following meanings unless different meanings are clearly required by the context: 1.1 "Account". The records maintained for purposes of accounting for a Participant's interest in the Plan. "Account" may refer to one or all of the following accounts which have been created on behalf of a Participant to hold specific types of Contributions under the Plan: (a) "Employee 401(k) Account". An account created to hold Employee 401(k) Contributions. (b) "After-Tax Account". An account created to hold After-Tax Contributions. (c) "Rollover Account". An account created to hold Rollover Contributions. (d) "Employer Matching Account". An account created to hold Employer Matching Contributions. (e) "Matching Stock Account". An account created to hold Matching Stock Contributions and, effective December 1, 1995, amounts designated as Employer Matching Contributions, which amounts prior to December 1, 1995, were held in a Participant's Employer Matching Account. (f) "Matching Cash Account". An account created to hold Matching Cash Contributions. (g) "Qualifying Account". An account created to hold Qualifying Contributions. 1.2 "ACP" or "Average Contribution Percentage". The percentage calculated in accordance with Section 12.1. 1.3 "Administrator". The Company, which may delegate all or a portion of the duties of the Administrator under the Plan to a Committee in accordance with Section 15.6. 1.4 "ADP" or "Average Deferral Percentage". The percentage calculated in accordance with Section 12.1. 1.5 "Beneficiary". The person or persons who is to receive benefits after the death of the Participant pursuant to the "Beneficiary Designation" paragraph in Section 11, or as a result of a QDRO. 1 1.6 "Break in Service". The end of five consecutive Plan Years (or six consecutive Plan Years if absence from employment was due to a Parental Leave) for which a Participant is credited with no Hours of Service. 1.7 "Code". The Internal Revenue Code of 1986, as amended. Reference to any specific Code section shall include such section, any valid regulation promulgated thereunder, and any comparable provision of any future legislation amending, supplementing or superseding such section. 1.8 "Committee". If applicable, the committee which has been appointed by the Company to administer the Plan in accordance with Section 15.6. 1.9 "Company". L.A. Gear, Inc. or any successor by merger, purchase or otherwise. 1.10 "Company Stock". Shares of common stock of the Company, or its successors or assigns, or any corporation with or into which said corporation may be merged, consolidated or reorganized, or to which a majority of its assets may be sold. 1.11 "Compensation". The sum of a Participant's Taxable Income and salary reductions, if any, pursuant to Code sections 125, 402(e)(3), 402(h), 403(b), 414(h)(2) or 457, excluding reimbursements or other expense allowances, cash and non-cash fringe benefits, moving expenses, deferred compensation and welfare benefits. Effective December 1, 1995, the preceding reference to "excluding reimbursements or other expense allowances, cash and non-cash fringe benefits, moving expenses, deferred compensation and welfare benefits" shall no longer apply. For purposes of determining benefits under this Plan, Compensation is limited to $200,000, (as adjusted for the cost of living pursuant to Code sections 401(a)(17) and 415(d)) per Plan Year. For purposes of determining benefits under this Plan for Plan Years beginning after December 31, 1993, Compensation is limited to $150,000, (as adjusted for the cost of living pursuant to Code sections 401(a)(17) and 415(d)) per Plan Year. For purposes of the preceding paragraph, in the case of an HCE who is a 5% Owner or one of the 10 most highly compensated Employees, (i) such HCE and such HCE's family group (as defined below) shall be treated as a single employee and the Compensation of each family group member shall be aggregated with the Compensation of such HCE, and (ii) the limitation on Compensation shall be allocated among such HCE and his or her family group members in proportion to each individual's Compensation before the application of this sentence. For purposes of this Section, the term "family group" shall mean an Employee's spouse and lineal descendants who have not attained age 19 before the close of the year in question. 2 For purposes of determining HCEs and key employees, Compensation for the entire Plan Year shall be used. For purposes of determining ADP and ACP, Compensation shall be limited to amounts paid to an Eligible Employee while a Participant. 1.12 "Contribution". An amount contributed to the Plan by the Employer or an Eligible Employee, and allocated by contribution type to Participants' Accounts, as described in Section 1.1. Specific types of contribution include: (a) "Employee 401(k) Contribution". An amount contributed by an eligible Participant in conjunction with his or her Code section 401(k) salary deferral election which shall be treated as made by the Employer on an eligible Participant's behalf. (b) "After-Tax Contribution". An amount contributed by an eligible Participant on an after-tax basis. (c) "Rollover Contribution". An amount contributed by an Eligible Employee which originated from another employer's or an Employer's qualified plan. (d) "Employer Matching Contribution". An amount contributed by the Employer on an eligible Participant's behalf based upon the amount contributed by the eligible Participant for periods prior to December 1, 1995. (e) "Matching Stock Contribution". An amount contributed by the Employer on an eligible Participant's behalf based upon the amount contributed by the eligible Participant as set forth in Section 5.2. (f) "Matching Cash Contribution". An amount contributed by the Employer on an eligible Participant's behalf based upon the amount contributed by the eligible Participant as set forth in Section 5.3. (g) "Qualifying Contribution". An amount contributed by the Employer on an eligible Participant's behalf and allocated on a pay based formula. 1.13 "Contribution Dollar Limit". The annual limit placed on each Participant's Employee 401(k) Contributions, which shall be $7,000 per calendar year (as adjusted for the cost of living pursuant to Code sections 402(g)(5) and 415(d)). For purposes of this Section, a Participant's Employee 401(k) Contributions shall include (i) any employer contribution made under any qualified cash or deferred arrangement as defined in Code section 401(k) to the extent not includible in gross income for the taxable year under Code section 402(e)(3) or 402(h)(1)(B) (determined without regard to Code section 402(g)), and (ii) any employer contribution to purchase an annuity contract under Code section 403(b) under a salary reduction agreement (within the meaning of Code section 3121(a)(5)(D)). 3 1.14 "Conversion Period". The period of converting the prior accounting system of the Plan and Trust, if such Plan and Trust were in existence prior to the Effective Date, or the prior accounting system of any plan and trust which is merged into this Plan and Trust subsequent to the Effective Date, to the accounting system described in Section 6. 1.15 "Direct Rollover". An Eligible Rollover Distribution that is paid directly to an Eligible Retirement Plan for the benefit of a Distributee. 1.16 "Disability". A Participant's total and permanent, mental or physical disability as evidenced by presentation of medical evidence satisfactory to the Administrator preventing a Participant from engaging in his or her normal job, provided that the Participant receives, or is anticipated to receive, disability benefits under the Social Security Act. 1.17 "Distributee". An Employee or former Employee, the surviving spouse of an Employee or former Employee and a spouse or former spouse of an Employee or former Employee determined to be an alternate payee under a QDRO. 1.18 "Effective Date". The date upon which the provisions of this document become effective. This date is August 1, 1993, unless stated otherwise and specifically except that the provisions related to Qualifying Contributions and related Accounts are effective November 1, 1994, provisions related to Employer Matching Contributions and related Accounts are discontinued effective November 30, 1995 and provisions related to Matching Stock and Matching Cash Contributions and related Accounts are effective December 1, 1995. In general, the provisions of this document only apply to Participants who are Employees on or after the Effective Date. However, investment and distribution provisions apply to all Participants with Account balances to be invested or distributed after the Effective Date. 1.19 "Eligible Employee". An Employee of an Employer, except any Employee: (a) whose compensation and conditions of employment are covered by a collective bargaining agreement to which an Employer is a party unless the agreement calls for the Employee's participation in the Plan; (b) who is treated as an Employee because he or she is a Leased Employee (c) who is a nonresident alien who (i) either receives no earned income (within the meaning of Code section 911(d)(2)), from sources within the United States under Code section 861(a)(3); or (ii) receives such earned income from such sources within the United States but such income is exempt from United States income tax under an applicable income tax convention; or (d) who is a Temporary Employee. 4 Effective December 1, 1995, an Eligible Employee shall include a Temporary Employee other than a Temporary Employee, if any, described in (a), (b) or (c) above. 1.20 "Eligible Retirement Plan". An individual retirement account described in Code section 408(a), an individual retirement annuity described in Code section 408(b), an annuity plan described in Code section 403(a), or a qualified trust described in Code section 401(a), that accepts a Distributee's Eligible Rollover Distribution, except that with regard to an Eligible Rollover Distribution to a surviving spouse, an Eligible Retirement Plan is an individual retirement account or individual retirement annuity. 1.21 "Eligible Rollover Distribution". A distribution of all or any portion of the balance to the credit of a Distributee, excluding a distribution that is one of a series of substantially equal periodic payments (not less frequently than annually) made for the life (or life expectancy) of a Distributee or the joint lives (or joint life expectancies) of a Distributee and the Distributee's designated Beneficiary, or for a specified period of ten years or more; a distribution to the extent such distribution is required under Code section 401(a)(9); and the portion of a distribution that is not includible in gross income (determined without regard to the exclusion for net unrealized appreciation with respect to Employer securities). 1.22 "Employee". An individual who is: (a) directly employed by any Related Company and for whom any income for such employment is subject to withholding of income or social security taxes, or (b) a Leased Employee. 1.23 "Employer". The Company and any Subsidiary or other Related Company of either the Company or a Subsidiary which adopts this Plan with the approval of the Company. 1.24 "ERISA". The Employee Retirement Income Security Act of 1974, as amended. Reference to any specific section shall include such section, any valid regulation promulgated thereunder, and any comparable provision of any future legislation amending, supplementing or superseding such section. 1.25 "Expatriate Employee". The employment status of an Eligible Employee during the period he or she is on an international assignment and residing in a location other this his or her home country. 1.26 "Forfeiture Account". An account holding amounts forfeited by Participants who have terminated employment with all Related Companies, invested in interest bearing deposits of the Trustee, pending disposition as provided in this Plan and Trust and as directed by the Administrator. 5 1.27 "HCE" or "Highly Compensated Employee". An Employee described as a Highly Compensated Employee in Section 12. 1.28 "Hour of Service". Each hour for which an Employee is entitled to: (a) payment for the performance of duties for any Related Company; (b) payment from any Related Company for any period during which no duties are performed (irrespective of whether the employment relationship has terminated) due to vacation, holiday, sickness, incapacity (including disability), layoff, leave of absence, jury duty or military service; (c) back pay, irrespective of mitigation of damages, by award or agreement with any Related Company (and these hours shall be credited to the period to which the agreement pertains); or (d) no payment, but is on a Leave of Absence (and these hours shall be based upon his or her normally scheduled hours per week or a 40 hour week if there is no regular schedule). The crediting of hours for which no duties are performed shall be in accordance with Department of Labor regulation sections 2530.200b-2(b) and (c). Actual hours shall be used whenever an accurate record of hours are maintained for an Employee. Otherwise, an equivalent number of hours shall be credited for each payroll period in which the Employee would be credited with at least 1 hour. The payroll period equivalencies are 45 hours weekly, 90 hours biweekly, 95 hours semimonthly and 190 hours monthly. Hours credited prior to a Break in Service are included. An Employee's service with a predecessor or acquired company shall only be counted in the determination of his or her Hours of Service for eligibility and/or vesting purposes if (1) the Company directs that credit for such service be granted, or (2) a qualified plan of the predecessor or acquired company is subsequently maintained by any Employer or Related Company. 1.29 "Ineligible". The Plan status of an individual during the period in which he or she is (1) an Employee of a Related Company which is not then an Employer, (2) an Employee, but not an Eligible Employee, or (3) not an Employee. 1.30 "Investment Fund" or "Fund". An investment fund as described in Section 16.2. The Investment Funds authorized by the Administrator to be offered under the Plan as of the Effective Date, or such date as otherwise specified, are set forth in Appendix A. 6 1.31 "Leased Employee". An individual who is deemed to be an employee of any Related Company as provided in Code section 414(n) or (o). 1.32 "Leave of Absence". A period during which an individual is deemed to be an Employee, but is absent from active employment, provided that the absence: (a) was authorized by a Related Company; or (b) was due to military service in the United States armed forces and the individual returns to active employment within the period during which he or she retains employment rights under federal law. 1.33 "Loan Account". The record maintained for purposes of accounting for a Participant's loan and payments of principal and interest thereon. 1.34 "NHCE" or "Non-Highly Compensated Employee". An Employee described as a Non-Highly Compensated Employee in Section 12. 1.35 "Normal Retirement Date". The date of a Participant's 65th birthday. 1.36 "Owner". A person with an ownership interest in the capital, profits, outstanding stock or voting power of a Related Company within the meaning of Code section 318 or 416 (which exclude indirect ownership through a qualified plan). 1.37 "Parental Leave". The period of absence from work by reason of pregnancy, the birth of an Employee's child, the placement of a child with the Employee in connection with the child's adoption, or caring for such child immediately after birth or placement as described in Code section 410(a)(5)(E). 1.38 "Participant". An Eligible Employee who begins to participate in the Plan after completing the eligibility requirements as described in Section 2.1. An Eligible Employee who makes a Rollover Contribution prior to completing the eligibility requirements as described in Section 2.1 shall also be considered a Participant, except that he or she shall not be considered a Participant for purposes of provisions related to Contributions, other than a Rollover Contribution, until he or she completes the eligibility requirements as described in Section 2.1. A Participant's participation continues until his or her employment with all Related Companies ends and his or her Account is distributed or forfeited. 1.39 "Pay". All cash compensation paid to an Eligible Employee by an Employer while a Participant during the current period, except that "base pay" shall be substituted for the preceding reference to "All cash compensation" with regard to an Eligible Employee during any period he or she is an Expatriate Employee. Pay excludes reimbursements or other expense allowances, cash and non-cash fringe benefits, moving expenses, deferred compensation and welfare benefits. 7 Pay is neither increased by any salary credit or decreased by any salary reduction pursuant to Code sections 125 or 402(e)(3). Pay is limited to $200,000 (as indexed for the cost of living pursuant to Code sections 401(a)(17) and 415(d)) per Plan Year. Pay is limited to $150,000 (as adjusted for the cost of living pursuant to Code sections 401(a)(17) and 415(d)) per Plan Year for Plan Years beginning after December 31, 1993. 1.40 "Plan". The L.A. Gear, Inc. Employee Stock Savings Plan set forth in this document, as from time to time amended. 1.41 "Plan Year". The annual accounting period of the Plan and Trust which ends on each November 30. 1.42 "QDRO". A domestic relations order which the Administrator has determined to be a qualified domestic relations order within the meaning of Code section 414(p). 1.43 "Related Company". With respect to any Employer, that Employer and any corporation, trade or business which is, together with that Employer, a member of the same controlled group of corporations, a trade or business under common control, or an affiliated service group within the meaning of Code sections 414(b), (c), (m) or (o), except that for purposes of Section 13 "within the meaning of Code sections 414(b), (c), (m) or (o), as modified by Code section 415(h)" shall be substituted for the preceding reference to "within the meaning of Code section 414(b), (c), (m) or (o)". 1.44 "Regular Employee". An Employee of an Employer other than an Employee classified as a Temporary Employee. 1.45 "Settlement Date". For each Trade Date, the Trustee's next business day. 1.46 "Spousal Consent". The written consent given by a spouse to a Participant's Beneficiary designation. The spouse's consent must acknowledge the effect on the spouse of the Participant's designation, and be duly witnessed by a Plan representative or notary public. Spousal Consent shall be valid only with respect to the spouse who signs the Spousal Consent and only for the particular choice made by the Participant which requires Spousal Consent. A Participant may revoke (without Spousal Consent) a prior designation that required Spousal Consent at any time before payments begin. Spousal Consent also means a determination by the Administrator that there is no spouse, the spouse cannot be located, or such other circumstances as may be established by applicable law. 1.47 "Subsidiary". A company which is 50% or more owned, directly or indirectly, by the Company. 8 1.48 "Sweep Account". The subsidiary Account for each Participant through which all transactions are processed, which is invested in interest bearing deposits of the Trustee. 1.49 "Sweep Date". The cut off date and time for receiving instructions for transactions to be processed on the next Trade Date. 1.50 "Taxable Income". Compensation in the amount reported by the Employer or a Related Company as "Wages, tips, other compensation" on Form W-2, or any successor method of reporting under Code section 6041(d). 1.51 "Temporary Employee". An Employee of an Employer whose work assignment is not intended to exceed 120 days and therefore whose employment commencement date and termination date is not intended to be more than 120 days apart. 1.52 "Trade Date". Each day the Investment Funds are valued, which is normally every day the assets of such Funds are traded. 1.53 "Trust". The legal entity created by those provisions of this document which relate to the Trustee. The Trust is part of the Plan and holds the Plan assets which are comprised of the aggregate of Participants' Accounts, any unallocated funds invested in deposit or money market type assets pending allocation to Participants' Accounts or disbursement to pay Plan fees and expenses and the Forfeiture Account. 1.54 "Trustee". Wells Fargo Bank, National Association. 1.55 "Year of Vesting Service". A 12 consecutive month period ending on the last day of a Plan Year in which an Employee is credited with at least 1,000 Hours of Service. An Employee shall be credited with a Year of Vesting Service at such time as he or she is credited with 1,000 Hours of Service during such 12 consecutive month period. Years of Vesting Service shall include service credited prior to December 1, 1985. 9 2 ELIGIBILITY ----------- 2.1 Eligibility All Participants as of August 1, 1993 shall continue their eligibility to participate. Each other Eligible Employee shall become a Participant on the later of August 1, 1993 or thereafter, on the first day of the next month after the date he or she attains age 21, and completes a three month eligibility period in which he or she is credited with at least 250 Hours of Service. The initial eligibility period begins on the date an Employee first performs an Hour of Service. Subsequent eligibility periods begin with the start of each quarter of the Plan Year beginning after the first Hour of Service is performed. Effective February 1, 1995, all Participants as of February 1, 1995 shall continue their eligibility to participate. Each other Eligible Employee shall become a Participant on the later of February 1, 1995 or thereafter, on the first day of the next payroll period after the date he or she attains age 21, and completes a 30 day eligibility period in which he or she is credited with at least 83 Hours of Service. The initial eligibility period begins on the date an Employee first performs an Hour of Service. Subsequent eligibility periods begin with the start of each month beginning after the first Hour of Service is performed. Effective December 1, 1995, all Participants as of December 1, 1995 shall continue their eligibility to participate. Each other Eligible Employee, other than a Temporary Employee or a Regular Employee classified as part-time, shall become a Participant on the first day of the next payroll period after the date he or she attains age 21, and completes a 30 day eligibility period in which he or she is credited with at least 83 Hours of Service. The initial eligibility period begins on the date an Employee first performs an Hour of Service. Subsequent eligibility periods begin with the start of each month beginning after the first Hour of Service is performed. Each Eligible Employee who is a Temporary Employee or a Regular Employee classified as part-time, shall become a Participant on the later of December 1, 1995 or thereafter, on the first day of the next payroll period after the date he or she attains age 21, and completes a twelve month eligibility period in which he or she is credited with at least 1,000 Hours of Service. The initial eligibility period begins on the date an Employee first performs an Hour of Service. Subsequent eligibility periods begin with the start of each Plan Year after the first Hour of Service is performed. 2.2 Ineligible Employees If an Employee completes the above eligibility requirements, but is Ineligible at the time participation would otherwise begin (if he or she were not Ineligible), he or she shall become a Participant on the first subsequent date on which he or she is an Eligible Employee. 10 2.3 Ineligible or Former Participants A Participant may not make or share in Plan Contributions, nor generally be eligible for a new Plan loan, during the period he or she is Ineligible, but he or she shall continue to participate for all other purposes. An Ineligible Participant or former Participant shall automatically become an active Participant on the date he or she again becomes an Eligible Employee. 11 3 PARTICIPANT CONTRIBUTIONS ------------------------- 3.1 Employee 401(k) Contribution Election Upon becoming a Participant, an Eligible Employee may elect to reduce his or her Pay by an amount which does not exceed the Contribution Dollar Limit, within the limits described in the Contribution Percentage Limits paragraph of this Section 3, and have such amount contributed to the Plan by the Employer as a Employee 401(k) Contribution. The election shall be made as a whole percentage of Pay in such manner and with such advance notice as prescribed by the Administrator. In no event shall an Employee's Employee 401(k) Contributions under the Plan and comparable contributions to all other plans, contracts or arrangements of all Related Companies exceed the Contribution Dollar Limit for the Employee's taxable year beginning in the Plan Year. 3.2 After-Tax Contribution Election Upon becoming a Participant, an Eligible Employee may elect to make After-Tax Contributions to the Plan in an amount which does not exceed the limits described in the Contribution Percentage Limits paragraph of this Section 3. The election shall be made as a whole percentage of Pay in such manner and with such advance notice as prescribed by the Administrator. 3.3 Changing a Contribution Election A Participant who is an Eligible Employee may change his or her Employee 401(k) and/or After-Tax Contribution election at any time, but no more frequently than once in any 3-month period, in such manner and with such advance notice as prescribed by the Administrator, and such election shall be effective with the first payroll paid after such date. Participants' Contribution election percentages shall automatically apply to Pay increases or decreases. 3.4 Revoking and Resuming a Contribution Election A Participant may revoke his or her Employee 401(k) and/or After-Tax Contribution election at any time in such manner and with such advance notice as prescribed by the Administrator, and such revocation shall be effective with the first payroll paid after such date. A Participant who has revoked his or her Employee 401(k) and/or After- Tax Contribution election shall be required to wait at least three months before he or she may resume Employee 401(k) and/or After-Tax Contributions to the Plan. Thereafter, a Participant who is an Eligible Employee may resume Employee 401(k) and/or After-Tax Contributions by making a new Contribution election at any time in such manner and with such advance notice as prescribed by the Administrator, and such election shall be effective with the first payroll paid after such date. 12 3.5 Contribution Percentage Limits The Administrator may establish and change from time to time, in writing, without the necessity of amending this Plan and Trust, the minimum, if applicable, and maximum Employee 401(k) and After-Tax Contribution percentages, and/or a maximum combined Employee 401(k) and After-Tax Contribution percentage, prospectively or retrospectively (for the current Plan Year), for all Participants. In addition, the Administrator may establish any lower percentage limits for Highly Compensated Employees as it deems necessary to satisfy the tests described in Section 12. As of the Effective Date, the minimum Employee 401(k) and After-Tax Contribution Percentages are 1%, and the maximum Contribution percentages are:
HIGHLY CONTRIBUTION COMPENSATED ALL OTHER TYPE EMPLOYEES PARTICIPANTS ------------------ ------------ ------------- Employee 401(k) 17% 17% After-Tax 10% 10% Sum of Both 17% 17%
Irrespective of the limits that may be established by the Administrator in accordance with this paragraph, in no event shall the contributions made by or on behalf of a Participant for a Plan Year exceed the maximum allowable under Code section 415. 3.6 Refunds When Contribution Dollar Limit Exceeded A Participant who makes Employee 401(k) Contributions for a calendar year to this Plan and comparable contributions to any other qualified defined contribution plan in excess of the Contribution Dollar Limit may notify the Administrator in writing by the following March 1 (or as late as April 14 if allowed by the Administrator) that an excess has occurred. In this event, the amount of the excess specified by the Participant, adjusted for investment gain or loss, shall be refunded to him or her by April 15 and shall not be included as an Annual Addition under Code section 415 for the year contributed. Refunds shall not include investment gain or loss for the period between the end of the applicable calendar year and the date of distribution. Excess amounts shall first be taken from unmatched Employee 401(k) Contributions and then from matched Employee 401(k) Contributions. Any Employer Matching Contributions attributable to refunded excess Employee 401(k) Contributions as described in this Section shall be forfeited and used as described in Section 8.4. For the calendar year commencing January 1, 1995, "Any Employer Matching, Matching Stock and Matching Cash Contributions" shall be substituted for the reference to "Any Employer Matching Contributions" in the preceding sentence and for calendar years commencing 13 on or after January 1, 1996, "Any Matching Stock and Matching Cash Contributions" shall be substituted for the reference to "Any Employer Matching Contributions" in the preceding sentence. 3.7 Timing, Posting and Tax Considerations Participants' Contributions, other than Rollover Contributions, may only be made through payroll deduction. Such amounts shall be paid to the Trustee in cash and posted to each Participant's Account(s) as soon as such amounts can reasonably be separated from the Employer's general assets and balanced against the specific amount made on behalf of each Participant. In no event, however, shall such amounts be paid to the Trustee more than 90 days after the date amounts are deducted from a Participant's Pay. Employee 401(k) Contributions shall be treated as Contributions made by an Employer in determining tax deductions under Code section 404(a). 14 4 ROLLOVERS AND TRANSFERS FROM AND TO OTHER QUALIFIED PLANS --------------------------------------------------------- 4.1 Rollovers The Administrator may authorize the Trustee to accept a rollover contribution, within the meaning of Code section 402(c) or 408(d)(3)(A)(ii), in cash, directly from an Eligible Employee or as a Direct Rollover from another qualified plan on behalf of the Eligible Employee, even if he or she is not yet a Participant. The Employee shall be responsible for furnishing satisfactory evidence, in such manner as prescribed by the Administrator, that the amount is eligible for rollover treatment. A rollover contribution received directly from an Eligible Employee must be paid to the Trustee in cash within 60 days after the date received by the Eligible Employee from a qualified plan or conduit individual retirement account. Contributions described in this paragraph shall be posted to the applicable Employee's Rollover Account as of the date received by the Trustee. If it is later determined that an amount contributed pursuant to the above paragraph did not in fact qualify as a rollover contribution under Code section 402(c) or 408(d)(3)(A)(ii), the balance credited to the Employee's Rollover Account shall immediately be (1) segregated from all other Plan assets, (2) treated as a nonqualified trust established by and for the benefit of the Employee, and (3) distributed to the Employee. Any such nonqualifying rollover shall be deemed never to have been a part of the Plan. 4.2 Transfers From and To Other Qualified Plans The Administrator may instruct the Trustee to receive assets in cash or in kind directly from another qualified plan or transfer assets in cash or in kind directly to another qualified plan; provided that a transfer should not be directed if: (a) any amounts are not exempted by Code section 401(a)(11)(B) from the annuity requirements of Code section 417 unless, in the event of a receipt of assets, the Plan complies with such requirements or, in the event of a transfer of assets, the receiving Plan complies with such requirements; or (b) any amounts include benefits protected by Code section 411(d)(6) which would not be preserved under applicable Plan provisions, in the event of a receipt of assets or, under the applicable provisions of the receiving plan, in the event of a transfer of assets. The Trustee may refuse the receipt of any transfer if: (a) the Trustee finds the in-kind assets unacceptable; or (b) instructions for posting amounts to Participants' Accounts are incomplete. Such amounts shall be posted to the appropriate Accounts of Participants as of the date received by the Trustee. 15 5 EMPLOYER CONTRIBUTIONS ---------------------- The provisions of Section 5.1 are discontinued effective November 30, 1995. The provisions of Sections 5.2 and 5.3 are effective December 1, 1995. The provisions of Section 5.4 are effective November 1, 1994. 5.1 Employer Matching Contributions (a) Frequency and Eligibility. For each Plan Year, the Employer shall make Employer Matching Contributions, as described in the following Allocation Method paragraph, on behalf of each Participant who contributed during the period and was an Eligible Employee on the last day of the period. Such Contributions shall also be made on behalf of each Participant who contributed during the period but who ceased being an Employee during the period after having attained age 65, or by reason of his or her Disability or death. (b) Allocation Method. The Employer Matching Contributions (including any Forfeiture Account amounts applied as Employer Matching Contributions in accordance with Section 8.4) for each period shall total 50% of each eligible Participant's Employee 401(k) Contributions for the period, provided that no Employer Matching Contributions (and Forfeiture Account amounts) shall be made based upon a Participant's Contributions in excess of 6% of his or her Pay. The Employer may change the 50% matching rate or the 6% of considered Pay to any other percentages, including 0%, generally by notifying eligible Participants in sufficient time to adjust their Contribution elections prior to the start of the period for which the new percentages apply, or in the case of an increased percentage matching rate or increased percentage of considered Pay, no later than the due date, including extensions, for filing the Employer's federal income tax return for the applicable year. (c) Timing, Medium and Posting. The Employer shall make each period's Employer Matching Contribution in cash as soon as administratively feasible, and for purposes of deducting such Contribution, not later than the Employer's federal tax filing date, including extensions. The Trustee shall post such amount to each Participant's Employer Matching Account once the total Contribution received has been balanced against the specific amount to be credited to each Participant's Employer Matching Account. 16 5.2 Matching Stock Contributions (a) Frequency and Eligibility. For each Participant for which Participants' Contributions are made, the Employer shall make Matching Stock Contributions, as described in the following Allocation Method paragraph, on behalf of each Participant who contributed during the period. (b) Allocation Method. The Matching Stock Contributions (including any Forfeiture Account amounts applied as Matching Stock Contributions in accordance with Section 8.4) for each period shall total 25% of each eligible Participant's Employee 401(k) Contributions for the period, provided that no Matching Stock Contributions (and Forfeiture Account amounts) shall be made based upon a Participant's Contributions in excess of 6% of his or her Pay. The Employer may change the 25% matching rate or the 6% of considered Pay to any other percentages, including 0%, generally by notifying eligible Participants in sufficient time to adjust their Contribution elections prior to the start of the Plan Year for which the new percentages apply. (c) Timing, Medium and Posting. The Employer shall make each period's Matching Stock Contribution in cash as soon as administratively feasible, and for purposes of deducting such Contribution, not later than the Employer's federal tax filing date, including extensions. The Trustee shall post such amount to each Participant's Matching Stock Account once the total Contribution received has been balanced against the specific amount to be credited to each Participant's Matching Stock Account. 5.3 Matching Cash Contributions (a) Frequency and Eligibility. For each period for which Participants Contributions are made, the Employer shall make Matching Cash Contributions, as described in the following Allocation Method paragraph, on behalf of each Participant who contributed during the period. (b) Allocation Method. The Matching Cash Contributions (including any Forfeiture Account amounts applied as Matching Cash Contributions in accordance with Section 8.4) for each period shall total 25% of each eligible Participant's Employee 401(k) Contributions for the period, provided that no Matching Cash Contributions (and Forfeiture Account amounts) shall be made based upon a Participant's Contributions in excess of 6% of his or her Pay. The Employer may change the 25% matching rate or the 6% of considered Pay to any other percentages, including 0%, generally by notifying eligible Participants in sufficient time to adjust their Contribution elections prior to the start of the Plan Year for which the new percentages apply. 17 (c) Timing, Medium and Posting. The Employer shall make each period's Matching Cash Contribution in cash as soon as administratively feasible, and for purposes of deducting such Contribution, not later than the Employer's federal tax filing date, including extensions. The Trustee shall post such amount to each Participant's Matching Cash Account once the total Contribution received has been balanced against the specific amount to be credited to each Participant's Matching Cash Account. 5.4 Qualifying Contributions (a) Frequency and Eligibility. For each Plan Year, the Employer may make a Qualifying Contribution on behalf of a Non-Highly Compensated Employee Participant who was an Eligible Employee at any time during the period. (b) Allocation Method. The Qualifying Contribution for each period shall be in an amount determined by the Employer, not in excess of the amount determined necessary to satisfy the tests described in Section 12, and allocated among eligible Participants in order of each Participant's Taxable Income for the Plan Year beginning with the Participant with the lowest Taxable Income, in an amount representing the lesser of the amount determined necessary to satisfy the tests described in Section 12 or that results in the Annual Addition, as defined in Section 13.1, to the Participant's Account equaling, but not exceeding, the Maximum Annual Addition, as defined in Section 13.2. This process shall be repeated with the Participant with the next lowest Taxable Income and so forth as necessary until the tests described in Section 12 are satisfied. (c) Timing, Medium and Posting. The Employer shall make each period's Qualifying Contribution in cash as soon as administratively feasible, and for purposes of deducting such Contribution, not later than the Employer's federal tax filing date, including extensions. Notwithstanding, for purposes of satisfying the tests described in Section 12, Qualifying Contributions shall be made before the end of the Plan Year following the Plan Year being tested. The Trustee shall post such amount to each Participant's Qualifying Account once the total Contribution received has been balanced against the specific amount to be credited to each Participant's Qualifying Account. 18 6 ACCOUNTING ---------- 6.1 Individual Participant Accounting The Administrator shall maintain an individual set of Accounts for each Participant in order to reflect transactions both by type of Contribution and investment medium. Financial transactions shall be accounted for at the individual Account level by posting each transaction to the appropriate Account of each affected Participant. Participant Account values shall be maintained in shares for the Investment Funds and in dollars for the Sweep and Loan Accounts. At any point in time, the Account value shall be determined using the most recent Trade Date values provided by the Trustee. 6.2 Sweep Account is Transaction Account All transactions related to amounts being contributed to or distributed from the Trust shall be posted to each affected Participant's Sweep Account. Any amount held in the Sweep Account shall be credited with interest up until the date on which it is removed from the Sweep Account. 6.3 Trade Date Accounting and Investment Cycle Participant Account values shall be determined as of each Trade Date. For any transaction to be processed as of a Trade Date, the Trustee must receive instructions for the transaction by the Sweep Date. Such instructions shall apply to amounts held in the Account on that Sweep Date. Financial transactions of the Investment Funds shall be posted to Participants' Accounts as of the Trade Date, based upon the Trade Date values provided by the Trustee, and settled on the Settlement Date. 6.4 Accounting for Investment Funds Investments in each Investment Fund shall be maintained in shares. The Trustee is responsible for determining the share values of each Investment Fund as of each Trade Date. To the extent an Investment Fund is comprised of collective investment funds of the Trustee, or any other fiduciary to the Plan, the share values shall be determined in accordance with the rules governing such collective investment funds, which are incorporated herein by reference. All other share values shall be determined by the Trustee. The share value of each Investment Fund shall be based on the fair market value of its underlying assets. 6.5 Payment of Fees and Expenses Except to the extent Plan fees and expenses related to Account maintenance, transaction and Investment Fund management and maintenance, as set forth below, are paid by the Employer directly, or indirectly, through the Forfeiture 19 Account as directed by the Administrator, such fees and expenses shall be paid as set forth below. The Employer may pay a lower portion of the fees and expenses allocable to the Accounts of Participants who are no longer Employees or who are not Beneficiaries, unless doing so would result in discrimination. (a) Account Maintenance: Account maintenance fees and expenses, may include but are not limited to, administrative, Trustee, government annual report preparation, audit, legal, nondiscrimination testing and fees for any other special services. Account maintenance fees shall be charged to Participants on a per Participant basis provided that no fee shall reduce a Participant's Account balance below zero. (b) Transaction: Transaction fees and expenses, may include but are not limited to, periodic installment payment Investment Fund election change and loan fees. Transaction fees shall be charged to the Participant's Account involved in the transaction provided that no fee shall reduce a Participant's Account balance below zero. (c) Investment Fund Management and Maintenance: Management and maintenance fees and expenses related to the Investment Funds shall be charged at the Investment Fund level and reflected in the net gain or loss of each Fund. As of the Effective Date, a breakdown of which Plan fees and expenses shall generally be borne by the Trust (and charged to individual Participants' Accounts or charged at the Investment Fund level and reflected in the net gain or loss of each Fund) and those that shall be paid by the Employer is set forth in Appendix B and may be changed from time to time by the Administrator, in writing, without the necessity of amending this Plan and Trust. The Trustee shall have the authority to pay any such fees and expenses, which remain unpaid by the Employer for 60 days, from the Trust. 6.6 Accounting for Participant Loans Participant loans shall be held in a separate Loan Account of the Participant and accounted for in dollars as an earmarked asset of the borrowing Participant's Account. 6.7 Error Correction The Administrator may correct any errors or omissions in the administration of the Plan by restoring any Participant's Account balance with the amount that would be credited to the Account had no error or omission been made. Funds necessary for any such restoration shall be provided through payment made by the Employer, or by the Trustee to the extent the error or omission is 20 attributable to actions or inactions of the Trustee, or if the restoration involves an Account holding amounts contributed by an Employer, the Administrator may direct the Trustee to use amounts from the Forfeiture Account. 6.8 Participant Statements The Administrator shall provide Participants with statements of their Accounts as soon after the end of each quarter of the Plan Year as administratively feasible. 6.9 Special Accounting During Conversion Period The Administrator and Trustee may use any reasonable accounting methods in performing their respective duties during any Conversion Period. This includes, but is not limited to, the method for allocating net investment gains or losses and the extent, if any, to which contributions received by and distributions paid from the Trust during this period share in such allocation. 6.10 Accounts for QDRO Beneficiaries A separate Account shall be established for an alternate payee entitled to any portion of a Participant's Account under a QDRO as of the date and in accordance with the directions specified in the QDRO. In addition, a separate Account may be established during the period of time the Administrator, a court of competent jurisdiction or other appropriate person is determining whether a domestic relations order qualifies as a QDRO. Such a separate Account shall be valued and accounted for in the same manner as any other Account. (a) Distributions Pursuant to QDROs. If a QDRO so provides, the portion of a Participant's Account payable to an alternate payee may be distributed, in a form as permissible under Section 11, to the alternate payee at the time specified in the QDRO, regardless of whether the Participant is entitled to a distribution from the Plan at such time. (b) Participant Loans. Except to the extent required by law, an alternate payee, on whose behalf a separate Account has been established, shall not be entitled to borrow from such Account. If a QDRO specifies that the alternate payee is entitled to any portion of the Account of a Participant who has an outstanding loan balance, all outstanding loans shall generally continue to be held in the Participant's Account and shall not be divided between the Participant's and alternate payee's Accounts. (c) Investment Direction. Where a separate Account has been established on behalf of an alternate payee and has not yet been distributed, the alternate payee may direct the investment of such Account in the same manner as if he or she were a Participant. 21 7 INVESTMENT FUNDS AND ELECTIONS ------------------------------ 7.1 Investment Funds Except for Participants' Sweep and Loan Accounts, the Trust shall be maintained in various Investment Funds. The Administrator shall select the Investment Funds offered to Participants and may change the number or composition of the Investment Funds, subject to the terms and conditions agreed to with the Trustee. As of the Effective Date or such date as otherwise specified, a list of the Investment Funds offered under the Plan is set forth in Appendix A, and may be changed from time to time by the Administrator, in writing, and as agreed to by the Trustee, without the necessity of amending this Plan and Trust. 7.2 Investment Fund Elections Each Participant shall direct the investment of all of his or her Contribution Accounts except for these Accounts: Employer Matching Account which shall be entirely invested in the Investment Fund specified by the Administrator, which Investment Fund as of the Effective Date is set forth in Appendix A. However, a Participant who has attained age 55 may direct the investment of the balances in his or her Employer Matching Account. Future amounts allocated to his or her Employer Matching Account shall continue to be entirely invested in the Investment Fund specified by the Administrator, until otherwise directed by the Participant. Effective December 1, 1995, "Matching Stock Account" (which effective December 1, 1995 includes amounts previously held in a Participant's Employer Matching Account) shall be substituted for each reference to "Employer Matching Account" in the preceding paragraph. A Participant shall make his or her investment election in any combination of one or any number of the Investment Funds offered in accordance with the procedures established by the Administrator and Trustee. However, during any Conversion Period, Trust assets may be held in any investment vehicle permitted by the Plan, as directed by the Administrator, irrespective of Participant investment elections. The Administrator may set a maximum percentage of the total election that a Participant may direct into any specific Investment Fund, which maximum, if any, as of the Effective Date is set forth in Appendix A, and may be changed from time to time by the Administrator, in writing, without the necessity of amending this Plan and Trust. 22 7.3 Responsibility for Investment Choice Each Participant shall be solely responsible for the selection of his or her Investment Fund choices. No fiduciary with respect to the Plan is empowered to advise a Participant as to the manner in which his or her Accounts are to be invested, and the fact that an Investment Fund is offered shall not be construed to be a recommendation for investment. 7.4 Default if No Election The Administrator shall specify an Investment Fund for the investment of that portion of a Participant's Account which is not yet held in an Investment Fund and for which no valid investment election is on file. The Investment Fund specified as of the Effective Date is set forth in Appendix A, and may be changed from time to time by the Administrator, in writing, without the necessity of amending this Plan and Trust. 7.5 Timing A Participant shall make his or her initial investment election upon becoming a Participant and may change his or her investment election at any time in accordance with the procedures established by the Administrator and Trustee. Investment elections received by the Trustee by the Sweep Date shall be effective on the following Trade Date. 7.6 Investment Fund Election Change Fees A reasonable processing fee may be charged directly to a Participant's Account for Investment Fund election changes in excess of a specified number per year as determined by the Administrator. 23 8 VESTING & FORFEITURES --------------------- 8.1 Fully Vested Contribution Accounts A Participant shall be fully vested in these Accounts at all times: Employee 401(k) Account After-Tax Account Rollover Account Qualifying Account 8.2 Full Vesting upon Certain Events A Participant's entire Account shall become fully vested once he or she has attained his or her Normal Retirement Date as an Employee or upon his or her terminating employment with all Related Companies due to his or her Disability or death. 8.3 Vesting Schedule In addition to the vesting provided above, a Participant's Employer Matching Account shall become vested in accordance with the following schedule:
YEARS OF VESTING VESTED SERVICE PERCENTAGE -------------------- ----------- Less than 1 0% 1 but less than 2 20% 2 but less than 3 40% 3 but less than 4 60% 4 but less than 5 80% 5 or more 100%
Effective December 1, 1995, "Matching Stock and Matching Cash Accounts" (which, with regard to "Matching Stock Account" effective December 1, 1995, includes amounts previously held in a Participant's Employer Matching Account) shall be substituted for the preceding reference to "Employer Matching Account". If this vesting schedule is changed, the vested percentage for each Participant shall not be less than his or her vested percentage determined as of the last day prior to this change, and for any Participant with at least three Years of Vesting Service when the schedule is changed, vesting shall be determined using the more favorable vesting schedule. 24 8.4 Forfeitures A Participant's non-vested Account balance shall be forfeited as of the Settlement Date following the Sweep Date on which the Administrator has reported to the Trustee that the Participant's employment has terminated with all Related Companies. Forfeitures from all Employer Contribution Accounts shall be transferred to and maintained in a single Forfeiture Account, which shall be invested in interest bearing deposits of the Trustee. Forfeiture Account amounts shall be utilized to restore Accounts, to pay Plan fees and expenses and to reduce Employer Matching Contributions as directed by the Administrator. Effective December 1, 1995, "Matching Stock and Matching Cash Contributions" shall be substituted for the reference to "Employer Matching Contributions" in the preceding paragraph. 8.5 Rehired Employees (a) Service. If a former Employee is rehired, all Years of Vesting Service credited when his or her employment last terminated shall be counted in determining his or her vested interest. (b) Account Restoration. If a former Employee is rehired before he or she has a Break in Service, the amount forfeited when his or her employment last terminated shall be restored to his or her Account. The restoration shall include the interest which would have been credited had such forfeiture been invested in the Sweep Account from the date forfeited until the date the restoration amount is restored. The amount shall come from the Forfeiture Account to the extent possible, and any additional amount needed shall be contributed by the Employer. The vested interest in his or her restored Account shall then be equal to: V% times (AB + D) - D where: V% = current vested percentage AB = current account balance D = amount previously distributed 25 9 PARTICIPANT LOANS ----------------- 9.1 Participant Loans Permitted Loans to Participants are permitted pursuant to the terms and conditions set forth in this Section. 9.2 Loan Application, Note and Security A Participant shall apply for any loan in such manner and with such advance notice as prescribed by the Administrator. All loans shall be evidenced by a promissory note, secured only by the portion of the Participant's Account from which the loan is made, and the Plan shall have a lien on this portion of his or her Account. 9.3 Spousal Consent A Participant is not required to obtain Spousal Consent in order to take out a loan under the Plan. 9.4 Loan Approval The Administrator, or the Trustee, if otherwise authorized by the Administrator and agreed to by the Trustee, is responsible for determining that a loan request conforms to the requirements described in this Section and granting such request. 9.5 Loan Funding Limits, Account Sources and Funding Order The loan amount must meet all of the following limits as determined as of the Sweep Date the loan is processed and shall be funded from the Participant's Accounts as follows: (a) Plan Minimum Limit. The minimum amount for any loan is $500. (b) Plan Maximum Limit, Account Sources and Funding Order. Subject to the legal limit described in (c) below, the maximum a Participant may borrow, including the outstanding balance of existing Plan loans, is 100% of the following of the Participant's Accounts which are fully vested in the priority order as follows: Employee 401(k) Account Qualifying Account Rollover Account After-Tax Account 26 (c) Legal Maximum Limit. The maximum a Participant may borrow, including the outstanding balance of existing Plan loans, is 50% of his or her vested Account balance, not to exceed $50,000. However, the $50,000 maximum is reduced by the Participant's highest outstanding loan balance during the 12 month period ending on the day before the Sweep Date as of which the loan is made. For purposes of this paragraph, the qualified plans of all Related Companies shall be treated as though they are part of this Plan to the extent it would decrease the maximum loan amount. 9.6 Maximum Number of Loans A Participant may have a maximum of two loans outstanding at any given time. 9.7 Source and Timing of Loan Funding A loan to a Participant shall be made solely from the assets of his or her own Account. The available assets shall be determined first by Account type and then within each Account used for funding a loan, amounts shall first be taken from the Sweep Account and then taken by Investment Fund in direct proportion to the market value of the Participant's interest in each Investment Fund as of the Trade Date on which the loan is processed. The loan shall be funded on the Settlement Date following the Trade Date as of which the loan is processed. The Trustee shall make payment to the Participant as soon thereafter as administratively feasible. 9.8 Interest Rate The interest rate charged on Participant loans shall be a fixed reasonable rate of interest, determined from time to time by the Administrator, which provides the Plan with a return commensurate with the prevailing interest rate charged by persons in the business of lending money for loans which would be made under similar circumstances. As of the Effective Date, the interest rate is determined as set forth in Appendix C, and may be changed from time to time by the Administrator, in writing, without the necessity of amending this Plan and Trust. 9.9 Loan Payment Substantially level amortization shall be required of each loan with payments made at least monthly, generally through payroll deduction. Loans may be prepaid in full or in part at any time. The Participant may choose the loan repayment period, not to exceed 5 years, except that the repayment period may be for any period not to exceed 10 years if the purpose of the loan is to acquire the Participant's principal residence. 27 9.10 Loan Payment Hierarchy Loan principal payments shall be credited to the Participant's Accounts in the inverse of the order used to fund the loan. Loan interest shall be credited to the Participant's Accounts in direct proportion to the principal payment. Loan payments are credited to the Investment Funds based upon the Participant's current investment election for new Contributions. 9.11 Repayment Suspension The Administrator may agree to a suspension of loan payments for up to 12 months for a Participant who is on a Leave of Absence without pay. During the suspension period interest shall continue to accrue on the outstanding loan balance. At the expiration of the suspension period all outstanding loan payments and accrued interest thereon shall be due unless otherwise agreed upon by the Administrator. 9.12 Loan Default A loan is treated as a default if scheduled loan payments are more than 90 days late. A Participant shall then have 30 days from the time he or she receives written notice of the default and a demand for past due amounts to cure the default before it becomes final. In the event of default, the Administrator may direct the Trustee to report the outstanding principal balance of the loan and accrued interest thereon as a taxable distribution. As soon as a Plan withdrawal or distribution to such Participant would otherwise be permitted, the Administrator may instruct the Trustee to execute upon its security interest in the Participant's Account by distributing the note to the Participant. 9.13 Call Feature The Administrator shall have the right to call any Participant loan once a Participant's employment with all Related Companies has terminated or if the Plan is terminated. 28 10 IN-SERVICE WITHDRAWALS ---------------------- 10.1 In-Service Withdrawals Permitted In-service withdrawals to a Participant who is an Employee are permitted pursuant to the terms and conditions set forth in this Section and as required by law as set forth in Section 11. 10.2 In-Service Withdrawal Application and Notice A Participant shall apply for any in-service withdrawal in such manner and with such advance notice as prescribed by the Administrator. The Participant shall be provided the notice prescribed by Code section 402(f). If an in-service withdrawal is one to which Code sections 401(a)(11) and 417 do not apply, such in-service withdrawal may commence less than 30 days after the aforementioned notice is provided, if: (a) the Participant is clearly informed that he or she has the right to a period of at least 30 days after receipt of such notice to consider his or her option to elect or not elect a Direct Rollover for all or a portion, if any, of his or her in-service withdrawal which shall constitute an Eligible Rollover Distribution; and (b) the Participant after receiving such notice, affirmatively elects a Direct Rollover for all or a portion, if any, of his or her in-service withdrawal which shall constitute an Eligible Rollover Distribution or alternatively elects to have all or a portion made payable directly to him or her, thereby not electing a Direct Rollover for all or a portion thereof. 10.3 Spousal Consent A Participant is not required to obtain Spousal Consent in order to make an in-service withdrawal under the Plan. 10.4 In-Service Withdrawal Approval The Administrator, or the Trustee, if otherwise authorized by the Administrator and agreed to by the Trustee, is responsible for determining that an in-service withdrawal request conforms to the requirements described in this Section and granting such request. 10.5 Minimum Amount, Payment Form and Medium There is no minimum amount for any type of withdrawal. The form of payment for an in-service withdrawal shall be a single lump sum and payment shall be made in cash. 29 With regard to the portion of a withdrawal representing an Eligible Rollover Distribution, a Participant may elect a Direct Rollover for all or a portion of such amount. 10.6 Source and Timing of In-Service Withdrawal Funding An in-service withdrawal to a Participant shall be made solely from the assets of his or her own Account and shall be based on the Account values as of the Trade Date the in-service withdrawal is processed. The available assets shall be determined first by Account type and then within each Account used for funding an in-service withdrawal, amounts shall first be taken from the Sweep Account and then taken by Investment Fund in direct proportion to the market value of the Participant's interest in each Investment Fund (which excludes his or her Loan Account balance) as of the Trade Date on which the in-service withdrawal is processed. The in-service withdrawal shall be funded on the Settlement Date following the Trade Date as of which the in-service withdrawal is processed. The Trustee shall make payment as soon thereafter as administratively feasible. 10.7 Hardship Withdrawals (a) Requirements. A Participant who is an Employee may request the withdrawal of up to the amount necessary to satisfy a financial need including amounts necessary to pay any federal, state or local income taxes or penalties reasonably anticipated to result from the withdrawal. Only requests for withdrawals (1) on account of a Participant's "Deemed Financial Need" or "Demonstrated Financial Need", and (2) which are "Demonstrated as Necessary" to satisfy the financial need shall be approved. (b) "Deemed Financial Need". An immediate and heavy financial need relating to: (1) the payment of unreimbursable medical expenses described under Code section 213(d) incurred (or to be incurred) by the Employee, his or her spouse or dependents; (2) the purchase (excluding mortgage payments) of the Employee's principal residence; (3) the payment of unreimbursable tuition and related educational fees (which, effective January 1, 1995 ,include room and board) for up to the next 12 months of post- secondary education for the Employee, his or her spouse or dependents; 30 (4) the payment of amounts necessary for the Employee to prevent losing his or her principal residence through eviction or foreclosure on the mortgage; or (5) any other circumstance specifically permitted under Code section 401(k)(2)(B)(i)(IV). (c) "Demonstrated Financial Need". A determination by the Administrator that an immediate and heavy financial need exists relating to: (1) a sudden and unexpected illness or accident to the Employee or his or her spouse or dependents; (2) the loss, due to casualty, of the Employee's property other than nonessential property (such as a boat or a television); or (3) some other similar extraordinary and unforeseeable circumstances arising as a result of events beyond the control of the Employee. (d) "Demonstrated as Necessary". A withdrawal is "demonstrated as necessary" to satisfy the financial need only if the withdrawal amount does not exceed the financial need, the Employee represents that he or she is unable to relieve the financial need (without causing further hardship) by doing any or all of the following and the Administrator does not have actual knowledge to the contrary: (1) receiving any reimbursement or compensation from insurance or otherwise; (2) reasonably liquidating his or her assets and the assets of his or her spouse or minor children that are reasonably available to the Employee; (3) ceasing his or her contributions to this Plan; (4) obtaining other withdrawals and nontaxable loans available from this Plan, plans maintained by Related Companies and plans maintained by any other employer; and (5) obtaining loans from commercial sources on reasonable commercial terms. (e) Account Sources and Funding Order. All available amounts must first be withdrawn from a Participant's After-Tax Account. The remaining withdrawal amount shall come from the following of the Participant's fully vested Accounts, in the priority order as follows: 31 Rollover Account Employee 401(k) Account The amount that may be withdrawn from a Participant's Employee 401(k) Account shall not include any earnings credited to his or her Employee 401(k) Account. (f) Permitted Frequency. There is no restriction on the number of Hardship withdrawals permitted to a Participant. (g) Suspension from Further Contributions. A Hardship withdrawal shall not affect a Participant's ability to make or be eligible to receive further Contributions. 10.8 After-Tax Account Withdrawals (a) Requirements. A Participant who is an Employee may withdraw from the Accounts listed in paragraph (b) below. (b) Account Sources and Funding Order. The withdrawal amount shall come from a Participant's After-Tax Account. (c) Permitted Frequency. The maximum number of After-Tax Account withdrawals permitted to a Participant in any 12-month period is one. (d) Suspension from Further Contributions. An After-Tax Account withdrawal shall not affect a Participant's ability to make or be eligible to receive further Contributions. 10.9 Over Age 59 1/2 Withdrawals (a) Requirements. A Participant who is an Employee and over age 59 1/2 may withdraw from the Accounts listed in paragraph (b) below. (b) Account Sources and Funding Order. The withdrawal amount shall come from the following of the Participant's fully vested Accounts, in the priority order as follows, except that the Participant may instead choose to have amounts taken from his or her After-Tax Account first: Rollover Account Employee 401(k) Account Qualifying Account Employer Matching Account Matching Cash Account After-Tax Account 32 Effective December 1, 1995, "Matching Stock Account" (which effective December 1, 1995 includes amounts previously held in a Participant's Employer Matching Account) shall be substituted for the preceding reference to "Employer Matching Account". (c) Permitted Frequency. The maximum number of Over Age 59 1/2 withdrawals permitted to a Participant in any 12-month period is one. (d) Suspension from Further Contributions. An Over Age 59 1/2 withdrawal shall not affect a Participant's ability to make or be eligible to receive further Contributions. 33 11 DISTRIBUTIONS ONCE EMPLOYMENT ENDS OR AS REQUIRED BY LAW --------------------------------------------------------- 11.1 Benefit Information, Notices and Election A Participant, or his or her Beneficiary in the case of his or her death, shall be provided with information regarding all optional times and forms of distribution available, to include the notices prescribed by Code section 402(f) and Code section 411(a)(11). Subject to the other requirements of this Section, a Participant, or his or her Beneficiary in the case of his or her death, may elect, in such manner and with such advance notice as prescribed by the Administrator, to have his or her vested Account balance paid to him or her beginning upon any Settlement Date following the Participant's termination of employment with all Related Companies or, if earlier, at the time required by law as set forth in Section 11.7. If a distribution is one to which Code sections 401(a)(11) and 417 do not apply, such distribution may commence less than 30 days after the aforementioned notices are provided, if: (a) the Participant is clearly informed that he or she has the right to a period of at least 30 days after receipt of such notices to consider the decision as to whether to elect a distribution and if so to elect a particular form of distribution and to elect or not elect a Direct Rollover for all or a portion, if any, of his or her distribution which shall constitute an Eligible Rollover Distribution; and (b) the Participant after receiving such notices, affirmatively elects a distribution and a Direct Rollover for all or a portion, if any, of his or her distribution which shall constitute an Eligible Rollover Distribution or alternatively elects to have all or a portion made payable directly to him or her, thereby not electing a Direct Rollover for all or a portion thereof. 11.2 Spousal Consent A Participant is not required to obtain Spousal Consent in order to receive a distribution under the Plan. 11.3 Payment Form and Medium Except to the extent otherwise provided by Section 11.4, a Participant may elect to be paid in any of these forms: (a) a single lump sum; (b) a portion paid in a lump sum, and the remainder paid later; or (c) periodic installments over a period not to exceed the life expectancy of the Participant and his or her Beneficiary. 34 Distributions shall be made in cash, except to the extent a distribution consists of a loan call as described in Section 9. Alternatively, a Participant may elect that a lump sum payment be made in the form of whole shares of Company Stock and cash in lieu of fractional shares to the extent invested in the Company Stock Fund. With regard to the portion of a distribution representing an Eligible Rollover Distribution, a Distributee may elect a Direct Rollover for all or a portion of such amount. 11.4 Distribution of Small Amounts If after a Participant's employment with all Related Companies ends, the Participant's vested Account balance is $3,500 or less, the Participant's benefit shall be paid as a single lump sum as soon as administratively feasible in accordance with procedures prescribed by the Administrator. Effective December 1, 1995, "If after a Participant's employment with all Related Companies ends, the Participant's vested Account balance is $3,500 or less, and if at the time of any prior in-service withdrawal or distribution the Participant's vested Account balance did not exceed $3,500," shall be substituted for the preceding reference to "If after a Participant's employment with all Related Companies ends, the Participant's vested Account balance is $3,500 or less,". 11.5 Source and Timing of Distribution Funding A distribution to a Participant shall be made solely from the assets of his or her own Accounts and shall be based on the Account values as of the Trade Date the distribution is processed. The available assets shall be determined first by Account type and then within each Account used for funding a distribution, amounts shall first be taken from the Sweep Account and then taken by Investment Fund in direct proportion to the market value of the Participant's interest in each Investment Fund as of the Trade Date on which the distribution is processed. The distribution shall be funded on the Settlement Date following the Trade Date as of which the distribution is processed. The Trustee shall make payment as soon thereafter as administratively feasible. 11.6 Deemed Distribution For purposes of Section 8.4, if at the time a Participant's employment with all Related Companies has terminated, the Participant's vested Account balance attributable to Accounts subject to vesting as described in Section 8, is zero, his or her vested Account balance shall be deemed distributed as of the Settlement Date following the Sweep Date on which the Administrator has reported to the Trustee that the Participant's employment with all Related Companies has terminated. 35 11.7 Latest Commencement Permitted In addition to any other Plan requirements and unless a Participant elects otherwise, his or her benefit payments shall begin not later than 60 days after the end of the Plan Year in which he or she attains his or her Normal Retirement Date or retires, whichever is later. However, if the amount of the payment or the location of the Participant (after a reasonable search) cannot be ascertained by that deadline, payment shall be made no later than 60 days after the earliest date on which such amount or location is ascertained but in no event later than as described below. A Participant's failure to elect in such manner as prescribed by the Administrator to have his or her vested Account balance paid to him or her, shall be deemed an election by the Participant to defer his or her distribution. Benefit payments shall begin by the April 1 immediately following the end of the calendar year in which the Participant attains age 70 1/2, whether or not he or she is an Employee, except that distribution for an Employee who was born before July 1, 1917 does not need to begin until his or her employment with all Related Companies ends. If benefit payments cannot begin at the time required because the location of the Participant cannot be ascertained (after a reasonable search), the Administrator may, at any time thereafter, treat such person's Account as forfeited subject to the provisions of Section 18.5. 11.8 Payment Within Life Expectancy The Participant's payment election must be consistent with the requirement of Code section 401(a)(9) that all payments are to be completed within a period not to exceed the lives or the joint and last survivor life expectancy of the Participant and his or her Beneficiary. The life expectancies of a Participant and his or her Beneficiary may not be recomputed annually. 11.9 Incidental Benefit Rule The Participant's payment election must be consistent with the requirement that, if the Participant's spouse is not his or her sole primary Beneficiary, the minimum annual distribution for each calendar year, beginning with the year in which he or she attains age 70 1/2 (or such later date as provided otherwise in Section 11), shall not be less than the quotient obtained by dividing (a) the Participant's vested Account balance as of the last Trade Date of the preceding year by (b) the applicable divisor as determined under the incidental benefit requirements of Code section 401(a)(9). 36 11.10 Payment to Beneficiary Payment to a Beneficiary must either: (1) be completed by the end of the calendar year that contains the fifth anniversary of the Participant's death or (2) begin by the end of the calendar year that contains the first anniversary of the Participant's death and be completed within the period of the Beneficiary's life or life expectancy, except that: (a) If the Participant dies after the April 1 immediately following the end of the calendar year in which he or she attains age 70 1/2, payment to his or her Beneficiary must be made at least as rapidly as provided in the Participant's distribution election; (b) If the surviving spouse is the Beneficiary, payments need not begin until the end of the calendar year in which the Participant would have attained age 70 1/2 and must be completed within the spouse's life or life expectancy; and (c) If the Participant and the surviving spouse who is the Beneficiary die (1) before the April 1 immediately following the end of the calendar year in which the Participant would have attained age 70 1/2 and (2) before payments have begun to the spouse, the spouse shall be treated as the Participant in applying these rules. 11.11 Beneficiary Designation Each Participant may complete a beneficiary designation form indicating the Beneficiary who is to receive the Participant's remaining Plan interest at the time of his or her death. The designation may be changed at any time. However, a Participant's spouse shall be the sole primary Beneficiary unless the designation includes Spousal Consent for another Beneficiary. If no proper designation is in effect at the time of a Participant's death or if the Beneficiary does not survive the Participant, the Beneficiary shall be, in the order listed, the: (a) Participant's surviving spouse, (b) Participant's children, in equal shares, (or if a child does not survive the Participant, and that child leaves issue, the issue shall be entitled to that child's share, by right of representation) or (c) Participant's estate. 37 12 ADP AND ACP TESTS ----------------- 12.1 Contribution Limitation Definitions The following definitions are applicable to this Section 12 (where a definition is contained in both Sections 1 and 12, for purposes of Section 12 the Section 12 definition shall be controlling): (a) "ACP" or "Average Contribution Percentage". The Average Percentage calculated using Contributions allocated to Participants as of a date within the Plan Year. (b) "ACP Test". The determination of whether the ACP is in compliance with the Basic or Alternative Limitation for a Plan Year (as defined in Section 12.2). (c) "ADP" or "Average Deferral Percentage". The Average Percentage calculated using Deferrals allocated to Participants as of a date within the Plan Year. (d) "ADP Test". The determination of whether the ADP is in compliance with the Basic or Alternative Limitation for a Plan Year (as defined in Section 12.2). (e) "Average Percentage". The average of the calculated percentages for Participants within the specified group. The calculated percentage refers to either the "Deferrals" or "Contributions" (as defined in this Section) made on each Participant's behalf for the Plan Year, divided by his or her Compensation for the portion of the Plan Year in which he or she was an Eligible Employee while a Participant. (Employee 401(k) Contributions to this Plan or comparable contributions to plans of Related Companies which shall be refunded solely because they exceed the Contribution Dollar Limit are included in the percentage for the HCE Group but not for the NHCE Group.) (f) "Contributions" shall include Employer Matching and After-Tax Contributions. For Plan Years commencing on or after December 1, 1995, "Matching Stock, Matching Cash and After-Tax Contributions" shall be substituted for the reference to "Employer Matching and After-tax Contributions" in the preceding sentence. In addition, Contributions may include Employee 401(k) and, effective for Plan Years commencing on or after December 1, 1993, Qualifying Contributions, but only to the extent that (1) the Employer elects to use them, (2) they are not used or counted in the ADP Test, (3) Qualifying Contributions are fully vested when made, not withdrawable by an Employee before he or she attains age 59 1/2 and (4) they otherwise 38 satisfy the requirements as prescribed under Code section 401(m) permitting treatment as Contributions for purposes of the ACP Test, including with regard to Qualifying Contributions satisfaction of the requirements of Code section 401(a) in the manner prescribed under Code section 401(m). (g) "Deferrals" shall include Employee 401(k) Contributions. In addition, effective for Plan Years commencing on or after December 1, 1993, Deferrals may include Qualifying Contributions, but only to the extent that (1) the Employer elects to use them, (2) they are not used or counted in the ACP Test, (3) they are fully vested when made, not withdrawable by an Employee before he or she attains age 59 1/2 and (4) they otherwise satisfy the requirements as prescribed under Code section 401(k) permitting treatment as Deferrals for purposes of the ADP Test, including satisfaction of the requirements of Code section 401(a) in the manner prescribed under Code section 401(k). (h) "Family Member". An Employee who is, at any time during the Plan Year or Lookback Year, a spouse, lineal ascendant or descendant, or spouse of a lineal ascendant or descendant of (1) an active or former Employee who at any time during the Plan Year or Lookback Year is a more than 5% Owner (within the meaning of Code section 414(q)(3)), or (2) an HCE who is among the 10 Employees with the highest Compensation for such Year. (i) "HCE" or "Highly Compensated Employee". With respect to each Employer and its Related Companies, an Employee during the Plan Year or Lookback Year who (in accordance with Code section 414(q)): (1) Was a more than 5% Owner at any time during the Lookback Year or Plan Year; (2) Received Compensation during the Lookback Year (or in the Plan Year if among the 100 Employees with the highest Compensation for such Year) in excess of (i) $75,000 (as adjusted for such Year pursuant to Code sections 414(q)(1) and 415(d)), or (ii) $50,000 (as adjusted for such Year pursuant to Code sections 414(q)(1) and 415(d)) in the case of a member of the "top-paid group" (within the meaning of Code section 414(q)(4)) for such Year), provided, however, that if the conditions of Code section 414(q)(12)(B)(ii) are met, the Company may elect for any Plan Year to apply clause (i) by substituting $50,000 for $75,000 and not to apply clause (ii); (3) Was an officer of a Related Company and received Compensation during the Lookback Year (or in the Plan Year if 39 among the 100 Employees with the highest Compensation for such Year) that is greater than 50% of the dollar limitation in effect under Code section 415(b)(1)(A) and (d) for such Year (or if no officer has Compensation in excess of the threshold, the officer with the highest Compensation), provided that the number of officers shall be limited to 50 Employees (or, if less, the greater of three Employees or 10% of the Employees); or (4) Was a Family Member at any time during the Lookback Year or Plan Year, in which case the Deferrals, Contributions and Compensation of the HCE and his or her Family Members shall be aggregated and they shall be treated as a single HCE. A former Employee shall be treated as an HCE if (1) such former Employee was an HCE when he separated from service, or (2) such former Employee was an HCE in service at any time after attaining age 55. The determination of who is an HCE, including the determinations of the number and identity of Employees in the top-paid group, the top 100 Employees and the number of Employees treated as officers shall be made in accordance with Code section 414(q). (j) "HCE Group" and "NHCE Group". With respect to each Employer and its Related Companies, the respective group of HCEs and NHCEs who are eligible to have amounts contributed on their behalf for the Plan Year, including Employees who would be eligible but for their election not to participate or to contribute, or because their Pay is greater than zero but does not exceed a stated minimum. (1) If the Related Companies maintain two or more plans which are subject to the ADP or ACP Test and are considered as one plan for purposes of Code sections 401(a)(4) or 410(b), all such plans shall be aggregated and treated as one plan for purposes of meeting the ADP and ACP Tests, provided that the plans may only be aggregated if they have the same Plan Year. (2) If an HCE, who is one of the top 10 paid Employees or a more than 5% Owner, has any Family Members, the Deferrals, Contributions and Compensation of such HCE and his or her Family Members shall be combined and treated as a single HCE. Such amounts for all other Family Members shall be removed from the NHCE Group percentage calculation and be combined with the HCE's. (3) If an HCE is covered by more than one cash or deferred arrangement, or more than one arrangement permitting 40 employee or matching contributions, maintained by the Related Companies, all such plans shall be aggregated and treated as one plan (other than those plans that may not be permissively aggregated) for purposes of calculating the separate percentage for the HCE which is used in the determination of the Average Percentage. (k) "Lookback Year". Pursuant to Code section 414(q), the Company elects as the Lookback Year the 12 months ending immediately prior to the start of the Plan Year. (l) "Multiple Use Test". The test described in Section 12.4 which a Plan must meet where the Alternative Limitation (described in Section 12.2(b)) is used to meet both the ADP and ACP Tests. (m) "NHCE" or "Non-Highly Compensated Employee". An Employee who is not an HCE. 12.2 ADP and ACP Tests For each Plan Year, the ADP and ACP for the HCE Group must meet either the Basic or Alternative Limitation when compared to the respective ADP and ACP for the NHCE Group, defined as follows: (a) Basic Limitation. The HCE Group Average Percentage may not exceed 1.25 times the NHCE Group Average Percentage. (b) Alternative Limitation. The HCE Group Average Percentage is limited by reference to the NHCE Group Average Percentage as follows:
IF THE NHCE GROUP THEN THE MAXIMUM HCE AVERAGE PERCENTAGE IS: GROUP AVERAGE PERCENTAGE IS: ------------------------- ----------------------------- Less than 2% 2 times NHCE Group Average % 2% to 8% NHCE Group Average % plus 2% More than 8% NA - Basic Limitation applies
12.3 Correction of ADP and ACP Tests If the ADP or ACP Tests are not met, the Administrator shall determine, no later than the end of the next Plan Year, a maximum percentage to be used in place of the calculated percentage for all HCEs that would reduce the ADP and/or ACP for the HCE group by a sufficient amount to meet the ADP and ACP Tests. ADP and/or ACP corrections shall be made in accordance with the leveling method as described below. 41 (a) ADP Correction. The HCE with the highest Deferral percentage shall have his or her Deferral percentage reduced to the lesser of the extent required to meet the ADP Test or to cause his or her Deferral percentage to equal that of the HCE with the next highest Deferral percentage. The process shall be repeated until the ADP Test is met. To the extent an HCE's Deferrals were determined to be reduced as described in the paragraph above, Employee 401(k) Contributions shall, by the end of the next Plan Year, be refunded to the HCE in an amount equal to the actual Deferrals minus the product of the maximum percentage and the HCE's Compensation, except that such amount to be refunded shall be reduced by Employee 401(k) Contributions previously refunded because they exceeded the Contribution Dollar Limit. The excess amounts shall first be taken from unmatched Employee 401(k) Contributions and then from matched Employee 401(k) Contributions. Any Employer Matching Contributions attributable to refunded excess Employee 401(k) Contributions as described in this Section shall be forfeited and used as described in Section 8.4. For Plan Years commencing on or after December 1, 1995, "Any Matching Stock and Matching Cash Contributions" shall be substituted for the reference to "Any Employer Matching Contributions" in the preceding sentence. (b) ACP Correction. The HCE with the highest Contribution percentage shall have his or her Contribution percentage reduced to the lesser of the extent required to meet the ACP Test or to cause his or her Contribution percentage to equal that of the HCE with the next highest Contribution percentage. The process shall be repeated until the ACP Test is met. To the extent an HCE's Contributions were determined to be reduced as described in the paragraph above, Contributions shall, by the end of the next Plan Year, be refunded to the HCE to the extent vested, and forfeited to the extent such amounts were not vested, as of the end of the Plan Year being tested, in an amount equal to the actual Contributions minus the product of the maximum percentage and the HCE's Compensation. The excess amounts shall first be taken from After-Tax Contributions and then from Employer Matching Contributions. For Plan Years commencing on or after December 1, 1995, "and then as a proportional combination of Matching Stock and Matching Cash Contributions" shall be substituted for the reference to "and then from Employer Matching Contributions" in the preceding sentence. 42 (c) Investment Fund Sources. Once the amount of excess Deferrals and/or Contributions is determined and with regard to excess Contributions, allocated by type of Contribution, amounts shall first be taken from the Sweep Account and then taken by Investment Fund in direct proportion to the market value of the Participant's interest in each Investment Fund (which excludes his or her Loan Account balance) as of the Trade Date on which the correction is processed. (d) Family Member Correction. To the extent any reduction is necessary with respect to an HCE and his or her Family Members that have been combined and treated for testing purposes as a single Employee, the excess Deferrals and Contributions from the ADP and/or ACP Test shall be prorated among each such Participant in direct proportion to his or her Deferrals or Contributions included in each Test. 12.4 Multiple Use Test If the Alternative Limitation (defined in Section 12.2) is used to meet both the ADP and ACP Tests, the ADP and ACP for the HCE Group must also comply with the requirements of Code section 401(m)(9). Such Code section requires that the sum of the ADP and ACP for the HCE Group (as determined after any corrections needed to meet the ADP and ACP Tests have been made) not exceed the sum (which produces the most favorable result) of: (a) the Basic Limitation (defined in Section 12.2) applied to either the ADP or ACP for the NHCE Group, and (b) the Alternative Limitation applied to the other NHCE Group percentage. 12.5 Correction of Multiple Use Test If the multiple use limit is exceeded, the Administrator shall determine a maximum percentage to be used in place of the calculated percentage for all HCEs that would reduce either or both the ADP or ACP for the HCE Group by a sufficient amount to meet the multiple use limit. Any excess shall be handled in the same manner that the distribution of excess Deferrals or Contributions are handled. 12.6 Adjustment for Investment Gain or Loss Any excess Deferrals or Contributions to be refunded to a Participant or forfeited in accordance with Section 12.3 or 12.5 shall be adjusted for investment gain or loss. Refunds or forfeitures shall include investment gain or loss for the period between the end of the applicable Plan Year and the date of distribution. For Plan Years commencing on or after December 1, 1993, "shall not include" shall be substituted for the reference to "shall include" in the preceding sentence. 43 12.7 Testing Responsibilities and Required Records The Administrator shall be responsible for ensuring that the Plan meets the ADP Test, the ACP Test and the Multiple Use Test, and that the Contribution Dollar Limit is not exceeded. In carrying out its responsibilities, the Administrator shall have sole discretion to limit or reduce Deferrals or Contributions at any time. The Administrator shall maintain records which are sufficient to demonstrate that the ADP Test, the ACP Test and the Multiple Use Test, have been met for each Plan Year for at least as long as the Employer's corresponding tax year is open to audit. 12.8 Separate Testing (a) Multiple Employers: The determination of HCEs, NHCEs, and the performance of the ADP Test, the ACP Test and Multiple Use Test, and any corrective action resulting therefrom, shall be made separately with regard to the Employees of each Employer (and its Related Companies) that is not a Related Company with the other Employer(s). (b) Collective Bargaining Units: The performance of the ADP Test, and if applicable, the ACP Test and Multiple Use Test, and any corrective action resulting therefrom, shall be applied separately to Employees who are eligible to participate in the Plan as a result of a collective bargaining agreement. In addition, separate testing may be applied, at the discretion of the Administrator and to the extent permitted under Treasury regulations, to any group of Employees for whom separate testing is permissible. 44 13 MAXIMUM CONTRIBUTION AND BENEFIT LIMITATIONS -------------------------------------------- 13.1 "Annual Addition" Defined The sum of all amounts allocated to the Participant's Account for a Plan Year. Amounts include contributions (except for rollovers or transfers from another qualified plan), forfeitures and, if the Participant is a Key Employee (pursuant to Section 14) for the applicable or any prior Plan Year, medical benefits provided pursuant to Code section 419A(d)(1). For purposes of this Section 13.1, "Account" also includes a Participant's account in all other defined contribution plans currently or previously maintained by any Related Company. The Plan Year refers to the year to which the allocation pertains, regardless of when it was allocated. The Plan Year shall be the Code section 415 limitation year. 13.2 Maximum Annual Addition The Annual Addition to a Participant's accounts under this Plan and any other defined contribution plan maintained by any Related Company for any Plan Year shall not exceed the lesser of (1) 25% of his or her Taxable Income or (2) the greater of $30,000 or one-quarter of the dollar limitation in effect under Code section 415(b)(1)(A), except that for Plan Years beginning after December 31, 1994, "(2) $30,000 (as adjusted for the cost of living pursuant to Code section 415(d))" shall be substituted for the preceding reference to "(2) the greater of $30,000 or one-quarter of the dollar limitation in effect under Code section 415(b)(1)(A)". 13.3 Avoiding an Excess Annual Addition If, at any time during a Plan Year, the allocation of any additional Contributions would produce an excess Annual Addition for such year, Contributions to be made for the remainder of the Plan Year shall be limited to the amount needed for each affected Participant to receive the maximum Annual Addition. 13.4 Correcting an Excess Annual Addition Upon the discovery of an excess Annual Addition to a Participant's Account (resulting from forfeitures, allocations, reasonable error in determining Participant compensation or the amount of elective contributions, or other facts and circumstances acceptable to the Internal Revenue Service) the excess amount (adjusted to reflect investment gains) shall first be returned to the Participant to the extent of his or her After-Tax Contributions, and then to the extent of his or her Employee 401(k) Contributions (however to the extent Employee 401(k) Contributions were matched, the applicable Employer Matching Contributions shall be forfeited in proportion to the returned matched Employee 401(k) Contributions) and the remaining excess, if any, shall be forfeited by the Participant and used as described in Section 8.4. For Plan Years commencing on or after December 1, 1995, "the applicable Matching Stock and Matching Cash Contributions" shall be substituted for the reference to "the applicable Employer Matching Contributions" in the preceding sentence. 45 13.5 Correcting a Multiple Plan Excess If a Participant, whose Account is credited with an excess Annual Addition, received allocations to more than one defined contribution plan, the excess shall be corrected by reducing the Annual Addition to this Plan only after all possible reductions have been made to the other defined contribution plans. 13.6 "Defined Benefit Fraction" Defined The fraction, for any Plan Year, where the numerator is the "projected annual benefit" and the denominator is the greater of 125% of the "protected current accrued benefit" or the normal limit which is the lesser of (1) 125% of the maximum dollar limitation provided under Code section 415(b)(1)(A) for the Plan Year or (2) 140% of the amount which may be taken into account under Code section 415(b)(1)(B) for the Plan Year, where a Participant's: (a) "projected annual benefit" is the annual benefit provided by the Plan determined pursuant to Code section 415(e)(2)(A), and (b) "protected current accrued benefit" in a defined benefit plan in existence (1) on July 1, 1982, shall be the accrued annual benefit provided for under Public Law 97-248, section 235(g)(4), as amended, or (2) on May 6, 1986, shall be the accrued annual benefit provided for under Public Law 99-514, section 1106(i)(3). 13.7 "Defined Contribution Fraction" Defined The fraction where the numerator is the sum of the Participant's Annual Addition for each Plan Year to date and the denominator is the sum of the "annual amounts" for each year in which the Participant has performed service with a Related Company. The "annual amount" for any Plan Year is the lesser of (1) 125% of the Code section 415(c)(1)(A) dollar limitation (determined without regard to subsection (c)(6)) in effect for the Plan Year and (2) 140% of the Code section 415(c)(1)(B) amount in effect for the Plan Year, where: (a) each Annual Addition is determined pursuant to the Code section 415(c) rules in effect for such Plan Year, and (b) the numerator is adjusted pursuant to Public Law 97-248, section 235(g)(3), as amended, or Public Law 99-514, section 1106(i)(4). 13.8 Combined Plan Limits and Correction If a Participant has also participated in a defined benefit plan maintained by a Related Company, the sum of the Defined Benefit Fraction and the Defined Contribution Fraction for any Plan Year may not exceed 1.0. If the combined fraction exceeds 1.0 for any Plan Year, the Participant's benefit under any defined benefit plan (to the extent it has not been distributed or used to purchase an annuity contract) shall be limited so that the combined fraction does not exceed 1.0 before any defined contribution limits shall be enforced. 46 14 TOP HEAVY RULES --------------- 14.1 Top Heavy Definitions When capitalized, the following words and phrases have the following meanings when used in this Section: (a) "Aggregation Group". The group consisting of each qualified plan of an Employer (and its Related Companies) (1) in which a Key Employee is a participant or was a participant during the determination period (regardless of whether such plan has terminated), or (2) which enables another plan in the group to meet the requirements of Code sections 401(a)(4) or 410(b). The Employer may also treat any other qualified plan as part of the group if the group would continue to meet the requirements of Code sections 401(a)(4) and 410(b) with such plan being taken into account. (b) "Determination Date". The last Trade Date of the preceding Plan Year or, in the case of the Plan's first year, the last Trade Date of the first Plan Year. (c) "Key Employee". A current or former Employee (or his or her Beneficiary) who at any time during the five year period ending on the Determination Date was: (1) an officer of a Related Company whose Compensation (i) exceeds 50% of the amount in effect under Code section 415(b)(1)(A) and (ii) places him within the following highest paid group of officers:
NUMBER OF EMPLOYEES NUMBER OF NOT EXCLUDED UNDER CODE HIGHEST PAID SECTION 414(Q)(8) OFFICERS INCLUDED -------------------------- ---------------------- Less than 30 3 30 to 500 10% of the number of Employees not excluded under Code section 414(q)(8) More than 500 50
(2) a more than 5% Owner, (3) a more than 1% Owner whose Compensation exceeds $150,000, or 47 (4) a more than 0.5% Owner who is among the 10 Employees owning the largest interest in a Related Company and whose Compensation exceeds the amount in effect under Code section 415(c)(1)(A). (d) "Plan Benefit". The sum as of the Determination Date of (1) an Employee's Account, (2) the present value of his or her other accrued benefits provided by all qualified plans within the Aggregation Group, and (3) the aggregate distributions made within the five year period ending on such date. Plan Benefits shall exclude Rollover Contributions and plan to plan transfers made after December 31, 1983 which are both employee initiated and from a plan maintained by a non-related employer. (e) "Top Heavy". The Plan's status when the Plan Benefits of Key Employees account for more than 60% of the Plan Benefits of all Employees who have performed services at any time during the five year period ending on the Determination Date. The Plan Benefits of Employees who were, but are no longer, Key Employees (because they have not been an officer or Owner during the five year period), are excluded in the determination. 14.2 Special Contributions (a) Minimum Contribution Requirement. For each Plan Year in which the Plan is Top Heavy, the Employer shall not allow any contributions (other than a Rollover Contribution from a plan maintained by a non-related employer) to be made by or on behalf of any Key Employee unless the Employer makes a contribution (other than contributions made by an Employer in accordance with a Participant's salary deferral election or contributions made by an Employer based upon the amount contributed by a Participant) on behalf of all Participants who were Eligible Employees as of the last day of the Plan Year in an amount equal to at least 3% of each such Participant's Taxable Income. The Administrator shall remove any such contributions (including applicable investment gain or loss) credited to a Key Employee's Account in violation of the foregoing rule and return them to the Employer or Employee to the extent permitted by the Limited Return of Contributions paragraph of Section 18. (b) Overriding Minimum Benefit. Notwithstanding, contributions shall be permitted on behalf of Key Employees if the Employer also maintains a defined benefit plan which automatically provides a benefit which satisfies the Code section 416(c)(1) minimum benefit requirements, including the adjustment provided in Code section 416(h)(2)(A), if applicable. If this Plan is part of an aggregation group in which a Key Employee is receiving a benefit and no minimum is provided in any other plan, a minimum contribution of at least 3% of Taxable Income shall be 48 provided to the Participants specified in the preceding paragraph. In addition, the Employer may offset a defined benefit minimum by contributions (other than contributions made by an Employer in accordance with a Participant's salary deferral election or contributions made by an Employer based upon the amount contributed by a Participant) made to this Plan. 14.3 Adjustment to Combined Limits for Different Plans For each Plan Year in which the Plan is Top Heavy, 100% shall be substituted for 125% in determining the Defined Benefit Fraction and the Defined Contribution Fraction. 49 15 PLAN ADMINISTRATION ------------------- 15.1 Plan Delineates Authority and Responsibility Plan fiduciaries include the Company, the Administrator, the Committee and/or the Trustee, as applicable, whose specific duties are delineated in this Plan and Trust. In addition, Plan fiduciaries also include any other person to whom fiduciary duties or responsibility is delegated with respect to the Plan. Any person or group may serve in more than one fiduciary capacity with respect to the Plan. To the extent permitted under ERISA section 405, no fiduciary shall be liable for a breach by another fiduciary. 15.2 Fiduciary Standards Each fiduciary shall: (a) discharge his or her duties in accordance with this Plan and Trust to the extent they are consistent with ERISA; (b) use that degree of care, skill, prudence and diligence that a prudent person acting in a like capacity and familiar with such matters would use in the conduct of an enterprise of a like character and with like aims; (c) act with the exclusive purpose of providing benefits to Participants and their Beneficiaries, and defraying reasonable expenses of administering the Plan; (d) diversify Plan investments, to the extent such fiduciary is responsible for directing the investment of Plan assets, so as to minimize the risk of large losses, unless under the circumstances it is clearly prudent not to do so; and (e) treat similarly situated Participants and Beneficiaries in a uniform and nondiscriminatory manner. 15.3 Company is ERISA Plan Administrator The Company is the plan administrator, within the meaning of ERISA section 3(16), which is responsible for compliance with all reporting and disclosure requirements, except those that are explicitly the responsibility of the Trustee under applicable law. The Administrator and/or Committee shall have any necessary authority to carry out such functions through the actions of the Administrator, duly appointed officers of the Company, and/or the Committee. 50 15.4 Administrator Duties The Administrator shall have the discretionary authority to construe this Plan and Trust, other than the provisions which relate to the Trustee, and to do all things necessary or convenient to effect the intent and purposes thereof, whether or not such powers are specifically set forth in this Plan and Trust. Actions taken in good faith by the Administrator shall be conclusive and binding on all interested parties, and shall be given the maximum possible deference allowed by law. In addition to the duties listed elsewhere in this Plan and Trust, the Administrator's authority shall include, but not be limited to, the discretionary authority to: (a) determine who is eligible to participate, if a contribution qualifies as a rollover contribution, the allocation of Contributions, and the eligibility for loans, withdrawals and distributions; (b) provide each Participant with a summary plan description no later than 90 days after he or she has become a Participant (or such other period permitted under ERISA section 104(b)(1)), as well as informing each Participant of any material modification to the Plan in a timely manner; (c) make a copy of the following documents available to Participants during normal work hours: this Plan and Trust (including subsequent amendments), all annual and interim reports of the Trustee related to the entire Plan, the latest annual report and the summary plan description; (d) determine the fact of a Participant's death and of any Beneficiary's right to receive the deceased Participant's interest based upon such proof and evidence as it deems necessary; (e) establish and review at least annually a funding policy bearing in mind both the short-run and long-run needs and goals of the Plan. To the extent Participants may direct their own investments, the funding policy shall focus on which Investment Funds are available for Participants to use; and (f) adjudicate claims pursuant to the claims procedure described in Section 18. 15.5 Advisors May be Retained The Administrator may retain such agents and advisors (including attorneys, accountants, actuaries, consultants, record keepers, investment counsel and administrative assistants) as it considers necessary to assist it in the performance of its duties. The Administrator shall also comply with the bonding requirements of ERISA section 412. 51 15.6 Delegation of Administrator Duties The Company, as Administrator of the Plan, has appointed a Committee to administer the Plan on its behalf. The Company shall provide the Trustee with the names and specimen signatures of any persons authorized to serve as Committee members and act as or on its behalf. Any Committee member appointed by the Company shall serve at the pleasure of the Company, but may resign by written notice to the Company. Committee members shall serve without compensation from the Plan for such services. Except to the extent that the Company otherwise provides, any delegation of duties to a Committee shall carry with it the full discretionary authority of the Administrator to complete such duties. 15.7 Committee Operating Rules (a) Actions of Majority. Any act delegated by the Company to the Committee may be done by a majority of its members. The majority may be expressed by a vote at a meeting or in writing without a meeting, and a majority action shall be equivalent to an action of all Committee members. (b) Meetings. The Committee shall hold meetings upon such notice, place and times as it determines necessary to conduct its functions properly. (c) Reliance by Trustee. The Committee may authorize one or more of its members to execute documents on its behalf and may authorize one or more of its members or other individuals who are not members to give written direction to the Trustee in the performance of its duties. The Committee shall provide such authorization in writing to the Trustee with the name and specimen signatures of any person authorized to act on its behalf. The Trustee shall accept such direction and rely upon it until notified in writing that the Committee has revoked the authorization to give such direction. The Trustee shall not be deemed to be on notice of any change in the membership of the Committee, parties authorized to direct the Trustee in the performance of its duties, or the duties delegated to and by the Committee until notified in writing. 52 16 MANAGEMENT OF INVESTMENTS ------------------------- 16.1 Trust Agreement All Plan assets shall be held by the Trustee in trust, in accordance with those provisions of this Plan and Trust which relate to the Trustee, for use in providing Plan benefits and paying Plan fees and expenses not paid directly by the Employer. Plan benefits shall be drawn solely from the Trust and paid by the Trustee as directed by the Administrator. Notwithstanding, the Administrator may appoint, with the approval of the Trustee, another trustee to hold and administer Plan assets which do not meet the requirements of Section 16.2. 16.2 Investment Funds The Administrator is hereby granted authority to direct the Trustee to invest Trust assets in one or more Investment Funds. The number and composition of Investment Funds may be changed from time to time, without the necessity of amending this Plan and Trust. The Trustee may establish reasonable limits on the number of Investment Funds as well as the acceptable assets for any such Investment Fund. Each of the Investment Funds may be comprised of any of the following: (a) shares of a registered investment company, whether or not the Trustee or any of its affiliates is an advisor to, or other service provider to, such company; (b) collective investment funds maintained by the Trustee, or any other fiduciary to the Plan, which are available for investment by trusts which are qualified under Code sections 401(a) and 501(a); (c) individual equity and fixed income securities which are readily tradeable on the open market; (d) guaranteed investment contracts issued by a bank or insurance company; (e) interest bearing deposits of the Trustee; and (f) Company Stock. Any Investment Fund assets invested in a collective investment fund, shall be subject to all the provisions of the instruments establishing and governing such fund. These instruments, including any subsequent amendments, are incorporated herein by reference. 53 16.3 Authority to Hold Cash The Trustee shall have the authority to cause the investment manager of each Investment Fund to maintain sufficient deposit or money market type assets in each Investment Fund to handle the Fund's liquidity and disbursement needs. Each Participant's and Beneficiary's Sweep Account, which is used to hold assets pending investment or disbursement, shall consist of interest bearing deposits of the Trustee. 16.4 Trustee to Act Upon Instructions The Trustee shall carry out instructions to invest assets in the Investment Funds as soon as practicable after such instructions are received from the Administrator, Participants, or Beneficiaries. Such instructions shall remain in effect until changed by the Administrator, Participants or Beneficiaries. 16.5 Administrator Has Right to Vote Registered Investment Company Shares The Administrator shall be entitled to vote proxies or exercise any shareholder rights relating to shares held on behalf of the Plan in a registered investment company. Notwithstanding, the authority to vote proxies and exercise shareholder rights related to such shares held in a Custom Fund is vested as provided otherwise in Section 16. 16.6 Custom Fund Investment Management The Administrator may designate, with the consent of the Trustee, an investment manager for any Investment Fund established by the Trustee solely for Participants of this Plan (a "Custom Fund"). The investment manager may be the Administrator, Trustee or an investment manager pursuant to ERISA section 3(38). The Administrator shall advise the Trustee in writing of the appointment of an investment manager and shall cause the investment manager to acknowledge to the Trustee in writing that the investment manager is a fiduciary to the Plan. A Custom Fund shall be subject to the following: (a) Guidelines. Written guidelines, acceptable to the Trustee, shall be established for a Custom Fund. If a Custom Fund consists solely of collective investment funds or shares of a registered investment company (and sufficient deposit or money market type assets to handle the Fund's liquidity and disbursement needs), its underlying instruments shall constitute the guidelines. (b) Authority of Investment Manager. The investment manager of a Custom Fund shall have the authority to vote or execute proxies, exercise shareholder rights, manage, acquire, and dispose of Trust 54 assets. Notwithstanding, the authority to vote proxies and exercise shareholder rights related to shares of Company Stock held in a Custom Fund is vested as provided otherwise in Section 16. (c) Custody and Trade Settlement. Unless otherwise agreed to by the Trustee, the Trustee shall maintain custody of all Custom Fund assets and be responsible for the settlement of all Custom Fund trades. For purposes of this section, shares of a collective investment fund, shares of a registered investment company and guaranteed investment contracts issued by a bank or insurance company, shall be regarded as the Custom Fund assets instead of the underlying assets of such instruments. (d) Limited Liability of Co-Fiduciaries. Neither the Administrator nor the Trustee shall be obligated to invest or otherwise manage any Custom Fund assets for which the Trustee or Administrator is not the investment manager nor shall the Administrator or Trustee be liable for acts or omissions with regard to the investment of such assets except to the extent required by ERISA. 16.7 Authority to Segregate Assets The Company may direct the Trustee to split an Investment Fund into two or more funds in the event any assets in the Fund are illiquid or the value is not readily determinable. In the event of such segregation, the Company shall give instructions to the Trustee on what value to use for the split-off assets, and the Trustee shall not be responsible for confirming such value. 16.8 Maximum Permitted Investment in Company Stock If the Company provides for a Company Stock Fund the Fund shall be comprised of Company Stock and sufficient deposit or money market type assets to handle the Fund's liquidity and disbursement needs. The Fund may be as large as necessary to comply with Participants' and Beneficiaries' investment elections (if the Company Stock Fund is designated as an Investment Fund offered to Participants and Beneficiaries) as well the total investment of Participants' and Beneficiaries' Employer Matching Accounts. Effective December 1, 1995, "Matching Stock Account" (which effective December 1, 1995 includes amounts previously held in a Participant's Employer Matching Account) shall be substituted for the reference to "Employer Matching Account" in the preceding sentence. 16.9 Participants Have Right to Vote and Tender Company Stock Each Participant or Beneficiary shall be entitled to instruct the Trustee as to the voting or tendering of any full or partial shares of Company Stock held on his or her behalf in the Company Stock Fund. Prior to such voting or tendering of 55 Company Stock, each Participant or Beneficiary shall receive a copy of the proxy solicitation or other material relating to such vote or tender decision and a form for the Participant or Beneficiary to complete which confidentially instructs the Trustee to vote or tender such shares in the manner indicated by the Participant or Beneficiary. Upon receipt of such instructions, the Trustee shall act with respect to such shares as instructed. The Administrator shall instruct the Trustee with respect to how to vote or tender any shares for which instructions are not received from Participants or Beneficiaries. 16.10 Registration and Disclosure for Company Stock The Administrator shall be responsible for determining the applicability (and, if applicable, complying with) the requirements of the Securities Act of 1933, as amended, the California Corporate Securities Law of 1968, as amended, and any other applicable blue sky law. The Administrator shall also specify what restrictive legend or transfer restriction, if any, is required to be set forth on the certificates for the securities and the procedure to be followed by the Trustee to effectuate a resale of such securities. 56 17 TRUST ADMINISTRATION -------------------- 17.1 Trustee to Construe Trust The Trustee shall have the discretionary authority to construe those provisions of this Plan and Trust which relate to the Trustee and to do all things necessary or convenient to the administration of the Trust, whether or not such powers are specifically set forth in this Plan and Trust. Actions taken in good faith by the Trustee shall be conclusive and binding on all interested parties, and shall be given the maximum possible deference allowed by law. 17.2 Trustee To Act As Owner of Trust Assets Subject to the specific conditions and limitations set forth in this Plan and Trust, the Trustee shall have all the power, authority, rights and privileges of an absolute owner of the Trust assets and, not in limitation but in amplification of the foregoing, may: (a) receive, hold, manage, invest and reinvest, sell, tender, exchange, dispose of, encumber, hypothecate, pledge, mortgage, lease, grant options respecting, repair, alter, insure, or distribute any and all property in the Trust; (b) borrow money, participate in reorganizations, pay calls and assessments, vote or execute proxies, exercise subscription or conversion privileges, exercise options and register any securities in the Trust in the name of the nominee, in federal book entry form or in any other form as shall permit title thereto to pass by delivery; (c) renew, extend the due date, compromise, arbitrate, adjust, settle, enforce or foreclose, by judicial proceedings or otherwise, or defend against the same, any obligations or claims in favor of or against the Trust; and (d) lend, through a collective investment fund, any securities held in such collective investment fund to brokers, dealers or other borrowers and to permit such securities to be transferred into the name and custody and be voted by the borrower or others. 17.3 United States Indicia of Ownership The Trustee shall not maintain the indicia of ownership of any Trust assets outside the jurisdiction of the United States, except as authorized by ERISA section 404(b). 57 17.4 Tax Withholding and Payment (a) Withholding. The Trustee shall calculate and withhold federal (and, if applicable, state) income taxes with regard to any Eligible Rollover Distribution that is not paid as a Direct Rollover in accordance with the Participant's withholding election or as required by law if no election is made or the election is less than the amount required by law. With regard to any taxable distribution that is not an Eligible Rollover Distribution, the Trustee shall calculate and withhold federal (and, if applicable, state) income taxes in accordance with the Participant's withholding election or as required by law if no election is made. (b) Taxes Due From Investment Funds. The Trustee shall pay from the Investment Fund any taxes or assessments imposed by any taxing or governmental authority on such Fund or its income, including related interest and penalties. 17.5 Trust Accounting (a) Annual Report. Within 60 days (or other reasonable period) following the close of the Plan Year, the Trustee shall provide the Administrator with an annual accounting of Trust assets and information to assist the Administrator in meeting ERISA's annual reporting and audit requirements. (b) Periodic Reports. The Trustee shall maintain records and provide sufficient reporting to allow the Administrator to properly monitor the Trust's assets and activity. (c) Administrator Approval. Approval of any Trustee accounting shall automatically occur 90 days after such accounting has been received by the Administrator, unless the Administrator files a written objection with the Trustee within such time period. Such approval shall be final as to all matters and transactions stated or shown therein and binding upon the Administrator. 17.6 Valuation of Certain Assets If the Trustee determines the Trust holds any asset which is not readily tradeable and listed on a national securities exchange registered under the Securities Exchange Act of 1934, as amended, the Trustee may engage a qualified independent appraiser to determine the fair market value of such property, and the appraisal fees shall be paid from the Investment Fund containing the asset. 58 17.7 Legal Counsel The Trustee may consult with legal counsel of its choice, including counsel for the Employer or counsel of the Trustee, upon any question or matter arising under this Plan and Trust. When relied upon by the Trustee, the opinion of such counsel shall be evidence that the Trustee has acted in good faith. 17.8 Fees and Expenses The Trustee's fees for its services as Trustee shall be such as may be mutually agreed upon by the Company and the Trustee. Trustee fees and all reasonable expenses of counsel and advisors retained by the Trustee shall be paid in accordance with Section 6. 17.9 Trustee Duties and Limitations The Trustee's duties, unless otherwise agreed to by the Trustee, shall be confined to construing the terms of the Plan and Trust as they relate to the Trustee, receiving funds on behalf of and making payments from the Trust, safeguarding and valuing Trust assets, investing and reinvesting Trust assets in the Investment Funds as directed by the Administrator, Participants or Beneficiaries and those duties as described in this Section 17. The Trustee shall have no duty or authority to ascertain whether Contributions are in compliance with the Plan, to enforce collection or to compute or verify the accuracy or adequacy of any amount to be paid to it by the Employer. The Trustee shall not be liable for the proper application of any part of the Trust with respect to any disbursement made at the direction of the Administrator. 59 18 RIGHTS, PROTECTION, CONSTRUCTION AND JURISDICTION ------------------------------------------------- 18.1 Plan Does Not Affect Employment Rights The Plan does not provide any employment rights to any Employee. The Employer expressly reserves the right to discharge an Employee at any time, with or without cause, without regard to the effect such discharge would have upon the Employee's interest in the Plan. 18.2 Limited Return of Contributions Except as provided in this paragraph, (1) Plan assets shall not revert to the Employer nor be diverted for any purpose other than the exclusive benefit of Participants or their Beneficiaries; and (2) a Participant's vested interest shall not be subject to divestment. As provided in ERISA section 403(c)(2), the actual amount of a Contribution made by the Employer (or the current value of the Contribution if a net loss has occurred) may revert to the Employer if: (a) such Contribution is made by reason of a mistake of fact; (b) initial qualification of the Plan under Code section 401(a) is not received and a request for such qualification is made within the time prescribed under Code section 401(b) (the existence of and Contributions under the Plan are hereby conditioned upon such qualification); or (c) such Contribution is not deductible under Code section 404 (such Contributions are hereby conditioned upon such deductibility) in the taxable year of the Employer for which the Contribution is made. The reversion to the Employer must be made (if at all) within one year of the mistaken payment of the Contribution, the date of denial of qualification, or the date of disallowance of deduction, as the case may be. A Participant shall have no rights under the Plan with respect to any such reversion. 18.3 Assignment and Alienation As provided by Code section 401(a)(13) and to the extent not otherwise required by law, no benefit provided by the Plan may be anticipated, assigned or alienated, except: (a) to create, assign or recognize a right to any benefit with respect to a Participant pursuant to a QDRO, or (b) to use a Participant's vested Account balance as security for a loan from the Plan which is permitted pursuant to Code section 4975. 60 18.4 Facility of Payment If a Plan benefit is due to be paid to a minor or if the Administrator reasonably believes that any payee is legally incapable of giving a valid receipt and discharge for any payment due him or her, the Administrator shall have the payment of the benefit, or any part thereof, made to the person (or persons or institution) whom it reasonably believes is caring for or supporting the payee, unless it has received due notice of claim therefor from a duly appointed guardian or conservator of the payee. Any payment shall to the extent thereof, be a complete discharge of any liability under the Plan to the payee. 18.5 Reallocation of Lost Participant's Accounts If the Administrator cannot locate a person entitled to payment of a Plan benefit after a reasonable search, the Administrator may at any time thereafter treat such person's Account as forfeited and use such amount as described in Section 8.4. If such person subsequently presents the Administrator with a valid claim for the benefit, such person shall be paid the amount treated as forfeited, plus the interest that would have been earned in the Sweep Account to the date of determination. The Administrator shall pay the amount through an additional amount contributed by the Employer or direct the Trustee to pay the amount from the Forfeiture Account. 18.6 Claims Procedure (a) Right to Make Claim. An interested party who disagrees with the Administrator's determination of his or her right to Plan benefits must submit a written claim and exhaust this claim procedure before legal recourse of any type is sought. The claim must include the important issues the interested party believes support the claim. The Administrator, pursuant to the authority provided in this Plan, shall either approve or deny the claim. (b) Process for Denying a Claim. The Administrator's partial or complete denial of an initial claim must include an understandable, written response covering (1) the specific reasons why the claim is being denied (with reference to the pertinent Plan provisions) and (2) the steps necessary to perfect the claim and obtain a final review. (c) Appeal of Denial and Final Review. The interested party may make a written appeal of the Administrator's initial decision, and the Administrator shall respond in the same manner and form as prescribed for denying a claim initially. 61 (d) Time Frame. The initial claim, its review, appeal and final review shall be made in a timely fashion, subject to the following time table:
Days to Respond Action From Last Action ------ ---------------- Administrator determines benefit NA Interested party files initial request 60 days Administrator's initial decision 90 days Interested party requests final review 60 days Administrator's final decision 60 days
However, the Administrator may take up to twice the maximum response time for its initial and final review if it provides an explanation within the normal period of why an extension is needed and when its decision shall be forthcoming. 18.7 Construction Headings are included for reading convenience. The text shall control if any ambiguity or inconsistency exists between the headings and the text. The singular and plural shall be interchanged wherever appropriate. References to Participant shall include Beneficiary when appropriate and even if not otherwise already expressly stated. 18.8 Jurisdiction and Severability The Plan and Trust shall be construed, regulated and administered under ERISA and other applicable federal laws and, where not otherwise preempted, by the laws of the State of California. If any provision of this Plan and Trust shall become invalid or unenforceable, that fact shall not affect the validity or enforceability of any other provision of this Plan and Trust. All provisions of this Plan and Trust shall be so construed as to render them valid and enforceable in accordance with their intent. 18.9 Indemnification by Employer The Employers hereby agree to indemnify all Plan fiduciaries against any and all liabilities resulting from any action or inaction, (including a Plan termination in which the Company fails to apply for a favorable determination from the Internal Revenue Service with respect to the qualification of the Plan upon its termination), in relation to the Plan or Trust (1) including (without limitation) expenses reasonably incurred in the defense of any claim relating to the Plan or its assets, and amounts paid in any settlement relating to the Plan or its assets, but (2) excluding liability resulting from actions or inactions made in bad faith, or resulting from the negligence or willful misconduct of the Trustee. The Company shall have the right, but not the obligation, to conduct the defense of any action to which this Section applies. The Plan fiduciaries are not entitled to indemnity from the Plan assets relating to any such action. 62 19 AMENDMENT, MERGER, DIVESTITURES AND TERMINATION ----------------------------------------------- 19.1 Amendment The Company reserves the right to amend this Plan and Trust at any time, to any extent and in any manner it may deem necessary or appropriate. The Company (and not the Trustee) shall be responsible for adopting any amendments necessary to maintain the qualified status of this Plan and Trust under Code sections 401(a) and 501(a). If the Committee is acting as the Administrator in accordance with Section 15.6, it shall have the authority to adopt Plan and Trust amendments which have no substantial adverse financial impact upon any Employer or the Plan. All interested parties shall be bound by any amendment, provided that no amendment shall: (a) become effective unless it has been adopted in accordance with the procedures set forth in Section 19.5; (b) except to the extent permissible under ERISA and the Code, make it possible for any portion of the Trust assets to revert to an Employer or to be used for, or diverted to, any purpose other than for the exclusive benefit of Participants and Beneficiaries entitled to Plan benefits and to defray reasonable expenses of administering the Plan; (c) decrease the rights of any Employee to benefits accrued (including the elimination of optional forms of benefits) to the date on which the amendment is adopted, or if later, the date upon which the amendment becomes effective, except to the extent permitted under ERISA and the Code; nor (d) permit an Employee to be paid the balance of his or her Employee 401(k) Account unless the payment would otherwise be permitted under Code section 401(k). 19.2 Merger This Plan and Trust may not be merged or consolidated with, nor may its assets or liabilities be transferred to, another plan unless each Participant and Beneficiary would, if the resulting plan were then terminated, receive a benefit just after the merger, consolidation or transfer which is at least equal to the benefit which would be received if either plan had terminated just before such event. 19.3 Divestitures In the event of a sale by an Employer which is a corporation of: (1) substantially all of the Employer's assets used in a trade or business to an unrelated corporation, or (2) a sale of such Employer's interest in a subsidiary to an unrelated entity or individual, lump sum distributions shall be permitted from the Plan, except as provided below, to Participants with respect to Employees who continue employment with the corporation acquiring such assets or who continue employment with such subsidiary, as applicable. 63 Notwithstanding, distributions shall not be permitted if the purchaser agrees, in connection with the sale, to be substituted as the Company as the sponsor of the Plan or to accept a transfer of the assets and liabilities representing the Participants' benefits into a plan of the purchaser or a plan to be established by the purchaser. 19.4 Plan Termination The Company may, at any time and for any reason, terminate the Plan in accordance with the procedures set forth in Section 19.5, or completely discontinue contributions. Upon either of these events, or in the event of a partial termination of the Plan within the meaning of Code section 411(d)(3), the Accounts of each affected Employee who has not yet incurred a Break in Service shall be fully vested. If no successor plan is established or maintained, lump sum distributions shall be made in accordance with the terms of the Plan as in effect at the time of the Plan's termination or as thereafter amended provided that a post-termination amendment shall not be effective to the extent that it violates Section 19.1 unless it is required in order to maintain the qualified status of the Plan upon its termination. The Trustee's and Employer's authority shall continue beyond the Plan's termination date until all Trust assets have been liquidated and distributed. 19.5 Amendment and Termination Procedures The following procedural requirements shall govern the adoption of any amendment or termination (a "Change") of this Plan and Trust: (a) The Company may adopt any Change by action of its board of directors in accordance with its normal procedures. (b) The Committee, if acting as Administrator in accordance with Section 15.6, may adopt any amendment within the scope of its authority provided under Section 19.1 and in the manner specified in Section 15.7(a). (c) Any Change must be (1) set forth in writing, and (2) signed and dated by the Company's board of directors or its designee. (d) If the effective date of any Change is not specified in the document setting forth the Change, it shall be effective as of the date it is signed in accordance with clause (2) above, except to the extent that another effective date is necessary to maintain the qualified status of this Plan and Trust under Code sections 401(a) and 501(a). (e) No Change affecting the Trustee in its capacity as Trustee or in any other capacity shall become effective until it is accepted and signed by the Trustee (which acceptance shall not unreasonably be withheld). 19.6 Termination of Employer's Participation Any Employer may, at any time and for any reason, terminate its Plan 64 participation by action of its board of directors in accordance with its normal procedures. Written notice of such action shall be signed and dated by an executive officer of the Employer and delivered to the Company. If the effective date of such action is not specified, it shall be effective on, or as soon as reasonably practicable after, the date of delivery. Upon the Employer's request, the Company may instruct the Trustee and Administrator to spin off all affected Accounts and underlying assets into a separate qualified plan under which the Employer shall assume the powers and duties of the Company. Alternatively, the Company may treat the event as a partial termination described above or continue to maintain the Accounts under the Plan. 19.7 Replacement of the Trustee The Trustee may resign as Trustee under this Plan and Trust or may be removed by the Company at any time upon at least 90 days written notice (or less if agreed to by both parties). In such event, the Company shall appoint a successor trustee by the end of the notice period. The successor trustee shall then succeed to all the powers and duties of the Trustee under this Plan and Trust. If no successor trustee has been named by the end of the notice period, the Company's chief executive officer shall become the trustee, or if he or she declines, the Trustee may petition the court for the appointment of a successor trustee. 19.8 Final Settlement and Accounting of Trustee (a) Final Settlement. As soon as administratively feasible after its resignation or removal as Trustee, the Trustee shall transfer to the successor trustee all property currently held by the Trust. However, the Trustee is authorized to reserve such sum of money as it may deem advisable for payment of its accounts and expenses in connection with the settlement of its accounts or other fees or expenses payable by the Trust. Any balance remaining after payment of such fees and expenses shall be paid to the successor trustee. (b) Final Accounting. The Trustee shall provide a final accounting to the Administrator within 90 days of the date Trust assets are transferred to the successor trustee. (c) Administrator Approval. Approval of the final accounting shall automatically occur 90 days after such accounting has been received by the Administrator, unless the Administrator files a written objection with the Trustee within such time period. Such approval shall be final as to all matters and transactions stated or shown therein and binding upon the Administrator. 65 APPENDIX A - INVESTMENT FUNDS I. Investment Funds Available The Investment Funds offered under the Plan as of the Effective Date to Participants and Beneficiaries include this set of daily valued funds, except that "as of December 1, 1995" shall be substituted for the preceding reference to "as of the Effective Date" with regard to the LifePath and Company Stock Funds: CATEGORY FUNDS -------- ----- MONEY MARKET Money Market ------------ INCOME Bond Index ------ BALANCED Asset Allocation -------- EQUITY Company Stock ------ Growth Stock S&P 500 Stock COMBINATION LifePath ----------- Prior to December 1, 1995, the Investment Funds included a Company Stock Fund but solely for the investment of a Participant's or Beneficiary's Employer Matching Account as directed by the Administrator. II. Default Investment Fund The default Investment Fund as of the Effective Date is the Money Market Fund. III. Contribution Accounts For Which Investment is Restricted A Participant or Beneficiary may direct the investment of his or her entire Account except for the following Contribution Accounts, and except as otherwise provided in Section 7, which shall be invested as of the Effective Date as follows: Employer Matching Account Company Stock Fund Effective December 1, 1995, "Matching Stock Account" (which effective December 1, 1995 includes amounts previously held in a Participant's Employer Matching Account) shall be substituted for the preceding reference to "Employer Matching Account". IV. Maximum Percentage Restrictions Applicable to Certain Investment Funds As of the Effective Date, there are no maximum percentage restrictions applicable to any Investment Funds. 66 APPENDIX B - PAYMENT OF PLAN FEES AND EXPENSES As of the Effective Date, payment of Plan fees and expenses shall be as follows: 1) Investment Management Fees: These are paid by Participants in that management fees reduce the investment return reported and credited to Participants, except that the Employer shall pay the fees related to the Company Stock Fund. These are paid by the Employer on a quarterly basis. 2) Recordkeeping Fees: These are paid by the Employer on a quarterly basis. 3) Loan Fees: A $3.50 per month fee is assessed and billed/collected quarterly from the Account of each Participant who has an outstanding loan balance for loans entered into on or after August 1, 1993. For loans entered into prior to August 1, 1993, these are paid by the Employer on a quarterly basis. 4) Investment Fund Election Changes: For each Investment Fund election change by a Participant, in excess of 4 changes per year, a $10 fee shall be assessed and billed/collected quarterly from the Participant's Account. 5) Periodic Installment Payment Fees: A $3.00 per check fee shall be assessed and billed/collected quarterly from the Participant's Account. 6) Additional Fees Paid by Employer: All other Plan related fees and expenses shall be paid by the Employer. To the extent that the Administrator later elects that any such fees shall be borne by Participants, estimates of the fees shall be determined and reconciled, at least annually, and the fees shall be assessed monthly and billed/collected from Accounts quarterly. 67 APPENDIX C - LOAN INTEREST RATE As of the Effective Date, the interest rate charged on Participant loans shall be equal to the Trustee's prime rate, plus 2%. 68 EX-10.14 3 EMPLOYMENT AGREEMENT Exhibit 10.14 ------------- EMPLOYMENT AGREEMENT -------------------- AGREEMENT made as of February 1, 1996, by and between L.A. GEAR, INC., a California corporation (the "Company"), and Tracey Chikahisa Doi (the "Employee"). WHEREAS, the Company desires to retain the exclusive services of Employee and Employee desires to be employed by the Company for the term of this Agreement; NOW, THEREFORE, in consideration of the premises and of the mutual covenants contained herein, the parties hereto agree as follows: 1. Duties. ------ (a) The Employee shall serve as Vice President and Controller of the Company or such other position as may be agreed between the Employee and the Company, and shall perform such duties, services and responsibilities as are consistent with such positions. The Employee's duties, services and responsibilities will be performed under the overall supervision of the Chief Administrative Officer of the Company (or such other executive officer as may be designated by the President of the Company) and consistent with the policies of the Board of Directors of the Company (the "Board of Directors"). (b) During the Employment Term (as defined in Section 2(a) below), the Employee shall devote her full business time, attention and skill to the performance of such duties, services and responsibilities, and will use her best efforts to promote the interests of the Company. The Employee will not, without the prior written approval of the Board of Directors, engage in any other business activity which would interfere with the performance of her duties, services and responsibilities hereunder or which is in violation of policies established from time to time by the Company. 2. Term. ---- (a) The term of employment of the Employee hereunder shall commence as of the date hereof and shall continue in full force and effect until January 31, 1997, unless earlier terminated or renewed as provided herein (the "Employment Term"). The term of this Agreement shall be coincident with the Employment Term. (b) On the six-month anniversary of the date hereof, and on each six- month anniversary thereafter, the Employment Term shall be extended by six months, on the same terms and conditions contained herein, unless the Company delivers written notice to the Employee on or prior to such six month anniversary date of its intention not to extend the then-current Employment Term, in which case the Employment Term and this Agreement shall expire on the then-current date of expiration of the Employment Term. 1 3. Compensation. In consideration of the performance by the Employee ------------ of the Employee's obligations during the Employment Term (including any services as an officer, director, employee, member of any committee of the Company or any of its subsidiaries, or otherwise), the Company will during the Employment Term pay the Employee a salary (the "Salary") at an annual rate of not less than $150,000. During the Employment Term, the Employee will be eligible to participate in any management bonus plan then in effect for similarly situated employees pursuant to the terms and conditions of such management bonus plan. The Salary shall be payable in accordance with the normal payroll practices of the Company then in effect. The Salary, and all bonuses or other forms of compensation paid to the Employee hereunder, shall be subject to all applicable taxes required to be withheld by the Company pursuant to federal, state or local law. The Employee shall be solely responsible for income taxes imposed on the Employee by reasons of any cash or non-cash compensation and benefits provided hereunder. In addition to the payment of Salary, the Employee shall be entitled to participate in any employee benefit plans then in effect for similarly situated employees to the extent the Employee meets the eligibility requirements for any such plan; provided, however, that nothing in this paragraph shall require the -------- ------- Company to provide health or medical insurance benefits to the Employee or any dependent of the Employee with respect to any condition existing prior to the commencement of the Employee's employment by the Company pursuant to the Prior Employment Agreement (as defined below), except as covered by the Company's health and medical insurance plans sponsored for employees in general. The Employee shall be entitled to three weeks vacation (in addition to the usual national holidays) per year, which vacation shall be accrued ratably during each year during which the Employee serves hereunder, subject to the limitations set forth in this paragraph. Any accrued but unused vacation may be carried forward into subsequent years; provided, however that accrued but unused -------- ------- vacation available to the Employee may not, at any time, exceed a total of six weeks. Vacation shall not be earned at any time that accrued but unused vacation totals six weeks and shall not resume to be earned until accrued but unused vacation again declines below six weeks. Such vacation shall be taken at such time or times as may be agreed between the Employee and the Company. If (i) the Employee is absent from work for 180 calendar days in any twelve-month period by reason of illness or incapacity (whether physical or otherwise) or (ii) the Company reasonably determines that the Employee is unable to perform her duties, services and responsibilities hereunder by reason of illness or incapacity (whether physical or otherwise) for a total of 180 calendar days in any twelve-month period during the 2 Employment Term ("Disability"), the Company shall not be obligated to pay the Employee any compensation (Salary or bonus) for any period in excess of such 180 days; furthermore, any such payments shall be reduced by any amount the Employee is entitled to receive as a result of such disability under any plan provided through the Company or under state or federal law. Notwithstanding anything to the contrary set forth herein, during the Employment Term, Employee shall be entitled to take an aggregate of eight (8) consecutive weeks of pregnancy disability and childcare leave at full compensation; provided; however, that (i) any such pregnancy disability and -------- ------- childcare leave taken by Employee shall not be counted as days absent from work for purposes of determining Disability hereunder and (ii) any and all compensation payments made to Employee for any pregnancy disability and childcare leave period shall be reduced by any amount Employee is entitled to receive as a result of such pregnancy disability under state or federal law. 4. Termination. ----------- (a) Except as otherwise provided in this Agreement, the employment of Employee hereunder and the Employment Term shall terminate upon the earliest to occur of the dates specified below: (i) the close of business on the date of expiration of the Employment Term; (ii) the close of business on the date of the Employee's death; (iii) the close of business on the day on which the Company shall have delivered to the Employee a written notice of the Company's election to terminate his employment for "Cause" (as defined in Section 4(c) hereof); (iv) the close of business on the day on which the Company shall have delivered to the Employee a written notice of the Company's election to terminate his employment because of Disability; (v) the close of business on the day following the date on which the Board of Directors shall have adopted a resolution terminating the employment of the Employee hereunder and such termination is not for death, Cause or Disability; or (vi) the close of business on an early termination date mutually agreed to in writing by the Company and the Employee. 3 (b) Any purported termination by the Company or by the Employee pursuant to Section 4(a) hereof shall be communicated by written "Notice of Termination" to the other. For purposes of this Agreement, a "Notice of Termination" shall mean a written notice which indicates the specific termination provision in this Agreement relied upon and which sets forth in reasonable detail the facts and circumstances claimed to provide a basis for termination of the Employee's employment under the provision so indicated. For purposes of this Agreement, no such purported termination shall be effective without delivery of such Notice of Termination. (c) For purposes of this Agreement, termination of employment for "Cause" shall mean termination based on (i) the Employee's breach of this Agreement, (ii) conviction of the Employee for (x) any crime constituting a felony in the jurisdiction in which committed, (y) any crime involving moral turpitude (whether or not a felony), or (z) any other criminal act against the Company involving dishonesty or willful misconduct intended to injure the Company (whether or not a felony), (iii) substance abuse by the Employee, (iv) the failure or refusal of the Employee to follow the lawful and proper directives of the Board of Directors (or of any superior officer of the Company having direct supervisory authority over the Employee), or (v) willful malfeasance or gross misconduct by the Employee which discredits or damages the Company. (d) In the event of termination of this Agreement, for whatever reason, the Employee agrees to cooperate with the Company and to be reasonably available to the Company with respect to continuing and/or future matters arising out of the Employee's employment or any other relationship with the Company, whether such matters are business-related, legal or otherwise. The Company agrees to reimburse the Employee for the Employee's reasonable travel expenses incurred in complying with the terms of this paragraph upon delivery by the Employee to the Company of valid receipts for such expenses. The provisions of this paragraph shall survive termination of this Agreement. 5. Termination Payments. If the Employee's employment with the -------------------- Company terminates for whatever reason, the Company will pay the Employee any portion of the Salary accrued hereunder on or prior to the date of termination but not paid. Subject to the last sentence of the following paragraph, if the Employee's employment with the Company terminates pursuant to Section 4(a)(v), the Company will continue to pay the Employee an amount equal to the Employee's Salary (at the salary rate in effect on the date of termination of the Employee's employment hereunder) for the remainder of the term of this Agreement. Except as otherwise provided in any stock option agreement between the Company and the Employee in effect at the time of the termination of the Employee's employment, the foregoing payments upon termination shall constitute the exclusive payments due the Employee upon termination under this Agreement, but shall have no effect on any benefits which may be due the Employee under any plan of the Company which provides benefits after termination of 4 employment. The Employee shall not be required to mitigate the foregoing amounts payable upon termination of this Agreement by seeking other employment or otherwise; provided, however, that the foregoing payments shall be reduced or -------- ------- mitigated by virtue of any cash compensation (including any deferred portion thereof) received or earned by the Employee from any other employer, or from personal services rendered by the Employee to a third party as an independent contractor, during the period commencing on the date of termination of this Agreement and ending on the date on which the Employment Term had been scheduled to expire. 6. Employee Covenants. ------------------ (a) Unauthorized Disclosure. The Employee agrees and understands that ----------------------- in the Employee's position with the Company, the Employee will be exposed to and receive information relating to the confidential affairs of the Company, including but not limited to technical information, business and marketing plans, strategies, customer information, other information concerning the Company's products, promotions, development, financing, expansion plans, business policies and practices, and other forms of information considered by the Company to be confidential and in the nature of trade secrets. Except to the extent that the proper performance of the Employee's duties, services and responsibilities hereunder may require disclosure, and except as such information (i) was known to the Employee prior to his employment by the Company or (ii) was or becomes generally available to the public other than as a result of a disclosure by the Employee in violation of the provisions of this Section 6(a), the Employee agrees that during the Employment Term and thereafter the Employee will keep such information confidential and not disclose such information, either directly or indirectly, to any third person or entity without the prior written consent of the Company. This confidentiality covenant has no temporal, geographical or territorial restriction. Upon termination of this Agreement, the Employee will promptly supply to the Company all property, keys, notes, memoranda, writings, lists, files, reports, customer lists, correspondence, tapes, disks, cards, surveys, maps, logs, machines, technical data or any other tangible product or document which has been produced by, received by or otherwise submitted to the Employee during or prior to the Employment Term. Any material breach of the terms of this paragraph shall be considered Cause. (b) Inventions. (i) The Employee agrees that any and all inventions, ---------- discoveries, improvements, processes, business application software, patents, copyrights and trademarks made, developed, discovered or acquired by him during the Employment Term, solely or jointly with others or otherwise and which relate to the business of the Company and all knowledge possessed by the Employee relating thereto (collectively, the "Inventions"), shall be fully and promptly disclosed to the Board of Directors and to such person or persons as the Board of Directors shall direct and shall be the sole and absolute property of the Company and the Company shall be the sole and absolute owner thereof. The Employee agrees that he will at all times keep all of the same secret from everyone except the Company and such persons as the 5 Board of Directors may from time to time direct. The Employee shall, as requested by the Company at any time and from time to time, whether prior to or after the expiration of the Employment Term, execute and deliver to the Company any instruments deemed necessary by the Company to effect disclosure and assignment of the Inventions to the Company or its designees and any patent applications (United States or foreign) and renewals with respect thereto, including any other instruments deemed necessary by the Company for the prosecution of patent applications or the acquisition of letters patent. (ii) Reference is hereby made to Appendix A to this Agreement reprinting the text of Sections 2870 through 2872 of the California Labor Code. Execution of this Agreement by the Employee shall confirm that the Employee has received and read such Appendix A. The provisions of this Section 6(b) shall not apply to any invention which qualifies fully under the provisions of Section 2870 of the California Labor Code. (c) Non-competition. By and in consideration of the Company's --------------- entering into this Agreement and the Salary and benefits to be provided by the Company hereunder, and further in consideration of the Employee's exposure to the proprietary information of the Company, the Employee agrees that the Employee will not, during the Employment Term, directly or indirectly own, manage, operate, join, control, be employed by, or participate in the ownership, management, operation or control of or be connected in any manner, including but not limited to holding the positions of shareholder, director, officer, consultant, independent contractor, employee, partner, or investor, with any Competing Enterprise. For purposes of this paragraph, the term "Competing Enterprise" shall mean any person, corporation, partnership or other entity engaged in the design and marketing of athletic and casual footwear and/or related apparel products and accessories. The prohibition of this clause (c) shall not be deemed to prevent Employee from owning 2% or less of any class of equity securities of an entity that has a class of equity securities registered under Section 12 of the Securities Exchange Act of 1934, as amended. (d) Non-solicitation. During the Employment Term and for a period of ---------------- one year thereafter, the Employee shall not interfere with the Company's relationship with, or endeavor to entice away from the Company, any person who at any time during the Employment Term was an employee or customer of the Company or otherwise had a material business relationship with the Company. (e) Remedies. The Employee agrees that any breach of the terms of -------- this Section 6 would result in irreparable injury and damage to the Company for which the Company would have no adequate remedy at law; the Employee therefore also agrees that in the event of said breach or any threat of breach, the Company shall be entitled to an immediate injunction and restraining order to prevent such breach and/or threatened breach and/or continued breach by the Employee and/or any and all persons and/or entities acting for and/or with the Employee, without having to prove damages, in addition to any other remedies to 6 which the Company may be entitled at law or in equity. The terms of this paragraph shall not prevent the Company from pursuing any other available remedies for any breach or threatened breach hereof, including but not limited to the recovery of damages from the Employee. The provisions of subsections (a), (b), (d) and (e) of this Section 6 shall survive any termination of this Agreement and the Employment Term. The existence of any claim or cause of action by the Employee against the Company, whether predicated on this Agreement or otherwise, shall not constitute a defense to the enforcement by the Company of the covenants and agreements of this Section 6. (f) "Company". For the purposes of this Section 6 only, the term --------- "Company" shall mean, collectively, L.A. Gear, Inc., a California corporation, and its successors, assigns and nominees, and all individuals, corporations and other entities that directly, or indirectly through one or more intermediaries, control or are controlled by or are under common control with any of the foregoing. 7. Notices. Any notice or other communication required or ------- permitted hereunder shall be in writing and shall be deemed to have been given (i) if personally delivered, when so delivered, or (ii) if mailed, three (3) business days after having been placed in the United States mail, registered or certified, postage prepaid, addressed to the party to whom it is directed at the address set forth below: If to the Company: L.A. Gear, Inc. 2850 Ocean Park Boulevard Santa Monica, California 90405 Attention: President With a copy to: L.A. Gear, Inc. 2850 Ocean Park Boulevard Santa Monica, California 90405 Attention: Legal Dept. - Office of General Counsel If to the Employee: Tracey Chikahisa Doi 19506 Flavian Avenue Torrance, CA 90503 7 by registered or certified mail, postage prepaid, return receipt requested. 8. Binding Effect/Assignment. This Agreement shall inure to the ------------------------- benefit of and be binding upon the parties hereto and their respective heirs, executors, personal representatives, estates, successors (including, without limitation, by way of merger) and assigns. Notwithstanding the provisions of the immediately preceding sentence, the Employee shall not assign all or any portion of this Agreement without the prior written consent of the Company. 9. Prior Employment Agreement. Upon the execution of this Agreement -------------------------- by each of the Employee and the Company, except as provided below the Employment agreement, dated as of August 1, 1994 (the "Prior Employment Agreement"), by and between the Company and the Employee, are hereby terminated, effective as of the date hereof, and of no further force and effect. Notwithstanding anything to the contrary in the foregoing, Section 6 of the Prior Employment Agreement shall remain in full force and effect and shall survive the termination of the other provisions of the Prior Employment Agreement pursuant to this Section 9. 10. Entire Agreement. This Agreement sets forth the entire ---------------- understanding of the parties hereto with respect to the subject matter hereof and supersedes all prior agreements, written or oral, between them as to such subject matter. This Agreement may not be amended, nor may any provision hereof be modified or waived, except by an instrument in writing duly signed by the party to be charged. 11. Severability. If any provision of this Agreement, or any ------------ application thereof to any circumstances, is invalid, in whole or in part, such provision or application shall to that extent be severable and shall not affect other provisions or applications of this Agreement. 12. Governing Law. This Agreement shall be governed by and construed ------------- in accordance with the internal laws of the State of California, without reference to the principles of conflict of laws. 13. Modifications and Waivers. No provisions of this Agreement may be ------------------------- modified, altered or amended except by an instrument in writing executed by the parties hereto. No waiver by either party hereto of any breach by the other party hereto of any provision of this Agreement to be performed by such other party shall be deemed a waiver of similar or dissimilar provisions at the time or at any prior or subsequent time. 14. Headings. The headings contained herein are solely for the -------- purposes of reference, are not part of this Agreement and shall not in any way affect the meaning or interpretation of this Agreement. 8 15. Counterparts. This Agreement may be executed in two or more ------------ counterparts, each of which shall be deemed to be an original but all of which together shall constitute one and the same instrument. IN WITNESS WHEREOF, the Company has caused this Agreement to be executed by authority of its Board of Directors, and the Employee has hereunto set his hand, as of the day and year first above written. L.A. GEAR, INC. By: /s/ William L. Benford --------------------------------- Title: President /s/ Tracey C. Doi ---------------------------------- Tracey Chikahisa Doi (Employee) 9 Appendix A NOTIFICATION TO EMPLOYEE Set forth below is the text of Sections 2870, 2871 and 2872 of the California Labor Code, as published in West's Ann. Cal.Labor Code (1989) and West's Ann. Cal.Labor Code (1994 Supp.): (S) 2870. EMPLOYMENT AGREEMENTS; ASSIGNMENT OF RIGHTS (a) Any provision in an employment agreement which provides that an employee shall assign, or offer to assign, any of his or her rights in an invention to his or her employer shall not apply to an invention that the employee developed entirely on his or her own time without using the employer's equipment, supplies, facilities, or trade secret information except for those inventions that either: (1) Relate at the time of conception or reduction to practice of the invention to the employer's business, or actual or demonstrably anticipated research or development of the employer; or (2) Result from any work performed by the employee for the employer. (b) To the extent a provision in an employment agreement purports to require an employee to assign an invention otherwise excluded from being required to be assigned under subdivision (a), the provision is against the public policy of this state and is unenforceable. (S) 2871. CONDITIONS OF EMPLOYMENT OR CONTINUED EMPLOYMENT; DISCLOSURE IF INVENTIONS No employer shall require a provision made void and unenforceable by Section 2870 as a condition of employment or continued employment. Nothing in this article shall be construed to forbid or restrict the right of an employer to provide in contracts of employment for disclosure, provided that any such disclosures be received in confidence, of all of the employee's inventions made solely or jointly with others during the term of his or her employment, a review process by the employer to determine such issues as may arise, and for full title to certain patents and inventions to be in the United States, as required by contracts between the employer and the United States or any of its agencies. 10 (S) 2872. NOTICE TO EMPLOYEE; BURDEN OF PROOF If an employee agreement entered into after January 1, 1980, contains a provision requiring the employee to assign or offer to assign any of his or her rights in any invention to his or her employer, the employer must also, at the time the agreement is made, provide a written notification to the employee that the agreement does not apply to an invention which qualifies fully under the provisions of Section 2870. In any suit or action arising thereunder, the burden of proof shall be on the employee claiming the benefits of its provisions. 11 EX-10.15 4 EMPLOYMENT AGREEMENT Exhibit 10.15 ------------- EMPLOYMENT AGREEMENT -------------------- AGREEMENT made as of February 1, 1996, by and between L.A. GEAR, INC., a California corporation (the "Company"), and Victor Trippetti (the "Employee"). WHEREAS, the Company desires to retain the exclusive services of Employee and Employee desires to be employed by the Company for the term of this Agreement; NOW, THEREFORE, in consideration of the premises and of the mutual covenants contained herein, the parties hereto agree as follows: 1. Duties. ------ (a) The Employee shall serve as Vice President and Treasurer of the Company or such other position as may be agreed between the Employee and the Company, and shall perform such duties, services and responsibilities as are consistent with such positions. The Employee's duties, services and responsibilities will be performed under the overall supervision of the Chief Administrative Officer of the Company (or such other executive officer as may be designated by the President of the Company) and consistent with the policies of the Board of Directors of the Company (the "Board of Directors"). (b) During the Employment Term (as defined in Section 2(a) below), the Employee shall devote his full business time, attention and skill to the performance of such duties, services and responsibilities, and will use his best efforts to promote the interests of the Company. The Employee will not, without the prior written approval of the Board of Directors, engage in any other business activity which would interfere with the performance of his duties, services and responsibilities hereunder or which is in violation of policies established from time to time by the Company. 2. Term. ---- (a) The term of employment of the Employee hereunder shall commence as of the date hereof and shall continue in full force and effect until January 31, 1997, unless earlier terminated or renewed as provided herein (the "Employment Term"). The term of this Agreement shall be coincident with the Employment Term. (b) On the six-month anniversary of the date hereof, and on each six-month anniversary thereafter, the Employment Term shall be extended by six months, on the same terms and conditions contained herein, unless the Company delivers written notice to the Employee on or prior to such six month anniversary date of its intention not to extend the then-current Employment Term, in which case the Employment Term and this Agreement shall expire on the then-current date of expiration of the Employment Term. 1 3. Compensation. In consideration of the performance by the Employee ------------ of the Employee's obligations during the Employment Term (including any services as an officer, director, employee, member of any committee of the Company or any of its subsidiaries, or otherwise), the Company will during the Employment Term pay the Employee a salary (the "Salary") at an annual rate of not less than $140,000. During the Employment Term, the Employee will be eligible to participate in any management bonus plan then in effect for similarly situated employees pursuant to the terms and conditions of such management bonus plan. The Salary shall be payable in accordance with the normal payroll practices of the Company then in effect. The Salary, and all bonuses or other forms of compensation paid to the Employee hereunder, shall be subject to all applicable taxes required to be withheld by the Company pursuant to federal, state or local law. The Employee shall be solely responsible for income taxes imposed on the Employee by reasons of any cash or non-cash compensation and benefits provided hereunder. In addition to the payment of Salary, the Employee shall be entitled to participate in any employee benefit plans then in effect for similarly situated employees to the extent the Employee meets the eligibility requirements for any such plan; provided, however, that nothing in this paragraph shall require the -------- ------- Company to provide health or medical insurance benefits to the Employee or any dependent of the Employee with respect to any condition existing prior to the commencement of the Employee's employment by the Company pursuant to the Prior Employment Agreement (as defined below), except as covered by the Company's health and medical insurance plans sponsored for employees in general. The Employee shall be entitled to three weeks vacation (in addition to the usual national holidays) per year, which vacation shall be accrued ratably during each year during which the Employee serves hereunder, subject to the limitations set forth in this paragraph. Any accrued but unused vacation may be carried forward into subsequent years; provided, however that accrued but unused -------- ------- vacation available to the Employee may not, at any time, exceed a total of six weeks. Vacation shall not be earned at any time that accrued but unused vacation totals six weeks and shall not resume to be earned until accrued but unused vacation again declines below six weeks. Such vacation shall be taken at such time or times as may be agreed between the Employee and the Company. If (i) the Employee is absent from work for 180 calendar days in any twelve-month period by reason of illness or incapacity (whether physical or otherwise) or (ii) the Company reasonably determines that the Employee is unable to perform his duties, services and responsibilities hereunder by reason of illness or incapacity (whether physical or otherwise) for a total of 180 calendar days in any twelve-month period during the 2 Employment Term ("Disability"), the Company shall not be obligated to pay the Employee any compensation (Salary or bonus) for any period in excess of such 180 days; furthermore, any such payments shall be reduced by any amount the Employee is entitled to receive as a result of such disability under any plan provided through the Company or under state or federal law. 4. Termination. ----------- (a) Except as otherwise provided in this Agreement, the employment of Employee hereunder and the Employment Term shall terminate upon the earliest to occur of the dates specified below: (i) the close of business on the date of expiration of the Employment Term; (ii) the close of business on the date of the Employee's death; (iii) the close of business on the day on which the Company shall have delivered to the Employee a written notice of the Company's election to terminate his employment for "Cause" (as defined in Section 4(c) hereof); (iv) the close of business on the day on which the Company shall have delivered to the Employee a written notice of the Company's election to terminate his employment because of Disability; (v) the close of business on the day following the date on which the Board of Directors shall have adopted a resolution terminating the employment of the Employee hereunder and such termination is not for death, Cause or Disability; or (vi) the close of business on an early termination date mutually agreed to in writing by the Company and the Employee. (b) Any purported termination by the Company or by the Employee pursuant to Section 4(a) hereof shall be communicated by written "Notice of Termination" to the other. For purposes of this Agreement, a "Notice of Termination" shall mean a written notice which indicates the specific termination provision in this Agreement relied upon and which sets forth in reasonable detail the facts and circumstances claimed to provide a basis for termination of the Employee's employment under the provision so indicated. For purposes of this Agreement, no such purported termination shall be effective without delivery of such Notice of Termination. 3 (c) For purposes of this Agreement, termination of employment for "Cause" shall mean termination based on (i) the Employee's breach of this Agreement, (ii) conviction of the Employee for (x) any crime constituting a felony in the jurisdiction in which committed, (y) any crime involving moral turpitude (whether or not a felony), or (z) any other criminal act against the Company involving dishonesty or willful misconduct intended to injure the Company (whether or not a felony), (iii) substance abuse by the Employee, (iv) the failure or refusal of the Employee to follow the lawful and proper directives of the Board of Directors (or of any superior officer of the Company having direct supervisory authority over the Employee), or (v) willful malfeasance or gross misconduct by the Employee which discredits or damages the Company. (d) In the event of termination of this Agreement, for whatever reason, the Employee agrees to cooperate with the Company and to be reasonably available to the Company with respect to continuing and/or future matters arising out of the Employee's employment or any other relationship with the Company, whether such matters are business-related, legal or otherwise. The Company agrees to reimburse the Employee for the Employee's reasonable travel expenses incurred in complying with the terms of this paragraph upon delivery by the Employee to the Company of valid receipts for such expenses. The provisions of this paragraph shall survive termination of this Agreement. 5. Termination Payments. If the Employee's employment with the -------------------- Company terminates for whatever reason, the Company will pay the Employee any portion of the Salary accrued hereunder on or prior to the date of termination but not paid. Subject to the last sentence of the following paragraph, if the Employee's employment with the Company terminates pursuant to Section 4(a)(v), the Company will continue to pay the Employee an amount equal to the Employee's Salary (at the salary rate in effect on the date of termination of the Employee's employment hereunder) for the remainder of the term of this Agreement. Except as otherwise provided in any stock option agreement between the Company and the Employee in effect at the time of the termination of the Employee's employment, the foregoing payments upon termination shall constitute the exclusive payments due the Employee upon termination under this Agreement, but shall have no effect on any benefits which may be due the Employee under any plan of the Company which provides benefits after termination of employment. The Employee shall not be required to mitigate the foregoing amounts payable upon termination of this Agreement by seeking other employment or otherwise; provided, however, that the foregoing payments shall be reduced or mitigated by - - -------- ------- virtue of any cash compensation (including any deferred portion thereof) received or earned by the Employee from any other employer, or from personal services rendered by the Employee to a third party as an independent contractor, during the period commencing on the date of termination of this Agreement and ending on the date on which the Employment Term had been scheduled to expire. 4 6. Employee Covenants. ------------------ (a) Unauthorized Disclosure. The Employee agrees and understands ----------------------- that in the Employee's position with the Company, the Employee will be exposed to and receive information relating to the confidential affairs of the Company, including but not limited to technical information, business and marketing plans, strategies, customer information, other information concerning the Company's products, promotions, development, financing, expansion plans, business policies and practices, and other forms of information considered by the Company to be confidential and in the nature of trade secrets. Except to the extent that the proper performance of the Employee's duties, services and responsibilities hereunder may require disclosure, and except as such information (i) was known to the Employee prior to his employment by the Company or (ii) was or becomes generally available to the public other than as a result of a disclosure by the Employee in violation of the provisions of this Section 6(a), the Employee agrees that during the Employment Term and thereafter the Employee will keep such information confidential and not disclose such information, either directly or indirectly, to any third person or entity without the prior written consent of the Company. This confidentiality covenant has no temporal, geographical or territorial restriction. Upon termination of this Agreement, the Employee will promptly supply to the Company all property, keys, notes, memoranda, writings, lists, files, reports, customer lists, correspondence, tapes, disks, cards, surveys, maps, logs, machines, technical data or any other tangible product or document which has been produced by, received by or otherwise submitted to the Employee during or prior to the Employment Term. Any material breach of the terms of this paragraph shall be considered Cause. (b) Inventions. (i) The Employee agrees that any and all ---------- inventions, discoveries, improvements, processes, business application software, patents, copyrights and trademarks made, developed, discovered or acquired by him during the Employment Term, solely or jointly with others or otherwise and which relate to the business of the Company and all knowledge possessed by the Employee relating thereto (collectively, the "Inventions"), shall be fully and promptly disclosed to the Board of Directors and to such person or persons as the Board of Directors shall direct and shall be the sole and absolute property of the Company and the Company shall be the sole and absolute owner thereof. The Employee agrees that he will at all times keep all of the same secret from everyone except the Company and such persons as the Board of Directors may from time to time direct. The Employee shall, as requested by the Company at any time and from time to time, whether prior to or after the expiration of the Employment Term, execute and deliver to the Company any instruments deemed necessary by the Company to effect disclosure and assignment of the Inventions to the Company or its designees and any patent applications (United States or foreign) and renewals with respect thereto, including any other instruments deemed necessary by the Company for the prosecution of patent applications or the acquisition of letters patent. 5 (ii) Reference is hereby made to Appendix A to this Agreement reprinting the text of Sections 2870 through 2872 of the California Labor Code. Execution of this Agreement by the Employee shall confirm that the Employee has received and read such Appendix A. The provisions of this Section 6(b) shall not apply to any invention which qualifies fully under the provisions of Section 2870 of the California Labor Code. (c) Non-competition. By and in consideration of the Company's --------------- entering into this Agreement and the Salary and benefits to be provided by the Company hereunder, and further in consideration of the Employee's exposure to the proprietary information of the Company, the Employee agrees that the Employee will not, during the Employment Term, directly or indirectly own, manage, operate, join, control, be employed by, or participate in the ownership, management, operation or control of or be connected in any manner, including but not limited to holding the positions of shareholder, director, officer, consultant, independent contractor, employee, partner, or investor, with any Competing Enterprise. For purposes of this paragraph, the term "Competing Enterprise" shall mean any person, corporation, partnership or other entity engaged in the design and marketing of athletic and casual footwear and/or related apparel products and accessories. The prohibition of this clause (c) shall not be deemed to prevent Employee from owning 2% or less of any class of equity securities of an entity that has a class of equity securities registered under Section 12 of the Securities Exchange Act of 1934, as amended. (d) Non-solicitation. During the Employment Term and for a period of ---------------- one year thereafter, the Employee shall not interfere with the Company's relationship with, or endeavor to entice away from the Company, any person who at any time during the Employment Term was an employee or customer of the Company or otherwise had a material business relationship with the Company. (e) Remedies. The Employee agrees that any breach of the terms of -------- this Section 6 would result in irreparable injury and damage to the Company for which the Company would have no adequate remedy at law; the Employee therefore also agrees that in the event of said breach or any threat of breach, the Company shall be entitled to an immediate injunction and restraining order to prevent such breach and/or threatened breach and/or continued breach by the Employee and/or any and all persons and/or entities acting for and/or with the Employee, without having to prove damages, in addition to any other remedies to which the Company may be entitled at law or in equity. The terms of this paragraph shall not prevent the Company from pursuing any other available remedies for any breach or threatened breach hereof, including but not limited to the recovery of damages from the Employee. The provisions of subsections (a), (b), (d) and (e) of this Section 6 shall survive any termination of this Agreement and the Employment Term. The existence of any claim or cause of action by the Employee against the Company, whether predicated on this Agreement or 6 otherwise, shall not constitute a defense to the enforcement by the Company of the covenants and agreements of this Section 6. (f) "Company". For the purposes of this Section 6 only, the term --------- "Company" shall mean, collectively, L.A. Gear, Inc., a California corporation, and its successors, assigns and nominees, and all individuals, corporations and other entities that directly, or indirectly through one or more intermediaries, control or are controlled by or are under common control with any of the foregoing. 7. Notices. Any notice or other communication required or ------- permitted hereunder shall be in writing and shall be deemed to have been given (i) if personally delivered, when so delivered, or (ii) if mailed, three (3) business days after having been placed in the United States mail, registered or certified, postage prepaid, addressed to the party to whom it is directed at the address set forth below: If to the Company: L.A. Gear, Inc. 2850 Ocean Park Boulevard Santa Monica, California 90405 Attention: President With a copy to: L.A. Gear, Inc. 2850 Ocean Park Boulevard Santa Monica, California 90405 Attention: Legal Dept. - Office of General Counsel If to the Employee: Victor Trippetti 3230 Overland Avenue #315 Los Angeles, CA 90034 by registered or certified mail, postage prepaid, return receipt requested. 8. Binding Effect/Assignment. This Agreement shall inure to the ------------------------- benefit of and be binding upon the parties hereto and their respective heirs, executors, personal representatives, estates, successors (including, without limitation, by way of merger) and assigns. Notwithstanding the provisions of the immediately preceding sentence, the Employee 7 shall not assign all or any portion of this Agreement without the prior written consent of the Company. 9. Prior Employment Agreement. Upon the execution of this Agreement -------------------------- by each of the Employee and the Company, except as provided below the Employment agreement, dated as of August 1, 1994 (the "Prior Employment Agreement"), by and between the Company and the Employee, are hereby terminated, effective as of the date hereof, and of no further force and effect. Notwithstanding anything to the contrary in the foregoing, Section 6 of the Prior Employment Agreement shall remain in full force and effect and shall survive the termination of the other provisions of the Prior Employment Agreement pursuant to this Section 9. 10. Entire Agreement. This Agreement sets forth the entire ---------------- understanding of the parties hereto with respect to the subject matter hereof and supersedes all prior agreements, written or oral, between them as to such subject matter. This Agreement may not be amended, nor may any provision hereof be modified or waived, except by an instrument in writing duly signed by the party to be charged. 11. Severability. If any provision of this Agreement, or any ------------ application thereof to any circumstances, is invalid, in whole or in part, such provision or application shall to that extent be severable and shall not affect other provisions or applications of this Agreement. 12. Governing Law. This Agreement shall be governed by and construed ------------- in accordance with the internal laws of the State of California, without reference to the principles of conflict of laws. 13. Modifications and Waivers. No provisions of this Agreement may be ------------------------- modified, altered or amended except by an instrument in writing executed by the parties hereto. No waiver by either party hereto of any breach by the other party hereto of any provision of this Agreement to be performed by such other party shall be deemed a waiver of similar or dissimilar provisions at the time or at any prior or subsequent time. 14. Headings. The headings contained herein are solely for the -------- purposes of reference, are not part of this Agreement and shall not in any way affect the meaning or interpretation of this Agreement. 15. Counterparts. This Agreement may be executed in two or more ------------ counterparts, each of which shall be deemed to be an original but all of which together shall constitute one and the same instrument. 8 IN WITNESS WHEREOF, the Company has caused this Agreement to be executed by authority of its Board of Directors, and the Employee has hereunto set his hand, as of the day and year first above written. L.A. GEAR, INC. By: /s/ William L. Benford -------------------------------- Title: President /s/ Victor Trippetti -------------------------------- Victor Trippetti (Employee) 9 Appendix A NOTIFICATION TO EMPLOYEE Set forth below is the text of Sections 2870, 2871 and 2872 of the California Labor Code, as published in West's Ann. Cal.Labor Code (1989) and West's Ann. Cal.Labor Code (1994 Supp.): (S) 2870. EMPLOYMENT AGREEMENTS; ASSIGNMENT OF RIGHTS (a) Any provision in an employment agreement which provides that an employee shall assign, or offer to assign, any of his or her rights in an invention to his or her employer shall not apply to an invention that the employee developed entirely on his or her own time without using the employer's equipment, supplies, facilities, or trade secret information except for those inventions that either: (1) Relate at the time of conception or reduction to practice of the invention to the employer's business, or actual or demonstrably anticipated research or development of the employer; or (2) Result from any work performed by the employee for the employer. (b) To the extent a provision in an employment agreement purports to require an employee to assign an invention otherwise excluded from being required to be assigned under subdivision (a), the provision is against the public policy of this state and is unenforceable. (S) 2871. CONDITIONS OF EMPLOYMENT OR CONTINUED EMPLOYMENT; DISCLOSURE IF INVENTIONS No employer shall require a provision made void and unenforceable by Section 2870 as a condition of employment or continued employment. Nothing in this article shall be construed to forbid or restrict the right of an employer to provide in contracts of employment for disclosure, provided that any such disclosures be received in confidence, of all of the employee's inventions made solely or jointly with others during the term of his or her employment, a review process by the employer to determine such issues as may arise, and for full title to certain patents and inventions to be in the United States, as required by contracts between the employer and the United States or any of its agencies. 10 (S) 2872. NOTICE TO EMPLOYEE; BURDEN OF PROOF If an employee agreement entered into after January 1, 1980, contains a provision requiring the employee to assign or offer to assign any of his or her rights in any invention to his or her employer, the employer must also, at the time the agreement is made, provide a written notification to the employee that the agreement does not apply to an invention which qualifies fully under the provisions of Section 2870. In any suit or action arising thereunder, the burden of proof shall be on the employee claiming the benefits of its provisions. 11 EX-10.35 5 SUMMARY DESCRIPTION OF L.A. GEAR, INC. "MIP" EXHIBIT 10.35 ------------- Summary Description of L.A. Gear, Inc. Management Incentive Program ("MIP") The Company provides cash and deferred bonus opportunities to its officers and other selected management personnel through its Management Incentive Program ("MIP"). Bonus awards are based primarily on improvements in Economic Value Added ("EVA"), although the plan provides that a portion of an individual's target bonus may be excluded from the bonus calculation based on EVA improvement and be allocated to bonus awards based on individual performance objectives. EVA is a measure of economic profit and equity-related capital. The bonus plan is based on three key concepts: a target bonus, a fixed share of EVA improvement in excess of expected EVA improvement ("excess EVA improvement") and a bonus bank. The EVA bonus earned is equal to the sum of the target bonus plus the fixed share of excess EVA improvement (which may be negative). The bonus earned is credited to the bonus bank, and the bonus paid is equal to the amount of the bonus bank balance, up to the amount of the target bonus, plus 1/3 of the bonus bank balance in excess of the target bonus. No bonus is paid when the bonus bank is negative (or when the Company has a net operating loss after tax), and negative bonus bank balances are carried forward to offset future bonuses earned. There is no cap on the bonus awards that can be achieved for superior levels of excess EVA improvement. Target bonuses are based on a percentage of a participant's annualized base salary as of the beginning of the fiscal year, with percentages ranging from 30-50% in the case of senior officers and vice presidents and 20-30% for other participants. The Compensation Committee administers the MIP. EX-13.1 6 MANAGEMENT'S DISCUSSION AND ANALYSIS EXHIBIT 13.1 ------------ L.A. GEAR, INC. AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF - - -------------------------------------------------------------------------- OPERATIONS - - ---------- All references to years are to the fiscal years ended November 30, 1995, 1994 and 1993 as applicable. 1995 COMPARED TO 1994 Net Sales In 1995 the Company's net sales decreased by 28.7% to $296.6 million from $416.0 million in 1994 primarily due to (i) a 23.8% decrease in the total number of pairs sold to 17.5 million pairs in 1995 from 22.9 million pairs in 1994 and (ii) a decrease of $1.36 in the overall average selling price per pair. Domestic net sales decreased by 35.3% from the prior year. International net sales, which accounted for approximately 35.1% of the Company's total net sales, decreased by 12.1% from the previous year. The following table sets forth certain information regarding the Company's net sales:
NET SALES --------------------------------- 1995 1994 --------------- --------------- $ % $ % - - --------------------------------------------------------------------- (DOLLARS IN THOUSANDS) DOMESTIC FOOTWEAR CHILDREN'S $107,570 36% $165,460 40% WOMEN'S 46,422 16 63,218 15 MEN'S 35,842 12 67,186 16 OTHER 2,659 1 1,721 1 - - --------------------------------------------------------------------- TOTAL DOMESTIC SALES 192,493 65 297,585 72 INTERNATIONAL FOOTWEAR CHILDREN'S 57,623 19 48,340 11 WOMEN'S 22,500 8 25,431 6 MEN'S 18,810 6 40,643 10 OTHER 5,125 2 3,967 1 - - --------------------------------------------------------------------- TOTAL INTERNATIONAL SALES 104,058 35 118,381 28 TOTAL NET SALES $296,551 100% $415,966 100% ======== === ======== ===
The following table sets forth the percentage changes, by Children's, Women's and Men's categories, in the number of pairs sold during 1995 as compared to 1994:
CHANGES BETWEEN 1995 AND 1994 ----------------------------- VOLUME OF FOOTWEAR SOLD DOMESTIC INTERNATIONAL TOTAL - - ---------------------------------------------------------------------- CHILDREN'S (26.2)% 14.1 % (17.0)% WOMEN'S (19.5)% (28.4)% (22.2)% MEN'S (35.4)% (51.1)% (41.4)% - - ---------------------------------------------------------------------- TOTAL VOLUME (DECREASE) (26.3)% (17.6)% (23.8)%
The decrease in 1995 domestic net sales principally represents (i) a 26.2% drop in the number of pairs of children's shoes sold primarily due to a $49.4 million decrease in domestic sales of children's lighted product, (ii) a 35.4% decrease in the number of pairs of men's shoes sold in 1995 compared to 1994 primarily due to sales of approximately $12.0 million of a newly introduced men's lighted LEAP GEAR(TM) product line in the first quarter of 1994 without a comparable introduction in the first quarter of 1995 and lower sales of the FLAK(TM) product line in 1995 compared to 1994, (iii) a 19.5% decrease in the number of pairs of women's shoes sold in 1995 compared to 1994 primarily due to overall reduced demand and (iv) a decrease of $2.33 in the average selling price per pair to $15.65 in 1995 from $17.98 in 1994. Due to the long lead times required to introduce new footwear products to market, the Company was unable to offer more women's shoe styles in 1995 despite its refocussed efforts on the women's and children's markets. A greater number of styles will be introduced in 1996. The decrease in the average selling price per pair was principally due to the Company's focus on offering more value-priced products for men and women, a reduced emphasis on more expensive performance athletic footwear and sales of a product line developed for Wal-Mart. Sales to Wal-Mart amounted to $45.3 million and $39.6 million in 1995 and 1994, respectively. 1 Total sales of the Company's children's lighted shoes decreased by $36.4 million to $122.3 million in 1995 from $158.7 million in 1994. Sales of children's lighted shoes accounted for 74.0% and 74.2% of total children's net sales in 1995 and 1994, respectively. Domestic sales of children's lighted product decreased by $49.4 million in 1995 compared to 1994 primarily due to a drop in both volume (4.3 million pairs from 6.2 million pairs) and average selling price per pair ($16.99 from $19.73) as a result of excess inventory at retailers, lower priced lighted shoes offered by competitors and the possible effect of adverse publicity regarding selected styles of its children's lighted shoes manufactured prior to May 1994 which utilized motion-activated switches containing mercury. Internationally, sales of children's lighted product grew by $13.0 million in 1995 compared to 1994, particularly in Europe and Asia. Sales by the Company's European subsidiaries and Far East joint venture increased by 23.7% compared to 1994 principally due to increased demand for children's lighted products. Overall, the average selling price per pair internationally increased by $0.87 from $17.71 in 1994 to $18.58 in 1995. Total international net sales in 1995 decreased by approximately $14.3 million from the prior year primarily due to reduced sales in Mexico, Central and South America and Poland. Sales in Mexico, Central and South America were adversely affected by poor economic conditions in those regions. In 1994 the Company sold approximately $6.5 million in excess inventory into Poland with no corresponding sale in 1995. The number of pairs of men's shoes sold internationally decreased by 51.1% from the prior year primarily due to lower sales of the FLAK(TM) product line in Germany and the impact of the lower sales in Mexico, Central and South America and Poland. The number of pairs of women's shoes sold internationally decreased by 28.4% primarily due to overall reduced demand. Gross Profit Gross profit increased to 29.9% for 1995 from 29.7% in 1994 primarily due to the improvement in the international gross margin to 36.0% from 30.0% in the prior year as a result of the increased demand for children's lighted products and reduced international sales of excess inventory in 1995. The increase in the international margin was partially offset by a decrease in the domestic gross margin to 26.7% in 1995 from 29.5% in 1994 primarily as a result of domestic sales of selected discontinued men's styles in 1995 and an increase in inventory obsolescence reserves in the fourth quarter. Selling, General and Administrative Expenses In September 1995, the Company announced a corporate reorganization plan designed to reengineer key business processes, streamline the Company's organizational structure and substantially reduce operating expenses. The reorganization plan resulted in a restructuring charge of $5.1 million in 1995 primarily relating to the elimination of approximately 160 full time jobs, the closure of the Company's retail outlet division and office space consolidation at the corporate headquarters. In addition, during the fourth quarter of 1995 the Company incurred non-recurring charges of $5.6 million in connection with (i) a $4.6 million increase in the reserve for unused barter credits and (ii) a $1.0 million write off of goodwill related to the acquisition of certain assets of the Company's exclusive distributor (and one of its affiliates) in Mexico in June 1994. In 1994 the Company incurred non-recurring charges of $2.5 million for payments due under contractual obligations to certain individuals upon realignment of senior management. Exclusive of restructuring and non-recurring charges of $10.7 million and $2.5 million in 1995 and 1994 respectively, total selling, general and administrative expenses decreased by $10.5 million or 7.4% to $130.9 million during 1995 from $141.4 million during 1994. Domestic selling, general and administrative expenses (exclusive of restructuring and non-recurring charges of $10.2 million) decreased by $15.4 million or 14.1% in 1995. This decrease includes reductions in (i) compensation expenses of $4.1 million, (ii) sourcing fees of $3.1 million, (iii) depreciation of $2.0 million, (iv) advertising and promotional expenses of $1.9 million, (v) legal fees of $1.5 million, (vi) sales commissions of $1.3 million, and (vii) other net variable expenses of $3.9 million. These overall expense reductions were offset by an increase of $2.4 million in bad debt expense primarily due to increased reserves to cover the Company's exposure to its customers importing product into Mexico and a general deterioration in the retail environment. International selling, general and administrative expenses, exclusive of restructuring charges of $0.5 million in 1995, increased by $4.9 million primarily due to higher expenses of the European subsidiaries and Far East joint venture as a result of the increase in volume of their business. The joint venture, which was formed in December 1993 with Inchcape Pacific Limited to engage in marketing, sales and distribution of L.A. Gear(R) branded footwear, apparel and accessories in selected Far East markets, was still in the start-up phase in 1994. As a result of the devaluation of the peso in fiscal 1995, the Company's Mexican subsidiary incurred a foreign exchange loss of $0.5 million related to the partial repayment of intercompany indebtedness. There were no other significant exchange gains or losses in 1995 or 1994. 2 As a percentage of net sales, selling, general and administrative expenses (exclusive of restructuring and non-recurring charges) increased to approximately 44% in 1995 from approximately 34% in 1994. Changes in the Company's selling, general and administrative expenses cannot be directly related to fluctuations in sales volume as a substantial portion of expenses are (i) fixed in nature, such as compensation and benefits for management and administrative personnel, rent, insurance, depreciation and other overhead charges or (ii) incurred to benefit future periods, such as media, advertising and trade show expenses. The benefits of the corporate reorganization plan are expected to be realized in fiscal 1996. Litigation Settlements, Net Fiscal 1995 results include net settlement income of $2.3 million, substantially all of which was in connection with the settlement of certain patent and trademark infringement actions. Fiscal 1994 results included a net credit of $1.3 million representing settlement income primarily in connection with trademark and patent infringement lawsuits partially offset by expenses relating to the settlement of employment litigation and a dispute with a former distributor. See Notes to Consolidated Financial Statements, Note 14-Litigation. Interest Expense/Income Interest expense of $4.2 million and $4.4 million in 1995 and 1994, respectively, primarily related to interest costs on the $50 million, 7 3/4% convertible subordinated debentures due 2002 (the "Debentures") issued in December 1992. Interest income increased to $2.0 million in 1995 from $1.4 million in 1994 primarily as a result of higher interest rates on approximately the same average cash balances. See Liquidity and Capital Resources. 1994 COMPARED TO 1993 Net Sales. The number of pairs sold worldwide increased by 9.9% to 22.9 million pairs in 1994 from 20.9 million pairs in 1993. However, the Company's net sales increased by 4.4% to $416.0 million from $398.4 million in the prior year due to a reduction in the average selling prices. Domestic net sales increased 3.9% from the prior year. International net sales, which accounted for approximately 28.5% of the Company's total net sales, increased by 5.7% from the previous year. The increase in net sales was primarily attributable to strong sales of children's products which experienced a 36.7% increase in the number of pairs sold worldwide and sales of $39.6 million to Wal-Mart during 1994, partially offset by a 17.8% reduction in the number of pairs of women's shoes and a decline in average selling prices. The sales to Wal-Mart consisted of $18.7 million (1.2 million pairs) of selected excess inventory during the first quarter and $20.9 million (1.3 million pairs) of full priced product in the fourth quarter. In fiscal 1994, the average selling price per pair domestically and internationally decreased from fiscal 1993 by $0.88 and $1.12 to $17.98 and $17.71, respectively. These decreases were primarily due to sales of excess inventory at reduced prices worldwide and the Company's strategy to provide value priced products. Sales of the Company's children's shoes increased from the prior year as a result of continued customer demand for the Company's L.A. LIGHTS(R) and Light GEAR(TM), one of the most successful shoe collections in the Company's history. The Company sold approximately 8.1 million pairs of children's lighted shoes during 1994. Sales of children's lighted shoes accounted for 74.2% and 62.3% of total children's net sales during 1994 and 1993, respectively. Internationally, sales of children's shoes increased by 63.7% from the prior year primarily due to increased demand for children's lighted products. Sales of the Company's women's shoes decreased by $28.7 million or 24.4% from the prior year primarily due to a drop in the number of pairs sold worldwide resulting from reduced customer demand, and, to a lesser extent, to a decrease in the average selling price per pair. 3 The following table sets forth certain information regarding the Company's net sales.
NET SALES ----------------------------------- 1994 1993 --------------- --------------- $ % $ % - - ------------------------------------------------------------------------- (DOLLARS IN THOUSANDS) DOMESTIC FOOTWEAR CHILDREN'S $165,460 40% $128,458 32% WOMEN'S 63,218 15 82,771 21 MEN'S 67,186 16 73,132 18 OTHER 1,721 1 1,959 1 -------- ---- -------- --- TOTAL DOMESTIC SALES 297,585 72 286,320 72 INTERNATIONAL FOOTWEAR AND OTHER 118,381 28 112,038 28 - - ------------------------------------------------------------------------ TOTAL NET SALES $415,966 100% $398,358 100% ======== ==== ======== ===
The following table sets forth the percentage changes, by Children's, Women's and Men's categories, in the number of pairs sold during 1994 as compared to 1993:
CHANGES BETWEEN 1994 AND 1993 ------------------------------ VOLUME OF FOOTWEAR SOLD DOMESTIC INTERNATIONAL TOTAL - - --------------------------------------------------------------------------- CHILDREN'S 30.4 % 63.7 % 36.7 % WOMEN'S (17.9)% (17.5)% (17.8)% MEN'S 4.1 % 0.6 % 2.7 % - - --------------------------------------------------------------------------- TOTAL VOLUME INCREASE 9.1 % 11.9 % 9.9 %
Gross Profit Gross profit increased to 29.7% for 1994 from 28.7% in 1993 primarily due to the improvement in the international gross margin to 30.0% from 25.6% in the prior year. Such improvement was principally due to (i) an increase of $1.02 per pair in the children's average selling price, (ii) increased refunds of U.S. import duties primarily arising from international shipments of excess inventory from the Company's U.S. distribution center, and (iii) the inclusion for a full year of the Company's foreign subsidiaries acquired or formed in fiscal 1993 in Germany, Austria, Benelux, Italy and the United Kingdom, together with the Far East joint venture, formed in December 1993. By selling through the subsidiaries, the Company realizes a wholesale margin on the sale to the retailer which is greater than that on the sales to independent distributors. The Company's gross margin on domestic sales decreased to 29.5% in 1994 from 29.9% in 1993 as a result of increased sales of excess inventory at lower margins partially offset by a reduction in air freight costs. Selling, General and Administrative Expenses Cost control and containment efforts continued through 1994. Exclusive of restructuring charges of (i) $2.5 million in 1994 for payments due under contractual obligations to certain individuals upon realignment of the Company's senior management and (ii) $2.6 million in 1993 for severance payments, benefits and outplacement costs associated with a workforce reduction of approximately 120 employees, total selling, general and administrative expenses decreased by $3.4 million or 2.3% to $141.4 million during fiscal 1994 from $144.8 million during 1993. Domestic selling, general and administrative expenses (exclusive of non- recurring charges) decreased by $11.1 million or 9.3% in 1994. This decrease includes reductions in (i) compensation expenses of $5.8 million, (ii) bad debt expense of $2.8 million, (iii) advertising and promotional expenses of $1.9 million and (iv) media costs of $1.6 million, partially offset by increases in (i) legal fees of $1.9 million for litigation, general corporate and intellectual property issues and (ii) product sourcing fees of $1.1 million. International expenses increased by $7.3 million in 1994 primarily as a result of additional operating costs of the Far East joint venture, the Company's Mexican subsidiary (formed in June 1994) and the inclusion of the European subsidiaries' expenses for a full year. There were no significant exchange gains or losses in 1994 or 1993 as a result of the Company's foreign operations. As a percentage of net sales, selling, general and administrative expenses (exclusive of non-recurring charges) decreased to approximately 34% in 1994 from approximately 36% in 1993. Changes in the Company's selling, general and administrative expenses cannot be directly related to fluctuations in sales volume as a substantial 4 portion of expenses are (i) fixed in nature, such as compensation and benefits for management and administrative personnel, rent, insurance, depreciation and other overhead charges or (ii) incurred to benefit future periods, such as media, advertising and trade show expenses. Litigation Settlements, Net Fiscal 1994 results include a net credit of $1.3 million representing settlement income primarily in connection with trademark and patent infringement lawsuits partially offset by expenses relating to the settlement of employment litigation and a dispute with a former distributor. Fiscal 1993 results include a credit of $2.7 million relating to the partial recovery of the fiscal 1992 charges for the settlement by the Company of three separate consolidated shareholder class action lawsuits and related actions. See Notes to Consolidated Financial Statements, Note 14 - Litigation. Interest Expense/Income Interest expense during 1994 of $4.4 million primarily related to (i) interest costs on the Debentures issued in December 1992 and (ii) short-term borrowings of the Company's foreign subsidiaries. Interest expense increased by $0.5 million in fiscal 1994 compared to fiscal 1993 primarily due to the inclusion of the foreign subsidiaries' operations for a full year in 1994. Interest income decreased to $1.4 million in 1994 from $1.9 million in 1993 primarily as a result of lower average cash balances in fiscal 1994. See Liquidity and Capital Resources. LIQUIDITY AND CAPITAL RESOURCES The following table sets forth certain data with respect to the Company's liquidity and capital resources.
YEAR ENDED NOVEMBER 30, ----------------------- 1995 1994 1993 - - ------------------------------------------------------------------------------------------- (IN THOUSANDS, EXCEPT INTEREST RATES) CASH AND CASH EQUIVALENTS $ 35,956 $ 49,710 $ 27,790 WORKING CAPITAL 103,999 147,848 161,948 CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES (11,212) 28,369 (66,763) CASH USED IN INVESTING ACTIVITIES (3,256) (4,448) (22,377) CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES 622 (1,016) 32,999 OUTSTANDING LETTERS OF CREDIT 24,440 36,699 33,553 BORROWINGS UNDER INTERNATIONAL CREDIT FACILITIES 1,233 557 3,737 CONVERTIBLE SUBORDINATED DEBENTURES 50,000 50,000 50,000 MANDATORILY REDEEMABLE PREFERRED STOCK PLUS ACCRUED AND UNPAID DIVIDENDS 107,746 100,000 100,000 WEIGHTED AVERAGE INTEREST RATES ON CREDIT FACILITIES 8.2% 8.3% 9.0%
Cash and Cash equivalents Cash and cash equivalent balances decreased by $13.8 million from November 30, 1994 to a balance of $36.0 million at November 30, 1995 primarily due to cash used to fund operating losses offset by reduced working capital requirements. Inventory Although inventory decreased by $5.9 million from $57.6 million at November 30, 1994 to $51.7 million at November 30, 1995, the number of pairs increased by 0.3 million pairs at November 30, 1995. The increase in the number of pairs was primarily due to inventory purchased in anticipation of sales that did not materialize during the Company's fourth quarter. The decrease in the value of the inventory was due to a reduction in the average cost per pair as a result of the Company's focus on offering more value priced products for men and women, a reduced emphasis on more expensive performance athletic footwear and sales of a product line developed for Wal-Mart. Accounts Receivable, Net Net accounts receivable at November 30, 1995 decreased by $30.7 million from the prior year primarily due to reduced domestic sales during October and November 1995 (including a $13.7 million reduction in sales to Wal-Mart) compared to the same period in 1994. Borrowing Facilities The Company has a $75 million revolving line of credit with BankAmerica Business Credit, Inc. ("BABC") for loans and letters of credit (the "Revolving Facility"). The Revolving Facility is secured primarily by the Company's domestic assets and is subject to certain financial covenants. Borrowings under the 5 Revolving Facility bear interest at a rate equal to Bank of America's publicly announced reference rate plus one and one-half percent. The Company may incur cash borrowings up to $10 million. There were no domestic cash borrowings under the Revolving Facility at any time during fiscal 1995. At November 30, 1995 approximately $23.6 million of domestic letters of credit were outstanding under the Revolving Facility. The Revolving Facility is scheduled to expire in November 1996, but will automatically be renewed for an additional one-year period unless either the Company or BABC delivers written notice to the contrary to the other party on or before September 23, 1996. The Company is currently evaluating all available options regarding sources of working capital. There can be no assurance, however, that such funding can be obtained on terms acceptable to the Company. The Company's German subsidiary had a $1.4 million credit facility in 1995 which was denominated in local currency and converted to U.S. dollars at the end-of-period exchange rate. The facility expired in December 1995 and the balance outstanding was repaid in January 1996. In fiscal 1995 the maximum borrowing under the facility at any time amounted to $1.4 million and the balance outstanding at November 30, 1995 was $1.2 million. The weighted average interest rate, as defined in the agreement and adjusted for current market conditions, was 8.3% as of November 30, 1995. The Company's Dutch subsidiary had a $4.9 million credit facility for the first seven months of fiscal 1995. At no time during fiscal 1995 did borrowings under this facility exceed $0.6 million. The Company believes that it has the ability to meet the financing needs, if any, of its foreign subsidiaries for the foreseeable future. See Short and Long-Term Liquidity. Convertible Debentures The $50 million Debentures are convertible into shares of the Company's Common Stock at a conversion rate of $12.30 per share, and are redeemable by the Company at any time, initially at a specified premium to par, declining to par for redemptions on or after November 30, 2000. The proceeds from the Debentures were primarily used for the implementation of the Company's international expansion program. Series A Cumulative Convertible Preferred Stock The Company determined that it was in its best interests not to, and it did not, pay the $1.875 million dividend on the Series A Cumulative Convertible Preferred Stock ("Series A Preferred Stock") due on each of February 28, 1995, May 31, 1995, August 31, 1995 and November 30, 1995 to Trefoil Capital Investors, L.P. ("Trefoil"), the holder of all of the issued and outstanding shares of Series A Preferred Stock. As of November 30, 1995, such dividend arrearage amounted to a total of $7.746 million. The Company is required to redeem 350,000 shares of the original issue of one million shares of Series A Preferred Stock on August 31, 1996, and 162,500 shares on each August 31 thereafter until all remaining shares of the Series A Preferred Stock have been redeemed. If the Company fails to redeem shares of the Series A Preferred Stock when required, the annual dividend rate on the outstanding shares of Series A Preferred Stock will be increased to 10.125% (compounded quarterly with respect to dividends in arrears at a rate of 11.644% per annum) of the stated value of such shares from the date of failure to redeem through the date of redemption. The Company believes that it is unlikely it will be able to satisfy the mandatory $35 million redemption obligation plus the accrued and unpaid dividends with respect to the Series A Preferred Stock from its cash flow from operations and its existing bank facility. Accordingly, in December 1995 the Company entered into an agreement with Trefoil providing for the exchange of all $100 million of the Company's Series A Preferred Stock, together with all accrued and unpaid dividends thereon, for a new issue of Series B Preferred Stock (the "Share Exchange Transaction"). The terms of the Series B Preferred Stock provide for, among other things, the elimination of the entire mandatory redemption feature of the Series A Preferred Stock and a reduction in the conversion price from $10.00 to $6.75 per common share. In addition, under the terms of the Series B Preferred Stock, the Company would be entitled, at its option, to pay dividends during the fiscal year ending November 30, 1996 in either additional shares of Series B Preferred Stock or in cash. The coupon rate of 7.5% per annum for dividends with respect to the Series B Preferred Stock remains unchanged from that of the Series A Preferred Stock. The proposed Share Exchange Transaction has been recommended by a Special Committee of independent members of the Board of Directors and has been approved by the Board of Directors. The Share Exchange Transaction, which is subject to certain conditions including the receipt of shareholder approval, will be considered at a special meeting of shareholders to be held in April 1996. If the proposed Share Exchange Transaction is not approved by the shareholders, the Company will explore the availability of new capital to satisfy the initial $35 million mandatory redemption obligation plus the accrued and unpaid dividends with respect to the Series A Preferred Stock due on August 31, 1996. The Company believes that it would be difficult to secure such funding on terms acceptable to the Company. 6 Investment Policies The Company's cash investment policy allows the investment of available cash in accordance with certain quality, maturity and diversification parameters. The basic objectives of this policy are: (i) safety and preservation of capital; (ii) liquidity of investments sufficient to meet cash flow requirements; and (iii) attainment of an optimal market rate of return on invested funds consistent with the stated objectives. Forward Exchange Contracts The Company enters into forward exchange contracts, with terms of less than one year, to offset the effects of exchange rate changes on cash flow exposures denominated in foreign currencies. These exposures are primarily repayments of U.S. dollar denominated liabilities by the Company's foreign subsidiaries. These contracts are marked to market and realized and unrealized gains and losses are recognized in the consolidated statement of operations. Capital Expenditures Capital expenditures of $3.3 million in 1995 included $1.0 million for leasehold improvements and equipment for the domestic distribution center, $0.7 million in leasehold improvements and equipment purchases for the international subsidiaries and joint venture; and $0.5 million in computer equipment for the field sales force. The remaining $1.1 million primarily related to domestic expenditures. Commitments In the normal course of business the Company enters into various agreements for obtaining footwear technology, product sourcing, endorsements and sponsorships. In addition, the Company occupies certain facilities, including corporate offices and distribution centers and rents certain equipment under operating leases. Agreements and lease commitments with terms extending through the year 2002 contain provisions for future guaranteed minimum payments aggregating approximately $35 million. There were no commitments for any material capital expenditures at November 30, 1995. Income Taxes At November 30, 1995, the Company had a federal tax net operating loss ("NOL") carryforward of approximately $73.5 million which will, if unused, expire in varying amounts in fiscal years 2007 through 2010. The Company also has a federal alternative minimum tax credit carryforward of approximately $3.2 million (available to offset future regular tax liabilities) which may be carried forward indefinitely. California franchise tax NOL carryforwards of approximately $76.2 million will, if unused, expire primarily in fiscal year 1998. In addition, the Company has other state and foreign NOL carryforwards with varying limitations on future utilization. Short and Long-Term Liquidity The short-term and long-term liquidity of the Company is contingent primarily on the Company's future operating results, shareholder approval of the proposed Share Exchange Transaction and certain other factors. The Company believes that its present funding sources are sufficient to sustain the Company's anticipated short-term and long-term liquidity needs (other than with respect to the initial $35 million mandatory redemption obligation plus the accrued and unpaid dividends on August 31, 1996 under the Series A Preferred Stock, which obligation will be eliminated if the proposed Share Exchange Transaction is approved). These needs are based on a number of factors including the size of the business and related working capital needs, the extent of the international subsidiaries' funding requirements, the extent to which the Company seeks to acquire or license other footwear brands and the level of domestic operating costs. In the event that the Company's future operating results fall below management's expectations, additional sources of working capital funding may be necessary and difficult to obtain. The Company may also need additional financing for future acquisitions which may be difficult to secure. EFFECT OF NEW ACCOUNTING PRONOUNCEMENTS In March 1995, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards ("SFAS") No. 121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of. SFAS No. 121 is required to be implemented by the Company for the fiscal year beginning December 1, 1996 and is not expected to have a material impact on the Company's financial position or results of operations. In October 1995, the Financial Accounting Standards Board issued SFAS No. 123, Accounting for Stock-Based Compensation. The Company will adopt only the disclosure provisions of SFAS No. 123 beginning in the year ending November 30, 1996. The adoption of SFAS No. 123 will not have a material impact on the Company's financial position or results of operations. 7 OUTLOOK FOR FISCAL 1996 The Company's greatest challenge is to increase revenue and sales velocity in an intensely competitive branded athletic footwear market. Toward that end, one of the key priorities of the corporate reorganization plan adopted by the Company in September 1995 is to bring on-trend products to market in a reduced amount of time. The Company plans to accomplish quicker product introductions by, among other things, improving design capabilities, better utilizing product development resources and strengthening relationships with factories and sourcing agents. With its 1996 product lines and advertising campaigns, the Company continues its efforts to focus upon its heritage as a premier designer and marketer of women's and children's footwear. In March 1996, the Company will launch a worldwide print campaign featuring its 1996 women's collection, which communicates an "L.A." attitude of fun, fashion and fitness. The 1996 men's collection will offer a "Comfort Zone" package featuring anatomically adjusted lasts, a comfort-flex forefoot, ABS(TM) shock absorption and an "Impact Sensor(TM)" sock liner. During 1996, the Company is introducing two innovative children's product lines in an effort to expand its significant presence in the under 12 year old segment of the athletic footwear market. The Company continues to believe in the viability of lighted footwear, the best selling product category in the Company's history. The NEONZ(TM) collection (scheduled for introduction in late second quarter of fiscal 1996) represents the Company's next generation of lighted footwear. For the first time, lighted panels on the shoe's upper will illuminate when the foot moves. The Company also plans to introduce GRAf/x(TM), a new non-lighted technology for the Back-to-School season. GRAf/x(TM) is a temperature sensitive collection that allows children to change the color of the upper, reveal a pattern or personalize their footwear by writing on their shoes. The Company has implemented cost reduction measures targeted to reduce operating expenses by approximately $25 million on an annualized basis. Such measures included a 30% reduction in the Company's workforce in September 1995 and the closure of its seven retail outlet stores. The Company's efforts to maintain tight overhead and working capital controls have been enhanced by, among other things, the elimination of underutilized sponsorships and licenses, in-house production of sales catalogs and selected initial footwear prototypes, the simplification of customer discount programs and office space consolidation. In June 1994, the Company entered into an agreement with Wal-Mart for the anticipated purchase of a minimum of $80 million of L.A. Gear branded footwear in each of the Company's 1995, 1996 and 1997 fiscal years (subject to reduction or elimination in 1996 and 1997 if sell-through did not meet certain designated sell-through targets.) Under the terms of the contract Wal-Mart is not subject to a minimum purchase commitment for the Company's fiscal 1996. The Company believes that it has established a better working relationship with Wal-Mart which should allow the Company to provide a product mix which better satisfies the footwear needs of the Wal-Mart customer. The Company had a combined domestic and international order backlog of $88.0 million and $170.5 million at December 31, 1995 and 1994, respectively. The lower backlog at December 31, 1995 is primarily due to (i) the inclusion in the backlog at December 31, 1994 of the entire $80 million minimum purchase commitment for fiscal 1995 under the Company's agreement with Wal-Mart, (ii) an approximate $19.6 million decrease in orders for children's lighted product and (iii) the institution of an early futures discount program for orders scheduled to ship in the third quarter of fiscal 1995. The backlog at December 31, 1995 includes the balance of Wal-Mart's $80 million minimum purchase commitment for fiscal 1995 ($29.5 million), substantially all of which the Company expects Wal-Mart to fulfill in the first quarter of the Company's fiscal 1996. Approximately 27.3% of the December 31, 1995 backlog was for children's lighted shoes compared to 25.3% at December 31, 1994. Shipments and sales for future periods depend on, among other things, the combination of "futures" and "at- once" orders. Accordingly, the comparison of backlog from period to period may not be indicative of eventual actual shipments. The Company believes that the athletic footwear market is facing a major consolidation at the wholesale level. The Company will continue to seek to recognize and capitalize on opportunities to expand its product lines and distribution channels through the licensing of key trade names and the acquisition of other footwear brands. 8 L.A. GEAR, INC. AND SUBSIDIARIES Consolidated Balance Sheets (in thousands, except share data)
NOVEMBER 30, ----------------------- 1995 1994 ---------- ---------- ASSETS Current assets: Cash and cash equivalents $ 35,956 $ 49,710 Accounts receivable, net 46,630 77,284 Inventories 51,677 57,597 Prepaid expenses and other current assets 3,773 9,827 -------- -------- Total current assets 138,036 194,418 Property and equipment, net 8,290 11,951 Goodwill, net 11,191 12,317 Other assets 2,058 5,777 -------- -------- $159,575 $224,463 ======== ======== LIABILITIES, MANDATORILY REDEEMABLE PREFERRED STOCK AND SHAREHOLDERS' (DEFICIT) EQUITY Current liabilities: Accounts payable and accrued liabilities $ 32,804 $ 46,013 Borrowings under international credit facilities 1,233 557 -------- -------- Total current liabilities 34,037 46,570 -------- -------- 7 3/4% convertible subordinated debentures due 2002 50,000 50,000 -------- -------- Minority interest 8,419 9,744 -------- -------- Mandatorily redeemable preferred stock: 7.5% Series A cumulative convertible preferred stock, $100 stated value; 1,000,000 shares authorized, issued and outstanding; redemption value of $100 per share plus accrued and unpaid dividends 107,746 100,000 -------- -------- Shareholders' (deficit) equity: Common stock, no par value; 80,000,000 shares authorized; 22,936,433 shares issued and outstanding at November 30, 1995 and 1994 128,093 128,093 Preferred stock, no stated value; 9,000,000 shares authorized; no shares issued -- -- Cumulative currency translation adjustment 561 194 Accumulated deficit (169,281) (110,138) -------- -------- Total shareholders' (deficit) equity (40,627) 18,149 -------- -------- Commitments and contingencies -- -- -------- -------- $159,575 $224,463 ======== ========
See accompanying Notes to Consolidated Financial Statements. 9 L.A. GEAR, INC. AND SUBSIDIARIES Consolidated Statements of Operations (in thousands, except per share data)
YEAR ENDED NOVEMBER 30, --------------------------------- 1995 1994 1993 -------- -------- -------- Net sales $296,551 $415,966 $398,358 Cost of sales 207,802 292,629 284,133 -------- -------- -------- Gross profit 88,749 123,337 114,225 Selling, general and administrative expenses 141,603 143,913 147,369 Litigation settlements, net (2,323) (1,268) (2,700) Interest expense 4,174 4,437 3,956 Interest income (1,984) (1,444) (1,887) -------- -------- -------- Loss before income taxes and minority interest (52,721) (22,301) (32,513) Income tax benefit -- -- -- Minority interest 1,324 106 -- -------- -------- -------- Net loss (51,397) (22,195) (32,513) Dividends on mandatorily redeemable preferred stock (7,746) (7,500) (7,667) -------- -------- -------- Loss applicable to common stock $(59,143) $(29,695) $(40,180) ======== ======== ======== Loss per common share $ (2.58) $ (1.29) $ (1.75) ======== ======== ======== Weighted average common shares outstanding 22,937 22,937 22,919 ======== ======== ========
See accompanying Notes to Consolidated Financial Statements. 10 L.A. GEAR, INC. AND SUBSIDIARIES Consolidated Statements of Shareholders' (Deficit) Equity (in thousands)
YEARS ENDED NOVEMBER 30, 1995, 1994 AND 1993 ------------------------------------------------------------ CUMULATIVE COMMON STOCK CURRENCY ----------------- TRANSLATION ACCUMULATED SHARES AMOUNT ADJUSTMENT DEFICIT TOTAL ------ -------- ------------ ------------ ---------- BALANCE, NOVEMBER 30, 1992 22,898 $127,714 $ -- $ (40,263) $ 87,451 Exercise of stock options 17 121 -- -- 121 Issuance of shares to employee stock savings plan 20 241 -- -- 241 Currency translation adjustment -- -- (836) -- (836) Dividends on mandatorily redeemable preferred stock -- -- -- (7,667) (7,667) Net loss -- -- -- (32,513) (32,513) ------ -------- ----------- --------- -------- BALANCE, NOVEMBER 30, 1993 22,935 128,076 (836) (80,443) 46,797 Exercise of stock options 2 17 -- -- 17 Currency translation adjustment -- -- 1,030 -- 1,030 Dividends on mandatorily redeemable preferred stock -- -- -- (7,500) (7,500) Net loss -- -- -- (22,195) (22,195) ------ -------- ----------- --------- -------- BALANCE, NOVEMBER 30, 1994 22,937 128,093 194 (110,138) 18,149 Currency translation adjustment -- -- 367 -- 367 Dividends on mandatorily redeemable preferred stock -- -- -- (7,746) (7,746) Net loss -- -- -- (51,397) (51,397) ------ -------- ----------- --------- -------- BALANCE, NOVEMBER 30, 1995 22,937 $128,093 $ 561 $(169,281) $(40,627) ====== ======== =========== ========= ========
See accompanying Notes to Consolidated Financial Statements. 11 L.A. GEAR, INC. AND SUBSIDIARIES Consolidated Statements of Cash Flows (in thousands)
YEAR ENDED NOVEMBER 30, -------------------------------- 1995 1994 1993 --------- -------- --------- Operating activities: Net loss $(51,397) $(22,195) $(32,513) Adjustments to reconcile net loss to net cash provided by (used in) operating activities: Depreciation and amortization 7,266 8,818 8,644 Minority interest in net loss of joint venture (1,324) (106) -- Loss on sale or abandonment of property and equipment 417 72 317 Increase in reserve for unused barter credits 4,568 -- -- Write off of goodwill 1,012 -- -- Issuance of shares to employee stock savings plan -- -- 241 Unrealized exchange gain (570) -- -- (Increase) decrease, net of effects of acquisitions, in: Accounts receivable, net 30,603 (4,676) (7,622) Inventories 6,100 53,587 (39,927) Prepaid expenses and other current assets 3,320 58 (9,327) Refundable income taxes -- -- 23,835 Other assets 1,624 -- -- Decrease, net of effects of acquisitions, in: Accounts payable and accrued liabilities (12,831) (6,180) (6,870) Costs related to discontinued operations - (1,009) (3,541) -------- ------- -------- Net cash provided by (used in) operating activities (11,212) 28,369 (66,763) -------- ------- -------- Investing activities: Capital expenditures (3,256) (3,969) (5,307) Cash paid for acquisition of subsidiaries, net of cash acquired -- (479) (17,070) -------- ------- -------- Net cash used in investing activities (3,256) (4,448) (22,377) -------- ------- -------- Financing activities: Payment of dividends on mandatorily redeemable preferred stock -- (7,500) (15,413) Proceeds from minority's investment in joint venture -- 9,850 -- Exercise of stock options and warrants -- 17 121 Net proceeds from issuance of convertible subordinated debentures -- -- 47,689 Net borrowings (repayments) under international credit facilities 622 (3,383) 602 -------- ------- -------- Net cash provided by (used in) financing activities 622 (1,016) 32,999 -------- ------- -------- Effect of exchange rate changes on cash and cash equivalents 92 (985) (51) -------- ------- -------- Net increase (decrease) in cash and cash equivalents (13,754) 21,920 (56,192) Cash and cash equivalents at beginning of year, including collateralized cash 49,710 27,790 83,982 -------- ------- -------- Cash and cash equivalents at end of year $ 35,956 $49,710 $ 27,790 ======== ======= ========
See accompanying Notes to Consolidated Financial Statements. 12 L.A. GEAR, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements NOTE 1. BACKGROUND AND ORGANIZATION - - ------ --------------------------- L.A. Gear, Inc., incorporated on February 7, 1979 in the State of California, designs, develops and markets a broad range of quality athletic and lifestyle footwear for adults and children. NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - - ------ ------------------------------------------ BASIS OF PRESENTATION - - --------------------- The consolidated financial statements include the accounts of L.A. Gear, Inc. and its subsidiaries (collectively referred to as the "Company"). All significant intercompany balances and transactions have been eliminated in consolidation. REVENUE RECOGNITION - - ------------------- Revenues are recognized when title passes based on the terms of the sale. Sales are recorded net of returns, discounts and allowances. CASH AND CASH EQUIVALENTS - - ------------------------- Cash equivalents are all highly liquid, temporary cash investments, primarily institutional money market funds. BARTER TRANSACTIONS - - ------------------- The Company records barter transactions based on the fair value of nonmonetary assets, primarily inventory, surrendered. Fair market value is presumed to be the asset's carrying value, adjusted for any impairment, so that no gain is recognized on the barter transaction. Impairment losses on the barter credits are recognized when the fair value of remaining barter credits is less than the carrying amount or it is probable that the barter credits will not be used. INVENTORIES - - ----------- Inventories, substantially all of which consist of purchased finished goods, are stated at the lower of first-in, first-out (FIFO) cost or market. The Company establishes inventory obsolescence reserves adjusting the inventory for any impairment in carrying cost to the estimated net realizable value. PROPERTY AND EQUIPMENT - - ---------------------- Property and equipment are recorded at cost and include improvements that significantly add to the productive capacity or extend the useful life of the asset. The costs of major remodeling and improvements relating to leased facilities are capitalized as leasehold improvements. Upon retirement or other disposal, the asset cost and related accumulated depreciation are removed from the accounts and the net amount, less any proceeds, is charged or credited to operations. Costs of maintenance and repairs are expensed when incurred. Depreciation and amortization are computed over the estimated useful lives of depreciable assets (three to seven years) on the straight-line method. Leasehold improvements are amortized using the straight-line method over the shorter of the remaining term of the applicable lease or the life of the asset. 13 L.A. GEAR, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements GOODWILL - - -------- The excess of the acquisition cost over the fair value of the net assets of businesses acquired in purchase transactions has been included in goodwill and is amortized, using the straight-line method, over the period of expected benefit of 15 years. The carrying value of goodwill is assessed for any permanent impairment by evaluating the operating performance and future undiscounted cash flows of the underlying businesses. Adjustments are made if the sum of the expected future net cash flows is less than carrying value. Statement of Financial Accounting Standard ("SFAS") No. 121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of, requires that long-lived assets be reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of assets may not be recoverable. SFAS No. 121 is required to be implemented by the Company for the fiscal year beginning December 1, 1996 and is not expected to have a significant impact on the Company's financial position or results of operations. FOREIGN CURRENCY TRANSLATION - - ---------------------------- The U.S. dollar is the functional currency for the Company's consolidated operations except for its foreign subsidiaries which use the currency of their respective countries. Adjustments resulting from translating foreign functional currency financial statements into U.S. dollars are recorded in a separate component of shareholders' equity. FORWARD EXCHANGE CONTRACTS - - -------------------------- The Company enters into forward exchange contracts, with terms of less than one year, to offset the effects of exchange rate changes on cash flow exposures denominated in foreign currencies. These exposures are primarily repayments of U.S. dollar denominated liabilities by the Company's foreign subsidiaries. These contracts are marked to market and realized and unrealized gains and losses are recognized in the consolidated statement of operations. ADVERTISING AND PROMOTIONAL EXPENDITURES - - ---------------------------------------- The Company recognizes advertising and promotional expenses as incurred, or, in the case of endorsement contracts, on the straight-line amortization basis over the term of the contract. LOSS PER COMMON SHARE - - --------------------- Loss per common share has been computed based on the loss applicable to common stock (net loss plus dividends on mandatorily redeemable preferred stock) divided by the weighted average number of common shares outstanding during each period. INCOME TAXES - - ------------ In December 1993, the Company adopted SFAS No. 109, Accounting for Income Taxes, which mandates the liability method of accounting for income taxes. Under SFAS No. 109, deferred tax liabilities are recognized for taxable temporary differences and deferred tax assets are recognized for deductible temporary differences and tax loss and credit carryforwards. A valuation allowance is established to reduce deferred tax assets if some, or all, of such deferred tax assets are not likely to be realized. The adoption of SFAS No. 109 did not have a material impact on the Company's financial position or results of operations. 14 L.A. GEAR, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements MINORITY INTEREST - - ----------------- In December 1993, a joint venture was formed with Inchcape Pacific Limited ("Inchcape"), a wholly owned subsidiary of Inchcape plc, to engage in the marketing, distribution and sales of L.A. Gear(R) branded footwear, apparel and accessories in selected Far East markets. The Company contributed the rights to distribute L.A. Gear branded products for a 50% share in the joint venture. Profits and losses are allocated based on specific terms of the joint venture agreement. The Company has a unilateral purchase option to acquire a majority interest in the joint venture and, accordingly, the Company has consolidated the accounts of the joint venture. Minority interest represents Inchcape's interest in the equity of the joint venture. CONCENTRATION OF CREDIT RISK - - ---------------------------- The Company sells its products to retailers and other customers and extends credit based on an evaluation of the customer's financial condition, generally without requiring collateral. Exposure to losses on receivables is principally dependent on each customer's financial condition. The Company closely monitors its exposure to credit risk and maintains allowances for anticipated losses. See Note 5 - Accounts Receivable. STOCK OPTIONS - - ------------- In October 1995, the Financial Accounting Standards Board issued SFAS No. 123, Accounting for Stock-Based Compensation. The Company will adopt only the disclosure provisions of SFAS No. 123 beginning in the year ending November 30, 1996. The adoption of SFAS No. 123 will not have a material impact on the Company's financial position or results of operations. RECLASSIFICATIONS - - ----------------- Certain reclassifications have been made to 1994 and 1993 amounts in order to conform to the 1995 presentation. NOTE 3. BUSINESS ACQUISITIONS - - ------ --------------------- Effective June 8, 1994, the Company acquired for $2.0 million certain assets of the Company's exclusive distributor (and one of its affiliates) in Mexico. The excess of the purchase price over the estimated fair value of net assets acquired in such transaction, amounting to $1.1 million, was recorded as goodwill. The purchase price for the acquisition was settled by reducing the balance on outstanding amounts owed by the distributor to the Company. The acquisition was accounted for under the purchase method and, accordingly, the acquired assets have been recorded at their estimated fair value at the effective date of the acquisition. As a result of the economic crisis and the devaluation of the peso in Mexico, there is uncertainty as to the volume of business which can be achieved in the future. Accordingly, in 1995 the remaining goodwill balance of approximately $1.0 million was written off. Effective March 1, 1993, the Company acquired for $8.3 million in cash all of the share capital of the exclusive distributor of the Company's products in Germany. During 1993, the Company also acquired for $8.7 million in cash (i) all of the share capital of the Company's exclusive distributor in the Netherlands and (ii) certain assets and assumed certain liabilities of its exclusive distributors in the United Kingdom, Belgium and Austria. The excess of the consideration paid over the estimated fair value of net assets acquired in such transactions, amounting to $11.5 million, has been recorded as goodwill. Each of these acquisitions was accounted for under the purchase method and the consolidated results of operations of the Company include those of the acquired subsidiaries since the effective dates of acquisition. 15 L.A. GEAR, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements The pro forma results of operations for the years ended November 30, 1994 and 1993, assuming the above acquisitions had taken place at the beginning of the respective periods, would not be materially different from the historical amounts reported. NOTE 4. SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION - - ------ -------------------------------------------------
1995 1994 1993 - - --------------------------------------------------------------------------------------- (IN THOUSANDS) CASH PAID (RECEIVED) DURING THE YEAR FOR: INTEREST PAID $ 4,186 $ 4,433 $ 4,037 ======= ======= ======= INTEREST RECEIVED $(1,984) $(1,444) $ (2,065) ======= ======= ======== INCOME TAXES, NET $ -- $ -- $(24,404) ======= ======= ======== NONCASH INVESTING ACTIVITIES: ACQUISITION OF MEXICAN DISTRIBUTOR'S ASSETS $ -- $ 1,953 $ -- ======= ======= ======== NONCASH FINANCING ACTIVITIES: DIVIDENDS ACCRUED AND UNPAID ON MANDATORILY REDEEMABLE PREFERRED STOCK $ 7,746 $ -- $ -- ======= ======= ========
NOTE 5. ACCOUNTS RECEIVABLE - - ------ ------------------- Accounts receivable, net of allowance for doubtful accounts and merchandise returns, consist of the following:
NOVEMBER 30, ------------------- 1995 1994 - - ----------------------------------------------------------------- (IN THOUSANDS) TRADE RECEIVABLES DOMESTIC $23,125 $55,531 INTERNATIONAL 28,291 24,552 ------- ------- 51,416 80,083 OTHER RECEIVABLES 2,767 3,676 ------- ------- 54,183 83,759 LESS ALLOWANCE FOR DOUBTFUL ACCOUNTS AND MERCHANDISE RETURNS (7,553) (6,475) ------- ------- $46,630 $77,284 ======= =======
Domestic accounts receivable include $7.2 million and $20.9 million for Wal- Mart at November 30, 1995 and 1994, respectively. NOTE 6. PROPERTY AND EQUIPMENT - - ------ ---------------------- Property and equipment, net of accumulated depreciation and amortization, consist of the following:
NOVEMBER 30, ------------------------ 1995 1994 - - ------------------------------------------------------------- (IN THOUSANDS) COMPUTER SOFTWARE AND EQUIPMENT $ 15,949 $ 22,253 FURNITURE AND EQUIPMENT 6,384 11,046 LEASEHOLD IMPROVEMENTS 3,683 6,722 -------- -------- 26,016 40,021 LESS ACCUMULATED DEPRECIATION AND AMORTIZATION (17,726) (28,070) -------- -------- $ 8,290 $ 11,951 ======== ========
16 L.A. GEAR, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements NOTE 7. BANK BORROWINGS AND LIQUIDITY - - ------ ----------------------------- The Company has a $75 million revolving line of credit with BankAmerica Business Credit, Inc. ("BABC") for loans and letters of credit (the "Revolving Facility"). The Revolving Facility is secured primarily by the Company's domestic assets and is subject to certain financial covenants. Borrowings under the Revolving Facility bear interest at a rate equal to Bank of America's publicly announced reference rate plus one and one-half percent. The Company may incur cash borrowings up to $10 million. There were no domestic cash borrowings under the Revolving Facility at any time during fiscal 1995. At November 30, 1995 approximately $23.6 million of domestic letters of credit were outstanding under the Revolving Facility. The Revolving Facility is scheduled to expire in November 1996, but will automatically be renewed for an additional one-year period unless either the Company or BABC delivers written notice to the contrary to the other party on or before September 23, 1996. The Company is currently evaluating all available options regarding sources of working capital. There can be no assurance, however, that such funding can be obtained on terms acceptable to the Company. The Company's German subsidiary had a $1.4 million credit facility in 1995 which was denominated in local currency and converted to U.S. dollars at the end-of-period exchange rate. The facility expired in December 1995 and the balance outstanding was repaid in January 1996. In fiscal 1995 the maximum borrowing under the facility at any time amounted to $1.4 million and the balance outstanding at November 30, 1995 was $1.2 million. The weighted average interest rate, as defined in the agreement and adjusted for current market conditions, was 8.3% as of November 30, 1995. The Company's Dutch subsidiary had a $4.9 million credit facility for the first seven months of fiscal 1995. At no time during fiscal 1995 did borrowings under this facility exceed $0.6 million. The Company believes that it has the ability to meet the financing needs, if any, of its foreign subsidiaries for the foreseeable future. The short-term and long-term liquidity of the Company is contingent primarily on the Company's future operating results, shareholder approval of a proposed share exchange transaction (see Note 11 - Series A Cumulative Convertible Preferred Stock/Proposed Share Exchange Transaction) and certain other factors. The Company believes that its present funding sources are sufficient to sustain the Company's anticipated short-term and long-term liquidity needs (other than with respect to the initial $35 million redemption obligation plus the accrued and unpaid dividends on August 31, 1996 under the Series A Preferred Stock, which obligation will be eliminated if the proposed share exchange transaction is approved). These needs are based on a number of factors including the size of the business and related working capital needs, the extent of the international subsidiaries' funding requirements, the extent to which the Company seeks to acquire or license other footwear brands and the level of domestic operating costs. In the event that the Company's future operating results fall below management's expectations, additional sources of working capital funding may be necessary and difficult to obtain. The Company may also need additional financing for future acquisitions which may be difficult to secure. NOTE 8. FINANCIAL INSTRUMENTS - - ------- --------------------- The Company enters into forward contracts, with terms of less than one year, to offset the effects of exchange rate changes on cash flow exposures denominated in foreign currencies. The Company's foreign currency forward contracts at November 30, 1995 are listed below. All of the contracts mature no later than September 30, 1996. The currencies listed are in relation to the U.S. dollar and are converted at year- end market exchange rates. 17 L.A. GEAR, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements
FOREIGN CURRENCY CONTRACTS SOLD BOUGHT - - ----------------------------------------------------------- (IN MILLIONS) GERMAN MARK $ 3.5 $ 0.2 FRENCH FRANC 3.3 -- BRITISH POUND 3.9 -- DUTCH GUILDER 1.2 -- ITALIAN LIRA 4.7 -- ------- ------- $ 16.6 $ 0.2 ======= =======
NOTE 9. ACCOUNTS PAYABLE AND ACCRUED LIABILITIES - - ------ ---------------------------------------- Accounts payable and accrued liabilities consist of the following:
NOVEMBER 30, ----------------- 1995 1994 - - ------------------------------------------------------------------------ (IN THOUSANDS) ACCOUNTS PAYABLE $ 5,249 $ 7,146 OTHER ACCRUED LIABILITIES 15,388 22,490 ACCRUED INVENTORY PURCHASES 7,111 11,327 ACCRUED RESTRUCTURING AND NON-RECURRING CHARGES 2,755 2,435 ACCRUED ADVERTISING 2,301 2,615 ------- ------- $32,804 $46,013 ======= =======
Accounts payable include issued but uncleared checks of $3.0 million at November 30, 1994. In September 1995, the Company announced a corporate reorganization plan designed to reengineer key business processes, streamline the Company's organizational structure and substantially reduce operating expenses. The reorganization plan resulted in a restructuring charge of $5.1 million in 1995 primarily related to the elimination of approximately 160 full time jobs, the closure of the Company's retail outlet division and office space consolidation at the corporate headquarters. In addition, in 1995 the Company incurred non- recurring charges of $5.6 million in connection with (i) a $4.6 million increase in the reserve for unused barter credits and (ii) a $1.0 million write off of goodwill related to the acquisition of the Company's Mexican business. In 1994, the Company incurred non-recurring charges of $2.5 million for payments due under contractual obligations to certain individuals upon realignment of senior management. NOTE 10. CONVERTIBLE SUBORDINATED DEBENTURES - - ------- ----------------------------------- On December 24, 1992, the Company completed a private sale of $50 million aggregate principal amount of 7 3/4% Convertible subordinated debentures due 2002, ("the Debentures"). On June 18, 1993, the Debentures were registered under the Securities Act of 1933, as amended. The fair market value of the Debentures at November 30, 1995 was $17.5 million. The Debentures are convertible into shares of the Company's Common Stock (the "Common Stock") at a conversion rate of $12.30 per share, subject to certain anti-dilution adjustments, and are redeemable by the Company at any time initially at a specified premium to par, declining to par for redemptions on or after November 30, 2000. Interest is payable semi-annually on May 31 and November 30. The Debentures were delisted from the NASDAQ Small Cap Market, effective November 21, 1995, as a result of the Company's failure to comply with NASDAQ's capital and surplus requirements. The Company's $100 million of Series A mandatorily redeemable preferred stock is not included in the NASDAQ calculation of capital and surplus. Upon completion of the proposed share exchange transaction (see Note 11 - Series A Cumulative 18 L.A. GEAR, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements Convertible Preferred Stock/Proposed Share Exchange Transaction), the Company will exceed NASDAQ's capital and surplus requirements and expects the Debentures to be reinstated on the Small Cap Market. NOTE 11. SERIES A CUMULATIVE CONVERTIBLE PREFERRED STOCK/PROPOSED SHARE - - ------- --------------------------------------------------------------- EXCHANGE TRANSACTION - - -------------------- In September 1991, the Company consummated the sale of one million shares of Series A cumulative convertible preferred stock (the "Series A Preferred Stock") to Trefoil Capital Investors, L.P. ("Trefoil") for an aggregate purchase price of $100 million. As long as shares of Series A Preferred Stock remain outstanding, the holders of such shares are entitled to receive, when, as and if declared by the Board of Directors out of assets of the Company legally available therefor, cumulative cash dividends at an annual rate of 7.5% (if in arrears, compounded quarterly at a rate of 8.625% per annum with respect to dividends in arrears, through the date of payment of such arrearages), payable quarterly in arrears on the last business day of February, May, August and November. The Company determined it was in its best interest not to, and it did not, pay the $1.875 million dividend on the Series A Preferred Stock due to Trefoil on each of February 28, 1995, May 31, 1995, August 31, 1995 and November 30, 1995. As of November 30, 1995, such dividend arrearage amounted to a total of $7.746 million. Each share of Series A Preferred Stock is convertible at the option of the holder into ten shares of Common Stock at $10.00 per common share, subject to certain antidilution adjustments (the "Conversion Price"). The Series A Preferred Stock may be redeemed by the Company any time after the second anniversary of the issuance date (in integral multiples having an aggregate stated value of at least $15 million) if (i) all quarterly dividends on the Series A Preferred Stock have been paid in full and (ii) the market price of the Common Stock is equal to at least 175% of the Conversion Price for thirty consecutive trading days preceding the notice of redemption. In any such event, the redemption price per share will be equal to $100, plus accrued and unpaid dividends to the redemption date. The Company is required to redeem 350,000 shares of the original issue of one million shares of Series A Preferred Stock on August 31, 1996, and 162,500 shares on each August 31 thereafter until all remaining shares of Series A Preferred Stock have been redeemed. If the Company fails to redeem shares of Series A Preferred Stock when required, the annual dividend rate on the outstanding shares of Series A Preferred Stock will be increased to 10.125% (compounded quarterly with respect to dividends in arrears at a rate of 11.644% per annum) of the stated value of such shares plus accrued and unpaid dividends from the date of failure to redeem through the date of redemption. The Company believes that it is unlikely that it will be able to satisfy the mandatory $35 million redemption obligation plus the accrued and unpaid dividends with respect to the Series A Preferred Stock on August 31, 1996 from its cash flow from operations and its existing bank facility. Accordingly, in December 1995, the Company entered into an agreement with Trefoil providing for the exchange of all $100 million of the Company's Series A Preferred Stock, together with all accrued and unpaid dividends, for a new issue of Series B Preferred Stock (the "Share Exchange Transaction"). The terms of the Series B Preferred Stock provide for, among other things, the elimination of the mandatory redemption feature of the Series A Preferred Stock and a reduction in the conversion price from $10.00 to $6.75 per common share. In addition, under the terms of the Series B Preferred Stock, the Company would be entitled, at its option, to pay dividends during the fiscal year ending November 30, 1996 in either additional shares of Series B Preferred Stock or in cash. The coupon rate of 7.5% per annum for dividends with respect to the Series B Preferred Stock remains unchanged from that of the Series A Preferred Stock. The proposed Share Exchange Transaction has been recommended by a Special Committee of independent members of the Board of Directors, and has been approved by the Board of Directors. The Share Exchange Transaction, which is subject to certain conditions including the receipt of shareholder approval, will be considered 19 L.A. GEAR, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements at a special meeting of shareholders to be held in April 1996. If the proposed Share Exchange Transaction is not approved by the shareholders, the Company will explore the availability of new capital to satisfy the initial $35 million mandatory redemption obligation plus accrued and unpaid dividends with respect to the Series A Preferred Stock due on August 31, 1996. The Company believes that it would be difficult to secure such funding on terms acceptable to the Company. The Series A Preferred Stock has the right, voting as a separate class, to elect three of the Company's ten directors. Trefoil also currently has the right to elect an additional four members of an expanded board of fourteen as a result of the Company's decision not to pay dividends on the Series A Preferred Stock for the past four quarters. The Company has not received any notification from Trefoil as to its intent to exercise such right. Upon completion of the Share Exchange Transaction, those voting rights will terminate and the Series B Preferred Stock will vote with the Common Stock in all matters submitted to the vote of the holders of Common Stock, including the election of directors. NOTE 12. STOCK OPTIONS AND EMPLOYEE BENEFIT PLANS - - ------- ---------------------------------------- In April 1992, an affiliate of Pentland Group, plc purchased 1,244,445 shares of the Company's Common Stock for $14 million in cash. At November 30, 1995, such affiliate held an option to purchase 400,000 shares of Common Stock (200,000 at $13.50 per share and 200,000 at $16.125 per share), all of which are currently exercisable and expire on April 28, 1996. 1986 STOCK OPTION PLAN - - ---------------------- The Company has adopted a noncompensatory stock option plan (the "1986 Plan"), which was approved by the Company's shareholders, for eligible employees, directors and consultants of the Company. Incentive stock options and nonqualified stock options may be issued under this stock option plan to purchase up to 3,500,000 shares of Common Stock and may be exercisable for a period of up to ten years from the date of grant. Options granted to date have been granted at prices equal to the fair market value of the Common Stock at the grant date. A summary of stock option activities under the 1986 Plan is as follows:
NUMBER OF SHARES OPTION PRICES - - ------------------------------------------------------------------------ OUTSTANDING AT NOVEMBER 30, 1992 1,758,186 $3.13 TO $33.63 GRANTED 411,666 $9.25 TO $11.25 EXERCISED (16,776) $6.13 TO $11.25 CANCELED (181,185) $3.13 TO $28.88 - - ------------------------------------------------------------------------ OUTSTANDING AT NOVEMBER 30, 1993 1,971,891 $6.13 TO $33.63 GRANTED 131,000 $5.63 TO $11.38 EXERCISED (1,810) $6.13 CANCELED (361,983) $6.13 TO $24.63 - - ------------------------------------------------------------------------ OUTSTANDING AT NOVEMBER 30, 1994 1,739,098 $5.63 TO $33.63 GRANTED 293,500 $2.60 TO $ 5.38 EXERCISED -- -- CANCELED (522,080) $4.38 TO $23.38 - - ------------------------------------------------------------------------ OUTSTANDING AT NOVEMBER 30, 1995 1,510,518 $2.60 TO $33.63 ========================================================================
20 L.A. GEAR, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements At November 30, 1995, 1,510,518 common shares were reserved for the exercise of outstanding options, 1,096,348 shares were exercisable and 591,910 shares were available for grant (1,264,158 shares were exercisable and 363,330 shares were available for grant at November 30, 1994). 1992 STOCK OPTION PLAN - - ---------------------- In June 1992, the Company adopted, and the shareholders approved, a separate stock option plan for Eligible Non-Employee Directors (the "1992 Plan"). The 1992 Plan provides that upon election or appointment to the Company's Board of Directors, each Eligible Non-Employee Director (as defined in the 1992 Plan) shall receive a one-time grant of an option to purchase 20,000 shares of Common Stock at a price equal to the Fair Market Value (as defined in the 1992 Plan) of the Common Stock on the date the option is granted. Up to 400,000 shares of Common Stock may be issued or transferred pursuant to the 1992 plan. A summary of stock option activities under the 1992 Plan is as follows:
NUMBER OF SHARES OPTION PRICES - - --------------------------------------------------------------------- OUTSTANDING AT NOVEMBER 30, 1992 40,000 $14.00 GRANTED 40,000 $ 9.75 EXERCISED -- -- CANCELED -- -- - - --------------------------------------------------------------------- OUTSTANDING AT NOVEMBER 30, 1993 80,000 $9.75 TO $14.00 GRANTED -- -- EXERCISED -- -- CANCELED -- -- - - --------------------------------------------------------------------- OUTSTANDING AT NOVEMBER 30, 1994 80,000 $9.75 TO $14.00 GRANTED -- -- EXERCISED -- -- CANCELED -- -- - - --------------------------------------------------------------------- OUTSTANDING AT NOVEMBER 30, 1995 80,000 $9.75 TO $14.00 =====================================================================
At November 30, 1995, 80,000 shares were reserved for the exercise of outstanding options, 70,000 shares were exercisable and 320,000 shares were available for grant (50,000 shares were exercisable and 320,000 shares were available for grant at November 30, 1994). 1993 STOCK INCENTIVE PLAN - - ------------------------- In April 1993, the Company adopted, and the shareholders approved, a stock incentive plan (the "1993 Plan") for eligible employees, directors, officers and consultants of the Company. Incentive stock options, non-qualified stock options, stock appreciation rights, restricted stock, performance units and performance shares may be granted under the 1993 Plan. Up to 2,500,000 shares of Common Stock may be issued or transferred pursuant to the 1993 Plan. Options granted under this plan may be exercisable for a period of up to ten years from the date of grant. Options granted to date under the 1993 Plan have been granted at an exercise price equal to the average closing price of the Common Stock on the New York Stock Exchange composite tape for each of the five consecutive trading days immediately preceding the grant date. 21 L.A. GEAR, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements A summary of stock option activities under the 1993 Plan is as follows:
NUMBER OF SHARES OPTION PRICES - - ------------------------------------------------------------------- OUTSTANDING AT NOVEMBER 30, 1992 -- -- GRANTED 750,000 $11.55 EXERCISED -- -- CANCELED -- -- - - ------------------------------------------------------------------- OUTSTANDING AT NOVEMBER 30, 1993 750,000 $11.55 GRANTED 1,423,178 $ 5.75 TO $11.38 EXERCISED -- -- CANCELED (144,403) $ 6.00 TO $ 7.78 - - ------------------------------------------------------------------- OUTSTANDING AT NOVEMBER 30, 1994 2,028,775 $ 5.75 TO $11.55 GRANTED 367,387 $ 2.66 TO $ 5.83 EXERCISED -- -- CANCELED (340,700) $ 5.18 TO $11.38 - - ------------------------------------------------------------------- OUTSTANDING AT NOVEMBER 30, 1995 2,055,462 $ 2.66 TO $11.55 ===================================================================
At November 30, 1995, 2,055,462 shares were reserved for the exercise of outstanding options, 1,333,198 shares were exercisable and 444,538 shares were available for grant (587,499 shares were exercisable and 471,225 shares were available for grant at November 30, 1994). EMPLOYEE STOCK SAVINGS PLAN - - --------------------------- The Company has a defined contribution employee stock savings plan covering substantially all employees who are at least 21 years of age and have completed at least thirty days of employment. The Company made matching contributions of $289,000, $397,000 and $402,000 for 1995, 1994 and 1993, respectively, in respect to employee contributions to such plan. NOTE 13. INCOME TAXES - - ------- ------------ Domestic and foreign components of loss before income taxes and minority interest are as follows:
YEAR ENDED NOVEMBER 30, - - ------------------------------------------------------ (IN THOUSANDS) 1995 1994 1993 ---------- --------- --------- DOMESTIC $(43,466) $(12,093) $(24,555) FOREIGN (9,255) (10,208) (7,958) -------- -------- -------- $(52,721) $(22,301) $(32,513) ======== ======== ========
No income tax benefit has been recorded in 1995, 1994, and 1993. The difference between the tax benefit computed based on applying the U.S. statutory income tax rate to the loss before income taxes and minority interest and the recorded benefit was primarily due to the nonrecognition of tax benefits for operating losses as evaluated under the provisions of SFAS No. 109. Temporary differences and carryforwards which give rise to deferred tax assets, net of valuation allowance, at November 30, 1995 and 1994 are as follows: 22 L.A. GEAR, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements
NOVEMBER 30, - - -------------------------------------------------------------------------- (IN THOUSANDS) 1995 1994 -------- -------- LOSS CARRYFORWARDS $ 46,011 $ 27,986 TAX CREDIT CARRYFORWARDS 3,226 3,226 RESERVES AND ACCRUED EXPENSES 8,520 10,542 DEPRECIATION AND AMORTIZATION 5,444 4,004 OTHER 907 1,147 -------- -------- TOTAL DEFERRED TAX ASSETS 64,108 46,905 LESS VALUATION ALLOWANCE (64,108) (46,905) -------- -------- NET DEFERRED TAX ASSETS $ -- $ -- ======== ========
At November 30, 1995, the Company had a federal tax net operating loss ("NOL") carryforward of approximately $73.5 million which will, if unused, expire in varying amounts in fiscal years 2007 through 2010. The Company also has a federal alternative minimum tax credit carryforward of approximately $3.2 million (available to offset future regular tax liabilities) which may be carried forward indefinitely. California franchise tax NOL carryforwards of approximately $76.2 million will, if unused, expire primarily in fiscal year 1998. In addition, the Company has other state and foreign NOL carryforwards with varying limitations on future utilization. NOTE 14. LITIGATION - - ------- ---------- SETTLEMENTS - - ----------- In 1995, the Company recorded net settlement income of $ 2.3 million, substantially all of which was in connection with the settlement of certain patent and trademark infringement actions. Results for 1994 include net settlement income of $1.3 million in connection with trademark and patent infringement lawsuits partially offset by expenses relating to the settlement of employee litigation and a dispute with a former distributor. Fiscal 1993 results include a credit of $2.7 million relating to the partial recovery of the fiscal 1992 charges for the settlement by the Company of three separate consolidated shareholder class action lawsuits and related actions. PENDING LITIGATION - - ------------------ The Company is a defendant in certain legal actions. In the opinion of management, the disposition of these actions is not expected to have a material adverse effect upon the Company's financial position or results of operations. NOTE 15. COMMITMENTS AND CONTINGENCIES - - ------- ----------------------------- The Company has entered into various agreements for the purpose of obtaining footwear technology and product sourcing. Such agreements provide for, among other things, fees and royalties to be paid. At November 30, 1995, the aggregate amount of future commitments under such contracts totaled $11.5 million and are to be paid as follows: $5.5 million in 1996, $5.5 million in 1997 and $0.5 million in 1998. The Company has entered into various endorsement and sponsorship agreements with professional athletes, Universal Studios and other parties. Such agreements provide for, among other things, fees and royalties to be paid. At November 30, 1995, the aggregate amount of future commitments under such contracts totaled $4.8 million and are to be paid as follows: $1.1 million in 1996, $1.3 million in 1997, $1.2 million in 1998 and $1.2 million in 1999. In September 1994, the Company entered into a new one year management and consulting agreement with Shamrock Capital Advisors, Inc. ("SCA"), a company which provides management and consulting services to Trefoil. Selling, general and administrative expenses included $0.4 million, $0.7 million and $0.6 million, 23 L.A. GEAR, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements respectively, in 1995, 1994 and 1993 for fees to SCA. The agreement was not renewed and expired according to its terms in September 1995. The Company occupies certain facilities, including corporate offices and distribution centers, and rents certain equipment under operating leases. The Company is in the process of trying to sublease approximately 23,000 square feet at its corporate facility. Rental expense for 1995, 1994 and 1993 amounted to approximately $8.7 million, $8.4 million and $8.1 million, respectively. At November 30, 1995, the minimum rental commitments under noncancelable operating leases with an initial or remaining term in excess of one year were as follows:
YEAR ENDING NOVEMBER 30 - - ------------------------------------------------------------ (IN THOUSANDS) 1996 $ 4,921 1997 3,467 1998 3,055 1999 2,321 2000 1,578 THEREAFTER 2,903 ------- $18,245 =======
NOTE 16. SEGMENT REPORTING - - ------- ----------------- The Company's principal business is the design, development and marketing of quality athletic and lifestyle footwear. The Company is a multinational corporation with operations in 10 countries. Transfers between geographic areas primarily represent intercompany export sales from the United States and are accounted for based upon established sales prices between the related companies. In computing results from operations for foreign subsidiaries, no allocation of general corporate expenses, interest or income taxes has been made.
1995 1994 - - ----------------------------------------------------------- (IN THOUSANDS) NET SALES UNITED STATES DOMESTIC $192,493 $298,489 EXPORT CUSTOMERS 33,656 59,240 SALES TO OVERSEAS SUBSIDIARIES 37,848 29,020 - - ----------------------------------------------------------- TOTAL UNITED STATES 263,997 386,749 EUROPE 59,996 50,104 OTHER 10,406 8,133 ELIMINATIONS (37,848) (29,020) - - ----------------------------------------------------------- TOTAL $296,551 $415,966 =========================================================== OPERATING PROFIT (LOSS) UNITED STATES (50,537) (18,428) EUROPE 3,161 (726) OTHER (2,990) (1,174) ELIMINATIONS (165) 1,020 - - ----------------------------------------------------------- (50,531) (19,308) INTEREST EXPENSE, NET (2,190) (2,993) - - ----------------------------------------------------------- TOTAL $(52,721) $(22,301) =========================================================== IDENTIFIABLE ASSETS UNITED STATES 111,656 176,321 EUROPE 38,389 36,134 OTHER 11,433 13,745 ELIMINATIONS (1,903) (1,737) - - ----------------------------------------------------------- TOTAL $159,575 $224,463 ===========================================================
24 L.A. GEAR, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements The Company's domestic customers consist primarily of department, shoe, sporting goods and athletic footwear stores and wholesale distributors. In 1995, sales to Wal-Mart accounted for 15.3% of the Company's net sales. In 1994 and 1993 none of the Company's customers individually accounted for 10% or more of the Company's net sales. The Company's five largest customers worldwide, in the aggregate, accounted for approximately 27.8%, 26.8% and 20.7% of the Company's net sales in 1995, 1994 and 1993, respectively. NOTE 17. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER - - ------- ---------------------------------------------------------------- MATTERS; SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED) - - ---------------------------- -------------------------- The Company's Common Stock is listed on the New York Stock Exchange under the symbol "LA". The following table presents summarized unaudited quarterly results and the range of high and low closing sales prices on the New York Stock Exchange for the indicated fiscal quarters.
FIRST QUARTER SECOND QUARTER THIRD QUARTER FOURTH QUARTER -------------------- ---------------------- ------------------- ------------------------- 1995 1994 1995(2) 1994(1) 1995 1994(2) 1995(1) 1994(1)(2) - - --------------------------------------------------------------------------------------------------------------------------------- (IN THOUSANDS, EXCEPT PER SHARE DATA) NET SALES $ 69,392 $120,436 $79,014 $ 84,248 $94,354 $126,550 $ 53,791 $ 84,732 GROSS PROFIT $ 20,740 $ 34,909 $24,970 $ 23,657 $32,542 $ 42,180 $ 10,497 $ 22,591 NET INCOME (LOSS) $(11,642) $ (2,027) $(5,911) $(11,765) $ 416 $ 6,526 $(34,260) $ (14,929) INCOME (LOSS) PER COMMON SHARE: PRIMARY $ (0.59) $ (0.17) $ (0.34) $ (0.59) $ (0.07) $ 0.20 $ (1.58) $ (0.73) ======== ======== ======= ======== ======= ======== ======== =========== FULLY DILUTED $ (0.59) $ (0.17) $ (0.34) $ (0.59) $ (0.07) $ 0.20 $ (1.58) $ (0.73) ======== ======== ======= ======== ======= ======== ======== =========== PRICE RANGE OF COMMON STOCK: HIGH $ 5.87 $ 11.38 $ 4.37 $ 7.50 $ 4.12 $ 7.00 $ 3.12 $ 8.25 LOW $ 3.87 $ 7.00 $ 3.00 $ 5.63 $ 2.25 $ 5.63 $ 1.62 $ 5.37
(1) In the fourth quarter of 1995, a restructuring charge of $5.1 million and non-recurring charges of $5.6 million were recorded in selling, general and administrative expenses. The restructuring charge primarily related to the elimination of approximately 160 full time jobs, the closure of the Company's retail outlet stores and office space consolidation at the corporate headquarters. The non-recurring charges were in connection with a $4.6 million increase in the reserve for unused barter credits and a $1.0 million write-off of goodwill related to the acquisition of the Company's Mexican business in June 1994. In the second and fourth quarters of 1994, the Company incurred charges of $2.3 million and $0.2 million respectively for costs associated with the realignment of the senior management of the Company. See Note 9-Accounts Payable and Accrued Liabilities. (2) In the second quarter of 1995, the Company recorded net litigation settlement income of $1.9 million as part of a settlement agreement in connection with patent infringement litigation. In the third quarter of 1994, the Company entered into various settlement agreements primarily in connection with trademark and patent infringement actions pursuant to which it recorded net litigation settlement income of $2.9 million. In the fourth quarter of 1994, the Company recorded $1.9 million of litigation settlement expense primarily related to the settlement of employment litigation and a dispute with a former distributor. See Note 14-Litigation. At January 22, 1996, the Company had approximately 12,601 holders of record of its Common Stock. To date, the Company has not paid cash dividends on its Common Stock. The terms of the Series A Preferred Stock place restrictions on the ability of the Company to pay dividends on the Common Stock. The Company does not anticipate paying any dividends on the Common Stock in the foreseeable future. SELECTED FINANCIAL DATA
FOR THE FISCAL YEAR ENDED NOVEMBER 30, -------------------------------------- 1995 1994 1993 1992 1991 - - --------------------------------------------------------------------------------------------------- (IN THOUSANDS, EXCEPT PER SHARE DATA) NET SALES $296,551 $415,966 $398,358 $430,194 $619,175 LOSS FROM CONTINUING OPERTIONS (51,397) (22,195) (32,513) (71,901) (44,996) NET LOSS (51,397) (22,195) (32,513) (71,901) (66,200) LOSS APPLICABLE TO COMMON STOCK (59,143) (29,695) (40,180) (79,647) (67,825) PER COMMON SHARE: LOSS FROM CONTINUING OPERATIONS BEFORE PREFERRED DIVIDENDS $ (2.24) $ (0.97) $ (1.42) $ (3.39) $ (2.31) LOSS FROM CONTINUING OPERATIONS (2.58) (1.29) (1.75) (3.76) (2.40) LOSS APPLICABLE TO COMMON STOCK (2.58) (1.29) (1.75) (3.76) (3.49) AT NOVEMBER 30, --------------- 1995 1994 1993 1992 1991 - - --------------------------------------------------------------------------------------------------- (IN THOUSANDS) CASH AND CASH EQUIVALENTS $ 35,956 $ 49,710 $ 27,790 $ 83,982(A) $ 1,422 INVENTORIES 51,677 57,597 109,797 61,923 141,115 WORKING CAPITAL 103,999 147,848 161,948 168,049 203,215 TOTAL ASSETS 159,575 224,463 254,613 250,144 327,751 CONVERTIBLE SUBORDINARTED DEBENTURES 50,000 50,000 50,000 -- -- MANDATORILY REDEEMABLE PREFERRED STOCK PLUS ACCRUED AND UNPAID DIVIDENDS 107,746 100,000 100,000 100,000 100,000 SHAREHOLDERS' (DEFICIT) EQUITY (40,627) 18,149 46,797 87,451 131,715
(A) Cash and cash equivalents included $29.0 million of collateralized cash. 25 REPORT OF INDEPENDENT ACCOUNTANTS TO THE BOARD OF DIRECTORS AND SHAREHOLDERS OF L.A. GEAR, INC. In our opinion, the accompanying consolidated balance sheets and the related consolidated statements of operations, shareholders' (deficit) equity and cash flows present fairly, in all material respects, the financial position of L.A. Gear, Inc. and its subsidiaries at November 30, 1995 and 1994, and the results of their operations and their cash flows for each of the three years in the period ended November 30, 1995, in conformity with generally accepted accounting principles. These financial statements are the responsibility of the Company's management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these statements in accordance with generally accepted auditing standards which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for the opinion expressed above. /s/ Price Waterhouse LLP PRICE WATERHOUSE LLP Los Angeles, California January 22, 1996 26 EX-21.1 7 SUBSIDIARIES OF REGISTRANT EXHIBIT 21.1 ------------ SUBSIDIARIES OF REGISTRANT -------------------------- Subsidiary Jurisdiction of Incorporation - - ---------- ----------------------------- L.A. Gear California, Inc. California Raegal Finance, Inc. Texas L.A. Gear Licensing Corp. California Brands Acquisition Corp. California L.A. Gear (France) SARL France L.A. Gear (Benelux) B.V. Netherlands L.A. Gear (UK) Limited United Kingdom L.A. Gear (Deutschland) GmbH Germany L.A. Gear (Italia) SRL Italy L.A. Gear Korea Korea L.A. Gear H.K. Ltd. Hong Kong L.A. Gear Sportswear, Ltd. Hong Kong L.A. Gear (Mexico), S.A. de C.V. Mexico L.A. Gear Servicios, S.A. de C.V. Mexico L.A. Gear - Inchcape Limited British Virgin Islands L.A. Gear (Far East) Limited British Virgin Islands EX-23.1 8 CONSENT OF INDEPENDENT ACCOUNTS EXHIBIT 23.1 ------------ CONSENT OF INDEPENDENT ACCOUNTS We hereby consent to the incorporation by reference in the Prospectus constituting part of Post-Effective Amendment No.1 to the Registration Statement on Form S-3 (No. 33-59360) and in the Registration Statement on From S-8 (Nos. 33-37408, 33-53122, 33-64678 and 33-64287) of L.A. Gear, Inc. of our report dated January 22, 1996, appearing on page 23 of the Annual Report to Shareholders which incorporated in this Annual Report on Form 10-K. We also consent to the incorporation by reference of our report on the Financial Statements Schedules, which appears on page 35 of this Form 10-K /s/ PRICE WATERHOUSE LLP Los Angeles, California February 28, 1996 EX-27 9 FINANCIAL DATA SCHEDULE
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE CONSOLIDATED BALANCE SHEETS, THE CONSOLIDATED STATEMENTS OF INCOME AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000 12-MOS NOV-30-1995 DEC-01-1994 NOV-30-1995 35,956 0 54,184 7,553 51,677 138,036 26,016 17,726 159,575 34,037 50,000 107,746 0 128,093 (168,720) 159,575 296,551 296,551 207,802 343,184 0 3,687 4,174 (52,721) 0 (51,397) 0 0 0 (51,397) (2.58) 0
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