Report on L.A. Gear says trouble may be ahead.

Report on L.A. Gear says trouble may be ahead

L.A. Gear Inc. the big Marina del Rey-based athletic goods manufacturer, may have violated generally accepted accounting principles, or GAAP, in its latest quarterly financial disclosure statement filed with the Securities and Exchange Commission, according to Kellogg Associates Inc., a Mt. Olympus-based securities research house.

Kellogg Associates, generally speaking, is hired by institutional investors to scrutinize the financial disclosure statements of publicly held companies. On Oct. 25 Kellogg issued a report on L.A. Gear Inc.'s third-quarter 10q filing.

L.A. Gear is the nation's third-largest sneaker manufacturer. It reported third-quarter profits of $14.3 million on revenues of $300.3 million.

The company's stock has fallen from a 52-week high of $50.625 to about $12 in trading last week.

According to Kellogg Associates:

* L.A. Gear's third-quarter growth in orders was much slower than the growth in sales, signalling a possible slowdown in sales.

* Advertising and promotional expenses increased as a percentage of net sales. L.A. Gear increased its advertising and promotional expenses to to 8.8 percent of sales in the third quarter, compared with 5.5 percent in the year-earlier quarter. L.A. Gear has hired expensive celebrities, such as singer-dancer Michael Jackson and professional football player Joe Montana, to tout its wares.

The increased effort on sales may not be working its magic: "L.A. Gear's advertising campaigns have not been successful in reversing the slowdown in sales. Nevertheless, advertising continues, at great expense," said Kellogg.

* Net interest expense increased, in order to fund higher inventories and receivables.

* In percentages, inventory rose faster than cost of sales (selling expenses), indicating inventory may be growing out of control.

* L.A. Gear experienced a third-quarter increase in "nonfactored" receivables, meaning the company is selling more goods on credit. (Factors are financial intermediaries that, in essence, pay L.A. Gear for its receivables.) The increase in nonfactored receivables "may signal that L.A. Gear is having trouble getting its factor to accept receivables."

* L.A. Gear's statement of cash flows did not have a breakdown of operating cash flows, a violation of generally accepted accounting principles and the principle of full and fair disclosure.

According to Kellogg, "The Statement of Cash Flows in the third-quarter 10q shows only a single line-item for operating cash flows, entitled `Net Cash Used in Operating Activities.'"

In the first quarter, L.A. Gear provided a more-complete accounting of cash flows, said Kellogg. "Why did L.A. Gear change its presentation of operating cash flows?" asked Kellogg.

* L.A. Gear had negative operating cash flow in the first nine months of 1989 and 1990; the latter year was worse. The deficit in 1989 was made up by selling new stock; 1990's operating losses were covered by borrowing money.