<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(MARK ONE)
/X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED AUGUST 31, 1995
Or
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM TO
----- -----
Commission file number 1-10157
L.A. GEAR, INC.
(Exact name of registrant as specified in its charter)
CALIFORNIA 95-3375118
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
2850 OCEAN PARK BOULEVARD, SANTA MONICA, CALIFORNIA 90405
(Address of principal executive offices) (Zip code)
(310) 452-4327
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
----- -----
The number of shares outstanding of the registrant's Common Stock, no par value,
at October 11, 1995 was 22,936,433 shares.
<PAGE> 2
L.A. GEAR, INC.
TABLE OF CONTENTS
FORM 10-Q FOR THE QUARTERLY PERIOD ENDED AUGUST 31, 1995
<TABLE>
<CAPTION>
PART I. FINANCIAL INFORMATION Page
- ------- --------------------- ----
<S> <C> <C>
Item 1. Financial Statements
Consolidated Condensed Balance Sheets at 3
August 31, 1995 and November 30, 1994
Consolidated Condensed Statements of Operations and Accumulated Deficit
for the three months ended August 31, 1995 and August 31, 1994 4
Consolidated Condensed Statements of Operations and Accumulated Deficit
for the nine months ended August 31, 1995 and August 31, 1994 5
Consolidated Condensed Statements of Cash Flows for the
nine months ended August 31, 1995 and August 31, 1994 6
Notes to Consolidated Condensed Financial Statements 7
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 10
PART II. OTHER INFORMATION
- -------- -----------------
Item 1. Legal Proceedings 15
Item 2. Changes in Securities 15
Item 3. Defaults Upon Senior Securities 15
Item 4. Submission of Matters to a Vote of Security Holders 15
Item 5. Other Information 15
Item 6. Exhibits and Reports on Form 8-K 16
Signature 17
Exhibit Index 18
</TABLE>
<PAGE> 3
L.A. GEAR, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
August 31, November 30,
1995 1994
---------- --------
(unaudited)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 25,083 $ 49,710
Accounts receivable, net 68,869 77,284
Inventories 65,522 57,597
Prepaid expenses and other current assets 8,928 9,827
--------- --------
Total current assets 168,402 194,418
Property and equipment and other assets, net 14,732 17,728
Goodwill, net 12,192 12,317
--------- --------
$ 195,326 $224,463
========= ========
LIABILITIES, MANDATORILY REDEEMABLE PREFERRED
STOCK AND SHAREHOLDERS' (DEFICIT) EQUITY
Current liabilities:
Accounts payable and accrued liabilities $ 35,256 $ 46,013
Borrowings under international credit facilities 806 557
--------- --------
Total current liabilities 36,062 46,570
7 3/4% convertible subordinated debentures due 2002 50,000 50,000
Minority interest 8,337 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 105,747 100,000
Shareholders' (deficit) equity:
Common stock, no par value; 80,000,000 shares authorized;
22,936,433 shares issued and outstanding at
August 31, 1995 and November 30, 1994 128,093 128,093
Preferred stock, no stated value; 9,000,000 shares
authorized; no shares issued -- --
Cumulative currency translation adjustment 110 194
Accumulated deficit (133,023) (110,138)
--------- --------
Total shareholders' (deficit) equity (4,820) 18,149
--------- --------
$ 195,326 $224,463
========= ========
</TABLE>
See accompanying Notes to Consolidated Condensed Financial Statements.
3
<PAGE> 4
L.A. GEAR, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
AND ACCUMULATED DEFICIT
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
<TABLE>
<CAPTION>
Three months ended August 31,
-----------------------------
1995 1994
--------- --------
<S> <C> <C>
Net sales $ 94,354 $126,550
Cost of sales 61,812 84,370
--------- --------
Gross profit 32,542 42,180
Selling, general and administrative expenses 32,223 37,909
Litigation settlement income (430) (2,900)
Interest expense, net 747 516
--------- --------
Income before income taxes and minority interest 2 6,655
Income taxes -- --
Minority interest 414 (129)
--------- --------
Net income 416 6,526
Dividends on mandatorily
redeemable preferred stock (1,957) (1,875)
--------- --------
Income (loss) applicable to common stock (1,541) 4,651
Accumulated deficit, beginning of period (131,482) (97,985)
--------- --------
Accumulated deficit, end of period $(133,023) $(93,334)
========= ========
Income (loss) per common share $ (0.07) $ 0.20
--------- --------
Weighted average common shares outstanding 22,937 22,936
--------- --------
</TABLE>
See accompanying Notes to Consolidated Condensed Financial Statements.
4
<PAGE> 5
L.A. GEAR, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
AND ACCUMULATED DEFICIT
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
<TABLE>
<CAPTION>
Nine months ended August 31,
----------------------------
1995 1994
--------- ---------
<S> <C> <C>
Net sales $ 242,760 $ 331,234
Cost of sales 164,509 230,488
--------- ---------
Gross profit 78,251 100,746
Selling, general and administrative expenses 97,610 109,050
Litigation settlement income (2,305) (3,200)
Interest expense, net 1,490 2,489
--------- ---------
Loss before income taxes and minority interest (18,544) (7,593)
Income taxes -- --
Minority interest 1,406 327
--------- ---------
Net loss (17,138) (7,266)
Dividends on mandatorily
redeemable preferred stock (5,747) (5,625)
--------- ---------
Loss applicable to common stock (22,885) (12,891)
Accumulated deficit, beginning of period (110,138) (80,443)
--------- ---------
Accumulated deficit, end of period $(133,023) $ (93,334)
========= =========
Loss per common share $ (1.00) $ (0.56)
--------- ---------
Weighted average common shares outstanding 22,937 22,936
--------- ---------
</TABLE>
See accompanying Notes to Consolidated Condensed Financial Statements.
5
<PAGE> 6
L.A. GEAR, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
Nine months ended August 31,
----------------------------
1995 1994
-------- -------
<S> <C> <C>
Net cash (used in) provided by operating activities $(22,596) $19,358
-------- -------
Investing activities:
Capital expenditures (2,613) (2,839)
-------- -------
Financing activities:
Net borrowings (repayments) under international credit facilities 218 (913)
Proceeds from minority's investment in joint venture -- 4,850
Payment of dividends on mandatorily redeemable
preferred stock -- (5,625)
Proceeds from the exercise of stock options -- 17
-------- -------
Net cash provided by (used in) financing activities 218 (1,671)
-------- -------
Effect of exchange rate changes on cash and
cash equivalents 364 132
-------- -------
Net (decrease) increase in cash and cash equivalents (24,627) 14,980
Cash and cash equivalents at beginning of period 49,710 27,790
-------- -------
Cash and cash equivalents at end of period $ 25,083 $42,770
======== =======
</TABLE>
See accompanying Notes to Consolidated Condensed Financial Statements.
6
<PAGE> 7
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
In the opinion of management, the accompanying unaudited consolidated
condensed financial statements contain all adjustments, which consist only of
normal recurring adjustments necessary to present fairly the consolidated
financial position of L.A. Gear, Inc. and its subsidiaries (collectively
referred to as the "Company") at August 31, 1995, the results of operations for
the three months and nine months ended August 31, 1995 and 1994 and the cash
flows for the nine months ended August 31, 1995 and 1994. This interim financial
information and notes thereto should be read in conjunction with the Company's
Annual Report on Form 10-K for the fiscal year ended November 30, 1994. The
Company's results of operations and cash flows for interim periods are not
necessarily indicative of the results to be expected for any other interim
period or the full year.
NOTE 2. LITIGATION SETTLEMENT INCOME
For the quarter and nine months ended August 31, 1995, the Company
recorded net settlement income of $0.4 million and $2.3 million, substantially
all of which was in connection with the settlement of certain patent
infringement actions.
NOTE 3. SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
<TABLE>
<CAPTION>
NINE MONTHS ENDED AUGUST 31,
-----------------------------
1995 1994
------ -----
(IN THOUSANDS)
<S> <C> <C>
CASH PAID DURING THE PERIOD FOR:
INTEREST, NET $ 539 $3,205
====== ======
INCOME TAXES, NET $ 23 $1,244
====== ======
NONCASH INVESTING ACTIVITY:
DIVIDENDS ACCRUED ON MANDATORILY
REDEEMABLE PREFERRED STOCK $5,747 $ --
====== ======
ACQUISITION OF MEXICAN DISTRIBUTOR'S ASSETS $ -- $1,953
====== ======
</TABLE>
NOTE 4. ACCOUNTS RECEIVABLE, NET
Accounts receivable, net of allowance for doubtful accounts and
merchandise returns, consist of the following:
<TABLE>
<CAPTION>
AUGUST 31, NOVEMBER 30,
1995 1994
---------- ------------
(IN THOUSANDS)
<S> <C> <C>
TRADE RECEIVABLES
DOMESTIC $43,461 $55,531
INTERNATIONAL 29,413 24,552
------- -------
TOTAL TRADE RECEIVABLES 72,874 80,083
OTHER RECEIVABLES 3,495 3,676
------- -------
76,369 83,759
LESS ALLOWANCE FOR DOUBTFUL ACCOUNTS
AND MERCHANDISE RETURNS (7,500) (6,475)
------- -------
$68,869 $77,284
======= =======
</TABLE>
7
<PAGE> 8
L.A. GEAR, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 5. INCOME TAXES
At August 31, 1995 deferred tax assets totaled approximately $53.3
million. A valuation allowance has been established against the entire deferred
tax asset balance.
For the period ended August 31, 1995, the difference between the tax
benefit computed based on applying the U.S. statutory income tax rate to the
loss before income taxes, 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.
NOTE 6. ACCOUNTS PAYABLE AND ACCRUED LIABILITIES
Accounts payable and accrued liabilities consist of the following:
<TABLE>
<CAPTION>
AUGUST 31, NOVEMBER 30,
1995 1994
---------- ------------
(IN THOUSANDS)
<S> <C> <C>
ACCOUNTS PAYABLE AND OTHER ACCRUED LIABILITIES $23,360 $32,251
ACCRUED INVENTORY PURCHASES 11,896 11,327
ACCRUED NON-RECURRING CHARGES -- 2,435
------- -------
$35,256 $46,013
======= =======
</TABLE>
Accounts payable include issued but uncleared checks of $1.8 million and
$3.0 million at August 31, 1995 and November 30, 1994, respectively.
NOTE 7. BANK BORROWINGS
The Company has $75 million revolving line of credit with BankAmerica
Business Credit, Inc. ("BABC") for loans and letters of credit which is
scheduled to expire in November 1996 (the "Revolving Facility"). The Revolving
Facility is secured primarily by the Company's domestic assets and is subject to
certain financial covenants. The Company may incur cash borrowings up to $10
million. There were no domestic cash borrowings under the Revolving Facility at
any time during the nine months ended August 31, 1995 and as of that date,
approximately $14.4 million of letters of credit were outstanding.
The Company's German subsidiary has a $1.4 million credit facility which
is denominated in local currency and converted to United States dollars at the
end of the period exchange rate. During the nine months ended August 31, 1995
the maximum borrowing at any time amounted to approximately $1.4 million and the
balance outstanding at August 31, 1995 was approximately $0.8 million. The
weighted average interest rates, as defined in the agreement and adjusted for
current market conditions, were 8.4% for both the quarter and nine months ended
August 31, 1995.
8
<PAGE> 9
L.A. GEAR, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 8. SERIES A CUMULATIVE CONVERTIBLE PREFERRED STOCK
As long as shares of Series A Cumulative Convertible Preferred Stock
("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 on each of
February 28, 1995, May 31, 1995 and August 31, 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 October 13, 1995, such dividend
arrearage amounted to a total of $5.809 million.
On September 1, 1995, the date on which an amount equal to three full
quarterly dividends with respect to the Series A Preferred Stock became in
arrears, Trefoil became entitled to elect four additional members to the
Company's Board of Directors. Such additional directors would continue in office
and the holders of Series A Preferred Stock will continue to have such
additional voting rights until such time as all accrued and unpaid dividends on
the Series A Preferred Stock have been paid in full, at which time the terms of
such additional directors will expire. The Company has not received any
notification from Trefoil as to its intention to exercise its option to elect
four additional members to the Board of Directors.
The Company is required to redeem 350,000 shares of the original issue 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
shall fail 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) 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 with
respect to the Series A Preferred Stock on August 31, 1996 from its cash flow
from operations and its existing bank facility. Accordingly, the Company is
currently evaluating all available options, including, without limitation,
restructuring the terms of the Series A Preferred Stock and the availability of
new capital to satisfy such mandatory redemption obligation.
NOTE 9. SUBSEQUENT EVENT
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
Company expects to record a one-time restructuring charge estimated at between
$3.0 million and $5.0 million for severance and other costs associated with the
corporate reorganization in the fourth quarter of fiscal 1995.
9
<PAGE> 10
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
All references to years are to fiscal years ending November 30, 1995 or 1994, as
applicable.
NET SALES
In the third quarter of 1995 the Company's net sales decreased 25.4% to
$94.4 million compared to $126.6 million in the third quarter of 1994. For the
nine months ended August 31, 1995, the Company's net sales decreased 26.7% to
$242.8 million compared to $331.2 million in the year earlier period. The sales
decline during the first nine months of 1995 is primarily due to a 22.9% drop in
the number of pairs sold worldwide. Domestic net sales in the third quarter and
nine months ended August 31, 1995 decreased by 26.9% and 33.5% from the
comparable 1994 periods, respectively. Net international sales, which accounted
for approximately 28.6% and 33.9% of the Company's total net sales for the
quarter and nine months ended August 31, 1995, respectively, decreased by 21.5%
and 8.7% from the comparable 1994 periods.
The following tables set forth certain information regarding the Company's
net sales:
<TABLE>
<CAPTION>
THREE MONTHS ENDED AUGUST 31, NET SALES
----------------------------- ----------------------------------
1995 1994
-------------- ---------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
DOMESTIC FOOTWEAR
CHILDREN'S $39,323 42% $ 58,286 46%
WOMEN'S 14,497 15 15,649 12
MEN'S 12,390 13 17,927 14
OTHER 1,139 1 304 1
------- --- -------- ---
TOTAL DOMESTIC SALES 67,349 71 92,166 73
INTERNATIONAL FOOTWEAR AND OTHER 27,005 29 34,384 27
------- --- -------- ---
TOTAL NET SALES $94,354 100% $126,550 100%
======= === ======== ===
</TABLE>
<TABLE>
<CAPTION>
NINE MONTHS ENDED AUGUST 31, NET SALES
- ---------------------------- -----------------------------------
1995 1994
--------------- ---------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
DOMESTIC FOOTWEAR
CHILDREN'S $ 94,717 39% $138,089 42%
WOMEN'S 34,571 14 49,358 15
MEN'S 28,925 12 52,327 15
OTHER 2,165 1 1,277 1
-------- --- -------- ---
TOTAL DOMESTIC SALES 160,378 66 241,051 73
INTERNATIONAL FOOTWEAR AND OTHER 82,382 34 90,183 27
-------- --- -------- ---
TOTAL NET SALES $242,760 100% $331,234 100%
======== === ======== ===
</TABLE>
The following tables set forth the percentage changes, by Children's,
Women's and Men's categories, in the number of pairs sold during the 1995 period
as compared to the same period of 1994:
<TABLE>
<CAPTION>
THREE MONTHS ENDED AUGUST 31, VOLUME OF FOOTWEAR SOLD
- ----------------------------- INCREASE/(DECREASE) BETWEEN 1995 AND 1994
-----------------------------------------
DOMESTIC INTERNATIONAL TOTAL
-------- ------------- -------
<S> <C> <C> <C>
CHILDREN'S (23.8%) 35.6% (14.4%)
WOMEN'S 1.1% (45.6%) (14.7%)
MEN'S (16.1%) (69.9%) (41.9%)
TOTAL VOLUME DECREASE (17.8%) (28.4%) (20.7%)
</TABLE>
10
<PAGE> 11
<TABLE>
<CAPTION>
NINE MONTHS ENDED AUGUST 31, VOLUME OF FOOTWEAR SOLD
- ---------------------------- INCREASE/(DECREASE) BETWEEN 1995 AND 1994
-----------------------------------------
DOMESTIC INTERNATIONAL TOTAL
-------- ------------- -------
<S> <C> <C> <C>
CHILDREN'S (24.4%) 28.6% (13.8%)
WOMEN'S (24.2%) (33.2%) (27.1%)
MEN'S (34.6%) (47.0%) (39.5%)
TOTAL VOLUME DECREASE (26.2%) (14.0%) (22.9%)
</TABLE>
The year to date decrease in domestic net sales resulted principally from
(1) approximately $47.3 million in lower domestic sales of children's lighted
product, (2) an overall drop in the total number of pairs sold of the Company's
children's, women's and men's shoes, (3) 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 (4)
a decrease of $1.91 in the average selling price per pair.
The year to date decrease in international net sales resulted principally
from reduced sales in Mexico and Central and South America partially offset by
increased sales in Europe and by the Company's Far East joint venture.
Internationally there was strong demand for children's lighted shoes which was
more than offset by reduced demand for the Company's adult products.
Total sales of the Company's children's lighted shoes decreased by $29.1
million and $19.7 million to $99.6 million and $34.1 million during the nine
months and three months ended August 31, 1995, respectively, compared to the
same periods in 1994. Domestic sales of children's lighted product decreased by
$47.3 million and $25.8 million in the nine months and three months ended August
31, 1995, respectively, compared to the same periods in 1994 due to heavy
inventory levels at retailers, lower priced lighted shoes offered by competitors
and the possible effect of adverse publicity regarding selected children's
lighted shoes manufactured prior to 1994 which utilized motion-activated
switches containing mercury. However, internationally sales of children's
lighted product increased, particularly in Europe and Asia, as sales grew by
$18.2 million and $6.1 million in the nine months and three months ended August
31, 1995, respectively, compared to the same periods in 1994.
GROSS MARGIN
The gross margins for the third quarter and the nine months ended August
31, 1995 increased to 34.5% and 32.2% from 33.3% and 30.4% during the comparable
periods in 1994. The improvement resulted primarily from an increase in
international gross margins to 39.2% and 35.8% in the third quarter and nine
months ended August 31, 1995, respectively, from 29.4% and 30.3% in the
comparable 1994 periods primarily as a result of the increased demand for
children's lighted product. Domestically, gross margins for the third quarter of
1995 decreased to 32.6% from 34.8% during the comparable period in 1994
primarily due to the sale of selected discontinued men's styles in 1995 and, for
the nine months ended August 31, 1995, remained constant at 30.4%. Although the
average domestic selling price decreased by $1.91 per pair during the first nine
months of 1995 in comparison to the prior year period, the average domestic unit
cost dropped by $1.35 per pair. To date, the Company has realized strong margins
in 1995 on its children's lighted product sold internationally and on its value
priced shoes and partially offset losses on any discontinued product against
previously established reserves.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Exclusive of a $2.3 million non-recurring charge incurred in May 1994,
total selling, general and administrative expenses decreased by $9.1 million or
8.6% to $97.6 million in the nine months ended August 31, 1995 and decreased by
$5.7 million or 15.0% to $32.2 million in the third quarter of 1995 compared to
the respective prior year periods. Domestic selling, general and administrative
expenses declined by $14.9 million or 17.3% to $71.0 million in the nine months
ended August 31, 1995 and by $7.6 million or 24.9% to $23.0 million in the third
quarter of 1995 from the comparable prior year periods. For the quarter and nine
months ended August 31, 1995 the reduction in domestic expenses was primarily
due to: (1) a reduction in product sourcing fees and distribution expenses
largely as a result of lower sales, and (2) general cost control and containment
efforts.
11
<PAGE> 12
The decreases in domestic operating expenses were partially offset by
increases in international operating expenses of $5.7 million and $2.0 million
for the nine months and quarter ended August 31, 1995, respectively. These
increases were primarily due to expenses of the Far East joint venture, which
was in the start-up phase during the first nine months of fiscal 1994, expenses
of the Company's Mexico subsidiary which was not formed until the second quarter
of fiscal 1994 and higher expenses of the European subsidiaries as a result of
the increase in the volume of their business.
Despite the overall decreases in selling, general and administrative
expenses, such expenses (exclusive of non-recurring charges) as a percentage of
net sales increased to 34.2% in the third quarter of 1995 and 40.2% for the nine
months ended August 31, 1995 from 30.0% and 32.2% in the comparable 1994 periods
as a result of lower sales. Changes in the Company's selling, general and
administrative expenses cannot be directly related to fluctuations in sales
volume as a substantial portion of such expenses are (i) fixed in nature, such
as compensation and benefits for management and administrative personnel, rent,
insurance, depreciation and other overhead charges or (ii) incurred to benefit
future periods, such as media, advertisement and trade show expenses.
INTEREST EXPENSE (INCOME), NET
Interest expense of $1.0 million and $3.0 million for the three months
and nine months ended August 31, 1995, respectively, and $1.0 million and $3.4
million for the three months and nine months ended August 31, 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 decreased to $0.2 million and increased to $1.5 million
for the three months and nine months ended August 31, 1995, respectively,
compared to $0.5 million and $0.9 million in the comparable year earlier
periods. The decrease for the quarter was due to a reduction in the average cash
balances and the increase for the nine months was primarily due to higher
interest rates on approximately the same average cash balances.
LIQUIDITY AND CAPITAL RESOURCES
The following table sets forth certain information regarding the
Company's liquidity and capital resources:
<TABLE>
<CAPTION>
AUGUST 31, NOVEMBER 30,
1995 1994
---------- -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
CASH AND CASH EQUIVALENTS $ 25,083 $ 49,710
WORKING CAPITAL 132,340 147,848
OUTSTANDING LETTERS OF CREDIT 14,991 36,699
CONVERTIBLE SUBORDINATED DEBENTURES 50,000 50,000
MANDATORILY REDEEMABLE PREFERRED STOCK 100,000 100,000
</TABLE>
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
AUGUST 31, AUGUST 31,
------------------ -----------------
1995 1994 1995 1994
---- ------ -------- ------
<S> <C> <C> <C> <C>
AVERAGE DAILY SHORT-TERM BORROWINGS $138 $2,278 $493 $4,756
WEIGHTED AVERAGE INTEREST RATES 8.2% 7.9% 8.2% 8.4%
</TABLE>
Cash and cash equivalent balances decreased by $24.6 million from
November 30, 1994 to a balance of $25.1 million at August 31, 1995 primarily due
to the funding of the operating loss for the nine months ended August 31, 1995.
During the nine months ended August 31, 1995 inventory increased from $57.6
million (5.4 million pairs) at November 30, 1994 to $65.5 million (6.3 million
pairs) at August 31, 1995 due primarily to increased inventory in Europe as a
result of the higher volume of business and the seasonality of the Company's
business. Although sales were greater in the last two months of the 1995 third
quarter compared to the last two months of the 1994 fourth quarter, net accounts
receivable at August 31, 1995 decreased by $8.4 million from November 30, 1994
primarily as a result of the sale of $20.9 million of product to Wal-Mart at the
end of November 1994.
The Company has a $75 million revolving line of credit with BankAmerica
Business Credit, Inc. ("BABC") for loans and letters of credit which is
scheduled to expire in November 1996 (the "Revolving Facility"). The Revolving
Facility is secured primarily by the Company's domestic assets and is subject to
certain financial
12
<PAGE> 13
covenants. The Company may incur cash borrowings up to $10 million. There were
no domestic cash borrowings under the Revolving Facility at any time during the
nine months ended August 31, 1995 and as of that date, approximately $14.4
million of letters of credit were outstanding.
The Company's German subsidiary has a $1.4 million credit facility which
is denominated in local currency and converted to United States dollars at the
end of the period exchange rate. During the nine months ended August 31, 1995
the maximum borrowing at any time amounted to approximately $1.4 million and the
balance outstanding at August 31, 1995 was approximately $0.8 million. The
weighted average interest rates, as defined in the agreement and adjusted for
current market conditions, were 8.4% for both the quarter and nine months ended
August 31, 1995. The Company believes that it has the ability to meet the
financing needs, if any, of its German subsidiary for the foreseeable future.
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 on each
of February 28, 1995, May 31, 1995 and August 31, 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 October 13, 1995, such dividend
arrearage amounted to a total of $5.809 million.
The Company is required to redeem 350,000 shares of the original issue 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
shall fail 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) 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 with
respect to the Series A Preferred Stock on August 31, 1996 from its cash flow
from operations and its existing bank facility. Accordingly, the Company is
currently evaluating all available options, including, without limitation,
restructuring the terms of the Series A Preferred Stock and the availability of
new capital to satisfy such mandatory redemption obligation.
The short-term and long-term liquidity of the Company is contingent
primarily on the Company's future operating results, its ability to restructure
the Series A Preferred Stock 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 on August 31, 1996 under
the Series A Preferred Stock). These needs are based on a number of factors
including the size of the business and related working capital needs, the extent
of the international subsidiaries' funding requirements, the extent to which the
Company seeks to acquire or license other footwear brands and the level of
domestic operating costs. In the event that the Company's future operating
results fall below management's expectations, additional sources of working
capital funding may be necessary and difficult to obtain. The Company may also
need additional financing for future acquisitions which may be difficult to
secure.
FUTURE OUTLOOK
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 is designed to maximize the Company's continued efforts to
re-establish the women's brand and capitalize on the strength of its children's
business. One of the key priorities of the Company's reengineering efforts is to
enhance the Company's ability to get the right product to market in the shortest
possible time. The Company hopes to reduce product cycle time significantly by
improving design capabilities, better utilizing product development resources,
strengthening relationships with factories and sourcing agents, and maintaining
disciplined inventory management practices.
As part of the reorganization the Company announced the hiring of James
V. Moodhe as Senior Vice President - Design, Development and Marketing. In
addition, David F. Gatto was promoted to Executive Vice President to oversee the
Company's sales, merchandising and operations functions and Thomas F. Larkins
was promoted to Chief Administrative Officer to oversee the Company's finance,
legal and administrative functions.
Prior to its November 30 fiscal year end, the Company will implement cost
reduction measures targeted to reduce operating expenses in fiscal 1996 by
approximately $25 million. Among these measures is the elimination of 135-160
full time positions, representing approximately 30% of the Company's domestic
workforce, and the
13
<PAGE> 14
possible closure of all or some of its seven retail outlet stores. The Company
expects to record a one-time restructuring charge estimated at between $3.0
million and $5.0 million for severance and other costs associated with the
corporate reorganization in the fourth quarter of fiscal 1995.
At September 30, 1995 the Company had a combined domestic and
international order backlog of $108.2 million, $38.0 million of which is
scheduled to ship in the October and November period and $58.1 million of which
is scheduled to ship in the Company's first quarter of fiscal 1996. The combined
backlog at September 30, 1994 was $126.6 million, $51.9 million of which was
scheduled to ship in the October and November 1994 period and $60.3 million of
which was scheduled to ship in the first quarter of fiscal 1995. Approximately
19.2% of the September 30, 1995 backlog was for children's lighted shoes
compared to 38.2% at September 30, 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.
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
for each of the 1995, 1996 and 1997 fiscal years (subject to reduction or
elimination in 1996 and 1997 if sell-through does not meet designated targets).
It is unlikely that the designated sell-through targets for fiscal 1995 will be
met. Accordingly, Wal-Mart would not be subject to a minimum purchase commitment
in the Company's fiscal 1996. Wal-Mart has agreed to fulfill its $80 million
minimum purchase commitment with respect to fiscal 1995 by the end of the
first quarter of the Company's fiscal 1996. The backlog at September 30, 1995
includes $43.7 million for Wal-Mart, as compared to $35.2 million at
September 30, 1994. The Company's agreement with Wal-Mart does not provide
for the sale of L.A. Gear lighted footwear products to Wal-Mart.
14
<PAGE> 15
PART II - OTHER INFORMATION
ITEM 1 - LEGAL PROCEEDINGS
- Not applicable.
ITEM 2 - CHANGES IN SECURITIES
- Not applicable.
ITEM 3 - DEFAULTS UPON SENIOR SECURITIES
- As long as shares of Series A Cumulative Convertible Preferred Stock
("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
on each of February 28, 1995, May 31, 1995 and August 31, 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 October 13, 1995,
such dividend arrearage amounted to a total of $5.809 million.
On September 1, 1995, the date on which an amount equal to three full
quarterly dividends with respect to the Series A Preferred Stock became
in arrears, Trefoil became entitled to elect four additional members to
the Company's Board of Directors. Such additional directors would
continue in office and the holders of Series A Preferred Stock will
continue to have such additional voting rights until such time as all
accrued and unpaid dividends on the Series A Preferred Stock have been
paid in full, at which time the terms of such additional directors will
expire. The Company has not received any notification from Trefoil as to
its intention to exercise its option to elect four additional members to
the Board of Directors.
ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
- Not applicable.
ITEM 5 - OTHER INFORMATION
- Not applicable.
15
<PAGE> 16
ITEM 6 - EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
10.1 Employment Agreement, dated as of September 11, 1995, by and
between James V. Moodhe and the Company.
27.1 Financial Data Schedule
(b) Reports on Form 8-K:
1. The Company filed a current report on Form 8-K on July 17,
1995, under Item 5. - Other Events, with respect to the Fifth
Amendment to Loan and Security Agreement dated as of November
22, 1993 between the Company and BankAmerica Business Credit
Inc., which amends the terms of the existing revolving line
of credit facility.
16
<PAGE> 17
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Dated: October 13, 1995 L.A. GEAR, INC.
----------------
By: /s/ William L. Benford
-----------------------
William L. Benford
President and
Chief Operating Officer
17
<PAGE> 18
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit No. Document Page No.
- ----------- -------- --------
<S> <C> <C>
10.1 Employment Agreement as of September 11 1995, by 19
and between James V. Moodhe and the Company.
27.1 Financial Data Schedule 30
</TABLE>
18
<PAGE> 1
EXHIBIT 10.1
EMPLOYMENT AGREEMENT
AGREEMENT made as of the 11th day of September, 1995, by and between
L.A. GEAR, INC., a California corporation (the "Company"), and James V. Moodhe
(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 Senior Vice President--Design,
Development and Marketing 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 position. The Employee's
duties, services and responsibilities will be performed under the overall
supervision of the President and Chief Operating Officer of the Company (or such
other executive officer as may be designated by the President and Chief
Operating Officer) and consistent with the policies of the Board of Directors of
the Company (the "Board of Directors").
(b) During the Employment Term, 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. The term of employment of the Employee hereunder shall
commence as of September 11, 1995 (the "Commencement Date") and shall continue
in full force and effect until September 11, 1996, unless earlier terminated as
provided herein (the "Employment Term"). The term of this Agreement shall be
coincident with the Employment Term.
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
$275,000.
<PAGE> 2
During the Term, Employee will be eligible to participate in the
management bonus plan based on excess return of capital (the "EVA Bonus Plan")
adopted by the Company. To the extent Employee was employed by the Company
hereunder for not less than six months during a fiscal year and Employee's
employment is terminated during such fiscal year, the Company, in its sole
discretion, may pay the Employee a cash bonus in an amount to be determined by
the Board of Directors.
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, (a) the Company shall grant to
the Employee on the Commencement Date non-qualified stock options to purchase
75,000 shares of the Company's Common Stock, no par value per share ("Common
Stock"), upon the terms and conditions set forth in the Non-Qualified Stock
Option Agreement attached hereto as Exhibit A (the "Option Agreement"), and (b)
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 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.
2
<PAGE> 3
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 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.
In the event that, during the Employment Term and in connection with
the performance of his duties hereunder, the Employee is required to move the
personal property of the Employee and his immediate family from their present
home to a new residence located in the Los Angeles, California greater
metropolitan area (the "Relocation"), then the Company will reimburse the
Employee for reasonable out-of-pocket moving costs and expenses incurred by the
Employee in connection with such Relocation, in accordance with the Company's
then-current Relocation Policy and upon receipt of appropriate accounting
therefor, in accordance with the usual practices of the Company.
4. Termination.
(a) Except as otherwise provided in this Agreement, the
employment of the 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
<PAGE> 4
(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 Company
further agrees to reimburse the Employee at his then-current salary for time
spent by the Employee in complying with the provisions hereof, but only to the
extent that the Employee is not paid a salary by his then-current employer
during such time. Such reimbursement shall be made upon delivery by the Employee
to the Company of valid documentation reflecting such non-payment. The
provisions of this paragraph shall survive termination of this Agreement.
5. Termination Payments. If the Employee's employment with the
Company terminates for any 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.
4
<PAGE> 5
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.
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
5
<PAGE> 6
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.
(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 (i) retaining ownership of the 410
shares of common stock of Pan Pacific Designs, Inc., held by Employee on the
date hereof, and (ii) 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
6
<PAGE> 7
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 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:
James V. Moodhe
500 Country Valley Road
Westlake Village, CA 91362
7
<PAGE> 8
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. 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.
10. 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.
11. 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.
12. 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.
13. 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
<PAGE> 9
14. 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
---------------------
William L. Benford
President
/s/James V. Moodhe
---------------------
James V. Moodhe
(Employee)
9
<PAGE> 10
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.):
SECTION 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.
SECTION 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
<PAGE> 11
SECTION 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
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