<PAGE>
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(MARK ONE)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED AUGUST 31, 1996
Or
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM ____________ TO ____________
Commission file number 1-10157
L.A. GEAR, INC.
(Exact name of registrant as specified in its charter)
CALIFORNIA 95-3375118
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
2850 OCEAN PARK BOULEVARD, SANTA MONICA, CALIFORNIA 90405
(Address of principal executive offices) (Zip code)
(310) 452-4327
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
--- ---
The number of shares outstanding of the registrant's Common Stock, no par value,
at October 10, 1996 was 22,936,433 shares.
<PAGE>
L.A. GEAR, INC.
TABLE OF CONTENTS
FORM 10-Q FOR THE QUARTERLY PERIOD ENDED AUGUST 31, 1996
<TABLE>
<CAPTION>
PART I. FINANCIAL INFORMATION Page
- ------ --------------------- ----
<S> <C>
Item 1. Financial Statements
Consolidated Condensed Balance Sheets at August 31, 1996 and
November 30, 1995 3
Consolidated Condensed Statements of Operations and Accumulated Deficit
for the three months ended August 31, 1996 and August 31, 1995 4
Consolidated Condensed Statements of Operations and Accumulated Deficit
for the nine months ended August 31, 1996 and August 31, 1995 5
Consolidated Condensed Statements of Cash Flows for the nine months
ended August 31, 1996 and August 31, 1995 6
Notes to Consolidated Condensed Financial Statements 7
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 10
PART II. OTHER INFORMATION
- ------- -----------------
Item 1. Legal Proceedings 16
Item 2. Changes in Securities 16
Item 3. Defaults Upon Senior Securities 16
Item 4. Submission of Matters to a Vote of Security Holders 16
Item 5. Other Information 17
Item 6. Exhibits and Reports on Form 8-K 17
Signature 18
Exhibit Index 19
</TABLE>
<PAGE>
L.A. GEAR, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
August 31, November 30,
1996 1995
---------- ------------
(unaudited)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 37,056 $ 35,956
Accounts receivable, net 43,219 46,630
Inventories, net 29,432 51,677
Prepaid expenses and other current assets 3,029 3,773
--------- ---------
Total current assets 112,736 138,036
Property and equipment and other assets, net 7,107 10,348
Goodwill, net 10,277 11,191
--------- ---------
$ 130,120 $ 159,575
========= =========
LIABILITIES, MANDATORILY REDEEMABLE PREFERRED
STOCK AND SHAREHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Accounts payable and accrued liabilities $ 25,326 $ 32,804
Borrowings under international credit facilities -- 1,233
--------- ---------
Total current liabilities 25,326 34,037
7 3/4% convertible subordinated debentures due 2002 50,000 50,000
Minority interest -- 8,419
Mandatorily redeemable preferred stock:
7.5% Series A Cumulative Convertible Preferred Stock,
$100 stated value; no shares issued at August 31, 1996;
1,000,000 shares authorized, issued and outstanding at
November 30, 1995; redemption value of $100 per share
plus accrued and unpaid dividends at November 30, 1995 -- 107,746
Shareholders' equity (deficit):
7.5% Series B Cumulative Convertible Preferred Stock,
$100 stated value; 1,161,822 shares authorized;
1,139,963 shares issued and outstanding at August 31, 1996;
no shares issued at November 30, 1995 113,336 --
Preferred stock, no stated value; 8,838,178 shares authorized
and unissued at August 31, 1996; 9,000,000 shares authorized
and unissued at November 30, 1995 -- --
Common stock, no par value; 80,000,000 shares authorized;
22,936,433 shares issued and outstanding at August 31,
1996 and November 30, 1995 128,093 128,093
Cumulative currency translation adjustment 125 561
Accumulated deficit (186,760) (169,281)
--------- ---------
Total shareholders' equity (deficit) 54,794 (40,627)
--------- ---------
$ 130,120 $ 159,575
========= =========
</TABLE>
See accompanying Notes to Consolidated Condensed Financial Statements.
3
<PAGE>
L.A. GEAR, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
AND ACCUMULATED DEFICIT
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
<TABLE>
<CAPTION>
Three months ended August 31,
-----------------------------------
1996 1995
------- --------
<S> <C> <C>
Net sales $ 53,431 $ 94,354
Cost of sales 39,209 61,812
--------- ---------
Gross profit 14,222 32,542
Selling, general and administrative expenses 21,633 32,197
Litigation settlement income, net -- (404)
Interest expense, net 475 747
--------- ---------
(Loss) income before income tax and minority interest (7,886) 2
Income tax -- --
Minority interest 3,038 414
--------- ---------
Net (loss) income (4,848) 416
Dividends on mandatorily
redeemable Series A Cumulative Convertible Preferred Stock -- (1,957)
Dividends on Series B Cumulative Convertible Preferred Stock (2,098) --
--------- ---------
Loss applicable to common stock (6,946) (1,541)
Accumulated deficit, beginning of period (179,814) (131,482)
--------- ---------
Accumulated deficit, end of period $(186,760) $(133,023)
========= =========
Loss per common share $ (0.30) $ (0.07)
========= =========
Weighted average common shares outstanding 22,937 22,937
========= =========
</TABLE>
See accompanying Notes to Consolidated Condensed Financial Statements.
4
<PAGE>
L.A. GEAR, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
AND ACCUMULATED DEFICIT
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
<TABLE>
<CAPTION>
Nine months ended August 31,
---------------------------------
1996 1995
------- -------
<S> <C> <C>
Net sales $ 170,569 $ 242,760
Cost of sales 122,095 164,509
--------- ---------
Gross profit 48,474 78,251
Selling, general and administrative expenses 65,546 97,578
Litigation settlement income, net (1,955) (2,273)
Interest expense, net 1,609 1,490
--------- ---------
Loss before income tax and minority interest (16,726) (18,544)
Income tax -- --
Minority interest 5,497 1,406
--------- ---------
Net loss (11,229) (17,138)
Dividends on mandatorily
redeemable Series A Cumulative Convertible Preferred Stock (3,044) (5,747)
Dividends on Series B Cumulative Convertible Preferred Stock (3,206) --
--------- ---------
Loss applicable to common stock (17,479) (22,885)
Accumulated deficit, beginning of period (169,281) (110,138)
--------- ---------
Accumulated deficit, end of period $(186,760) $(133,023)
========= =========
Loss per common share $ (0.76) $ (1.00)
========= =========
Weighted average common shares outstanding 22,937 22,937
========= =========
</TABLE>
See accompanying Notes to Consolidated Condensed Financial Statements.
5
<PAGE>
L.A. GEAR, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
Nine months ended August 31,
---------------------------------
1996 1995
-------- --------
<S> <C> <C>
Net cash provided by (used in) operating activities $ 4,103 $(22,596)
-------- --------
Investing activities:
Capital expenditures (723) (2,613)
-------- --------
Financing activities:
Net (repayments) borrowings under international credit facilities (1,218) 218
Other (660) --
------- --------
Net cash (used in) provided by financing activities (1,878) 218
------- --------
Effect of exchange rate changes on cash and
cash equivalents (402) 364
------- --------
Net increase (decrease) in cash and cash equivalents 1,100 (24,627)
Cash and cash equivalents at beginning of period 35,956 49,710
------- --------
Cash and cash equivalents at end of period $ 37,056 $ 25,083
======== ========
</TABLE>
See accompanying Notes to Consolidated Condensed Financial Statements.
6
<PAGE>
L.A. GEAR, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
- ------- ------------------------------------------
Basis of Presentation In the opinion of management, the accompanying unaudited
consolidated condensed financial statements contain all adjustments, which
consist only of normal recurring adjustments, necessary to present fairly the
consolidated financial position of L.A. Gear, Inc. and its subsidiaries
(collectively referred to as the "Company") at August 31, 1996, the results of
operations for the three months and nine months ended August 31, 1996 and 1995
and the cash flows for the nine months ended August 31, 1996 and 1995. This
interim financial information and notes thereto should be read in conjunction
with the Company's Annual Report on Form 10-K for the fiscal year ended November
30, 1995. The Company's results of operations and cash flows for interim periods
are not necessarily indicative of the results to be expected for any other
interim period or the full year.
Reclassifications Certain reclassifications have been made to 1995 amounts in
order to conform to the 1996 presentation.
NOTE 2. SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
- ------- -------------------------------------------------
<TABLE>
<CAPTION>
NINE MONTHS ENDED AUGUST 31,
------------------------------
1996 1995
------- ---------
(IN THOUSANDS)
<S> <C> <C>
CASH PAID (RECEIVED) DURING THE PERIOD FOR:
INTEREST PAID $ 2,126 $ 2,064
======== =======
INTEREST RECEIVED $ (1,471) $(1,525)
======== =======
NONCASH FINANCING ACTIVITY:
DIVIDENDS ACCRUED ON MANDATORILY
REDEEMABLE SERIES A CUMULATIVE CONVERTIBLE
PREFERRED STOCK $ -- $ 5,747
======== =======
EXCHANGE OF SERIES A CUMULATIVE CONVERTIBLE
PREFERRED STOCK PLUS ACCRUED AND UNPAID DIVIDENDS
FOR SERIES B CUMULATIVE CONVERTIBLE PREFERRED STOCK $110,790 $ --
======== =======
SERIES B CUMULATIVE CONVERTIBLE PREFERRED STOCK ISSUED
IN PAYMENT OF DIVIDENDS DUE ON SERIES B CUMULATIVE
CONVERTIBLE PREFERRED STOCK $ 3,206 $ --
======== =======
</TABLE>
7
<PAGE>
L.A. GEAR, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 3. ACCOUNTS RECEIVABLE, NET
- ------- ------------------------
Accounts receivable, net of allowance for doubtful accounts and merchandise
returns, consist of the following:
<TABLE>
<CAPTION>
AUGUST 31, NOVEMBER 30,
1996 1995
----------- -------------
(IN THOUSANDS)
<S> <C> <C>
TRADE RECEIVABLES
DOMESTIC $26,273 $23,125
INTERNATIONAL 18,609 28,291
------- -------
TOTAL TRADE RECEIVABLES 44,882 51,416
OTHER RECEIVABLES 2,739 2,767
------- -------
47,621 54,183
LESS ALLOWANCE FOR DOUBTFUL ACCOUNTS
AND MERCHANDISE RETURNS (4,402) (7,553)
------- -------
$43,219 $46,630
======= =======
</TABLE>
Domestic accounts receivable include $0.1 million and $7.2 million from
Wal-Mart at August 31, 1996 and November 30, 1995, respectively.
NOTE 4. INCOME TAXES
- ------- ------------
At August 31, 1996, deferred tax assets totaled approximately $69.5
million. A valuation allowance has been established against the entire deferred
tax asset balance.
NOTE 5. ACCOUNTS PAYABLE AND ACCRUED LIABILITIES
- ------- ----------------------------------------
Accounts payable and accrued liabilities consist of the following:
<TABLE>
<CAPTION>
AUGUST 31, NOVEMBER 30,
1996 1995
---------- -------------
(IN THOUSANDS)
<S> <C> <C>
ACCOUNTS PAYABLE AND OTHER ACCRUED LIABILITIES $15,998 $22,938
ACCRUED INVENTORY PURCHASES 8,919 7,111
ACCRUED RESTRUCTURING CHARGES 409 2,755
------- -------
$25,326 $32,804
======= =======
</TABLE>
NOTE 6. BANK BORROWINGS
- ------- ---------------
Effective as of August 31, 1996, the Company entered into an amendment to
its existing revolving credit facility with BankAmerica Business Credit, Inc.
("BABC") for loans and letters of credit (the "Revolving Facility"). The
amendment provides for, among other things, (i) an extension of the term of the
Revolving Facility for an additional three years to November 30, 1999, (ii) a
reduction in the maximum amount available for aggregate loans and letters of
credit at any time from $75 million to $50 million, (iii) an increase in the
maximum amount of aggregate loans permitted to be outstanding at any time from
$10 million to $20 million and (iv) a reduction in the minimum Adjusted Tangible
Net Worth (as defined in the Revolving Facility) required to be maintained under
the Revolving Facility, with a restriction on the payment of cash dividends on
the Company's Series B Cumulative Convertible Preferred Stock and a reduction in
the amount of the available Borrowing Base (as defined in the Revolving
Facility) if the Company's Adjusted Tangible Net Worth falls below certain
thresholds.
8
<PAGE>
L.A. GEAR, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(UNAUDITED)
The Revolving Facility is secured primarily by the Company's domestic
assets. Cash 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. There were no domestic cash borrowings under the Revolving
Facility at any time during the nine months ended August 31, 1996 and, as of
that date, approximately $17.9 million of domestic letters of credit were
outstanding under the Revolving Facility.
NOTE 7. SERIES A CUMULATIVE CONVERTIBLE PREFERRED STOCK / SHARE EXCHANGE
- ------ ----------------------------------------------------------------
TRANSACTION
-----------
On April 9, 1996, the Company's shareholders approved the exchange (the
"Share Exchange Transaction") of all of the issued and outstanding shares of the
Company's Series A Cumulative Convertible Preferred Stock, stated value $100 per
share ("Series A Preferred Stock"), and all accrued and unpaid dividends thereon
for (i) 1,000,000 shares of a new series of preferred stock to be issued by the
Company, entitled Series B Cumulative Convertible Preferred Stock, stated value
$100 per share ("Series B Preferred Stock"), plus (ii) an additional number of
shares of Series B Preferred Stock equal to the dollar amount of accrued and
unpaid dividends in respect to the Series A Preferred Stock through the closing
of the Share Exchange Transaction. The Share Exchange Transaction was completed
on April 12, 1996 and, as a result, Trefoil Capital Investors, L.P. ("Trefoil"),
the holder of all the Series A Preferred Stock, was issued 1,107,902 shares of
Series B Preferred Stock and the Series A Preferred Stock was retired.
The terms of the Series B Preferred Stock provide for, among other things,
(i) the elimination of the mandatory redemption feature of the Series A
Preferred Stock (including the initial $35 million mandatory redemption
obligation, plus accrued and unpaid dividends on the Series A Preferred Stock,
in August 1996), (ii) a reduction in the conversion price from $10.00 to $6.75
per share and (iii) the voting of shares of Series B Preferred Stock (on an as
converted basis) together with shares of the Company's Common Stock on all
matters, including the election of directors. The coupon rate of 7.5% per annum
for dividends with respect to the Series B Preferred Stock remains unchanged
from that of the Series A Preferred Stock. During the fiscal year ending
November 30, 1996, the Company is entitled, at its option, to pay dividends on
the Series B Preferred Stock in either additional shares of Series B Preferred
Stock or in cash. Thereafter, dividends on the Series B Preferred Stock will be
payable only in cash. The Company elected to pay the dividends of $1.1 million
and $2.1 million due on May 31 and August 31, 1996, respectively, in additional
shares of Series B Preferred Stock.
NOTE 8. SUBSEQUENT EVENT
- ------- ----------------
In September 1996, L.A. Gear (Far East) Limited, the Company's Far East
joint venture with Inchcape Pacific Limited ("Inchcape"), ceased operations as
the exclusive marketer, distributor and seller of L.A. Gear branded footwear,
apparel and accessories in select Far East markets.
The joint venture was formed in December 1993 and, through August 31, 1996,
has recorded aggregate net sales of $18.3 million and recognized an aggregate
net loss of $6.9 million.
The Company has consolidated the results of operations of the joint venture
for the nine months ended August 31, 1996 and, as of that date, has netted the
assets, liabilities and minority interest of the joint venture, the net impact
of which is not material to the Company's consolidated balance sheet. Minority
interest in the consolidated condensed statements of operations represents
Inchcape's share of losses in the joint venture for the periods presented. The
Company anticipates receiving approximately $1 million in proceeds upon the
dissolution of the joint venture.
9
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
- ------- ---------------------------------------------------------------
RESULTS OF OPERATIONS
---------------------
All references to years are to fiscal years ending November 30, 1996 or 1995, as
applicable.
NET SALES
- --------------------------------------------------------------------------------
In the third quarter of 1996, the Company's net sales decreased 43.4% to
$53.4 million compared to $94.4 million in the third quarter of 1995. For the
nine months ended August 31, 1996, the Company's net sales decreased 29.7% to
$170.6 million compared to $242.8 million in the prior year period. Domestic
net sales in the third quarter and nine months ended August 31, 1996 decreased
by 45.6% and 24.1% from the comparable 1995 periods, respectively. Net
international sales, which accounted for approximately 31.5% and 28.6% of the
Company's total net sales for the quarter and nine months ended August 31, 1996,
respectively, decreased by 37.7% and 40.8% from the comparable 1995 periods.
The following tables set forth certain information regarding the Company's
net sales:
<TABLE>
<CAPTION>
THREE MONTHS ENDED AUGUST 31, NET SALES
- ----------------------------- --------------------------------------------
1996 1995
------------------- ---------------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
DOMESTIC FOOTWEAR
CHILDREN'S $ 24,918 47% $ 39,323 42%
WOMEN'S 7,143 13 14,497 15
MEN'S 3,763 7 12,390 13
OTHER 782 1 1,139 1
-------- --- -------- ---
TOTAL DOMESTIC SALES 36,606 68 67,349 71
-------- --- -------- ---
INTERNATIONAL FOOTWEAR
CHILDREN'S 9,543 18 16,878 18
WOMEN'S 4,233 8 4,154 5
MEN'S 2,627 5 4,747 5
OTHER 422 1 1,226 1
-------- --- -------- ---
TOTAL INTERNATIONAL SALES 16,825 32 27,005 29
-------- --- -------- ---
TOTAL NET SALES $ 53,431 100% $ 94,354 100%
======== === ======== ===
<CAPTION>
NINE MONTHS ENDED AUGUST 31, NET SALES
- ----------------------------- --------------------------------------------
1996 1995
------------------- ---------------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
DOMESTIC FOOTWEAR
CHILDREN'S $ 65,185 38% $ 94,717 39%
WOMEN'S 35,587 21 34,571 14
MEN'S 19,176 11 28,925 12
OTHER 1,827 1 2,165 1
-------- --- -------- ---
TOTAL DOMESTIC SALES 121,775 71 160,378 66
-------- --- -------- ---
INTERNATIONAL FOOTWEAR
CHILDREN'S 26,036 15 46,442 19
WOMEN'S 11,456 7 15,322 6
MEN'S 7,481 5 17,717 8
OTHER 3,821 2 2,901 1
-------- --- -------- ---
TOTAL INTERNATIONAL SALES 48,794 29 82,382 34
-------- --- -------- ---
TOTAL NET SALES $170,569 100% $242,760 100%
======== === ======== ====
</TABLE>
10
<PAGE>
The following tables set forth the percentage changes, by Children's,
Women's and Men's categories, in the number of pairs sold during the 1996 period
as compared to the same period of 1995:
<TABLE>
<CAPTION>
THREE MONTHS ENDED AUGUST 31, VOLUME OF FOOTWEAR SOLD
- ----------------------------- ------------------------
DECREASE BETWEEN 1996 AND 1995
----------------------------------------
DOMESTIC INTERNATIONAL TOTAL
---------- ---------------- --------
<S> <C> <C> <C>
CHILDREN'S (33.9%) (24.5%) (31.6%)
WOMEN'S (48.4%) -- (37.9%)
MEN'S (66.0%) (44.7%) (60.7%)
TOTAL VOLUME DECREASE (42.6%) (22.9%) (37.8%)
<CAPTION>
NINE MONTHS ENDED AUGUST 31, VOLUME OF FOOTWEAR SOLD
- ---------------------------- -------------------------
INCREASE (DECREASE) BETWEEN 1996 AND 1995
------------------------------------------------
DOMESTIC INTERNATIONAL TOTAL
---------- ------------- --------
<S> <C> <C> <C>
CHILDREN'S (17.2%) (38.4%) (23.5%)
WOMEN'S 22.3% (26.3%) 7.9%
MEN'S (26.5%) (55.4%) (36.5%)
TOTAL VOLUME DECREASE (9.2%) (39.0%) (18.3%)
</TABLE>
The decrease in overall net sales for the quarter was primarily
attributable to reduced worldwide demand for the Company's products and a $15.5
million reduction in domestic sales to Wal-Mart from the comparable prior year
period. Despite the lower total international sales, the response to the new
adult Fatmox(TM) line in Europe has been positive, generating over half of the
European adult sales for the quarter.
The decrease in overall net sales for the nine months ended August 31, 1996
was primarily attributable to (i) reduced worldwide demand for the Company's
children's lighted footwear and men's products and (ii) a $2.68 per pair
decrease in the average domestic selling price, primarily with respect to
children's lighted footwear and the women's Wal-Mart line.
Total sales of the Company's children's lighted shoes decreased by $15.4
million and $48.9 million to $18.7 million and $50.7 million during the three
months and nine months ended August 31, 1996, respectively, compared to the same
periods in 1995. Domestic sales of children's lighted product decreased by $7.3
million in the third quarter of 1996 primarily due to a decrease in volume of
0.4 million pairs. For the first nine months of 1996, domestic sales of
children's lighted product decreased by $27.5 million with a decrease in volume
of 1.4 million pairs and a decrease in the average selling price per pair of
$1.80 from the prior year period. Internationally, children's lighted sales
decreased by $8.1 million and $21.5 million in the three months and nine months
ended August 31, 1996, respectively, compared to the same periods in 1995,
primarily in Europe and Asia.
In addition, late deliveries of the Company's new children's lighted
footwear collection, NEONZ(TM), resulted in cancellations of more than $2.6
million in customer orders during the quarter ended August 31, 1996. The Company
does not anticipate further cancellations of customer orders for NEONZ(TM)
footwear due to production delays.
GROSS MARGIN
- --------------------------------------------------------------------------------
The consolidated gross margin for the third quarter and the nine months
ended August 31, 1996 decreased to 26.6% and 28.4% from 34.5% and 32.2% during
the comparable periods in 1995, respectively. The decrease principally resulted
from a decline in international gross margins to 13.1% and 22.0% in the third
quarter and nine months ended August 31, 1996, respectively, from 39.2% and
35.8% in the comparable 1995 periods. These decreases in the international
margin were primarily due to increases of $2.1 million and $2.7 million,
respectively, in markdowns issued by the Company's Far East joint venture, low
margins realized on sales of discontinued lighted product and increases in
reserves for slow moving and discontinued lighted inventory.
11
<PAGE>
Domestically, gross margins increased to 32.8% and 31.0% for the third
quarter and nine months ended August 31, 1996, respectively, from 32.6% and
30.4% during the comparable periods in 1995. In the second and third quarters of
fiscal 1996, the Company settled a number of outstanding claims against
factories for defective product, which settlements were partially offset by
liabilities to such factories for unamortized molds and tooling. The net
settlement amounts had a favorable impact of 1.1% on the Company's domestic
margin for the nine months ended August 31, 1996. Losses on domestic sales of
discontinued products sold below cost were offset against previously established
inventory reserves.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
- --------------------------------------------------------------------------------
Total selling, general and administrative expenses decreased by $10.6
million, or 32.8%, to $21.6 million in the third quarter of 1996 and decreased
by $32.0 million, or 32.8%, to $65.5 million in the nine months ended August 31,
1996 compared to the respective prior year periods. Domestic selling, general
and administrative expenses declined by $7.7 million, or 33.5%, to $15.3 million
in the third quarter of 1996 and by $23.6 million, or 33.2%, to $47.4 million in
the nine months ended August 31, 1996 from the comparable prior year periods.
In the nine months ended August 31, 1996, the reduction in domestic expenses was
primarily due to the benefits realized from the implementation of the Company's
1995 corporate reorganization plan which reduced (i) advertising and promotional
expenses by $8.4 million, (ii) compensation and benefit expenses by $4.5
million, (iii) depreciation by $2.2 million, (iv) professional and consulting
fees by $2.1 million and (v) other net expenses by $1.7 million. Approximately
$2.3 million in restructuring costs incurred in the first nine months of 1996
was applied against the restructuring reserve established in fiscal 1995. In
addition, bad debt expense decreased by $2.9 million as a result of lower sales,
a reduced level of bad debt write-offs and a $0.9 million recovery of bad debt
in the first quarter of 1996. Sales commissions also decreased by $1.8 million
due to reduced sales in the first nine months of 1996 compared to the prior year
period. International operating expenses decreased by $8.4 million, or 31.7%, to
$18.1 million compared to $26.5 million in the first nine months of 1995
primarily due to lower advertising and promotional expenses, compensation and
benefits and bad debt expense.
Despite the overall decrease in selling, general and administrative
expenses, as a percentage of net sales, such expenses in the third quarter of
1996 increased to approximately 40.5% from approximately 34.1% in the prior year
quarter as a result of reduced sales. Total selling, general and administrative
expenses, as a percentage of net sales, decreased in the nine months ended
August 31, 1996 to approximately 38.4% from 40.2% in the comparable prior year
period. Changes in the Company's selling, general and administrative expenses
cannot be directly related to fluctuations in sales volume as a substantial
portion of such expenses are (i) fixed in nature, such as compensation and
benefits for management and administrative personnel, rent, insurance,
depreciation and other overhead charges or (ii) incurred to benefit future
periods, such as media, advertising and trade show expenses.
OTHER
- --------------------------------------------------------------------------------
Interest Expense Interest expense of $1.0 million and $3.1 million for the
three months and nine months ended August 31, 1996, respectively, and $1.0
million and $3.0 million for the three months and nine months ended August 31,
1995, respectively, was primarily related to interest costs on the $50 million,
7 3/4% convertible subordinated debentures due 2002 (the "Debentures") issued in
December 1992.
Interest Income Interest income amounted to $0.5 million and $1.5 million for
the three months and nine months ended August 31, 1996, respectively, compared
to $0.2 million and $1.5 million in the comparable prior year periods. The
increase in interest income for the quarter ended August 31, 1996 was primarily
a result of higher average cash balances.
Minority Interest Minority interest increased by $2.6 million and $4.1 million
for the quarter and nine months ended August 31, 1996, respectively. These
increases relate to losses incurred by the Company's Far East joint venture with
Inchcape Pacific Limited ("Inchcape") primarily as a result of markdowns given
to its customers and reduced sales of children's lighted product. Minority
interest represents the share of the joint venture's losses allocated to
Inchcape pursuant to the terms of the joint venture agreement.
12
<PAGE>
In September 1996, L.A. Gear (Far East) Limited, the Company's Far East
joint venture with Inchcape, ceased operations as the exclusive marketer,
distributor and seller of L.A. Gear branded footwear, apparel and accessories in
select Far East markets. The Company anticipates receiving approximately $1
million in proceeds upon the dissolution of the joint venture. See Notes to
Consolidated Financial Statements, Note 8 - Subsequent Event.
The Company is currently reviewing alternative means of distributing L.A.
Gear branded products in the Far East markets previously serviced by the joint
venture. Separately, the Company has recently entered into agreements with
Daiwa Corporation and Itochu Corporation to distribute L.A. Gear branded
footwear and L.A. Gear branded apparel and accessories, respectively, in Japan,
a market not previously serviced by the joint venture.
Management In August 1996, Bruce MacGregor joined the Company as Senior Vice
President - Product Marketing. Prior to joining the Company, Mr. MacGregor
served as Vice President - Marketing at Avia and Co-Founder, President and CEO
at Deja Shoe. James Moodhe, Senior Vice President - Marketing, Design and
Development, left the Company in August 1996 to pursue other career
opportunities.
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,
1996 1995
----------- ------------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
CASH AND CASH EQUIVALENTS $37,056 $ 35,956
WORKING CAPITAL 87,410 103,999
OUTSTANDING LETTERS OF CREDIT 17,930 24,440
CONVERTIBLE SUBORDINATED DEBENTURES DUE 2002 50,000 50,000
MANDATORILY REDEEMABLE SERIES A CUMULATIVE
CONVERTIBLE PREFERRED STOCK PLUS ACCRUED
AND UNPAID DIVIDENDS -- 107,746
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
AUGUST 31, AUGUST 31,
------------------- ------------------
1996 1995 1996 1995
-------- ------- ------ -------
<S> <C> <C> <C> <C>
AVERAGE DAILY SHORT-TERM BORROWINGS $ -- $138 $ 3 $493
WEIGHTED AVERAGE INTEREST RATES -- 8.2% 8.2% 8.2%
</TABLE>
Cash and Cash Equivalents Cash and cash equivalent balances increased by $1.1
million from November 30, 1995 to $37.1 million at August 31, 1996 primarily due
to a reduction in inventory from the fiscal 1995 year end partially offset by a
decrease in current liabilities and the funding of the fiscal 1996 year to date
operating loss.
Inventory Inventory decreased from $51.7 million (5.3 million pairs) at November
30, 1995 to $29.4 million (3.2 million pairs) at August 31, 1996 due to the
shipment of 0.6 million pairs to Wal-Mart in the first half of 1996 from the
November 30, 1995 inventory and the Company's continuing efforts to effectively
manage inventory levels.
Borrowing Facilities Effective as of August 31, 1996, the Company entered
into an amendment to its existing revolving credit facility with BankAmerica
Business Credit, Inc. ("BABC") for loans and letters of credit (the "Revolving
Facility"). The amendment provides for, among other things, (i) an extension of
the term of the Revolving Facility for an additional three years to November 30,
1999, (ii) a reduction in the maximum amount available for aggregate loans and
letters of credit at any time from $75 million to $50 million, (iii) an increase
in the maximum amount of aggregate loans permitted to be outstanding at any time
from $10 million to $20 million and (iv) a reduction in the minimum Adjusted
Tangible Net Worth (as defined in the Revolving Facility) required to be
maintained under the Revolving Facility, with a restriction on the payment of
cash dividends on the
13
<PAGE>
Company's Series B Cumulative Convertible Preferred Stock and a reduction in the
amount of the available Borrowing Base (as defined in the Revolving Facility) if
the Company's Adjusted Tangible Net Worth falls below certain thresholds.
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.
Share Exchange Transaction On April 9, 1996, the Company's shareholders
approved the exchange (the "Share Exchange Transaction") of all of the issued
and outstanding shares of the Company's Series A Cumulative Convertible
Preferred Stock, stated value $100 per share ("Series A Preferred Stock"), and
all accrued and unpaid dividends thereon for (i) 1,000,000 shares of a new
series of preferred stock to be issued by the Company, entitled Series B
Cumulative Convertible Preferred Stock, stated value $100 per share ("Series B
Preferred Stock"), plus (ii) an additional number of shares of Series B
Preferred Stock equal to the dollar amount of accrued and unpaid dividends in
respect to the Series A Preferred Stock through the closing of the Share
Exchange Transaction. The Share Exchange Transaction was completed on April 12,
1996 and, as a result, Trefoil Capital Investors, L.P. ("Trefoil"), the holder
of all the Series A Preferred Stock, was issued 1,107,902 shares of Series B
Preferred Stock and the Series A Preferred Stock was retired.
The terms of the Series B Preferred Stock provide for, among other things,
(i) the elimination of the mandatory redemption feature of the Series A
Preferred Stock (including the initial $35 million mandatory redemption
obligation, plus accrued and unpaid dividends on the Series A Preferred Stock,
in August 1996), (ii) a reduction in the conversion price from $10.00 to $6.75
per share and (iii) the voting of shares of Series B Preferred Stock (on an as
converted basis) together with shares of the Company's Common Stock on all
matters, including the election of directors. The coupon rate of 7.5% per annum
for dividends with respect to the Series B Preferred Stock remains unchanged
from that of the Series A Preferred Stock. During the fiscal year ending
November 30, 1996, the Company is entitled, at its option, to pay dividends on
the Series B Preferred Stock in either additional shares of Series B Preferred
Stock or in cash. Thereafter, dividends on the Series B Preferred Stock will be
payable only in cash. The Company elected to pay the dividends of $1.1 million
and $2.1 million due on May 31 and August 31, 1996, respectively, in additional
shares of Series B Preferred Stock.
Short and Long-Term Liquidity The short-term and long-term liquidity of the
Company is contingent primarily on the Company's future operating results and
certain other factors. The Company believes that its present funding sources
are sufficient to sustain the Company's anticipated short-term and long-term
liquidity needs. 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, 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.
FUTURE OUTLOOK
- --------------------------------------------------------------------------------
At September 30, 1996, the Company had a combined domestic and
international order backlog of $49.0 million, $16.7 million of which is
scheduled to ship in the October and November period and $24.5 million of which
is scheduled to ship in the first quarter of fiscal 1997. The combined backlog
at September 30, 1995 was $108.2 million, $38.0 million of which was scheduled
to ship in the October and November 1995 period and $58.1 million of which was
scheduled to ship in the first quarter of fiscal 1996.
The lower backlog at September 30, 1996 is primarily due to (i) the
inclusion in the September 30, 1995 backlog of the then-remaining balance ($43.7
million) of Wal-Mart's $80 million minimum purchase commitment for fiscal 1995,
(ii) an approximate $7.8 million decrease in orders for children's lighted
product and (iii) reduced "futures" orders for the Company's adult products.
Children's lights as a percentage of the total September 30, 1996 and 1995
backlog, excluding Wal-Mart orders, were 29.8% and 32.2%, respectively. The
Company's agreement with Wal-Mart does not provide for the sale of L.A. Gear
lighted footwear products to Wal-Mart. Wal-Mart is not subject to any minimum
purchase commitment for fiscal 1996. The combined backlog at September 30, 1996
includes $5.4 million for Wal-Mart.
Shipments and sales for future periods depend on, among other things, the
combination of "futures" and "at-once" orders. Accordingly, the comparison of
backlog from period to period may not be indicative of eventual
14
<PAGE>
actual shipments. Management believes, however, that it is unlikely that the
Company will be able to generate a sufficient volume of "at-once" orders in its
fourth quarter to produce operating income for such period or for fiscal 1996.
In the first nine months of fiscal 1996, the Company's operating expenses
have declined from $97.5 million to $65.5 million, while the Company's net sales
have declined from $242.8 million to $170.6 million, from the comparable prior
year period. The Company is reviewing strategic, marketing and operational
alternatives for (i) generating increased revenues and (ii) bringing the
Company's operating expenses in line with its sales base, each of which is
necessary for the Company to be able to effectively compete in an intensely
competitive and consolidating branded athletic footwear industry. Although no
specific actions have been determined, the Company believes that it is likely
that additional charges (which could be material) will be incurred in the fourth
quarter in connection with these efforts.
15
<PAGE>
PART II - OTHER INFORMATION
ITEM 1 - LEGAL PROCEEDINGS
- ------ -----------------
- Not applicable.
ITEM 2 - CHANGES IN SECURITIES
- ------ ---------------------
- Not applicable.
ITEM 3 - DEFAULTS UPON SENIOR SECURITIES
- ------ -------------------------------
- Not applicable.
ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
- ------ ---------------------------------------------------
(a) The Annual Meeting of Shareholders of the Company was held on June 11,
1996.
(b) Omitted pursuant to Instruction 3 to Item 4 of Form 10-Q.
(c) (i) PROPOSAL ONE: Election of Directors:
<TABLE>
<CAPTION>
For Withheld
---------- --------
<S> <C> <C>
William L. Benford 36,208,465 487,180
Walter C. Bladstrom 36,281,908 413,737
Allan E. Dalshaug 36,250,893 444,652
Willie D. Davis 36,279,862 415,783
Stanley P. Gold 36,285,865 409,780
Stephen A. Koffler 36,266,485 429,160
Ann E. Meyers 36,263,551 432,094
Clifford A. Miller 36,263,551 432,094
Robert G. Moskowitz 36,255,355 440,290
Vappalak A. Ravindran 36,274,972 420,673
</TABLE>
(c)(ii) PROPOSAL TWO: Approval of an amendment to the Company's 1992 Stock
Option Plan for Eligible Nonemployee Directors to provide for the
granting of options to purchase Common Stock to members of the
Company's Board of Directors in lieu of any cash compensation for
their services on the Board:
<TABLE>
<S> <C>
For: 35,328,646
Against: 1,178,999
Abstain: 187,549
</TABLE>
(c)(iii) PROPOSAL THREE: Ratification of the appointment of Price
Waterhouse LLP as the Company's independent accountants for the
fiscal year ending November 30, 1996:
<TABLE>
<S> <C>
For: 36,378,264
Against: 197,241
Abstain: 120,139
</TABLE>
(d) Not applicable.
16
<PAGE>
ITEM 5 - OTHER INFORMATION
- ------ -----------------
- Not applicable.
ITEM 6 - EXHIBITS AND REPORTS ON FORM 8-K
- ------ --------------------------------
(a) Exhibits:
10.1 Employment Agreement, dated as of August 26, 1996, between
Bruce W. MacGregor and the Company.
27 Financial Data Schedule.
(b) Reports on Form 8-K:
Not applicable.
17
<PAGE>
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Dated: October 15, 1996 L.A. GEAR, INC.
---------------------
By: /s/ William L. Benford
-------------------------------
William L. Benford
President and
Chief Operating Officer
18
<PAGE>
EXHIBIT INDEX
-------------
<TABLE>
<CAPTION>
Exhibit No. Document Page No.
- ----------- ---------------------------------------- --------
<S> <C> <C>
10.1 Employment Agreement, dated as of August
26, 1996, between Bruce W. MacGregor and
the Company. 20
27 Financial Data Schedule. 32
</TABLE>
19
<PAGE>
EXHIBIT 10.1
EMPLOYMENT AGREEMENT
--------------------
AGREEMENT made as of August 26, 1996, by and between L.A. GEAR, INC., a
California corporation (the "Company"), and Bruce W. MacGregor (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--Product
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 including, but not limited
to, the management and direction of all facts of the Company's marketing and
product development. 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.
Employee agrees that he will be in the Company's Santa Monica headquarters on a
regular basis during Monday through Thursday of every week (unless he is
required to travel for business purposes to other locations and except in the
case of planned vacations) and will be in the Santa Monica headquarters on
Fridays on an as-needed basis for meetings or to attend to other necessary
business matters. On those Fridays that Employee is not in the office, he will
continue to devote his full business time and attention to his services to the
Company, and will be available by telephone as necessary.
<PAGE>
2. Term.
----
(a) The term of employment of the Employee hereunder shall commence as
of August 26, 1996 (the "Commencement Date") and shall continue in full force
and effect until August 25, 1997, unless earlier terminated 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.
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
$225,000.
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 equal to 40% of
Employee's base salary.
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 date of the first Board of Directors meeting following the
Commencement Date (the "Grant Date") non-qualified stock options to purchase an
aggregate of 70,000 shares of the Company's Common Stock, no par value per share
("Common Stock"), 30,000 of which options will vest on the one-year anniversary
of the Grant Date, 20,000 of which will vest on the two-year anniversary of the
Grant Date, and 20,000 of which will vest on the three-year anniversary of the
Grant Date. All of such options will be subject to the terms and conditions set
forth in the Non-Qualified Stock Option Agreement attached hereto as Exhibit A
2
<PAGE>
(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.
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.
During the first year of his Employment Term only, the Company will pay
for one round trip coach airfare ticket between Los Angeles and Portland for
Employee each week (which ticket may be used by Employee or any member of his
immediate family, but which may not be sold). Such tickets will be purchased
through the Company's travel agency and Employee will use his best efforts to
facilitate the purchase of such tickets under the most favorable rates
available, including but not limited to by providing as much notice as possible
of travel plans.
The Company will also reimburse Employee the expenses for a furnished
apartment in the Santa Monica vicinity (the "Apartment") during the first year
of his Employment Term only, the selection of which shall be in the sole
discretion of the Company and the lease payments for which will be made directly
by Employee and reimbursed by the Company (the "Lease Reimbursements"). The
lease for the Apartment will be in Employee's
3
<PAGE>
name. At the request of Employee, the Company shall advance Employee such amount
as may be necessary to cover the security deposit charged for the Apartment,
with such advance to be payable by Employee within ten (10) business days after
vacating the Apartment (except as specified below). In addition, the Company
shall, on a monthly basis, gross up the monthly Lease Reimbursements in an
amount necessary to pay Employee's taxes on such Lease Reimbursements based on
the standard supplemental wage percentage method established by the Internal
Revenue Service and state taxing authority. In the event that Employee's
employment with the Company is terminated pursuant to Sections 4(a)(ii), (iv),
(v) or (vi) hereunder prior to the expiration of the initial six month lease
term on the Apartment, the Company agrees that it will use its best efforts to
have the lease for the Apartment assigned to the Company, and will pay the
balance of the lease payments from the date of termination to the expiration of
the term and Employee will not be liable therefor. In the event the lease is
assigned to L.A. Gear, MacGregor shall only be required to repay the security
deposit advance to the extent the Company does not receive the full security
deposit from the Apartment landlord upon termination of the Apartment lease.
Additionally, after one full year of employment under this Employment
Agreement, the Company will reimburse the Employee for reasonable out-of-pocket
moving costs and expenses incurred by the Employee in connection with a move of
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"), in accordance with the Company's then-
current Relocation Policy (the "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;
4
<PAGE>
(v) the close of business on the day following the date on which
the Board of Directors or Executive Committee of 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.
(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
<PAGE>
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.
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
6
<PAGE>
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.
(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.
7
<PAGE>
(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 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:
8
<PAGE>
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:
Bruce W. MacGregor
13515 Streamside Drive
Lake Oswego, Oregon 97035
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.
9
<PAGE>
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.
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 Benford
---------------------------
William L. Benford
President
/s/ Bruce W. MacGregor
--------------------------
Bruce W. MacGregor
(Employee)
10
<PAGE>
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 OF
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.
11
<PAGE>
(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.
12
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