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L.A. Gear Seeks Chapter 11 Bankruptcy Reorganization

Apparel: Shoe company says it will use filing to carry out pact reached with bondholders.

January 14, 1998|JAMES F. PELTZ | TIMES STAFF WRITER

L.A. Gear Inc., an athletic-shoe powerhouse a decade ago but now an industry laggard overwhelmed by debt, said Tuesday that it filed for reorganization under Chapter 11 of the U.S. bankruptcy laws.

The Santa Monica-based company said it made the filing in U.S. Bankruptcy Court in Los Angeles after reaching a restructuring pact with a group representing holders of $50 million of L.A. Gear bonds.

L.A. Gear said it will use the bankruptcy proceedings to implement the agreement. Under Chapter 11, a company keeps operating but is protected against creditors' lawsuits while it works out a plan to pay off or restructure its debts. L.A. Gear said it expects to "continue its day-to-day business activities without interruption."

The Chapter 11 filing is "an opportunity to begin focusing on L.A. Gear's long-term success," David Gatto, chairman and chief executive, said in a statement. "During our restructuring process, we fully expect to deliver all of our pending orders and to proceed with our fall 1998 line of footwear."

Gatto became chairman last October after Los Angeles-based PCH Investments acquired a 42% equity stake in the company, much of it purchased from Trefoil Capital Investors. Trefoil, an investment group whose principals included Walt Disney Co. Vice Chairman Roy E. Disney, had made its investment in the early 1990s as part of a failed bid to turn the struggling company around.

The new restructuring calls for, among other things, eliminating L.A. Gear's existing common stock. Those shares have been trading at around 19 cents a share on Nasdaq's Bulletin Board, after being de-listed by the New York Stock Exchange in December.

Under the proposed overhaul, newly created shares of L.A. Gear preferred stock--which would be convertible into common shares--would be distributed to PCH Investments, the bondholders and other creditors.

It wasn't immediately disclosed how much of L.A. Gear each group will own. Asked if PCH Investments will keep at least its current ownership of 42%, L.A. Gear spokesman Bill Schreiber said "there's been no indication that will change," but that specifics won't be known until L.A. Gear files its reorganization plan, perhaps as early as next week.

The bankruptcy petition was not a surprise. As its cash ran out, L.A. Gear in November laid off 60% of its workers, defaulted on an interest payment on its bonds and said it might enter Chapter 11 proceedings to work things out.

L.A. Gear never fully recovered from its collapse in 1990-91, a slide that was nearly as abrupt as the shoemaker's earlier stellar growth.

L.A. Gear, begun as a shop on Los Angeles' Melrose Avenue in 1982, became a star of the apparel industry in the late 1980s, mostly because its colorful high-top sneakers were a smash with teenage girls. By 1990, it had 12% of the U.S. athletic-shoe market, third only to titans Nike Inc. and Reebok International Ltd.

But L.A. Gear's prominence faded quickly amid marketing gaffes, poorly made shoes, unpopular designs, bloated inventories and an ill-fated push into other apparel.

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