Development, And Sourcing Agreement

LIGHTED FOOTWEAR DESIGN,
DEVELOPMENT, AND SOURCING AGREEMENT


This LIGHTED FOOTWEAR DESIGN, DEVELOPMENT, AND SOURCING AGREEMENT ("Agreement") is made and entered into this 7th day of March, 1997, between BBC International, Ltd., a New York corporation having an office at 19 West 34th Street, New York, NY 10001 (hereinafter "BBC"), and L.A. Gear, Inc., a California corporation, having an office at 2850 Ocean Park Boulevard, Santa Monica, CA 90405 (hereinafter "LAG").


WHEREAS, BBC has in the past designed, developed and acted as a buying agent for LAG with respect to certain children's lighted footwear marketed and distributed by LAG.


NOW, THEREFORE, in consideration of the mutual covenants and obligations hereinafter set forth and for other valuable and sufficient consideration extended by each party hereto to the other, the receipt and sufficiency of which are hereby acknowledged, the parties hereto agree as follows:


1. INCORPORATION OF WHEREAS CLAUSES. The Whereas clauses are incorporated in the text of this Agreement.


2. SCOPE OF SERVICES.


(a) LAG grants to BBC the exclusive right (i) to design and develop all children's lighted footwear marketed and distributed by LAG, including any and all sizes, genders, types and constructions thereof (collectively, the "Product") to be shipped to LAG or its customers during the Term (as defined below); and (ii) subject to the provisions set forth in Section 4 below, to source (i.e., arrange for the manufacture, inspection, packaging, shipment and delivery of) all Product; PROVIDED, HOWEVER, that during the pendency of the litigation entitled L.A. GEAR, INC., etc. v. ORLAFORD LIMITED, etc., et al., Case No. 26-776726B (CWx), United States District Court for the Central District of California, and/or ORLAFORD, etc., et al. v. L.A. GEAR, etc., et al., Civil Action No. 96C-973-5, United States District Court for the Western District of Wisconsin (collectively, the "Rodgers Litigation"), BBC shall not source Product utilizing (i) the apparatus disclosed and claimed in United States Patent No.4,848,009 in the name of Nicholas A. Rodgers and Canadian Patent No. 1,253,832 in the name of Nicholas A. Rodgers (the "Rodgers Patents") or (ii) any footwear which was found to have infringed the Rodgers Patents in a judgment in ORLAFORD LIMITED, et al. v. K-MART CORPORATION et al., Civil Action No. 96-C0058-S, United States District Court for the Western District of Wisconsin (collectively, "Excluded Product"). With respect to any and all Product which is not to be sourced by BBC (including, without limitation any and all Excluded Product), BBC shall (i) instruct all of its agents and affiliates, and all factories manufacturing such Product (including, without limitation, any and all Excluded Product) and any and all


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agents therefor (including, without limitation, Continents (Taiwan) and Saihon (Hong Kong)) and all suppliers or vendors of lighting components utilized in such Product (including, without limitation, any and all Excluded Product) (x) to cooperate fully with LAG and/or any sourcing agent designated by LAG and (y) to provide any and all information (including, without limitation, specifications and costing information) regarding such Product (including, without limitation, any and all Excluded Product) to LAG and/or any sourcing agent designated by LAG so to ensure the timely manufacture and delivery of such Product (including, without limitation, any and all Excluded Product); and (ii) send letters (as requested by, and in a form satisfactory to LAG) to each of the parties set forth in clause (i) of this sentence confirming the instructions described therein.


(b) BBC shall incorporate into Product designs the particular type of lighting technology specified or approved by LAG. BBC shall employ only those lighting component suppliers or vendors that are approved by LAG, in the design, development and/or sourcing of any Product hereunder; PROVIDED, HOWEVER, that (i) LAG (or its designee) shall have the right to purchase any and all lighted components utilized in the Product directly and provide such lighted components to the factory or factories manufacturing such Product, (ii) LAG shall have the right to designate lighting component suppliers or vendors with respect to any "New Technology" (as defined in Section 6(c) below), the rights to which have been obtained by LAG from a party other than BBC; PROVIDED, that any such lighting component supplier or vendor designated by LAG is able to meet the quality standards established by LAG and BBC with respect to lighting technology to be utilized in Product, and (iii) lighting components shall not be purchased from Reflex Corporation of America, Inc. ("Reflex") prior to the settlement or dismissal of the Rodgers Litigation without the prior written consent of LAG.


3. DESIGN AND DEVELOPMENT SERVICES.


On a seasonal basis, BBC shall, through its special line-building staff, and based on LAG's marketing team's requests or briefs, create new lines of Product expressly for LAG. BBC shall maintain coordinated calendar timetables with LAG to facilitate Product design and development in accordance with the provisions of Section 3(h) below. Individual design and development staffs for each line shall be designated by BBC to communicate directly with their LAG counterpart on an "as needed" basis. For such purpose, each of BBC and LAG shall designate in writing one or more members of its respective line building and/or development staffs to serve as the principal liaison(s) with the other party hereto. Each such designee shall make himself or herself available to the other to the extent reasonably necessary and appropriate for the performance of the respective duties of BBC and LAG hereunder. The initial Designee of each of the respective parties to this Agreement shall be as specified in ExhibitA attached hereto.


(a) PRODUCT BRIEFS. On a seasonal basis, each of LAG and BBC shall prepare and submit to the other a product brief, in the form attached hereto as Exhibit B ("Product Brief"), for each Product it proposes to be designed and/or developed by BBC


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for LAG hereunder. LAG reserves the right to amend, revise, expand and otherwise change the form of the Product Brief in its absolute discretion at any time and from time to time. LAG shall review all Product Briefs submitted to it by BBC and, from the entire group of the exchanged Briefs, shall (i) select those proposed Products, if any, with respect to which it wishes BBC to develop detailed sketch designs, color graphics and prototypes ("Stage I Products"), and (ii) provide BBC with its comments and/or instructions as to any desired changes or modifications to the Product Briefs for such Stage I Products.


(b) INITIAL DESIGN AND SAMPLES. BBC shall produce detailed sketch design and color graphics for (i) each Stage I Product, and (ii) each Product for which LAG has prepared and submitted a Product Brief to BBC ("LAG Original(s)"). BBC shall then produce, or cause to be produced, at least two (2) pairs of prototypes or initial samples of each such Stage I Product and/or LAG Original and deliver one pair to LAG for its review and approval and retain one pair for its own reference.


LAG shall then (i) review the refined sketches and prototypes; (ii) select those Stage I Products and/or LAG Originals for which it wishes BBC to develop and produce refined samples ("Stage II Products"); and (iii) shall provide BBC with its comments and/or instructions as to the changes or modifications, if any, that it desires to be made in the prototypes of such Stage II Products.


(c) REFINED SAMPLES. BBC shall then re-develop and produce refined samples of the Stage I Products selected by LAG, and shall produce or cause to be produced at least two pairs of each such refined initial sample Stage II Product, and shall deliver one pair to LAG for its review and approval and shall retain one pair for its own reference.


LAG shall then (i) review the refined samples; (ii) select those Stage II Products for which it wishes BBC to develop and produce final development samples ("Stage III Products"), and shall provide BBC with its comments and/or instructions as to the changes or modifications, if any, that it desires to be made in the refined samples of such Stage III Products.


(d) FINAL DEVELOPMENT SAMPLING. BBC shall then develop and produce final development samples of the Stage III Products selected by LAG and shall produce, or cause to be produced, at least two (2) pairs of final development samples of each such Stage III Product, and shall deliver one pair to LAG for its review and approval and shall retain one pair for BBC's own reference. Concurrently with its delivery of each final development sample to LAG pursuant to this Section 3(d), BBC shall deliver to LAG a fully completed FCA price confirmation memo, in the form attached hereto as Exhibit C (the "Price Confirmation Memo"), setting forth the FCA price, by factory and country, of such Stage III Product, and the production volume and size range upon which such FCA price is based, and shall be accompanied by detailed cost breakdown sheets for each such Stage IV Product from the factory proposed by BBC to manufacture such Product, setting


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forth the projected cost of each component thereof, its manufacturing, assembly, packaging and freight cost for shipment to LAG's consolidator ("Cost Breakdown Sheets"), together with detailed computerized specification sheets, in the form attached hereto as Exhibit D, complete as to each and every material feature, part, component, fabrication method, weight breakdown, required box size, and color description and codes based on LAG's approved color list and referenced to the Pantone color system ("Specification Sheets"), developed for such Stage III Product; PROVIDED, HOWEVER, that (i) if such Price Confirmation Memo (x) is for a Product style that would constitute any EEC quota style (only where applicable) and (y) identifies the People's Republic of China as the proposed country-of-origin, then BBC shall deliver a second fully completed Price Confirmation Memo for such Product style (together with the corresponding Cost Breakdown Sheets and Specification Sheets) which sets forth a country-of-origin other than the People's Republic of China; and (ii) the proposed manufacturer of such Product, and the proposed supplier of the lighted technology to be contained therein, must be acceptable to LAG in its sole discretion.


LAG shall then (i) review the final development samples, (ii) select those Stage III Products for which it wishes to make sales samples ("Stage IV Product"), and (iii) provide BBC with its comments and/or instructions as to the changes or modifications, if any, that it desires to be made for the sales samples of such Stage IV Products.


(e) SALES SAMPLES. For each Stage IV Product selected by LAG for sales sampling by BBC in accordance with Section 3(d) above, LAG shall prepare and submit to BBC a written Sales Sample Request Form, in the form attached hereto as Exhibit E, together with a memorandum outlining any special manufacturing and/or delivery procedures to be followed in connection therewith. BBC shall source and cause to be produced the number of pairs of such sales samples as directed in such forms, but not to exceed one hundred seventy eight (178) pairs thereof, and shall deliver or cause them to be delivered, to LAG for its review and disposition. BBC shall invoice LAG for the manufacturer's actual, FCA cost of all such sales samples developed by it, or shall cause the manufacturer thereof to invoice LAG directly therefor, in either case upon "Net 30 day" terms.


Upon LAG's approval of a sales sample of a Stage IV Product, BBC shall provide at least three pairs of production confirmation samples that incorporate any alterations, corrections or improvements specified by LAG after review of the sales sample of such Stage IV Product. BBC shall provide one pair of the production confirmation sample, together with copies of the corresponding specification sheets pertaining thereto, to (i) the appointed quality control entity (the "Q.C. Agent") and (ii) to LAG, for its review and approval, and BBC shall retain one pair for its own reference. The production confirmation samples approved by LAG, together with the corresponding specification sheets, shall thereafter be the standard by which the applicable Product shall be judged, and except as otherwise agreed in writing by the parties hereto, each Product


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shall conform strictly to its respective production confirmation sample and specification sheets, in terms of its specifications, construction, materials, workmanship and quality.


(f) DETAILED COMMERCIALIZATION PACKAGE. For each Stage IV Product selected by LAG for sales sampling in accordance with Section 3(d) above, BBC shall provide LAG with a commercialization package ("Commercialization Package(s)") comprising the following elements:


(1) Detailed drawings (dimensioned and/or to scale) illustrating every feature and component of each such Stage IV Product, together with the corresponding Specification Sheets.


(2) A "Minimum Matrix", in the form attached hereto as Exhibit F, that sets forth the minimum quantity or pairage, of such Stage IV Product that any proposed manufacturer of such Product requires be ordered; PROVIDED, HOWEVER, that if such Minimum Matrix (i) is for a Product style that would constitute an EEC quota style (only where applicable) and (ii) sets forth a proposed manufacturer located in the Peoples Republic of China, then BBC shall deliver a second Minimum Matrix for such Product style based on a proposed manufacturer located outside the People's Republic of China;


(3) An information package (hereinafter a "Tech Pak"), including such detailed drawings, lists of components, materials, specifications, and specification of manufacturing processes, as is necessary and sufficient to define completely at least one size (VIZ, the selected confirmation sample size) of such Stage IV Product to a manufacturer of the Product;


(4) A list and description of all tooling (including, without limitation, all molds, dies, plates, stamps, patterns, embroidery and lasts to be used in the manufacture of such Product or any component thereof) developed or produced specifically by or on behalf of BBC, or procured from its vendors and/or subcontractors, to make the sales samples of each Stage IV Product; and


(5) Detailed amortization schedules for all molds and permanent tooling required for the commercialization of each such Stage IV Product.


(g) SMU DESIGN AND DEVELOPMENT. A similar design and development procedure to that set forth above in this Section 3 shall be followed relative to special makeup Products ("SMU Products") that are specially designed for particular customers of LAG and which do not otherwise form a part of its seasonal Product line; provided, however, that (i) any and all product briefs prepared by BBC with respect to SMU Products shall be in the form attached hereto as Exhibit G ("SMU Product Brief") and (ii) such design and development procedure fully complies with the SMU Design and Development Guidelines attached hereto as Exhibit H ("SMU Guidelines"). LAG reserves the right to amend, revise, expand and otherwise change the form of SMU


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Product Brief and/or the SMU Guidelines in its absolute discretion at any time and from time to time.


(h) DESIGN AND DEVELOPMENT SCHEDULES. BBC shall perform the services and accomplish the tasks assigned to it under the provisions hereinabove with respect to all in-line Products and SMU Products in strict compliance with LAG's season-specific In-Line Product Development Calendar, a copy of which is attached hereto as Exhibit I, and LAG's SMU Product Development Calendar, a copy of which is attached hereto as Exhibit J, respectively, LAG reserves the right to amend, revise, expand and otherwise change such In-Line and/or SMU Product Development Calendars in its absolute discretion at any time and from time to time.


(i) ADDITIONAL STAFF SERVICES. In furtherance of the development of the Product line, BBC shall implement an LAG-exclusive development and customer-service staff that is coordinated with its overseas liaison offices, such staff including technical staff, laboratory quality control and related communications functions. BBC shall provide LAG in writing with the names, addresses and phone numbers of such overseas staff personnel, which sourcing may include in BBC's discretion a person responsible for sourcing Products and a separate person for research and development.


(j) PRODUCTS NOT SOURCED. BBC shall not be responsible for fulfilling the obligations of BBC set forth in Sections 3(e) and 3(f) of this Agreement with respect to Products which are not to be sourced by BBC.


4. PROCEDURES REGARDING PRICING.


(a) Within twenty (20) calendar days of LAG's receipt of one or more Price Confirmation Memos from BBC pursuant to the terms of Section 3 above, LAG shall deliver to BBC one of the following written responses thereto: (i) an acceptance of the terms specified in such Price Confirmation Memo; (ii) a notice of its intention not to commercialize such Product at such time; or (iii) a copy of a bona fide written offer (a "Competitive Offer") from a third party sourcing agent and/or factory (other than * or * ) to source the identical Product that includes an FCA Price that is at least * lower than that contained in BBC's Price Confirmation Memo for such Product.


(b) Any and all Price Confirmation Memos and/or Competitive Offers (i) must be for the identical Product, and (ii) must be able to meet the minimum specifications of such Product as set forth in the Specification Sheets.


- --------------- * Material omitted and filed separately with the SEC pursuant to a request for confidential treatment.


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(c) In the event that LAG delivers a Competitive Offer to BBC in accordance with Section 4(a) above, BBC may, within ten (10) calendar days of its receipt thereof, deliver to LAG, a revised Price Confirmation Memo; PROVIDED, HOWEVER, that the FOB price for such Product set forth therein must be lower than that contained in the Competitive Offer, and the proposed manufacturer of such Product (and the proposed supplier of the lighted technology to be contained therein) must be acceptable to LAG in its sole discretion. In the event that BBC fails to deliver such revised Price Confirmation Memo within the time period specified above in this Section 4(c), or if such revised Price Confirmation Memo does not satisfy the conditions set forth in the proviso to the first sentence in this Section 4(c), then LAG shall be free to accept the Competitive Offer.


(d) In the event LAG accepts the terms set forth on BBC's initial or revised Price Confirmation Memo, BBC shall (i) secure from each of the Product manufacturers specified or approved by LAG such manufacturer's entrance into and execution of a written "Footwear Manufacturing Agreement" between LAG and such manufacturer in the form attached hereto as Exhibit K (the "Manufacturing Agreement"), and (ii) use its best efforts to secure from each supplier or vendor of lighting components to be utilized in the Product, such supplier's or vendor's entrance into and execution of a written "Lighting Component Supply Agreement" between LAG or LAG's approved factory and such supplier or vendor in the form attached hereto as Exhibit M (the "Electronic Component Supply Agreement"), the terms and conditions of which Manufacturing Agreement and Component Supply Agreement, by this reference, are incorporated herein, and BBC shall serve as LAG's agent with respect to such manufacturers and suppliers and vendors to secure to LAG all of the rights, privileges, and benefits accorded to it under such Manufacturing Agreement and Supply Agreement. BBC shall not source any Product from any manufacturer unless and until such manufacturer has executed a Manufacturing Agreement with LAG. BBC shall not source any lighting components (or permit any factory or agent to source any lighting components) from any supplier or vendor unless and until BBC has used it best efforts to cause such supplier or vendor to execute a Component Supply Agreement with LAG or LAG's approved factory. LAG shall not source any Product through any third party sourcing agent other than BBC unless and until the proposed manufacturer of such Product has executed a Manufacturing Agreement with LAG. BBC shall promptly deliver to LAG executed originals of all Manufacturing Agreements entered into by factories manufacturing Product and all Supply Agreements entered into by suppliers or vendors of lighting components.


(e) Upon reasonable notice, and while in the company of designated BBC liaison staff, LAG shall have access to all factories or other facilities wherein any Product is being sourced by BBC for LAG, as well as to all development and commercialization schedules generated by BBC with respect to such Product.


(f) The parties contemplate that, during the "Term" (as defined below) of this Agreement, the governments of the United States or certain foreign countries or jurisdictions may enact into law such measures affecting international trade that could render the sourcing of Product from certain countries, e.g., the People's Republic of


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China, practically or economically unfeasible. In light of the foregoing, BBC agrees that it will make all commercially reasonable efforts to develop its Product development and sourcing capabilities in multiple countries, and will take other and further measures, such as the procurement of portable or duplicate tooling and Tech Paks, such that, in the event it becomes practically or economically necessary in the reasonable determination of LAG (under the circumstances existing at the time) to shift the development and/or manufacture of Products from one country to another quickly, BBC will be able to, and shall, accomplish the same with a minimum of cost and schedule delays.


5. SOURCING SERVICES. In addition to the obligations of BBC set forth above in Section 4 hereof, with respect to Product sourced by BBC hereunder, BBC shall perform the following services:


(a) Identify factories suitable for the manufacture of Product and, on LAG's behalf, solicit bids from, and negotiate most favorable terms with, such factories and their agents with respect thereto;


(b) Act as LAG's buying agent for the ordering, manufacture, inspection, packing and shipment of Product sourced through the agency of BBC;


(c) In strict accordance with LAG's written instructions, place purchase orders with the selected factories on behalf of LAG and confirm that all such purchase orders are received, understood and confirmed in writing by the relevant factory or factories; such orders shall include all details concerning design specifications, sizes, genders, quantities, prices, packaging instructions, labeling requirements, branding, shipping dates, delivery dates and instructions regarding country of destination, payment terms and other terms of purchase specified by LAG in its instructions;


(d) Ensure that the Q.C. Agent (i) performs random inspections during the production process to assure that the quality and workmanship of the Product in process strictly complies with the relevant sales samples and design and manufacturing specifications, (ii) promptly advise LAG in writing of any problems affecting the completion of orders for Product in accordance with the specified quality and delivery terms therefor, and (iii) certify to LAG in writing (in the form of a signed certificate of inspection) that each order meets all quality specifications for that particular Product in accordance with the quality specifications and sales samples established and/or provided for it;


(e) Obtain any and all documentation necessary for the exportation and/or importation of Product from and/or into their respective countries of origin and destinations;


(f) Provide LAG with the relevant factory's original invoices for Product, it being understood that BBC shall never act as a seller of any Product to LAG;


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(g) Maintain complete and accurate records of all Product ordered, in progress, finished and in transit for the account of LAG and, at the request of LAG, provide LAG with access to, or copies of, such records;


(h) In the event that delivery of any Product is refused by LAG, or not shipped, use its best efforts to prevent the manufacturer of such Product from disposing thereof prior to removing any labels, trademarks and/or other markings identifying or belonging to LAG; and


(i) Pay all costs of conducting its agency and all taxes, including assessments, which may be made against the salary or wages of those directly or indirectly employed by it.


6. EXCLUSIVITY OBLIGATIONS OF BBC.


(a) * BBC shall not design, develop and/or source, or sell or permit the sale of, lighted footwear anywhere in the world by any party other than LAG * .


(b) The exclusive rights granted herein shall include and extend to all patent rights which BBC has obtained a license to use or may hereafter acquire during the Term of this Agreement, and any extension thereof or improvement thereon, and any other rights whatsoever anywhere in the world (the "Light Rights") specifically including, but not limited to U.S. Pat. No.5,408,764 to Wut and U.S. Pat. No.5,430,621 to Raskas. BBC hereby grants to LAG a royalty-free license of U.S. Pat. Nos. 5,408,764 and 5,430,621 to make, have made, use, sell, offer for sale, and otherwise dispose of Products incorporating the inventions of such patents through the agency of BBC and this Agreement. No Product incorporating any of the Light Rights shall be made, used, sold, offered for sale or otherwise disposed of unless and until (i) a Sublicense Agreement, in the form attached hereto as Exhibit M, has been entered into between BBC and LAG and (ii) a Consent to Sublicense Agreement, in the form attached hereto as Exhibit N, has been entered into between BBC and the owner or holder of such Light Rights.


(c) In the event that subsequent to the date of this Agreement, BBC develops or obtains the license or rights to use new lighted technology ("New Technology"), BBC shall deliver a written offer to sublicense the right to utilize such New Technology to LAG before offering any rights to such New Technology to any third party. Any such offer shall be accompanied by (i) a true, correct and complete copy of any proposed license agreement between BBC and any third party with respect to such New Technology, (ii) a written non-infringement opinion from patent counsel to BBC (on which LAG shall be entitled to rely) with respect to such New Technology, and (iii) a


- --------------- * Material omitted and filed separately with the SEC pursuant to a request for confidential treatment.


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working prototype of such New Technology. LAG shall have a period of ninety (90) days to enter into a sublicense agreement with respect to the New Technology and if the parties, negotiating in good faith, are unable to do so, then BBC may design, develop, source and/or sell lighted footwear containing such New Technology for or to any third party whatsoever; PROVIDED, that it may not do so on terms more favorable than those offered to LAG with respect to such New Technology. If LAG accepts BBC's offer with respect to any New Technology, Products containing such New Technology shall fall within the scope of BBC's exclusivity obligations under this Section 6 (unless otherwise specifically provided in Section 6(d) below or in the sublicense agreement between LAG and BBC with respect to such New Technology); for purposes of this Agreement, the lighting technology utilized in LAG's NEONZ, Faderz and Lazerlites product lines shall constitute New Technology.
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