-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, FqE+gQV+yxlcnhFHqqzUvajmaAmxFD1HZGZtNQwJkVR7hwthvgF3vqLAACLzfHqp /g70Kek8o+vqfOKoDyOScA== 0000927016-98-001362.txt : 19980403 0000927016-98-001362.hdr.sgml : 19980403 ACCESSION NUMBER: 0000927016-98-001362 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 6 CONFORMED PERIOD OF REPORT: 19980103 FILED AS OF DATE: 19980402 SROS: NYSE FILER: COMPANY DATA: COMPANY CONFORMED NAME: CONVERSE INC CENTRAL INDEX KEY: 0000716934 STANDARD INDUSTRIAL CLASSIFICATION: RUBBER & PLASTICS FOOTWEAR [3021] IRS NUMBER: 041419731 STATE OF INCORPORATION: MA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K405 SEC ACT: SEC FILE NUMBER: 001-13430 FILM NUMBER: 98586419 BUSINESS ADDRESS: STREET 1: ONE FORDHAM RD CITY: NORTH READING STATE: MA ZIP: 01864 BUSINESS PHONE: 5086641100 MAIL ADDRESS: STREET 1: ONE FORDHAM ROAD CITY: NORTH READING STATE: MA ZIP: 01864 10-K405 1 FORM 10-K405 ================================================================================ SECURITIES AND EXCHANGE COMMISSION WASHINGTON, DC 20549 FORM 10-K [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED January 3, 1998. OR [_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 [NO FEE REQUIRED] FOR THE TRANSITION PERIOD FROM _________ TO __________ COMMISSION FILE NUMBER 1-13430 CONVERSE INC. (Exact name of registrant as specified in its charter) DELAWARE 43-1419731 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) ONE FORDHAM ROAD NORTH READING MASSACHUSETTS 01864 (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: (978) 664-1100 --------------------------- Securities registered pursuant to Section 12(b) of the Act: TITLE OF EACH CLASS NAME OF EACH EXCHANGE ON WHICH REGISTERED Common stock, without par value New York Stock Exchange 7% Convertible Subordinated Notes New York Stock due 2004 Securities registered pursuant to Section 12 (g) of the Act: None. --------------------------- 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 such shorter period that registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days: YES [X] NO [_] Indicate by check mark if disclosure of delinquent filers pursuant to item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in part iii of this Form 10-K or any amendment to this Form 10-K. [X] As of March 10, 1998, the aggregate market value of the registrant's voting stock held by non-affiliates of the registrant was approximately $39,199,167, based on the closing sales price of the registrant's Common Stock as reported on the New York Stock Exchange as of such date ($ 6 7/16). Indicate with a check mark whether the registrant has filed all documents and reports required to be filed by Section 12, 13 or 15(d) of the Securities Exchange Act of 1934 subsequent to the distribution of securities under a plan confirmed by a Court. YES [X] NO [_] As of March 10, 1998, 17,319,556 shares of the registrant's Common Stock were outstanding. DOCUMENTS INCORPORATED BY REFERENCE Portions of the Registrant's definitive Proxy Statement to be filed with the Securities and Exchange Commission on or before April 30, 1998 for the Annual Meeting of Stockholders to be held on May 11, 1998 are incorporated by reference into Part III of this Report, as indicated herein. ================================================================================ CONVERSE INC. ANNUAL REPORT ON FORM 10-K TABLE OF CONTENTS
Page ---- PART I. Item 1. Business....................................................... 1 Products.................................................. 1 Marketing and Product Development......................... 2 Sales and Distribution.................................... 3 Licensing Agreements...................................... 3 Sourcing and Manufacturing................................ 4 Research and Development.................................. 5 Backlog................................................... 5 Competition............................................... 5 Trademarks and Patents.................................... 6 Environmental Matters..................................... 6 Employees................................................. 6 Risk Factors.............................................. 6 Item 2. Properties..................................................... 9 Item 3. Legal Proceedings.............................................. 9 Item 4. Submission of Matters to a Vote of Security Holders............ 9 PART II. Item 5. Market for Registrant's Common Equity and Related Stockholder Matters............................................ 10 Item 6. Selected Financial Data........................................ 10 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations............................ 12 Item 7A. Quantitative and Qualitative Disclosure About Market Risk...... 21 Item 8. Financial Statements and Supplemental Data..................... 21 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure............................ 21 PART III. Item 10. Directors and Executive Officers of the Registrant............. 22 Item 11. Executive Compensation......................................... 23 Item 12. Security Ownership of Certain Beneficial Owners and Management. 23 Item 13. Certain Relationships and Related Transactions................. 23 PART IV. Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K.................................................... 24 SIGNATURES Signatures..................................................... 28
Information contained or incorporated by reference in this Report contains "forward-looking statements" which can be identified by the use of forward- looking terminology such as "believes," "expects," "may," "will," "should," or "anticipates" or the negative thereof or other variations thereon or comparable terminology, or by discussions of strategy. See, e.g., "Management's Discussion and Analysis of Financial Condition and Results of Operations." No assurance can be given that the future results covered by the forward-looking statements will be achieved. The Risk Factors contained in "Business--Risk Factors" of this Report constitute cautionary statements identifying important factors with respect to such forward-looking statements, including certain risks and uncertainties, that could cause actual results to vary materially from the future results covered in such forward-looking statements. Other factors could also cause actual results to vary materially from the future results covered in such forward-looking statements. Converse Inc. (hereinafter the "Company" or "Converse") undertakes no obligation to publicly release any revisions to these forward-looking statements to reflect any future events or occurrences. PART I ------ ITEM 1. BUSINESS. - ------------------ Converse is a leading global designer, manufacturer and marketer of high quality athletic footwear for men, women and children. The Company is also a global licensor of sports apparel, accessories and selected footwear. The Company, founded in 1908, began establishing its authentic footwear heritage with the introduction of its original canvas Chuck Taylor(R) basketball shoe in 1923. Throughout its 90-year history, Converse has achieved a high level of brand name recognition due to its reputation for high performance products, quality, value and style. Through its well-known Converse(R) All Star(R) brand, the Company has consistently maintained its position as the American performance brand with authentic sports heritage. In 1997, the Company's marketing strategy focused on four core footwear categories: basketball; athletic originals; children's and cross training. The basketball category is comprised of high performance footwear for athletes and typically features Converse's proprietary REACT(R) shock absorption technology. Converse's athletic originals footwear offerings are centered on the Converse Chuck Taylor All Star canvas athletic shoe, which management believes is the world's all time best-selling athletic shoe with over 560 million pairs sold since its introduction. The children's category consists of children's-sized models of the Company's basketball, athletic originals and cross training shoes, as well as certain styles designed exclusively for children. The cross training category consists of high performance athletic shoes used for sports training and fitness. The Company's products are distributed in over 90 countries to approximately 9,000 customers, which include specialty athletic, sporting goods, department and shoe stores, as well as to 31 Company-operated retail outlet stores. In 1997 the Company reported record net sales of $450.2 million or a 28.9% increase from 1996. However, this figure understates the total worldwide presence of Converse- branded products since a large amount is sold through licensees, and Converse recognizes only a percentage of these licensees' sales which it records as royalty income. Global wholesale sales of Converse-branded products, which include direct sales by the Company to retailers, sales by Converse distributors and sales of licensed products by Converse licensees, were approximately $900 million in 1997, of which over $540 million, or approximately 60%, were international sales or an increase of approximately 10.6% compared to 1996. PRODUCTS In 1997, the Company concentrated its marketing, product development and sales efforts on its four core categories: basketball; athletic originals; children's and cross training. 1 BASKETBALL Converse's basketball footwear offerings are comprised of high performance footwear for athletes and typically feature Converse's proprietary REACT shock absorption technology. The Company's basketball footwear is worn by a number of NBA players, including endorsers such as Dennis Rodman of the Chicago Bulls and NBA rookies Bobby Jackson of the Denver Nuggets, Jacque Vaughn of the Utah Jazz and Brevin Knight of the Cleveland Cavaliers in addition to several major NCAA basketball teams. The Company's basketball footwear sells in the U.S. at suggested retail prices ranging from $45.00 to $91.00 through an extensive network of athletic specialty, sporting goods, department and shoe stores. While the target consumers for Converse basketball shoes are males and females ages 12 to 24, the Company's basketball shoes appeal to a broad group of consumers. ATHLETIC ORIGINALS Converse athletic originals footwear offerings are centered on the Chuck Taylor All Star canvas athletic shoe, which management believes is the world's all time best-selling athletic shoe with over 560 million pairs sold since its introduction in 1923 as the world's first basketball shoe. Converse's athletic originals footwear encompasses both classic, time-tested athletic shoes and styles targeted at alternative sports enthusiasts. Because these shoes have authentic sports heritage, many have remained unchanged since their inception and have become true American sports icons. The Company's athletic originals products, which come in a wide variety of colors, sell in the U.S. at suggested retail prices ranging from $20.00 to $65.00 in athletic specialty, sporting goods, department and shoe stores, as well as specialty apparel retailers. CHILDREN'S Converse's children's category consists of children's-sized versions of the Company's basketball, athletic originals and cross training shoes, as well as certain styles designed exclusively for children. The children's category is rooted in sports, offering all the features and benefits of the adult models and the same unique styling that attracts adults to the Company's basketball, athletic originals and cross training products. The Company's children's footwear is generally sold in the U.S. at suggested retail prices ranging from $22 to $60 through athletic specialty, children's bootery, sporting goods and department stores. CROSS TRAINING The Company's cross training category consists of high performance athletic shoes used for multiple sports activities. The Company believes this category represents a growth opportunity since Converse's cross training and basketball products have similar target purchasers. The Company's cross training footwear sells in the U.S. at suggested retail prices ranging from $50.00 to $75.00 through an extensive network of athletic specialty, sporting goods, department and shoe stores. MARKETING AND PRODUCT DEVELOPMENT The Company's marketing strategy is centered on the Converse All Star brand, which is positioned as the American performance brand with authentic sports heritage. The Company believes that there are significant opportunities to continue to build the brand, which commands high consumer awareness generated by its 90-year history. The Company's consumer research has become an integral part of its product development, advertising campaigns and in-store point of purchase materials. Each of the Company's products is now fully supported by a consistent, integrated marketing program, responsive to the demands of the Company's target customers. 2 The Company recently adopted "Stay True" as its new brand positioning statement and tag line. "Stay True" is intended to convey the concept, through the products, that athletes should stay true to themselves and be proud of who they are and where they came from and to communicate a feeling of continuing respect for people and institutions that enabled the athlete to succeed. To complement its marketing strategies, Converse cultivates the endorsement and promotion of Converse footwear among athletes. The Company's endorsers include both current NBA athletes, such as Dennis Rodman, Bobby Jackson, Brevin Knight, Jacque Vaughn and Kevin Johnson and NBA athletes from an earlier era, including Julius "Dr. J" Erving and Larry Bird. The Company is also a leading supplier of athletic shoes to premier NCAA basketball teams, including the University of Arkansas, Indiana University, the University of Louisville, the University of New Mexico, Oklahoma University and the University of South Carolina. Management believes that there are substantial opportunities to utilize these endorsers to influence its target customers and further build the Converse All Star brand through the Company's focused and integrated marketing strategies. SALES AND DISTRIBUTION The Company's products are distributed in over 90 countries to approximately 9,000 customers, which include athletic specialty, sporting goods, department and shoe stores, as well as to 31 Company-operated retail outlet stores. UNITED STATES MARKET The Company's 38 member U.S. sales force markets Converse footwear through approximately 4,200 active retail accounts. In 1997, domestic sales represented 63% of the Company's net sales. The Company has refined its distribution strategy to increase its focus on key growth accounts such as specialty athletic retailers. National and large regional accounts are serviced by 13 account executives who are paid on a salary and bonus basis, and who focus on the product and merchandising needs of these retailers. Certain of the Company's domestic sales are served by an electronic data interface ("EDI") ordering system where electronic customer orders are received directly into Converse's order processing system. In addition, a quick response system has been implemented with a number of the Company's highest volume accounts. The quick response system provides for the rapid replenishment of customer inventory through an electronic management process which produces constant "on-hand" customer inventory quantities. INTERNATIONAL MARKET The Company currently markets its products in approximately 90 countries outside of the United States through subsidiaries, branch offices, independent distributors and licensees. Non-U.S. net sales accounted for 36.7% of total revenues in 1997 compared to 44.4% in 1996. Moonstar Chemical Corp., Converse's distributor and licensee of footwear in Japan, accounted for approximately 14% of 1997 total net sales worldwide for Converse. The Pacific Region contributes the largest percentage of international licensing income. See "Business- Licensing Agreements." LICENSING AGREEMENTS Converse utilizes licensees who manufacture or purchase and distribute sports apparel, accessories and selected footwear to provide consumers head-to-toe Converse-branded products globally. Converse has entered into 69 separate licensing agreements permitting the licensees to design and market selected products under the Converse brand name in specific markets. Under the terms of Converse's licensee arrangements, all products designed by licensees, as well as the related advertising, must be approved in advance by Converse. In addition, Converse monitors the quality of the licensed products on an ongoing basis. 3 The following table details sales by Converse's licensees and the related royalty income to Converse:
FISCAL YEAR ENDED DECEMBER 30, 1995 DECEMBER 28, 1996 JANUARY 3, 1998 ----------------- ----------------- --------------- (DOLLARS IN THOUSANDS) Total sales by licensees: Footwear....................... $ 84,231 $101,117 $141,344 Apparel and accessories........ 178,185 307,011 208,866 -------- -------- -------- Total.............................. $262,416 $408,128 $350,210 ======== ======== ======== Total royalty income: Footwear....................... $ 7,046 $ 7,944 $ 10,013 Apparel and accessories........ 10,211 19,694 12,556 -------- -------- -------- Total.............................. $ 17,257 $ 27,638 $ 22,569 ======== ======== ========
In Japan, Converse has agreements with 12 licensees to produce Converse- branded apparel, accessories and selected footwear for the Japanese market. These Japanese licensees accounted for approximately 35.8% of Converse's total worldwide royalty income in 1997. Royalty income in the Japanese market was substantially lower in 1997 than it was in the prior year due to the Company's strategic decision to eliminate certain lower quality distribution channels in Japan. Royalty income in the Pacific Region contributed 59.1% of total worldwide royalty income. Royalty income generated in the U.S. represented approximately 16.9% of total worldwide royalty income in 1997. SOURCING AND MANUFACTURING The majority of the Company's footwear is sourced from various Far East factories. However, most of the Company's athletic originals products are manufactured domestically. SOURCING In 1997, approximately 64% of all Converse footwear was sourced from a variety of Far East manufacturers on a per order basis. These manufacturers produce the Company's footwear according to the Company's own design specifications and quality standards. Sourcing is managed by the Company's corporate headquarters in the United States. In selecting subcontractors, Converse attempts to use manufacturers that specialize in the type of footwear being produced and to avoid over reliance on any particular supplier by having a sufficient diversity of manufacturing resources. The Company utilizes one sourcing agent in Taiwan who assists the Company in selecting and overseeing third party contractors, ensuring quality, sourcing fabrics and monitoring quotas and other trade regulations. The Company's production staff and independent sourcing agent together oversee all aspects of manufacturing and production. Many of the manufacturers utilized by Converse are also used by the Company's competitors. In 1997, the Company purchased over 13.3 million pairs of shoes from 16 manufacturers located in China, Taiwan, Macau, Vietnam and the Philippines. While one manufacturer produces approximately 30% of the Company's products, the Company believes any manufacturer can be replaced, if necessary, subject to short-term supply disruptions. MANUFACTURING Converse is the largest manufacturer of athletic footwear in the United States, producing over 7.5 million pairs in 1997. Converse operates manufacturing facilities in Lumberton, North Carolina, Mission, Texas and Reynosa, Mexico. The Company manufactures and assembles most of its athletic originals footwear at the Company's 350,000 square foot Lumberton facility. The Lumberton factory also produces components for its other manufacturing facilities. The Mission facility performs certain cutting operations and limited production of canvas All Star footwear. All stitching is done at the Reynosa facility to capitalize on lower labor costs. 4 The domestic manufacturing of Converse's athletic originals products has enabled the Company to actively pursue EDI/Quick response programs with some of its major customers. Converse's ability to produce its best-selling athletic originals models with significantly shorter lead-times than foreign-sourced products is a competitive advantage. The principal materials used in Converse's athletic originals footwear products are canvas, linen and rubber. The Company purchases its raw materials from diverse suppliers. While one supplier accounts for approximately 15% of raw materials purchases, the Company believes such supplier can be replaced, if necessary, subject to short-term supply disruptions. RESEARCH AND DEVELOPMENT Converse is a leading innovator of new footwear technologies. The Company spent $8.6 million, $6.5 million and $8.8 million on research and development in 1995, 1996 and 1997, respectively. Converse's state of the art biomechanics laboratory, located in a leased facility near the Company's headquarters, continually conducts research on new performance-enhancing technologies. The Company's biomechanical engineers are also involved in the design stages of athletic footwear to help develop new technologies and attributes to improve the function of shoes for specific sports. The Company maintains a full set of production equipment at its biomechanics laboratory to develop prototypes, and to ensure that new products can be manufactured efficiently to Converse's specifications. In addition, Converse maintains a chemistry laboratory that develops and tests midsole and outsole compounds, adhesives and fabrics for use in its products. Many of Converse's basketball shoes use the patented REACT shock absorption technology. REACT gel is a polymer encapsulated in the midsoles of Converse basketball shoes in the heel and forefoot regions that attenuates shock as athletes run and jump and force pressure on their feet. BACKLOG At the end of 1997, the Company's global backlog was $129.5 million, compared to $183.3 million at the end of 1996. The amount of backlog at a particular time is affected by a number of factors, including the scheduling of the introduction of new products and the timing of the manufacturing and shipping of the Company's products. Accordingly, a comparison of backlog as of two different dates is not necessarily meaningful. COMPETITION The athletic footwear market is highly competitive. Industry participants compete with respect to fashion, price, quality, performance and durability. During the second half of 1997, there was an overall weakening of the athletic footwear and apparel market which has resulted in an oversupply of inventory in the marketplace. The athletic footwear industry in the United States can be broken down into several groups. Nike Inc. ("Nike"), with 1997 estimated U.S. footwear revenues exceeding $3.8 billion, controls over 47% of the U.S. athletic footwear market. Reebok International, Inc. ("Reebok"), with 1997 estimated U.S. footwear revenues exceeding $1.2 billion, controls approximately 15% of the U.S. athletic footwear market. Each of these companies has full lines of product offerings, competes with Converse in the Far East for manufacturing sources, distributes to more than 10,000 outlets worldwide and spends substantially more on advertising and promotion than Converse. Fila USA, Inc. and adidas AG ("adidas") have estimated U.S. footwear sales of approximately $500 million in 1997, while New Balance Athletic Shoe, Inc. and Stride Rite Corporation each have 1997 U.S. branded athletic footwear revenues of between $200 million and $300 million. All of these companies also compete with Converse for access to foreign manufacturing facilities. In addition to these competitors, there are companies with U.S. revenues of under $200 million, including Airwalk, ASICS Tiger Corporation, Vans, Inc., Etonic, Inc., Hyde Athletic Industries, Inc. and K-Swiss, Inc. among others. Some of these companies emphasize footwear in categories such as running, tennis or team sports that are not currently being produced by the Company. Worldwide footwear industry data is unavailable, but the largest companies worldwide are believed to be Nike, Reebok and adidas. 5 TRADEMARKS AND PATENTS Converse utilizes trademarks on virtually all of its footwear and licensed apparel. Converse's main trademarks are "Converse(R) All Star(R)", "Chuck Taylor(R)" and "REACT(R)" name and design and the "Converse All Star Chuck Taylor Patch" and "All Star and Design" logos. In addition to those main trademarks, from time to time Converse registers and/or uses other special trademarks for special product lines, or products or features. Converse believes that these trademarks are important in identifying its products with the Converse brand image, and the trademarks are often incorporated prominently in product designs. The Company believes the Converse brand to be among its most important and valuable assets for its marketing, and generally seeks protection for its trademarks in most countries where significant existing or potential markets for its products exist. Converse takes vigorous action to defend its trademarks in any jurisdiction where infringement is threatened or has occurred or others have tried to register them. It is impossible to estimate the amount of counterfeiting involving Converse products or the effect such counterfeiting may have on Converse's revenue and brand image. The Company maintains and preserves its trademarks and the related registrations and aggressively protects such rights by taking appropriate legal action against infringement, counterfeiting and misuse. The Company is not aware of any material claim of infringement or other challenges to the Company's right to use any of its trademarks, tradenames, or patents. The Company has a variety of patents, including a number of U.S. and foreign patents and patent applications on its REACT(R) technology. ENVIRONMENTAL MATTERS The Company's operations are subject to federal, state and local laws, regulations and ordinances relating to the operation and removal of underground storage tanks and the storage, handling, generation, treatment, emission, release, discharge and disposal of certain materials, substances and wastes. The nature of the Company's operations expose it to the risk of claims with respect to environmental matters and there can be no assurance that material costs or liabilities will not be incurred in connection with such claims. Based on the Company's experience to date, the Company believes that its future cost of compliance with environmental laws, regulations and ordinances, or exposure to liability for environmental claims, will not have a material adverse effect on the Company's business, operations, financial position or liquidity. However, future events such as changes in existing laws and regulations, or unknown contamination of sites owned or operated by the Company (including contamination caused by prior owners and operators of such sites) may give rise to additional compliance costs which could have a material adverse effect on the Company's financial condition. EMPLOYEES As of January 3, 1998, Converse employed 2,956 individuals, of which 1,766 were in manufacturing, and 1,190 were in sales, administration, development and distribution. Management believes its relationship with its employees to be good. Converse has not experienced any material work stoppages or strikes in recent years. The Reynosa, Mexico manufacturing workforce, representing approximately 24% of Converse's work force, is represented by a union. RISK FACTORS Investors should carefully consider the following factors, together with other information contained and incorporated by reference in this Report, in evaluating an investment in the Company. 6 RECENT OPERATING RESULTS The Company sustained an operating loss of $29.7 million in 1995, and operating gains of $0.2 million in 1996 and $14.7 million in 1997. The Company had an accumulated stockholders' deficit of $48.0 million at January 3, 1998. Although recent improvements in operating earnings are encouraging, there can be no assurance that any profitability that is achieved will be maintained. COMPETITION; CHANGES IN CONSUMER PREFERENCES As described above under "Business--Competition," the branded athletic footwear industry is highly competitive. Furthermore, the Company's success depends in part on its ability to anticipate and respond to changing merchandise trends and consumer preferences and demands in a timely manner. Accordingly, any failure by the Company to anticipate and respond to changing merchandise trends and consumer preferences and demands could materially adversely affect consumer acceptance of the Company's brand name and product lines, which in turn could materially adversely affect the Company's business, financial condition or results of operations. FOREIGN PRODUCTION Approximately 64% of the Company's footwear is manufactured to its specifications by independent producers located in the Far East, particularly China, Taiwan, Macau, Vietnam and the Philippines. The Company also operates a facility in Mexico for the stitching of canvas uppers for certain athletic originals category footwear. As a result of the Company's continuing use of foreign manufacturing facilities, the Company's operations are subject to the customary risks of doing business abroad, including fluctuations in the value of currencies, import and export duties and trade barriers (including quotas), restrictions on the transfer of funds, work stoppage and, in certain parts of the world, political instability. To date, these factors have not had an adverse impact on the Company's operations. See "Business--Sourcing and Manufacturing." ECONOMIC CONDITIONS AND SEASONALITY Converse and the footwear industry in general are dependent on the economic environment and levels of consumer spending which affect not only the ultimate consumer, but also retailers, Converse's primary direct customers. As a result, Converse's results may be adversely affected by downward trends in the economy or the occurrence of events that adversely affect the economy in general. There can be no assurance that any prolonged economic downturn would not have a material adverse effect on Converse. Sales of Converse's footwear products are somewhat seasonal in nature with the strongest sales generally occurring in the first and third quarters. See "Management's Discussion and Analysis of Financial Condition and Results of Operations." INTERNATIONAL SALES AND CURRENCY EXCHANGE International sales accounted for approximately 49%, 44% and 37% of Converse's net sales in 1995, 1996 and 1997, respectively. Because a significant portion of Converse's international sales, particularly those in the Pacific region, are made through international distributors, Converse's future operating results will depend, in part, on the relationships with these companies. Additionally, Converse's international sales may be affected by changes in demand resulting from fluctuations in currency exchange rates. All foreign distributor agreements are denominated in U.S. dollars. All international sales are denominated in U.S. dollars and an increase in the value of the U.S. dollar relative to foreign currencies could make Converse products less competitive in those markets. During 1997, the Company used foreign exchange forward contracts and put options to protect the Company from the effected changes in foreign exchange rates on the statement of operations. International sales and operations may also be subject to risks such as the imposition of governmental controls, export license requirements, political instability, trade restrictions, changes in tariffs and difficulties in staffing and managing international operations and managing accounts receivable. In addition, the laws of certain countries do not protect Converse's products and intellectual property rights to the same extent as the laws of the United States. There can be no assurance that these factors will not have an adverse effect on Converse's future 7 international sales and, consequently, on Converse's operating results. See "Management's Discussion and Analysis of Financial Condition and Results of Operations" and "Business - Sales and Distribution - International." NATURE OF ENDORSEMENT CONTRACTS A key element of Converse's marketing strategy has been to obtain endorsements from prominent athletes, and management believes that this has proven to be an effective way to gain global brand exposure. See "Business-- Marketing and Product Development." These endorsement contracts generally have three to five- year terms, and there can be no assurance that they will be renewed or that endorsers signed by the Company will continue to be effective promoters of the Company's products. If Converse were unable in the future to secure suitable athletes to endorse its products on terms it deemed reasonable, it would be required to modify its marketing plans and could have to rely more heavily on other forms of advertising and promotion, which might not prove to be as effective as endorsements. RISKS ASSOCIATED WITH THE YEAR 2000 The Year 2000 issue is the result of computer programs being written using two digits rather than four to define the applicable year. In other words, date- sensitive software may recognize a date using "00" as the year 1900 rather than the year 2000. This could result in system failures or miscalculations causing disruptions of operations, including, among others, a temporary inability to process transactions, send invoices, or engage in similar normal business activities. The Company is completing an evaluation of the Year 2000 issue on its business. The Company does not believe that it has material exposure to the Year 2000 issue with respect to its own information systems. The Company is conducting an analysis to determine the extent to which its major suppliers and customers' systems (insofar as they relate to the Company's business) are subject to the Year 2000 issue. The Company is currently unable to predict the extent to which the Year 2000 issue will affect its suppliers and customers, or the extent to which it would be vulnerable to its suppliers and customers' failure to remediate any Year 2000 issue on a timely basis. The failure of a major supplier or customer subject to the Year 2000 issue to convert its systems on a timely basis or a conversion that is incompatible with the Company's systems could have a material adverse effect on the Company. CONTROLLING STOCKHOLDERS Apollo Investment Fund, L.P. ("Apollo") and its affiliate Lion Advisors, L.P., on behalf of an investment account under management ("Lion"; Apollo and Lion together being referred to herein as the "Apollo Stockholders"), together beneficially owned approximately 65% of the outstanding Common Stock of the Company at January 3, 1998. By reason of their ownership of shares of Common Stock, the Apollo Stockholders have the power effectively to control or influence control of the Company, including in elections of the Board of Directors and other matters submitted to a vote of the Company's stockholders, including extraordinary corporate transactions such as mergers. The Apollo Stockholders may exercise such control from time to time. A majority of the Board of Directors consists of individuals associated with affiliates of Apollo and Lion. SHARES ELIGIBLE FOR FUTURE SALE The Apollo Stockholders have the right to cause Converse to register the shares of Common Stock that they own pursuant to a registration rights agreement. Future sales of shares, or the availability of shares for future sale, could adversely affect the prevailing market prices for the Common Stock. ANTI-TAKEOVER PROVISIONS The Company's Restated Certificate of Incorporation contains certain provisions, including authorization to issue "blank check" preferred stock ("Preferred Stock"), prohibition of stockholder action by written consent and the requirement of 75% ("supermajority") stockholder vote to alter, amend, repeal or adopt certain provisions of the Restated Certificate of Incorporation. In addition, the Company's Restated Certificate of Incorporation contains provisions limiting the ability of any person who is the beneficial owner of more than 10% of the outstanding voting stock to effect certain transactions involving the Company unless approved by a majority of the Disinterested Directors (as defined in the 8 Restated Certificate of Incorporation of the Company). Such provisions could impede any merger, consolidation, takeover or other business combination involving the Company or discourage a potential acquirer from making a tender offer or otherwise attempting to obtain control of the Company. ITEM 2. PROPERTIES. - -------------------- Converse owns or leases the following principal plants, offices and warehouses:
FLOOR SPACE LOCATION TYPE OF FACILITY (SQUARE FEET) OWNED/LEASED - -------- ---------------- ----------- ------------ North Reading, MA.............. Headquarters 106,800 Owned Wilmington, MA................. Research and Development Facility 23,192 Leased Lumberton, NC.................. Plant 386,761 Owned Charlotte, NC.................. Distribution Center 431,665 Leased Reynosa, Mexico................ Plant 50,188 Owned Mission, TX.................... Plant 55,552 Leased Exeter, NH..................... Research and Development Facility 2,050 Leased
In addition to the above properties, the Company leases space for 29 retail stores in the U.S. and 2 retail stores in the United Kingdom. The Company also leases several sales and customer service offices and distribution centers throughout the world. The Wilmington, Massachusetts lease expires in 2003, the Charlotte, North Carolina lease expires in 2001, the Exeter, New Hampshire lease expires in 1999 and the Mission, Texas facility lease expires in 1998, with renewal terms through 2003. For further information regarding the Lumberton and Mission facilities see "Business--Sourcing and Manufacturing". ITEM 3. LEGAL PROCEEDINGS. - --------------------------- Converse is or may become a defendant in a number of pending or threatened legal proceedings in the ordinary course of its business. Converse believes the ultimate outcome of any such proceedings will not have a material adverse effect on its financial position or results of operations. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS. - ------------------------------------------------------------- Not applicable. 9 PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS - ------------------------------------------------------------------------------ The Company's common stock ("Common Stock") is traded on the New York Stock Exchange ("NYSE") under the symbol "CVE." The following table sets forth the range of high and low closing sales prices for the Common Stock as reported by the NYSE for the periods indicated.
High Low ---- --- 1995 ---- First Quarter................................................... $11 3/4 $ 9 3/8 Second Quarter.................................................. 9 7/8 6 5/8 Third Quarter................................................... 8 5/8 5 3/8 Fourth Quarter.................................................. 5 3/4 3 1/2 1996 ---- First Quarter................................................... 7 1/8 4 1/8 Second Quarter.................................................. 5 1/2 3 7/8 Third Quarter................................................... 6 7/8 4 1/8 Fourth Quarter.................................................. 15 3/4 6 1997 ---- First Quarter................................................... 27 3/8 14 1/4 Second Quarter.................................................. 22 13 1/4 Third Quarter................................................... 22 1/8 10 5/16 Fourth Quarter.................................................. 10 1/4 5 5/8
As of March 10, 1998 there were 17,319,556 shares of Common Stock issued and outstanding, which shares were held by approximately 2,200 holders of record of the Company's Common Stock. The Company has not paid any dividends on its Common Stock during the periods indicated and does not anticipate paying any dividends on its Common Stock in the foreseeable future. Any future payment of dividends will depend upon the financial condition, capital requirements, earnings and loan covenant restrictions of Converse, as well as upon other factors that the Board of Directors may deem relevant. ITEM 6. SELECTED FINANCIAL DATA - -------------------------------- The following selected consolidated financial data of Converse should be read in conjunction with Converse's historical consolidated financial statements and the notes thereto contained herein. The following selected historical consolidated financial data has been derived from the historical consolidated financial statements of Converse. Prior to the Distribution effected on November 17, 1994, Converse was a wholly-owned subsidiary of Furniture Brands International, Inc. ("Furniture Brands"). Furniture Brands and its principal domestic subsidiaries, including Converse, emerged from Chapter 11 reorganization on August 3, 1992. In accordance with AICPA Statement of Position 90-7, "Financial Reporting by Entities in Reorganization under the Bankruptcy Code," Furniture Brands was required to adopt "fresh-start" reporting, and such principles have been applied to the consolidated financial statements of Converse and the tables presented below. The historical consolidated financial statements of Converse for 1994 and prior periods may not reflect the results of operations or financial position that would have been obtained had Converse been a separate, independent company during such periods. 10
FISCAL YEAR ENDED -------------------------------------------------------------------------- (DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) JAN. 1, 1994 DEC. 31, 1994 DEC. 30, 1995 DEC. 28, 1996 JAN. 3, 1998 ------------ ------------- -------------- -------------- ------------- STATEMENT OF OPERATIONS DATA: Net sales ............................................... $ 380,427 $ 437,307 $ 407,483 $ 349,335 $ 450,199 Cost of sales............................................ 254,338 286,555 293,948 263,098 329,258 --------- --------- --------- --------- --------- Gross profit............................................. 126,089 150,752 113,535 86,237 120,941 Selling, general and administrative expenses............. 108,059 128,876 146,332 114,888 127,261 Royalty income........................................... 10,808 14,212 17,257 27,638 22,569 Restructuring expense (credit)........................... --- --- 14,182 (1,177) 1,537 --------- --------- --------- --------- --------- Earnings (loss) from operations.......................... 28,838 36,088 (29,722) 164 14,712 Loss (credit) on investment in unconsolidated subsidiary. --- --- 52,160 (1,362) (12,537) Interest expense, net.................................... 7,501 7,423 14,043 17,776 15,374 Other expense, net....................................... 1,904 504 3,966 6,319 3,026 --------- --------- --------- --------- --------- Earnings (loss) from continuing operations before income taxes.................................... 19,433 28,161 (99,891) (22,569) 8,849 Income tax expense (benefit)............................. 7,329 10,565 (28,144) (4,134) 13,154 --------- --------- --------- --------- --------- Earnings (loss) from continuing operations............... 12,104 17,596 (71,747) (18,435) (4,305) Extraordinary loss, net of income tax benefit of $576.... --- --- --- --- 744 --------- --------- --------- --------- --------- Net earnings (loss)...................................... $ 12,104 $ 17,596 $ (71,747) $ (18,435) $ (5,049) ========= ========= ========= ========= ========= Net basic and diluted earnings (loss) per share: Continuing operations................................... $ 1.05 $ (4.30) $ (1.10) $ (0.25) Extraordinary loss...................................... -- -- -- (0.04) --------- --------- --------- --------- Net earnings (loss)..................................... $ 1.05 $ (4.30) $ (1.10) $ (0.29) BALANCE SHEET DATA (AT PERIOD END): Working capital......................................... $ 111,080 $ 131,122 $ 89,680 $ (32,648) $ 20,260 Total assets............................................ 179,954 223,726 224,507 222,603 234,694 Long-term debt, less current maturities................. 69,262 77,087 112,824 9,644 80,000 Total stockholders' equity (deficiency)................. 10,270 44,987 (22,685) (38,868) (47,982)
11 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS - -------------------------------------------------------------------------------- OF OPERATIONS . - --------------- The following discussion is based upon and should be read in conjunction with the consolidated financial statements and the notes thereto of the Company included elsewhere herein. GENERAL Converse was founded in 1908, and operated as an independent family-owned company until 1971, when it was acquired by Eltra Corporation, a diversified holding company. In 1983, Converse became a publicly-traded company through an initial public offering. In 1986, Furniture Brands, then named INTERCO INCORPORATED, acquired Converse. On November 17, 1994, Furniture Brands distributed to its stockholders all of the outstanding Common Stock of Converse (the "Distribution"), and Converse became an independent publicly-traded company. Converse is a leading global designer, manufacturer and marketer of high quality athletic footwear for men, women and children. The Company is also a global licensor of sports apparel, accessories and selected footwear. The Company's products are distributed in over 90 countries to approximately 9,000 customers, which include athletic specialty, sporting goods, department and shoe stores, as well as to 31 Company-operated retail outlet stores. The primary costs and expenses of the Company result from the following: athletic products sourced from various Far East manufacturers, employee salaries and fringe benefits, advertising and promotion expenses and the purchase of raw materials used in the Company's manufacturing process. The Company's Fiscal 1997 (as defined below) financial results have been affected by several significant factors including: (i) record sales revenues of $450.2 million, a 28.9% increase over the previous year; (ii) increased demand for the Company's athletic originals products resulting in the expansion of the Company's manufacturing capabilities and significant improvements in the factories' quality, productivity and economic performance; (iii) successful resolution of litigation resulting from the 1995 purchase of Apex One, Inc. ("Apex"); (iv) completion of an $80.0 million convertible bond offering resulting in reduced interest expense; (v) execution of a new five-year term Credit Facility; (vi) overall weakening of the athletic footwear and apparel market which negatively impacted second half financial results; (vii) significant strengthening of the U.S. dollar in the European and Asian markets resulting in weaker sales, gross profit and licensing income; and (viii) Company-wide restructuring charges as a result of the uncertainty caused by the recent industry downturn and the oversupply of inventory in the marketplace. These factors have had, and may continue to have, an impact on the Company's future financial results. RESULTS OF OPERATIONS The Company's fiscal year end is the Saturday closest to December 31 in each year. The results of operations will periodically include a 53-week fiscal year. For purposes of the Company's financial statements, Fiscal 1997 refers to the 53-week period ended January 3, 1998 ("Fiscal 1997"), Fiscal 1996 refers to the 52-week period ended December 28, 1996 ("Fiscal 1996"), and Fiscal 1995 refers to the 52-week period ended December 30, 1995 ("Fiscal 1995"). 12 COMPARISON OF FISCAL 1997 AND FISCAL 1996 The following table sets forth certain items related to operations and such items as a percentage of net sales for Fiscal 1997 and Fiscal 1996:
FISCAL YEAR ENDED ----------------------------------------------------- JANUARY 3, 1998 % DECEMBER 28, 1996 % ---------------- ----------------- (Dollars in Thousands, except per share amounts) Net sales................................................................. $450,199 100.0 $349,335 100.0 Gross profit.............................................................. 120,941 26.9 86,237 24.7 Selling, general and administrative expenses.............................. 127,261 28.3 114,888 32.9 Royalty income............................................................ 22,569 5.0 27,638 7.9 Restructuring expenses (credit)........................................... 1,537 0.3 (1,177) (0.3) Earnings from operations.................................................. 14,712 3.3 164 0.0 Loss (credit) on investment in unconsolidated subsidiary.................. (12,537) (2.8) (1,362) (0.4) Interest expense.......................................................... 15,374 3.4 17,776 5.1 Income tax expense (benefit).............................................. 13,154 2.9 (4,134) (1.2) Loss from continuing operations........................................... (4,305) (1.0) (18,435) (5.3) Extraordinary loss........................................................ 744 (0.1) ---- ---- Net loss.................................................................. $ (5,049) (1.1) $(18,435) (5.3) Net loss per share........................................................ $ (0.29) $ (1.10)
Net Sales Net sales for Fiscal 1997 increased to $450.2 million from $349.3 million in Fiscal 1996, a 28.9% improvement. The $100.9 million sales growth in Fiscal 1997 is attributable to increases of 44.3%, 40.1% and 8.5% in the athletic originals, basketball and children's categories, respectively, compared to Fiscal 1996. These gains were partially offset by a 1.1% decline in the cross training category compared to the prior year. Net sales in the United States for Fiscal 1997 increased 46.8% and net sales internationally increased 6.5% compared to the prior year. Net sales in the Pacific region (Japan) improved 62.4% in Fiscal 1997 as a result of strong demand for the Company's athletic originals products while net sales in the Latin/South America region increased 3.2%. Net sales in the Europe, Middle East and Africa region, and Canada recorded declines of 18.2% and 10.6%, respectively, in Fiscal 1997. The strong U.S. dollar continued to have an adverse affect on the Company's results. On a constant dollar basis, Fiscal 1997 international net sales would have increased 11.1% compared to Fiscal 1996. Gross Profit Gross profit increased to $120.9 million in Fiscal 1997 from $86.2 million in Fiscal 1996, a 40.3% improvement. As a percentage of net sales, gross profit increased to 26.9% in Fiscal 1997 compared to 24.7% for the prior year period. This improvement is primarily attributable to strong sales in the first half of Fiscal 1997 in all categories as well as increasing consumer demand for the Company's athletic originals products in the second half of the year, resulting in greater manufacturing utilization and economic efficiencies at the Company's U.S. factories. These gross profit gains were partially offset by weaker margins in the second half of Fiscal 1997 in the basketball, training and children's categories resulting from an oversupply of inventory in the market due to an industry-wide slow down in athletic footwear sales. Selling, General and Administrative Expenses Selling, general and administrative expenses, which are primarily comprised of advertising, promotion and selling expenses in addition to employee salaries and benefits and other overhead costs, increased $12.4 million to $127.3 million for Fiscal 1997 from $114.9 million for Fiscal 1996, a 10.8% increase. This gain was mainly attributable to increased spending in advertising, promotion, and direct selling activities necessary to support the Fiscal 1997 sales 13 growth in the United States and the Pacific region. As a percentage of net sales, selling, general and administrative expenses decreased to 28.3% for Fiscal 1997 from 32.9% for the prior year. Royalty Income Royalty income decreased 18.1% to $22.6 million in Fiscal 1997 from $27.6 million in Fiscal 1996. As a percentage of net sales, royalty income declined to 5.0% in Fiscal 1997 compared to 7.9% in the prior year. International royalty income, which represented 83.1% of the Company's total royalty income, declined 24.9% in Fiscal 1997 primarily as a result of a 37.5% reduction in the Pacific region compared to Fiscal 1996. The Pacific region decline is primarily attributable to streamlining the distribution of the Company's licensed products and to the strengthening of the U.S. dollar. The decline in the Pacific region was partially offset by increases of 141.6% in the Latin/South America region and 33.4% in the Europe, Middle East and Africa region. United States royalty income increased 42.7% to $3.8 million in Fiscal 1997 compared to Fiscal 1996. Restructuring Expenses (Credit) The Company established pretax restructuring reserves of $2.1 million related to a workforce reduction and the elimination of certain unprofitable retail stores in the fourth quarter of Fiscal 1997. The restructuring reserves represent fixed amounts to be paid out over the next two years. This restructuring charge was partially offset by the reversal of previously written- off expenses relating to the re-opening of the Mission, Texas manufacturing facility in the first quarter of Fiscal 1997. See Note 4 to the Consolidated Financial Statements of the Company included herein. Earnings from Operations The Company recorded earnings from operations in Fiscal 1997 of $14.7 million, compared to $0.2 million in Fiscal 1996. This change was primarily due to the factors discussed above. Loss (Credit) on Investment in Unconsolidated Subsidiary In the first quarter of Fiscal 1997, the Company recorded a pretax gain totaling $13.1 million relating to the settlement of certain Apex-related obligations. This amount was partially offset by additional Apex-related legal and settlement costs incurred in the fourth quarter of Fiscal 1997, finalizing all remaining outstanding litigation relating to the Company's investment in Apex. The net activity for Fiscal 1997 was a net credit on investment in unconsolidated subsidiary of $12.5 million. At January 3, 1998, there were no remaining claims against the Company relating to its 1995 acquisition of Apex. See Note 3 to the Consolidated Financial Statements of the Company included herein. Interest Expense Interest expense for Fiscal 1997 decreased 13.5% to $15.4 million from $17.8 million in Fiscal 1996. The decrease is primarily attributable to the reversal of $1.4 million of interest payments paid into escrow relating to the subordinated notes issued to the former owners of Apex, the write-off of unamortized bank fees and the issuance of the convertible notes replacing other higher-interest indebtedness. These decreases were partially offset by an increase in interest payments due to higher borrowing levels in Fiscal 1997 compared to Fiscal 1996. Income Tax Expense (Benefit) Income tax expense for Fiscal 1997 was $13.2 million, compared to an income tax benefit of $4.1 million for Fiscal 1996. As of January 3, 1998, the Company's gross deferred tax assets were $44.2 million, which is the result of net operating loss carryforwards and other future tax deductible items totaling $117.2 million. Although the period to use these deferred tax assets is 12 to 15 years for tax purposes, the accounting guidance requires that a shorter time frame be used to assess the certainty of their realization. As a result of the uncertainty caused by the recent industry downturn and 14 related oversupply of inventory in the marketplace during the fourth quarter of Fiscal 1997, the Company increased its deferred tax valuation by $9.3 million to a total of $20.9 million. Loss from Continuing Operations The net loss from continuing operations for Fiscal 1997 was $4.3 million or $0.25 per share, compared to a loss of $18.4 million or $1.10 per share in Fiscal 1996. The net loss from continuing operations for Fiscal 1997, excluding non-recurring items, was $1.2 million, or $0.07 per share, compared to a net loss from continuing operations in the prior year, excluding non-recurring items, of $15.6 million, or $0.93 per share. The Company incurred the following non-recurring items net of tax in Fiscal 1997: a restructuring charge of $0.9 million, a gain of $7.1 million on its investment in Apex, and an increase to the deferred tax asset valuation allowance of $9.3 million. Extraordinary Loss During Fiscal 1997, the Company entered into a new $150.0 million secured credit agreement replacing its former credit agreement. In connection with the repayment of the former credit agreement, the Company wrote-off deferred financing fees of $1.3 million which resulted in an extraordinary loss net of tax of $0.7 million. Net Loss Due to the factors described above, the Company recorded a net loss of $5.0 million in Fiscal 1997 compared to an $18.4 million net loss in Fiscal 1996. The Fiscal 1997 net loss of $5.0 million included the following net of tax non- recurring items: (i) restructuring charge of $0.9 million relating to a workforce reduction and the closing of certain retail stores; (ii) gain on investment in unconsolidated subsidiary of $7.1 million resulting from the settlement of outstanding Apex litigation; (iii) a $9.3 million charge to increase the valuation allowance related to the Company's deferred tax assets; and (iv) an extraordinary charge of $0.7 million relating to the write-off of certain deferred bank financing fees. Net Loss Per Share The Company recorded a net loss per share of $0.29 in Fiscal 1997 compared to a net loss per share of $1.10 in Fiscal 1996. The weighted average number of outstanding shares in Fiscal 1997 was 17,271,911 versus 16,760,620 in Fiscal 1996. COMPARISON OF FISCAL 1996 AND FISCAL 1995 The following table sets forth certain items related to operations and such items as a percentage of net sales for Fiscal 1996 and Fiscal 1995:
FISCAL YEAR ENDED --------------------------------------------------------- DECEMBER 28, 1996 % DECEMBER 30, 1995 % ----------------- -- ----------------- -- (Dollars in Thousands, except per share amounts) Net sales.......................................................... $349,335 100.0 $407,483 100.0 Gross profit....................................................... 86,237 24.7 113,535 27.9 Selling, general and administrative expenses....................... 114,888 32.9 146,332 35.9 Royalty income..................................................... 27,638 7.9 17,257 4.2 Restructuring expenses (credit).................................... (1,177) (0.3) 14,182 3.5 Earnings (loss) from operations.................................... 164 0.0 (29,722) (7.3) Loss (credit) on investment in unconsolidated subsidiary........... (1,362) (0.4) 52,160 12.8 Interest expense................................................... 17,776 5.1 14,043 3.4 Income tax expense (benefit)....................................... (4,134) (1.2) (28,144) (6.9) Net loss........................................................... $(18,435) (5.3) $(71,747) (17.6) Net loss per share................................................. $ (1.10) $ (4.30)
15 Net Sales Net sales for Fiscal 1996 decreased to $349.3 million from $407.5 million for Fiscal 1995, a decrease of 14.3%. The $58.2 million decrease in net sales was attributable to declines in the athletic originals (31%), cross training (22%) and basketball (3%) categories. These declines were slightly offset by a 20% improvement in the children's category. Fiscal 1996 net sales for the Company's four core product categories decreased 12.5% from Fiscal 1995. This decline was primarily attributable to decreased net sales in the core categories in the first half of Fiscal 1996 and partially offset by increased net sales in the second half of Fiscal 1996. During Fiscal 1996 net sales in the United States decreased to $194.1 million from $208.0 million in Fiscal 1995, a decrease of $13.9 million or 6.7%. The Company's international net sales decreased from $199.5 million to $155.3 million over the same period, a decrease of $44.2 million or 22.2%. Fiscal 1996 international net sales declines over the prior year period were recorded in the following geographic regions: Europe, Middle East and Africa (18.4%), Pacific (Japan) (12.6%), and Latin/South America (47.0%). Gross Profit Gross profit decreased to $86.2 million for Fiscal 1996 from $113.5 million for Fiscal 1995, a 24.0% decline. The Company's gross profit margin decreased to 24.7% for Fiscal 1996, as compared to 27.9% for the prior year. Weak sell- throughs of certain products, manufacturing losses relating to production declines and operating inefficiencies, the sell-off of discontinued categories and increased air freight costs all contributed to the decline in gross profit. Selling, General and Administrative Expenses Selling, general and administrative expenses, which are primarily comprised of advertising, promotion and selling expenses in addition to employee salaries and benefits and other overhead costs, decreased to $114.9 million for Fiscal 1996 from $146.3 million for Fiscal 1995, a 21.5% decline. The decrease in selling, general and administrative expenses of $31.4 million is a result of the expense reduction plan announced by the Company in November 1995 and was primarily attributable to: (i) a reduction in sports marketing spending as a result of refocused endorsement efforts; (ii) a decrease in worldwide advertising expenses; and (iii) a reduction in salary and benefit expenses related to a streamlining of the Company's operations. As a percentage of net sales, selling, general and administrative expenses decreased to 32.9% for Fiscal 1996 from 35.9% for the prior year. Royalty Income Despite the decrease in the Company's net sales in Fiscal 1996, there was a substantial increase in royalty income in Fiscal 1996 which management primarily attributed to the strong consumer demand for Converse-branded apparel in the Pacific region. Royalty income increased to $27.6 million for Fiscal 1996 from $17.3 million for Fiscal 1995, an increase of $10.3 million or 59.5%. As a percentage of net sales, royalty income grew to 7.9% for Fiscal 1996 from 4.2% for Fiscal 1995. The $10.3 million growth was mainly attributable to a $7.7 million increase in royalty income in Japan and a $1.7 million increase in royalty income in the United States primarily as a result of growth in licensed apparel sales in these markets. Restructuring Expenses (Credit) The Company established restructuring reserves during Fiscal 1995 which included the sale of certain idle assets of the Company. One such asset, a distribution center in Chester, South Carolina was sold at a gain of $2.2 million in June 1996. The gain on the sale of this asset was partly offset by additional restructuring charges for severance and additional asset write-offs. See Note 4 to the Consolidated Financial Statements of the Company included herein. 16 Earnings (Loss) from Operations The Company recorded earnings from operations in Fiscal 1996 of $0.2 million, compared to a loss of $29.7 million in Fiscal 1995. This change was primarily due to the factors discussed above. Loss (Credit) on Investment in Unconsolidated Subsidiary In the fourth quarter of Fiscal 1996, Converse reversed certain accruals totaling $1.9 million relating to the settlement of certain Apex-related obligations. These reversals were partly offset by other Apex-related expenses. See Note 3 to the Consolidated Financial Statements of the Company included herein. Interest Expense Interest expense for Fiscal 1996 increased to $17.8 million from $14.0 million in Fiscal 1995, a 27.1% increase. The increase is primarily attributable to: (i) increased borrowing levels under the A Facility to finance normal business activities; (ii) an increase in the interest rate charged for the B Facility; (iii) interest paid into escrow on the subordinated notes delivered in connection with the purchase of Apex; and (iv) fees paid in conjunction with certain amendments to the Credit Facility. These increases were partly offset by an interest expense reduction due to decreased borrowing levels on the B Facility. See Note 8 to the Consolidated Financial Statements of the Company included herein. Income Tax Expense (Benefit) Income tax benefit recorded for Fiscal 1996 was $4.1 million as compared to an income tax benefit for Fiscal 1995 of $28.1 million. Deferred income tax assets have been established for net operating loss carryforwards and net temporary differences between the book and the tax basis of assets and liabilities. Based on the review of operating forecasts, historical operating results and the significant net operating loss carryforwards, the Company has recorded a valuation allowance of $11.6 million against these tax assets. Approximately $107.0 million of future taxable income will be necessary to realize the Company's net deferred tax assets of $35.0 million. See Note 10 to the Consolidated Financial Statements of the Company included herein. Net Loss Due to the factors described above, the Company recorded a net loss of $18.4 million for Fiscal 1996, compared to a $71.7 million net loss in the prior year. Net Loss Per Share The Company recorded a net loss per share of $1.10 in Fiscal 1996 versus a net loss per share of $4.30 in Fiscal 1995. The weighted average number of shares outstanding in Fiscal 1996 was 16,760,620 compared to 16,692,156 in Fiscal 1995. LIQUIDITY AND CAPITAL RESOURCES Cash Flow Net cash required for operating activities was $48.1 million for Fiscal 1997. Requirements for operating activities were comprised of a net loss of $12.8 million (after giving effect to adjustments for non-cash items), working capital needs of $32.7 million consisting principally of receivables, inventories and payables, and other long-term assets and liabilities of $2.6 million. In Fiscal 1996, net cash required for operating activities was $8.0 million. The major components of cash flow were a requirement for operating cash from a net loss of $33.8 million (after giving effect to 17 adjustments for non-cash items), offset by cash provided from a decrease in refundable income taxes of $10.8 million and an increase in accounts payable and accrued expenses of $16.9 million. Net cash used from investing activities was $5.9 million in Fiscal 1997 and consisted entirely of additions to property, plant and equipment. In Fiscal 1996, net cash used by investing activities was $0.2 million and consisted of additions to property, plant and equipment of $5.3 million offset by proceeds of $5.1 million received from the disposal of a distribution facility in Chester, South Carolina. Net cash provided by financing activities was $52.8 million for Fiscal 1997. Cash was provided from the net proceeds from the sale of 7% Convertible Subordinated Notes in May 1997 of $76.4 million, net borrowings under the Credit Facility (see Financing Arrangements below) of $96.9 million and net proceeds from the exercise of stock options of $0.5 million. This was partially offset by cash used from the decrease of short-term debt of $3.2 million and the repayment of the Old Credit Facility (see Financing Arrangements below) of $117.8 million. In Fiscal 1996, net cash provided by financing activities of $10.9 million is attributable to net proceeds from debt of $8.5 million and from the exercise of stock options of $2.4 million. Working Capital The Company's working capital position, net of cash, increased to $14.5 million on January 3, 1998, from a deficit of $38.6 million on December 28, 1996, an improvement of $53.1 million. As of January 3, 1998, total current assets, net of cash, increased $5.8 million from the prior year to $176.5 million. Receivables and inventories increased $10.5 million and $7.9 million, respectively. The increase in receivables is primarily due to the increased sales activity in the fourth quarter of Fiscal 1997 (up $19.4 million, or 28.0%, versus prior year fourth quarter). The increase in inventories is primarily attributable to timing, as the Company had several spring launch dates scheduled in January 1998 (versus February-March in prior year) which necessitated the purchasing of inventory in the fourth quarter of Fiscal 1997. These increases were partially offset by a decrease in restricted cash, prepaid expenses and other current assets of $12.6 million due principally to an increase in the valuation allowance related to the Company's deferred tax assets. Total current liabilities decreased from $209.2 million on December 28, 1996 to $162.0 million on January 3, 1998, a decrease of $47.2 million. This decrease is due to reductions in short-term debt of $4.4 million, credit facility borrowing of $20.9 million, and payables and accrued expenses of $21.9 million. Financing Arrangements In May 1997, the Company issued $80.0 million of 7% Convertible Subordinated Notes due June 1, 2004 (the "Convertible Notes"). The Convertible Notes are subordinated to all existing and future Senior Indebtedness (as defined therein). The Convertible Notes are convertible at any time prior to maturity, unless previously redeemed into common stock of the Company, at the option of the holder, at a conversion price of $21.83 per share, subject to adjustment in certain events. In addition, the Convertible Notes may be redeemed, in whole or in part, at the option of the Company, at any time on or after June 5, 2000, at redemption prices set forth therein plus accrued interest to the date of redemption. Interest is payable semi-annually on June 1 and December 1, commencing on December 1, 1997. Proceeds from the Convertible Notes were used to repay indebtedness under the Company's then existing credit agreement (the "Old Credit Facility"). Simultaneously with the issuance of the Convertible Notes in May 1997, the Company entered into a new $150.0 million secured credit agreement (the "Credit Facility") with BT Commercial Corporation ("BTCC") for revolving loans, letters of credit, foreign exchange contracts and banker acceptances and repaid the Old Credit Facility. In connection with the repayment of the Old Credit Facility, the Company wrote-off deferred financing fees of $1.3 million in the second quarter. This write-off is presented as an extraordinary item on the statement of operations. In July 1997, BTCC, 18 as agent, syndicated the Credit Facility to a group of participating lenders (the "Banks"). The amount of credit available to the Company at any time is limited by a borrowing base formula, as defined in the Credit Facility, consisting primarily of U.S. and Canadian accounts receivable and inventory (the "Borrowing Base"). The aggregate of letters of credit, foreign exchange contracts and banker acceptances may not exceed $80.0 million at any time; revolving loans are limited only by the Credit Facility's maximum availability less any amounts outstanding for letters of credit, foreign exchange contracts or banker acceptances. The Credit Facility is for a five-year term and, accordingly, has an expiration date of May 21, 2002. However, the total revolving loans and banker acceptances outstanding under the Credit Facility of $96.8 million are classified as current due to the Company's lockbox arrangement (whereby payments by the Company's customers are deposited in a lockbox controlled by the Banks) and certain clauses contained in the Credit Facility regarding mandatory repayment that involve subjective judgments by the Banks. This classification is required by Emerging Issues Task Force 95-22, "Balance Sheet Classification of Borrowings Outstanding under a Revolving Credit Agreement that Includes both a Subjective Acceleration Clause and a Lockbox Arrangement". As of January 3, 1998, the Borrowing Base was $111.2 million. Utilization under the Credit Facility at year end amounted to $102.0 million consisting of revolving loans of $74.3 million, banker acceptances of $22.5 million and outstanding letters of credit of $5.2 million. Accordingly, $9.2 million of the maximum available Borrowing Base remained unutilized as of January 3, 1998. Revolving loans under the Credit Facility bear interest either at the Prime Lending Rate (as defined therein) plus one percent (1.00%) per annum or at the Adjusted LIBOR Rate (as defined therein) plus a margin of two and one-half percent (2.50%) per annum. The foregoing LIBOR margin is subject to a reduction based upon the Company achieving certain interest coverage ratios specified in the Credit Facility. At January 3, 1998, revolving loans outstanding under the Credit Facility bore interest of 8.45% based upon the weighted average of the Prime Lending Rate and Adjusted LIBOR Rate. Obligations outstanding under the Credit Facility are secured by first priority liens on substantially all of the Company's U.S. and Canadian assets. The Credit Facility, as amended, requires compliance with customary affirmative and negative covenants, including certain financial covenants. In November 1997, the Credit Facility was amended for one financial covenant with respect to the fourth quarter 1997 requirement of the Interest Coverage Ratio (as defined therein). The Company was in compliance with the amended financial covenant as of January 3, 1998. In January 1998, the Credit Facility was amended for the Interest Coverage Ratio requirements for the four quarterly periods in fiscal 1998. The Company believes that it will be in compliance with this amended financial covenant during 1998. Subsidiaries of the Company maintain asset based financing arrangements in certain European countries with various lenders. In general, these financing arrangements allow for borrowings based upon eligible accounts receivable and inventory at varying advance rates and varying interest rates. Total short-term borrowings outstanding under these financing arrangements were $9.0 million as of January 3, 1998. Interest is payable at the respective lender's base rate plus 1.5% (6.0% to 8.5% at year end). Additionally, letters of credit outstanding under these financing arrangements totaled $3.9 million at year end. The obligations are secured by first priority liens on the respective European assets being financed. In addition, Converse Inc. provided guarantees with respect to the outstanding borrowings for certain of the financing arrangements. Capital Expenditures Capital expenditures were $5.9 million, $5.3 million and $5.8 million in Fiscal 1997, Fiscal 1996 and Fiscal 1995, respectively. Fiscal 1997 investments included $0.5 million on building improvements primarily to upgrade the heating system at the corporate office, $0.5 million on leasehold improvements primarily to open or remodel the Company's retail stores, $1.6 million to maintain and upgrade the Company's manufacturing facilities in Lumberton, North Carolina, Mission, Texas and Reynosa, Mexico, $0.7 million to maintain and upgrade the Company's distribution 19 facility in Charlotte, North Carolina, $1.2 million in information technology to support improvements in networking and international operations and $1.4 million on various smaller projects and improvements. In Fiscal 1996, the Company spent $1.4 million on leasehold improvements primarily to open or remodel the Company's retail stores, $1.0 million to maintain and upgrade the Company's manufacturing facility in Lumberton, North Carolina, $0.9 million in information technology to support improvements in networking, retail store operations and international operations, $0.9 million to upgrade the Company's trade show booth and $1.1 million on various smaller projects and improvements. Fiscal 1995 investments included $2.3 million in new equipment and improvements to upgrade the Company's manufacturing facility in Lumberton, North Carolina, $0.8 million in computer equipment, $0.7 million to move the research and development offices to its present location, $0.7 million to support international expansion, $0.4 million to open four new retail stores, and the remaining $0.9 million was invested in various smaller projects. YEAR 2000 SOFTWARE CHANGES A Company-wide task force has been established to review the possible effects of the Year 2000 issue on its business and to implement potential solutions. The Company is also in communication with its suppliers, customers and others with which it does business to coordinate conversion efforts. All Year 2000 compliance related costs will be expensed as incurred. The Company does not believe that it has material exposure to the Year 2000 issue with respect to its own information system. See "Business-Risk Factor - Risks Associated with the Year 2000 Issue." BACKLOG At the end of Fiscal 1997, the Company's global backlog was $129.5 million, compared to $183.3 million at the end of Fiscal 1996. The amount of backlog at a particular time is affected by a number of factors, including the scheduling of the introduction of new products and the timing of the manufacturing and shipping of the Company's products. Accordingly, a comparison of backlog as of two different dates is not necessarily meaningful. IMPACT OF RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS The Financial Accounting Standards Board issued Statement No. 130, "Reporting Comprehensive Income". This Statement established standards for reporting and display of comprehensive income and its components in a full set of general- purpose financial statements. This Statement is required to be adopted in the Company's fiscal year-end 1998. This Statement is not expected to have a material impact on the Company's consolidated financial position or results of operations. The Financial Accounting Standards Board issued Statement No. 131, "Disclosure about Segments of an Enterprise and Related Information". This Statement requires an enterprise to report financial and descriptive information about its reportable operating income. Operating segments are components that are evaluated regularly by chief operating decision makers in deciding how to allocate resources and in assessing performance. This Statement requires a business enterprise to report a measure of segment profit or loss, certain specific revenue and expense items (including interest, depreciation, and income taxes), and segment assets. It also establishes standards for related disclosures about products and services, geographic areas, and major customers. This Statement is required to be adopted in the Company's fiscal year-end 1998. Management has not yet completed its assessment of how this Statement will impact existing segment disclosures. The Financial Accounting Standards Board issued Statement No. 132, "Employers' Disclosures about Pensions and Other Postretirement Benefits". This Statement revises employers' disclosures about pensions and other postretirement plans. The Statement does not change the measurement or recognition of those types of plans and, accordingly, will not have a material impact on the Company's consolidated financial position or results of operations. 20 ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK - ------------------------------------------------------------------- Not applicable. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTAL DATA - --------------------------------------------------- The information required by this Item is submitted in a separate section of this report. See Item 14 for index to financial statements required by this item. ITEM 9. CHANGE IN AND DISAGREEMENTS WITH ACCOUNTANTS OR ACCOUNTING AND - ----------------------------------------------------------------------- FINANCIAL DISCLOSURE - -------------------- Not applicable. 21 PART III -------- ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT. - ------------------------------------------------------------- EXECUTIVE OFFICERS OF THE COMPANY The information required by this item with respect to the Company's directors is incorporated herein by reference to the Company's definitive proxy statement for the Annual Meeting of Stockholders to be held on May 11, 1998, which will be filed with the Securities and Exchange Commission on or before April 30, 1998 (the "1998 Proxy Statement"). Information required by this Item with respect to the Company's executive officers is set forth below.
NAME AGE POSITION - ---- --- -------- Glenn N. Rupp................................................... 53 Chairman of the Board and Chief Executive Officer Donald J. Camacho............................................... 47 Senior Vice President and Chief Financial Officer Edward C. Fredrick.............................................. 51 Senior Vice President, Research and Development Jack A. Green................................................... 52 Senior Vice President, General Counsel and Secretary Thomas L. Nelson................................................ 43 Senior Vice President, Sales/North America Herbert R. Rothstein............................................ 56 Senior Vice President, Production James E. Solomon................................................ 42 Senior Vice President, Marketing Alistair M. Thorburn............................................ 40 Senior Vice President, International James E. Lawlor................................................. 44 Vice President, Finance and Treasurer
MR. RUPP was elected Chairman of the Board and Chief Executive Officer by Converse's Board of Directors on April 11, 1996. From August 1994 to April 1996, Mr. Rupp was the Acting Chairman of McKenzie Sports Products, Inc. and a Strategic Planning Advisor for CRC Industries, Inc. Mr. Rupp was President and Chief Executive Officer of Simmons Upholstered Furniture Inc. ("Simmons") from August 1991 until May 1994. Prior to 1991, Mr. Rupp held various positions with Wilson Sporting Goods Co., including President and Chief Executive Officer from 1987 to 1991. Mr. Rupp is also a director of Consolidated Papers, Inc. and Johnson Worldwide Associates, Inc. In July 1994, a voluntary petition for reorganization under Chapter 11 of the U.S. Bankruptcy Code was filed on behalf of Simmons. MR. CAMACHO has served as Senior Vice President and Chief Financial Officer since September 1994. Previously, Mr. Camacho held the positions of Vice President and Controller from 1992 to 1994, Controller from 1984 to 1992, Assistant Controller from 1980 to 1984, and several other positions of increasing responsibility since 1974. DR. FREDERICK has served as Senior Vice President, Research and Development since April 1997. From February 1996 to April 1997, Dr. Frederick was a consultant to Converse through his wholly-owned consulting company, Exeter Research, Inc. ("Exeter") and held the title of Chief Product Executive of Converse. Dr. Frederick has been the President of Exeter since 1987. Since 1995, Dr. Frederick has also served as an Adjunct Professor in the Department of Exercise Sciences, School of Public Health and Health Sciences, University of Massachusetts. Dr. Frederick worked as a consultant for adidas, AG in the fields of development, design and technology from 1991 to 1996. Previously, Dr. Frederick worked as the Director of Research for Nike from 1980 to 1986 and as a design consultant for Nike from 1978 to 1980 and from 1986 to 1990. MR. GREEN has served as Senior Vice President, General Counsel and Secretary since August 1985, having joined the Company as Vice President, Legal in 1983. 22 MR. NELSON joined Converse as Senior Vice President, Sales/North America on March 13, 1995. Before joining Converse, Mr. Nelson worked for The Rockport Company, a subsidiary of Reebok International Ltd., where he served as Senior Vice President of Sales/Operations from 1992 to 1995. Prior to that, Mr. Nelson worked for G.H. Bass & Company from 1983 to 1992 where he held several sales- related positions before being promoted to Senior Vice President of Sales in 1990. MR. ROTHSTEIN has served as Senior Vice President, Production since January 1996. Previously, Mr. Rothstein was Senior Vice President, Sourcing from 1992 to 1996, Senior Vice President of Materials Management and Manufacturing from 1991 to 1992 and Vice President of Materials Management from 1988 to 1991. Before joining Converse, Mr. Rothstein held several senior management positions with Reebok International Ltd. from 1985 to 1988; Morse Shoe Inc. from 1973 to 1985, BGS Shoe Corporation from 1969 to 1972 and Signet from 1964 to 1969. MR. SOLOMON has served as Senior Vice President, Marketing since October 1996. Previously, Mr. Solomon worked for Lenox Inc. from August 1990 to September 1996 in a number of senior positions, including president and chief operating officer of the Dansk International Design division from May 1994 to September 1996 and Gorham, Kirk-Stieff, Dansk division from July 1991 to May 1994. He also has experience in the athletic footwear industry, having served as Executive Vice President of Kangaroos USA from 1989 to 1990, Vice President, Marketing of Avia Athletic Footwear from 1985 to 1988, and Group Product Manager, New Balance Athletic Shoes from 1981 to 1983. MR. THORBURN has served as Senior Vice President, International since December 1993. Prior to joining the Company, Mr. Thorburn was Vice President Europe/Asia Pacific for the Wilson Sporting Goods Co., Ltd. from 1987 to 1993. MR. LAWLOR has served as Vice President, Finance of Converse since June 1995. Previously, Mr. Lawlor held the positions of Vice President and Treasurer from September 1994 to June 1995, Treasurer from 1984 to 1994 and other positions of increasing responsibility since 1975. ITEM 11. EXECUTIVE COMPENSATION. - --------------------------------- The information required by this Item is incorporated by reference from the 1998 Proxy Statement. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT. - ------------------------------------------------------------------------- The information required by this Item is incorporated by reference from the 1998 Proxy Statement. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS. - --------------------------------------------------------- The information required by this Item is incorporated by reference from the 1998 Proxy Statement. 23 PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K. - -------------------------------------------------------------------------- (a) List of documents filed as part of this report. 1. Financial statements: The following consolidated financial statements are included in Item 8 and presented as a separate section of this report:
Page --- Report of Independent Accountants F-2 Consolidated Balance Sheet at December 28, 1996 and January 3, 1998 F-3 For each of the fiscal years ended December 30, 1995, December 28, 1996 and January 3, 1998: Consolidated Statement of Operations F-4 Consolidated Statement of Cash Flows F-5 Consolidated Statement of Stockholders' Equity (Deficiency) F-6 Notes to Consolidated Financial Statements F-7 2. Financial Statement Schedule: Schedule II - Valuation and Qualifying Accounts F-26
All other schedules are omitted because they are not applicable or because the required information is presented in the consolidated financial statements or notes thereto. 3. Exhibits 3.1 Restated Certificate of Incorporation (3) 3.2 By-laws (3) 4. Indenture dated as of May 21, 1997 between Converse and First Union National Bank, as Trustee, relating to Converse Inc. 7% Convertible Subordinated Notes due 2004 in the principal amount of $80.0 million, including the form of Note (12) 10.1 Credit Agreement dated as of May 21, 1997, among Converse Inc., its subsidiaries, BT Commercial Corporation, as agent, and the financial institutions party thereto (the "Credit Agreement") (12) 10.2 Amendment Number One to Credit Agreement (12) 10.3 Amendment Number Two to Credit Agreement* 24 10.4 Amendment Number Three Credit Agreement* 10.5 Converse Inc. 1994 Stock Option Plan, as Amended and Restated as of July 30, 1997 (13) 10.6 Converse Inc. 1995 Non-Employee Director Stock Option Plan, as amended and restated as of July 30, 1997 (13) 10.7 Amendment and Reaffirmation of Lease dated June 29, 1988, between Godley Construction Company Inc. ("Godley") and Converse Inc. and Lease Agreement dated as of March 26, 1974, between Godley and Charlotte Footwear, Inc. (1) 10.8 Sublease Agreement dated as of September 28, 1993, between Kmart Corporation and Converse Inc. (1) 10.9 Registration Rights Agreement dated as of November 17, 1994, between Apollo Interco Partners, L.P. and Converse Inc. (3) 10.10 Consulting Agreement dated as of November 17, 1994, between Apollo Advisors, L.P. and Converse Inc. (3) 10.11 Converse Inc. Executive Incentive Plan (1) 10.12 Converse Inc. Team Incentive Plan (1) 10.13 Converse Inc. Supplemental Executive Retirement Plan (6) 10.14 Agreement among Julius W. Erving, the Erving Group and Converse Inc., dated October 1, 1984 as amended by an Amendment dated September 16, 1988, a Second Amendment dated July 18, 1989, a Third Amendment dated October 17, 1991, and a Fourth Amendment dated February 7, 1994 (2) 10.15 Fifth Amendment to Agreement among Julius W. Erving, The Erving Group, Inc. and Converse Inc. (5) 10.16 Sixth Amendment to Agreement among Julius W. Erving, the Erving Group, Inc. and Converse Inc.(8) 10.17 Seventh Amendment to Agreement among Julius W. Erving, the Erving Group, Inc. and Converse Inc.(7) 10.18 Lease Agreement dated as of January 3, 1995 between Talbot Operations Inc. and Converse Inc. (4) 10.19 Employment Agreement between Converse and Glenn N. Rupp (8) 10.20 Employment Agreement between Converse and James Solomon (9) 10.21 Employment Agreement between Converse and Donald J. Camacho (6) 10.22 Form of Employment Agreement dated as of October 25, 1995, between Converse and each of the following: Jack A. Green, Herbert R. Rothstein, Alistair Thorburn, Thomas L. Nelson and James E. Lawlor (6) 10.23 Employment Agreement between Converse and Edward C. Frederick (11) 25 10.24 Amended and Restated Accommodation Letter (10) 10.25 Consultant's Agreement between Converse and Exeter Research, Inc. (11) 10.26 Letter regarding joint basketball promotion between Converse, Footlocker and Julius Erving (11) 10.27 Purchase Agreement dated June 1, 1997 between Converse and Exeter Research, Inc. (12) 21. List of subsidiaries* 23. Consent of Price Waterhouse LLP* 27 Financial Data Schedule* * Filed herewith (1) Filed as an Exhibit to Converse Inc. Form 10 dated October 14, 1994 filed with the SEC on October 14, 1994, and incorporated by reference herein. (2) Filed as an Exhibit to Converse Inc. Form 10/A Amendment No. 1, filed with the SEC on November 8, 1994, and incorporated by reference herein. (3) Filed as an Exhibit to Converse Inc. Form 10/A Amendment No. 2, filed with the SEC on November 23, 1994, and incorporated by reference herein. (4) Filed as an Exhibit to Converse Inc. Form 10-K dated March 17, 1995, and incorporated by reference herein. (5) Filed as an Exhibit to Converse Inc. Quarterly Report on Form 10-Q for the quarter ended April 1, 1995, and incorporated by reference herein. (6) Filed as an Exhibit to Converse Inc. Annual Report on Form 10-K for the year ended December 30, 1995, and incorporated by reference herein. (7) Filed as an Exhibit to Converse Inc. Annual Report on Form 10-Q for the quarter ended March 30, 1996, and incorporated by reference herein. (8) Filed as an Exhibit to Converse Inc. Annual Report on Form 10-Q for the quarter ended June 29, 1996, and incorporated by reference herein. (9) Filed as an Exhibit to Converse Inc. Annual Report on Form 10-Q for the quarter ended September 28, 1996, and incorporated by reference herein. (10) Filed as an Exhibit to Converse Inc. Annual Report on Form 10-K for year ended December 28, 1996, and incorporated herein by reference. (11) Filed as an Exhibit to Converse Inc. Quarterly Report on Form 10-Q for the quarter ended March 29, 1997, and incorporated by reference herein. (12) Filed as an Exhibit by Converse Inc. Quarterly Report on Form 10-Q for the quarter ended June 28, 1997, and incorporated by reference herein. 26 (13) Filed as an Exhibit by Converse Inc. Quarterly Report on Form 10-Q for the quarter ended September 29, 1997, and incorporated by reference herein. (b) No reports on Form 8-K were filed by the Company during the last quarter of Fiscal 1995. UPON WRITTEN REQUEST TO THE COMPANY'S SECRETARY, THE COMPANY WILL FURNISH SHAREHOLDERS WITH A COPY OF ANY OR ALL SUCH EXHIBITS REQUESTED AT A CHARGE OF TEN CENTS PER PAGE, WHICH REPRESENTS THE COMPANY'S REASONABLE EXPENSES IN FURNISHING SUCH EXHIBITS. SIGNATURES Pursuant to the requirements of Section 13 or 15(d) 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, in North Reading, Massachusetts on March 31, 1998. CONVERSE INC. By: /s/ Glenn N. Rupp ----------------- Glenn N. Rupp Chairman of the Board and Chief Executive Officer 27 Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrants and in the capacities and on the date indicated.
SIGNATURE TITLE DATE - --------- ----- ---- /s/ Glenn N. Rupp Chairman of the Board, Chief Executive Officer March 31, 1998 - -------------------------------- Glenn N. Rupp and Director (Principal Executive Officer) /s/ Donald J. Camacho Senior Vice President and Chief Financial Officer March 31, 1998 - -------------------------------- Donald J. Camacho (Principal financial and Accounting Officer) /s/ Donald J. Barr Director March 31, 1998 - -------------------------------- Donald J. Barr /s/ Leon D. Black Director March 31, 1998 - -------------------------------- Leon D. Black /s/ Julius W. Erving Director March 31, 1998 - -------------------------------- Julius W. Erving /s/ Robert H. Falk Director March 31, 1998 - -------------------------------- Robert H. Falk /s/ Gilbert Ford Director March 31, 1998 - -------------------------------- Gilbert Ford /s/ Michael S. Gross Director March 31, 1998 - -------------------------------- Michael S. Gross /s/ John J. Hannan Director March 31, 1998 - -------------------------------- John J. Hannan /s/ Joshua J. Harris Director March 31, 1998 - -------------------------------- Joshua J. Harris /s/ John H. Kissick Director March 31, 1998 - -------------------------------- John H. Kissick /s/ Richard B. Loynd Director March 31, 1998 - -------------------------------- Richard B. Loynd /s/ Michael D. Weiner Director March 31, 1998 - -------------------------------- Michael D. Weiner
28 CONVERSE INC. AND SUBSIDIARIES INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
PAGE -------- Report of Independent Accountants F-2 Consolidated Balance Sheet............................................................................. F-3 Consolidated Statement of Operations................................................................... F-4 Consolidated Statement of Cash Flows................................................................... F-5 Consolidated Statement of Stockholders' Equity......................................................... F-6 Notes to Consolidated Financial Statements............................................................. F-7
REPORT OF INDEPENDENT ACCOUNTANTS To the Board of Directors and Stockholders of Converse Inc. In our opinion, the accompanying consolidated balance sheet and the related consolidated statements of operations, cash flows and stockholders' equity present fairly, in all material respects, the financial position of Converse Inc. and its subsidiaries at December 28, 1996 and January 3, 1998, and the results of their operations and their cash flows for each of the three years in the period ended January 3, 1998, in conformity with generally accepted accounting principles. These financial statements are the responsibility of the Company's management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these statements in accordance with generally accepted auditing standards which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for the opinion expressed above. PRICE WATERHOUSE LLP Boston, Massachusetts February 18, 1998 F-2 CONVERSE INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEET (DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
DECEMBER 28, 1996 JANUARY 3, 1998 ------------------ ---------------- ASSETS Current assets: Cash and cash equivalents.................................................................. $ 5,908 $ 5,738 Restricted cash............................................................................ 1,354 --- Receivables, less allowances of $1,994 and $2,066, respectively............................ 61,546 72,083 Inventories (Note 5)....................................................................... 86,799 94,681 Prepaid expenses and other current assets (Note 10)........................................ 20,965 9,713 -------- -------- Total current assets................................................................... 176,572 182,215 Net property, plant and equipment (Note 6).................................................. 17,849 20,086 Other assets (Note 10)...................................................................... 28,182 32,393 -------- -------- $222,603 $234,694 ======== ======== LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIENCY) Current liabilities: Short-term debt (Note 8)................................................................... $ 13,421 $ 9,036 Credit facility (Note 8)................................................................... 117,765 96,844 Accounts payable........................................................................... 49,503 41,318 Accrued expenses (Note 7).................................................................. 25,124 14,279 Income taxes payable (Note 10)............................................................. 3,407 478 -------- -------- Total current liabilities.............................................................. 209,220 161,955 Long-term debt (Note 8)..................................................................... 9,644 80,000 Current assets in excess of reorganization value (Note 2)................................... 32,376 30,299 Accrued postretirement benefits other than pensions (Note 11)............................... 10,231 10,422 Commitments and contingencies (Note 14) Stockholders' equity (deficiency): Common stock, $1.00 stated value, 50,000,000 shares authorized, 17,213,156 and 17,317,956 shares issued and outstanding at December 28, 1996 and January 3, 1998, respectively.......................................................... 17,213 17,318 Preferred stock, no par value, 10,000,000 shares authorized, none issued and outstanding............................................................................ --- --- Additional paid-in capital................................................................. 5,392 2,271 Retained deficit........................................................................... (60,265) (65,314) Foreign currency translation adjustment.................................................... (1,208) (2,257) -------- -------- Total stockholders' equity (deficiency)................................................ (38,868) (47,982) -------- -------- $222,603 $234,694 ======== ========
See accompanying notes to consolidated financial statements. F-3 CONVERSE INC. AND SUBSIDIARIES CONSOLIDATED STATEMENT OF OPERATIONS (DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
FISCAL YEAR ENDED ------------------------------------------------------- DECEMBER 30, 1995 DECEMBER 28, 1996 JANUARY 3, 1998 ----------------- ----------------- --------------- Net sales.............................................................. $407,483 $349,335 $450,199 Cost of sales.......................................................... 293,948 263,098 329,258 -------- -------- -------- Gross profit........................................................... 113,535 86,237 120,941 Selling, general and administrative expenses........................... 146,332 114,888 127,261 Royalty income......................................................... 17,257 27,638 22,569 Restructuring expense (credit) (Note 4)................................ 14,182 (1,177) 1,537 -------- -------- -------- Earnings (loss) from operations........................................ (29,722) 164 14,712 Loss (credit) on investment in unconsolidated subsidiary (Note 3).......................................................... 52,160 (1,362) (12,537) Interest expense....................................................... 14,043 17,776 15,374 Other expense, net (Note 15)........................................... 3,966 6,319 3,026 -------- -------- -------- Earnings (loss) from continuing operations before income taxes......... (99,891) (22,569) 8,849 Income tax expense (benefit) (Note 10)................................. (28,144) (4,134) 13,154 -------- -------- -------- Loss from continuing operations........................................ (71,747) (18,435) ( 4,305) Extraordinary loss, net of income tax benefit of $576 (Note 9)......... --- --- 744 Net loss............................................................... $(71,747) $(18,435) $ (5,049) ======== ======== ======== Net basic and diluted loss per share (Note 2): Continuing operations............................................. $(4.30) $(1.10) $ (0.25) Extraordinary loss................................................ --- --- (0.04) -------- -------- -------- Net loss.......................................................... $(4.30) $(1.10) $ (0.29) ======== ======== ======== Weighted average common shares outstanding (Note 2).................... 16,692 16,761 17,272 ======== ======== ========
See accompanying notes to consolidated financial statements. F-4 CONVERSE INC. AND SUBSIDIARIES CONSOLIDATED STATEMENT OF CASH FLOWS (DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
FISCAL YEAR ENDED ------------------------------------------------------ DECEMBER 30, 1995 DECEMBER 28, 1996 JANUARY 3, 1998 ----------------- ----------------- --------------- Cash flows from operating activities: Net loss..................................................................... $(71,747) $(18,435) $ (5,049) Adjustments to reconcile net loss to net cash provided by (required for) operating activities: Loss (credit) on investment in unconsolidated subsidiary, less cash payments of $28,763, $3,439 and $8,064, respectively................................. 23,397 (4,801) (20,601) Provision for restructuring actions, less cash payments of $1,230, $5,316 and $3,763, respectively.................................................... 12,952 (6,493) (2,226) Extraordinary loss on write-off of deferred financing fees................... ---- ---- 1,320 Depreciation of property, plant and equipment................................ 2,744 3,100 3,589 Amortization of intangible assets............................................ 471 539 548 Amortization of current assets in excess of reorganization value............. (2,078) (2,078) (2,077) Deferred income taxes........................................................ (18,551) (5,614) 11,709 Changes in assets and liabilities: Receivables.................................................................. 7,940 (759) (12,359) Inventories.................................................................. 18,546 (5,844) (8,775) Prepaid expenses and other current assets.................................... (9,750) 10,859 114 Accounts payable and accrued expenses........................................ 912 16,889 (8,751) Income taxes payable......................................................... 223 1,612 (2,929) Other long-term assets and liabilities....................................... (966) 3,009 (2,620) -------- -------- --------- Net cash required for operating activities.................................. (35,907) (8,016) (48,107) -------- -------- --------- Cash flows from investing activities: Proceeds from disposal of assets............................................. --- 5,101 --- Additions to property, plant and equipment................................... (5,760) (5,305) (5,909) -------- -------- --------- Net cash used by investing activities....................................... (5,760) (204) (5,909) -------- -------- --------- Cash flows from financing activities: Net proceeds from exercise of stock options.................................. --- 2,385 512 Net proceeds from (payment of) short-term debt............................... 8,093 231 (3,236) Net proceeds from (repayment of) old credit facility......................... 32,185 8,261 (117,765) Net borrowings under new credit facility.................................... --- --- 96,844 Net proceeds from bond issue................................................. --- --- 76,400 -------- -------- --------- Net cash provided by financing activities................................... 40,278 10,877 52,755 -------- -------- --------- Effect of foreign currency rate fluctuations on cash and cash equivalents..... (865) 513 1,091 -------- -------- --------- Net increase (decrease) in cash and cash equivalents.......................... (2,254) 3,170 (170) Cash and cash equivalents at beginning of period.............................. 4,992 2,738 5,908 -------- -------- --------- Cash and cash equivalents at end of period.................................... $ 2,738 $ 5,908 $ 5,738 ======== ======== ========= Supplemental Disclosures: Cash payments for (refunds of) income taxes, net............................. $ 5,081 $(10,150) $ 3,719 ======== ======== ========= Cash payments for interest................................................... $ 12,276 $ 13,283 $ 16,663 ======== ======== =========
See accompanying notes to consolidated financial statements. F-5 CONVERSE INC. AND SUBSIDIARIES CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY (DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
FOREIGN TOTAL RETAINED CURRENCY STOCKHOLDERS' COMMON ADDITIONAL EARNINGS TRANSLATION EQUITY STOCK PAID-IN CAPITAL (DEFICIT) ADJUSTMENT (DEFICIENCY) -------- --------------- --------- ----------- ------------ Balance, December 31, 1994 $16,692 $ ---- $ 29,917 $(1,622) $ 44,987 Net loss (71,747) (71,747) Foreign currency translation 547 547 Issuance of common stock warrants (Note 3) 3,528 3,528 -------- ---------- -------- ------- ---------- Balance, December 30, 1995 16,692 3,528 (41,830) (1,075) (22,685) Net loss (18,435) (18,435) Foreign currency translation (133) (133) Exercise of common stock options 521 1,864 2,385 -------- ---------- -------- ------- ---------- Balance, December 28, 1996 17,213 5,392 (60,265) (1,208) (38,868) Net loss (5,049) (5,049) Foreign currency translation (1,049) (1,049) Exercise of common stock options 105 407 512 Cancellation of common stock warrants (Note 3) (3,528) (3,528) -------- ---------- -------- ------- ---------- Balance, January 3, 1998 $17,318 $ 2,271 $(65,314) $(2,257) $(47,982) ======== ========== ======== ======= ==========
See accompanying notes to consolidated financial statements. F-6 CONVERSE INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) 1. SUMMARY OF BUSINESS OPERATIONS Converse Inc. ("Converse" or the "Company") is a leading global designer, manufacturer and marketer of high quality athletic footwear for men, women and children. The Company is also a global licensor of sports apparel, accessories and selected footwear. Converse's principal markets are the United States, Europe and the Pacific Rim. Distribution Prior to November 17, 1994, Converse was a wholly-owned subsidiary of Furniture Brands International, Inc. ("Furniture Brands"), which until March 1, 1996 was named INTERCO INCORPORATED. On November 17, 1994, Furniture Brands distributed to the holders of Furniture Brands common stock all outstanding shares of common stock of Converse (the "Distribution"). 2. SIGNIFICANT ACCOUNTING POLICIES The major accounting policies of Converse are set forth below. Fiscal year Converse's fiscal year end is the Saturday closest to December 31 in each year. For 1997, Converse's fiscal year ended on January 3, 1998 ("Fiscal 1997"); for 1996, Converse's fiscal year ended on December 28, 1996 ("Fiscal 1996"); and for 1995, Converse's fiscal year ended December 30, 1995 ("Fiscal 1995"). Fiscal year 1997 includes 53-weeks whereas Fiscal years 1996 and 1995 include 52-weeks. Basis of consolidation The consolidated financial statements include the accounts of Converse and its subsidiaries. All material intercompany transactions are eliminated in consolidation. As more fully described in Note 3, effective May 18, 1995, Converse acquired 100% of the outstanding common stock of Apex One, Inc. ("Apex"). On August 11, 1995, Converse stopped funding the operations of Apex. As a result of this decision, Apex was unable to meet its obligations, ceased operations and on September 14, 1995 filed for Chapter 11 bankruptcy protection. Because Converse's control of Apex was temporary in nature, its investment in Apex has been recorded as an unconsolidated equity investment. Accordingly, the accompanying consolidated financial statements do not include the accounts of Apex. Management estimates The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Cash and cash equivalents Converse considers all short-term investments with an original maturity of three months or less to be cash equivalents. F-7 Fair value of financial instruments The carrying amount of cash, cash equivalents, trade receivables and trade payables approximates their fair value because of the short maturity of these financial instruments. The fair value of Converse's long-term instruments is estimated based on market values for similar instruments and approximates their carrying value at December 28, 1996 and January 3, 1998. As described in Note 3, at December 28, 1996, the Apex subordinated notes and common stock warrants were carried within the accompanying consolidated balance sheet at their originally recorded amounts of $9,644 and $3,528, respectively. In the first quarter of 1997, Converse settled substantially all of the remaining material claims between the Company and the former owners of Apex. See Note 3. Inventories Inventories are stated at the lower of cost (first-in, first-out) or market. Property, plant and equipment Property, plant and equipment are recorded at cost when acquired. Expenditures for improvements are capitalized while normal repairs and maintenance are expensed as incurred. When properties are disposed of, the related cost and accumulated depreciation or amortization are removed from the accounts, and gains or losses on the dispositions are reflected in results of operations. For financial reporting purposes, Converse utilizes the straight- line method of computing depreciation and amortization while accelerated methods are used for tax purposes. Such expense is computed based on the estimated useful lives of the respective assets. Current assets in excess of reorganization value In 1992, in connection with a reorganization under the bankruptcy code, Furniture Brands and its domestic subsidiaries, including Converse, were required to adopt "fresh-start" reporting. As a result of adopting "fresh-start" reporting, Converse recorded current assets in excess of reorganization value of approximately $41,553. This deferred credit is being amortized on a straight- line basis over a 20 year period. Foreign currency transactions Assets and liabilities of international operations are translated into U.S. dollars at current exchange rates. Income and expense accounts are translated into U.S. dollars at average rates of exchange prevailing during the period. Adjustments resulting from the translation of foreign functional currency financial statements into U.S. dollars are recorded in a separate component of stockholders' equity. Other foreign currency transaction gains and losses are included in the determination of net income. During Fiscal 1997, the Company used foreign exchange forward contracts and put options to protect the Company from the effects of changes in foreign exchange rates on the statement of operations. These instruments do not qualify for hedge accounting. At January 3, 1998, the Company had open "out of the money" put options totaling $15.1 million with a maximum remaining term to maturity of less than one year and no open foreign exchange forward contracts. Net realized losses of $214 related to these transactions have been reflected in the statement of operations for the year ended January 3, 1998. Revenue recognition Revenue from the sale of product is recognized at the time of shipment. Royalty income is recognized by Converse upon the shipment of product by the licensees to the ultimate customer. F-8 Advertising Advertising production costs are expensed the first time an advertisement is run. Media placement costs are expensed the first time the advertising appears. Endorsement contracts Accounting for endorsement contracts is based upon specific contract provisions. Generally, endorsement payments are expensed uniformly over the term of the contract after giving recognition to periodic performance compliance provisions of the contracts. Earnings per share In February 1997, Statement of Financial Accounting Standards No. 128, "Earnings per Share" (SFAS No. 128) was issued which supersedes the old methodology for calculation of earnings per share, as promulgated under APB Opinion No. 15. SFAS No. 128 requires presentation of "basic" earnings per share (which excludes dilution as a result of unexercised stock options and convertible subordinated debentures) and "diluted" earnings per share. The Statement was adopted in Fiscal 1997, and all prior periods were retroactively restated. For the fiscal years ended December 30, 1995, December 28, 1996 and January 3, 1998, basic and diluted earnings per share are the same. Concentration of risk Converse purchases dyed canvas raw material primarily from two dye houses. A change in dye houses could cause a delay in manufacturing; however, management does not expect such a change to impact long-term supply due to the existence of alternative suppliers. Financial instruments which potentially expose the Company to concentration of credit risk include trade accounts receivable and put option contracts. Concentration of credit risk with respect to trade accounts receivable is limited due to the large number of customers and their international dispersion. In addition, the Company maintains reserves for potential credit losses, and such losses, in the aggregate, have not exceeded management expectations. Concentration of credit risk with respect to put option contracts is limited because the Company maintains these financial instruments with various major financial institutions. The Company performs periodic evaluations of the relative credit standing of these financial institutions and limits the amount of credit exposure with any institution. Reclassifications Certain amounts in the prior year financial statements and related notes have been reclassified to conform with the Fiscal 1997 presentation. 3. LOSS ON INVESTMENT IN UNCONSOLIDATED SUBSIDIARY On May 18, 1995, Converse consummated the acquisition of Apex. Under the terms of the Securities Purchase Agreement, the total consideration paid by Converse to the sellers in exchange for 100% of the outstanding common stock consisted of: (i) subordinated promissory notes in the aggregate principal amount of $11,000 discounted to $9,644 at a rate of 12%; and (ii) warrants, expiring May 18, 2000, to purchase 1,750,000 shares of Converse common stock at an exercise price of $11.40 with an aggregate value of $3,528 at the date of the acquisition. Subsequent to the acquisition of Apex, Converse, through its integration of Apex's information systems and in-depth review of Apex operating procedures and financial condition, determined that the operating losses of Apex and its weak financial position could not be corrected without additional significant investment or financing. On August 11, 1995, Converse's Board of Directors voted to cease funding Apex's operations as of that date. F-9 As a result of this decision, Apex ceased operations and was unable to meet its obligations and on September 14, 1995 filed for Chapter 11 bankruptcy protection. Because Converse's control of Apex was temporary in nature, its investment in Apex was recorded as an unconsolidated equity investment. During 1995, Converse recorded a loss on this unconsolidated subsidiary, comprised primarily of: (i) the Company's initial investment in Apex; (ii) additional funding advances; (iii) contractual obligations, bank guarantees, professional fees and other closing costs; and (iv) loss on the sale of Apex inventory purchased by Converse for sale to independent third parties. As a result of the significant operations and financial difficulties discovered subsequent to the acquisition of Apex, Converse performed an investigation of potential breaches of representations and warranties by Apex and its former owners in connection with Converse's purchase of Apex. In November 1995, Converse paid into escrow, as opposed to paying the former owners directly, the first interest payment of $443 pertaining to the subordinated notes issued as part of the Apex purchase price. Converse also paid the May 1996 and November 1996 interest payments into escrow. In January 1996, certain former owners of Apex filed suit against Converse seeking a declaratory judgment that they were entitled to payment of this interest. In March 1996, Converse filed a counter claim against these former Apex owners for breach of warranty and other claims relating to the Apex purchase (together the "State Court Action"). In January 1997, a jury ruled unanimously in favor of Converse and against each of the four former owners of Apex who were parties to the State Court Action. In connection with the favorable jury verdict, the Company was awarded damages against each of the four former Apex owners. Subsequently, the Company entered into settlement agreements with three of these parties, whereby subordinated notes, common stock warrants and other contractual obligations issued to such parties by Converse in connection with the acquisition of Apex were delivered to the Company, together with a cash payment of $2,000 by one of the former owners, in satisfaction of Converse's indemnification claims. Separately, during the first quarter of 1997, the Company entered into settlement agreements with substantially all of the remaining former owners of Apex who were not parties to the State Court Action, whereby these former owners acknowledged their obligations to Converse for indemnification claims under the Securities Purchase Agreement. As part of these settlements, the former owners delivered to Converse in full satisfaction of Converse's indemnification claims their subordinated notes, common stock warrants and other contractual obligations issued by Converse to these parties in connection with the acquisition of Apex. As a result of the Chapter 11 bankruptcy filing, various lawsuits were filed against Converse alleging that the Company was liable for the debts of Apex. Claims in connection with these lawsuits totaled approximately $6,500. Despite Converse's belief that it had valid defenses to the claims made, the Company entered into settlement discussions with the Apex estate in order to avoid defending these lawsuits and incurring the associated legal fees. In February 1997, the United States Bankruptcy Court confirmed the Apex plan of liquidation pursuant to which Converse made a $4,400 payment to the Apex estate and a $500 payment to certain creditors of Apex during the first quarter of 1997. In addition, Converse withdrew its claims against Apex. The confirmed plan also included injunction and release provisions which preclude Apex or its creditors from bringing or continuing any Apex-related claims against Converse. F-10 The following table summarizes the Fiscal 1995, 1996 and 1997 activity relating to Apex:
CONTRACTUAL OBLIGATIONS, BANK FUNDING GUARANTEES, INITIAL PROVIDED PROFESSIONAL INVESTMENT MAY 18 - FEES AND OTHER LOSS ON SALE OF IN APEX AUGUST 11, 1995 CLOSING COSTS APEX INVENTORY TOTAL --------- --------------- --------------- --------------- ----- Loss as of July 1, 1995...................... $ 13,172 $ 10,422 $ 18,005 $ --- $ 41,599 Changes in estimates......................... ---- ---- 2,680 7,881 10,561 Charges/write-offs........................... (13,172) (10,422) (10,460) (7,881) (41,935) ------- ------- ------- ------ ------- December 30, 1995 Balance.................... ---- ---- 10,225 ---- 10,225 Changes in estimates......................... ---- ---- (1,877) 515 (1,362) Charges/write-offs........................... ---- ---- (2,924) (515) (3,439) ------- ------- ------- ------ ------- December 28, 1996 Balance.................... ---- ---- 5,424 ---- 5,424 Changes in estimates......................... (13,172) ---- 635 ---- (12,537) Charges/write-offs........................... 13,172 ---- (6,059) ---- 7,113 ------- ------- ------- ------ ------- January 3, 1998 Balance...................... $ ---- $ ---- $ ---- $ ---- $ ---- ======= ======= ======= ====== =======
During 1995, Converse recorded a $41,599 loss on its unconsolidated equity investment in Apex, as described above. During the fourth quarter of 1995, Converse recorded an additional $10,561 loss on its unconsolidated equity investment in Apex, resulting in a total loss of $52,160. This additional loss was comprised of unanticipated losses of $7,881 on the fourth quarter sale of Apex inventory purchased by Converse for sale to independent third parties and additional contractual obligations, professional fees and other closing costs of $2,680. This additional amount was a result of changes in estimates made during the fourth quarter of 1995 due to previously unanticipated events and circumstances. During 1996, the Company recorded a $1,362 credit on investment in unconsolidated subsidiary which was comprised of: (i) an additional loss of $515 relating to unanticipated credits issued to customers to settle claims of discrepancies on shipments of the Apex inventory; and (ii) a credit of $1,877 relating to the Company's entering into agreements with two of the former owners of Apex to settle certain obligations for less than originally anticipated, resulting in a reduction in the accrual for the loss on investment in unconsolidated subsidiary. In the first quarter of 1997, as stated above, the Company prevailed in a breach of warranty lawsuit brought against several former owners of Apex. Subsequently, the Company entered into settlement agreements with substantially all of the former owners of Apex. As a result of these settlements in the first quarter, the Company recorded a credit on investment in unconsolidated subsidiary of $13,051. In the fourth quarter of 1997, the Company recorded a loss on investment in unconsolidated subsidiary of $514 relating to the settlement of outstanding litigation with the one remaining former Apex owner and final settlement of a vendor suit against the Company. The net activity for Fiscal 1997 was a credit on investment in unconsolidated subsidiary of $12,537. At January 3, 1998, there were no remaining claims by or against the Company relating to its 1995 acquisition of Apex, and one former owner of Apex continues to hold subordinated notes issued by Converse in the amount of $774. This amount is included within accrued expenses in the accompanying consolidated balance sheet. 4. RESTRUCTURING CHARGES During 1995, Converse recorded restructuring charges of $14,182 relating primarily to initiatives aimed at reducing future operating costs, including domestic manufacturing, global distribution, marketing, and general and administrative costs. The Company recorded a restructuring charge of $2,100 in the fourth quarter of 1997, in order to bring the Company's expenses more in line with projected revenues as a result of the uncertainty caused by the recent industry downturn and the related oversupply of inventory in the marketplace. This restructuring charge related to a workforce reduction and elimination of certain unprofitable retail stores. F-11 The following table summarizes the Fiscal 1995, 1996 and 1997 activity relating to these initiatives:
LOSS EMPLOYEE REDUCTION IN CONTRACT (CREDIT) SEVERANCE LEASE RETAIL LIABILITY FOR TERMINATION ON ASSET & RELATED TERMINATION STORE POSTRETIREMENT COSTS DISPOSALS COSTS COSTS CLOSINGS BENEFITS TOTAL ------------ ---------- ---------- ----------- -------- -------------- ----- 1995 restructuring accrual... $ 6,150 $ 4,807 $ 2,502 $1,453 ---- $ ( 730) $14,182 Charges/write-offs........... (415) (4,807) (815) ---- ---- 730 (5,307) ------------ ---------- --------- ----------- -------- -------------- ------- December 30, 1995 Balance.... 5,735 ---- 1,687 1,453 ---- ---- 8,875 Changes in estimates ....... (1,000) (1,533) 1,356 ---- ---- ---- (1,177) Charges/write-offs........... (3,233) 1,533 (587) (889) ---- ---- (3,176) ------------ ---------- ---------- ----------- -------- -------------- ------- December 28, 1996 Balance.... 1,502 ---- 2,456 564 ---- ---- 4,522 Changes in estimates ....... ---- ---- ---- $ (564) ---- ---- (564) 1997 restructuring........... 444 ---- 1,192 ---- 464 ---- 2,100 Charges/write-offs........... (1,633) ---- (1,987) ---- ---- ---- (3,620) ------------ ---------- ---------- ----------- -------- -------------- ------- January 3, 1998 Balance...... $ 313 $ ---- $ 1,661 $ ---- $464 $ ---- $ 2,438 ============ ========== ========== =========== ======== ============== =======
During 1995, Converse recorded restructuring charges totaling $14,182. Principal costs included in the charge were: (i) contract termination costs relating to licensed apparel and certain marketing activities; (ii) estimated losses on the sale or disposal of assets, including a writedown for the proposed sale of a warehouse facility in Chester, South Carolina; (iii) costs for employee severance and related benefits for the termination of 140 employees; and (iv) lease termination costs relating to the shutdown of the manufacturing facility in Mission, Texas and a distribution facility in the United Kingdom. During the second quarter of 1996, the Company sold the warehouse facility in Chester, South Carolina. Proceeds from this sale exceeded the Company's estimate, resulting in a reversal of $2,209 of restructuring reserves. During the third quarter of 1996, certain contracts were terminated on terms more advantageous than originally anticipated resulting in a reversal of $1,000 of restructuring accruals. In addition, while implementing its fourth quarter 1995 restructuring plans, the Company incurred additional severance charges of $1,000 and $356 in the third and fourth quarters of 1996, respectively, and additional asset write-offs of $676 during the fourth quarter of 1996. Such additional charges were in excess of previously estimated amounts. During the first quarter of 1997, the Company re-opened the manufacturing facility located in Mission, Texas for cutting and limited production due to an unexpected increase in demand for athletic originals products. Accordingly, the remaining lease termination restructuring reserve of $564 was reversed into income. During the fourth quarter of 1997, the Company recorded a restructuring charge of $2,100. The costs included in the charge were primarily: (i) employee severance and related benefits for the termination of 35 employees; (ii) costs related to the closing of three unprofitable retail stores; and (iii) termination costs related to marketing endorser contracts. All remaining restructuring liabilities represent fixed amounts to be paid out over the next two years. 5. INVENTORIES Inventories are summarized as follows:
DECEMBER 28, 1996 JANUARY 3, 1998 ----------------- --------------- Retail merchandise............... $ 6,298 $ 5,245 Finished products................ 73,887 81,311 Work-in-process.................. 3,320 4,560 Raw materials.................... 3,294 3,565 -------- --------- $86,799 $94,681 ======== =========
F-12 6. PROPERTY, PLANT AND EQUIPMENT Property, plant and equipment consisted of the following:
ESTIMATED USEFUL LIFE (YEARS) DECEMBER 28, 1996 JANUARY 3, 1998 ------------ ----------------- --------------- Building and leasehold improvements 5 - 10 $ 5,734 $ 7,832 Machinery and equipment...................... 3 - 11 9,890 12,012 Furniture and fixtures....................... 5 - 8 2,448 2,944 Office and computer equipment................ 7 7,272 8,381 ----------- --------- 25,344 31,169 Less accumulated depreciation................ 7,495 11,083 ----------- --------- $17,849 $20,086 =========== =========
7. ACCRUED EXPENSES Accrued expenses consisted of the following:
DECEMBER 28, 1996 JANUARY 3, 1998 ----------------- --------------- Employee compensation.......................... $ 3,543 $ 3,325 Advertising and promotion...................... 3,432 2,520 Customer deposits.............................. 2,943 61 Accrued interest............................... 2,160 1,155 Restructuring charges.......................... 4,522 2,438 Loss on investment in unconsolidated subsidiary................................. 5,424 ---- Other.......................................... 3,100 4,780 -------- -------- $25,124 $14,279 ======== ========
8. DEBT Debt consisted of the following:
DECEMBER 28, 1996 JANUARY 3, 1998 ----------------- --------------- Current: Short-term debt................................... $ 13,421 $ 9,036 Credit facility................................... ---- $96,844 Old credit facility............................... $117,765 ---- Long-Term: Convertible subordinated notes.................... ---- $80,000 Subordinated notes (Apex)......................... $ 9,644 ----
Short-term debt Converse maintains asset based financing arrangements in certain European countries with various lenders. In general, these financing arrangements allow the Company to borrow against varying percentages of eligible customer receivable balances based on pre-established credit lines, along with varying percentages of inventory, as defined. Interest is payable at the respective lender's base rate plus 1.5% (6.0% to 8.5% at January 3, 1998). The obligations are F-13 secured by a first priority lien on the respective European assets being financed. In addition, Converse has provided guarantees of these borrowings in certain of the European countries. Credit facility Simultaneously with the issuance of the $80,000 principal amount of Convertible Subordinated Notes (the "Convertible Notes") in May 1997 (see below), the Company entered into a new $150,000 secured credit agreement (the "Credit Facility") with BT Commercial Corporation ("BTCC") for revolving loans, letters of credit, foreign exchange contracts and banker acceptances and repaid the indebtedness under the Company's then existing credit agreement (the "Old Credit Facility"). In connection with the repayment of the Old Credit Facility, the Company wrote-off deferred financing fees of $1,320 in the second quarter. This write-off is presented as an extraordinary item on the statement of operations. In July 1997, BTCC, as agent, syndicated the Credit Facility to a group of participating lenders (the "Banks"). The amount of credit available to the Company at any time is limited by a borrowing base formula, as defined in the Credit Facility, consisting primarily of U.S. and Canadian accounts receivable and inventory (the "Borrowing Base"). The aggregate of letters of credit, foreign exchange contracts and banker acceptances may not exceed $80,000 at any time; revolving loans are limited only by the Credit Facility's maximum availability less any amounts outstanding for letters of credit, foreign exchange contracts or banker acceptances. The Credit Facility is for a five-year term and, accordingly, has an expiration date of May 21, 2002. However, the total revolving loans and banker acceptances outstanding under the Credit Facility of $96,844 are classified as current due to the Company's lockbox arrangement (whereby payments by the Company's customers are deposited in a lockbox controlled by the Banks) and certain clauses contained in the Credit Facility regarding mandatory repayment that involve subjective judgments by the Banks. This classification is required by Emerging Issues Task Force 95-22, "Balance Sheet Classification of Borrowings Outstanding under a Revolving Credit Agreement that Includes both a Subjective Acceleration Clause and a Lockbox Arrangement". As of January 3, 1998, the Borrowing Base was $111,197. Utilization under the Credit Facility at year end amounted to $101,964 consisting of revolving loans of $74,256, banker acceptances of $22,588 and outstanding letters of credit of $5,120. Accordingly, $9,233 of the maximum available Borrowing Base remained unutilized as of January 3, 1998. Revolving loans under the Credit Facility bear interest either at the Prime Lending Rate (as defined therein) plus one percent (1.00%) per annum or at the Adjusted LIBOR Rate (as defined therein) plus a margin of two and one-half percent (2.50%) per annum. The foregoing LIBOR margin is subject to reduction based upon the Company achieving certain interest coverage ratios specified in the Credit Facility. At January 3, 1998, revolving loans outstanding under the Credit Facility bore interest of 8.45% based upon the weighted average of the Prime Lending Rate and Adjusted LIBOR Rate. Obligations outstanding under the Credit Facility are secured by first priority liens on substantially all of the Company's U.S. and Canadian assets. The Credit Facility requires compliance with customary affirmative and negative covenants, including certain financial covenants. In November 1997, the Credit Facility was amended to adjust one financial covenant pertaining to the fourth quarter 1997 Interest Coverage Ratio, as defined therein. The Company was in compliance with this amended financial covenant as of January 3, 1998. In January 1998, the Credit Facility was amended to adjust the Interest Coverage Ratio requirements for the four quarterly periods in fiscal 1998. The Company believes that it will be in compliance with this amended financial covenant during 1998. The Credit Facility provides for customary ongoing fees including an unused line fee of .50% per annum on the unutilized portion of the credit commitment and fees with respect to documentary or stand-by letters of credit varying from 1.25% to 2.25% per annum on the outstanding face amount of the respective credit. The Company is obligated to pay BTCC, as agent for the Credit Facility, an annual collateral management fee of $100. F-14 In May 1997, the Company paid a funding fee with respect to the Credit Facility of 2% of the total commitment, or $3,000, to BTCC. In November 1997, a fee of $150 was paid to the Banks with respect to the above-referenced amendment executed on November 21, 1997. The Company has capitalized these fees and is amortizing these costs over the term of the Credit Facility. Accordingly, unamortized financing fees relating to the Credit Facility, recorded in other assets on the consolidated balance sheet of the Company, were $2,780 at January 3, 1998. Unamortized financing fees of $2,014 with respect to the Old Credit Facility were included in other assets on the consolidated balance sheet of the Company at December 28, 1996. Convertible subordinated notes On May 21, 1997, the Company completed the sale of the Convertible Notes due June 1, 2004. The Convertible Notes are subordinated to all existing and future Senior Indebtedness (as defined therein). The Convertible Notes are convertible at any time prior to maturity, unless previously redeemed into common stock of the Company, at the option of the holder, at a conversion price of $21.83 per share, subject to adjustment in certain events. In addition, the Convertible Notes may be redeemed, in whole or in part, at the option of the Company, at any time on or after June 5, 2000 at the redemption prices set forth therein plus accrued interest to the date of redemption. Interest is payable semi-annually on June 1 and December 1, commencing on December 1, 1997. The Company capitalized deferred note issuance costs of $3,673 in conjunction with the issuance of the Convertible Notes. These deferred costs are being amortized over the seven year life of the Convertible Notes. Proceeds from the Convertible Notes were used to repay indebtedness under the Old Credit Facility. Subordinated notes (Apex) On May 18, 1995, in conjunction with Converse's acquisition of 100% of the outstanding common stock of Apex (see Note 3), Converse issued subordinated notes in the face amount of $11,000, discounted at a rate of 12%, to $9,644. The notes bore interest at the rate of 8% per annum for the first three years and were to bear interest at the rate of 10% and 12% in 1998 and 1999, respectively. The notes had an original maturity of May 18, 2003. As described in Note 3, during 1997, substantially all of these notes were returned to Converse in connection with the settlement of the Apex litigation. The Company had accrued $1,354 of interest expense related to these notes which was included as restricted cash on the December 28, 1996 balance sheet. In connection with the settlement of the subordinated notes, this interest expense was reversed in Fiscal 1997. Total interest expense consisted of the following:
FISCAL YEAR ENDED ---------------------------------------------------------------------- DECEMBER 30, 1995 DECEMBER 28, 1996 JANUARY 3, 1998 ----------------- ----------------- --------------- Interest on short-term debt, Credit Facility and Old Credit Facility.... $ 9,220 $11,368 $ 9,777 Interest on Convertible Notes......... ---- ---- 3,508 Interest on subordinated notes........ 474 880 (1,354) Amortization of Convertible Notes Issuance costs...................... ---- ---- 320 Credit line fees...................... 2,030 1,518 1,819 Amortization of Old Credit Facility financing fees...... 1,767 1,767 694 Old Credit Facility amendment and other fees...................... 552 2,243 240 Amortization of Credit Facility Financing fees...................... ---- ---- 370 --------- --------- --------- $14,043 $17,776 $15,374 ========= ========= =========
F-15 9. EXTRAORDINARY LOSS In May 1997, the Company entered into the Credit Facility and repaid the Old Credit Facility. In connection with the repayment of the Old Credit Facility, the Company wrote-off deferred financing fees of $1,320 in the second quarter of Fiscal 1997. This write-off is presented as an extraordinary loss of $744, net of income tax benefit of $576, on the statement of operations. 10. INCOME TAXES The domestic and foreign components of income (loss) from continuing operations before income taxes were as follows:
FISCAL YEAR ENDED ---------------------------------------------------------------------------- DECEMBER 30, 1995 DECEMBER 28, 1996 JANUARY 3, 1998 ----------------------- ------------------------- ------------------------ Domestic....................... $(84,482) $(17,967) $ 29,730 Foreign........................ (15,409) (4,602) (20,881) ------------- ------------- ------------- $(99,891) $(22,569) $ 8,849 ============= ============= =============
Income tax expense (benefit) related to continuing operations was comprised of the following:
FISCAL YEAR ENDED --------------------------------------------------------------------------------- DECEMBER 30, 1995 DECEMBER 28, 1996 JANUARY 3, 1998 -------------------------- -------------------------- ------------------------- Current: Federal........................ $(12,666) $(3,617) $ ---- State.......................... 417 299 362 Foreign........................ 2,656 3,571 2,336 ------------- ------------- ------------- (9,593) 253 2,698 ------------- ------------- ------------- Deferred: Federal........................ (16,557) (3,906) 8,574 State.......................... (1,994) (481) 1,882 ------------- ------------- ------------- (18,551) (4,387) 10,456 ------------- ------------- ------------- $(28,144) $(4,134) $13,154 ============= ============= =============
The following table reconciles the differences between the Federal corporate statutory rate and Converse's effective income tax rate:
FISCAL YEAR ENDED -------------------------------------------------------------------------- DECEMBER 30, 1995 DECEMBER 28, 1996 JANUARY 3, 1998 ------------------------ ----------------------- ----------------------- Federal corporate statutory tax rate (benefit)...................................... (35.0)% (35.0)% 35.0% State taxes (benefit), net of Federal tax effect......................................... (1.5) (2.9) 13.9 Foreign income taxes............................ 1.7 10.1 ---- Valuation allowance............................. 6.7 12.7 105.0 Other........................................... (0.1) (3.2) (5.3) ---------- ---------- ---------- Effective income tax (benefit) rate (28.2)% (18.3)% 148.6% ========== ========== ==========
Deferred income taxes reflect the effect of temporary differences between the tax basis of assets and liabilities and the reported amounts of assets and liabilities for financial reporting purposes net of any valuation allowance. Converse's deferred tax assets and liabilities at December 28, 1996 and January 3, 1998, consisted of the following: F-16
DECEMBER 28, 1996 JANUARY 3, 1998 ------------------------- ------------------------- Deferred tax assets: Tax benefit of loss carryforwards.......................... $ 22,263 $ 36,526 Loss on investment in unconsolidated subsidiary............ 11,739 ---- Restructuring accruals..................................... 1,524 978 Fair value adjustments..................................... 3,718 3,234 Employee postretirement benefits other than pensions....... 4,061 4,012 Expense accruals........................................... 3,182 561 Receivable, inventory and other reserves................... 3,399 2,660 Depreciation............................................... 341 1,604 ----------- ----------- Gross deferred tax assets................................ 50,227 49,575 Deferred tax liabilities: Employee pension plans..................................... (762) (627) Other...................................................... (2,840) (4,739) ----------- ----------- Net deferred tax assets before valuation allowance....... 46,625 44,209 Valuation allowance........................................ (11,584) (20,877) ----------- ----------- Net deferred tax assets.................................. $ 35,041 $ 23,332 =========== ===========
The net deferred tax assets are included in the consolidated balance sheet as follows:
DECEMBER 28, 1996 JANUARY 3, 1998 ---------------------- -------------------------- Prepaid expenses and other current assets..................... $14,491 $ 2,063 Other assets.................................................. 20,550 21,269 -------------- -------------- $35,041 $23,332 ============== ==============
Statement of Financial Accounting Standards No. 109, "Accounting for Income Taxes," requires that a valuation allowance be recorded against deferred tax assets for which there is a greater than fifty percent chance that the tax assets will not be realized. In assessing the realizability of the deferred tax assets, Converse has based its judgment primarily on estimated future earnings. Although the period to use these deferred tax assets is 12 to 15 years for tax purposes, the accounting guidance requires that a shorter time frame be used to assess the certainty of their realization. Converse believes it's deferred tax assets will be realized; however, as a result of the uncertainty caused by the recent industry downturn and the related oversupply of inventory in the marketplace during the fourth quarter of Fiscal 1997, the Company increased its deferred tax valuation by $9,293 to a total of $20,877. At January 3, 1998, Converse had operating loss carryforwards of $88,416. The loss carryforwards expire between the years 2009 and 2012. 11. EMPLOYEE BENEFITS Converse sponsors or contributes to retirement plans covering substantially all domestic employees. Converse has defined benefit pension and postretirement plans in addition to other retirement plans and benefits. The annual cost for defined benefit plans is determined using the projected unit credit actuarial cost method which includes significant actuarial assumptions and estimates which are subject to change in the near term. Prior service cost is amortized on a straight-line basis over the average remaining service period of employees expected to receive benefits. In certain foreign countries, contributions are made to defined contribution plans as well as to government sponsored plans, as required in the respective jurisdictions. Liabilities and expenses related to these foreign employees are not material. F-17 Defined benefit pension plan Converse has a non-contributory defined benefit pension plan covering substantially all salaried employees at its domestic operations. Retirement benefits generally are based on years of service and final average compensation with employees generally becoming vested upon completion of five years of service. The plan is funded by company contributions to trust funds which are held for the sole benefit of the employees. It is Converse's practice to fund pension costs to the extent that such costs are tax deductible and in accordance with ERISA. The assets of the plan are primarily comprised of equity securities and fixed income investments. The table below summarizes the plan's funded status and amounts recognized in the balance sheet:
DECEMBER 28, 1996 JANUARY 3, 1998 ----------------- --------------- Actuarial present value of benefit obligations: Vested benefit obligation............................ $39,048 $42,444 ======== ======== Accumulated benefit obligation....................... $39,641 $48,467 ======== ======== Projected benefit obligation......................... $46,781 $58,553 Fair value of plan assets............................... 51,122 59,507 -------- -------- Plan assets in excess of projected benefit obligation... 4,341 954 Unrecognized net loss (gain)............................ (2,166) 895 Unrecognized prior service cost......................... (82) (75) -------- -------- Prepaid pension cost included in other assets........... $ 2,093 $ 1,774 ======== ========
Net periodic pension cost for Fiscal 1995, 1996 and 1997 included the following components:
FISCAL YEAR ENDED ------------------------------------------------------------------------- DECEMBER 30, 1995 DECEMBER 28, 1996 JANUARY 3, 1998 ----------------- ----------------- --------------- Service cost-benefits earned during the period.................................. $ 1,300 $ 1,410 $ 1,751 Interest cost on the projected benefit obligation.............................. 3,309 3,375 3,769 Actual return on plan assets............. ( 9,775) ( 6,365) (10,457) Net amortization and deferral............ 6,364 2,110 5,662 ---------- ---------- ---------- Net periodic pension cost................ $ 1,198 $ 530 $ 725 ========== ========== ==========
Measurement of the projected benefit obligation was based on a weighted average discount rate of 7.25%, 7.50% and 7.00% in Fiscal 1995, 1996 and 1997, respectively, and a rate of increase in future compensation levels of 4.5% in each year. The expected long-term rate of return on plan assets used in determining net pension cost was 9.5% in each year. Defined benefit postretirement plan In addition to pension benefits, certain retired employees are currently provided with specified health care and life insurance benefits. Eligibility requirements generally state that benefits are available to employees who retire after a certain age with specified years of service if they agree to contribute a portion of the cost. Converse has reserved the right to modify or terminate these benefits. Health care and life insurance benefits are provided to both retired and active employees through medical benefit trusts, third-party administrators and insurance companies. F-18 The following table sets forth the combined financial status of deferred postretirement benefits other than pensions:
DECEMBER 28, 1996 JANUARY 3, 1998 ----------------- --------------- Accumulated postretirement benefit obligation: Retirees.......................................... $ 4,311 $ 3,514 Fully eligible active plan participants........... 128 97 Other active plan participants.................... 1,564 1,391 --------- --------- Total......................................... 6,003 5,002 Unrecognized net gain................................ 1,735 3,152 Unrecognized prior service gain...................... 2,493 2,268 --------- --------- Accrued postretirement benefit obligation............ $10,231 $10,422 ========= =========
Net periodic postretirement benefit cost (income) for Fiscal 1995, 1996 and 1997 was $(651), $221, and $216, respectively. For measurement purposes, a 15.0%, 15.0% and 9.0% annual rate of increase in the cost of health care benefits was assumed for Fiscal 1995, 1996 and 1997, respectively. The rates are assumed to decrease gradually to 8.0% in the year 2002 for pre-age 65 retirees and to 7.0% in 1999 for post-age 65 retirees for Fiscal 1995 and 1996, and down to 6.0% by 2000 for both pre- and post-age 65 participants for Fiscal 1997 and remain at those levels thereafter. The health care cost trend rate assumption has an effect on amounts reported. Increasing the health care cost trend rate by one percentage point in each year would increase the accumulated postretirement benefit obligation as of January 3, 1998 by approximately $239 and the net periodic cost by $27 for the year. Measurement of the accumulated postretirement benefit obligation was based upon a weighted average discount rate of 7.25%, 7.50% and 7.00% for Fiscal 1995, 1996 and 1997, respectively, and a long-term rate of compensation increase of 4.5% for Fiscal 1995 and 1996, and 4.0% for Fiscal 1997. Other retirement plans and benefits Converse has a non-contributory defined contribution plan covering all hourly employees with at least one year of service at its domestic manufacturing and warehouse facilities. Contributions under this plan are fixed at $0.39 per hour of service with a maximum contribution based on 2,000 hours per employee. The defined contribution expense was $992, $318 and $625 for Fiscal 1995, 1996 and 1997, respectively. Converse also sponsors a savings plan. The total cost of this plan for Fiscal 1995, 1996, and 1997 was $609, $329 and $333, respectively. 12. STOCK OPTION PLANS Converse 1994 stock option plan The Board of Directors of Converse adopted the Converse Inc. 1994 Stock Option Plan (the "1994 Plan") as a means to encourage ownership of Converse common stock by key employees and enable Converse to attract and retain the services of outstanding employees in competition with other employers. The 1994 Plan authorizes grants to key employees, including executive officers of Converse and its subsidiaries, and to its consultants, of incentive and non- qualified options to purchase shares of common stock. The plan administrator has discretion to grant non-qualified options at less than 100% of the fair market value per share of the common stock of Converse on the date of grant. Converse incentive stock options must be granted with an exercise price of not less than 100% of the fair market value per share of common stock of Converse on the date of grant. Option prices are payable in full and in cash, upon the exercise of a stock option, and the proceeds are added to the general funds of Converse. As of January 3, 1998, the number of shares of common stock which may be issued under the 1994 Plan is 2,300,000 subject to F-19 adjustment upon the occurrence of certain contingencies. The maximum number of shares with respect to which options may be granted to any individual during any calendar year and during the term of the 1994 Plan is 500,000 and 750,000, respectively. Options under the 1994 Plan generally expire nine years from the grant date. The 1994 Plan will terminate in October 2004, subject to the right of the Board of Directors to suspend or discontinue the 1994 Plan at any prior date and the rights of holders of options to exercise options after such date in accordance with the terms of such options. The following table summarizes option activity under the 1994 Plan:
WEIGHTED AVERAGE EXERCISE EXERCISE PRICE NUMBER OF OPTIONS PRICE PER SHARE PER SHARE ----------------- --------------- --------- Outstanding at January 1, 1995.................. 920,000 $ 5.27-$11.46 $ 8.66 Granted......................................... 633,000 $ 5.00-$23.00 9.64 Canceled........................................ (429,000) $ 7.00 7.00 ----------- Outstanding at December 30, 1995................ 1,124,000 $ 5.00-$23.00 7.71 Granted......................................... 1,221,000 $ 4.00-$23.00 7.17 Canceled........................................ (520,200) $ 5.00-$23.00 11.71 Exercised....................................... (246,000) $ 5.00-$7.00 5.57 ----------- Outstanding at December 28, 1996................ 1,578,800 $ 4.00-$23.00 6.31 Granted......................................... 442,000 $10.94-$26.88 17.30 Canceled........................................ (127,250) $ 5.27-$26.88 9.34 Exercised....................................... (104,800) $ 4.00-$9.40 5.96 ----------- Outstanding at January 3, 1998.................. 1,788,750 $ 4.00-$26.88 8.85 =========== ======== Exercisable at January 3, 1998.................. 370,650 $ 6.81 =========== ======== Available for future grants..................... 160,450 ===========
The following table summarizes information about the 1994 Plan stock options outstanding at January 3, 1998:
OPTIONS OUTSTANDING OPTIONS EXERCISABLE ----------------------------------------------------------- ------------------------------- WEIGHTED AVERAGE REMAINING RANGE OF NUMBER OUTSTANDING CONTRACTUAL LIFE WEIGHTED AVERAGE NUMBER EXERCISABLE WEIGHTED AVERAGE EXERCISE PRICES AT JANUARY 3, 1998 (YEARS) EXERCISE PRICE AT JANUARY 3, 1998 EXERCISE PRICE --------------- ------------------ ---------------- -------------- ------------------ -------------- $4.00-$5.00 509,800 7 $ 4.99 102,000 $ 5.00 $5.27 74,750 6 5.27 46,000 5.27 $5.63-$6.50 468,200 8 6.27 88,200 6.31 $7.00 206,000 6 7.00 74,000 7.00 $7.75-$8.65 22,000 6 7.99 5,200 7.96 $9.00-$11.46 288,000 8 10.87 43,250 10.70 $13.00-$19.00 20,000 8 16.00 8,000 16.00 $20.63-$26.88 200,000 8 24.44 4,000 22.00 ----------- --------- 1,788,750 370,650 =========== =========
F-20 On June 2, 1995, Converse repriced certain stock options granted under the 1994 Plan. Options to purchase 854,000 shares of common stock were repriced at an exercise price of $7.00 per share, which represented the closing price of Converse's common stock on June 2, 1995. The original vesting schedules and expiration dates associated with these stock options were also amended to coincide with the stock option repricing date. None of the foregoing stock option grants had vested prior to the repricing date and they did not begin to vest until June 2, 1996. On September 5, 1996, Converse repriced certain additional stock options granted under the 1994 Plan. Options to purchase 105,000 shares of common stock at prices ranging from $5.00 to $23.00 per share were repriced to an exercise price of $6.375 per share, which represented the closing price of Converse's common stock on September 5, 1996. In connection with this repricing, options to purchase 45,000 shares of common stock were canceled. None of the repriced options had vested prior to the repricing date and they did not begin to vest until September 5, 1997. The above option activity table reflects all options at their amended price and vesting terms. Converse 1995 non-employee director plan On March 22, 1995, the Board of Directors of Converse adopted the 1995 Non- Employee Director Plan ("the 1995 Plan") as a means of fostering and promoting the long-term financial success of Converse by attracting and retaining Non- Employee Directors of outstanding ability. Converse has reserved an aggregate of 45,000 shares for issuance under the 1995 Plan. Options to purchase 22,500 of these shares were granted during 1995 at the fair market value on the date of grant of $9.88. These stock options become exercisable in equal one-third increments on the anniversaries of the grant date beginning on March 22, 1996 and expire ten years from the date of grant. No such options were exercised during 1995, 1996 or 1997 and all options remain outstanding at January 3, 1998. Other stock option activity On October 13, 1995, in addition to the aforementioned option grants, Converse granted options to purchase an aggregate of 275,000 shares of common stock not pursuant to any formal plan. These options were granted in conjunction with a consulting agreement at the fair market value on the date of grant of $4.88 and were exercised during Fiscal 1996. Stock-based compensation The Company accounts for stock-based compensation using the method prescribed in Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees". Accordingly, no compensation cost has been recognized for the Company's stock option plans. The Company has adopted the disclosure-only provisions of Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based Compensation" ("SFAS 123"). Had compensation cost been determined based on the fair value at the grant dates for awards in 1995, 1996, and 1997 consistent with the provisions of SFAS 123, the Company's net loss and loss per share would have been increased to the pro forma amounts indicated below:
FISCAL YEAR ENDED ------------------------------------------------------------------------------- DECEMBER 30, 1995 DECEMBER 28, 1996 JANUARY 3, 1998 ----------------- ----------------- --------------- Net loss - as reported................ $(71,747) $(18,435) $(5,049) Net loss - pro forma.................. (73,031) (19,559) (7,041) Basic and diluted loss per share as reported......................... (4.30) (1.10) (0.29) Basic and diluted loss per share pro forma........................... (4.38) (1.17) (0.41)
F-21 The fair value of options granted at date of grant was estimated using the Black-Scholes model with the following weighted average assumptions:
FISCAL YEAR ENDED ------------------------------------------------------------------------------- DECEMBER 30, 1995 DECEMBER 28, 1996 JANUARY 3, 1998 ----------------- ----------------- --------------- Expected life (years).................. 5.3 6.0 6.0 Interest rate.......................... 6.45% 6.27% 6.18% Volatility............................. 75.00% 65.00% 67.00% Dividend yield......................... ---- ---- ----
The weighted average grant date fair value of options granted during Fiscal 1995, Fiscal 1996 and Fiscal 1997 was $3.87, $3.37 and $12.20, respectively. The pro forma net income and earnings per share amounts reflected above do not include a tax benefit for 1995, 1996 or 1997 as a full valuation allowance would have been provided against any such benefit. The pro forma effect on net income for Fiscal 1995, Fiscal 1996 and Fiscal 1997 is not necessarily indicative of future amounts as it does not take into consideration pro forma compensation expense related to grants made prior to 1995 as SFAS 123 does not apply to awards prior to 1995. 13. LEASE COMMITMENTS Substantially all of Converse's retail outlets and certain other real properties and equipment are operated under lease agreements expiring at various dates through the year 2012. Leases covering retail outlets and equipment generally require, in addition to stated minimums, contingent rentals based on retail sales and equipment usage. Generally, the leases provide for renewal for various periods at stipulated rates. Rental expense under operating leases was as follows:
FISCAL YEAR ENDED ------------------------------------------------------------------------------- DECEMBER 30, 1995 DECEMBER 28, 1996 JANUARY 3, 1998 ----------------- ----------------- --------------- Minimum rentals........................ $3,901 $4,244 $4,713 Contingent rentals .................... 1,088 825 1,588 --------- ------- ------- $4,989 $5,069 $6,301 ========= ======= =======
Future minimum lease payments under operating leases are $3,246, $2,735, $2,146, $1,383 and $688 for 1998 through 2002, respectively. 14. COMMITMENTS AND CONTINGENCIES Converse is or may become a defendant in a number of pending or threatened legal proceedings in the ordinary course of its business. Converse believes the ultimate outcome of any such proceedings will not have a material adverse effect on its financial position or results of operations. 15. RELATED PARTY TRANSACTIONS In connection with the Distribution, Converse and Furniture Brands entered into a Tax Sharing Agreement (the "Agreement") providing, among other things, for an equal allocation between Furniture Brands and Converse of benefits derived from a carryback of federal and state tax liabilities to periods prior to completion of the Distribution. On February 21, 1996, Converse amended this Tax Sharing Agreement with Furniture Brands, under which Converse agreed to carryback certain federal income tax operating losses for the years ended December 30, 1995 and December 28, F-22 1996 to one or more Pre-Distribution tax periods. For the year ended December 30, 1995, the amendment applied to the first $41,000 of tax operating losses generated, which approximated the taxable income available in the carryback period. For the year ended December 30, 1995, tax operating losses of approximately $31,000 were carried back generating a tax refund of $10,832. In accordance with the Agreement, as amended, Furniture Brands paid Converse $8,000 on February 29, 1996 and in return Furniture Brands was entitled to the full amount of the tax refund. Furniture Brands is not entitled to any refund of the $8,000 payment in the event the ultimate tax refund it receives from the Internal Revenue Service is less than anticipated. In accordance with the agreement, Furniture Brands was also entitled to tax refunds resulting from the carryback of approximately $10,000 of the Company's Fiscal 1996 tax operating losses. The $2,832 excess of the Fiscal 1995 tax refund over Furniture Brands' payment to Converse and the $3,616 tax refund associated with the aforementioned $10,000 of 1996 tax operating losses of Converse being carried back to Furniture Brands have been recorded by Converse as other expense in Fiscal 1995 and 1996, respectively. In addition, Furniture Brands and Converse shared, on an equal basis, 1994 tax carryback benefits totaling $1,380. Furniture Brands' share of this amount, $690, was recorded by Converse as other expense for Fiscal 1995. In connection with the Distribution, Converse and Furniture Brands entered into a Distribution and Services Agreement for Fiscal 1995 relating to the continued provision of certain of the services described above by Furniture Brands to Converse as well as additional advisory services, support and consulting as a result of Converse being a public company. In November 1995, this Agreement was amended to decrease the amount of fees payable from Converse to Furniture Brands. For the year ended December 30, 1995, Converse paid $210 to Furniture Brands for these services. In November 1995, Apollo Investment Fund, L.P. ("Apollo"), owner with its affiliates of a majority of the outstanding common stock of the Company, caused a standby letter of credit to be provided to the Banks to enable Converse to borrow an additional $25,000 above its defined borrowing base under the Old Credit Facility. The Company paid Apollo a fee of 3% of the face amount of the letter of credit and a subsequent extension fee of $100. The standby letter of credit arrangement ceased to exist upon the repayment of the Old Credit Facility. On November 17, 1994, Converse entered into a consulting agreement with Apollo Advisors, L.P., an affiliate of Apollo, pursuant to which Apollo Advisors, L.P. provides corporate advisory, financial and other consulting services to Converse. Fees under the agreement were initially payable at an annual rate of $500 plus out-of-pocket expenses. During Fiscal 1997, this agreement was amended to decrease the annual rate for the year ended January 3, 1998 from $500 to $375. The consulting agreement continues on a year-to-year basis unless terminated by the Converse Board of Directors. 16. OTHER FINANCIAL DATA Items charged to earnings during Fiscal 1995, 1996 and 1997 included the following:
FISCAL YEAR ENDED --------------------------------------------------------------------- DECEMBER 30, 1995 DECEMBER 28, 1996 JANUARY 3, 1998 ----------------- ----------------- --------------- Advertising and promotion.................. $49,884 $28,544 $34,887 Research and development................... $ 8,617 $ 6,503 $ 8,817
F-23 17. BUSINESS SEGMENT INFORMATION Converse operates in one industry segment; designing, manufacturing and marketing of athletic and leisure footwear. Converse has a diversified customer base with one customer accounting for 12% of the Company's net sales in both Fiscal 1995 and Fiscal 1996 and 14% in Fiscal 1997. Converse's products are distributed in the United States and internationally.
FISCAL YEAR ENDED -------------------------------------------------------------- DECEMBER 30, 1995 DECEMBER 28, 1996 JANUARY 3, 1998 ----------------- ----------------- --------------- Total Revenues: United States...................................... $277,241 $254,255 $325,904 Europe, Middle East, Africa........................ 115,788 96,613 82,926 Pacific............................................ 49,979 43,695 71,327 Americas (excluding United States)................. 36,577 19,374 18,899 Less: Inter-Geographic Revenues................... (72,102) (64,602) (48,857) -------- -------- -------- $407,483 $349,335 $450,199 ======== ======== ======== Operating Income (loss): United States...................................... $(38,922) $(12,367) $ 9,925 Europe, Middle East, Africa........................ (12,131) (11,253) (16,846) Pacific............................................ 18,276 23,576 20,808 Americas (excluding United States)................. 3,055 208 825 -------- -------- -------- $(29,722) $ 164 $ 14,712 ======== ======== ======== Identifiable Assets: United States...................................... $ 85,147 $ 99,724 $ 85,577 Europe, Middle East, Africa........................ 83,358 72,293 78,384 Pacific............................................ 33,780 35,611 53,600 Americas (excluding United States)................. 22,222 14,975 17,133 -------- -------- -------- $224,507 $222,603 $234,694 ======== ======== ======== United States Export Sales: (included in geographic revenues above) Europe, Middle East, Africa........................ $ 15,984 $ 12,203 $ 12,599 Pacific............................................ 31,171 23,570 62,335 Americas (excluding United States)................. 20,758 11,415 10,831 -------- -------- -------- $ 67,913 $ 47,188 $ 85,765 ======== ======== ========
Inter-Geographic sales are accounted for based on established sales prices between the related companies and pertain primarily to sales from the United States to various foreign operations. F-24 18. QUARTERLY FINANCIAL INFORMATION (UNAUDITED) Following is a summary of unaudited quarterly information:
FIRST SECOND THIRD FOURTH QUARTER QUARTER QUARTER QUARTER ------- ------- ------- ------- Year ended December 28, 1996: Net sales............................. $ 86,551 $ 79,907 $113,318 $ 69,559 Gross profit.......................... $ 21,617 $ 22,887 $ 29,930 $ 11,803 Net earnings (loss)................... $ (3,260) $ (3,743) $ (3,011) $ (8,421) ======== ======== ======== ======== Net earnings (loss) per share......... $ (0.20) $ (0.22) $ (0.18) $ (0.50) ======== ======== ======== ======== FIRST SECOND THIRD FOURTH QUARTER QUARTER QUARTER QUARTER ------- ------- ------- ------- Year ended January 3, 1998: Net sales............................. $135,969 $103,324 $121,903 $ 89,003 Gross profit.......................... $ 42,160 $ 30,885 $ 32,104 $ 15,792 Net earnings (loss)................... $ 12,680 $ 4 $ 175 $(17,908) ======== ======== ======== ======== Net earnings (loss) per share......... $ 0.71 $ 0.00 $ 0.01 $ (1.03) ======== ======== ======== ========
F-25 SCHEDULE II VALUATION AND QUALIFYING ACCOUNTS (DOLLAR AMOUNTS IN THOUSANDS)
ADDITIONS (REVERSALS) BEGINNING CHARGED TO COSTS ENDING DESCRIPTION BALANCE AND EXPENSES DEDUCTIONS BALANCE ------------ --------- ------------ ---------- ------- Year Ended December 30, 1995: Allowance for Doubtful Accounts................. $ 1,553 $1,366 $ 682 $ 2,237 Inventory Reserve............................... 1,473 6,424 681 7,216 Deferred Tax Asset Valuation Allowance.......... ---- 6,650 ---- 6,650 Year Ended December 28, 1996: Allowance for Doubtful Accounts................. $ 2,237 $ 670 $ 913 $ 1,994 Inventory Reserve............................... 7,216 306 1,951 5,571 Deferred Tax Asset Valuation Allowance.......... 6,650 4,934 ---- 11,584 Year Ended January 3, 1998: Allowance for Doubtful Accounts................. $ 1,994 $1,074 $1,002 $ 2,066 Inventory Reserve............................... 5,571 (769) 1,840 2,962 Deferred Tax Asset Valuation Allowance.......... 11,584 9,293 ---- 20,877
F-26 EX-10.3 2 AMENDMENT #2 TO CREDIT AGREEMENT EXHIBIT 10.3 SECOND AMENDMENT TO CREDIT AGREEMENT ------------------------------------ This Second Amendment to Credit Agreement (the "Amendment") is made on this 21st day of November, 1997 by and among Converse Inc. (the "Borrower"), BT Commercial Corporation, as Agent (in such capacity, the "Agent") and BT Commercial Corporation (in its capacity as lender, "BTCC"), Sanwa Business Credit Corporation ("Sanwa"), LaSalle National Bank ("LaSalle"), BankBoston, N.A. ("BankBoston"), FINOVA Capital Corporation ("FINOVA"), BNY Financial Corporation ("BNY"), Fleet Capital Corporation ("Fleet"), NationsBank of Texas, N.A. ("NationsBank"), Heller Financial, Inc. (BT, Sanwa, LaSalle, BankBoston, FINOVA, BNY, Fleet, NationsBank, and Heller referred to collectively as "Lenders"). WITNESSETH: WHEREAS, the Agent, the Lenders and the Borrower are parties to that certain Credit Agreement dated as of May 21, 1997, as amended by that certain First Amendment to Credit Agreement dated as of June 26, 1997 (the "Credit Agreement"); and WHEREAS, the parties desire to amend the Credit Agreement, as more fully set forth herein. NOW, THEREFORE, in consideration of the mutual agreements herein contained and other good and valuable consideration, the adequacy is hereby acknowledged, and subject to the terms and conditions hereof, the parties hereto agree as follows: SECTION 1. DEFINITIONS Unless otherwise defined herein, all capitalized ----------- terms shall have the meaning given to them in the Credit Agreement. SECTION 2. AMENDMENTS TO CREDIT AGREEMENT Section 7.7 of the Credit ------------------------------ Agreement is hereby deleted in its entirety, and the following is inserted instead: "7.7 INTEREST COVERAGE RATIO Borrower shall not permit the ratio of ----------------------- EBITDA to Consolidated Interest Expense to be less than (i) 1.0 to 1 for the four (4) fiscal quarters ending December 1997, and (ii) 1.6 to 1 thereafter during the term hereof. Borrower's compliance with this Section 7.7 shall be tested at the end of each fiscal quarter for the ----------- immediately preceding four (4) fiscal quarters." 1 SECTION 3. CONDITIONS PRECEDENT The effectiveness of this Amendment is -------------------- expressly conditioned upon satisfaction of the following conditions precedent: 3.1 Borrower shall have paid, on the date hereof, to Agent for the benefit of Lenders, an amendment fee in the amount of $150,000. 3.2 Agent shall have received copies of this Amendment duly executed by Borrower and Lenders constituting Required Lenders. SECTION 4. REAFFIRMATION OF BORROWER Borrower hereby represents and ------------------------- warrants to Agent and Lender that (i) the representations and warranties set forth in Section 5 of the Credit Agreement are true and correct on and as of the date hereof, except to the extent (a) that any such representations or warranties relate to a specific date, or (b) of changes thereto as a result of transactions for which Agent and Lender have granted their consent; (ii) Borrower is on the date hereof in compliance with all of the terms and provisions set forth in the Credit Agreement as hereby amended; and (iii) upon execution hereof no Default or Event of Default has occurred and is continuing or has not previously been waived. SECTION 5. FULL FORCE AND EFFECT Except as herein amended, the Credit --------------------- Agreement and all other Credit Documents shall remain in full force and effect. SECTION 6. COUNTERPARTS This Amendment may be executed in two or more ------------ counterparts, each of which shall be deemed an original, but all of which together shall constitute one and the same document. IN WITNESS WHEREOF, the parties hereto have executed this Amendment on the day and year specified above. BORROWER: CONVERSE INC. By: /s/ Donald J. Camacho ----------------------- Name: Donald J. Camacho ------------------- Title: Senior Vice President ---------------------- 2 AGENT: BT COMMERCIAL CORPORATION By: /s/ Frank Fazio ---------------------- Name: Frank Fazio ---------------- Title: Vice President ---------------- LENDER: BT COMMERCIAL CORPORATION By: /s/ Frank Fazio --------------------- Name: Frank Fazio --------------- Title: Vice President --------------- 3 LENDER: SANWA BUSINESS CREDIT CORPORATION By: /s/ Lawrence J. Placer ------------------------- Name: Lawrence J. Placer -------------------- Title:Vice President ------------------- LENDER: LASALLE NATIONAL BANK By: /s/ Christopher G. Clifford ----------------------------- Name: Christopher G. Clifford ------------------------ Title: Senior Vice President ----------------------- LENDER: BANKBOSTON, N.A. By: /s/ Kathy A. Sweeney ---------------------- Name: Kathy A. Sweeney ------------------ Title: Vice President ---------------- LENDER: FINOVA CAPITAL CORPORATION By: /s/ Brian Rujawitz ------------------------------- Name: Brian Rujawitz -------------------------- Title: Assistant Vice President ------------------------- 4 LENDERS: BNY FINANCIAL CORPORATION By: /s/ Anthony Violp --------------------- Name: Anthony Violp ---------------- Title: Vice President ---------------- LENDER: FLEET CAPITAL CORPORATION By: /s/ Jennifer S. Mellitt ------------------------ Name:Jennifer S. Mellitt ------------------- Title: Vice President ------------------ LENDER: NATIONSBANK OF TEXAS, N.A. By: /s/ Stacy Wells -------------------------------- Name: Stacy Wells --------------------------- Title: Assistant Vice President -------------------------- LENDER: HELLER FINANCIAL, INC. By: /s/ Linda Peddle ---------------------- Name: Linda Peddle ----------------- Title: Vice President ---------------- 5 EX-10.4 3 AMENDMENT #3 TO CREDIT AGREEMENT EXHIBIT 10.4 ------------ THIRD AMENDMENT TO CREDIT AGREEMENT ----------------------------------- This Third Amendment to Credit Agreement (the "Amendment") is made on this 29 day of January, 1998 by and among Converse Inc. (the "Borrower"), BT Commercial Corporation, as Agent (in such capacity, the "Agent") and BT Commercial Corporation (in its capacity as lender, "BTCC"), Sanwa Business Credit Corporation ("Sanwa"), LaSalle National Bank ("LaSalle"), BankBoston, N.A. ("BankBoston"), FINOVA Capital Corporation ("FINOVA"), BNY Financial Corporation ("BNY"), Fleet Capital Corporation ("Fleet"), NationsBank of Texas, N.A. ("NationsBank"), Heller Financial, Inc. (BT, Sanwa, LaSalle, BankBoston, FINOVA, BNY, Fleet, NationsBank, and Heller referred to collectively as "Lenders"). W I T N E S S E T H: WHEREAS, the Agent, the Lenders and the Borrower are parties to that certain Credit Agreement dated as of May 21, 1997, as amended by that certain First Amendment to Credit Agreement dated as of June 26, 1997, and that certain Second Amendment to Credit Agreement dated as of November 25, 1997 (collectively, the "Credit Agreement"); and WHEREAS, the parties desire to amend the Credit Agreement, as more fully set forth herein. NOW, THEREFORE, in consideration of the mutual agreements herein contained and other good and valuable consideration, the adequacy is hereby acknowledged, and subject to the terms and conditions hereof, the parties hereto agree as follows: SECTION 1. DEFINITIONS Unless otherwise defined herein, all capitalized ----------- terms shall have the meaning given to them in the Credit Agreement. SECTION 2 AMENDMENTS TO CREDIT AGREEMENT ------------------------------ 2.1 The defined term "Borrowing Base", which appears in Section 1.1 of the Credit Agreement, is hereby amended by deleting the proviso appearing at the end of subsection (B) thereof, and inserting the following in its stead: "; provided, however, that during the period from January -------- ------- 29, 1998 through and including March 31, 1998, and during the months of April, May, June and July of each year during the term hereof, the advance rate with respect to Eligible Inventory and Eligible L/C Inventory shall be seventy percent (70%), plus" ---- 2.2 Section 7.7 of the Credit Agreement is hereby deleted in its entirety, and the following is inserted in its stead: "7.7 INTEREST COVERAGE RATIO. Borrower shall not permit the ----------------------- ratio of EBITDA to Consolidated Interest Expense to be less than (i) 1.2 to 1 for the fiscal quarter ending March, 1998, (ii) 1.25 to 1 for the fiscal quarter ending June, 1998, (iii) 1.0 to 1 for the four (4) fiscal quarters ending September, 1998, and (iv) 1.40 to 1 thereafter at the end of each subsequent fiscal quarter for the immediately preceding four (4) fiscal quarters." SECTION 3. CONDITIONS PRECEDENT. The effectiveness of this Amendment is -------------------- expressly conditioned upon satisfaction of the following conditions precedent: 3.1 Agent shall have received copies of this Amendment duly executed by Borrower and Lenders constituting Required Lenders. 3.2 Agent shall have received such other documents, certificates and assurances as it shall reasonably request. SECTION 4. REAFFIRMATION OF BORROWER. Borrower hereby represents and ------------------------- warrants to Agent and Lender that (i) the representations and warranties set forth in Section 5 of the Credit Agreement are true and correct on and as of the date hereof, except to the extent (a) that any such representations or warranties relate to a specific date, or (b) of changes thereto as a result of transactions for which Agent and Lender have granted their consent; (ii) Borrower is on the date hereof in compliance with all of the terms and provisions set forth in the Credit Agreement as hereby amended; and (iii) upon execution hereof no Default or Event of Default has occurred and is continuing or has not previously been waived. SECTION 5. FULL FORCE AND EFFECT. Except as herein amended, the Credit --------------------- Agreement and all other Credit Documents shall remain in full force and effect SECTION 6. COUNTERPARTS. This Amendment may be executed in two or more ------------ counterparts, each of which shall be deemed an original, but all of which together shall constitute one and the same document. IN WITNESS WHEREOF, the parties hereto have executed this Amendment on the day and year specified above. BORROWER: CONVERSE INC. By: /s/ Donald J. Camacho ---------------------------- Name: Donald J. Camacho ----------------------- Title: Senior Vice President ---------------------- AGENT: BT COMMERCIAL CORPORATION By: /s/ Frank Fazio --------------------- Name: Frank Fazio ---------------- Title: Vice President --------------- LENDER: BT COMMERCIAL CORPORATION By: /s/ Frank Fazio --------------------- Name: Frank Fazio ---------------- Title: Vice President --------------- LENDER: SANWA BUSINESS CREDIT CORPORATION By: /s/ Lawrence J. Placer ------------------------ Name: Lawrence J. Placer ------------------- Title: Vice President ------------------- LENDER: LASALLE NATIONAL BANK By: /s/ Christopher G. Clifford ----------------------------- Name: Christopher G. Clifford ------------------------ Title: Senior Vice President ----------------------- LENDER: BANKBOSTON, N.A. By: /s/ Kathy A. Sweeney ---------------------- Name: Kathy A. Sweeney ----------------- Title: Vice President ---------------- LENDER: FINOVA CAPITAL CORPORATION By: /s/ Brian Rujewitz ------------------------------- Name: Brian Rujewitz -------------------------- Title: Assistant Vice President ------------------------- LENDER: BNY FINANCIAL CORPORATION By: /s/ Frank Imperato --------------------- Name: Frank Imperato ---------------- Title: Vice President --------------- LENDER: FLEET CAPITAL CORPORATION By: /s/ Jennifer S. Mellitt ------------------------- Name: Jennifer S. Mellitt -------------------- Title: Vice President ------------------- LENDER: NATIONSBANK OF TEXAS, N.A. By: /s/ Stacy Wills ------------------------------ Name: Stacy Wills ------------------------- Title: Assistant Vice President ------------------------- LENDER: HELLER FINANCIAL, INC. By: /s/ Linda Peddle --------------------- Name: Linda Peddle ---------------- Title: Vice President --------------- EX-21 4 LIST OF SUBSIDIARIES EXHIBIT 21 CONVERSE INC. INCORPORATED IN DELAWARE ON JULY 22, 1986 SUBSIDIARIES ------------ CONVERSE STAR I, INC., a subsidiary of Converse Inc. Incorporated in Massachusetts on March 26, 1985 CONVERSE EMEA LTD., a subsidiary of Converse Inc. Incorporated in Delaware on January 29, 1990 CONVERSE FRANCE, INC., a subsidiary of Converse Benelux Holding Company, Inc. Incorporated in Delaware on November 23, 1993 (branch in France) CONVERSE EUROPE, INC., a subsidiary of Converse Inc. Incorporated in Delaware on November 23, 1993 (branch in the Netherlands) CONVERSE BENELUX, INC., a subsidiary of Converse Benelux Holding Company, Inc. Incorporated in Delaware on November 23, 1993 (branches in the Netherlands and Belgium) CONVERSE BENELUX HOLDING COMPANY, INC., a subsidiary of Converse Europe, Inc. Incorporated in Delaware on November 23, 1993 CONVERSE GERMANY, INC., a subsidiary of Converse Europe, Inc. Incorporated in Delaware on March 21, 1994 (branch in Germany) CONVERSE IBERIA, INC., a subsidiary of Converse Europe, Inc. Incorporated in Delaware on July 8, 1994 (branches in Portugal and Spain) CONVERSE ITALY, INC., a subsidiary of Converse Europe, Inc. Incorporated in Delaware on September 21, 1994 (branch in Italy) CONVERSE JAPAN, INC., a subsidiary of Converse Inc. Incorporated in Delaware on November 21, 1994 (branch in Japan) CONVERSE SCANDINAVIA, INC., a subsidiary of Converse Europe, Inc. Incorporated in Delaware on June 7, 1995 (branch in Denmark) CONVERSE PACIFIC, INC., a subsidiary of Converse Inc. Incorporated in Delaware on May 2, 1996 (branch in Japan) CONVERSE MEXICO, INC., a subsidiary of Converse Inc. Incorporated in Delaware on October 23, 1996 (branch in Mexico) CONVERSE ALL STAR DO BRASIL INDUSTRIA E COMERCIO LTDA., a subsidiary of Converse Inc. Incorporated in Brazil CALZADO DEPORTIVO DE REYNOSA, S.A. DE C.V., a subsidiary of Converse Inc. Incorporated in Mexico on January 25, 1984 CONVERSE EXPORT CO. LIMITED, a subsidiary of Converse Inc. Incorporated in Barbados on December 28, 1984 (a foreign sales corporation) APEX ONE, INC., a subsidiary of Converse Inc. Incorporated in New Jersey on July 8, 1988 EX-23 5 CONSENT OF PRICE WATERHOUSE LLP Exhibit 23 ---------- CONSENT OF INDEPENDENT ACCOUNTANTS We hereby consent to the incorporation by reference in the Registration Statements on Form S-8 (Nos. 33-87806 and 333-13269) of Converse Inc. of our report dated February 18, 1998, appearing in Converse Inc.'s January 3, 1998 Annual Report on Form 10-K. We also consent to the application of such report to the Financial Statement Schedule for the three years ended January 3, 1998 when such schedule is read in conjunction with the financial statements referred to in our report. The audits referred to in such report also included this Financial Statement Schedule. /s/ Price Waterhouse LLP PRICE WATERHOUSE LLP Boston, Massachusetts March 31, 1998 EX-27 6 FINANCIAL DATA SCHEDULE
5 1,000 YEAR JAN-03-1998 DEC-29-1996 JAN-03-1998 5,738 0 74,149 2,066 94,681 182,215 31,169 11,083 234,694 161,955 80,000 0 0 17,318 (65,300) 234,694 450,199 472,768 329,258 458,056 (9,511) 0 15,374 8,849 13,154 (4,305) 0 (744) 0 (5,049) (0.29) (0.29)
-----END PRIVACY-ENHANCED MESSAGE-----