-----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, PTSD3rGXoua6hrU6DZeK98H1IAdWAlGT413pGwTVy7PmOXYfGvedYTmKEl+k4kG2 ye3K0J4qF4UwiPnC1oKrug== /in/edgar/work/20000815/0000927016-00-003051/0000927016-00-003051.txt : 20000922 0000927016-00-003051.hdr.sgml : 20000921 ACCESSION NUMBER: 0000927016-00-003051 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 20000701 FILED AS OF DATE: 20000815 FILER: COMPANY DATA: COMPANY CONFORMED NAME: CONVERSE INC CENTRAL INDEX KEY: 0000716934 STANDARD INDUSTRIAL CLASSIFICATION: [3021 ] IRS NUMBER: 041419731 STATE OF INCORPORATION: MA FISCAL YEAR END: 0102 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 001-13430 FILM NUMBER: 703108 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-Q 1 0001.txt FORM 10-Q SECURITIES AND EXCHANGE COMMISSION Washington, DC 20549 Form 10-Q Quarterly Report Pursuant to Section 13 or 15(d) of The Securities Exchange Act of 1934 For the quarterly period ended July 1, 2000 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 01864 North Reading, Massachusetts (Zip Code) (Address of principal executive offices) Registrant's telephone number, including area code: (978) 664-1100 Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that 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 the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practical date. As of July 1, 2000, 17,513,861 shares of common stock were outstanding. TABLE OF CONTENTS
PAGE PART I: FINANCIAL INFORMATION Item 1. Consolidated Financial Statements A. Consolidated Balance Sheet 1 B. Consolidated Statement of Operations 2 C. Consolidated Statement of Cash Flows 3 D. Notes to Consolidated Financial Statements 4 Item 2. Management's Discussion and Analysis of 11 Financial Condition and Results of Operations Item 3. Quantitative and Qualitative Disclosures 20 About Market Risk PART II: OTHER INFORMATION Item 1. Legal Proceedings 21 Item 2. Changes in Securities 21 Item 3. Defaults Upon Senior Securities 21 Item 4. Submission of Matters to a Vote of Security Holders 21 Item 5. Other Information 22 Item 6. Exhibits and Reports on Form 8-K 22 SIGNATURE 23
PART I - FINANCIAL INFORMATION Item 1. FINANCIAL STATEMENTS CONVERSE INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEET (Dollars in thousands, except per share amounts) (Unaudited)
January 1, 2000 July 1, 2000 --------------- ------------ Assets Current assets: Cash and cash equivalents............................................. $ 2,305 $ 2,559 Receivables, less allowances of $3,945 and $2,298, respectively....... 40,511 45,016 Inventories (Note 3).................................................. 76,414 69,037 Prepaid expense and other current assets.............................. 2,866 3,027 ------------ ----------- Total current assets............................................. 122,096 119,639 Net property, plant and equipment.......................................... 18,855 16,474 Other assets............................................................... 11,412 12,076 ------------ ----------- $ 152,363 $ 148,189 ============ =========== Liabilities and Stockholders' Equity (Deficiency) Current liabilities: Short-term debt (Note 4).............................................. $ 1,951 $ 3,459 Credit facility (Note 4).............................................. 71,551 77,010 Current portion long-term debt(Note 4)................................ 28,223 102,784 Accounts payable...................................................... 41,257 40,616 Accrued expenses...................................................... 15,063 15,004 Income taxes payable.................................................. 6,455 6,505 ------------ ----------- Total current liabilities........................................ 164,500 245,378 Long-term debt (Note 4).................................................... 74,265 -- Current assets in excess of reorganization value........................... 26,143 25,105 Stockholders' equity (deficiency): Common stock, $1.00 stated value, 50,000,000 shares authorized, 17,479,025 and 17,513,861 shares issued and outstanding at January 1, 2000 and July 1, 2000, respectively... 17,479 17,514 Preferred stock, no par value, 10,000,000 shares authorized none issued and outstanding..................................... -- -- Additional paid-in capital............................................ 4,764 4,604 Unearned compensation................................................. (1,061) (644) Retained earnings (deficit)........................................... (131,737) (141,514) Accumulated other comprehensive income................................ (1,990) (2,254) ------------ ----------- Total stockholders' equity (deficiency) ......................... (112,545) (122,294) ------------ ----------- $ 152,363 $ 148,189 ============ ===========
See accompanying notes to condensed consolidated financial statements. -1- CONVERSE INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS (Dollars in thousands, except per share amounts) (Unaudited)
Three Months Ended Six Months Ended ----------------------------------- ----------------------------------- July 3, 1999 July 1, 2000 July 3, 1999 July 1, 2000 ------------ ------------ ------------ ------------ Net revenue....................................... $58,320 $56,524 $ 129,318 $ 108,919 Cost of sales..................................... 43,268 44,286 95,525 85,126 ------------ ------------ ------------ ------------ Gross profit...................................... 15,052 12,238 33,793 23,793 Selling, general and administrative expenses...... 18,714 14,451 40,365 29,093 Royalty income.................................... 4,940 4,051 9,782 8,218 Restructuring and other unusual charges........... 543 (387) 543 (387) ------------ ------------ ------------ ------------ Earnings from operations.......................... 735 2,225 2,667 3,305 Interest expense, net............................. 5,283 5,658 10,522 10,981 Other (income) expense, net....................... 94 639 (902) 735 ------------ ------------ ------------ ------------ Loss before income tax............................ (4,642) (4,072) (6,953) (8,411) Income tax expense................................ 938 638 1,866 1,366 ------------ ------------ ------------ ------------ Net loss.......................................... $(5,580) $(4,710) $ (8,819) $ (9,777) ============ ============ ============ ============ Net basic and diluted loss per share (Note 2)..... $ (0.32) $ (0.27) $ (0.51) $ (0.56) ============ ============ ============ ============ Weighted average number of common shares outstanding (Note 2).............................. 17,396 17,514 17,363 17,503 ============ ============ ============ ============
See accompanying notes to condensed consolidated financial statements. -2- CONVERSE INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS (Dollars in thousands) (Unaudited)
Six Months Ended ------------------------------------ July 3, 1999 July 1, 2000 ------------ ------------ Cash flows from operating activities: Net loss........................................................ $ (8,819) $ (9,777) Adjustments to reconcile net loss to net cash required for operating activities: Depreciation of property, plant and equipment............. 2,164 2,278 Amortization of intangible assets......................... 100 -- Amortization of current assets in excess of reorganization value................................................... (1,038) (1,038) Amortization of note discount/warrants.................... 318 296 Amortization of deferred compensation..................... 211 260 Loss on disposal of property, plant and equipment......... -- 14 Changes in assets and liabilities: Receivables............................................... 2,257 (4,505) Inventories............................................... (6,431) 7,377 Prepaid expenses and other current assets................ 2,350 (161) Accounts payable and accrued expenses..................... (2,094) (517) Income taxes payable...................................... 493 50 Other long-term assets and liabilities.................... (314) (928) ------------ ------------ Net cash required for operating activities............ (10,803) (6,651) ------------ ------------ Cash flows from investing activities: Additions to property, plant and equipment...................... (1,211) (94) ------------ ------------ Net cash used by investing activities................. (1,211) (94) ------------ ------------ Cash flows from financing activities: Net proceeds from exercise of warrants.......................... 268 -- Net proceeds from sale of common stock (Note 7)................. 73 32 Net proceeds from (payment of) short-term debt.................. (547) 1,508 Net proceeds from (payment of) credit facility.................. 11,263 5,459 ------------ ------------ Net cash provided by financing activities............. 11,057 6,999 Net increase (decrease) in cash and cash equivalents.............. (957) 254 Cash and cash equivalents at beginning of period.................. 3,274 2,305 ------------ ------------ Cash and cash equivalents at end of period........................ $ 2,317 $ 2,559 ============ ============
See accompanying notes to condensed consolidated financial statements. -3- CONVERSE INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Dollars in thousands) 1. Summary of Significant Accounting Policies Basis of presentation: In the opinion of management, the accompanying unaudited condensed consolidated financial statements contain all adjustments, consisting of normal recurring accruals, considered necessary for a fair presentation. This interim financial information and notes thereto should be read in conjunction with the Company's annual report on Form 10-K for the year ended January 1, 2000. The Company's consolidated results of operations for the three and six months ended July 1, 2000 are not necessarily indicative of the results to be expected for any other interim period or the entire fiscal year. In the prior year financial statements and related notes certain amounts have been reclassified to conform with the Fiscal 2000 presentation. 2. Net Earnings (Loss) per Common Share Net earnings (loss) per common share is computed based on the weighted average number of common shares and common equivalent shares, if dilutive, assumed outstanding for the applicable period. 3. Inventories Inventories are summarized as follows:
January 1, 2000 July 1, 2000 --------------- ------------ Retail merchandise.................... $ 6,452 $ 5,550 Finished products..................... 62,157 57,609 Work in process....................... 4,120 2,947 Raw materials......................... 3,685 2,931 ----------- --------- $76,414 $69,037 =========== =========
4. Debt As more fully described in Note 9 to the Consolidated Financial Statements for the year ended January 1, 2000 included within the Company's annual report on Form 10-K, in May 1997 the Company issued $80,000 of 7% Convertible Subordinated Notes due June 1, 2004 (the "Convertible Notes"). 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 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. Proceeds from the Convertible Notes were used to repay indebtedness under the Company's then existing credit facility. As discussed further below, in September 1998 the Company repurchased and cancelled -4- $5,735 face amount of the Convertible Notes. As of July 1, 2000, $74,265 face amount of Convertible Notes remain outstanding. The Company did not make the interest payment due on June 1, 2000 with respect to the Convertible Notes. This interest payment remains outstanding and constitutes an Event of Default under the related indenture. On August 4, 2000, the trustee under the indenture for the Convertible Notes sent Converse a letter stating that holders of more than twenty-five percent (25%) of the Convertible Notes had directed it to declare the full amount of principal and interest under the notes to be due and payable. Simultaneously with the issuance of the Convertible Notes in May 1997, 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 then existing credit facility. In July 1997 BTCC, as agent, syndicated the Credit Facility to a group of participating lenders (the "Banks"). The credit commitment was subsequently reduced by the Company to $120,000 in September 1998 and to $90,000 in November 1999. 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. accounts receivable and inventory. The aggregate letters of credit, foreign exchange contracts and banker acceptances may not exceed $40,000 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 with an expiration date of May 21, 2002. However, the total revolving loans and banker acceptances outstanding under the Credit Facility of $77,010 are classified as current due to the Event of Default as more fully described below and due to the Company's lockbox arrangement (whereby payments made 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 Issue No. 95-22, "Balance Sheet Classification of Borrowings Outstanding under a Revolving Credit Agreement that Includes both a Subjective Acceleration Clause and a Lockbox Arrangement". In May 1999, the Company's Credit Facility was amended to allow for $6,000 of additional borrowing base through July 31, 1999. Subsequent amendments to the Credit Facility extended this additional borrowing base from July 31, 1999 through July 31, 2000. As of August 1, 2000, the $6,000 of additional borrowing base has expired and is no longer in effect. Obligations under the Credit Facility are secured by first priority liens on substantially all of the Company's U.S. assets. The Credit Facility requires compliance with customary affirmative and negative covenants, including certain financial covenants. At July 1, 2000 the Company was not in compliance with the minimum EBITDA (as defined therein) covenant contained in the Credit Facility and such failure to comply constitutes an Event of Default under the Credit Facility. Also, the default in payment of interest due with respect to the Convertible Notes (see above) constitutes an Event of Default under the Credit Facility. -5- As of July 1, 2000 the Company's calculated borrowing base was $90,657, but limited to the total credit commitment of $90,000. Utilization under the Credit Facility amounted to $80,974 consisting of revolving loans of $74,486, banker acceptances of $2,524 and outstanding letters of credit of $3,964. Accordingly, $9,026 of the maximum available borrowing base remained unutilized as of July 1, 2000. Under the terms of the Third Supplement to Note Purchase Agreements (the "Third Supplement") executed in June 2000 (see Secured Notes below), the Company may not borrow amounts as revolving loans under the Credit Facility if such amounts would exceed the maximum permitted amount available to borrow less $5,750. As a result, net availability under the Credit Facility was $3,276 as of July 1, 2000. With the expiration of the $6,000 additional borrowing base as of August 1, 2000 (see above), the Company has failed to maintain availability under the Credit Facility in excess of the $5,750 required by the Third Supplement. 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 three percent (3.00%) per annum. At July 1, 2000, revolving loans outstanding under the Credit Facility bore interest of 9.86% based upon the weighted average of the Prime Lending Rate and Adjusted LIBOR Rate. In September 1998, the Company issued $28,643 aggregate principal amount of 15% Senior Secured Notes (the "Secured Notes") due September 16, 2000 (the "Initial Maturity Date"). Interest on the Secured Notes is payable quarterly in arrears. The Secured Notes were issued in two series: Series A in the aggregate principal amount of $24,858 (the "Series A Secured Notes") and Series B in the aggregate principal amount of $3,785 (the "Series B Secured Notes"). The Secured Notes are redeemable at any time at face amount plus accrued interest. The Secured Notes require compliance with customary affirmative and negative covenants, including certain financial covenants, substantially the same as the requirements contained in the Credit Facility. The Company was not in compliance with the minimum EBITDA (as defined therein) covenant contained in the Secured Notes agreement for the six month period ending July 1, 2000 and such failure to comply constitutes an Event of Default under the Secured Notes. Also, the default in payment of interest due with respect to the Convertible Notes (described above) constitutes an Event of Default under the Secured Notes. Under the terms of the Third Supplement, as of July 31, 2000 the holders of the Secured Notes were free to proceed to enforce their rights, including, but not limited to, declaring all or any part of the notes outstanding to be immediately due and payable. Upon issuance of the Series A Secured Notes, the Company received gross proceeds of $24,000 after discount from the face amount. In connection with the issuance of the Series A Secured Notes, the Company issued warrants to purchase 360,000 shares of the Company's common stock to the purchasers and paid funding fees to certain purchasers amounting to $350. The warrants were valued at $1.22 per share, vested immediately and expire on March 16, 2003. In May 1999 warrants to purchase 91,412 shares of the Company's common stock were exercised, leaving 268,588 outstanding. The Company paid a placement fee of 4% of the gross proceeds, or $960, with respect to the Series A Secured Notes. The Series A Secured Notes carry -6- a second priority perfected lien on substantially all real and personal, tangible and intangible assets of the Company. The Series B Secured Notes were issued in exchange for the surrender of $5,735 face amount of Convertible Notes, which were subsequently cancelled by the Company. In connection with the issuance of the Series B Secured Notes, the Company paid a placement fee of 2% of the face amount, or $76. The Series B Secured Notes carry a third priority perfected lien on substantially all real and personal, tangible and intangible assets of the Company. Subsidiaries of the Company maintain asset-based financing arrangements in certain European countries, principally with NMB-Heller, N.V. In general, these financing arrangements allow for borrowings based upon eligible accounts receivable and inventory at varying advance rates and varying interest rates. As of July 1, 2000, total short-term borrowings outstanding under these financing arrangements totaled $3,459. These 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. During the second quarter of 2000, the Company wrote-off deferred financing costs of $701 related to the royalty securitization financing which is no longer being pursued. As announced on August 9, 2000, the Company has received a commitment letter from Euro American Investment Corporation, a private investment concern, to provide $25,000 in credit enhancement to afford the Company additional liquidity under its credit agreement. The financing is subject to customary closing conditions and requires the consent of the existing secured creditors of the Company. Euro American and the Company have been in communication with the secured creditors and certain holders of the Convertible Notes. Converse expects these communications to continue. This financing transaction is expected to close by August 31, 2000, subject to receipt of required consents and regulatory review. 5. Restructuring and Other Unusual Charges As more fully described in Note 4 to the Consolidated Financial Statements for the year ended January 1, 2000 included within the Company's annual report on Form 10-K, the Company recorded restructuring and other unusual charges of $9.4 million in 1999 related primarily to initiatives aimed at reducing future operating costs. Principal costs included in the charge were: (i) costs for employee severance and related benefits for the termination of 49 corporate employees; (ii) costs related to the closing of five unprofitable retail stores; (iii) lease termination costs related to the R&D facility; (iv) termination costs related to endorser contracts; and (v) costs of converting wholly-owned subsidiaries with foreign operations into licensee/distributor arrangements. The following table summarizes the related reserves remaining at July 1, 2000: -7-
January 1, 2000 Change in Charges/ July 1, 2000 Balance Provisions Write-offs Balance --------------- ---------- ----------- ------------- Corporate Employee Severance & Related Costs....... $1,135 $(285) $ 850 $ --- Retail Store Closings.............................. 728 --- 402 326 R&D Building Lease Termination Costs............... 136 (136) --- --- Contract Termination Costs......................... 1,667 (242) 284 1,141 Conversion of Subsidiaries into Licensees.......... 4,007 276 1,319 2,964 --------- -------- ------- ------------ July 1, 2000 Balance............................... $7,673 $(387) $2,855 $4,431 ========= ======== ======= ============
During the first six months of 2000, the Company charged $2,855 of costs against the reserves for restructuring and other unusual charges. These charges include $850 for employee severance related to the termination of corporate employees, lease termination costs of $219 and writedown of fixed assets of $183 related to the closing of three unprofitable retail stores and costs of $1,319 related to the conversion of wholly-owned foreign subsidiaries in Canada, Mexico, Italy, Benelux and France. Due to attrition, the Company incurred less than anticipated severance costs and reversed restructuring costs of $285. The Company also had lower than the anticipated restructuring charges related to the R&D building lease termination costs and contract termination costs. The Company recorded an additional restructuring charge of $276 related to the write-off of cumulative translation adjustment for Benelux. The remaining costs, as well as additional cumulative translation adjustment charges and employee severance costs relating to the conversion of the wholly-owned foreign subsidiaries into licensee/distributor arrangements, are expected to be incurred during 2000. At July 1, 2000, $4,431 of the charges recorded remain in current liabilities on the balance sheet. On July 1, 2000, Converse entered into a long-term agreement with a third party company to convert its wholly-owned subsidiary into a licensee for the exclusive distribution and license rights for Converse footwear and apparel in France, Guadeloupe, Martinique, Reunion and Monaco. This agreement becomes effective January 1, 2001 and will have the impact of reducing the Company's future global order backlog, net revenue and expenses, while increasing royalty income. The losses from this transaction have been included in restructuring and other unusual charges for the year ended January 1, 2000. 6. Comprehensive Income For the three months ended July 3, 1999 and July 1, 2000, comprehensive income (loss) items included in stockholders' equity consisted of cumulative translation adjustments of $(564) and $(133), respectively. Total comprehensive income (loss) for the second quarter of 1999 was $(6,144) compared to $(4,843) for the second quarter of 2000. For the six months ended July 3, 1999 and July 1, 2000, comprehensive income (loss) items included in stockholders' equity consisted of cumulative translation adjustments of $(1,109) and $(264), respectively. Total comprehensive income (loss) for the first six months of 1999 was $(9,928) compared to $(10,041) for the first six months of 2000. -8- 7. Employee Stock Plans During the first six months of 2000, 55,000 shares of restricted stock were cancelled due to employee terminations resulting in the reversal of paid in capital and unearned compensation of $157. All restricted stock grants are subject to restrictions as to continuous employment. The restricted stock vests 100% on the third anniversary of the grant date. As there is no exercise payment associated with the restricted stock awards, the cost of the awards, determined as the fair market value of the shares on the date of grant, is charged to expense ratably over the three year vesting period. In February 2000, 34,836 shares of common stock were issued under the Company's Employee Stock Purchase Plan. Proceeds of $32 were recorded in conjunction with this purchase. 8. Commitments and Contingencies Converse is or may become a defendant in a number of pending or threatened legal proceedings relating to its business and operations. Converse believes that the ultimate outcome of any pending proceedings will not have a material adverse effect on its financial position or results of operations. 9. Recently Issued Accounting Standards On June 15, 1998, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards No. 133, "Accounting for Derivative Instruments and Hedging Activities" ("FAS 133"). FAS 133 is effective for all fiscal years beginning after June 15, 1999 (January 2, 2000 for the Company). FAS 133 requires that all derivative instruments be recorded on the balance sheet at their fair value. Changes in the fair value of derivatives are recorded each period in current earnings or other comprehensive income, depending on whether a derivative is designated as part of a hedge transaction and, if it is, the type of hedge transaction. Management of the Company anticipates that, due to its limited use of derivative instruments, the adoption of FAS 133 will not have a significant effect on the Company's results of operations or its financial position. On July 8, 1999, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 137, "Accounting for Derivative Instruments and Hedging Activities - Deferral of the Effective Date of FASB Statement No. 133" ("FAS 137"). FAS 137 defers the effective date of FAS 133 from all fiscal years beginning after June 15, 1999 to all fiscal years beginning after June 15, 2000 (December 31, 2000 for the Company). 10. Subsequent Events On August 8, 2000, the Company received a commitment letter from Euro American Investment Corporation ("Euro American"), a private investment concern, to provide $25,000 in credit enhancement to afford the Company additional liquidity under its Credit Facility. Under -9- the terms of the commitment letter, Euro American would also purchase, at $0.001 per share, 20,000,000 shares of common stock of Converse and would have an option, for six months following the closing of the $25,000 financing, to provide an additional $50,000 in secured debt financing and receive warrants to purchase up to 50,000,000 shares of stock at $1.50 per share. The commitment letter also provides for designees of Euro American to become a majority of the Board of Directors. The $25,000 financing is subject, among other things, to the negotiation of definitive legal documentation, approval by the Company's Board of Directors, and other customary closing conditions (including Hart-Scott-Rodino clearance if required) and requires the existing secured creditors of Converse to consent to the transaction. The transaction is scheduled to close by August 31, 2000 subject to receipt of required consents and regulatory review. 11. Business Segment Information As more fully described in Note 19 to the Consolidated Financial Statements for the year ended January 1, 2000 included within the Company's annual report on Form 10-K, the Company has adopted Statement of Financial Accounting Standards No. 131, "Disclosures about Segments of an Enterprise and Related Information". Summarized financial information concerning the Company's reportable business segments is shown in the following table:
Europe, Americas Middle East, (excluding United States Africa Asia Pacific United States) Eliminations Consolidated -------------- ------------- ------------ -------------- ------------ ------------ Six months ending July 1, 2000: Net revenue to customer................... $ 73,878 $22,485 $10,969 $1,587 $ ---- $108,919 Intersegment net revenue.................. 8,919 ---- ---- ---- (8,919) ---- Segment pretax profit (loss).............. (6,824) (2,340) 594 159 ---- (8,411) Segment total assets at July 1, 2000...... $127,053 $17,464 $ 2,606 $1,066 ---- $148,189 Six months ending July 3, 1999: Net revenue to customer................... $ 69,042 $35,683 $19,698 $4,895 $ ---- $129,318 Intersegment net revenue.................. 14,888 ---- ---- ---- (14,888) ---- Segment pretax profit (loss).............. (9,584) (229) 3,807 (947) ---- (6,953) Segment total assets at January 1, 2000... $127,670 $19,466 $ 3,839 $1,388 ---- $152,363 Three months ending July 1, 2000: Net revenue to customer................... $ 39,972 $ 9,557 $ 6,177 $ 818 $ ---- $ 56,524 Intersegment net revenue.................. 2,692 ---- ---- ---- (2,692) ---- Segment pretax profit (loss).............. (2,711) (1,614) 252 1 ---- (4,072) Three months ending July 3, 1999: Net revenue to customer................... $ 33,402 $13,275 $ 9,901 $1,742 $ ---- $ 58,320 Intersegment net revenue.................. 6,189 ---- ---- ---- (6,189) ---- Segment pretax profit (loss).............. (5,346) (1,561) 2,471 (206) ---- (4,642)
-10- Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following table sets forth certain items relating to the Company's operating results as a percentage of net revenue for the three months ended July 3, 1999 ("Second Quarter 1999") and for the three months ended July 1, 2000 ("Second Quarter 2000").
Three Months Ended ------------------------------------------------ July 3, 1999 % July 1, 2000 % ------------ --- ------------ --- Net revenue.................................... $ 58,320 100.0 $ 56,524 100.0 Gross profit................................... 15,052 25.8 12,238 21.7 Selling, general and administrative expenses..................................... 18,714 32.1 14,451 25.6 Royalty income................................. 4,940 8.5 4,051 7.2 Restructuring and other unusual charges...................................... 543 0.9 (387) (0.7) Earnings from operations....................... 735 1.3 2,225 3.9 Interest expense, net.......................... 5,283 9.1 5,658 10.0 Other (income) expense, net.................... 94 0.2 639 1.1 Loss before income tax......................... (4,642) (8.0) (4,072) (7.2) Income tax expense............................. 938 1.6 638 1.1 Net loss....................................... (5,580) (9.6) (4,710) (8.3) Net basic and diluted loss per share.................................... $ (0.32) -- $ (0.27) --
Net Revenue Net revenue for Second Quarter 2000 decreased to $56.5 million from $58.3 million for Second Quarter 1999, a 3.0% decline. The $1.8 million reduction in net revenue was attributable to a decrease of 43.5% for Second Quarter 2000 in the performance category, mainly offset by increases of 14.0%, 26.2% and 46.7% in the athletic originals, children's and action sports categories as compared to Second Quarter 1999. Net revenue in the United States increased 19.8% to $40.0 million for Second Quarter 2000 from $33.4 million for Second Quarter 1999. Net revenue decreased 33.7% internationally to $16.5 million for Second Quarter 2000 from $24.9 million for Second Quarter 1999. The international net revenue reduction was impacted by $2.4 million from converting wholly-owned subsidiaries with foreign operations into licensee arrangements. The downward United States net revenue trend that has impacted the Company over the past two years has turned positive in the Second Quarter 2000. The Company believes this reversal is -11- primarily attributable to the improving athletic footwear and apparel market as well as the efforts the Company has made to broaden its product offerings. The decline in the E.M.E.A. and Latin America regions was partly attributable to the conversion of the Company's wholly-owned subsidiaries operating in Italy, Benelux and Mexico to third-party licensing entities, revenues from which are now recorded as royalty income rather than net revenue. The revenue decline in the Pacific region was primarily attributable to the softening of demand for the traditionally strong athletic originals product offerings in that region. Gross Profit Gross profit decreased to $12.2 million for Second Quarter 2000 from $15.0 million for Second Quarter 1999, an 18.7% reduction. The decline in net revenue and the Company's efforts to keep inventory levels down through the sale of excess inventory at reduced margins accounted for the majority of the gross profit reduction over the period. As a percentage of net revenue, gross profit decreased to 21.7% in Second Quarter 2000 compared to 25.8% for the prior year period. Selling, General and Administrative Expenses The Company took aggressive actions in 1999 to reduce its on-going operating expenses in order to address the current industry conditions. Selling, general and administrative expenses decreased $4.2 million to $14.5 million for Second Quarter 2000 from $18.7 million for Second Quarter 1999, a 22.5% decrease. This reduction was mainly attributable to decreased spending in global selling, marketing, advertising and promotion activities, as well as corporate staff reductions and expense reductions associated with converting wholly-owned subsidiaries with foreign operations into licensee arrangements. As a percentage of net revenue, selling, general and administrative expenses decreased to 25.6% for Second Quarter 2000 from 32.1% for the prior year period. Royalty Income Royalty income decreased 18.4% to $4.0 million for Second Quarter 2000 from $4.9 million for Second Quarter 1999. International royalty income, which represented 72.9% of the Company's total royalty income in Second Quarter 2000, decreased 25.8%. This reduction was primarily attributable to the elimination of Japanese non-footwear trademark licensee agreements, which were sold in November 1999 and which generated $1.1 million of royalty income in Second Quarter 1999. This reduction was partially offset by improvement primarily attributable to an increase of 226.1% in the EMEA region. As a percentage of net revenue, royalty income decreased to 7.2% for Second Quarter 2000 as compared to 8.5% in the prior year period. On November 29, 1999, the Company completed the sale of all its non- footwear trademarks in Japan and the assignment of its Japanese non-footwear trademark license agreements to Itochu Corporation for $25.0 million cash. The licensees of these trademarks generated royalty income -12- of $1.1 million in Second Quarter 1999 as stated above. Royalty income adjusted to eliminate the Japanese non-footwear trademarks was $4.0 million in Second Quarter 2000 and $3.8 million in Second Quarter 1999. Restructuring and Other Unusual Charges In the Second Quarter 2000, the Company recorded a credit of $0.4 million based upon lower than anticipated costs from the lease termination costs related to the Company's R&D facility and termination costs related to endorser contracts. In the Second Quarter 1999, the Company recorded a charge totaling $0.5 million relating to the conversion of our Canada operation from a Company owned subsidiary (direct operating unit) to a third party licensee/distributor arrangement. Earnings from Operations The Company recorded earnings from operations in Second Quarter 2000 of $2.2 million compared to $0.7 million in Second Quarter 1999. This change was primarily due to the factors discussed above. Interest Expense Interest expense for Second Quarter 2000 increased to $5.7 million from $5.3 million for Second Quarter 1999. Other (Income) Expense Other expenses for Second Quarter 2000 were $0.6 million compared to $0.1 million for Second Quarter 1999. The Company wrote off deferred financing fees associated with a royalty securitization financing transaction which the Company is no longer pursuing. Income Tax Expense Income tax expense for Second Quarter 2000 was $0.6 million compared to $0.9 million for Second Quarter 1999. The Company continued to fully reserve the income tax benefit of the quarterly losses by recording an additional valuation allowance of $2.0 million in Second Quarter 2000, the same amount recorded in Second Quarter 1999. Net Loss The Company recorded a net loss of $4.7 million for Second Quarter 2000 compared to a net loss of $5.6 million for Second Quarter 1999. The net loss for Second Quarter 2000 and Second Quarter 1999 each included a charge of $2.0 million to increase the deferred tax valuation reserve. Excluding this non- operating charge, the net loss was $2.7 million for Second Quarter 2000 and $3.6 million for Second Quarter 1999. -13- Net Loss Per Share Net loss per share for Second Quarter 2000 was $0.27 compared to net loss per share of $0.32 for Second Quarter 1999. The net loss per share for Second Quarter 2000 and Second Quarter 1999 included a charge of $0.12 per share and $0.11 per share, respectively, to increase the deferred tax valuation reserve. Excluding this non-operating charge, the net loss per share for Second Quarter 2000 was $0.15 compared to net loss per share of $0.21 for Second Quarter 1999. -14- Comparison of six months ended July 3, 1999 to six months ended July 1, 2000 The following table sets forth certain items relating to the Company's operating results as a percentage of net revenue for the six months ended July 3, 1999 ("First Half 1999") and for the six months ended July 1, 2000 ("First Half 2000").
Six Months Ended ---------------------------------------------------------- July 3, 1999 % July 1, 2000 % ------------ --- ------------ --- Net revenue........................... $129,318 100.0 $108,919 100.0 Gross profit.......................... 33,793 26.1 23,793 21.8 Selling, general and administrative expenses............................ 40,365 31.2 29,093 26.7 Royalty income........................ 9,782 7.6 8,218 7.5 Restructuring and other unusual charges............................. 543 0.4 (387) (0.4) Earnings from operations.............. 2,667 2.1 3,305 3.0 Interest expense, net................. 10,522 8.1 10,981 10.1 Other (income) expense ............... (902) (0.7) 735 0.7 Loss before income tax................ (6,953) (5.4) (8,411) (7.7) Income tax expense.................... 1,866 1.4 1,366 1.3 Net loss.............................. $ (8,819) (6.8) $ (9,777) (9.0) Net basic and diluted loss per share........................... $ (0.51) -- $ (0.56) --
Net Revenue Net revenue for First Half 2000 decreased 15.8% to $108.9 million from $129.3 million for First Half 1999. Compared to the prior year period, the $20.4 million reduction in net revenue was attributable to decreases of 34.7%, 6.1%, 7.5% and 2.0% in the categories of performance, athletic originals, children's, and action sports, respectively. Net revenue in the United States increased 7.1% to $73.9 million in First Half 2000 from $69.0 million for First Half 1999. Net revenue decreased 42.0% internationally to $35.0 million in First Half 2000 from $60.3 million in First Half 1999. The conversion of wholly-owned subsidiaries with foreign operations into licensing arrangements accounts for $9.6 million of the total reduction of $25.3 million in international net revenue. The downward United States net revenue trend that has impacted the Company over the past two years turned positively in the First Half 2000. The decline in the E.M.E.A. and Latin America regions was partly attributable to the conversion of the Company's wholly-owned subsidiaries operating in Italy, Benelux and Mexico to third-party licensing entities, revenues from which are now recorded as royalty income rather than net revenue. The revenue decline in the Pacific region was primarily attributable to the softening of demand for the traditionally strong athletic originals product offerings in that region. -15- Gross Profit Gross profit decreased to $23.8 million for First Half of 2000 from $33.8 million for First Half 1999, a 29.6% reduction. The decline of $20.4 million in net revenue and the Company's efforts to keep inventory levels down through the sale of excess inventory at reduced margins accounted for the majority of the gross profit reduction over the period. As a percentage of net revenue, gross profit decreased to 21.8% for First Half 2000 compared to 26.1% for the prior year period. Selling, General and Administrative Expenses Selling, general and administrative expenses decreased $11.3 million to $29.1 million for First Half 2000 from $40.4 million for First Half 1999, a 28.0% decrease. This reduction was mainly attributable to decreased spending in global selling, marketing, advertising, and promotion activities, as well as corporate staff reductions and expense reductions associated with converting wholly-owned subsidiaries with foreign operations into licensee arrangements. As a percentage of net revenue, selling, general and administrative expenses decreased to 26.7% for First Half 2000 from 31.2% for the prior year period. Royalty Income Royalty income decreased 16.3% to $8.2 million in First Half 2000 from $9.8 million in First Half 1999. International royalty income, which represented 78.9% of the Company's total royalty income in First Half 2000, decreased 19.5%. This reduction was primarily attributable to the elimination of Japanese non- footwear trademark licensee agreements which were sold in November 1999, which generated $2.2 million of royalty income in the First Half 1999. This reduction was partially offset by improvement primarily attributable to increases of 101.9% in the EMEA region and 20.7% in Japanese footwear. As a percentage of net revenue, royalty income decreased to 7.5% in the First Half 2000 compared to 7.6% in the prior year period. On November 29, 1999, the Company completed the sale of all of its non- footwear trademarks in Japan and the assignment of its Japanese non-footwear trademark license agreements to Itochu Corporation for $25.0 million cash. The licensees of these trademarks generated royalty income of $2.2 million in First Half 1999, as stated above. Royalty income adjusted to eliminate the Japanese non-footwear trademarks was $8.2 million in First Half 2000 and $7.6 million in First Half 1999. Restructuring and Other Unusual Charges In the First Half 2000, the Company recorded a credit of $0.4 million based upon lower than anticipated costs from the lease termination costs related to the Company R&D facility and termination costs related to endorser contracts. In the First Half 1999, the Company recorded a charge totaling $0.5 million related to the conversion of our Canada operation from a Company owned subsidiary (direct operating unit) to a third party licensee/distributor arrangement. -16- Earnings from Operations The Company recorded earnings from operations in the First Half 2000 of $3.3 million compared to $2.7 million in the First Half 1999. This change was primarily due to the factors discussed above. Interest Expense Interest expense for First Half 2000 increased to $11.0 million from $10.5 million for First Half 1999. Other (Income) Expense Other expenses for First Half 2000 was $0.7 million primarily from writing off deferred financing fees associated with a royalty securitization financing arrangement which the Company is no longer pursuing. The First Half 1999 other income of $0.9 million was primarily related to foreign exchange gains associated with foreign currency exchange contracts and put options the Company had entered into as part of its strategy to reduce exposure to foreign currency fluctuations. Income Tax Expense Income tax expense for First Half 2000 was $1.4 million compared to $1.9 million for First Half 1999. The Company fully reserved the income tax benefit of the first half losses by recording an additional valuation allowance of $4.2 million in First Half 2000 and $3.8 million in First Half 1999. Net Loss The Company recorded a net loss of $9.8 million for First Half 2000 compared to net loss of $8.8 million for First Half 1999. The net loss for First Half 2000 and First Half 1999 included a charge of $4.2 million and $3.8 million, respectively, to increase the deferred tax valuation reserve. Excluding this non-operating charge, the net loss was $5.6 million for First Half 2000 and $5.0 million for First Half 1999. Net Loss Per Share Net loss per share for First Half 2000 was $0.56 compared to net loss per share of $0.51 for First Half 1999. The net loss per share for First Half 2000 and First Half 1999 included a charge of $0.24 per share and $0.22 per share, respectively, to increase the deferred tax valuation reserve. Excluding this non-operating charge, the net loss per share for First Half 2000 was $0.32 compared to net loss per share of $0.29 for First Half 1999. -17- Liquidity and Capital Resources As of July 1, 2000, the Company's working capital (net of cash) position decreased $83.6 million to a deficit of $128.3 million from a deficit of $44.7 million at January 1, 2000. The principal reason for the decrease was the reclassification of the Convertible Notes in the principal amount of $74.3 million from long-term debt to current liabilities. The Company did not make the interest payment due on June 1, 2000 with respect to these notes and such non-payment constitutes an Event of Default under the related indenture. In August 2000, the trustee for the holders of the Convertible Notes notified the Company in writing that at least twenty-five percent (25%) of the holders had directed the Trustee to declare the full amount of principal and interest on the Convertible Notes to be immediately due and payable. Total borrowings under the Company's Credit Facility increased $5.4 million to $77.0 million on July 1, 2000 versus $71.6 million at January 1, 2000 and short term debt increased $1.5 million to $3.5 million at July 1, 2000 versus $2.0 million at January 1, 2000. For the First Half 2000 and First Half 1999, net cash required for operating activities was $6.7 million and $10.8 million, respectively. Net cash required for operating activities in the First Half 2000 was principally the result of the net loss partially offset by a reduction in working capital requirements. Cash required for operating activities in First Half 1999 was used primarily to fund a net loss and seasonal working capital requirements. Net cash used by investing activities was $0.1 million in the First Half 2000 versus $1.2 million in the First Half 1999 for additions to the property, plant and equipment. Net cash provided by financing activities was $7.0 million and $11.1 million in the First Half 2000 and the First Half 1999, respectively. Cash provided by financing activities was derived primarily from net proceeds of the Company's asset-based borrowing facilities. As discussed in Note 4 of the Notes to the Condensed Consolidated Financial Statements, in May 1999, the Company's Credit Facility was amended to allow for $6.0 million of additional borrowing base through July 1999. Subsequent amendments to the Credit Facility extended this additional borrowing base from July 31, 1999 through July 31, 2000. As of August 1, 2000, the $6.0 million of additional borrowing base has expired and is no longer in effect. At July 1, 2000, the Company was not in compliance with the minimum EBITDA (as defined therein) covenant contained in the Credit Facility and in the Secured Notes agreement and such failure to comply constitutes an Event of Default under the Credit Facility and the Secured Notes. Also, the default in payment of interest due with respect to the Convertible Notes constitutes an Event of Default under the Credit Facility and the Secured Notes. The Company will require a new source of liquidity in order to sustain its operations, as well as forbearance from the holders of its outstanding indebtedness which is in default. There can be no assurance that these requirements will be achieved. As announced on August 9, 2000, the Company has received a commitment letter from Euro American Investment Corporation, a private investment concern, to provide $25,000 in credit enhancement to afford the Company additional liquidity under its credit agreement. The financing is subject to customary closing conditions and requires the consent of the existing -18- secured creditors of the Company. Euro American and the Company have been in communication with the secured creditors and certain holders of the Convertible Notes. Converse expects these communications to continue. This financing transaction is expected to close by August 31, 2000, subject to receipt of required consents and regulatory review. See Note 10 to the Company's Condensed Consolidated Financial Statements set forth elsewhere herein for a description of a new commitment letter to provide credit enhancement. Backlog At the end of Second Quarter 2000, the Company's global order backlog was $67.6 million, compared to $75.9 million at the end of Second Quarter 1999, a decrease of 10.9%. The 1999 backlog figure has been adjusted to eliminate the Company's backlog in Canada, Italy and Benelux, where the Company's subsidiaries have been converted to licensee/distributor arrangements. The backlog in the athletic originals and children's categories increased 2.7% and 8.0%, respectively, offset by a decline of 26.8% in the performance category. 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. The Company continues to convert its international wholly-owned operating units to new licensee arrangements which, based on the results of conversions already completed, will reduce the Company's global backlog and lower future new revenue, while increasing royalty income. Accordingly, a comparison of the actual backlog as of two different dates is not necessarily meaningful. Forward-looking statements Any statements set forth above which are not historical facts, including the statements concerning the outlook for revenue, earnings and anticipated cost savings, and the product and industry developments for 2000 and beyond are forward looking statements that involve certain risks and uncertainties that could cause actual results to differ materially from those in the forward looking statements. Potential risks and uncertainties include such factors as the financial strength of the Company, the competitive pricing environment and inventory levels within the footwear and apparel industries, consumer demand for athletic footwear, market acceptance of the Company's products, the strength of the U.S. dollar and the success of planned advertising, marketing and promotional campaigns and other risks identified in documents filed by the Company with the Securities and Exchange Commission. -19- Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK Interest Rate Risk At July 1, 2000, the carrying value of the Company's debt totaled $183.2 million. This debt includes amounts at both fixed and variable interest rates. For fixed rate debt, interest rate changes affect the fair market value but do not impact earnings or cash flows. Conversely, for variable rate debt, interest rate changes generally do not affect the fair market value but do impact earnings and cash flows, assuming other factors are held constant. At July 1, 2000, the Company had fixed rate debt of $102.7 million and variable rate debt of $80.5 million. Holding other variables constant (such as foreign exchange rates and debt levels), a one percentage point decrease in interest rates would increase the unrealized fair market value of fixed rate debt by approximately $2.5 million. Based on the amounts of variable rate debt outstanding at July 1, 2000, the earnings and cash flow impact for the next year resulting from a one percentage point increase in interest rates would be approximately $0.8 million, holding other variables constant. Foreign Currency Risk Converse sells its products in a number of countries throughout the world and, as a result, is exposed to movements on foreign currency exchange rates. Although Converse has some of its products manufactured outside of the United States on a per order basis, these purchases are made in U.S. dollars. The major foreign currency exposures involve the markets in Western Europe, Japan and Australia. In order to protect against the volatility associated with earnings currency translations of foreign subsidiaries and royalty income from sources outside the United States, the Company may, from time to time, utilize forward foreign exchange contracts and/or foreign currency options with durations generally from three to twelve months. As of July 1, 2000, the Company had no outstanding foreign exchange forward contracts. Commodity Price Risk Raw materials used by the Company are subject to price volatility caused by weather, supply conditions and other unpredictable factors. The Company does not have a program of hedging activity to address these risks. -20- PART II. OTHER INFORMATION Item 1. Legal Proceedings. There have been no material changes from the information previously reported under Item 3 of the Company's annual report on Form 10-K for the fiscal year ended January 1, 2000. Item 2. Changes in Securities. Not Applicable Item 3. Defaults Upon Senior Securities. As described in Note 4 of the Notes to Consolidated Financial Statements under Item 1 of this report, there is currently a covenant default under the Company's Senior Secured Credit Facility and Secured Notes, as well as a payment default under its subordinated, unsecured Convertible Notes. The Company did not make a scheduled interest payment of $2,600 on June 1, 2000, which became an Event of Default after the passage of a thirty (30) day grace period. On August 4, 2000, the trustee under the indenture for the Convertible Notes notified Converse in writing that holders of not less than twenty-five percent (25%) of the Convertible Notes had directed it to declare the full amount of principal and interest under such notes to be due and payable. Due to such notice, the entire $74,265 face amount of Convertible Notes is currently due and payable, together with interest, which accrues at 7% per annum. Under the Credit Facility, as a result of the default, the Banks may declare the entire amount outstanding and payable at any time, although they have not done so. Under the terms of the Third Supplement, as of July 31, 2000, the holders of the Secured Notes may proceed to enforce their rights including, but not limited to, declaring all $28,643 principal to be due and payable. Item 4. Submission of Matters to a Vote of Security-Holders. On June 29, 2000, the Company conducted its annual meeting of stockholders pursuant to due notice. A quorum being present either in person or by proxy, the stockholders voted on the following matters: 1. To elect ten directors to hold office until the next annual meeting and until their successors are elected and qualified. 2. To ratify the appointment of PricewaterhouseCoopers LLP as the Company's independent auditors for the next fiscal year. 3. To amend the Converse Inc. 1994 Stock Option Plan to permit grants to non-employee directors. -21- No other matters were voted upon. The votes cast were as follows: 1. Election of directors. The following directors were elected to the Company's Board: NUMBER OF VOTES CAST FOR AGAINST --- ------- Donald J. Barr 16,937,315 269,225 Julius W. Erving 16,925,057 281,483 Robert H. Falk 16,936,499 270,041 Gilbert Ford 16,925,411 281,129 Michael S. Gross 16,932,872 273,668 John J. Hannan 16,918,876 287,664 Joshua J. Harris 16,922,481 284,059 John H. Kissick 16,920,517 286,023 Glenn N. Rupp 16,933,395 273,145 Michael D. Weiner 16,921,959 284,581 2. Ratification of the selection of PricewaterhouseCoopers LLP as the Company's independent auditors. For 17,099,365 Against 91,513 Abstain 15,662 3. Amendment of Converse Inc. 1994 Stock Option Plan. For 16,609,502 Against 546,013 Abstain 51,025 Item 5. Other Information. Not Applicable Item 6. Exhibits and Reports on Form 8-K (a) Exhibits. The following exhibits are contained in this report: 10 Amendment Number Twelve to Credit Agreement. -22- 10.1 Third Supplement to Note Purchase Agreements. 27 Financial Data Statement (b) Reports on Form 8-K. There were no reports on Form 8-K filed during the quarter ended July 1, 2000. SIGNATURE Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. Dated: August 15, 2000 Converse Inc. By: /s/ Donald J. Camacho -------------------------- Donald J. Camacho Senior Vice President and Chief Financial Officer -23- EXHIBIT INDEX Exhibit No. Description - ----------- ----------- 10 Amendment Number Twelve to Credit Agreement. 10.1 Third Supplement to Note Purchase Agreements. 27 Financial Data Statement EX-10 2 0002.txt AMENDMENT NUMBER TWELVE TO CREDIT AGREEMENT TWELVETH AMENDMENT TO CREDIT AGREEMENT -------------------------------------- This Twelveth Amendment to Credit Agreement (the "Amendment") is made on this 30th day of June, 2000 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"), Fleet Business Credit Corporation ("FBC"), LaSalle National Bank ("LaSalle"), BankBoston, N.A. ("BankBoston"), FINOVA Capital Corporation ("FINOVA"), GMAC Commercial Credit LLC ("GMAC"), Fleet Capital Corporation ("Fleet"), Bank of America, N.A. ("BofA"), Heller Financial, Inc. (BT, FBC, LaSalle, BankBoston, FINOVA, GMAC, Fleet, BofA, 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, that certain Second Amendment to Credit Agreement dated as of November 21, 1997, that certain Third Amendment to Credit Agreement dated as of January 29, 1998, that certain Fourth Amendment to Credit Agreement dated as of September 16, 1998, that certain Fifth Amendment to Credit Agreement dated as of May 28, 1999, that certain Sixth Amendment to Credit Agreement dated as of July 30, 1999, that certain Seventh Amendment to Credit Agreement dated as of October 31, 1999, that certain Eighth Amendment to Credit Agreement dated November 15, 1999, that certain Ninth Amendment to Credit Agreement dated February 15, 2000, that certain Tenth Amendment to Credit Agreement dated March 31, 2000, and that certain Eleventh Amendment to Credit Agreement dated May 15, 2000 (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 reference to " June 30, 2000" contained in subsection (F)(i) thereof and inserting "July 31, 2000" in its stead. 1 SECTION 3. CONDITIONS PRECEDENT. The effectiveness of this Amendment is -------------------- expressly conditioned upon satisfaction of the following conditions precedent: 3.1 Amendment. Agent shall have received copies of this Amendment --------- duly executed by Borrower and Lenders constituting Required Lenders. 3.2 Amendment Fee. Borrower shall have paid to Agent for the benefit ------------- of the Lenders who have committed to make advances pursuant to subsection (F) of the Borrowing Base, an amendment fee in the amount of $50,000. 3.3 Other. 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) to the best of Borrower's knowledge, on the date hereof it is in compliance with all of the terms and provisions set forth in the Credit Agreement as hereby amended; and (iii) to the best of Borrower's knowledge, 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. 2 IN WITNESS WHEREOF, the parties hereto have executed this Amendment on the day and year specified above. Borrower: CONVERSE INC. By:_________________________________________ Name:_____________________________________ Title:____________________________________ Agent: BT COMMERCIAL CORPORATION By:_________________________________________ Name:_____________________________________ Title:____________________________________ Lenders: BT COMMERCIAL CORPORATION By:_________________________________________ Name:_____________________________________ Title:____________________________________ FLEET BUSINESS CREDIT CORPORATION By:_________________________________________ Name:_____________________________________ Title:____________________________________ LASALLE NATIONAL BANK By:_________________________________________ Name:_____________________________________ Title:____________________________________ 3 BANKBOSTON, N.A. By:_________________________________________ Name:_____________________________________ Title:____________________________________ FINOVA CAPITAL CORPORATION By:_________________________________________ Name:_____________________________________ Title:____________________________________ GMAC COMMERCIAL CREDIT LLC By:_________________________________________ Name:_____________________________________ Title:____________________________________ FLEET CAPITAL CORPORATION By:_________________________________________ Name:_____________________________________ Title:____________________________________ BANK OF AMERICA, N.A. By:_________________________________________ Name:_____________________________________ Title:____________________________________ HELLER FINANCIAL, INC. By:_________________________________________ Name:_____________________________________ Title:____________________________________ 4 ANNEX I ------- LENDERS AND COMMITMENT AMOUNTS ------------------------------ Lender Revolving Credit Commitment - ------ --------------------------- BT Commercial Corporation $12,600,000 233 South Wacker Drive, Suite 8400 Chicago, Illinois 60606 Fleet Business Credit Corporation $12,000,000 200 Glastonbury Blvd. Glastonbury, CT 06033 LaSalle National Bank $12,600,000 135 South LaSalle Street, Suite 425 Chicago, IL 60603 FINOVA Capital Corporation $ 9,600,000 311 South Wacker Drive, Suite 4400 Chicago, IL 60606-6618 GMAC Commercial Credit LLC $12,000,000 1290 Avenue of the Americas, 3rd Floor New York, NY 10104 Fleet Capital Corporation $ 3,600,000 200 Glastonbury Blvd. Glastonbury, CT 06033 Bank of America, N.A. $ 9,600,000 600 Peachtree Street, 13th Floor Atlanta, Georgia 30308 Heller Financial, Inc. $12,000,000 500 West Monroe Street, 18th Floor Chicago, IL 60661 BankBoston, N.A. $ 6,000,000 5 ANNEX I-A LENDERS AND COMMITMENT AMOUNT With Respect to Subsection (F) of the Borrowing Base as of June 30, 2000 Name and Address of Lender Revolving Credit Commitment - -------------------------- --------------------------- BT Commercial Corporation $4,000,000 233 South Wacker Drive, 84/th/ Floor Chicago, Illinois 60606 LaSalle National Bank $2,000,000 135 South LaSalle Street, Suite 425 Chicago, IL 60603 6 EX-10.1 3 0003.txt THIRD SUPPLEMENT TO NOTE PURCHASE AGREEMENT THIRD SUPPLEMENT TO NOTE PURCHASE AGREEMENTS -------------------------------------------- This THIRD SUPPLEMENT TO NOTE PURCHASE AGREEMENTS (the "Third Supplemental Agreement") is made and dated as of June 30, 2000, by and among Converse Inc. (the "Company"), and Libra Investments, Inc. ("Libra"), Foothill Partners III, L.P. ("Foothill"), DDJ Canadian High Yield Fund ("DDJ Canadian"), and B III Capital Partners, L.P. ("DDJ Capital") (Libra, Foothill, DDJ Canadian, and DDJ Capital collectively the "Purchasers" or individually a "Purchaser"). WITNESSETH: WHEREAS, the Company and the Purchasers are parties to several substantially identical Note Purchase Agreements dated as of September 16, 1998 (collectively the "Note Purchase Agreements" or individually a "Note Purchase Agreement"), pursuant to which the Company issued and sold its 15% senior secured notes, in two series, in the aggregate principal amount of $28,642,687, as more fully set forth therein (the "Secured Notes"); and WHEREAS, the Note Purchase Agreements were supplemented in a Supplement to Note Purchase Agreements dated as of November 15, 1999 (the "Supplemental Agreement"), pursuant to which the parties (i) acknowledged the consent of the Purchasers to the sale of certain Proprietary Rights by the Company, (ii) waived certain provisions under the Note Purchase Agreements, and (iii) amended certain provisions of the Note Purchase Agreements, as more fully set forth therein; WHEREAS, the Note Purchase Agreements were further supplemented in a Second Supplement to Note Purchase Agreements dated as of May 16, 2000 (the "Second Supplemental Agreement"), pursuant to which the Purchasers waived certain provisions under the Supplemented Note Purchase Agreements and the parties amended and confirmed certain provisions of the Supplemented Note Purchase Agreements, as more fully set forth therein; WHEREAS, the Company is a party to that certain Credit Agreement among the Company, the lenders from time to time party thereto (the "Lenders") and BT Commercial Corporation as Agent (the "Bank Agent"), dated as of May 21, 1997, as the same may have been amended and modified from time to time (the "Senior Credit Facility"); WHEREAS, on or about May 21, 1997, the Company issued its 7% Convertible Subordinated Notes due 2004 (the "Subordinated Notes") pursuant to an Indenture dated as of May 21, 1997 between the Company and First Union National Bank as Trustee (the "Indenture Trustee"), as the same may have been amended and modified from time to time (the "Convertible Note Indenture"); WHEREAS, (i) on June 1, 2000, the Company failed to make an interest payment to the holders of the Subordinated Notes and as of June 30, 2000 such failure constitued an Event of Default and (ii) for the six (6) month period ending June 30, 2000, the Company failed to maintain the minimum EBITDA as required pursuant to Section 9.7 of the Note Purchase Agreement, thereby causing Events of Default pursuant to Section 10.1 of the Note Purchase Agreements (the "Existing Defaults"); WHEREAS, the Company acknowledges that the Purchasers, by reason of the Defaults have the right to exercise any and all remedies available under the Supplemented Note Purchase Agreements, at law or in equity, including, without limitation, the right to declare the Obligations under the Supplemented Note Purchase Agreements (as defined below) immediately due and payable; WHEREAS, the Company has requested that the Purchasers forbear for a certain period of time from enforcing their rights against the Company and the Collateral; WHEREAS, the Purchasers are willing to forbear in the enforcement of their rights against the Company and the Collateral only in accordance with the terms and conditions hereinafter set forth; and WHEREAS, the Company and the Purchasers desire to supplement further the Note Purchase Agreements, as supplemented by the Supplemental Agreement and the Second Supplemental Agreement (collectively the "Supplemented Note Purchase Agreements" or individually a "Supplemented Note Purchase Agreement"), in order to confirm the Purchasers' agreement to forbear from exercising certain rights and remedies under the Supplemented Note Purchase Agreements and in order to amend and confirm certain provisions of the Supplemented Note Purchase Agreements, as more fully set forth herein. NOW, THEREFORE, in consideration of the premises and the mutual agreements herein contained and other good and valuable consideration, the adequacy of which is hereby acknowledged, and on and subject to the terms and conditions hereof, the parties agree as follows: SECTION 1. DEFINITIONS. Unless otherwise defined herein, all ----------- capitalized terms shall have the respective meanings given to them in the Supplemented Note Purchase Agreements. SECTION 2. CERTIFICATIONS OF PURCHASERS. The Purchasers severally ---------------------------- represent and warrant as follows: (a) Libra. Libra is (i) the purchaser and remains the holder of that ----- Series A Secured Note in the principal amount of $4,142,931 and (ii) the party in interest as "Purchaser" under the related Supplemented Note Purchase Agreement, and in such capacity Libra is authorized to extend consents, waivers, and amendments with respect to its Supplemented Note Purchase Agreement as set forth herein. (b) Foothill. Foothill is (i) the purchaser and remains the holder -------- of that Series A Secured Note in the principal amount of $10,357,328 and (ii) the party in interest as "Purchaser" under the related Supplemented Note Purchase Agreement, and in such 2 capacity Foothill is authorized to extend consents, waivers, and amendments with respect to its Supplemented Note Purchase Agreement as set forth herein. (c) DDJ Canadian. DDJ Canadian is (i) the purchaser and remains the ------------ holder of that Series A Secured Note in the principal amount of $4,045,408 and that Series B Secured Note in the aggregate principal amount of $1,478,400 and (ii) the party in interest as "Purchaser" under the related Supplemented Note Purchase Agreement, and in such capacity DDJ Canadian is authorized to extend consents, waivers and amendments with respect to its Supplemented Note Purchase Agreement as set forth herein. (d) DDJ Capital. DDJ Capital is (i) the purchaser and remains the ----------- holder of that Series A Secured Note in the principal amount of $6,311,920 and that Series B Secured Note in the aggregate principal amount of $2,306,700 and (ii) the party in interest as "Purchaser" under the related Supplemented Note Purchase Agreement, and in such capacity DDJ Capital is authorized to extend consents, waivers and amendments with respect to its Supplemented Note Purchase Agreement as set forth herein. SECTION 3. FORBEARANCE. Subject to the conditions set forth in ----------- Section 5 hereof, the Purchasers agree to forbear from exercising their rights and remedies under the Supplemented Note Purchase Agreements with respect to the exercise of rights and remedies after an Event of Default until the date (the "Forbearance Termination Date") which is the earliest to occur of: (i) July 31, 2000; (ii) an Event of Default (other than the Existing Defaults) under the Supplemented Note Purchase Agreements; and (iii) (y) holders of the Subordinated Notes or the Indenture Trustee exercise any of their rights and remedies (including the right to declare all of the obligations owed to holders of Subordinated Notes immediately due and payable) arising by reason of an Event of Default under the Convertible Note Indenture or (z) the Lenders or the Bank Agent exercise any of their rights and remedies (including the right to declare all of the obligations owed to the Lenders immediately due and payable) arising by reason of an Event of Default under the Senior Credit Facility. Upon the Forbearance Termination Date, the Purchasers shall be free to proceed to enforce any or all of their rights and remedies under or in respect of the Supplemented Note Purchase Agreements and applicable law. SECTION 4. AMENDMENT. The provisions of Section 9.15 of the --------- Supplemented Note Purchase Agreements are hereby amended by deleting the number "$6,850,000" in clause (i) thereof and substituting therefor the number "$5,750,000". SECTION 5. CONDITION PRECEDENT. The effectiveness of this Third ------------------- Supplemental Agreement is expressly conditioned upon receipt by the Purchasers of the June 30, 2000 interest payment under the Secured Notes in the aggregate amount of $1,086,035.21. SECTION 6. EXPENSES. The Company agrees to pay Purchasers (i) any -------- and all reasonable out-of-pocket costs or expenses (including reasonable legal fees and disbursements of counsel to the Purchasers) incurred as a result of the negotiation and documentation of this Third Supplement and (ii) from time to time any and all reasonable out-of-pocket costs or expenses (including reasonable legal fees and disbursements) hereafter incurred or sustained by 3 the Purchasers in connection with the preservation of or enforcement of their rights under the Supplemented Note Purchase Agreements or in respect of Company's other obligations to the Purchasers. SECTION 7. OBLIGATIONS IN FULL FORCE AND EFFECT; RECITALS. Except as ---------------------------------------------- herein amended or otherwise provided (by consent or waiver), the Note Purchase Agreements, as supplemented by the Supplemental Agreement and the Second Supplemental Agreement, and the Ancillary Documents shall remain in full force and effect. All of the recitals to this Third Supplemental Agreement are hereby affirmed by each of the parties hereto as true statements of fact and hereby by reference are made part of this Third Supplemental Agreement as if fully set out herein. SECTION 8. COUNTERPARTS. This Third Supplemental Agreement may be ------------ executed in counterparts, each of which shall be deemed an original, but all of which together shall constitute one and the same documents. IN WITNESS WHEREOF, the parties hereto have executed this Third Supplemental Agreement as of the day and year specified above. COMPANY: CONVERSE INC. By:_______________________________ Name:__________________________ Title:_________________________ PURCHASERS: LIBRA INVESTMENTS, INC. By:_______________________________ Name:__________________________ Title:_________________________ FOOTHHILL PARTNERS III, L.P. By:_______________________________ Name:__________________________ Title:_________________________ 4 DDJ CANADIAN HIGH YIELD FUND By:_______________________________ Name:__________________________ Title:_________________________ B III CAPITAL PARTNERS, L.P. By:_______________________________ Name:__________________________ Title:_________________________ 5 EX-27 4 0004.txt FINANCIAL DATA SCHEDULE
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM CONVERSE INC., JULY 1, 2000 10-Q AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000 6-MOS DEC-30-2000 JAN-02-2000 JUL-01-2000 2,559 0 47,314 2,298 69,037 119,639 37,617 21,143 148,189 245,378 74,265 0 0 17,514 (139,808) 148,189 108,919 117,137 85,126 113,832 735 0 10,981 (8,411) 1,366 (9,777) 0 0 0 (9,777) (0.56) (0.56)
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