-----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, E2Sj51x5XEfJuZPaTvybd+p+YbWJsk06FEQixKAUu62IO1wODlvkb1ZZz+0JxZsb da5MpWOIwFdraO+qz6n74A== /in/edgar/work/0000927016-00-004040/0000927016-00-004040.txt : 20001115 0000927016-00-004040.hdr.sgml : 20001115 ACCESSION NUMBER: 0000927016-00-004040 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 20000930 FILED AS OF DATE: 20001114 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: 767468 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 SEPTEMBER 30, 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 SEPTEMBER 30, 2000, 17,535,555 SHARES OF COMMON STOCK WERE OUTSTANDING. TABLE OF CONTENTS 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 19 About Market Risk PART II: OTHER INFORMATION Item 1. Legal Proceedings 20 Item 2. Changes in Securities 20 Item 3. Defaults Upon Senior Securities 20 Item 4 Submission of Matters to a Vote of Security Holders 21 Item 5. Other Information 21 Item 6. Exhibits and Reports on Form 8-K 21 SIGNATURE 21 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, SEPTEMBER 30, 2000 2000 ---------- ------------- Assets Current assets: Cash and cash equivalents ........................................... $ 2,305 $ 2,047 Receivables, less allowances of $3,945 and $2,179, respectively ..... 40,511 35,934 Inventories (Note 3) ................................................ 76,414 60,310 Prepaid expense and other current assets ............................ 2,866 2,018 --------- --------- Total current assets ........................................... 122,096 100,309 Net property, plant and equipment ........................................ 18,855 15,288 Other assets ............................................................. 11,412 11,122 --------- --------- $ 152,363 $ 126,719 ========= ========= Liabilities and Stockholders' Equity (Deficiency) Current liabilities: Short-term debt (Note 4) ............................................ $ 1,951 $ 1,519 Credit facility (Note 4) ............................................ 71,551 64,887 Current portion long-term debt(Note 4) .............................. 28,223 102,908 Accounts payable .................................................... 41,257 38,636 Accrued expenses .................................................... 15,063 16,704 Income taxes payable ................................................ 6,455 6,578 --------- --------- Total current liabilities ...................................... 164,500 231,232 Long-term debt (Note 4) .................................................. 74,265 -- Current assets in excess of reorganization value ......................... 26,143 24,585 Stockholders' equity (deficiency): Common stock, $1.00 stated value, 50,000,000 shares authorized, 17,479,025 and 17,535,555 shares issued and outstanding at January 1, 2000 and September 30, 2000, respectively .................................................. 17,479 17,536 Preferred stock, no par value, 10,000,000 shares authorized none issued and outstanding ................................... -- -- Additional paid-in capital .......................................... 4,764 4,463 Unearned compensation ............................................... (1,061) (386) Retained earnings (deficit) ......................................... (131,737) (147,812) --------- --------- Accumulated other comprehensive income .............................. (1,990) (2,899) Total stockholders' equity (deficiency) ........................ (112,545) (129,098) --------- --------- $ 152,363 $ 126,719 ========= =========
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 NINE MONTHS ENDED ------------------------------------- ------------------------------------- OCTOBER 2, 1999 SEPTEMBER 30, 2000 OCTOBER 2, 1999 SEPTEMBER 30, 2000 --------------- ------------------ --------------- ------------------ Net revenue....................................... $61,651 $53,552 $ 190,969 $ 162,471 Cost of sales..................................... 46,815 42,857 142,340 127,983 ------ ------ ------- ------- Gross profit...................................... 14,836 10,695 48,629 34,488 Selling, general and administrative expenses...... 20,598 13,933 60,963 43,026 Royalty income.................................... 5,251 4,040 15,033 12,258 Restructuring and other unusual charges (credits) --- --- 543 (387) ------ ------ ------- ------- Earnings (loss) from operations.................. (511) 802 2,156 4,107 Interest expense, net............................. 5,683 5,060 16,205 16,041 Other expense, net................................ 1,321 1,370 419 2,105 ------ ------ ------- ------- Loss before income tax ........................... (7,515) (5,628) (14,468) (14,039) Income tax expense ............................... 1,061 670 2,927 2,036 ------ ------ ------- ------- Net loss.......................................... $(8,576) $(6,298) $ (17,395) $ (16,075) ======= ======= ========= ========= Net basic and diluted loss per share (Note 2)..... $ (0.49) $ (0.36) $ (1.00) $ (0.92) ======= ======= ======== ======== Weighted average number of common shares outstanding (Note 2).............................. 17,451 17,521 17,392 17,509 ====== ====== ====== ======
See accompanying notes to condensed consolidated financial statements. -2- CONVERSE INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS (DOLLARS IN THOUSANDS) (UNAUDITED)
NINE MONTHS ENDED --------------- ------------------ OCTOBER 2, 1999 SEPTEMBER 30, 2000 --------------- ------------------ Cash flows from operating activities: Net loss .......................................................... $(17,395) $(16,075) Adjustments to reconcile net loss to net cash required for operating activities: Depreciation of property, plant and equipment ............... 3,410 3,355 Amortization of intangible assets ........................... 150 -- Amortization of current assets in excess of reorganization value ..................................................... (1,558) (1,558) Amortization of note discount/warrants ...................... 466 420 Amortization of deferred compensation ....................... 423 381 Changes in assets and liabilities: Receivables ................................................. 10,227 4,577 Inventories ................................................. (1,187) 16,104 Prepaid expenses and other current assets ................... 1,386 848 Accounts payable and accrued expenses ....................... (2,546) (721) Income taxes payable ........................................ 726 123 Other long-term assets and liabilities ...................... 304 (619) -------- -------- Net cash provided by (required for) operating activities ............................................ (5,594) 6,835 -------- -------- Cash flows from investing activities: Additions to property, plant and equipment ........................ (2,010) (47) -------- -------- Net cash (used) by investing activities ................. (2,010) (47) -------- -------- Cash flows from financing activities: Net proceeds from exercise of warrants ............................ 268 -- Net proceeds from sale of common stock (Note 7) ................... 151 50 Net proceeds from (payment of) short-term debt .................... (2,377) (432) Net proceeds from (payment of) credit facility .................... 7,996 (6,664) -------- -------- Net cash provided (used) by financing activities ........ 6,038 (7,046) Net (decrease) in cash and cash equivalents ......................... (1,566) (258) Cash and cash equivalents at beginning of period .................... 3,274 2,305 -------- -------- Cash and cash equivalents at end of period .......................... $ 1,708 $ 2,047 ======== ========
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 nine months ended September 30, 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 SEPTEMBER 30, 2000 --------------- ------------------ Retail merchandise..................... $ 6,452 $ 5,295 Finished products...................... 62,157 49,163 Work in process ....................... 4,120 3,358 Raw materials.......................... 3,685 2,494 ------- ------- $76,414 $60,310 ======= =======
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 September 30, 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 Convertible Notes to be due and payable. Accordingly, the entire principal amount of the Convertible Notes is now due. 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, to $90,000 in November 1999 and to $80,000 in October 2000. 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, as amended, has an expiration date of December 31, 2001. However, the total revolving loans and banker acceptances outstanding under the Credit Facility of $64,887 are classified as current due to the Events 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 September 30, 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) and the default in the payment of principal and interest due with respect to the 15% Senior Secured Notes (see below) constitute Events of Default under the Credit Facility. In -5- October 2000 the Company entered into an agreement (the "Forbearance Agreement") with the Banks whereby the Banks agreed to forbear the exercise of rights and remedies under the Credit Facility in respect of these defaults until the earlier of January 31, 2001, the date that the required lenders (as defined in the Credit Facility) notify the agent that the Facility has been terminated or such other date as certain defaults or other events specified in the Forbearance Agreement occur. In November 2000, the Company paid a fee of $200 with respect to the implementation of the Forbearance Agreement. As of September 30, 2000 the Company's borrowing base was $73,704. Utilization under the Credit Facility amounted to $68,112 consisting of revolving loans of $51,191, banker acceptances of $13,696 and outstanding letters of credit of $3,225. Accordingly, $5,592 of the maximum available borrowing base remained unutilized as of September 30, 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. 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 and such failure is a continuing default under the Secured Notes. 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 September 30, 2000, revolving loans outstanding under the Credit Facility bore interest of 9.73% 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. 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 a second priority perfected lien on substantially all real and personal, tangible and intangible assets of the Company. -6- 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. 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 defaulted on the payment of principal and interest due in September 2000 with respect to the Secured Notes. The Company was not in compliance with the minimum EBITDA (as defined therein) covenant contained in the Secured Notes agreement for the nine month period ending September 30, 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. In October 2000 the Company and the holders of the Secured Notes executed the Fourth Supplement to Note Purchase Agreements and Standstill Agreement (the "Fourth Supplement") whereby the holders of the Secured Notes agreed to forbear from exercising remedies under the Secured Notes until the earlier of January 31, 2001 or such other date as certain defaults or other events specified in the Fourth Supplement occur. As a condition to the effectiveness of the Fourth Supplement, the Company paid $1,468 of interest due under the Secured Notes through October 31, 2000 and a supplement fee of $72. 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 September 30, 2000, total short-term borrowings outstanding under these financing arrangements totaled $1,519. 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 first nine months of 2000, the Company wrote-off deferred financing costs and other recapitalization transactions of $2,151 related to potential financing transactions which were not completed and a commitment to provide financing had expired. These charges have been included within other expense in the accompanying condensed consolidated statement of operations. In September 2000 the Company announced that previously disclosed negotiations with Euro American Investment Corporation, a private investment concern, with respect to a potential financing transaction had terminated. The Company is not in a position to pay its indebtedness and other obligations without new financing and restructuring and in this connection is continuing to explore a number of alternatives during the period afforded the Company under the Forbearance Agreement with the Banks and the Fourth Supplement with the holders of the Secured Notes. -7- 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 September 30, 2000:
JANUARY 1, 2000 CHANGE IN CHARGES/ SEPT. 30, 2000 BALANCE PROVISIONS WRITE-OFFS BALANCE --------------- ---------- ---------- -------------- Corporate Employee Severance & Related Costs...... $ 1,135 $ (285) $ 850 $ --- Retail Store Closings............................. 728 --- 551 177 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 1,605 2,678 ------- ------ ------ ------ $ 7,673 $ (387) $3,290 $3,996 ======= ====== ====== ======
During the first nine months of 2000, the Company charged $3,290 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 $368 and writedown of fixed assets of $183 related to the closing of five unprofitable retail stores and costs of $1,605 related to the sale and conversion of wholly-owned foreign subsidiaries in Canada, Mexico, Italy, Benelux and France. Due to attrition, the Company incurred less than anticipated corporate 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 resulting in the reversal of restructuring costs of $136 and $242, respectively. The Company recorded an additional restructuring charge of $276 related to the write-off of the cumulative translation adjustment for its Benelux subsidiary. The remaining costs, as well as additional cumulative translation adjustment charges and employee severance costs relating to the sale and conversion of the wholly-owned foreign subsidiaries into licensee/distributor arrangements, are expected to be incurred in the fourth quarter of 2000. At September 30, 2000, $3,996 of the charges recorded remain in current liabilities on the balance sheet. On November 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 the United Kingdom and Ireland. 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 employee severance costs and cumulative translation adjustment charges related to this transaction will be incurred in the fourth quarter of 2000. -8- In October of 2000, the Company restructured its research and development, marketing and distribution organizations, which resulted in the termination of 28 employees. As a result, the Company will record a charge in the fourth quarter of 2000 of approximately $500 for employee severance and related benefits. 6. COMPREHENSIVE INCOME For the three months ended October 2, 1999 and September 30, 2000, comprehensive income (loss) items included in stockholders' equity consisted of cumulative translation adjustments of $277 and $(645), respectively. Total comprehensive income (loss) for the third quarter of 1999 was $(8,299) compared to $(6,943) for the third quarter of 2000. For the nine months ended October 2, 1999 and September 30, 2000, comprehensive income (loss) items included in stockholders' equity consisted of cumulative translation adjustments of $(832) and $(909), respectively. Total comprehensive income (loss) for the first nine months of 1999 was $(18,227) compared to $(16,984) for the first nine months of 2000. 7. EMPLOYEE STOCK PLANS During the first nine months of 2000, 135,000 shares of restricted stock were cancelled due to employee terminations resulting in the reversal of paid in capital and unearned compensation of $294. 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 and August 2000, 34,836 and 21,694 shares of common stock respectively, were issued under the Company's Employee Stock Purchase Plan. Proceeds of $50 were recorded in conjunction with these purchases. 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 -9- 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. 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 ------------- ------ ------------ -------------- ------------ ------------ NINE MONTHS ENDING SEPTEMBER 30, 2000: Net revenue to customer ................ $ 115,057 $ 29,545 $14,814 $ 3,055 $ -- $ 162,471 Intersegment net sales ................. 11,423 -- -- -- (11,423) -- Segment pretax profit (loss) ........... (9,355) (6,266) 1,450 132 -- (14,039) Segment total assets at September 30, 2000 ................................... $ 112,251 $ 10,920 $ 2,657 $ 891 -- $ 126,719 NINE MONTHS ENDING OCTOBER 2, 1999: Net sales to customer .................. $ 105,792 $ 51,655 $27,511 $ 6,011 $ -- $ 190,969 Intersegment net sales ................. 20,682 -- -- -- (20,682) -- Segment pretax profit (loss) ........... (18,411) (629) 5,978 (1,406) -- (14,468) Segment total assets at January 1, 2000. $ 127,670 $ 19,466 $ 3,839 $ 1,388 -- $ 152.363 THREE MONTHS ENDING SEPTEMBER 30,2000: Net sales to customer .................. $ 41,179 $ 7,060 $ 3,845 $ 1,468 $ -- $ 53,552 Intersegment net sales ................. 2,504 -- -- -- (2,504) -- Segment pretax profit (loss) ........... (2,531) (3,926) 856 (27) -- (5,628) THREE MONTHS ENDING OCTOBER 2, 1999: Net sales to customer .................. $ 36,750 $ 15,972 $ 7,813 $ 1,116 $ -- $ 61,651 Intersegment net sales ................. 5,794 -- -- -- (5,794) -- Segment pretax profit (loss) ........... (8,829) (400) 2,171 (457) -- (7,515)
-10- ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS COMPARISON OF THREE MONTHS ENDED OCTOBER 2, 1999 TO THREE MONTHS ENDED SEPTEMBER 30, 2000 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 October 2, 1999 ("Third Quarter 1999") and for the three months ended September 30, 2000 ("Third Quarter 2000").
THREE MONTHS ENDED ----------------------------------------------------------- OCTOBER 2, 1999 % SEPTEMBER 30, 2000 % ---------------- --- ------------------ --- Net revenue ................................ $61,651 100.0 $ 53,552 100.0 Gross profit................................ 14,836 24.1 10,695 20.0 Selling, general and administrative expenses ................................. 20,598 33.4 13,933 26.0 Royalty income ............................. 5,251 8.5 4,040 7.5 Earnings (loss) from operations ............ (511) (0.8) 802 1.5 Interest expense, net ...................... 5,683 9.2 5,060 9.4 Other expense, net.......................... 1,321 2.1 1,370 2.6 Loss before income tax ..................... (7,515) (12.2) (5,628) (10.5) Income tax expense.......................... 1,061 1.7 670 1.3 Net loss ................................... (8,576) (13.9) (6,298) (11.8) Net basic and diluted loss per share................................. $ (0.49) --- $ (0.36) ---
NET REVENUE Net revenue for Third Quarter 2000 decreased to $53.6 million from $61.7 million for Third Quarter 1999, a 13.1% decline. The $8.1 million reduction in net revenue was attributable to decreases of 28.4%, 29.5%, 54.7% and 36.4% in the categories of performance, athletic originals, children's and action sports, respectively, as compared to Third Quarter 1999. These reductions were partially offset by additional net revenue of $11.2 million in the Company's lifestyle category. Net revenue in the United States increased 12.0% to $41.2 million for Third Quarter 2000 from $36.8 million for Third Quarter 1999. Net revenue decreased 50.2% internationally to $12.4 million for Third Quarter 2000 from $24.9 million for Third Quarter 1999. The conversion of wholly-owned subsidiaries with foreign operations into licensing arrangements accounted for $4.6 million of the total reduction of $12.5 million in international net revenue. -11- For the second consecutive quarter, net revenue from the United States region reflected an increase in net revenue versus the prior year quarters. The Company believes this positive trend is primarily attributable to the improving athletic footwear market as well as the efforts the Company has made to broaden its product offerings with the introduction during 1999 of the lifestyles category. The net revenue decline in the E.M.E.A. region was partly attributable to the conversion of the Company's wholly-owned subsidiaries operating in Italy and Benelux 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 $10.7 million for Third Quarter 2000 from $14.8 million for Third Quarter 1999, a 27.7% reduction. The decline in gross profit of $4.1 million was due to the lower volume of shipments as well as a charge to increase the lower of cost or market inventory reserve as a result of strategic pricing as well as a charge to increase distribution decisions made by management during the Third Quarter 2000. As a percentage of net revenue, gross profit decreased to 20.0% in Third Quarter 2000 compared to 24.1% for the prior year period. SELLING, GENERAL AND ADMINISTRATIVE EXPENSES Selling, general and administrative expenses decreased $6.7 million to $13.9 million for Third Quarter 2000 from $20.6 million for Third Quarter 1999, a 32.5% 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 26.0% for Third Quarter 2000 from 33.4% for the prior year period. ROYALTY INCOME Royalty income decreased 24.5% to $4.0 million for Third Quarter 2000 from $5.3 million for Third Quarter 1999. International royalty income, which represented 76.6% of the Company's total royalty income in Third Quarter 2000, decreased 34.5%. This reduction was primarily attributable to the elimination of Japanese non-footwear trademark licensee agreements, which were sold in November 1999 (see below). As a percentage of net revenue, royalty income decreased to 7.5% for Third 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 of $1.1 million in Third Quarter 1999. Royalty income adjusted to eliminate the Japanese non-footwear trademarks was $4.2 million in Third Quarter 1999 versus $4.0 million in Third Quarter 2000. -12- EARNINGS (LOSS) FROM OPERATIONS The Company recorded earnings from operations in Third Quarter 2000 of $0.8 million compared to a loss from operations of $0.5 million in Third Quarter 1999. This change was primarily due to the factors discussed above. INTEREST EXPENSE Interest expense for Third Quarter 2000 decreased to $5.1 million from $5.7 million for Third Quarter 1999 due to a reduction in the level of debt partially offset by increased interest rates. OTHER EXPENSE Other expense for Third Quarter 2000 was $1.4 million compared to $1.3 million for Third Quarter 1999. During Third Quarter 2000, the Company wrote off deferred financing fees and other recapitalization transactions of $1.4 million associated with financing transactions which were not completed and the commitment to provide financing had expired. Other expense for Third Quarter 1999 was mainly comprised of a one time legal settlement of $1.0 million. INCOME TAX EXPENSE Income tax expense for Third Quarter 2000 was $0.7 million compared to $1.1 million for Third Quarter 1999. The Company continued to fully reserve the income tax benefit of the quarterly loss by recording an additional valuation allowance of $2.2 million in Third Quarter 2000 and $3.2 million in Third Quarter 1999. NET LOSS The Company recorded a net loss of $6.3 million for Third Quarter 2000 compared to a net loss of $8.6 million for Third Quarter 1999. The net loss for Third Quarter 2000 and Third Quarter 1999 included a charge of $2.2 million and $3.2 million, respectively to increase the deferred tax valuation reserve. Excluding this non-operating charge, the net loss was $4.1 million for Third Quarter 2000 and $5.4 million for Third Quarter 1999. NET LOSS PER SHARE Net loss per share for Third Quarter 2000 was $0.36 compared to net loss per share of $0.49 for Third Quarter 1999. The net loss per share for Third Quarter 2000 and Third Quarter 1999 included a charge of $0.13 per share and $0.18 per share, respectively, to increase the deferred tax valuation reserve. Excluding this non-operating charge, the net loss per share for Third Quarter 2000 was $0.23 compared to net loss per share of $0.31 for Third Quarter 1999. -13- COMPARISON OF NINE MONTHS ENDED OCTOBER 2, 1999 TO NINE MONTHS ENDED SEPTEMBER 30, 2000 The following table sets forth certain items relating to the Company's operating results as a percentage of net revenue for the nine months ended October 2, 1999 ("Nine Months 1999") and for the nine months ended September 30, 2000 ("Nine Months 2000").
NINE MONTHS ENDED ------------------------------------------------------------ OCTOBER 2, 1999 % SEPTEMBER 30, 2000 % --------------- --- ------------------ --- Net revenue ................................ $190,969 100.0 $162,471 100.0 Gross profit................................ 48,629 25.5 34,488 21.2 Selling, general and administrative expenses ................................. 60,963 31.9 43,026 26.5 Royalty income ............................. 15,033 7.9 12,258 7.5 Restructuring and other unusual charges................................... 543 0.3 (387) (0.2) Earnings from operations ................... 2,156 1.1 4,107 2.5 Interest expense, net ...................... 16,205 8.5 16,041 9.9 Other expense .............................. 419 0.2 2,105 1.3 Loss before income tax ..................... (14,468) (7.6) (14,039) (8.6) Income tax expense.......................... 2,927 1.5 2,036 1.3 Net loss.................................... $ (17,395) (9.1) $(16,075) (9.9) Net basic and diluted loss per share................................. $ (1.00) --- $ (0.92) ---
NET REVENUE Net revenue for Nine Months 2000 decreased 14.9% to $162.5 million from $191.0 million for Nine Months 1999. Compared to the prior year period, the $28.5 million reduction in net revenue was attributable to decreases of 32.5%, 25.6%, 44.9% and 12.5% in the categories of performance, athletic originals, children's, and action sports, respectively. These reductions were partially offset by additional net revenue of $27.4 million in the Company's lifestyle category which was introduced during 1999. Net revenue in the United States increased 8.8% to $115.1 million for Nine Months 2000 from $105.8 million for Nine Months 1999. Net revenue decreased 44.4% internationally to $47.4 million for Nine Months 2000 from $85.2 million for Nine Months 1999. The conversion of wholly-owned subsidiaries with foreign operations into licensing arrangements accounted for $14.6 million of the total reduction of $37.8 million in international net revenue. The downward trend in net revenue in the United States region that has impacted the Company over the past two years turned positive for Nine Months 2000 primarily impacted by additional net revenue in the lifestyle category. 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 -14- 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 $34.5 million for Nine Months 2000 from $48.6 million for Nine Months 1999, a 29.0% reduction. The decline of $14.1 million was due to the lower volume of shipments as well as decreased manufacturing utilization and the Company's efforts to keep inventory levels down through the sale of excess inventory at reduced prices. As a percentage of net revenue, gross profit decreased to 21.2% for Nine Months 2000 compared to 25.5% for the prior year period. SELLING, GENERAL AND ADMINISTRATIVE EXPENSES Selling, general and administrative expenses decreased $18.0 million to $43.0 million for Nine Months 2000 from $61.0 million for Nine Months 1999, a 29.5% 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 26.5% for Nine Months 2000 from 31.9% for the prior year period. ROYALTY INCOME Royalty income decreased 18.0% to $12.3 million for Nine Months 2000 from $15.0 million for Nine Months 1999. International royalty income, which represented 78.1% of the Company's total royalty income for Nine Months 2000, decreased 25.0%. This reduction was primarily attributable to the elimination of Japanese non-footwear trademark licensee agreements which were sold in November 1999, (see below). This reduction was partially offset by an increase of 48.5% in the E.M.E.A. region. As a percentage of net revenue, royalty income decreased to 7.5% in the First Half 2000 compared to 7.9% 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 $3.3 million for Nine Months 1999. Royalty income adjusted to eliminate the Japanese non-footwear trademarks was $11.7 million for Nine Months 1999 versus $12.3 million for Nine Months 2000. RESTRUCTURING AND OTHER UNUSUAL CHARGES During Nine Months 2000, the Company recorded a net credit of $0.4 million based upon lower than anticipated restructuring and other unusual costs which consisted of credits of $0.3 -15- million, $0.1 million and $0.3 million related to corporate employee severance costs, R&D building lease termination costs and contract termination costs, respectively, offset by a charge of $0.3 million of cumulative translation adjustment charges related to the conversion of the Company's foreign subsidiary in Benelux. During Nine Months 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. EARNINGS FROM OPERATIONS The Company recorded earnings from operations for Nine Months 2000 of $4.1 million compared to $2.2 million for Nine Months 1999. This change was primarily due to the factors discussed above. INTEREST EXPENSE Interest expense for Nine Months 2000 decreased to $16.0 million from $16.2 million for Nine Months 1999. OTHER (INCOME) EXPENSE Other expense for Nine Months 2000 was $2.1 million primarily from writing off deferred financing fees and other recapitalization transactions associated with financing transactions which were not completed and the commitment to provide financing has expired. Other expense for Nine Months 1999 of $0.4 million was primarily comprised of a one time legal settlement of $1.0 million partially offset by gains realized from foreign exchange contracts and put options. INCOME TAX EXPENSE Income tax expense for Nine Months 2000 was $2.0 million compared to $2.9 million for Nine Months 1999. The Company fully reserved the income tax benefit for the nine months losses by recording an additional valuation allowance of $6.4 million for Nine Months 2000 and $7.0 million for Nine Months 1999. NET LOSS The Company recorded a net loss of $16.1 million for Nine Months 2000 compared to net loss of $17.4 million for Nine Months 1999. The net loss for Nine Months 2000 and Nine Months 1999 included a charge of $6.4 million and $7.0 million, respectively, to increase the deferred tax valuation reserve. Excluding this non-operating charge, the net loss was $9.7 million for Nine Months 2000 and $10.4 million for Nine Months 1999. NET LOSS PER SHARE Net loss per share for Nine Months 2000 was $0.92 compared to net loss per share of $1.00 for Nine Months 1999. The net loss per share for Nine Months 2000 and Nine Months 1999 -16- included a charge of $0.37 per share and $0.40 per share, respectively, to increase the deferred tax valuation reserve. Excluding this non-operating charge, the net loss per share for Nine Months 2000 was $0.55 compared to net loss per share of $0.60 for Nine Months 1999. LIQUIDITY AND CAPITAL RESOURCES As of September 30, 2000, the Company's working capital (net of cash) position decreased $88.3 million to a deficit of $133.0 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 the Convertible 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. Accordingly, the entire principal amount of the Convertible Notes is now due. Total borrowings under the Company's Credit Facility decreased $6.7 million to $64.9 million on September 30, 2000 versus $71.6 million at January 1, 2000 and short term debt decreased $0.5 million to $1.5 million at September 30, 2000 versus $2.0 million at January 1, 2000. Net cash provided by operating activities for Nine Months 2000 was $6.8 million compared to net cash required for operating activities of $5.6 million for Nine Months 1999. Net cash provided by operating activities for Nine Months 2000 was primarily the result of a reduction in working capital requirements partially offset by the net loss. Cash required for operating activities for Nine Months 1999 was used primarily to fund a net loss offset by a reduction in working capital requirements. Net cash used by investing activities was nil for Nine Months 2000 versus $2.0 million for Nine Months 1999 for additions to property, plant and equipment. Net cash used by financing activities of $7.0 million for Nine Months 2000 consisted of a net reduction in the Company's asset-based borrowing facilities. Net cash provided by financing activities for Nine Months 1999 of $6.0 million 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 September 30, 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. The default in payment of interest due with respect to the Convertible Notes also constitutes an Event of Default under the Credit Facility and the Secured Notes, and the -17- default in the payment of principal and interest due with respect to the Secured Notes constitutes an Event of Default under the Credit Facility. As discussed in Note 4 to the Company's Condensed Consolidated Financial Statements, in October 2000 the Company entered into the Forbearance Agreement with the Banks pertaining to the Credit Facility and a Fourth Supplement to Note Purchase Agreements and Standstill Agreement with the holders of the Secured Notes. As a result of these agreements, the Company is currently the beneficiary of a forbearance period granted by its secured lenders that ends on January 31, 2001, subject to earlier termination in certain events. The Company does not expect to be in a position to pay its indebtedness and other obligations without new financing and restructuring and in this connection is continuing to explore a number of alternatives during the forbearance period. BACKLOG At the end of Third Quarter 2000, the Company's global order backlog was $88.1 million, compared to $85.5 million at the end of Third Quarter 1999, an increase of 3.0%. The U.S. order backlog increased from $55.0 million at October 2, 1999 to $56.9 million at September 30, 2000, or 3.5%. The international order backlog increased from $30.5 million at October 2, 1999 to $31.2 million at September 30, 2000, or 2.3%. 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 lifestyle categories increased 14.8% and 200.0%, respectively, offset by declines of 47.4% in the performance category and 36.2% in the children's 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. -18- ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK Interest Rate Risk At September 30, 2000, the carrying value of the Company's debt totaled $169.3 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 September 30, 2000, the Company had fixed rate debt of $102.9 million and variable rate debt of $66.4 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 September 30, 2000, the earnings and cash flow impact for the next year resulting from a one percentage point increase in interest rates would be approximately $0.7 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 September 30, 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. -19- 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 Condensed Consolidated Financial Statements under Part I, Item 1, of this report, there are a number of defaults under the Company's senior secured Credit Facility and Secured Notes, and the entire principal of and accrued interest on the Company's subordinated unsecured Convertible Notes have been declared due and payable by the trustee as a result of default in payment of interest that was payable on June 1, 2000. The outstanding principal amount of all such indebtedness at September 30, 2000 was approximately $168 million. To address the defaults under the Credit Facility, the Company entered into a Forbearance Agreement, dated as of October 27, 2000, with the lenders and the agent. To address defaults under the Secured Notes, the Company has entered into a Fourth Supplement to Note Purchase Agreements and Standstill Agreement, dated as of October 27, 2000, with the holders of the Secured Notes. The forbearance periods under these agreements will continue until January 31, 2001 unless terminated earlier upon the occurrence of certain events, as described therein. -20- Item 4. Submission of Matters to a Vote of Security-Holders. Not Applicable. Item 5. Other Information. See Item 3 above. Item 6. Exhibits and Reports on Form 8-K (a) Exhibits. The following exhibits are contained in this report: 10.1 Forbearance Agreement between the Company, the lenders under the Company's Credit Agreement and the agent 10.2 Thirteenth Amendment to Credit Agreement 10.3 Fourth Supplement to Note Purchase Agreements and Standstill Agreement 27 Financial Data Schedule (b) Reports on Form 8-K. There were no reports on Form 8-K filed during the quarter ended September 30, 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: November 14, 2000 Converse Inc. By: /s/ James E. Lawlor ------------------------------- James E. Lawlor Senior Vice President and Chief Financial Officer -21- EXHIBIT INDEX Exhibit No. Description - ----------- ----------- 10.1 Forbearance Agreement between the Company, the lenders under the Company's Credit Agreement and the agent 10.2 Thirteenth Amendment to Credit Agreement 10.3 Fourth Supplement to Note Purchase Agreements and Standstill Agreement 27 Financial Data Schedule
EX-10.45 2 0002.txt FOREBEARANCE AGREEMENT Exhibit 10.1 FORBEARANCE AGREEMENT --------------------- THIS FORBEARANCE AGREEMENT (this "Agreement") is entered into as of --------- October 27, 2000, by and among CONVERSE INC., a Delaware corporation (the "Borrower"), the financial institutions party hereto (the "Lenders"), and BT - --------- ------- COMMERCIAL CORPORATION, as agent for the Lenders. RECITALS -------- WHEREAS, the Borrower, the Lenders, and the Agent are parties to that certain Credit Agreement, dated as of May 21, 1997 (as previously amended, modified, supplemented, extended or restated, and as may hereafter be amended, modified, supplemented, extended or restated from time to time, the "Credit ------ Agreement"); - --------- WHEREAS, the Borrower has notified the Agent and the Lenders that the Existing Defaults (as defined below) have occurred and are continuing and the Fourth Quarter Defaults (as defined below) may occur; WHEREAS, the Borrower has requested that the Lenders and the Agent temporarily forbear, for a period commencing on the Effective Date (as defined below) and ending on the Forbearance Period Termination Date (as defined below), the exercise of rights and remedies under the Credit Agreement and other Credit Documents in respect of the Existing Defaults and any Fourth Quarter Default if and when any such Fourth Quarter Default occurs; and WHEREAS, subject to the terms and conditions of this Agreement, the Agent and the Lenders are willing to temporarily forbear the exercise of rights and remedies under the Credit Agreement and the other Credit Documents in respect of, and only in respect of, the Existing Defaults and the Fourth Quarter Defaults if and when any such Fourth Quarter Default occurs, and temporarily agree to continue to make loans and other extensions of credit pursuant to, and in accordance with, the terms of the Credit Agreement. NOW, THEREFORE, in consideration of the premises and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereto agree as follows: 1. Definitions. Capitalized terms used herein and not otherwise ----------- defined herein shall have the respective meanings given to them in the Credit Agreement. As used in this Agreement, the following terms shall have the following meanings: "Effective Date" shall mean the first date upon which each of the conditions to effectiveness set forth in Section 5 hereof have been satisfied. --------- "Existing Defaults" shall mean the following Defaults and Events of Default: (a) Event of Default under Section 10.1(b)(i) of the Credit Agreement solely to the extent resulting from the shortfall under Section 7.7 of the Credit Agreement with respect to Minimum EBITDA for the fiscal quarters ended on or about 6/30/00 and 9/30/00; (b) Events of Default under Sections 10.1(b)(ii) and 10.1(b)(iii) of the Credit Agreement solely to the extent resulting from the failure to provide, on a timely basis, financial information, reports, notices and certificates pursuant to Sections 6.1(c)(ii), 6.1(f), 6.1(g), 6.1(h), and 6.1(o) of the Credit Agreement for periods ended on or prior to October 27, 2000; and (c) Events of Default under Section 10.1(f) of the Credit Agreement solely to the extent resulting from the cross-default to (i) the defaults in payment and performance of covenants relating to Debt under the Note Purchase Agreements to the extent described in the Noteholder Waiver and (ii) the Events of Default and acceleration under the Subordinated Note Indenture described in the Notice of Default and Acceleration, dated August 4, 2000, from First Union National Bank, as Trustee, to Converse Inc. "Forbearance Period Termination Date" shall mean the earliest to occur of (i) January 31, 2001, (ii) the date the Required Lenders inform the Agent in writing that the agreement to forbear set forth in this Agreement has been terminated, (iii) the "Forbearance Termination Date" (as defined in the Noteholder Waiver), (iv) the date that a Default or Event of Default that is not an Existing Default or a Fourth Quarter Default occurs under the Credit Agreement, (v) the date that the Borrower shall breach its obligations hereunder or any representations or warranty contained herein shall prove to have been incorrect at the time made, and (vi) the date that any Noteholder shall exercise any right, power or remedy or take any action to commence any judicial or other proceeding to enforce any right, power or remedy against the Borrower under any Note Purchase Agreement or shall direct the "Collateral Agent" under the Collateral Agency and Intercreditor Agreement, dated as of September 16, 1998, among BT Commercial Corporation, as bank agent, the Noteholders, and BT Commercial Corporation, as collateral agent, to take any such action. "Fourth Quarter Defaults" shall mean (i) a Default or Event of Default under Section 10.1(b)(i) of the Credit Agreement that results from a shortfall under Section 7.7 of the Credit Agreement with respect to Minimum EBITDA for the fiscal quarter ended on or about December 31, 2000, (ii) any Default or Event of Default that may occur under Section 10.1(f) of the Credit Agreement, solely to the extent resulting from a cross default resulting from a payment default under the Subordinated Note Indenture, and (iii) any Default or Event of Default under Section 10.1(b)(ii) of the Credit Agreement solely to the extent resulting from the failure to provide on a timely basis notice of the Defaults or Events of Default described in clauses (i) or (ii) of this definition of Fourth Quarter Defaults. "Noteholder Waiver" shall mean the Fourth Supplement to Note Purchase Agreements and Standstill Agreement, dated as of October 27, 2000, pursuant to which the Noteholders have, among other things, (i) agreed to standstill arrangements with respect to the defaults or events of default that exist under the Note Purchase Agreements through the "Forbearance Termination Date" (as defined therein in the Noteholder Waiver) and (ii) extended the effect of the Notice of Actionable Default sent by Foothill Partners III, L.P., DDJ Canadian High Yield Fund and B III Capital Partners, L.P. to the Agent, which notice was dated August 21, 2000 and initially sent to, and received by, the Agent on August 28, 2000. "Thirteenth Amendment" shall mean the Thirteenth Amendment to Credit Agreement, dated as of the date hereof, among the Borrower, the Agent and the Lenders signatory thereto. 2. Acknowledgment of Defaults. The Borrower hereby acknowledges -------------------------- that, as of the date hereof, each of the Existing Defaults has occurred and is continuing. 3. Forbearance. Subject to the terms and conditions of this ----------- Agreement, the Agent and the Lenders hereby temporarily agree to forebear the exercise of rights and remedies under the Credit Agreement and the other Credit Documents in respect of, and only in respect of, each of the Existing Defaults and any Fourth Quarter Default if and when any such Fourth Quarter Default occurs, such agreement to forebear to be effective as of the Effective Date and to terminate on the Forbearance Period Termination Date. 4. Effect of Termination. Immediately upon the occurrence of the --------------------- Forbearance Period Termination Date, the agreement to forebear set forth in this Agreement shall cease to be of any further force and effect without any further action on the part of any Person, and the Agent and the Lenders may exercise any or all of their respective rights and remedies under the Credit Agreement and other Credit Documents in respect of the Existing Defaults and any other Defaults or Events of Default that may have occurred and be continuing (including, without limitation, any Fourth Quarter Default). 5. Conditions Precedent. This Agreement shall become effective upon -------------------- (a) due execution of counterparts of this Agreement by the Borrower, the Agent and the Required Lenders and receipt thereof by the Agent, (b) receipt by the Agent for the account of the Lenders of the fee payable pursuant to Section 6 --------- hereof, and such fee shall be fully earned upon the effectiveness of this Agreement, (c) receipt by the Agent of all other costs and expenses pursuant to Section 6 hereof, (d) due execution of counterparts of the Thirteenth Amendment - --------- by the Borrower, the Agent and such Lenders as are required for the Thirteenth Amendment to be 3 effective in accordance with the terms of the Credit Agreement, and receipt thereof by the Agent, and (e) receipt by the Agent of a certified copy of the Noteholder Waiver, together with a certificate of an officer of the Borrower that the Noteholder Waiver has become effective, or if the effectiveness of this Agreement is a condition to the effectiveness of the Noteholder Waiver, that immediately upon the effectiveness of this Agreement, the Noteholder Waiver will become effective without any further action on the part of any Person. 6. Expenses. The Borrower hereby agrees to pay all costs and -------- Expenses incurred by the Agent in connection with or related to (i) the negotiation, drafting and execution of this Agreement, the Thirteenth Amendment, and the Credit Agreement, or (ii) any contingency planning in connection with the transactions contemplated hereby or thereby, in each case including without limitation fees and Expenses of counsel. The Borrower further agrees to pay to the Agent for the account of each Lender, a fee in an amount equal to $200,000, such fee to be due and payable on the Effective Date and to be apportioned among the Lenders, to each in accordance with its Proportionate Share. Such fee is in addition to any and all other fees and Expenses required to be paid from time to time by the Borrower under the Credit Agreement. If the Borrower becomes a debtor and a debtor-in-possession in a case filed under Chapter 11 of the United States Bankruptcy Code, and in connection therewith the Borrower (as debtor and debtor-in-possession) enters into a post-petition credit facility, the amount of such fee allocable to each of the Lenders who is also a lender in such post- petition credit facility shall be credited against the closing fee payable to each such lender under such post-petition credit facility. 7. Credit Documents. This Agreement is a Credit Document executed ---------------- pursuant to the Credit Agreement and shall (unless otherwise expressly indicated herein) be construed, administered and applied in accordance with the terms and provisions of the Credit Agreement. 8. Representations and Warranties. To induce the Agent and the ------------------------------ Lenders to enter into this Agreement, the Borrower hereby represents to each of them as follows as of the date hereof: (a) it has the requisite corporate power and authority to execute, deliver and perform this Agreement, (b) it is duly authorized, and has been authorized by all necessary corporate action, to execute, deliver and perform this Agreement, (c) it has no claims, counterclaims, offsets or defenses to the Credit Documents and the performance of its obligations thereunder, or if the Borrower did have any such claims, counterclaims, offsets or defenses to the Credit Documents or any transaction related to the Credit Documents, the same are hereby waived, relinquished and released in consideration of the Required Lenders' and the Agents' execution and delivery of this Agreement, (d) the representations and warranties contained in Section 5 of the Credit Agreement are true and correct in all material respects on and as of the date hereof as though made on and as of the date hereof (except those that expressly relate to an earlier date in which case such representations and warranties were true and correct as of such earlier date and except those which are not true and correct solely by reason of the Existing Defaults), and (e) other than the Existing Defaults, no Default or Event of Default exists under the Credit Agree- 4 ment on and as of the date hereof or will occur as a result of the transactions contemplated hereby. 9. Liens. The Borrower hereby affirms the Liens and security ----- interests created and granted in the Credit Documents and agrees that this Agreement shall in no manner adversely affect or impair such Liens and security interests. 10. Release. The Borrower hereby releases the Lenders, the Agent and ------- the Lenders' and the Agent's officers, employees, representatives, agents, counsel and directors from any and all actions, claims, demands, damages and liabilities of whatever kind or nature, in law or in equity, now known or unknown, suspected or unsuspected to the extent that any of the foregoing arises from any action or failure to act on or prior to the date hereof. 11. No Other Changes. Except as expressly modified in this Agreement ---------------- or the Thirteenth Amendment, all the terms, provisions and conditions of the Credit Agreement and other Credit Documents shall remain unchanged and shall continue in full force and effect. The agreement to forebear contained herein is with respect to the Existing Defaults and any Fourth Quarter Default only and shall not constitute an agreement to forebear in respect of any other Default or Event of Default that may now or hereafter exist under the Credit Agreement. 12. No Third Party Beneficiaries. Except for the Borrower, the ---------------------------- Lenders, and the Agent, no Person is intended to be a beneficiary of the Agreement and no other Person shall be authorized to rely upon the contents of this Agreement. 13. No Waiver; Cumulative Remedies. The parties hereto confirm and ------------------------------ agree that none of the following is, nor shall any of the following be deemed or construed in any way to be, a waiver of any Default or Event of Default under the Agreement or any of the other Credit Documents: (a) the existence of this Agreement or the execution thereof by any party thereto, or (b) the Agent or any Lender permitting the making of any Revolving Loans, the issuance of any Letter of Credit, or making available of any Foreign Exchange Contracts or Acceptances after the effectiveness of this Agreement. No failure to exercise and no delay in exercising, on the part of the Agent or any Lender any right, remedy, power or privilege hereunder or under the Credit Agreement or any other Credit Document, shall operate as a waiver thereof; nor shall any single or partial exercise of any right, remedy, power or privilege hereunder or under the Credit Agreement or any other Credit Document preclude any other or further exercise thereof or the exercise of any other right, remedy, power or privilege. The rights, remedies, powers and privileges provided herein and under the Credit Agreement and any other Credit Document are cumulative and not exclusive of any rights, remedies, powers and privileges provided by law. 14. Counterparts. This Agreement may be executed by the parties ------------ hereto in several counterparts, each of which shall be deemed to be an original and all of which shall constitute together but one and the same agreement. Delivery of an executed counterpart of this 5 Agreement by telecopy shall be effective as an original and shall constitute a representation that the original shall be delivered to the Agent. 15. Entirety. This Agreement, the Credit Agreement and the other -------- Credit Documents embody the entire agreement between the parties and supersede all prior agreements and understandings, if any, relating to the subject matter hereof. These Credit Documents represent the final agreement between the parties and may not be contradicted by evidence of prior, contemporaneous or subsequent oral agreements of the parties. 16. GOVERNING LAW. THE VALIDITY, INTERPRETATION AND ENFORCEMENT OF ------------- THIS CREDIT AGREEMENT SHALL BE GOVERNED BY THE LAWS OF THE STATE OF ILLINOIS WITHOUT GIVING EFFECT TO THE CONFLICT OF LAW PRINCIPLES THEREOF. 17. Successors and Assigns. This Agreement shall be binding upon and ---------------------- inure to the benefit of the parties and their respective successors and assigns. 18. Notices. All notices and correspondences permitted or required ------- hereunder shall be delivered in accordance with Section 13.5 of the Credit Agreement. 19. Headings Descriptive. The headings of the several sections of -------------------- this Agreement are inserted for convenience only and shall not in any way affect the meaning or construction of any provision of this Agreement. [signature pages to follow] 6 IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be executed and delivered by their proper and duly authorized officers as of the date set forth above. CONVERSE INC. By: /s/ James E. Lawlor Name: Title: Senior Vice President and CFO BT COMMERCIAL CORPORATION, as Agent By: /s/William E. Howe Name: William E. Howe Title:Vice President LENDERS: BT COMMERCIAL CORPORATION By: /s/William E. Howe Name: William E. Howe Title:Vice President GMAC COMMERCIAL CREDIT LLC By: /s/ Name: Title: LA SALLE BANK N.A. By: /s/ Christopher G. Clifford Name: Christopher G. Clifford Title:GSVP BANK OF AMERICA, N.A. By: /s/ Gaye L. Stathis Name: Gaye L. Stathis Title: Vice President MADELEINE LLC By: /s/ Name: Title: HELLER FINANCIAL, INC. By: /s/ Thomas Bukowski Name: Thomas Bukowski Title: Senior Vice President FINOVA CAPITAL CORPORATION By: /s/ Name: Title: EX-10.46 3 0003.txt THIRTEENTH AMENDMENT TO CREDIT AGREEMENT Exhibit 10.2 THIRTEENTH AMENDMENT TO CREDIT AGREEMENT ---------------------------------------- This THIRTEENTH AMENDMENT TO CREDIT AGREEMENT (this "Amendment") is --------- entered into as of October 27, 2000, by and among CONVERSE INC. (the "Borrower"), BT COMMERCIAL CORPORATION, AS AGENT (in such capacity, the -------- "Agent"), and the several banks and other financial institutions listed on the ----- signature pages of this agreement (together with each of their respective successors and assigns, individually, a "Lender" and, collectively, the ------ "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, 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, that certain Eleventh Amendment to Credit Agreement dated May 15, 2000, and that certain Twelfth Amendment to Credit Agreement dated June 30, 2000 (such Credit Agreement as amended, supplemented or otherwise modified prior to the date hereof, the "Credit Agreement"); and ---------------- WHEREAS, the Borrower has requested that the Borrower, the Lenders, and the Agent enter into that certain Forbearance Agreement, dated as of October 27, 2000 (such Forbearance Agreement as amended, supplemented or otherwise modified, the "Forbearance Agreement"); and --------------------- WHEREAS, as a condition to entering into the Forbearance Agreement, the Lenders and the Agent have required that certain provisions of the Credit Agreement be modified in the manner provided for in this Amendment. NOW, THEREFORE, in consideration of the mutual agreements herein contained and other good and valuable consideration, the adequacy of which 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 Additional Definitions. Section 1.1 of the Credit Agreement is hereby amended by inserting the following new defined terms in proper alphabetical sequence: "Adjusted Total Commitment shall mean, for any date ------------------------- after the first Amortization Date, the greater of (x) the sum of (i) the outstanding principal balance of Revolving Loans, plus ---- (ii) the aggregate Letter of Credit Obligations, plus (iii) the ---- aggregate Foreign Exchange Obligations, plus (iv) the aggregate ---- Acceptance Obligations, in each case, as of the immediately preceding Amortization Date (or if such date is an Amortization Date, as of such date) or (y) the amount listed opposite the immediately preceding Amortization Date (or if such date is an Amortization Date, listed opposite such date) in the definition of Projected Commitments." "Amortization Date shall mean each date listed under ----------------- the caption "Amortization Date" in the definition of Projected Commitments." "Eligible L/C Inventory shall have the meaning given ---------------------- thereto in clause (B) of the definition of "Borrowing Base" contained herein." "Excess Proceeds shall mean (i) with respect to an --------------- Asset Disposition of the North Reading Building, Net Cash Proceeds of such Asset Disposition to the extent such Net Cash Proceeds exceed $9,000,000; provided that the maximum amount of -------- Excess Proceeds pursuant to this clause (i) shall be $3,000,000, and (ii) with respect to an Asset Disposition of all or a portion of the North American Manufacturing Operations, the aggregate Net Cash Proceeds of all such Asset Dispositions to the extent such Net Cash Proceeds exceed the excess of (y) $7,000,000 over (z) the aggregate value of all Inventory sold in all such Asset Dispositions." "Fixed Asset Sublimit shall have the meaning given to -------------------- it in clause (D) of the definition of "Borrowing Base" contained herein." "North American Manufacturing Operations shall mean, --------------------------------------- either individually or collectively, the Borrower's manufacturing operations located at (i) Mission, Texas, (ii) Reynosa, Mexico, and (iii) Lumberton, North Carolina." 2 "North Reading Building shall mean the building located ---------------------- at One Fordham Road, North Reading, MA." "Projected Commitments shall mean, for each date listed --------------------- below, the amount listed opposite such date: Amortization Projected Date Commitment ---- ---------- March 31, 2001 $55,000,000 April 30, 2001 $45,000,000 May 31, 2001 $25,000,000 August 31, 2001 $10,000,000 December 31, 2001 $ 0" 2.2 Definitions. (1) Borrowing Base. Section 1.1 of the Credit Agreement is hereby further amended by deleting the definition "Borrowing Base" appearing therein and inserting the following in lieu thereof: "Borrowing Base shall mean an amount equal to the sum of -------------- (A) eighty-five percent (85%) of the then Eligible Accounts Receivable, plus ---- (B) the lesser of (i) $40,000,000 and (ii) the sum of (1) sixty-five percent (65%) of the then Eligible Inventory, plus (2) an amount equal to sixty-five percent (65%) of the face amount of any Letter of Credit issued to support the purchase of finished goods Inventory which, in the determination of the Agent in the exercise of its Permitted Discretion, would constitute Eligible Inventory when title thereto passes to the Borrower ("Eligible L/C Inventory"); ---------------------- provided, that from and after April 1, 2001, the advance rate with -------- respect to Eligible Inventory and Eligible L/C Inventory shall be sixty percent (60%); plus ---- (C) sixty percent (60%) of the then Eligible Retail Inventory, plus ---- (D) $5,320,000 (as reduced pursuant to this clause (D), --------- the "Fixed Asset Sublimit"), provided that such amount shall -------------------- automatically be 3 reduced from time to time during the term hereof by (x) on the first business day of February 2001, May 2001, August 2001 and November 2001, and so long as the Fixed Asset Sublimit is greater than zero, the lesser of (I) the Fixed Asset Sublimit as of such day (prior to any reduction pursuant to this clause (x)), and (II) $360,000, (y) an amount equal to the Net Cash Proceeds from any Asset Disposition, other than Excess Proceeds of a disposition from the sale of the North Reading Building or the North American Manufacturing Operations, and (z) on February 28, 2001, an amount equal to the Excess Proceeds from the sale of the North Reading Building (it being understood that the dollar amount set forth in this clause (D) may be a negative number (and thereby shall reduce the Borrowing Base)), plus ---- (E) the lesser of (i) $15,000,000 or (ii) sixty-five percent (65%) of Borrower's annual Royalty Income, based on a rolling twelve month period. Agent at any time (upon one (1) Business Days' notice to Borrower) in the exercise of its Permitted Discretion shall be entitled to (i) establish and increase or decrease reserves against Eligible Accounts Receivable, Eligible Inventory, Eligible L/C Inventory, Eligible Retail Inventory, or the Borrowing Base, (ii) reduce the advance rates under clauses (A), (B), (C) and (E) above or (following any such reduction) restore the advance rates under clauses (A), (B), (C) and (E) above to any level equal to or below the advance rates stated in clauses (A), (B), (C) and (E) above, (iii) impose additional restrictions (or eliminate the same) to the standards of eligibility set forth in the respective definitions of Eligible Accounts Receivable, Eligible Inventory, Eligible L/C Inventory, or Eligible Retail Inventory or the Borrowing Base and (iv) establish and increase or decrease a reserve in the amount of interest payable by Borrower, including interest on Loans, Letter of Credit Obligations and Acceptance Obligations." (2) Expiration Date. Section 1.1 of the Credit Agreement is hereby further amended by deleting the definition "Expiration Date" appearing therein and inserting the following in lieu thereof: "Expiration Date shall mean December 31, 2001." --------------- (3) LIBOR Rate Margin. Section 1.1 of the Credit Agreement is hereby further amended by 4 deleting the definition "LIBOR Rate Margin" appearing therein and inserting the following in lieu thereof: "LIBOR Rate Margin shall three and one-half percent ----------------- (3.50%) per annum." (4) Net Cash Proceeds. Section 1.1 of the Credit Agreement is hereby further amended by inserting the following text at the end of the definition of "Net Cash Proceeds": "Notwithstanding the foregoing and solely for the purpose of clause (D) of the definition of Borrowing Base, clause (ii) of the definition of Excess Proceeds, and Section 3.5(c)(v) hereof, Net Cash Proceeds shall not include cash received by the Borrower in connection with the sale of all or a portion of the Borrower's North American Manufacturing Operations to the extent and only to the extent that such cash is attributable to the value of the Inventory sold in such transaction." (5) Section 1.1 of the Credit Agreement is hereby further amended by deleting the second sentence of the definition of "Permitted Discretion" and inserting the following text in lieu thereof: "In exercising such judgment, the Agent may consider such factors which are already included in or tested by the definition of Eligible Accounts Receivable, Eligible Inventory, Eligible L/C Inventory, Eligible Retail Inventory, or the Borrowing Base, as well as any of the following: (i) changes in collection history and dilution with respect to the Accounts, (ii) changes in levels of backlog of firm purchase orders and demand for, and pricing of, Inventory, (iii) changes in any concentration of risk with respect to Accounts and Inventory and (iv) any other factors that change the credit risk of lending to the Borrower on the security of the Collateral." 2.3 Determination of Borrowing Base. Section 3.2 of the Credit Agreement is hereby amended by deleting the last sentence of subsection (a) thereof. 2.4 Asset Dispositions. Section 3.5 of the Credit Agreement is hereby amended by deleting subsection (c) appearing therein and inserting the following new subsection (c) in lieu thereof: "(c) (i) If the Borrower shall make any Asset Disposition of the North Reading Building prior to February 28, 2001, (x) the Borrower shall make a prepayment of the Revolving Loans in an amount equal to the Net Cash 5 Proceeds received in connection therewith, (y) the Revolving Credit Commitment of each Lender shall automatically reduce by an amount equal to such Lender's Proportionate Share of such Net Cash Proceeds (other than Excess Proceeds in respect of such Asset Disposition), and (z) such Revolving Credit Commitments may not be reinstated. (ii) If the Borrower shall make any Asset Disposition of the North Reading Building on or after February 28, 2001 and prior to March 31, 2001 (x) the Borrower shall make a prepayment of the Revolving Loans in an amount equal to the Net Cash Proceeds in connection therewith, (y) the Revolving Credit Commitment of each Lender shall automatically reduce by an amount equal to such Lender's Proportionate Share of such Net Cash Proceeds, and (z) such Revolving Credit Commitments may not be reinstated. (iii) If the Borrower shall make any Asset Disposition of the North Reading Building after March 31, 2001, the Borrower shall make a prepayment of the Revolving Loans in an amount equal to the Net Cash Proceeds in connection therewith but the Revolving Credit Commitments shall not be reduced by such prepayment. (iv) If the Borrower shall make an Asset Disposition of the North Reading Building prior to February 28, 2001 and there shall be any Excess Proceeds in connection therewith, then on February 28, 2001 (y) the Revolving Credit Commitment of each Lender shall automatically reduce by an amount equal to such Lender's Proportionate Share of such Excess Proceeds, and (z) such Revolving Credit Commitments may not be reinstated. (v) If the Borrower shall make an Asset Disposition of all or a portion of the North American Manufacturing Operations, (x) the Borrower shall make a prepayment of the Revolving Loans in an amount equal to the Net Cash Proceeds received in connection therewith, (y) the Revolving Credit Commitment of each Lender shall automatically reduce by an amount equal to such Lender's Proportionate Share of such Net Cash Proceeds (other than Excess Proceeds), and (z) such Revolving Credit Commitments may not be reinstated. (vi) If the Borrower shall make any Asset Disposition (other than an Asset Disposition covered by clauses (i) ----------- through (v) --- 6 above) (x) the Borrower shall make a prepayment of the Revolving Loans in an amount equal to the Net Cash Proceeds received in connection with such Asset Disposition, (y) the Revolving Credit Commitment of each Lender shall automatically reduce by an amount equal to such Lender's Proportionate Share of such Net Cash Proceeds, and (z) such Revolving Credit Commitments may not be reinstated." 2.5 Amortization. Section 3.5 of the Credit Agreement is hereby further amended by inserting the following new subsection (f) at the end thereof: "(f) If on any Amortization Date the Total Commitments exceed the Adjusted Total Commitments, then on such Amortization Date, the Revolving Credit Commitment of each Lender shall automatically reduce to an amount equal to the product of (x) the Adjusted Total Commitment as of such Amortization Date, multiplied by (y) such Lender's Proportionate Share determined immediately prior to such reduction. Such reduction shall constitute a permanent reduction of the Total Commitment and each Lender's Revolving Credit Commitment and may not be reinstated. Upon any such reduction, Annex I shall be deemed to be amended to reflect the reduction in the Total Commitment and the Revolving Credit Commitment." 2.6 Commitment Reduction. Section 3.5 of the Credit Agreement is hereby further amended by inserting the following new subsection (g) at the end thereof: "(g) On November 6, 2000, the Total Commitment shall automatically reduce to $80,000,000, and the Revolving Credit Commitment of each Lender shall automatically reduce to the amount set forth on Annex I, as amended, and the aggregate balance of Revolving Loans, plus all Letter of Credit Obligations ---- outstanding, plus all Foreign Exchange Obligations, plus all ---- ---- Acceptance Obligations, in excess of $80,000,000 shall be immediately due and payable without the necessity of any demand. Such reduction shall constitute a permanent reduction of the Total Commitment and each Lender's Revolving Credit Commitment and may not be reinstated." 2.7 Bank Accounts. Article 5 of the Credit Agreement is hereby amended by inserting the following new Section 5.29 at the end thereof: "5.29 Bank Accounts. Set forth on Schedule E is a true and ------------- correct list of all existing bank accounts of the Borrower and its domestic Subsidiar- 7 ies, including any checking, savings or other account at any bank or other financial institution, or any other account where money is or may be deposited or maintained with any Person, other than the Loan Disbursement Account." 2.8 Information. Section 6.1 of the Credit Agreement is hereby amended by deleting subsection (e) appearing therein and inserting the following new subsection (e) in lieu thereof: "(e) on (i) December 1, 2000, (ii) the first Business Day of every month thereafter, and (iii) at such other times as may be requested by the Agent, a budget of the Borrower and its Subsidiaries, together with a comparison of actual results with each such budget previously delivered, each such budget to be presented on a monthly basis through a date not earlier than the later of (y) December 31, 2001, or (z) a date twelve calendar months from the date that such budget is required to be delivered;" 2.9 Corporate Existence. Section 6.8 of the Credit Agreement is hereby amended by deleting the period appearing at the end thereof inserting the following text in lieu thereof: "; provided, that nothing in this Section 6.8 shall prohibit -------- the Borrower from discontinuing its manufacturing operations and converting to a Person primarily engaged in the licensing of its Proprietary Rights." 2.10 Funded Debt. Section 7.1 of the Credit Agreement is hereby amended by deleting clause (v) appearing therein and inserting the following new clause (v) in lieu thereof: "(v) To the extent incurred prior to October 27, 2000, any other Funded Debt not described in clauses (i) through (iv) above (the "Additional Funded Debt") which, when aggregated with the Funded Debt of Borrower under clauses (i), (ii), and (iii) above then outstanding, shall not exceed the principal sum of $225,000,000;" 2.11 Investments. Section 7.3 of the Credit Agreement is hereby amended by deleting clause (e) appearing therein and inserting the following new clause (e) in lieu thereof: "(e) Investments in new Subsidiaries, including new Foreign Subsidiaries, created after May 21, 1997 and prior to October 27, 2000, to the extent that such Investments are made prior to October 27, 2000." 8 2.12 Negative Pledge. Section 7.4 of the Credit Agreement is hereby amended by deleting clause (e) appearing therein and inserting the following new clause (e) in lieu thereof: "(e) To the extent created or assumed prior to October 27, 2000, Liens securing Debt incurred pursuant to Section 7.1(v);" 2.13 Consolidations, Mergers and Sales of Assets. Section 7.5 of the Credit Agreement is hereby amended by deleting said section in its entirety and inserting the following in lieu thereof: "7.5 Consolidations, Merger and Sales of Assets. ------------------------------------------ (a) The Borrower will not sell, convey, lease or otherwise transfer, or cause or permit to be sold, conveyed, leased or otherwise transferred, directly or indirectly, in whole or in part, any assets, other than (i) Inventory (including obsolete Inventory) in the ordinary course of business, (ii) Accounts supported by letters of credit discounted on a commercially reasonable basis, (iii) obsolete or worn out equipment, (iv) the North Reading Building, (v) the North American Manufacturing Operations, and (vi) other property, plant or equipment; provided that -------- no such sale, conveyance, lease or other transfer shall be permitted hereunder unless (aa) in the case of clauses (iii) through (vi), any such sale, conveyance, lease or transfer shall be for no less than the fair market value of such asset at the time of such sale, (bb) in the case of clauses (iii) through (vi), the purchase price for the assets sold, conveyed, leased or otherwise transferred in such transaction shall be paid to the Borrower solely in cash on the closing date of such transaction, (cc) in the case of clauses (iii) through (vi), the proceeds of such transaction shall be used to prepay the Revolving Loans and to permanently reduce the Commitments to the extent required by and in accordance with the terms of Section 3.5(c) hereof, (dd) in the case of clauses (iii) through (vi), no Default or Event of Default has occurred and is continuing or would result from such transaction (which requirement may be waived in writing by the Agent in its good faith discretion), and (ee) for any sale, conveyance, lease or transfer of the North Reading Building or the North American Manufacturing Operations, the Borrower shall provide a certificate of an officer of the Borrower certifying (I) the Borrower's compliance with the requirements of this Section 7.5, and (II) setting forth a detailed calculation of the Net Cash Proceeds of such transaction and of any prepayment of the Revolving Loans and reduction of the Total Commitments required pursuant to Section 3.5(c) or any other provision of this Agreement as a result thereof. 9 (b) The Borrower shall continue to maintain the operating integrity of its business and shall continue to operate only in the same general types of businesses as now conducted thereby and reasonable extensions thereof, and shall continue to preserve, renew and keep in full force and effect, its corporate existence and all material rights, privileges and franchises necessary or desirable in the normal conduct of its business; provided, that -------- nothing in this Section 7.5(b) shall prohibit the Borrower from discontinuing its manufacturing operations and converting to a Person primarily engaged in the licensing of its Proprietary Rights. (c) The Borrower will not, and will not permit any Subsidiary to, consolidate or merge with or into any other Person. (d) The Borrower will not, and will not permit any Subsidiary to, purchase or otherwise acquire all or substantially all of the assets of any Person or all or substantially all of the capital stock or other ownership interests of any Person." 2.14 Capital Expenditures. Section 7.6 of the Credit Agreement is hereby amended by inserting the following new text at the end thereof: "Notwithstanding the foregoing, the Borrower shall not make, or commit to make, Consolidated Capital Expenditures, from October 27, 2000 and until the Expiration Date, in excess of $500,000 in the aggregate." 2.15 Transactions with Affiliates. Section 7.8 of the Credit Agreement is hereby amended by deleting said section in its entirety and inserting the following in lieu thereof: "7.8 Transactions with Affiliates. The Borrower will not, and ---------------------------- will not permit any of its Subsidiaries to, directly or indirectly, pay any funds to or for the account of, make any Investment (whether by acquisition of stock or indebtedness, by loan, advance, transfer of property, guarantee or other agreement to pay, purchase or service, directly or indirectly, any Debt, or otherwise) in, lease, sell, transfer or otherwise dispose of any assets, tangible or intangible, to, or participate in, or effect any other transaction with, or render to or receive any service from, any Affiliate; provided, however, that the foregoing -------- ------- provisions of this Section 7.8 shall not prohibit, the Borrower or any Subsidiary from making sales to or purchases from any Affiliate and, in connection therewith, extending credit or making payments, or from making payments for services rendered by any Affiliate, or from effecting any other transactions with an Affiliate, if such sales or purchases are made or such services are rendered, or such other 10 transactions are effected, on terms and conditions at least as favorable and reasonable to the Borrower or such Subsidiary as the terms and conditions which would apply in a similar transaction on an arm's length basis with a Person not an Affiliate and will not have a material adverse effect on the Collateral taken as a whole or the Accounts and Inventory; provided further, that, notwithstanding the foregoing or any -------- ------- other provision of this Credit Agreement, from and after October 27, 2000, the Borrower will not, and will not permit any Subsidiary to, directly or indirectly, pay any fees to Apollo or a Controlled Account or any Affiliate of Apollo or of a Controlled Account, without the consent of the Agent. The foregoing restrictions shall not apply to reasonable fees paid to and indemnity provided on behalf of the Directors and officers of the Borrower or any of its Subsidiaries in the ordinary course of business and consistent with past practices." 2.16 Foreign Subsidiary Support. Section 7.9 of the Credit Agreement is hereby amended by deleting said section in its entirety and inserting the following in lieu thereof: "7.9 Restrictions on Foreign Subsidiary Support. Except for ------------------------------------------ open accounts existing as of October 27, 2000, the Borrower will not permit to exist any open account sales, transfers by the Borrower of goods of any kind, or any other financial support, to any Foreign Subsidiary, except the Borrower may, in the ordinary course of business and consistent with past practice, in amounts similar to those funded historically by the Borrower to such entities, fund (i) operating expenses of Calzado Deportivo de Reynosa, S.A. on a weekly basis, and (ii) operating expenses of Converse Japan, Inc. on a monthly basis." 2.17 Principal Amount of Revolving Loans. Section 7.12 of the Credit Agreement is hereby amended by deleting said section in its entirety and inserting the following in lieu thereof: "7.12 Principal Amount of Revolving Loans. The Borrower shall ----------------------------------- not, on any date on or after the first Amortization Date, have Obligations outstanding in excess of the Projected Commitment for the most recently preceding Amortization Date (or, if such date is an Amortization Date, for such date)." 2.18 No Acquisition of Real Property. Section 7.13 of the Credit Agreement is hereby amended by deleting said section in its entirety and inserting the following in lieu thereof: 11 "7.13 No Acquisition of Real Property. From and after October ------------------------------- 27, 2000, the Borrower shall not, and shall not permit any of its Subsidiaries to, directly or indirectly, purchase or acquire any ownership interest in real property other than the Owned Real Property." 2.19 No Additional Retail Stores. Section 7.14 of the Credit Agreement is hereby amended by deleting said section in its entirety and inserting the following in lieu thereof: "7.14 No Additional Retail Stores. The Borrower shall not, and --------------------------- shall not permit any of its Subsidiaries to, directly or indirectly, open any retail store after October 27, 2000." 2.20 Bank Accounts. Section 7.17 of the Credit Agreement is hereby amended by deleting the text "Schedule D" appearing therein and inserting the text "Schedule E" in lieu thereof. 2.21 No Additional Subsidiaries. Section 7.18 of the Credit Agreement is hereby amended by deleting said section in its entirety and inserting the following in lieu thereof: "7.18 No Additional Subsidiaries. From and after October 27, -------------------------- 2000, the Borrower will not, and shall not permit any of its Subsidiaries to, directly or indirectly, form or acquire any new Subsidiaries, including Foreign Subsidiaries." 2.22 Interest on Prime Loans. Section 8.2 of the Credit Agreement is hereby amended by deleting the text "one percent (1.00%)" appearing therein and inserting the text "one and one-half percent (1.50%)" in lieu thereof. 2.23 List of Lenders and Commitment Amounts. Annex I to the Credit Agreement is hereby deleted in its entirety and replaced with Annex I attached hereto. 2.24 Schedule E. Schedule E attached hereto is hereby attached to the Credit Agreement after Schedule D, and the list of schedules appearing in the Credit Agreement is hereby amended by inserting the following text at the end thereof: "Schedule E - Bank Accounts" Section 3. CONDITIONS PRECEDENT. This Amendment shall be effective -------------------- on the first date upon which all of the following conditions have been satisfied: 12 3.1 Amendment. Agent shall have received copies of this Amendment --------- duly executed by Borrower and such Lenders as are required for this Amendment to be effective in accordance with the terms of the Credit Agreement. 3.2 Forbearance Agreement. All other conditions precedent to the --------------------- effectiveness of the Forbearance Agreement shall have been satisfied. 3.3 Other. Agent shall have received such other documents, ----- certificates and assurances as it shall reasonably request. Section 4. REAFFIRMATION OF BORROWER. To induce the Agent and the ------------------------- Lenders to enter into this Agreement, the Borrower hereby represents to each of them as follows as of the date hereof, each of the representations and warranties contained in Section 8 of the Forbearance Agreement are true and correct as of the date hereof. Section 5. NO OTHER CHANGES. Except as herein amended or as otherwise ---------------- expressly provided in the Forbearance Agreement, the terms, provisions and conditions of the Credit Agreement and all other Credit Documents shall remain unchanged and shall continue in full force and effect. Section 6. COUNTERPARTS. This Amendment may be executed by the ------------ parties hereto in several counterparts, each of which shall be deemed an original and all of which shall constitute together one and the same document. Delivery of an executed counterpart of this Amendment by telecopy shall be effective as an original and shall constitute a representation that the original shall be delivered to the Agent. Section 7. GOVERNING LAW. THE VALIDITY, INTERPRETATION AND ------------- ENFORCEMENT OF THIS AMENDMENT SHALL BE GOVERNED BY THE LAWS OF THE STATE OF ILLINOIS WITHOUT GIVING EFFECT TO THE CONFLICT OF LAW PRINCIPLES THEREOF. Section 8. HEADINGS DESCRIPTIVE. The headings of the several sections -------------------- and subsections of this Amendment are inserted for convenience only and shall not in any way affect the meaning or construction of any provision of this Amendment. 13 IN WITNESS WHEREOF, the parties hereto have executed this Amendment on the day and year specified above. CONVERSE INC. By: /s/ James E. Lawlor Name: James E. Lawlor Title:Senior Vice President and CFO BT COMMERCIAL CORPORATION, as Agent By: /s/ William E. Howe Name: William E. Howe Title: Vice President LENDERS: BT COMMERCIAL CORPORATION By: /s/ William E. Howe Name: William E. Howe Title: Vice President GMAC COMMERCIAL CREDIT LLC By:________________________________ Name: Title: LA SALLE BANK N.A. By: /s/ Christopher G. Clifford Name: Christopher G. Clifford Title: GSVP BANK OF AMERICA, N.A. By: Gaye L. Stathis Name: Gaye L. Stathis Title: Vice President MADELEINE LLC By:________________________________ Name: Title: HELLER FINANCIAL, INC. By: /s/ Thomas Bukowski Name: Thomas Bukowski Title: Senior Vice President FINOVA CAPITAL CORPORATION By:________________________________ Name: Title: ANNEX I ------- LENDERS AND COMMITMENT AMOUNTS Name and Address of Lender Revolving Credit Commitment - -------------------------- --------------------------- SCHEDULE E BANK ACCOUNTS ------------- E-1 EX-10.47 4 0004.txt FOURTH SUPPLEMENT TO NOTE PURCHASE Exhibit 10.3 FOURTH SUPPLEMENT TO NOTE PURCHASE AGREEMENTS AND STANDSTILL AGREEMENT ------------------------ This FOURTH SUPPLEMENT TO NOTE PURCHASE AGREEMENTS AND STANDSTILL AGREEMENT (the "Fourth Supplemental Agreement") is made and dated as of October 27, 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, 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"), which Note Purchase Agreements have been amended and modified in a Supplement to Note Purchase Agreements dated as of November 23, 1999, a Second Supplement to Note Purchase Agreements dated as of May 16, 2000, and a Third Supplement to Note Purchase Agreements dated as of June 30, 2000 (the Note Purchase Agreements, as amended and modified by the Supplement, the Second Supplement and the Third Supplement collectively the "Note Purchase Agreements" or individually a "Note Purchase Agreement"); and WHEREAS, the Company is a party to a 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 amended and modified to date and as the same may hereafter be further amended and modified from time to time (the "Revolving Credit Agreement"); and WHEREAS, the Purchasers, BT Commercial Corporation as collateral agent (the "Collateral Agent"), and the Bank Agent are parties to a Collateral Agency and Intercreditor Agreement dated as of September 16, 1998 (the "Intercreditor Agreement"); and 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 amended and modified to date and as the same may hereafter be further amended and modified from time to time (the "Convertible Note Indenture"); and WHEREAS, the Company has been and continues to be in default under the Note Purchase Agreements, and by notice dated as of August 21, 2000 (the "August Notice of Actionable Default") the Purchasers have given notice to the Collateral Agent under Sections 5.1 and 5.3 of the Intercreditor Agreement preliminary to the exercise by the Collateral Agent of remedies under the Note Purchase Agreement and the Ancillary Documents; and WHEREAS, the Company and the Purchasers desire to further supplement the Note Purchase Agreements and desire to agree to forbearance with respect to the exercise of remedies under the Note Purchase Agreements and the Ancillary Documents, as more fully set forth herein. NOW, THEREFORE, in consideration of the premises and the mutual agreements herein contained, and for other good and valuable consideration, the adequacy and sufficiency of which are 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 used in this Fourth Supplemental Agreement shall have the respective meanings assigned to such terms in the 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 original 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 original principal amount of $10,357,328 and (ii) the party in interest as "Purchaser" under the related Supplemented Note Purchase Agreement, and in such 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 original principal amount of $4,045,408 and that Series B Secured Note in the original 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 original principal amount of $6,311,920 and that Series B Secured Note in the original principal amount of $2,306,700 and (ii) the party in interest as "Purchaser" under the related Supplemented Note Purchase Agreement, and in 2 such capacity DDJ Capital is authorized to extend consents, waivers and amendments with respect to its Supplemented Note Purchase Agreement as set forth herein. The Purchasers further represent and warrant that, as of the date of this Fourth Supplemental Agreement, Libra, Foothill, DDJ Canadian, and DDJ Capital collectively own 100% of the principal outstanding in respect of the Secured Notes, and therefore constitute all of the Purchasers, as well as the "Required Holders" as such term is defined in the Intercreditor Agreement. SECTION 3. ACKNOWLEDGMENT OF COMPANY. The Company acknowledges, as of ------------------------- the date of this Fourth Supplemental Agreement, the following Defaults or Events of Default under the Note Purchase Agreements: (a) Failure to pay the principal balance of the Series A Secured Notes and Series B Secured Notes on the Initial Maturity Date, which failure is continuing (the "Principal Default"). (b) Failure to pay interest due and payable to date with respect to the Series A Secured Notes and Series B Notes, which failure is continuing (the "Interest Default"). (c) Failure to maintain the minimum EBITDA as required pursuant to Section 9.7 of the Note Purchase Agreements, which failure is continuing (the "EBITDA Default"), failure to maintain the required reserve amount of $5,750,000 pursuant to Section 9.15 of the Note Purchase Agreements, which failure is continuing (the "Reserve Default"), and failure to furnish financial information, reports and notices pursuant to subsections (a)(i), (a)(ii), (a)(iii) and (c) of Section 8.1 of the Note Purchase Agreements, which failure is continuing (the "Financial Information Defaults"). (d) Default under the Credit Agreement, which default is continuing (the "Credit Agreement Cross Default"). (e) Default under the Convertible Note Indenture, which default is continuing (the "Indenture Cross Default"). The Credit Agreement Cross Default and the Indenture Cross Default, together with such additional defaults as may have occurred or as may hereafter occur under the Credit Agreement or the Convertible Note Indenture, and together with such Defaults or Events of Default as may have occurred or as may hereafter occur under Section 10.1(f) of the Note Purchase Agreements, are hereinafter sometimes collectively referred to as the "Cross Defaults". The Cross Defaults and the Principal Default are hereinafter sometimes collectively referred to as the "Continuing Defaults". The Principal Default and the Interest Default constitute "Actionable Payment Defaults" as such term is defined under the Intercreditor Agreement. The EBITDA Default, the Reserve Default, the 3 Financial Information Defaults and the Cross Defaults constitute "Actionable Other Defaults" as such term is defined under the Intercreditor Agreement. SECTION 4. CONDITIONS. The effectiveness of the amendments and ---------- modification, waivers, and forbearance set forth herein is subject to satisfaction, on the date of this Fourth Supplemental Agreement, of the following conditions: (a) The Company shall pay the Purchasers all interest accrued to date and to accrue to and including October 31, 2000 under the Secured Notes, calculated at the pre-default and pre-maturity rate of interest notwithstanding the Defaults and Events of Default existing as of and continuing after the date of this Fourth Supplemental Agreement. (b) The Company shall pay the Purchasers a supplement fee in the aggregate sum of $71,607, to be distributed among the Purchasers such that the amount remitted to each such Purchaser as its share of the supplement fee shall be determined by multiplying $71,607 by the percentage calculated by dividing the principal amount of the Secured Notes held by such Purchaser as of the date hereof by the aggregate principal amount of the Secured Notes held by all the Purchasers as of the date hereof. SECTION 5. AMENDMENT AND WAIVER. The Purchasers and the Company -------------------- agree to amend and modify and waive the terms and conditions of the Note Purchase Agreements, as of the date of this Fourth Supplemental Agreement, as follows: (a) From and after the date hereof and upon satisfaction of the conditions set forth in Section 4 of this Fourth Supplemental Agreement, (i) the EBITDA Default is hereby waived by the Purchasers, and compliance with Section 9.7 of the Note Purchase Agreements is waived by the Purchasers until (but only until) the Forbearance Termination Date, (ii) the Reserve Default is hereby waived by the Purchasers, and the provisions of Section 9.15 of the Note Purchase Agreements are deleted in their entirety, and (iii) the Financial Information Defaults are hereby waived by the Purchasers, and compliance with Section 8.1(a)(iii) of the Note Purchase Agreements with respect to any statement concerning the Continuing Defaults and the EBITDA Default is hereby waived by the Purchasers until (but only until) the Forbearance Termination Date. (b) From and after the date hereof and upon satisfaction of the conditions set forth in Section 4 of this Fourth Supplemental Agreement, the Interest Defaults are hereby waived by the Purchasers, and until the Forbearance Termination Date (as determined pursuant to Section 6 of this Fourth Supplemental Agreement) interest accruing on and after November 1, 2000 under the Secured Notes shall be calculated at the pre-maturity and pre-default rate of interest notwithstanding the Defaults and Events of Default existing as of and continuing after the date of this Fourth Supplemental Agreement, and such interest shall be paid, in arrears, monthly instead of quarterly, on the last day of each calendar month or, if sooner, on the Forbearance Termination Date. 4 (c) The provisions of Section 8.8 of the Note Purchase Agreements are deleted in their entirety and hereby replaced with the following provisions: The Company (i) except as otherwise permitted pursuant to Section 9.5, shall maintain its corporate existence, shall maintain in full force and effect all material licenses, bonds, franchise, leases, qualifications to do business, trademarks, patents, contracts and other rights necessary for the conduct of the businesses from time to time operated by the Company, (ii) shall continue in, and limit its operations to, the same general lines of business as that presently conducted by it and reasonable extensions thereof, except that the Company may discontinue its North American manufacturing operations in connection with the conversion to a primary business focus on licensing and brand management, and (iii) shall comply with all applicable laws and regulations of any federal, state or local governmental authority, except in each case when noncompliance with the foregoing would not, in the aggregate, have a Material Adverse Effect. (d) The provisions of Section 9.5 of the Note Purchase Agreements are hereby amended by deleting the parenthetical phrase at the end of subsection (b) and replacing the same with the following parenthetical phrase: "(so long as the Company shall continue to be operated in the same general types of licensing and branding businesses as now conducted and reasonable extensions thereof, in accordance with Section 8.8)". SECTION 6. FORBEARANCE. Subject to the conditions set forth in ----------- Section 4 hereof, from and after the date hereof and until the Forbearance Termination Date, the Purchasers agree as follows: (a) to forbear from exercising remedies under or in connection with the Note Purchase Agreements, (b) to forbear from exercising remedies, or rights preliminary or prerequisite to remedies, under or in connection with the Intercreditor Agreement and the Ancillary Documents, including but not limited to any right to (i) give any "Notice of Actionable Default" (as such term is defined under the Intercreditor Agreement), (ii) give or direct the giving of notices to account debtors, or (iii) request or direct any exercise of remedies with respect to the Collateral under the Intercreditor Agreement by reason of any Actionable Payment Default or Actionable Other Default, and (c) to advise the Collateral Agent to take no action under or in connection with the Intercreditor Agreement or the Ancillary Documents by reason of any Actionable Payment Default or Actionable Other Default. The "Forbearance Termination Date" shall be the earliest to occur of: (i) January 31, 2001; (ii) an Event of Default other than the Continuing Defaults under the Note Purchase Agreements, as amended and modified by this Fourth Supplemental Agreement; (iii) declaration of acceleration, 5 by the lenders under the Credit Agreement or the Bank Agent (as such term is defined in the Intercreditor Agreement), of all of the obligations owed to the lenders under the Credit Agreement by reason of an event of default thereunder; (iv) refusal by the lenders under the Credit Agreement or the Bank Agent to make loans and advances requested by the Company for more than five (5) consecutive Business Days as a result of an event of default under the Credit Agreement; and (v) or other exercise by such lenders or the Bank Agent of any material rights and remedies with respect to foreclosure or realization on the Collateral. From and after the Forbearance Termination Date, however, the Purchasers shall be free to proceed to enforce any or all of rights and remedies that the Purchasers may have under or in respect of the Note Purchase Agreements, as amended and modified by the Fourth Supplemental Agreement, or under or in respect of the Ancillary Documents or the Intercreditor Agreement. SECTION 7. 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 Fourth Supplemental Agreement 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 the Purchasers in connection with the preservation of or enforcement of their rights under the Note Purchase Agreements or in respect of Company's other obligations to the Purchasers; and in connection with such agreements the Company shall remit to the Purchasers on the date hereof payment of an outstanding invoice for legal fees and disbursements dated October 17, 2000 in the amount of $8,923.94 and an advance (subject to refund to the Company to the extent not hereafter applied) of $25,000 in respect of such out-of-pocket costs and expenses hereafter incurred. The Company agrees to pay future invoices for legal fees and disbursements within ten (10) days of receipt by the Company. SECTION 8. OBLIGATIONS IN FULL FORCE AND EFFECT; RECITALS. Except as ---------------------------------------------- herein amended and modified or otherwise herein expressly provided (by consent or waiver), the Note Purchase Agreements, as supplemented by this Fourth Supplemental Agreement, and the Ancillary Documents shall remain in full force and effect. All of the recitals to this Fourth 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 Fourth Supplemental Agreement as if fully set out herein. SECTION 9. COUNTERPARTS. This Fourth 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. 6 IN WITNESS WHEREOF, the parties hereto have executed this Fourth Supplemental Agreement as of the day and year specified above. COMPANY: PURCHASERS: CONVERSE INC. LIBRA INVESTMENTS, INC. By:/s/ James E. Lawlor By:/s/ Jeffrey D. Benjamin ----------------------- Name: Name:________________________ Title: Senior Vice President and CFO Title:_______________________ ----------------------------- FOOTHHILL PARTNERS III, L.P. By:_____________________________ Name:________________________ Title:_______________________ DDJ CANADIAN HIGH YIELD FUND By: DDJ Capital Management, LLC, its attorney-in-fact By: /s/Judy K. Mencher ---------------------------- Name:________________________ Title:_______________________ B III CAPITAL PARTNERS, L.P. By: DDJ Capital III, LLC, its General Partner By: DDJ Capital Management, LLC, Manager By:/s/ Judy K. Mencher --------------- Name:________________________ Title:_______________________ 7 EX-27 5 0005.txt FINANCIAL DATA SCHEDULE
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM CONVERSE INC. FORM 10-Q AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000 9-MOS DEC-30-2000 JAN-02-2000 SEP-30-2000 2,047 0 35,934 2,179 60,310 100,309 37,303 22,015 126,719 231,232 74,265 0 0 17,536 (146,634) 126,719 162,471 174,729 127,983 170,622 2,105 0 16,041 (14,039) 2,036 (16,075) 0 0 0 (16,075) 0.92 0.92
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