-----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, Q4daljrrkMapMh3WLAmtvZ/FMkIf/RNAt8GJfAv6vfcnxU6eNoW2eAJE+crjzN9P iBnLu8sHoZaOwZKghyRt6A== 0000927016-96-001666.txt : 19961113 0000927016-96-001666.hdr.sgml : 19961113 ACCESSION NUMBER: 0000927016-96-001666 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 19960928 FILED AS OF DATE: 19961112 SROS: NYSE FILER: COMPANY DATA: COMPANY CONFORMED NAME: CONVERSE INC CENTRAL INDEX KEY: 0000716934 STANDARD INDUSTRIAL CLASSIFICATION: RUBBER & PLASTICS FOOTWEAR [3021] IRS NUMBER: 041419731 STATE OF INCORPORATION: MA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 001-13430 FILM NUMBER: 96659364 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 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 28, 1996 COMMISSION FILE NUMBER 1-13430 CONVERSE INC. (Exact name of registrant as specified in its charter) DELAWARE 04-1419731 (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: (508) 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 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 28, 1996, 16,772,156 SHARES OF COMMON STOCK WERE OUTSTANDING. TABLE OF CONTENTS
PAGE PART I: FINANCIAL INFORMATION Item 1. Condensed Consolidated Financial Statements A. Condensed Consolidated Balance Sheets 1 B. Condensed Consolidated Statements of Operations 2 C. Condensed Consolidated Statements of Cash Flows 3 D. Notes to Condensed Consolidated Financial Statements 4 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 9 PART II: OTHER INFORMATION Item 1. Legal Proceedings 14 Item 2. Changes in Securities 14 Item 3. Defaults Upon Senior Securities 14 Item 4. Submission of Matters to a Vote of Security Holders 15 Item 5. Other Information 15 Item 6. Exhibits and Reports on Form 8-K 15 SIGNATURE 15
ii PART I - FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS CONVERSE INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS (DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) (UNAUDITED)
DECEMBER 30, SEPTEMBER 28, 1995 1996 ------------ ------------- Assets Current assets: Cash and cash equivalents.......... $ 2,738 $ 4,051 Restricted cash................ 443 903 Receivables, less allowances of $2,237 and $1,720 respectively.... 61,688 81,274 Inventories (Note 3)............... 81,903 82,899 Refundable income taxes............ 11,377 -- Prepaid expenses and other current assets............................ 21,059 25,245 -------- -------- Total current assets............ 179,208 194,372 -------- -------- Asset held for sale (Note 7)............ 3,066 -- Net property, plant and equipment....... 15,521 17,095 Other assets............................ 26,712 23,634 -------- -------- $224,507 $235,101 ======== ======== Liabilities and Stockholders' Equity (Deficiency) Current liabilities: Short-term debt (Note 4)........... 13,906 20,173 Current maturities of long-term debt........................... 6,324 6,392 Accounts payable................... 34,208 42,674 Accrued expenses................... 33,295 28,324 Income taxes payable............... 1,795 2,771 -------- -------- Total current liabilities....... 89,528 100,334 Long-term debt, less current maturities (Note 4)............................... 112,824 123,708 Current assets in excess of 34,454 32,896 reorganization value................... Deferred postretirement benefits other than pensions.......................... 10,386 10,269 Stockholders' equity (deficiency): Common stock, $1.00 stated value, 50,000,000 shares authorized, shares issued and outstanding; 1995 - 16,692,156; 1996 - 16,772,156................. 16,692 16,772 Preferred stock, no par value, authorized 10,000,000 shares, none issued and outstanding....... -- -- Additional paid in capital......... 3,528 3,755 Retained earnings (deficit)........ (41,830) (51,843) Foreign currency translation adjustment........................ (1,075) (790) -------- -------- Total stockholders' equity (deficiency)................... (22,685) (32,106) -------- -------- $224,507 $235,101 ======== ========
See accompanying notes to condensed consolidated financial statements. CONVERSE INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) (UNAUDITED)
THREE MONTHS ENDED NINE MONTHS ENDED ------------------------------------------------- ------------------ SEPT. 30, 1995 SEPT. 28, 1996 SEPT. 30, 1995 SEPT. 28, 1996 --------------- --------------- --------------- ------------------ Net sales............................... $110,121 $113,318 $330,641 $279,776 Cost of sales........................... 80,783 83,388 225,820 205,342 -------- -------- -------- -------- Gross profit............................ 29,338 29,930 104,821 74,434 Selling, general and administrative expenses............................... 36,026 33,153 110,586 88,588 Royalty income.......................... 4,489 6,301 12,240 17,546 Restructuring expense (credit) (Note 7). 0 0 1,000 (2,209) -------- -------- -------- -------- Earnings (loss) from operations......... (2,199) 3,078 5,475 5,601 Loss on investment in unconsolidated subsidiary (Note 5).................... 0 0 41,599 515 Interest expense........................ 3,525 4,827 9,518 12,921 Other (income) expense, net............. 962 229 (555) 1,726 -------- -------- -------- -------- Earnings (loss) before income tax....... (6,686) (1,978) (45,087) (9,561) Income tax expense (benefit)............ (103) 1,033 (14,660) 452 -------- -------- -------- -------- Net earnings (loss)..................... $( 6,583) $ (3,011) $(30,427) $(10,013) ======== ======== ======== ======== Net earnings (loss) per share........... $(0.39) $(0.18) $(1.82) $(0.60) ======== ======== ======== ======== Weighted average number of common shares (Note 2)........................ 16,692 16,707 16,692 16,697 ======== ======== ======== ========
See accompanying notes to condensed consolidated financial statements. 2 CONVERSE INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (DOLLARS IN THOUSANDS) (UNAUDITED)
NINE MONTHS ENDED ----------------- SEPTEMBER 30, 1995 SEPTEMBER 28, 1996 ------------------ ------------------ Cash flows from operating activities: Net earnings (loss)................. $(30,427) $(10,013) Adjustments to reconcile net earnings (loss) to net cash provided by (required for) operating activities: Loss on investment in unconsolidated subsidiary....... 41,599 515 Provision for (reversal of) restructuring actions........... 1,000 (2,209) Depreciation of property, plant and equipment................... 2,346 2,431 Amortization of intangible assets 263 342 Amortization of current assets in excess of reorganization value........................... (1,558) (1,558) Deferred income taxes............ (6,710) (3,198) Changes in assets and liabilities: Receivables...................... (16,715) (19,586) Inventories...................... (1,521) (996) Refundable income taxes.......... (12,934) 11,377 Prepaid expenses and other current assets.............................. (3,381) (1,310) Accounts payable and accrued expenses (8,866) 2,974 Income taxes payable............. 794 976 Other long-term assets and liabilities..................... 1,067 2,765 -------- -------- Net cash required for operating activities............................. (35,043) (17,490) -------- -------- Cash flows from investing activities: Advances to unconsolidated subsidiary....................... (10,822) -- Exercise of stock options......... -- 307 Proceeds from disposal of assets.. -- 5,101 Additions to property, plant and equipment......................... (5,172) (3,823) -------- -------- Net cash (used) provided by investing activities............................. (15,994) 1,585 -------- -------- Cash flows from financing activities: Net proceeds from debt.............. 50,212 17,218 -------- -------- Net cash provided by financing activities............................. 50,212 17,218 Net (decrease) increase in cash and cash equivalents....................... (825) 1,313 Cash and cash equivalents at beginning of period.............................. 4,992 2,738 -------- -------- Cash and cash equivalents at end of period................................. $ 4,167 $ 4,051 ======== ========
See accompanying notes to condensed consolidated financial statements. 3 CONVERSE INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) 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 hereto should be read in conjunction with the Company's annual report on Form 10-K for the year ended December 30, 1995. The Company's consolidated results of operations for the three months ended September 28, 1996 are not necessarily indicative of the results to be expected for any other interim period or the entire fiscal year. 2. NET EARNINGS (LOSS) PER COMMON SHARE Net earnings (loss) per common share is computed based on the weighted average number of common shares outstanding for the applicable period. 3. INVENTORIES Inventories are summarized as follows:
DECEMBER 30, SEPTEMBER 28, 1995 1996 ------- ------- Retail merchandise............. $ 5,766 $ 7,085 Finished products.............. 67,835 68,017 Work in process................ 4,226 3,956 Raw materials.................. 4,076 3,841 ------- ------- $81,903 $82,899 ======= =======
4 4. DEBT As more fully described in Note 9 to the consolidated financial statements for the year ended December 30, 1995 included within the Company's annual report on Form 10-K, the Company maintains a $175,000 secured credit facility (comprising an "A Facility" for $135,000 and a "B Facility" for $40,000 (which amount has been permanently reduced to $31,966 at September 28, 1996)) (the "Credit Facility") with a group of participating lenders (the "Banks"). The amount of credit available to the Company under the A Facility at any time is determined by reference to the Company's borrowing base set forth in the Credit Facility, consisting primarily of domestic accounts receivable and inventory. In addition, in conjunction with certain amendments to the Credit Facility in November 1995 and February 1996, the Company has the ability to borrow an additional $25,000 under the A Facility as a result of Apollo Investment Fund, L.P. ("Apollo"), which, together with its affiliates, is the beneficial owner of approximately 67.3% of the Company's outstanding common stock, having caused a standby letter of credit (the "Collateral Letter of Credit") to be provided to the Banks in the amount of $25,000. This additional $25,000 of availability to the Company under the A Facility will expire on March 1, 1997. As of September 28, 1996, the maximum available borrowing base under the A Facility, inclusive of borrowings made available as a result of the Collateral Letter of Credit, was approximately $105,311. Utilization under the A Facility as of September 28, 1996, inclusive of amounts supported by the Collateral Letter of Credit, consisted of revolving loans of $71,858, bankers acceptances of $16,632 and outstanding letters of credit of $6,739. As a result, $10,082 of the maximum available borrowing base remained unutilized as of September 28, 1996. As of September 28, 1996, the B Facility had loans outstanding of $31,966, and, pursuant to the terms of the Credit Facility, the Company may not increase its borrowings under the B Facility. At September 28, 1996, $6,392 of the outstanding Credit Facility debt has been classified as short-term in accordance with the repayment terms of the Credit Facility. At September 28, 1996, revolving loans outstanding under the A Facility and loans outstanding under the B Facility bore interest at 8.18% and 10.48%, respectively, based upon (i) the weighted average of the prime and Adjusted LIBOR rates and (ii) the Adjusted LIBOR rate as defined in the Credit Facility, respectively. Obligations outstanding under the Credit Facility are secured by a first priority lien on substantially all of the Company's U. S. assets. In addition, the Credit Facility contains certain financial and other covenants. The Company was in compliance with all such covenants at September 28, 1996. 5 Subsidiaries of the Company maintain asset based financing arrangements in certain European countries with various lenders. In general, these financing arrangements allow the subsidiaries to borrow against varying percentages of eligible customer receivable balances based on pre-established credit lines, along with varying percentages of inventory, as defined, at varying interest rates. As of September 28, 1996, total short-term borrowings outstanding under these financing arrangements totaled $20,173. The obligations are secured by a first priority lien on the respective European assets being financed. In addition, Converse Inc. has provided guarantees of these borrowings outstanding in certain of the European countries. In conjunction with the Company's acquisition of 100% of the outstanding common stock of Apex One Inc. ("Apex") (see Note 5), Converse issued promissory notes in the face amount of $11,000, discounted at a rate of 12% to $9,644. The notes bear interest at the rate of 8% per annum for the first three years and increase to 10% and 12% in 1998 and 1999, respectively. 5. LOSS ON INVESTMENT IN UNCONSOLIDATED SUBSIDIARY As more fully described in Note 3 to the consolidated financial statements for the year ended December 30, 1995 included within the Company's annual report on Form 10-K, on August 11, 1995 the Company ceased funding the operations of its unconsolidated subsidiary, Apex. At December 30, 1995, an accrual of $10,225 remained, which represented the Company's estimates of its liabilities relating to Apex. At September 28, 1996, the total accrual remaining was $8,072, with the $2,153 decrease primarily relating to payments of contractual obligations and professional fees made during the first nine months of 1996. During 1995 the Company decided to cease operations and funding of Apex. During the nine months ended September 28, 1996 the Company incurred an additional $0.5 million in charges resulting primarily from credits issued to settle claims of discrepancies on shipments of inventory. The Company initially recorded a loss on its investment in Apex during the nine months ended September 30, 1995 of $41.6 million. 6 6. RESTRUCTURING As more fully described in Note 4 to the consolidated financial statements for the year ended December 30, 1995 included within the Company's annual report on Form 10-K, during 1995 the Company recorded restructuring charges relating primarily to initiatives aimed at reducing future operating costs. The following table presents the restructuring reserves remaining at September 28, 1996:
DECEMBER 30, 1995 INCREASE/ SEPTEMBER 28, 1996 ----------------- CHARGES/ (DECREASE) ------------------ BALANCE WRITE-OFFS RESERVES BALANCE ------- ---------- ----------- ------- Contract termination costs........ $5,735 $2,639 $(1,000) $2,096 Employee severance and related costs............................ 1,687 745 1,000 1,942 Lease termination costs........... 1,453 745 0 708 ------ ------ ------- ------ $8,875 $4,129 $ 0 $4,746 ====== ====== ======= ======
During the nine months ended September 28, 1996, $4,129 of charges were made to the restructuring reserve primarily relating to contract termination costs. In addition, certain contracts were terminated on terms more advantageous than originally anticipated, resulting in a reversal of $1,000 of restructuring accruals. Further, while implementing its Fourth Quarter, 1995 restructuring plans, the Company executed additional severance actions resulting in a $1,000 restructuring charge. The remaining liabilities are expected to be paid or settled during 1996. 7. ASSET HELD FOR SALE The Company recorded restructuring charges during 1995 which included a charge for the writedown of certain assets which the Company plans to dispose of. One such asset, a distribution center located in Chester, S.C., was sold in May, 1996. The sale of this asset resulted in proceeds in excess of the Company's estimates, and as a result a gain of $2,200 was recorded as an offset to restructuring expense in the Second Quarter, 1996. 8. COMMITMENTS AND CONTINGENCIES As a result of the Company's decision to cease funding of Apex and Apex's subsequent filing of a voluntary petition for Chapter 11 bankruptcy protection, various lawsuits have been filed by Apex creditors since the Third Quarter of 1995 alleging that the Company is liable for the debts of Apex. Claims to date in connection with these lawsuits total approximately $6,500. The Company believes that it has valid defenses to the claims made and intends to contest them vigorously. On June 28, 1996 a proposed plan of orderly liquidation (the "Plan") was filed in the Apex Chapter 11 bankruptcy proceeding. The Plan includes a proposed settlement between the Company and the Apex One, Inc. Official Committee of Unsecured Creditors (the "Proposed Settlement"). The Proposed Settlement, which is subject to 7 approval of the unsecured creditors of Apex and the Bankruptcy Court, contemplates a $4,000 payment by Converse to the Apex estate and the relinquishment of the Company's claims against the Apex estate. In return, Converse would be granted a release of all claims held by the Apex estate and individual creditors of Apex. In addition, pursuant to the Proposed Settlement the Court would grant an injunction against any Apex Creditors from commencing or continuing any lawsuit against the Company or its agents relating in any way to Apex. As a result of significant operational and financial difficulties discovered subsequent to the acquisition of Apex, the Company investigated potential breaches of representations and warranties by Apex and its former owners. In conjunction with this investigation, in November 1995 and May 1996 the Company paid into escrow, as opposed to paying the former owners directly, the first two semi-annual interest payments aggregating $903 pertaining to the subordinated notes issued in conjunction with the Apex purchase price. As a result of this action, certain of the former owners filed a lawsuit against the Company seeking a declaratory judgment that they are entitled to payment of this interest and the related notes. The Company believes it has valid defenses against this lawsuit. In March 1996, the Company filed counter claims against the former owners based upon the results of the investigation. On May 17, 1996, the Company filed suit against several of the sellers of Apex seeking damages for federal securities law violations and other claims in connection with the acquisition of Apex. On the same day certain sellers of Apex filed suit against the Company and several of its officers, directors and stockholders seeking damages for federal securities law violations and certain other claims. The Company believes that it has valid defenses to the claims made and intends to contest them vigorously. The Company believes the ultimate outcome of the above proceedings will not have a material adverse effect on its financial position or results of operations. 9. STOCK OPTION AMENDMENT At its 1996 Annual Meeting of Stockholders the Company's stockholders approved certain amendments to the Converse Inc. 1994 Stock Option Plan (the "1994 Plan"). The amendments: (i) increased the maximum number of shares with respect to which stock options may be granted to any individual during any calendar year from 150,000 to 500,000; (ii) increased the maximum number of shares with respect to which stock options may be granted to any individual during the term of the 1994 Plan from 300,000 to 750,000; (iii) increased from 1,600,000 to 2,300,000 the number of shares of the Company's common stock authorized for issuance under the 1994 Plan; and (iv) authorized the granting of stock options and issuance of shares to consultants of the Company. 8 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS COMPARISON OF THREE MONTHS ENDED SEPTEMBER 28, 1996 TO SEPTEMBER 30, 1995 The following table sets forth certain items relating to the Company's operating results as a percentage of net sales for the three months ended September 28, 1996 (the "Third Quarter 1996") and the three months ended September 30, 1995 (the "Third Quarter 1995").
Three Months Ended -------------------------------------------------------- SEPTEMBER 30, 1995 % SEPTEMBER 28, 1996 % ------------------- ------ ------------------- ------ Net sales............................... $110.1 100.0 $113.3 100.0 Gross profit............................ 29.3 26.6 29.9 26.4 Selling, general and administrative 36.0 32.7 33.2 29.3 expenses............................... Earnings (loss) from operations......... (2.2) (2.0) 3.1 2.7 Net earnings (loss)..................... (6.6) (6.0) (3.0) (2.6)
NET SALES Net sales for the Third Quarter 1996 increased 2.9% to $113.3 million from $110.1 million for the Third Quarter 1995. The $3.2 million improvement in net sales resulted from a 28.4% increase in the Company's children's category sales and a 14.3% increase in the Company's basketball category, partially offset by an 17.5% decrease in the Company's athleisure sales and a 9.2% decrease in cross training sales. Unit sales of footwear increased 6.8% over this period. Net sales in the United States increased to $62.9 million from $57.3 million, an improvement of $5.6 million, or 9.8%. International sales decreased to $50.4 million from $52.8 million, a $2.4 million, or 4.5%, reduction. Based on geographic location, net sales in the Pacific region increased 51.3% over the prior year period, net sales in Latin America decreased 57.0%, net sales in Europe, Middle East and Africa decreased 5.3% and net sales in Canada declined 34.9%. Net sales globally were negatively impacted in 1996 by increased competition in the athleisure market. GROSS PROFIT Gross profit for the Third Quarter 1996 increased 2.0% to $29.9 million from $29.3 million for the Third Quarter 1995. The Company's gross profit as a percentage of net sales decreased to 26.4% for the Third Quarter 1996 as compared to 26.6% for the prior year. Volume increases and decreases in product costs accounted for the gross profit increase, partially offset by price reductions. Gross profit percentage was affected by: (i) poor retail sell-through of athleisure product, making price reductions necessary, 9 and (ii) unfavorable changes in inventory valuation; partially offset by reductions in global distribution expenses and improved inventory purchasing variances. SELLING, GENERAL AND ADMINISTRATIVE EXPENSES Selling, general and administrative expenses for the Third Quarter 1996 decreased 7.8% to $33.2 million from $36.0 million for the Third Quarter 1995. As a percentage of net sales, such expenses decreased to 29.3% for the Third Quarter 1996 from 32.7% for the prior year period. The $2.8 million decrease in selling, general and administrative expenses was a direct result of the Company's initiative announced during 1995 to reduce operating costs. This expense reduction consisted of decreases in sports marketing expenditures, North American selling expenses, research and development costs, and international operating expenses and an overall reduction in administrative overhead partially offset by an increase in expenses related to the Company's retail outlet stores to support additional stores and United States advertising costs. ROYALTY INCOME Royalty income for the Third Quarter 1996 increased 40.0% to $6.3 million from $4.5 million for the Third Quarter 1995. As a percentage of net sales royalty income increased to 5.6% for the Third Quarter from 4.1% for the Third Quarter 1995. The $1.8 million increase was primarily attributable to a $1.4 million improvement in royalty income in the Pacific region mainly attributable to increased sales of licensed apparel in Japan. EARNINGS (LOSS) FROM OPERATIONS The Company recorded income from operations for the Third Quarter 1996 of $3.1 million, compared to a loss from operations of $2.2 million for the Third Quarter 1995 primarily as a result of the factors described above. INTEREST EXPENSE Interest expense for the Third Quarter 1996 increased 37.1% to $4.8 million from $3.5 million for the Third Quarter 1995. This increase is due to (i) increased borrowings which reflect additional working capital requirements; (ii) increased financing fees related to the Credit Facility; and (iii) higher average interest rates on borrowings under the B Facility. NET EARNINGS (LOSS) The Company recorded a net loss for the Third Quarter 1996 of $3.0 million compared to a net loss of $6.6 million for the Third Quarter 1995 primarily as a result of the factors discussed above. 10 COMPARISON OF NINE MONTHS ENDED SEPTEMBER 28, 1996 TO SEPTEMBER 30, 1995 The following table sets forth certain items relating to the Company's operating results as a percentage of net sales for the nine months ended September 28, 1996 and the nine months ended September 30, 1995.
Nine months Ended -------------------------------------------------------- SEPTEMBER 30, 1995 % SEPTEMBER 28, 1996 % ------------------- ------ ------------------- ------ Net sales............................... $330.6 100.0 $279.8 100.0 Gross profit............................ 104.8 31.7 74.4 26.6 Selling, general and administrative 110.6 33.5 88.6 31.7 expenses............................... Earnings from operations............... 5.5 1.7 5.6 2.0 Net earnings (loss)..................... (30.4) (9.2) (10.0) (3.6)
NET SALES Net sales for the nine months ended September 28, 1996 decreased 15.4% to $279.8 million from $330.6 million for the nine months ended September 30, 1995. The $50.8 million reduction in net sales was attributable to a 28.9% decrease in the Company's athleisure category, a 14.5% reduction in its basketball category and a 24.4% decrease in its cross training sales, as well as the impact of the Company's decision to reduce its product offerings during 1996. These decreases were partially offset by an increase of 19.0% in the Company's children's category. Volume decreases accounted for the majority of the total net sales reduction over the prior year period as unit sales of footwear decreased 11.6% over this period. Net sales in the United States decreased to $154.0 million from $176.7 million, a reduction of $22.7 million or 12.8%. International sales decreased to $125.8 million from $153.9 million, a $28.1 million or 18.3% reduction. Based on geographic location, net sales in Europe, Middle East and Africa decreased 13.8% from the prior year period, Canada sales decreased 49.8% and sales in Latin America decreased 51.2%. Net sales globally were negatively impacted by increased competition in the athleisure market as well as lessened consumer acceptance of the Company's spring 1996 basketball product line. 11 GROSS PROFIT Gross profit for the nine months ended September 28, 1996 decreased 29.0% to $74.4 million from $104.8 million for the nine months ended September 30, 1995. The Company's gross profit as a percentage of net sales decreased to 26.6% for the nine months ended September 28, 1996 as compared to 31.7% for the prior year. Volume reductions accounted for the majority of the gross profit decrease with the remaining decrease due to increases in other product costs and price reductions. Gross profit percentage was affected by: (i) poor retail sell-through of spring 1996 basketball and athleisure product, making price reductions necessary; (ii) unfavorable inventory purchasing variances; (iii) reduced manufacturing utilization and efficiencies; and (iv) unfavorable changes in inventory valuation amounts, partially offset by reductions in global distribution expenses. SELLING, GENERAL AND ADMINISTRATIVE EXPENSES Selling, general and administrative expenses for the nine months ended September 28, 1996 decreased 19.9% to $88.6 million from $110.6 million for the nine months ended September 30, 1995. As a percentage of net sales, such expenses decreased to 31.7% for the nine months ended September 28, 1996 from 33.5% for the prior year period. The $22.0 million reduction in selling, general and administrative expenses was a direct result of the Company's initiative announced during 1995 to reduce operating costs. This expense reduction consisted of decreases in United States advertising, sports marketing expenditures, research and development costs, international operating expenses, North American selling expenses and an overall reduction in administrative overhead, partially offset by an increase in expenses related to the Company's retail outlet stores to support the net addition of seven stores. ROYALTY INCOME Royalty income for the nine months ended September 28, 1996 increased 43.4% to $17.5 million from $12.2 million for the nine months ended September 30, 1995. As a percentage of net sales, royalty income increased to 6.3% for the nine months ended September 28, 1996 from 3.7% for the nine months ended September 30, 1995. The $5.3 million increase was mainly attributable to a $4.1 million improvement in royalty income in the Pacific region which was mainly attributable to increased sales of licensed apparel in Japan. RESTRUCTURING EXPENSE The Company recorded restructuring charges during 1995 which included a charge for the writedown of certain assets which the Company plans to dispose of. One such asset, a distribution center located in Chester, S.C., was sold in May, 1996. The sale of this asset resulted in proceeds in excess of the 12 Company's estimates and as a result a gain of $2.2 million was recorded as an offset to restructuring expense in the Second Quarter 1996. During the nine months ended September 28, 1996, $4,129 of charges were made to the restructuring reserve primarily relating to contract termination costs. In addition, certain contracts were terminated on terms more advantageous than originally anticipated, resulting in a reversal of $1,000 of restructuring accruals. Further, while implementing its Fourth Quarter, 1995 restructuring plans, the Company executed additional severance actions resulting in a $1,000 restructuring charge. The remaining liabilities are expected to be paid or settled during 1996. EARNINGS FROM OPERATIONS Earnings from operations for the nine months ended September 28, 1996 increased 1.8% to $5.6 million from $5.5 million for the nine months ended September 30, 1995 primarily as a result of the factors described above. Earnings from operations as a percentage of net sales increased to 2.0% for the nine months ended September 28, 1996 from 1.7% for the prior year period. LOSS ON INVESTMENT IN UNCONSOLIDATED SUBSIDIARY During 1995 the Company decided to cease operations and funding of Apex One, Inc., an unconsolidated subsidiary. During the nine months ended September 28, 1996 the Company incurred an additional $0.5 million in charges resulting primarily from credits issued to settle claims of discrepancies on shipments of inventory. The Company initially recorded a loss on its investment in Apex during the nine months ended September 30, 1995 of $41.6 million. INTEREST EXPENSE Interest expense for the nine months ended September 28, 1996 increased 35.8% to $12.9 million from $9.5 million for the nine months ended September 30, 1995. This increase of $3.4 million is due to: (i) increased borrowings which reflect additional working capital requirements; (ii) increased financing fees related to the Credit Facility; and (iii) higher average interest rates on borrowings under the B Facility. NET EARNINGS (LOSS) As a result of the factors discussed above the Company recorded a net loss for the nine months ended September 28, 1996 of $10.0 million as compared to a net loss of $30.4 million for the nine months ended September 30, 1995. LIQUIDITY AND CAPITAL RESOURCES As of September 28, 1996, the Company's balance sheet reflects working capital (net of cash) of $90.0 million as compared to $86.9 million as of December 30, 1995. Accounts receivable increased $19.6 million primarily related to Third Quarter shipments. Refundable income taxes were reduced by $11.4 million as income tax refunds due to the Company were received during the period. 13 Borrowings under the Company's credit facilities increased to $150.3 million at September 28, 1996 from $133.1 million at December 30, 1995, reflecting the seasonal increase in accounts receivable (see Note 4 of Notes to Condensed Consolidated Financial Statements). For the nine months ended September 28, 1996 and September 30, 1995 net cash required for operating activities was $17.5 million and $35.0 million respectively. During these periods cash was used predominately to fund the Company's accounts receivable and purchases of inventory. During both periods cash flows from financing activities reflected cash inflows from seasonal borrowings under the credit facilities. For the nine months ended September 28, 1996 cash flows provided from financing activities totaled $17.2 million, a $33.0 million decrease over the prior year period. BACKLOG At September 28, 1996, the Company's global backlog of firm orders was $173 million, compared to $149 million at September 30, 1995. Approximately 38% of the September 28, 1996 order backlog is expected to be shipped during the fourth quarter of 1996 with the remaining 62% of the backlog to be shipped during the first quarter of 1997. The amount of unfilled orders at a particular time is affected by a number of factors, including the scheduling of the introduction of new products and the timing of the manufacturing and shipping of the Company's products. Accordingly, a comparison of unfilled orders as of two different dates is not necessarily meaningful. 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 December 30, 1995 and in the Company's Quarterly Report on Form 10-Q for the fiscal quarters ended March 30, 1996 and June 29, 1996. ITEM 2. CHANGES IN SECURITIES. Not Applicable. ITEM 3. DEFAULTS UPON SENIOR SECURITIES. Not Applicable. 14 ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY-HOLDERS. Not Applicable ITEM 5. OTHER INFORMATION. Not Applicable. ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits. The following exhibits are contained in this report: 10.1 Employment Agreement, dated September 12, 1996 between Converse Inc. and James Solomon. 10.2 Fourth Amendment, dated August 30, 1996 to Credit Facility. 10.3 Second Amendment, dated September 1, 1996 to Accommodation Letter between Converse Inc. and Apollo. 27 Financial Data Schedule (b) Reports on Form 8-K. Not Applicable. 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 12, 1996 Converse Inc. By: ---------------------------------- Donald J. Camacho Senior Vice President and Chief Financial Officer 15 EXHIBIT INDEX
Exhibit No. Description - ----------- ----------- 10.1 Employment Agreement, dated September 12, 1996 between Converse Inc. and James Solomon. 10.2 Fourth Amendment, dated August 30, 1996 to Credit Facility. 10.3 Second Amendment, dated September 1, 1996 to Accommodation Letter between Converse Inc. and Apollo. 27 Financial Data Schedule
EX-10.1 2 EMPLOYMENT AGREEMENT 09/12/96 Exhibit 10.1 Glenn N. Rupp Chairman and Chief Executive Officer Converse Inc. One Fordham Road North Reading, MA 01864 September 12, 1996 Mr. James E. Solomon 1365 York Avenue #26A New York, NY 10021 Dear Jim: This letter will serve to confirm our offer concerning your employment with Converse Inc. 1. TITLE: Senior Vice President, Marketing ------ 2. REPORTING RELATIONSHIP: You will be reporting directly to me in my ----------------------- capacity as Chairman and CEO of Converse Inc. The following departments will report directly to you: Marketing, Marketing Communications/Services, Licensing, and Sports Marketing. 3. COMPENSATION: Base salary of $275,000 annually, to be reviewed annually ------------- under the Converse Inc. Salary Administration Program. 4. INCENTIVE BONUS: You will be eligible to receive a 1997 performance- ---------------- oriented bonus at a target amount of 55% under the Converse Inc. Executive Incentive Plan. The bonus will be calculated on a qualitative and quantitative assessment of your contribution to the Marketing Department and Converse Inc., as well as the Company's financial and operating performance. Bonus payments will be made in the first quarter of each fiscal year for the prior year's performance. 5. ALLOWANCE PAYMENT: You will receive three payments in the amount of ------------------ $93,000 each on: October 1, 1996; October 1, 1997; and October 1, 1998, respectively. All normal and customary withholdings will be applied to these payments. These payments are not contingent upon your continuing employment with Converse, except if you voluntarily terminate or are terminated for cause. J. Solomon Page Two September 12, 1996 6. 401K: You will be eligible to join the Converse Inc. Thrift Savings Plan ----- after one year of employment, subject to the Company's compliance with applicable federal requirements. Employee contributes 2-16% of base salary, up to an annual maximum of $9,500. The Company matches 25-50% of the first 6% of base salary. Present Company contribution match - 25%. 7. STOCK OPTIONS: The Compensation and Stock Option Committee of the Converse -------------- Inc. Board of Directors has approved today the grant of 200,000 shares of Converse stock options to you. These options shall be for a term of nine years from the date of issue and shall be at a price equal to the closing price per share on the date of the grant, which will be September 16, 1996, your first day of employment with Converse. Twenty percent (20%) of such options shall vest and become exercisable on each anniversary of the grant date for the first five-years. In the event of termination after the second anniversary date of your Converse employment, other than for cause or resignation, fifty percent (50%) of the then unvested options shall vest. The accelerated vesting shall apply to this 200,000 share option grant only. 8. PENSION PLAN: You will be enrolled in the Converse Inc. Retirement Plan ------------- which is a Defined Benefit Pension Plan fully paid for by the Company. You will also be eligible for participation in the new Converse Supplemental Executive Retirement Plan (SERP). This plan restores those benefits that would otherwise be restricted by the regulations governing the Converse Defined Pension Plan. 9. INSURANCE: ---------- Life - 2X annual salary - Company paid, (maximum $300,000). Contributory Life - Employee paid, Increments of 1, 2, or 3X annual salary (maximum $300,000). Employee Business Travel - Company paid, 6X annual salary (maximum $400,000). Voluntary Accidental Death & Dismemberment - Employee paid, (maximum $400,000). Short Term Disability - Company paid, full salary up to six (6) months. Long Term Disability - Employee paid, 60% of base pay after six (6) months of disability (maximum $10,000 monthly). Health - Choice of Aetna Medical/Dental or one of two HMO options. J. Solomon Page Three September 12, 1996 10. TERMINATION AGREEMENT: In the event of the involuntary termination, ---------------------- including a permanent layoff, of your employment by Converse, other than for cause and within the first year of your employment by Converse, you will be provided with 24 months' base salary; during the second year, eighteen months' base salary; thereafter, twelve months' base salary. Any such payment shall be made as and when normally payable. All employee benefits will cease at the time of termination. You would be eligible to continue your medical and dental insurance under the terms of COBRA. Converse will pay to you a single payment on your date of termination that is comprised of the following components: (a) The amount to cover Converse's share of the cost of your medical and dental insurance, as in effect on the date of termination of employment, for the severance period, plus an amount equal to twenty-eight percent (28%) of such payment; and (b) If you are vested in the Converse Inc. Retirement Plan at the time of termination, you will receive the actuarial present value (as determined by Converse in its sole discretion) of your participation in the retirement plan for the severance period, assuming you continued to earn the same base pay you were earning as of your termination date. 11. "CAUSE" means (a) willful misconduct, (b) repeated, serious and substantial ------- infractions of Converse rules or policies, (c) willful material breach of this Agreement, or (d) conviction for a felony involving moral turpitude. It is understood that mere failure to achieve financial results shall not in any respect be deemed "cause" for purposes of this Agreement. 12. RELOCATION: Enclosed is the Relocation Policy outlining the benefits for ----------- which you are eligible. It is imperative that you contact Camille Welch (508-664-8738) as soon as possible regarding issues relating to relocation eligibility. 13. MISCELLANEOUS: -------------- Vacation: Annual vacation of four weeks. Educational Assistance Program: Company paid, tuition reimbursement (maximum $2,000 Undergraduate, $3,000 Graduate) annually. J. Solomon Page Four September 12, 1996 Jim, it gives me great pleasure to confirm this offer of employment on behalf of Converse. This position is vital to the future success of Converse. I look forward to your joining us and becoming a key part of our management team. Sincerely, CONVERSE INC. /s/ Glenn N. Rupp September 12, 1996 - ------------------ ------------------ Glenn N. Rupp, Chairman & CEO Date /s/ James Solomon September 13, 1996 - ------------------ ------------------ Jim Solomon Date EX-10.2 3 4TH AMENDMENT TO CREDIT FACILITY 08/30/96 Exhibit 10.2 FOURTH AMENDMENT TO CREDIT AGREEMENT ------------------------------------ THIS FOURTH AMENDMENT to Credit Agreement (the "Amendment") is made as of this 30th day of August, 1996, by and among Converse Inc. ("Borrower"), BT Commercial Corporation, as Agent in such capacity, ("Agent"), BT Commercial Corporation (in its capacity as lender, "BTCC"), The Bank of New York Commercial Corporation ("Bank of New York"), Fleet Bank of Massachusetts, N.A. ("Fleet"), Harris Trust and Savings Bank ("Harris"), Heller Financial, Inc. ("Heller"), LaSalle National Bank ("LaSalle"), Nationsbank of Texas, N.A. ("Nationsbank"), Sanwa Business Credit Corporation ("Sanwa"), Fleet Capital Corporation ("Fleet Capital"), and First Source Financial LLP ("First Source"), (BTCC, Bank of New York, Fleet, Harris, Heller, LaSalle, Nationsbank, Sanwa, Fleet Capital and First Source, herein collectively referred to as "Lenders"). W I T N E S S E T H: ------------------- WHEREAS, Borrower, Agent and Lenders are parties to that certain Credit Agreement dated as of November 17, 1994, as amended by that certain First Amendment to Credit Agreement dated as of May 18, 1995, that certain Second Amendment to Credit Agreement dated as of November 13, 1995 and that certain Third Amendment to Credit Agreement dated as of February 29, 1996 (collectively, the "Credit Agreement"); and WHEREAS, Borrower has requested that Agent and Lenders provide for certain amendments to the Credit Agreement, as more fully set forth herein. NOW, THEREFORE, in consideration of the mutual agreements herein contained and other good and valuable consideration, the adequacy of which is hereby acknowledged, and subject to the terms and conditions hereof, the parties hereto agree as follows: 1 . DEFINITIONS. Unless otherwise defined herein, all capitalized terms ----------- shall have the meaning given to them in the Credit Agreement. 2 . AMENDMENTS TO CREDIT AGREEMENT. ------------------------------ .1 The defined term "BORROWING BASE", which appears in Section 1.1 of the Credit Agreement is hereby amended by deleting the phrase "thirty percent (30%) of the then Eligible Retail Inventory, but in any event not more than $2,500,000," in subclause (B)(ii)(2) and inserting the following in lieu thereof: "fifty percent (50%) of the then Eligible Retail Inventory, but in any event not more than $5,000,000" and also by deleting the phrase "May, June and July of each year" in the proviso of clause (B) and inserting the phrase "May through and including November in 1996 and May, June and July of every year thereafter" in lieu thereof. .2 Section 7.7 of the Credit Agreement is hereby amended by deleting the phrase " ".93 to 1 for the nine month period ending September 30, 1996; (E)" and relettering clause "(F)", clause "(E)". .3 Section 7.19 of the Credit Agreement is hereby amended after the phrase "at the end of any calendar quarter commencing March 31, 1996" in the second and third lines by inserting the parenthetical "(other than the calendar quarter ending September 30, 1996)" and in the table listing Projected Net Income Amounts by deleting the reference to calendar quarter September 30 and the corresponding figure, "$1,101,000." .4 Section 7.20 of the Credit Agreement is hereby amended by deleting such Section in its entirety and inserting the following in lieu thereof: "7.20 MINIMUM EBITDA. Borrower shall not permit its EBITDA to -------------- be an amount less than $1,500,000 for the three month period ending September 30, 1996." 3 . AMENDMENT FEE. The effectiveness of the amendments herein ------------- contained is expressly conditioned upon the payment by Borrower, on the date hereof, to Agent for the benefit of the Lenders, of an Amendment Fee in an amount equal to $75,000. 4 . REAFFIRMATION BY BORROWER. Borrower hereby represents and warrants ------------------------- to Agent and Lenders that (i) the representations and warranties set forth in Section 5 of the Credit Agreement are true and correct on and as of the date hereof, except to the extent (a) that any such representations or warranties relate to a specific date, or (b) of changes thereto as a result of transactions for which Agent and Lenders have granted their consent; (ii) Borrower is on the date hereof in compliance with all of the terms and provisions set forth in the Credit Agreement as hereby amended; and (iii) upon execution hereof no Default or Event of Default has occurred and is continuing or has not previously been waived. 5 . FULL FORCE AND EFFECT. Except as herein amended, the Credit --------------------- Agreement and all other Credit Documents shall remain in full force and effect. 6 . COUNTERPARTS. This Amendment may be executed in two or more ------------ counterparts, each of which shall be deemed an original, but all of which together shall constitute one and the same document. IN WITNESS WHEREOF, the parties hereto have executed this Amendment on the day and year specified above. BORROWER: CONVERSE INC. By: /s/ Donald J. Camacho ---------------------- Name: Donald J. Camacho ----------------- Title: Senior Vice President --------------------- AGENT: BT COMMERCIAL CORPORATION By: /s/ Wayne D. Hillock -------------------- Name: Wayne D. Hillock ---------------- Title: Senior Vice President --------------------- LENDERS: BT COMMERCIAL CORPORATION By: /s/ Wayne D. Hillock --------------------- Name: Wayne D. Hillock ---------------- Title: Senior Vice President ---------------------- THE BANK OF NEW YORK COMMERCIAL CORPORATION By: /s/ Anthony Viola ------------------ Name: Anthony Viola ------------- Title: Vice President -------------- FLEET BANK OF MASSACHUSETTS, N.A. By: ----------------------- Name: ------------------- Title: ------------------ HARRIS TRUST AND SAVINGS BANK By: /s/ John McKelvie ----------------- Name: John McKelvie ------------- Title: Vice President -------------- HELLER FINANCIAL, INC. By: /s/ Joel Richards ----------------- Name: Joel Richards ------------- Title: Vice President --------------- LASALLE NATIONAL BANK By: /s/ Christopher G. Clifford --------------------------- Name: Christopher G. Clifford ----------------------- Title: Senior Vice President --------------------- NATIONSBANK OF TEXAS, N.A. By: /s/ J. Bart Bearden ------------------- Name: J. Bart Bearden --------------- Title: Vice President -------------- SANWA BUSINESS CREDIT CORPORATION By: ----------------------- Name: ------------------- Title: ------------------ FLEET CAPITAL CORPORATION By: ----------------------- Name: ------------------- Title: ------------------ FIRST SOURCE FINANCIAL LLP By: First Source Financial, Inc., its Manager By: ----------------------- Name: ------------------- Title: ------------------ EX-10.3 4 2ND AMND/LETTER BETWEEN CONVERSE & APOLLO-09/01/96 Exhibit 10.3 Apollo Advisors, L.P. Two Manhattanville Road Purchase, New York 10577 Converse Inc. One Fordham Road North Reading, MA 01864 Attention: Mr. Donald Camacho Senior Vice President and Chief Financial Officer Re: Amended Accommodation Letter September 1, 1996 Gentlemen: Reference is hereby made to that certain Credit Agreement dated as of November 17, 1994 by and among Converse Inc. (the "Company"), the financial institutions parties thereto (collectively, the "Lenders") and BT Commercial Corporation, as agent for the Lenders (in such capacity, the "Agent"), as amended by the First Amendment to the Credit Agreement dated as of May 10, 1995, by and among the Company, the Lenders and the Agent, and as further amended by the Second Amendment dated as of November 15, 1995, Third Amendment dated as of February 29, 1996, and Fourth Amendment as of August 30, 1996, by and among the Company, the Lenders, and the Agent amending the Credit Agreement (the Credit Agreement, as amended by the First, Second, Third, and Fourth Amendment, the "Credit Agreement" and the Fourth Amendment, the "Amendment"). All terms used but not defined in this Accommodation Letter have the meaning given to them in the Credit Agreement. So long as the Letter of Credit or any Letter of Credit Loan remains outstanding, you will not, without Apollo's prior consent, cause the amount of the availability under paragraph (D) of the definition of "Borrowing Base" utilized from time to time to be more than the amounts set forth below in the period below Period Amount -------------- ---------------- Through March 1, 1997 $25 million This Amended and Restate Accommodation Letter shall be governed by, and construed in accordance with, the laws of the State of New York. This Amended and Restated Accommodation Letter may be executed in any number of counterparts, each of which shall be an original and all of which, when taken together, shall constitute one original. If the foregoing correctly sets forth our agreement, please indicate your acceptance of the terms hereof by signing in the appropriate space below and returning to us the executed duplicate of this Amended and Restated Accommodation Letter. Very truly yours, APOLLO INVESTMENT FUND, L.P. By: Apollo Advisors, L.P. as Managing Partner and on behalf of Apollo Investment Fund, L.P. By: Apollo Capital Management, Inc., its general partner By: /s/ Joshua J. Harris -------------------- Its: Vice President Agreed to and accepted as of the date first above written: Converse Inc. By: /s/ Donald J. Camacho --------------------- Its: Senior Vice President EX-27 5 FINANCIAL DATA SCHEDULE
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE COMPANY'S UNAUDITED FINANCIAL STATEMENTS CONTAINED IN ITS THIRD QUARTER FORM 10-Q AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000 9-MOS DEC-28-1996 DEC-31-1995 SEP-28-1996 4,954 0 82,994 1,720 82,899 194,372 23,919 6,824 235,101 100,334 0 0 0 16,772 (48,878) 235,101 279,776 297,322 205,342 293,930 32 0 12,921 (9,561) 452 (9,046) 0 0 0 (10,013) (0.600) 0
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