-----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, TjwMQw6YaVy6xciK85WOT4sNDTTkh/pWQ/M7vzdsU8Wi1gIQ05VOiwEbOhEeeh7r nfM5HrGlEeBnzt/MDDuXZQ== 0000927016-99-003047.txt : 19990818 0000927016-99-003047.hdr.sgml : 19990818 ACCESSION NUMBER: 0000927016-99-003047 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 19990703 FILED AS OF DATE: 19990817 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: 0102 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 001-13430 FILM NUMBER: 99694499 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 QUARTERLY REPORT SECURITIES AND EXCHANGE COMMISSION Washington, DC 20549 Form 10-Q Quarterly Report Pursuant to Section 13 or 15(d) of The Securities Exchange Act of 1934 For the quarterly period ended July 3, 1999 Commission File Number 1-13430 Converse Inc. (Exact name of registrant as specified in its charter) Delaware 43-1419731 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) One Fordham Road 01864 North Reading, Massachusetts (Zip Code) (Address of principal executive offices) Registrant's telephone number, including area code: (978) 664-1100 Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that registrant was required to file such reports); and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [_] Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practical date. As of July 3, 1999, 17,437,140 shares of common stock were outstanding. TABLE OF CONTENTS
PAGE PART I: FINANCIAL INFORMATION Item 1. Consolidated Financial Statements A. Consolidated Balance Sheet 1 B. Consolidated Statement of Operations 2 C. Consolidated Statement of Cash Flows 3 D. Notes to Consolidated Financial Statements 4 Item 2. Management's Discussion and Analysis of 10 Financial Condition and Results of Operations Item 3. Quantitative and Qualitative Disclosures About Market Risk 19 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 20 Item 5. Other Information 21 Item 6. Exhibits and Reports on Form 8-K 22 SIGNATURE 23
PART I - FINANCIAL INFORMATION Item 1. FINANCIAL STATEMENTS CONVERSE INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEET (Dollars in thousands, except per share amounts)
(Unaudited) January 2, 1999 July 3, 1999 --------------- ------------ Assets Current assets: Cash and cash equivalents............................... $ 3,274 $ 2,317 Receivables, less allowances of $2,086 and $1,801, respectively.......................................... 57,826 55,569 Inventories (Note 3).................................... 71,292 77,723 Prepaid expenses and other current assets............... 8,962 6,591 ---------- ------------ Total current assets............................... 141,354 142,200 Net property, plant and equipment............................ 20,838 19,885 Other assets................................................. 32,814 31,940 ---------- ------------ $ 195,006 $ 194,025 ========== ============ Liabilities and Stockholders' Equity (Deficiency) Current liabilities: Short-term debt......................................... $ 9,557 $ 9,010 Credit facility (Note 4)................................ 73,833 85,096 Accounts payable........................................ 37,184 37,206 Accrued expenses........................................ 10,861 8,745 Income taxes payable.................................... 2,861 3,354 ---------- ------------ Total current liabilities.......................... 134,296 143,411 Long-term debt (Note 4)...................................... 101,799 102,191 Current assets in excess of reorganization value............. 28,221 27,183 Stockholders' equity (deficiency): Common stock, $1.00 stated value, 50,000,000 shares authorized, 17,319,556 and 17,437,140 shares issued and outstanding at outstanding at January 2, 1999 and July 3, 1999, respectively........................ 17,320 17,437 Preferred stock, no par value, 10,000,000 shares authorized none issued and outstanding................ -- -- Additional paid-in capital.............................. 3,695 4,748 Unearned compensation................................... (758) (1,450) Retained deficit........................................ (88,129) (96,948) Accumulated other comprehensive income.................. (1,438) (2,547) ---------- ------------ Total stockholders' equity (deficiency)............ (69,310) (78,760) ---------- ------------ $ 195,006 $ 194,025 ========== ============
See accompanying notes to condensed consolidated financial statements. -1- CONVERSE INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS (Dollars in thousands, except per share amounts) (Unaudited)
Three Months Ended Six Months Ended --------------------------- --------------------------- July 4, 1998 July 3, 1999 July 4, 1998 July 3, 1999 ------------ ------------ ------------ ------------ Net sales.............................................. $ 78,351 $57,140 $173,591 $127,219 Cost of sales.......................................... 58,614 42,088 126,039 93,426 ------------ ---------- ---------- ---------- Gross profit........................................... 19,737 15,052 47,552 33,793 Selling, general and administrative expenses........... 21,964 18,714 51,680 40,365 Royalty income......................................... 4,459 4,940 9,487 9,782 Loss on sale of foreign subsidiaries................... --- 543 --- 543 ------------ ---------- ---------- ---------- Earnings from operations............................... 2,232 735 5,359 2,667 Interest expense, net.................................. 4,213 5,280 8,661 10,515 Other (income) expense, net............................ (764) 97 (1,151) (895) ------------ ---------- ---------- ---------- Loss before income tax................................. (1,217) (4,642) (2,151) (6,953) Income tax expense..................................... 299 938 528 1,866 ------------ ---------- ---------- ---------- Net loss............................................... $ (1,516) $(5,580) $ (2,679) $ (8,819) ============ ========== ========== ========== Net basic and diluted loss per share (Note 2).......... $ (0.09) $ (0.32) $ (0.15) $ (0.51) ============ ========== ========== ========== Weighted average number of common shares outstanding (Note 2)................................... 17,320 17,396 17,319 17,363 ============ ========== ========== ==========
See accompanying notes to condensed consolidated financial statements. -2- CONVERSE INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS (Dollars in thousands) (Unaudited)
Six Months Ended ------------------------------- July 4, 1998 July 3, 1999 ------------ ------------ Cash flows from operating activities: Net earnings (loss)..................................................... $ (2,679) $ (8,819) Adjustments to reconcile net loss to net cash (required for) provided by operating activities: Depreciation of property, plant and equipment...................... 1,834 2,164 Amortization of intangible assets.................................. 234 100 Amortization of current assets in excess of reorganization value............................................................ (1,039) (1,038) Amortization of note discount/warrants............................. --- 318 Amortization of deferred compensation.............................. 54 211 Gain on sale of property, plant and equipment...................... (1,037) --- Deferred income taxes.............................................. --- 224 Changes in assets and liabilities: Receivables........................................................ 639 2,257 Inventories........................................................ 4,164 (6,431) Prepaid expenses and other current assets.......................... 1,240 2,350 Accounts payable and accrued expenses.............................. 728 (2,094) Income taxes payable............................................... (478) 493 Other long-term assets and liabilities............................. (1,789) (538) ------------ ------------ Net cash (required for) provided by operating activities........ 1,871 (10,803) ------------ ------------ Cash flows from investing activities: Additions to property, plant and equipment.............................. (1,520) (1,211) Proceeds from sale of property, plant and equipment..................... 1,169 --- ------------ ------------ Net cash used by investing activities........................... (351) (1,211) ------------ ------------ Cash flows from financing activities: Net proceeds from exercise of stock options............................. 11 --- Net proceeds from exercise of warrants.................................. --- 268 Net proceeds from employee stock purchase plan.......................... --- 73 Net proceeds from (payment of) short-term debt.......................... (1,685) (547) Net proceeds from (payment of) credit facility.......................... (2,915) 11,263 ------------ ------------ Net cash provided (used) by financing activities................ (4,589) 11,057 Net decrease in cash and cash equivalents................................. (3,069) (957) Cash and cash equivalents at beginning of period.......................... 5,738 3,274 ------------ ------------ Cash and cash equivalents at end of period................................ $ 2,669 $ 2,317 ============ ============
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 thereto should be read in conjunction with the Company's annual report on Form 10-K for the year ended January 2, 1999. The Company's consolidated results of operations for the three and six months ended July 3, 1999 are not necessarily indicative of the results to be expected for any other interim period or the entire fiscal year. Reclassifications: Certain amounts in the prior period financial statements and related notes have been reclassified to conform with the current period's 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 2, 1999 July 3, 1999 --------------- ------------ Retail merchandise............ $ 4,535 $ 4,578 Finished products............. 57,365 64,791 Work in process............... 5,009 5,112 Raw materials................. 4,383 3,242 ------------ ---------- $ 71,292 $ 77,723 ============ ========== 4. Debt As more fully described in Note 8 to the Consolidated Financial Statements for the year ended January 2, 1999 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 -4- "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. 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 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 $80,000 at any time; revolving loans are limited only by the Credit Facility's maximum availability less any amounts outstanding for letters of credit, foreign exchange contracts or banker acceptances. The Credit Facility is for a five-year term and, accordingly, has an expiration date of May 21, 2002. However, the total revolving loans and banker acceptances outstanding under the Credit Facility of $85,096 are classified as current 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 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 September 1998, the Company's Credit Facility was amended to permit the issuance of the Secured Notes as discussed below. The amendment decreased the commitment under the Credit Facility from $150,000 to $120,000 and changed a financial performance covenant. In May 1999, the Company's Credit Facility was amended to allow for $6,000 of additional borrowing base through July 1999. In July 1999, the Company's Credit Facility was further amended to extend the $6,000 of additional borrowing base through October 31, 1999. As of July 3, 1999 the Company's borrowing base was $92,843. Utilization under the Credit Facility amounted to $88,037 consisting of revolving loans of $80,048, banker acceptances of $5,048 and outstanding letters of credit of $2,941. Accordingly, $4,806 of the maximum available borrowing base remained unutilized as of July 3, 1999. -5- Revolving loans under the Credit Facility bear interest either at the Prime Lending Rate (as defined therein) plus one percent (1.00%) per annum or at the Adjusted LIBOR Rate (as defined therein) plus a margin of two and one-half percent (2.50%) per annum. The foregoing LIBOR margin is subject to reduction based upon the Company achieving certain interest coverage ratios specified in the Credit Facility. At July 3, 1999, revolving loans outstanding under the Credit Facility bore interest of 7.67% based upon the weighted average of the Prime Lending Rate and Adjusted LIBOR Rate, as defined. Obligations outstanding under the Credit Facility are secured by first priority liens on substantially all of the Company's U.S. assets. The Credit Facility requires compliance with customary affirmative and negative covenants, including certain financial covenants. At July 3, 1999, the Company was in compliance with all covenants contained in the Credit Facility, as amended. 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 Initial Maturity Date may be extended an additional 12 months at the Company's option upon written notification of its election to extend and payment of a fee equal to 3% of the then outstanding principal amount of the Secured Notes (the "First Extended Maturity Date"). The First Extended Maturity Date may be extended to May 21, 2002 at the Company's option upon written notification of its election to extend and payment of an additional fee equal to 3% of the then outstanding principal amount of the Secured Notes. The Secured Notes were issued in two series: Series A in the aggregate principal amount of $24,858 (the "Series A Secured Notes") and Series B in the aggregate principal amount of $3,785 (the "Series B Secured Notes"). The Secured Notes are redeemable at any time at face amount plus accrued interest. The Secured Notes require compliance with customary affirmative and negative covenants, including certain financial covenants, substantially the same as the requirements contained in the Credit Facility. 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, vest immediately and expire on March 16, 2003. 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 all real and personal, tangible and intangible assets of the Company. The Series B Secured Notes were issued in exchange for the surrender of $5,735 face amount of Convertible Notes, which were subsequently cancelled by the Company. In connection with the issuance of the Series B Secured Notes, the Company paid a placement fee of 2% of the face amount, or $76. The Series B Secured Notes carry a third priority perfected lien on all real and personal, tangible and intangible assets of the Company. Subsidiaries of the Company maintain asset-based financing arrangements in certain European countries with various lenders. In general, these financing arrangements allow for borrowings based upon eligible accounts receivable and inventory at varying advance rates and -6- varying interest rates. As of July 3, 1999, total short-term borrowings outstanding under these financing arrangements totaled $9,010. These obligations are secured by first priority liens on the respective foreign assets being financed. In addition, Converse Inc. provided guarantees with respect to the outstanding borrowings for certain of the financing arrangements. -7- 5. Comprehensive Income For the three months ended July 4, 1998 and July 3, 1999, comprehensive income items included in stockholders' equity consisted of cumulative translation adjustments of $233 and $(564), respectively. Total comprehensive income (loss) for the second quarter of 1998 was $(1,283) compared to comprehensive income (loss) of $(6,144) for the second quarter of 1999. For the six months ended July 4, 1998 and July 3, 1999, comprehensive income items included in stockholders' equity consisted of cumulative translation adjustments of $(55) and $(1,109), respectively. Total comprehensive income (loss) for the first six months of 1998 was $(2,734) compared to comprehensive income (loss) of $(9,928) for the first six months of 1999. 6. Stock Plans and Warrant Exercises In February and May 1999, 250,000 shares and 10,000 shares of restricted stock, respectively, were granted to certain employees, resulting in $922 of unearned compensation. 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 1999, 26,172 shares of common stock were issued under the Company's Employee Stock Purchase Plan. Proceeds of $73 were recorded in conjunction with this purchase. In May 1999, 91,412 shares of common stock were issued pursuant to the exercise of stock warrants. These warrants had an exercise price of $2.9375. Proceeds of $268 were recorded in conjunction with this exercise. 7. Commitments and Contingencies Converse is or may become a defendant in a number of pending or threatened legal proceedings in the ordinary course of its business. Converse believes that the ultimate outcome of any such proceedings will not have a material adverse effect on its financial position or results of its operations. 8. Recently Issued Accounting Standards On June 15, 1998, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards No. 133, "Accounting for Derivative Instruments and Hedging Activities" (FAS 133). FAS 133 is effective for all fiscal years beginning after June 15, 1999 (January 2, 2000 for the Company). FAS 133 requires that all derivative instruments be recorded on the balance sheet at their fair value. Changes in the fair value of derivatives are recorded each period in current earnings or other comprehensive income, depending on whether a derivative is designated as part of a hedge transaction and, if it is, the type of hedge transaction. Management -8- 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). 9. Subsequent Events On July 1, 1999, Converse entered into a long-term agreement with a third party company for the exclusive distribution and license rights in Italy for Converse footwear and apparel. This agreement becomes effective in January 2000 and will have the impact of reducing the Company's future global backlog, net sales and expenses while increasing the Company's royalty income. 10. Business Segment Information As more fully described in Note 17 to the Consolidated Financial Statements for the year ended January 2, 1999 included within the Company's annual report on Form 10-K, the Company has adopted Statement of Financial Accounting Standards No. 131, "Disclosures about Segments of an Enterprise and Related Information". Summarized financial information concerning the Company's reportable business segments is shown in the following table:
Europe, Americas Middle East, (excluding United States Africa Asia Pacific United States) Eliminations Consolidated -------------- ------------ ------------- ------------- ------------- ------------ Six months ending July 3, 1999: Net sales to customer.......... $ 67,948 $ 34,684 $ 19,697 $ 4,890 $ ---- $ 127,219 Intersegment net sales......... 14,888 ---- ---- ---- (14,888) ---- Segment pretax profit (loss).. (9,583) (229) 3,807 (948) ---- (6,953) Segment total assets at July 3, 1999........................ 156,871 30,655 3,130 3,369 ---- 194,025 Six months ending July 4, 1998: Net sales to customer.......... $ 99,296 $ 41,395 $ 27,210 $ 5,690 $ ---- $ 173,591 Intersegment net sales......... 22,296 ---- ---- ---- (22,296) ---- Segment pretax profit (loss)... (11,573) (384) 9,563 243 ---- (2,151) Segment total assets at January 2, 1999..................... 153,107 33,066 4,834 3,999 ---- 195,006 Three months ending July 3, 1999: Net sales to customer.......... $ 32,852 $ 12,668 $ 9,900 $ 1,720 $ ---- $ 57,140 Intersegment net sales......... 6,189 ---- ---- ---- (6,189) ---- Segment pretax profit (loss)... (5,346) (1,561) 2,471 (206) ---- (4,642) Three months ending July 4, 1998: Net sales to customer.......... $ 45,680 $ 13,813 $ 15,997 $ 2,861 $ ---- $ 78,351 Intersegment net sales......... 5,608 ---- ---- ---- (5,608) ---- Segment pretax profit (loss)... (5,082) (1,701) 4,833 733 ---- (1,217)
-9- Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Comparison of three months ended July 4, 1998 to three months ended July 3, 1999 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 July 4, 1998 ("Second Quarter 1998") and for the three months ended July 3, 1999 ("Second Quarter 1999").
Three Months Ended --------------------------------------------------- July 4, 1998 % July 3, 1999 % ------------ - ------------ - Net sales............................ $ 78,351 100.0 $ 57,140 100.0 Gross profit......................... 19,737 25.2 15,052 26.3 Selling, general and administrative Expenses........................... 21,964 28.0 18,714 32.8 Royalty income....................... 4,459 5.7 4,940 8.6 Loss on sale of foreign subsidiaries....................... --- --- 543 1.0 Earnings from operations............. 2,232 2.8 735 1.3 Interest expense, net................ 4,213 5.4 5,280 9.2 Other (income) expense, net.......... (764) (1.0) 97 0.2 Net loss............................. $ (1,516) (1.9) $ (5,580) (9.8) Net basic and diluted loss per share......................... $ (0.09) --- $ (0.32) ---
Net Sales Net sales for the Second Quarter 1999 decreased to $57.1 million from $78.4 million for the Second Quarter 1998, a 27.2% decrease. The $21.3 million reduction in net sales was attributable to decreases of 24.7%, 30.5%, 39.5% and 31.5% for the Second Quarter 1999 in the categories of basketball, children's, cross training and athletic originals, respectively, as compared to Second Quarter 1998. The reduction in net sales was partially offset by a 7.3% increase in the action sports category. Net sales in the United States decreased 28.2% to $32.9 million in the Second Quarter 1999 from $45.7 million for the Second Quarter 1998. Net sales decreased 25.7% internationally to $24.3 million for Second Quarter 1999 from $32.7 million for Second Quarter 1998. Second Quarter 1999 net sales decreased from Second Quarter 1998 by 8.3%, 38.1% and 39.9% in the Europe, Middle East and Africa ("E.M.E.A."), Asia Pacific and the Americas regions, respectively. -10- The Company's net sales continue to suffer from the effects of the athletic footwear market slowdown which has occurred over the past two years. Also contributing to the sales decline internationally was the conversion of three wholly-owned subsidiaries operating in Spain, Portugal and Canada to new licensing agreements, revenues from which are now recorded as royalty income rather than as net sales. Gross Profit Gross profit decreased to $15.1 million for Second Quarter 1999 from $19.7 million for Second Quarter 1998, a 23.4% reduction. The net sales reduction accounted for the majority of the gross profit decline. The Company's gross profit margin increased to 26.3% of net sales for Second Quarter 1999 compared to 25.2% of net sales for Second Quarter 1998. The increase is primarily the result of the slight improvement in the athletic footwear market and the lower sell off of unsold inventory in the Company's basketball and children's categories in Second Quarter 1999. Selling, General and Administrative Expenses Selling, general and administrative expenses decreased 15.0% to $18.7 million for Second Quarter 1999 from $22.0 million for Second Quarter 1998. The decrease in selling, general and administrative expenses of $3.3 million resulted from reduced spending across all of the Company's functions. As a percentage of net sales, selling, general and administrative expenses increased to 32.8% for Second Quarter 1999 from 28.0% for the prior year period. Second Quarter 1998 expenses included one-time expense credits of $3.3 million generated by a gain from the curtailment of the active employees from the post- retirement medical benefit plan and a gain of $0.6 million resulting from pension curtailment. Excluding these one-time 1998 expense credits of $3.9 million, the expense reduction would have been $7.2 million or 27.8% for Second Quarter 1999 compared to Second Quarter 1998. As a result of sluggish conditions in the athletic footwear market, the Company continues to tightly control costs and inventory levels. Royalty Income Royalty income increased by 8.9% to $4.9 million in Second Quarter 1999 from $4.5 million in Second Quarter 1998. International royalty income, which currently represents approximately 81% of the Company's total royalty income, increased 6.7% for Second Quarter 1999 from Second Quarter 1998. The increase was primarily attributable to an increase of 24.3% in the Asia Pacific region due mainly to recovery in our Southeast Asia business, partially offset by weakness in the E.M.E.A. and Americas regions. U.S. royalty income increased by 42.9% to $1.0 million for Second Quarter 1999 from $0.7 million for Second Quarter 1998. As a percentage of net sales, royalty income was 8.6% in the Second Quarter 1999 compared to 5.7% in the Second Quarter 1998. -11- Loss on Sale of Foreign Subsidiaries In the Second Quarter 1999, the Company recorded a pretax loss totaling $0.5 million relating to the conversion of our Canada operation from a Company owned subsidiary (direct operating unit) to a third party licensee/distributor arrangement. Earnings from Operations Primarily as a result of the factors discussed above, the Company recorded earnings from operations of $0.7 million for Second Quarter 1999 as compared to $2.2 million for Second Quarter 1998. As a percentage of net sales, earnings from operations were 1.3% and 2.8% for Second Quarter 1999 and Second Quarter 1998, respectively. Interest Expense Interest Expense for Second Quarter 1999 increased to $5.3 million from $4.2 million for Second Quarter 1998, a 26.2% increase. The increase reflects the higher borrowing levels in Second Quarter 1999 compared to Second Quarter 1998 as well as higher interest costs associated with the Secured Notes issued in September 1998. Other (Income) Expense The Second Quarter 1998 income of $0.8 million was primarily attributable to the May 1998 sale of the Company's Reynosa, Mexico manufacturing facility, partially offset by foreign exchange losses attributable to the appreciation of the U.S. dollar. Net Loss The Company recorded a net loss for Second Quarter 1999 of $5.6 million compared to net loss of $1.5 million for Second Quarter 1998. The net loss for Second Quarter 1999 includes a charge of $2.0 million to increase the deferred tax valuation reserve and a loss on sale of foreign subsidiaries of $0.3 million. Excluding these charges, the net loss for Second Quarter 1999 was $3.3 million. Net Loss Per Share The Company recorded a loss per share of $0.32 for Second Quarter 1999 compared to $0.09 loss per share for Second Quarter 1998. The net loss for the Second Quarter 1999 includes a charge of $0.11 per share to increase the deferred tax valuation reserve and loss of $0.02 from sale of foreign subsidiaries. Excluding these charges, the net loss for Second Quarter 1999 was $0.19 per share. -12- Comparison of six months ended July 4, 1998 to six months ended July 3, 1999 The following table sets forth certain items relating to the Company's operating results as a percentage of net sales for the six months ended July 4, 1998 ("First Half 1998") and for the six months ended July 3, 1999 ("First Half 1999").
Six Months Ended ------------------------------------------------- July 4, 1998 % July 3, 1999 % ------------ ----- ------------ ----- Net sales............................... $173,591 100.0 $127,219 100.0 Gross profit............................ 47,552 27.4 33,793 26.6 Selling, general and administrative expenses............................... 51,680 29.8 40,365 31.7 Royalty income.......................... 9,487 5.5 9,782 7.7 Loss on sale of foreign subsidiaries.... --- --- 543 0.4 Earnings from operations................ 5,359 3.1 2,667 2.1 Interest expense, net................... 8,661 5.0 10,515 8.3 Other (income) expense.................. (1,151) (0.7) (895) (0.7) Net loss................................ $ (2,679) (1.5) $ (8,819) (6.9) Net basic and diluted loss per share.............................. $ (0.15) --- $ (0.51) ---
Net Sales Net sales for the First Half 1999 decreased 26.7% to $127.2 million from $173.6 million for First Half 1998. Compared to the prior year period, the $46.4 million reduction in net sales was attributable to decreases of 29.6%, 33.4%, 56.3% and 26.3% in the categories of basketball, children's, cross training and athletic originals, respectively. The reduction in net sales was partially offset by a $2.0 million increase in the Company's action sports category, which was introduced in 1998. Net sales in the United States for First Half 1999 decreased 31.6% to $67.9 from $99.3 million for First Half 1998. International net sales decreased 20.2% to $59.3 million from $74.3 million in the prior year period. Net sales in the E.M.E.A., Asia Pacific, and the Americas regions decreased 16.5%, 27.6% and 14.1%, respectively from the First Half 1998. The Company's net sales continued to suffer from the effects of the athletic footwear market slowdown which has occurred over the past two years. Contributing to the sales decline internationally was the conversion of three wholly-owned subsidiaries operating in Spain, Portugal and Canada to new licensing agreements, revenues from which are now recorded as royalty income rather than as net sales. -13- Gross Profit Gross profit decreased to $33.8 million for First Half of 1999 from $47.6 million for First Half 1998, a 29.0% reduction. The net sales reduction accounted for the majority of the gross profit decline. The Company's gross profit margin fell to 26.6% of net sales for First Half 1999 compared to 27.4% of net sales for First Half 1998. The decline was caused by the industry downturn and the resulting reduced demand for the Company's products. Selling, General and Administrative Expenses Selling, general and administrative expenses decreased 21.9% to $40.4 million for First Half 1999 from $51.7 million for First Half 1998. The decrease in selling, general and administrative expenses of $11.3 million resulted in reduced spending across all of the Company's functions. As a percentage of net sales, selling, general and administrative expenses increased to 31.7% for First Half 1999 from 29.8% for the prior year period. First Half 1998 expenses include one-time expense credits of $3.3 million generated by a gain from the curtailment of the active employees from the post-retirement medical benefit plan and a gain of $0.6 million resulting from pension curtailment. Excluding these one-time 1998 expense credits of $3.9 million, the expense reduction would have been $15.2 million or 27.3% for First Half 1999 compared to First Half 1998. Royalty Income Royalty income increased 3.2% to $9.8 million in First Half 1999 from $9.5 million in First Half 1998. International royalty income, which currently represents approximately 82% of the company's total royalty income, was similar to the prior year period. The international royalty income was favorably impacted by increase of 12.5% in the Asia Pacific region due mainly to recovery in the Southeast Asia economies, partially offset by weakness in the E.M.E.A. and Americas regions. U.S. royalty income increased 13.3% to $1.7 million for First Half 1999 from $1.5 million for First Half 1998. As a percentage of net sales, royalty income was 7.7% in the First Half 1999 compared to 5.5% in the First Half 1998. Loss on Sale of Foreign Subsidiaries In the Second Quarter 1999, the Company recorded a pretax loss totaling $0.5 million relating to the conversion of our Canada operation from a Company owned subsidiary (direct operating unit) to a third party licensee/distributor arrangement. Earnings from Operations Primarily as a result of the factors discussed above, the Company recorded earnings from operations of $2.7 million for First Half 1999 as compared to $5.4 million for First Half 1998. As a percentage of net sales, earnings from operations were 2.1% and 3.1% for First Half 1999 and First Half 1998, respectively. -14- Interest Expense Interest Expense for First Half 1999 increased to $10.5 million from $8.7 million for First Half 1998, a 20.7% increase. The increase reflects the higher borrowing levels in First Half 1999 compared to First Half 1998 as well as higher interest costs associated with the Secured Notes issued in September 1998. Other (Income) Expense The First Half 1999 income of $0.9 million was primarily attributable to gains realized from foreign exchange contracts and put options. The First Half 1998 income of $1.2 million was primarily related to the May 1998 sale of the Company's Reynosa, Mexico manufacturing facility. Net Loss The Company recorded a net loss for First Half 1999 of $8.8 million compared to net loss of $2.7 million for First Half 1998. The net loss for the First Half 1999 includes a charge of $3.8 million to increase the deferred tax valuation reserve and loss of $0.3 million from the sale of foreign subsidiaries. The net loss for the First Half 1998 includes a charge of $1.1 million to increase the deferred tax valuation reserve. Excluding these non- operating charges and credits, the net loss for the First Half 1999 was $4.7 million compared to net loss of $1.6 million in First Half 1998. Net Loss Per Share Net loss per share for the First Half 1999 was $0.51 as compared to net loss per share of $0.15 for the First Half 1998. Net loss for First Half 1999 includes a charge of $0.22 per share to increase the deferred tax valuation reserve and loss on sale of foreign subsidiaries of $0.02 per share. Net loss for the First Half 1998 includes a charge of $0.06 per share to increase the deferred tax valuation reserve. Excluding these nonrecurring charges, the net loss per share for the First Half 1999 was $0.27 compared to net loss per share of $0.09 in First Half 1998. Liquidity and Capital Resources As of July 3, 1999 the Company's working capital (net of cash) position decreased $7.3 million to a deficit of $3.5 million from $3.8 million at January 2, 1999. Inventory increased $6.4 million due to a seasonal buildup for the Company's back to school selling period. Accounts receivable and prepaid expenses decreased $4.5 million due to decreased sales levels and the Company's efforts to reduce operating costs. Accounts payable, accrued liabilities and income taxes payable decreased $1.6 million while seasonal borrowings increased $10.7 million. Total borrowings under the Company's Credit Facility and asset based financing arrangements increased to $85.1 million at July 3, 1999 from $73.8 million at January 2, 1999, -15- reflecting the seasonal working capital needs discussed above (see Note 4 of Notes to Condensed Consolidated Financial Statements contained herein). For First Half 1999 and First Half 1998, net cash provided by (required for) operating activities was $(10.8) million and $1.9 million, respectively. Cash required for operating activities in First Half 1999 was primarily used to fund the Company's seasonal requirements. In the First Half 1998, cash was provided through inventory reduction and lower operating costs. Net cash used by investing activities was $1.2 million and $0.4 million for First Half 1999 and First Half 1998, respectively. Cash invested was for additions to property, plant and equipment partially offset in First Half 1998 by cash received from sale of Reynosa facility. Net cash provided by (used for) financing activities was $11.0 million and ($4.6) million for First Half 1999 and First Half 1998, respectively. Net cash provided by financing activities in First Half 1999 consisted primarily of proceeds from the Company's seasonal borrowings. Backlog At the end of First Half 1999, the Company's global backlog was $80.9 million, compared to $90.2 million at the end of the First Half 1998, a decrease of 10.3%. The 1998 backlog figure has been adjusted to eliminate the Company's backlog in Spain, Portugal and Canada where the Company's subsidiaries subsequently were converted to licensee arrangements. The Company's categories of athletic originals, children's and cross training recorded declines of 19.6%, 17.3% and 7.7%, respectively, offset by an improvement in the basketball category of 22.8%. The United States order backlog increased by 12.2% but was more than offset by international backlog which decreased 32.0%. The decline was primarily the result of the continued industry-wide soft demand for athletic footwear. The amount of backlog at any particular time is affected by a number of factors, including the scheduling of the introduction of new products and the timing of the manufacture and shipment of the Company's products. Accordingly a comparison of backlog as of two different dates is not necessarily meaningful. In addition, the backlog position is not necessarily indicative of future sales because the ratio of future orders to "at once" shipments and sales by Company owned retail stores may vary from year to year. The Year 2000 Background The "Year 2000 Problem" is the result of many existing computer programs and embedded chip technology containing programming code in which calendar year data is abbreviated by using only two digits rather than four to refer to a year. As a result of this, some of these programs may fail to operate or may not properly recognize a year that begins with "20" instead of "19." This may cause such software to recognize a date using "00" as the year 1900 rather than the year 2000. Even systems and equipment that are not typically thought of as computer-related often contain embedded hardware or software that may improperly interpret dates beginning with the year 2000. -16- The Company's Year 2000 Project Converse began working on Year 2000 compliance issues in 1996 when it established a Company-wide Year 2000 project team (the "Year 2000 Project Team") to identify all potential non-compliant software, hardware and embedded chip technology and determine to what extent modification or replacement was necessary to mitigate the Year 2000 Problem. The first task of the Year 2000 Project Team was to conduct an assessment of all internal hardware, software and embedded chip technology to determine Year 2000 compliance and to assess the risks associated with non-compliance by the Company's vendors, suppliers and customers. The Year 2000 Project Team divided the action steps necessary to minimize any Year 2000 non-compliance into two distinct categories: internal compliance of software, hardware and embedded chip technology, and external non- compliance by the Company's vendors, suppliers and customers. Internal Year 2000 Compliance. The Company began the process of executing ----------------------------- the necessary code changes and upgrading existing systems in 1996. As a result, most of the Company's software, hardware and embedded chip technology are already Year 2000 compliant. The Year 2000 Project Team developed an ongoing program designed to bring the remaining software, hardware and embedded chip technology at all of its domestic and international locations into Year 2000 compliance in time to minimize any significant detrimental affects on the Company's business and operations. In many cases these upgrades were already planned as part of ongoing business process improvements. Currently, the Company has completed approximately 95% of the work believed to be required to bring all internal systems into compliance. Converse's current target is to complete all remaining work by the end of the third quarter of 1999. External Year 2000 Compliance. The Year 2000 Project Team reviewed all ----------------------------- material relationships between Converse and each of its vendors and suppliers and determined which ones were critical to Converse's business and operations. The Company addressed each category as follows: "Critical" Suppliers. Converse deemed 165 of its vendors and suppliers ------------------- to be "critical" to the Company's business and operations. Converse has sent each of its critical suppliers a detailed Year 2000 readiness questionnaire and checklist, followed in some cases by formal communication and/or site visits. Response rate to date is 97%, with 93% of the respondents indicating all systems have been or will be verified Year 2000 compliant. For those critical suppliers that do not respond or that do not have adequate compliance plans, Converse is developing contingency plans that assume an estimated level of noncompliance. These plans will likely consist of early purchase of materials, components, work-in-process or finished goods. Even so, these contingency plans are subject to much uncertainty and may not be sufficient to mitigate any business interruption. Thus, some material adverse impact to Converse may result from one or more third parties regardless of Converse's defensive contingency plans. -17- "Non-Critical" Suppliers. The Company sent letters to 2,193 suppliers ----------------------- and vendors deemed to be "non-critical" advising them of the Year 2000 Problem and requesting that they address compliance. Non-compliance by such suppliers would not have a material adverse affect on the Company. Costs Associated with Year 2000 Compliance. - Through the second quarter of 1999 the Company spent approximately $2.2 million on incremental costs associated with the Year 2000 Problem. These costs consisted of new hardware and software as well as the cost of contracted programmers and the salaries and fringe benefits of employees dedicated to addressing the Year 2000 Problem. These costs have been funded through operating cash flows. Approximately $0.8 million of this amount relates to hardware and software which the Company has capitalized and the remainder has been expensed as incurred. The Company estimates that an additional $0.3 million will be incurred during the remainder of 1999 to complete this process. These additional expenditures will be comprised of some additional new hardware and software, as well as the cost of contracted programmers and the salaries and benefits of employees dedicated to addressing the Year 2000 Problem. These estimates are based on currently available information and may change in the event of unforeseen future developments. Risks Associated with the Year 2000 Problem. The failure to correct a material Year 2000 Problem could result in the interruption in, or failure of, certain normal business activities or operations of the Company. Such failures could materially and adversely affect the Company's results of operations, liquidity and financial condition. Due to the general uncertainty inherent in the Year 2000 Problem, resulting primarily from uncertainty of the Year 2000 readiness of third-party vendors and suppliers, the Company is unable at this time to determine whether the consequences of any Year 2000 failures will have a material impact on the Company. As discussed above, Converse is dependent on a large number of vendors and suppliers in most of the locations in which the Company operates to deliver a wide range of goods and services. These vendors and suppliers, in turn, rely on many sub-tier vendors and suppliers. Converse believes that this extended supply chain presents the area of greatest risk of Year 2000 noncompliance, due to Converse's limited ability to influence actions of some of these third parties and because of Converse's inability to accurately estimate the level and impact of noncompliance of third parties throughout the extended supply chain. Forward-looking statements Any statements set forth above which are not historical facts, including the statements concerning the outlook for sales, earnings, anticipated cost savings, and the product and industry developments for 1999 and 2000 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 -18- 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. Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK Interest Rate Risk The Company's exposure to market risk associated with changes in interest rates relates primarily to its debt obligations. The Company's Credit Facility bears interest at the Prime Lending Rate (as defined therein) plus 1% or the adjusted LIBOR (as defined therein) plus 2.5%. The Company's foreign borrowings also have variable interest rates. The Company's Convertible Notes and Secured Notes bear fixed rates of interest. See Item 2 - Management's Discussion and Analysis of Financial Condition and Results of Operations - Liquidity and Capital Resources for further information. Converse does not use derivative financial instruments to hedge its interest rate risks. 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 of generally from three to twelve months. As of July 3, 1999, the company had outstanding foreign exchange forward contracts as follows:
(currency per USD) Notional Average Estimated Amount Contract Rate Fair Value ------ ------------- ---------- (Dollars in thousands) Foreign exchange sell forward contracts: Japanese Yen......................... $6,414.9 113.34 $ 363.2 Australian Dollar.................... $1,123.4 1.59 $ (68.5) Spanish Pesetas...................... $ 140.2 139.80 $ 18.7 Foreign exchange buy forward contracts: Japanese Yen......................... $2,217.7 113.44 $(136.4)
-19- 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. 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 2, 1999. Item 2. Changes in Securities. Not Applicable Item 3. Defaults Upon Senior Securities. Not Applicable Item 4. Submission of Matters to a Vote of Security-Holders. On May 12, 1999, the Company conducted its annual meeting of stockholders pursuant to due notice. A Quorum being present either in person or by proxy, the stockholders voted on the following matters: 1. To elect twelve directors to hold office until the next annual meeting and until their successors are elected and qualified 2. To ratify the appointment of PricewaterhouseCoopers as the Company's independent auditors for the next fiscal year. 3. To consider approval of the Converse Inc. Employee Stock Purchase Plan. Subsequent to the date the Company's proxy materials were delivered to stockholders, Mr. John Ryan, one of the individuals nominated to be elected a director of the Company, declined his nomination due to a heavy work schedule. The Executive Committee of the Company's Board of Directors subsequently voted to reduce the number of directors to be elected to eleven and deleted Mr. Ryan's name from the list of nominees. No other matters were voted upon. The votes cast were as follows: -20- 1. Election of directors. The following directors were elected to the Company's Board:
NUMBER OF VOTES CAST -------------------- FOR WITHHELD --- -------- Donald J. Barr 16,871,184 145,986 Julius W. Erving 16,858,535 158,635 Robert H. Falk 16,857,016 160,154 Gilbert Ford 16,856,179 169,991 Michael S. Gross 16,863,027 154,143 John J. Hannan 16,855,242 161,928 Joshua J. Harris 16,163,703 163,703 John H. Kissick 16,853,688 160,482 Richard B. Loynd 16,864,968 152,202 Glenn N. Rupp 16,870,166 147,004 Michael D. Weiner 16,863,678 153,492
2. Ratification of the selection of PricewaterhouseCoopers as the Company's independent auditors. For 16,693,868 Against 216,148 Abstain 107,154 3. Approval of Converse Inc. Employee Stock Purchase Plan. For 16,693,868 Against 216,148 Abstain 107,154 Item 5. Other Information. Not Applicable -21- Item 6. Exhibits and Reports on Form 8-K (a) Exhibits. The following exhibits are contained in this report: 10.1 Lease Agreement - Charlotte, North Carolina 10.2 Fifth Amendment, dated May 28, 1999, to Credit Agreement dated May 21, 1997. 10.3 Sixth Amendment, dated July 30, 1999, to Credit Agreement dated May 21, 1997. 27 Financial Data Statement (b) Reports on Form 8-K. There were no reports on Form 8-K filed during the quarter ended July 3, 1999. -22- SIGNATURE Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. Dated: August 13, 1999 Converse Inc. By: /s/ Donald J. Camacho -------------------------- Donald J. Camacho Senior Vice President and Chief Financial Officer -23- EXHIBIT INDEX Exhibit No. Description - ----------- ----------- 10.1 Lease Agreement - Charlotte, North Carolina 10.2 Fifth Amendment, dated May 28, 1999, to Credit Agreement dated May 21, 1997. 10.3 Sixth Amendment, dated July 30, 1999, to Credit Agreement dated May 21, 1997. 27 Financial Data Statement EX-10.1 2 LEASE AGREEMENT EXHIBIT 10.1 LEASE AGREEMENT THIS LEASE AGREEMENT (the "Lease"), made and entered into by and between Godley Construction Company I, LLC, a North Carolina limited liability company, hereinafter referred to as "Landlord", and Converse Inc., a corporation organized under the laws of the State of Delaware, hereinafter referred to as "Tenant". WITNESSETH: 1. Premises and Term. In consideration of the obligation of Tenant to pay rent as herein provided, and in consideration of the other terms, provisions and covenants hereof, Landlord hereby demises and leases to Tenant, and Tenant hereby takes from Landlord that certain premises consisting of approximately Seventeen (17) acres, more or less, situated within the County of Mecklenburg, State of North Carolina, and more particularly described on EXHIBIT "A" attached hereto and incorporated herein by reference, together with all rights, privileges, easements, and appurtenances belonging to or in any way pertaining to the premises and together with the buildings and other improvements situated upon said premises (said real property, building and improvements being hereinafter referred to as the "premises"). TO HAVE AND TO HOLD for the term (the "term") commencing on the "commencement date", as hereinafter defined, and ending one hundred twenty (120) months thereafter The commencement date of this lease (hereinafter the "commencement date") shall be at 12:01 A.M. on February 1, 2001, the day immediately following the expiration of the term of the existing lease of the premises, dated March 17, 1970, which Landlord and Tenant hereby agree shall expire on January 31, 2011. 2. Base Rent. Tenant agrees to pay to Landlord base rent for the premises, in advance, without demand, deduction or set off, for the entire term hereof at the rate of Eighty Thousand Two Hundred Forty-Five and No/100 Dollars ($80,245.00) per month. One such monthly installment shall be due and payable on the commencement date and a like monthly installment shall be due and payable on or before the first day of each calendar month succeeding the commencement date during the hereby demised term. 3. Use. The premises shall be used only for the purpose of sale, storage, distribution, repair and servicing of its merchandise, and for all other operations 1 necessary or incident to the conduct of its business. Tenant shall at its own cost and expense obtain any and all licenses and permits necessary for any such use. Tenant shall comply with all governmental laws, ordinances, and regulations applicable to the use of the premises, and shall promptly comply with all governmental orders and directives for the correction, prevention and abatement of nuisances, in, upon or connected with, the premises, all at Tenant's sole expense. Tenant shall not permit any objectionable or unpleasant odors, smoke, dust, gas, noise or vibrations to emanate from the premises, nor take any other action which would constitute a nuisance or would disturb or endanger any other tenants of the building in which the premises are situated or the occupants of buildings in the vicinity of the premises or unreasonably interfere with their use of their respective premises. Without Landlord's prior written consent, Tenant shall not receive, store or otherwise handle any product, material or merchandise which is explosive or highly inflammable. Tenant will not permit the premises to be used for any purpose or in any manner (including without limitation any method of storage) which would render the insurance thereon void or the insurance risk more hazardous or cause the State Board of Insurance or other insurance authority to disallow any sprinkler credits. It is understood that the Tenant's current use of the premises is an appropriate and acceptable use. 4. Base Rent Adjustment. The base rent payable under the terms of Paragraph 2 of this Lease shall be adjusted on the fourth, seventh and tenth annual anniversaries of the commencement date of this Lease in accordance with the following provisions: Base rent shall be increased on each Comparison Date by the Percentage CPI Increase. Provided, however, that: (i) the Base Rent for the second Comparison Date shall be the Base Rent as previously increased during the second three (3) year period of this Lease and (ii) the Base Rent for the third Comparison Date shall be the Base Rent as previously increased during the third three (3) year period of this Lease. Landlord shall notify Tenant on or about each Comparison Date of each increase by delivering a written statement setting forth the Index for the Base CPI Month, the Index for the applicable Comparison CPI Month, the Percentage CPI Increase, and the new minimum base rent payable by Tenant. Beginning on the first (1st) day of the month immediately following receipt by Tenant of Landlord's notice herein, and continuing thereafter until the next Comparison Date or the end of the Lease, whichever shall first occur, Tenant shall pay Landlord the new Base Rent and in addition, Tenant shall pay Landlord the difference between the new Base Rent and the Base Rent previously paid for any month following the last Comparison Date to the end that the Landlord shall have been paid the new Base Rent for each calendar month following the last Comparison Date. 2 For purposes of this Section, the following definitions shall apply: (i) The "Index" shall mean the United States Department of Labor, Bureau of Labor Statistics, Consumer Price Index for all Urban Consumers (on the basis 1982-1984 = 100). If the format or components of the Index have materially changed before or after the execution of this Lease, Landlord shall substitute an index which is published by the Bureau of Labor Statistics or similar agency and which has been determined by independent third party sources to be comparable to the Consumer Price Index for all Urban Consumers in effect on the date of this Lease. Landlord shall notify Tenant of the substituted index, which shall be used to calculate the increase in the minimum base rent. (ii) The "Comparison Date" shall mean each of the third (3rd), sixth (6th) and ninth (9th) calendar anniversary of the commencement date of this Lease. (iii) The "Comparison CPI Month" for each Comparison Date shall mean the month immediately preceding the month in which such Comparison Date occurs. (iv) The "Base CPI Month" shall be defined as follows: (1) for the Comparison Date which occurs on the third (3rd) calendar anniversary of the Lease commencement date, the month in which the lease commencement date occurs (Month 1); (2) for the Comparison Date which occurs on the sixth (6th) calendar anniversary of the Lease commencement date, the month which is three (3) years after the Lease commencement date (Month 37); and (3) for the Comparison Date which occurs on the ninth (9th) calendar anniversary of the Lease commencement date, the month which is six (6) years after the Lease commencement date (Month 73). (v) The "Percentage CPI Increase" shall mean the increase in the Index which has occurred between the Base CPI Month and the Comparison CPI Month for each Comparison Date. 5. Five Year Renewal Option. Landlord hereby grants the Tenant the right to extend the term hereof for an additional five (5) years beginning at 12:01 A.M. on February 1, 2011. The Tenant shall renew the Lease by giving the Landlord written notice thereof as provided in Paragraph 24 hereof not less than six (6) months prior to the expiration of the initial ten year term of this Lease. In the event the Tenant does renew this Lease for such additional five (5) year term, all terms and conditions of this Lease for the initial ten (10) year term shall apply to the five (5) year renewal term except that the rent payable shall be determined as hereinafter provided. 3 The base rent payable for the first two (2) years of the five (5) year renewal term shall be the same amount of rent payable during the tenth (10th) year of the initial ten (10) year term hereof. Base rent shall be increased by the Percentage CPI Increase on the first (and only) Comparison Date during the five (5) year renewal term, which shall be on the second (2nd) calendar anniversary of the beginning of the five (5) year renewal term. The Base CPI Month for the Comparison Date during the five (5) year renewal term shall be the month which is nine (9) years after the Lease commencement date). The provisions of Paragraph 4, except as modified in this Paragraph 5, shall apply in determining the rent payable by the Tenant to the Landlord during the five (5) year renewal term. 6. Landlord's Repairs. Landlord shall at its expense maintain only the roof and the structural soundness of the foundation and exterior walls of the building in good repair, reasonable wear and tear excepted. Tenant shall repair and pay for any damage to the roof, foundation and exterior walls of the building caused by Tenant, or Tenant's employees, agents or invitees, or caused by Tenant's default hereunder. In connection with maintaining the roof in good repair, the Tenant agrees to not allow any of its employees, agents or invitees to gain access to the roof without the written approval of the Landlord, except for the specific purpose of repairing the exhaust fans on the roof which are a part of the HVAC system. With regard to the Landlord's obligations hereunder, the term "walls" as used herein shall not include interior and exterior windows, glass, painting or plate glass, doors, special store fronts or office entries, all of which shall be the responsibility of the Tenant to repair and maintain. Tenant shall immediately give Landlord written notice of defect or need for repairs, after which Landlord shall have reasonable opportunity to repair same or cure such defect. Landlord's liability with respect to any defects, repairs or maintenance for which Landlord is responsible under any of the provisions of this lease shall be limited to the cost of such repairs or maintenance of the curing or such defect. 7. Tenant's Repairs and Other Covenants of Care and Treatment or Premises. A. Tenant shall at its own cost and expense keep and maintain all parts of the premises (except those for which Landlord is expressly responsible under the terms of the Lease) in good condition, promptly making all necessary repairs and replacement, including, but not limited to, interior and exterior windows, glass and plate glass, doors, any special office entries, interior walls, painting, exterior walls (other than structural) and finish work, doors and floor covering, down spouts, gutters, heating and air conditioning systems, transportation accesses 4 and pavement, dock boards, truck doors, dock bumpers, plumbing work and fixtures, termite and pest extermination and regular removal of interior trash and debris, keeping the whole of the premises in a clean and sanitary condition. In making all such repairs and/or replacements, Tenant shall comply with all governmental codes, requirements and regulations. Tenant shall be obligated to repair any damage to Landlord's property caused by fire, windstorm, tornado, earthquake or other casualty, unless the cost to repair is fully covered by the insurance to be maintained by Tenant pursuant to subparagraph 13(A) below. B. Tenant shall, at its own cost and expense, enter into a regularly scheduled preventative maintenance/service contract with a maintenance contractor for servicing all hot water, heating and air conditioning systems and equipment within the premises. The maintenance contractor and the contract must be approved by Landlord. The service contract must include all services suggested by the equipment manufacturer within the operation/maintenance manual and must become effective (and a copy thereof delivered to Landlord) within thirty (30) days after the Commencement Date of this Lease. C. Tenant agrees that washing over the road tractor and trailer equipment is permitted and will take place on the premises, including the truck apron and parking areas, but there shall be no washing of any kind on asphalt areas. D. Tenant covenants and agrees not to permit any employees, agents, representatives, or any subcontractors to go upon the roof of any building within the premises without the Landlord's written consent. Notwithstanding the foregoing, the Tenant may make emergency repairs to the roof; provided, that the Tenant gives the Landlord notice thereof within thirty (30) days thereafter. Tenant shall be permitted access to the office roof to service the HVAC units, but any damage to the roof caused by such servicing shall be the Tenant's responsibility to repair and pay the cost thereof. The failure on the part of the Tenant to comply with this covenant and agreement shall cause the Tenant to be fully liable for the entire cost of making any and all necessary repairs to the roof which were cause by such entry upon the roof. 8. Alterations. Tenant shall not make any alterations, additions or improvements to the premises (including but not limited to roof and wall penetrations) without the prior written consent of Landlord, which consent shall not be unreasonably withheld. Tenant may, without the consent of Landlord, but at its own cost and expense and in a good workmanlike manner erect such shelves, bins, machinery and trade fixtures as it may deem advisable, without altering the basic character of the building or improvements and without overloading or damaging such building or improvements, and in each case complying with all applicable governmental laws, ordinances, regulations and other requirements. All alterations, additions, improvements and partitions 5 erected by Tenant shall be and remain the property of Tenant during the term of this Lease and Tenant shall, unless Landlord otherwise elects as hereinafter provided, remove all alterations, additions, improvements and partitions erected by Tenant and restore the premises to their original condition by the date of termination of this Lease or upon earlier vacating of the premises and shall be delivered up to the Landlord with the premises. All shelves, bins, machinery and trade fixtures installed by Tenant may be removed by Tenant prior to the termination of this Lease if Tenant so elects, and shall be removed by the date of termination of this Lease or upon earlier vacating of the premises if required by Landlord; upon any such removal Tenant shall restore the premises to their original condition. All such removals and restoration shall be accomplished in a good workmanlike manner so as not to damage the primary structure or structural qualities of the buildings and other improvements situated on the premises. 9. Signage. Tenant shall have the right to install signs upon the premises only when first approved in writing by Landlord and subject to any applicable governmental laws, ordinances, regulations and other requirements. Tenant shall remove all such signs by the termination of this Lease. Such installations and removals shall be made in such manner as to avoid injury or defacement of the building and other improvements, and Tenant shall repair any injury or defacement, including without limitation discoloration, caused by such installation and/or removal. The provisions of this paragraph shall not apply to any existing signs upon the premises which were installed during the prior lease. 10. Inspection. Landlord and Landlord's agents and representatives shall have the right to enter and inspect the premises at any reasonable time during business hours, for the purpose of ascertaining the condition of the premises or in order to make such repairs is may be required or permitted to be made by Landlord under the terms of this lease. During the period that is twelve (12) months prior to the end of the term hereof, Landlord and Landlord's agents and representatives shall have the right to enter the premises at any reasonable time during business hours for the purpose of showing the premises and shall have the right to erect on the premises a suitable sign indicating the premises are available. Tenant shall give written notice to Landlord at least forty-five (45) days prior to vacating the premises and shall arrange to meet with Landlord for a joint inspection of the premises prior to vacating. In the event of Tenant's failure to give such notice or arrange such joint inspection, Landlord's inspection at or after Tenant's vacating the premises shall be conclusively deemed correct for purposes of determining Tenant's responsibility for repairs and restoration. 11. Utilities. Landlord has already made available during the prior lease water, electricity and telephone service connections into the premises, and Tenant shall pay for all water, gas, storm water fees, heat, light, power, 6 telephone, sewer, sprinkler charges and other utilities and services used on or from the premises, together with any taxes, penalties, surcharges or the like pertaining thereto and any maintenance charges for utilities and shall furnish all electric light bulbs and tubes. Landlord shall in no event be liable for any interruption or failure of utility services on the premises. 12. Assignment and Subletting. Tenant shall not have the right to assign, sublet, transfer or encumber this lease, or any interest therein, without the prior written consent of Landlord, which consent shall not be unreasonably withheld. Any attempted assignment, subletting, transfer or encumbrance by Tenant in violation of the terms and covenants of this Paragraph shall at Landlord's option be void. In addition to all rents payable hereunder by the Tenant to the Landlord, the Landlord shall, in addition, be entitled to receive from the Tenant one-half (1/2) of all cash or other proceeds received by the Tenant which exceeds the rentals called for hereunder, resulting from any sublease of the premises, assignment of this Lease or any other transfer. Such additional rent shall be paid to Landlord, whether such assignment, subletting or other transfer is consented to by Landlord or not, unless Landlord agrees to the contrary in writing. These covenants shall run with the land and shall bind Tenant and Tenant's heirs, executors, administrators, personal representatives, successors and assigns in any bankruptcy proceeding. Any assignee, sublessee or transferee of Tenant's interest in this lease (all such assignees, sublessees and transferees being hereinafter referred to as "successors"), by assuming Tenant's obligations hereunder shall assume liability to Landlord for all amounts paid to persons other than Landlord by such successors in contravention of this Paragraph. No assignment, subletting or other transfer, whether consented to by Landlord or not, shall relieve Tenant of its liability hereunder. Upon the occurrence of an "event of default" as hereinafter defined, if the premises or any part thereof are then assigned or sublet, Landlord, in addition to any other remedies herein provided, or provided by law, may at its option collect directly from such assignee or subtenant all rents becoming due to Tenant under such assignment or sublease and apply such rent against any sums due to Landlord from Tenant hereunder, and no such collection shall be construed to constitute a novation or a release of Tenant from the further performance of Tenant's obligations hereunder. In determining the reasonableness of Landlord's decision to grant or withhold its consent to a proposed assignment or sublease, Landlord may take into consideration all relevant factors surrounding the proposed assignment or sublease, including, without limitation, the following: (a) the business reputation of the proposed assignee or subtenant and its officers, directors and stockholders; (b) the nature of the business and the proposed use of the premises by the proposed assignee or subtenant; (c) the financial condition of the proposed assignee or subtenant; (c) the effect that the proposed assignee's or subtenant's occupancy or use of a portion of the premises would have upon the premises and Landlord's investment therein; (d) the extent to 7 which the proposed assignee or subtenant and Tenant provide Landlord with assurances reasonably satisfactory to Landlord as to the satisfaction of Tenant's obligation hereunder, including the payment of rent; and (e) restrictions, if any, imposed by the holder of any deed to secure debt or mortgage encumbering the premises or any portion thereof. 13. Fire and Casualty Damage. A. Tenant shall keep the building(s) and all other improvements on the premises insured for the benefit of Landlord only, against loss or damage by fire, windstorm, hurricane, tornado, earthquake and similar hazards covered by insurance of the type now known as "fire or extended coverage", and shall keep and provide boiler and machinery insurance covering pressure vessels, air tanks, boiler, machinery, pressure piping, and heating and air conditioning equipment, in an amount reasonably satisfactory to Landlord. Such fire and extended coverage policy or policies shall be for the full replacement value of the building(s) and all other improvements located on the premises, including sufficient proceeds to rebuild the improvements in compliance with all applicable building codes. Tenant shall maintain and pay for such insurance on Tenant's personal property as Tenant deems appropriate for Tenant's protection. The Tenant shall not use or permit upon the premises anything that will invalidate any policy of hazard or extended coverage or boiler and machinery insurance now or hereafter carried with respect to the premises. B. The policies representing such hazard insurance coverage shall contain a provision that they may not be cancelled without first giving Landlord not less than thirty (30) days prior written notice. A duplicate copy of the policies, or a certificate of such insurance coverage, shall be delivered to Landlord prior to commencement of the term of this Lease, and renewal policies, or copies thereof, shall be delivered to Landlord at least thirty (30) days prior to the expiration date of the preceding policy or policies, provided until such time as the policy or the certificate is available, a binder, in usual form, will suffice. All such insurance shall be for the sole benefit of Landlord, shall be issued by insurance providers who have been approved in writing by the Landlord, and shall be issued in the name of and insure only the Landlord and shall be under its sole control. C. If the buildings situated upon the premises should be damaged or destroyed by fire, tornado or other casualty, Tenant shall give immediate written notice to Landlord. D. If the buildings situated upon the premises should be totally destroyed by fire, windstorm, hurricane, tornado, earthquake or other casualty, or if they should be partially damaged thereby so that rebuilding or repairs cannot in Landlord's estimation be completed within two hundred fifty-five (255) days after the date upon which Landlord is notified by the Tenant of such damage, this 8 lease shall terminate and the rent shall be abated during the unexpired portion of this Lease, effective upon the date of the occurrence of such damage. E. If the buildings situated upon the premises should be damaged by any peril covered by the insurance to be provided by Tenant under subparagraph 13(A) above, but only to such extent that rebuilding or repairs can in Landlord's estimation be completed within two hundred fifty-five (255) days after the date upon which Landlord is notified by the Tenant of such damage, this Lease shall not terminate, and Landlord shall at its sole cost and expense, but only to extent the Landlord has received the insurance proceeds, thereupon proceed with reasonable diligence to rebuild and repair such buildings to substantially the condition in which they existed prior to such damage, except that Landlord shall not be required to rebuild, repair or replace any part of the partitions, fixtures, additions and other improvements which may have been placed in, on or about the premises by Tenant. If the premises are untenantable in whole or in part following such damage, the rent payable hereunder during the period in which they are untenantable shall, nevertheless, not abate and remain fully payable by the Tenant to the Landlord. In the event that Landlord should fail to complete such repairs and rebuilding within two hundred fifty-five (255) days after the date upon which Landlord is notified by Tenant of such damage, Tenant may at its option terminate this lease by delivering written notice of termination to Landlord as Tenant's exclusive remedy, whereupon all rights and obligations hereunder shall cease and terminate. F. Notwithstanding anything herein to the contrary, in the event the holder of any indebtedness secured by a mortgage or deed of trust covering the premises requires that the insurance proceeds be applied to such indebtedness, then Landlord shall have the right to terminate this lease by delivering written notice of termination to Tenant within fifteen (15) days after such requirement is made by any such holder, whereupon all rights and obligations hereunder shall cease and terminate. G. Anything in this lease to the contrary notwithstanding, Landlord and Tenant hereby waive and release each other of and from any and all rights of recovery, claim, action or cause of action, against each other, their agents, officers and employees, for any loss or damage that may occur to the premises, improvements to any building of which the premises are a part, or personal property (building contents) within the building, by reason of fire or the elements regardless of cause or origin, including negligence of Landlord or Tenant and their agents, officers and employees, but only to the extent of the insurance proceeds payable under the policies of insurance covering the property. Because this subparagraph will preclude the assignment of any claim mentioned in it by way of subrogation (or otherwise) to an insurance company (or any other person), the Tenant agrees immediately to give to each insurance company 9 which has issued to it policies of fire and extended coverage insurance, written notice of the terms of the mutual waivers contained in this subparagraph, and to have the insurance policies properly endorsed, if necessary, to prevent the invalidation of the insurance coverage by reason of the mutual waivers contained in this subparagraph. 14. Taxes. Tenant shall pay when due all real property ad valorem taxes (including any increases in any subsequent years, with payments in the last year of Tenant's occupancy to be appropriately apportioned or prorated) and assessments of any kind or nature which may be imposed upon the premises. 15. Liability. Landlord shall not be liable to Tenant or Tenant's employees, agents, patrons or visitors, or to any other person whomsoever, for any injury to person or damage to property on or about the premises, resulting from and/or caused in part or whole by the negligence or misconduct of Tenant, its agents, servants or employees, or of any other person entering upon the premises, or caused by the buildings and improvements located on the premises becoming out of repair, or caused by leakage of gas, oil, water or steam or by electricity emanating from the premises, or due to any cause whatsoever, and Tenant hereby covenants and agrees that it will at all times indemnify and hold safe and harmless the property, the Landlord (including without limitation the trustee and beneficiaries if Landlord is a trust), Landlord's agents and employees from any loss, liability, claims, suits, costs, expenses, including without limitation attorney's fees and damages, both real and alleged, arising out of any such damage or injury; except injury to persons or damage to property the sole cause of which is the negligence of Landlord or the failure of Landlord to repair any part of the premises which Landlord is obligated to repair and maintain hereunder within a reasonable time after the receipt of written notice from Tenant of needed repairs. Tenant shall procure and maintain throughout the term of this lease a policy or policies of insurance, at its sole cost and expense, insuring both Landlord and Tenant against all claims, demands or actions arising out of or in connection with: (i) the premises; (ii) the condition of the premises; (iii) Tenant's operations in and maintenance and use of the premises; and (iv) Tenant's liability assumed under this lease, the limits of such policy or policies to be in the amount of not less than $2,000,000 per occurrence in respect of injury to persons (including death), and in the amount of not less than $1,000,000 per occurrence in respect of property damage or destruction, including loss of use thereof. All such policies shall be procured by Tenant from responsible insurance companies satisfactory to Landlord. Certified copies of such policies, together with receipt evidencing payment of premiums therefor, shall be delivered to Landlord prior to the commencement date of this lease. Not less than fifteen (15) days prior to the expiration date of any such policies, certified copies of the renewals thereof, bearing notations evidencing the payment of renewal premiums shall be delivered to Landlord. Such policies shall further provide that not less than thirty 10 (30) days written notice shall be given to Landlord before such policy may be canceled or changed to reduce insurance provided thereby. 16. Condemnation. A. If the whole or any substantial part of the premises which renders Tenant's current use of the premises impractible should be taken for any public or quasi-public use under governmental law, ordinance or regulation, or by right of eminent domain, or by private purchase in lieu thereof and the taking would prevent or materially interfere with the use of the premises for the purpose for which they are being used, as determined by Landlord, this lease shall terminate and the rent shall be abated during the unexpired portion of this Lease, effective when the physical taking of said premises shall occur. B. If part of the premises shall be taken for any public or quasi-public use under any governmental law, ordinance or regulation, or by right of eminent domain, or by private purchase in lieu thereof, and this Lease is not terminated as provided in the subparagraph above, this Lease shall not terminate but the rent payable hereunder during the unexpired portion of this Lease shall be reduced by an amount proportionate to the percentage of the premises so taken. C. All compensation awarded for any taking (or the proceeds of private sales in lieu thereof) of the premises shall be the property of Landlord, and Tenant hereby assigns its interest in any such award to Landlord-, provided, however, Landlord shall have no interest in any award made to Tenant for loss of business or for the taking of Tenant's fixtures and other property if a separate award for such items is made to Tenant. 17. Holding Over. Tenant will, at the termination of this lease by lapse of time or otherwise, yield up immediate possession to Landlord. If Landlord agrees in writing that Tenant may hold over after the expiration or termination of this Lease, unless the parties hereto otherwise agree in writing on the terms or such holding over, the hold over tenancy shall be construed as a tenancy at will and shall be subject to termination by Landlord at any time upon not less than five (5) days advance written notice, or by Tenant at any time upon not less than thirty (30) days advance written notice, and all of the other terms and provisions of this lease shall be applicable during that period, except that Tenant shall pay Landlord from time to time upon demand, as rental for the period of any hold over, an amount equal to double the rent in effect on the termination date, computed on a daily basis for each day of the hold over period. No holding over by Tenant, whether with or without consent of Landlord, shall operate to extend this lease except as otherwise expressly provided. The preceding provisions of this Paragraph 15 shall not be construed consent for Tenant to hold over. 11 18. Quiet Enjoyment. Landlord covenants that it now has good title to the premises, free and clear of all liens and encumbrances, excepting only the lien for current taxes not yet due, such mortgage or mortgages as are permitted by the terms of this Lease, zoning ordinances and other building and fire ordinances and governmental regulations relating to the use of the premises, and easements, restrictions and other conditions of record. Landlord represents and warrants that it has full right and authority to enter into this Lease and that Tenant, upon paying the rental herein set forth and performing its other covenants and agreements herein set forth, shall peaceably and quietly have, hold and enjoy the premises for the term hereof without hindrance or molestation from Landlord, subject to the terms and provisions of this Lease. 19. Events of Default. The following events shall be deemed to be events of default by Tenant under this lease: A. In the event of (i) failure of Tenant to pay any installment of rent due hereunder promptly for a period of ten (10) days after written notice from Landlord to Tenant of such default; or (ii) failure of Tenant to comply with any other term, covenant or condition of this Lease for a period of thirty (30) days after written notice from Landlord to Tenant of such default (provided, however, that if the default complained of is a default other than one which may be cured by the payment of money, no default on the part of the Tenant in the performance of any acts to be done or conditions to be met shall be deemed to exist if steps shall have been commenced in good faith by the Tenant to rectify the same and shall be prosecuted to completion with diligence and continuity). B. Tenant shall make a transfer in fraud of creditors, or shall make an assignment for the benefit of creditors. C. Tenant shall file a petition, other than a Chapter XI proceeding, under any section or chapter of the United States Bankruptcy Code, as amended, or under any similar law or statute of the United States or any State thereof, or an order for relief shall be entered against Tenant in any proceedings filed against Tenant thereunder. D. A receiver or trustee shall be appointed for all or substantially all of the assets of Tenant. E. Tenant shall vacate all or a substantial portion of the premises, whether or not Tenant is in default of the rental payments due under this Lease. F. Tenant shall fail to discharge any lien placed upon the premises in violation of Paragraph 23 hereof within twenty (20) days after any such lien or encumbrance is filed against the premises, or shall fail to take such actions as is reasonably necessary to cause such lien to be discharged. 12 G. Tenant shall fail to comply with any material term, provision or covenant of this lease (other than the foregoing in this Paragraph 19), and shall not cure such failure within twenty (20) days after written notice thereof to Tenant. 20. Remedies. A. Upon the occurrence of any such events of default described in Paragraph 19 hereof, Landlord shall have the option to pursue any one or more of the following remedies without any notice or demand whatsoever. (a) Terminate this lease, in which event Tenant shall immediately surrender the premises to Landlord, and if Tenant fails so to do, Landlord may, without prejudice to any other remedy which it may have for possession or arrearage in rent, enter upon and take possession of the premises and expel or remove Tenant and any other person who may be occupying such premises or any part thereof, by force if necessary, but only within the law. (b) Enter upon and take possession of the premises and expel or remove Tenant and any other person who may be occupying such premises or any part thereof, by force if necessary, but only within the law and relet the premises and receive the rent therefor. (c) Enter upon the premises, by force if necessary, but only within the law, and do whatever Tenant is obligated to do under the terms of this Lease; and Tenant agrees to reimburse Landlord on demand for any reasonable expenses which Landlord may incur in thus effecting compliance with Tenant's obligations under this Lease, and Tenant further agrees that Landlord shall not be liable for any damages resulting to the Tenant from such action. (d) After obtaining possession as provided herein, alter all locks and other security devices at the premises without terminating this Lease. In the event Landlord may elect to regain possession of the premises by summary ejectment proceeding, Tenant hereby specifically waives any statutory notice which may be required prior to any such proceeding, and agrees that Landlord's execution of this Lease is, in part, consideration for this waiver. In the event Tenant fails to pay any installment of rent hereunder as and when such installment is due, to help defray the additional cost to Landlord for processing such late payments Tenant shall pay to Landlord on demand a late charge in an amount equal to five percent (5%) of such installment; and the failure to pay such amount within ten (10) days after demand therefor shall be an 13 event of default hereunder. The provision for such late charge shall be in addition to all of Landlord's other rights and remedies hereunder or at law and shall not be construed as liquidated damages or as limiting Landlord's remedies in any manner. B. Exercise by Landlord of any one or more remedies hereunder granted or otherwise available shall not be deemed to be in acceptance of surrender of the premises by Tenant, whether by agreement or by operation of law, it being understood that such surrender can be effected only by the written agreement of Landlord and Tenant. No such alteration of locks or other security devices and no removal or other exercise of dominion by Landlord over the property of Tenant or others at the premises shall be deemed unauthorized or constitute a conversion, Tenant hereby consenting, after any event or default, to the aforesaid exercise of dominion over Tenant's property within the premises. All claims for damages by reason of such re-entry and/or repossession and/or alteration of locks or other security devices are hereby waived, as are all claims for damages by reason of any summary ejectment proceedings, or other legal process. Tenant agrees that any re-entry by Landlord may be pursuant to judgement obtained in summary ejectment proceedings or other legal proceedings or without the necessity for any legal proceedings, as Landlord may elect, and Landlord shall not be liable in trespass or otherwise. C. In the event Landlord elects to terminate the lease by reason of an event of default, then notwithstanding such termination, Tenant shall be liable for and shall pay to Landlord, at the address specified for notice to Landlord herein, the sum of all rental and other indebtedness accrued to date of such termination, plus, as liquidated damages and not as a penalty, an amount equal to the present value (using a discount rate equal to the Bank of America's then prime rate) of the total rental hereunder for the remaining portion of the lease term (had such term not been terminated by Landlord prior to the date of expiration stated in Paragraph I ). D. In the event that Landlord elects to repossess the premises without terminating the lease, then Tenant shall be liable for and shall pay to Landlord, at the address specified for notice to Landlord herein, all rental and other indebtedness accrued to the date of such repossession, plus rental and all other charges and expenses required to be paid by Tenant to Landlord during the remainder of the lease term until the date of expiration of the term as stated in Paragraph I diminished by any net sums thereafter received by Landlord through reletting the premises during said period (after deducting expenses incurred by Landlord as provided in subparagraph 17(E) below). In no event shall Tenant be entitled to any excess of any rental obtained by reletting over and above the rental herein reserved. Actions to collect amounts due by Tenant to Landlord under this subparagraph may be brought from time to time, on one or more occasions, without the necessity of Landlord's waiting until expiration of the lease term. 14 E. In case of any event of default or breach by Tenant, or threatened or anticipatory breach or default, Tenant shall also be liable for and shall pay to Landlord, at the address specified for notice to Landlord herein, in addition to any sum provided to be paid above, reasonable brokers' fees incurred by Landlord in connection with reletting the whole or any part of premises; the reasonable costs of removing and storing Tenant's or other occupant's property; the reasonable costs of repairing, altering, remodeling or otherwise putting the premises into condition acceptable to a new tenant or tenants; and all reasonable expenses incurred by Landlord in enforcing or defending Landlord's rights and/or remedies including reasonable attorney's fees. F. If Tenant should fail to make any payment or cure any default hereunder within the time herein permitted, Landlord, without being under any obligation to do so and without thereby waiving such default, may make such payment and/or remedy such other default for the account of Tenant (and enter the premises for such purpose), and thereupon Tenant shall be obligated to, and hereby agrees, to pay Landlord, upon demand, all reasonable costs, expenses and disbursements (including reasonable attorney's fees) incurred by Landlord in taking such remedial action, plus interest thereon at the rate of eight percent (8%) (or the highest rate allowed by law, whichever is less) from the date Landlord incurs such costs, expenses, disbursements or fees. G. In the event of any default by Landlord, Tenant's exclusive remedy shall be an action for damages, but prior to any such action Tenant will give Landlord written notice specifying such default with particularity, and Landlord shall thereupon have thirty (30) days in which to cure any such default. Unless and until Landlord fails to so cure any default after such notice, Tenant shall not have any remedy or cause of action by reason thereof. All obligations of Landlord hereunder will be construed as covenants, not conditions; and all such obligations will be binding upon Landlord only during the period of its possession of the premises and not thereafter. The term "Landlord" shall mean only the owner, for the time being of the premises, and in the event of the transfer by such owner of its interest in the premises, such obligations of the Landlord shall be binding during the lease term upon each new owner for the duration of such owner's ownership. Notwithstanding any other provision hereof, Landlord shall not have any personal liability hereunder. H. In the event that Landlord shall have taken possession of the premises pursuant to the authority herein granted then Landlord shall have the right to keep in place and use all of the furniture, fixtures and equipment at the premises, including that which is owned by or leased to Tenant at all times prior to any foreclosure thereon by Landlord or repossession thereof by any lessor thereof or 15 third party having a lien thereon. Landlord shall also have the right to remove from the premises (without the necessity of obtaining an order for summary ejectment or other legal process) all or any portion of such furniture, fixtures, equipment and other property located thereon and to place same in storage at any premises within the County in which the premises is located; and in such event, Tenant shall be liable to Landlord for costs incurred by Landlord in connection with such removal and storage. Landlord shall also have the right to relinquish possession of all or any portion of such furniture, fixtures, equipment and other property to any person ("Claimant") claiming to be entitled to possession thereof who presents to Landlord a copy of any instrument represented to Landlord by Claimant to have been executed by Tenant (or any predecessor of Tenant) granting Claimant the right under various circumstances to take possession of such furniture, fixtures, equipment or other property, without the necessity on the part of the Landlord to inquire into the authenticity of said instrument's copy of Tenant's or Tenant's predecessors signature thereon and without the necessity of Landlord making any nature of investigation or inquiry as to the validity of the actual or legal basis upon which Claimant purports to act; and Tenant agrees to indemnify and hold Landlord harmless from all cost, expense, loss, damage and liability incident to Landlord's relinquishment of possession of all or any portion of such furniture, fixtures, equipment or other property to Claimant. The rights of Landlord herein stated shall be in addition to any and all other rights which Landlord has or may hereafter have at law or in equity; and Tenant stipulates and agrees that the rights herein granted Landlord are commercially reasonable. 21. Landlord's Lien. In addition to any statutory lien for rent in Landlord's favor, Landlord shall have and Tenant hereby grants to Landlord a continuing security interest for all rentals and other sums of money becoming due hereunder from Tenant, upon all goods, wares, equipment, fixtures, furniture, inventory, accounts, contract rights, chattel paper and other personal property of Tenant situated on the premises, and such property shall not be removed therefrom without the consent of Landlord until all arrearages in rent as well as any and all other sums of money then due to Landlord hereunder shall first have been paid and discharged. In the event of a default under this lease, Landlord shall have, in addition to any other remedies provided herein or by law, all rights and remedies under the Uniform Commercial Code, including without limitation the right to sell the property described in this Paragraph 19 at public or private sale upon five (5) days notice to Tenant. Tenant hereby agrees to execute such financing statements and other instruments necessary or desirable in Landlord's discretion to perfect the security interest hereby created, and hereby appoints Landlord as attorney-in-fact for Tenant with full power and authority to execute such financing statements and other instruments on Tenant's behalf. Any statutory lien for rent is not hereby waived, the express contractual lien herein granted being in addition and supplementary thereto. 16 22. Mortgages. Tenant accepts this lease subject and subordinate to any mortgage(s) and/or deed(s) of trust now or at any time hereafter constituting a lien or charge upon the premises or Landlord's improvements situated thereon, provided, however, that if the mortgagee, trustee, or holder of any such mortgage or deed of trust elects to have Tenant's interest in this lease superior to any such instrument in whole or in part, then by notice to Tenant, from such mortgagee, trustee or holder, this lease shall be deemed superior to such lien, whether this lease was executed before or after said mortgage or deed of trust. Tenant shall at any time hereafter on demand execute any instruments, releases or other documents which may be required by any mortgagee for the purpose of subjecting and subordinating this lease or making this lease superior to the lien of any such mortgage. 23. Mechanic's Liens and Tenant's Personal Property Taxes. A. Tenant shall have no authority, express or implied, to create or place any lien or encumbrance of any kind or nature whatsoever upon, or in any manner to bind, the interest of Landlord or Tenant in the premises or to charge the rentals payable hereunder for any claim in favor of any person dealing with Tenant, including those who may furnish materials or perform labor for any construction or repairs. Tenant covenants and agrees that it will pay or cause to be paid all sums legally due and payable by it on account of any labor performed or materials furnished in connection with any work performed on the premises on which any lien is or can be validly and legally asserted against its leasehold interest in the premises or the improvements thereon and that it will save and hold Landlord harmless from any and all loss, cost or expense based on or arising out of asserted claims or liens against the leasehold estate or against the right, title and interest of the Landlord in the premises or under the terms of this lease. Tenant agrees to give Landlord immediate written notice of the placing of any lien or encumbrance against the premises. B. Tenant shall be liable for all taxes levied or assessed against personal property, furniture or fixtures placed by Tenant in the premises. 24. Notices. Each provision of this instrument or of any applicable governmental laws, ordinances, regulations and other requirements with reference to the sending, mailing or delivery of any notice or the making of any payment by Landlord to Tenant or with reference to the sending, mailing or delivery of any notice or the making of any payment by Tenant to Landlord shall be deemed to be complied with when and if the following steps are taken: A. All rent and other payments required to be made by Tenant to Landlord hereunder shall be payable to Landlord at the address for Landlord hereinbelow 17 set forth or at such other address as Landlord may specify from time to time by written notice delivered in accordance herewith. Tenant's obligation to pay rent and any other amounts to Landlord under the terms of this lease shall not be deemed satisfied until such rent and other amounts have been actually received by Landlord. B. With the exception of the payment of rent as provided in Paragraph 24(a) above, any notice or document required or permitted to be delivered hereunder shall be deemed to be delivered whether actually received or not when deposited in the United States Mail, postage prepaid, Certified or Registered Mail, addressed to the parties hereto at the respective addresses set out below, or at such other address as they have theretofore specified by written notice delivered in accordance herewith: LANDLORD: Godley Construction Company I, LLC c/o Godley Builders, Inc. 415-D Minuet Lane Charlotte, North Carolina 28217 TENANT: Attn: Jack A. Green Converse Inc. One Fordham Road North Reading, Massachusetts 01864-2680 If and when included within the term "Landlord", as used in this instrument, there are more than one person, firm or corporation, all shall jointly arrange among themselves for their joint execution of such a notice specifying some individual at some specific address for the receipt of notices and payments to Landlord; if and when included within the term "Tenant", as used in this instrument, there are more than one person, firm or corporation, all shall jointly arrange among themselves for their joint execution of such a notice specifying some individual at some specific address within the continental United States for the receipt of notices and payments to Tenant. All parties included within the terms "Landlord" and "Tenant" respectively, shall be bound by notices given in accordance with the provisions of this paragraph to the same effect as if each had received such notice. 25. Hazardous Materials. A. For purposes of this lease: (i) "CERCLA" means The Comprehensive Environmental Response, Compensation and Liability Act of 1980; (ii) "Hazardous Material" or "Hazardous Materials" means and includes petroleum (including, without limitation, gasoline, crude oil, fuel oil, diesel oil, lubricating oil, sludge, oil refuse, oil mixed with wastes and any other petroleum-related 18 product), flammable explosives, radioactive materials, any substance defined or designated as a "hazardous substance", under Sections 101 (14) and 102 of CERCLA; (iii) "Release" shall have the meaning given such term, or any similar term, in Section 101 (22) of CERCLA; and (iv) "Environmental Law" or "Environmental Laws" shall mean any "Superfund" or "Super Lien" law, or any other federal, state or local statute, law, ordinance, code, rule, regulation, order or decree, regulating, relating to or imposing liability or standards of conduct concerning any Hazardous Materials as may now or at any time hereafter be in effect and as amended from time to time, including, without limitation, the following, as same may be amended or replaced from time to time, and all regulations promulgated thereunder or in connection therewith: CERCLA; the Superfund Amendments and Reauthorization Act of 1986 ("SARA"); The Clean Air Act ("CCA"); the Clean Water Act ("CWA"); The Toxic Substances Control Act ("TSCA"); The Solid Waste Disposal Act ("SWDA"), as amended by the Resource Conservation and Recovery Act ("RCRA"); and the Occupational Safety and Health Act of 1970 ("OSHA"). B. Tenant hereby covenants and agrees that: (i) no activity shall be undertaken on the premises, nor shall any activity be undertaken within the building if the premises are less than the whole building or on the land on which the premises are situated by Tenant or its agents, employees or contractors, which would in either event cause (A) the premises, building or land to become a hazardous waste treatment, storage or disposal facility regulated or subject to regulation under any Environment Law, (B) a Release of any Hazardous Material into the environment at, on, in, under, above, through, or surrounding the premises, building or land, or (C) the discharge of pollutants ' or effluents into any water source or system, which would require a permit under any federal law, state law, local ordinance or any other Environmental Law pertaining to such matters; (ii) Tenant shall at its sole cost and expense comply with all applicable Environmental Laws relating to or affecting the premises, and Tenant shall keep the premises free and clear of any liens imposed pursuant to any applicable Environmental Laws arising out of Tenant's use of the premises, all at Tenant's sole cost and expense; (iii) Tenant will, at Tenant's sole cost and expense, obtain and/or maintain all licenses, permits and/or other governmental or regulatory actions necessary to comply with all applicable Environmental Laws (the "Permits") and Tenant at all times remain in full compliance with the terms and provisions of the Permits; (iv) Tenant shall immediately give Landlord oral and written notice in the event that Tenant receives any communication from any governmental agency, entity, or any other party with regard to Hazardous Materials on, from or affecting the premises, building or land or otherwise with respect to Tenant's use and occupancy of the premises or the operation of Tenant's business therein; and (v) Tenant shall, at Tenant's sole cost and expense, conduct and complete all investigations, studies, sampling, and testing, and all remedial, removal, and other actions necessary to clean up and remove 19 all Hazardous Materials on, from or affecting the premises or, where resulting from acts or omissions of Tenant or its agents, employees and contractors, the building and/or land, in accordance with all applicable Environmental Laws. C. Tenant hereby indemnifies Landlord and agrees to hold Landlord harmless from and against any and all liens, demands, suits, actions, proceedings, disbursements, liabilities, losses, litigation, damages, judgements, obligations, penalties, injuries, costs, expenses (including, without limitation, attorneys' and expert's fees) and claims of any and every kind whatsoever paid, incurred, suffered by, or asserted against Landlord and/or the premises, building and/or land for, with respect to, or as a direct or indirect result of: (i) the Release or presence from, in, on, over or under the premises of any Hazardous Materials regardless of quantity and regardless of whether or not caused by or within the control of Tenant; (ii) the Release or presence from, in, on, over or under the building or land of Hazardous Materials regardless of quantity where caused by Tenant or its agents, employees or contractors; (iii) the violation of any Environmental Laws relating to or affecting the premises or Tenant, whether or not caused by or within the control of Tenant; and (iv) the failure by Tenant to comply fully with the terms and provisions of this Paragraph 25; provided, however that nothing contained in this Paragraph 25 shall make Tenant liable or responsible for conditions existing prior to the commencement of the term of this lease or first occurring after the expiration of the term of this lease except where caused by Tenant or its agents, employees or contractors. D. In the event Landlord suspects, in its reasonable opinion, that Tenant has violated any of the covenants contained in this Paragraph 25, or that the premises, building or land are not in compliance with the Environmental Laws for any reason as to which Tenant is responsible hereunder, or that the premises, building or land are not free of Hazardous Materials for any reason as to which Tenant is responsible hereunder, Tenant shall take such steps as Landlord requires by written notice to Tenant in order to confirm or deny such occurrences, including, without limitation, the preparation of environmental studies, audits, surveys or reports. In the event that Tenant fails to take such action, Landlord may take such action and shall have such access to the premises as Landlord deems necessary, and the cost and expenses of all such actions taken by Landlord, including, without limitation, Landlord's attorneys' fees, shall be due and payable by Tenant upon demand therefore from Landlord as additional rent hereunder. Further, Landlord reserves the right at any time and from time to time to enter the premises following reasonable advance notice thereof to Tenant (except in cases of emergency) in order to perform periodic environmental studies, audits, surveys and reports and in order to determine whether Tenant is in compliance with the terms of this Paragraph 25. E. The obligations and liabilities of Tenant under this Paragraph 25 shall survive the expiration or earlier termination of this lease. 20 26. Miscellaneous. A. Words of any gender used in this lease shall be held and construed to include any other gender, and words in the singular number shall be held to include the plural, unless the context otherwise requires. B. The terms, provisions and covenants and conditions contained in this Lease shall apply to, inure to the benefit of, and be binding upon, the parties hereto and upon their respective heirs, legal representatives, successors and permitted assigns, except as otherwise herein expressly provided. Landlord shall have the right to transfer and assign, in whole or in part, its rights and obligations in the premises that are the subject of this Lease. Each party agrees to furnish to the other, promptly upon demand, a corporate resolution, proof of due authorization by partners, or other appropriate documentation evidencing the due authorization of such party to enter into this lease. C. The captions inserted in this lease are for convenience only and in no way define, limit or otherwise describe the scope or intent of this lease, or any provision hereof, or in any way affect the interpretation of this lease. D. Tenant agrees from time to time within ten (10) days after request of Landlord, to deliver to Landlord, or Landlord's designee, an estoppel certificate stating that this Lease is in full force and effect, the date to which rent has been paid, the unexpired term of this lease and such other matters pertaining to this Lease as may be requested by Landlord. It is understood and agreed that Tenant's obligation to furnish such estoppel certificates in a timely fashion is a material inducement for Landlord's execution of this Lease. E. This Lease may not be altered, changed or amended except by an instrument in writing signed by both parties hereto. F. All obligations of Tenant hereunder not fully performed as of the expiration or earlier termination of the term of this Lease shall survive the expiration or earlier termination of the term hereof, including without limitation all payment obligations with respect to taxes and insurance and all obligations concerning the condition of the premises. Upon the expiration or earlier termination of the term hereof, and prior to Tenant vacating the premises, Tenant shall pay to Landlord any amount reasonably estimated by Landlord as necessary to put the premises, including without limitation all heating and air conditioning systems and equipment herein, in good condition and repair, ordinary wear and tear excepted. Tenant shall also, prior to vacating the premises, pay to Landlord the amount, as estimated by Landlord, of Tenant's obligation hereunder for real 21 estate taxes and insurance premiums for the year in which the Lease expires or terminates. All such amounts shall be used and held by Landlord for payment of such obligations of Tenant hereunder, with Tenant being liable for any additional costs therefor upon demand by Landlord, or with any excess to be returned to Tenant after all such obligations have been determined and satisfied, as the case may be. G. If any clause or provision of this lease is illegal, invalid or unenforceable under present or future laws effective during the term of this Lease, then and in that event, it is the intention of the parties hereto that the remainder of this Lease shall not be affected thereby, and it is also the intention of the parties to this Lease that in lieu of each clause or provision of this Lease that is illegal, invalid or unenforceable, there be added as a part of this Lease a clause or provision as similar in terms to such illegal, invalid or unenforceable clause or provision as may be possible and be legal, valid and enforceable. H. All references in this lease to "the date hereof' or similar references shall be deemed to refer to the last date, in point of time, on which all parties hereto have executed this lease. I. Landlord and Tenant represent and warrant that they have dealt with no broker, agent or other person in connection with this transaction or that no broker, agent or other person brought about this transaction, and each party agrees to indemnify the other and hold it harmless from and against any claims by any broker, agent or other person claiming a commission or other form of compensation by virtue of having dealt with the other party with regard to this leasing transaction. J. This Lease must be executed by both the Landlord and the Tenant on or before July 15, 1999 for this Lease to become effective. K. The Tenant presently occupies the premises under a lease with the Landlord which shall expire on January 31, 2001(the "current lease"). Attached as a part of this Lease is Exhibit B, which describes additional obligations of both the Landlord and the Tenant under both this Lease and under the current lease. The failure of either party to perform an obligation set forth in Exhibit B shall constitute an Event of Default under Paragraph 19G (as regards the Tenant) or a default under Paragraph 20G (as regards the Landlord). 22 (EXECUTION PAGE TO LEASE OF WESTINGHOUSE BOULEVARD PROPERTY IN CHARLOTTE, NORTH CAROLINA) EXECUTED BY TENANT THIS 7th DAY OF JULY, 1999. Converse Inc. (Corporate Seal) By: /s/ Glenn N. Rupp ---------------------------------------- Name: Glenn N. Rupp ATTEST: ------------------------------------- Title: Chairman and Chief Executive Officer ------------------------------------- /s/ Jack A. Green - --------------------------- Secretary EXECUTED BY LANDLORD, this 8th day of July, 1999. Godley Construction Company I, LLC By: /s/ William C. Godley ---------------------------------------- William C. Godley Title: Manager By: /s/ Robert T. Godley ---------------------------------------- Robert T. Godley Title: Manager 23 Exhibit B 1. The total warehouse building is approximately 437,700 square feet. 2. Landlord to install new roof on the 30,000 square footage office building (return goods building) with a completion date of 9/1/99 or earlier. To include two pump house roofs. 3. Tenant agrees to pay $100,000 to the Landlord in full consideration of its obligation under the lease to return the office building (return goods building) to its original condition. This shall be full payment for any damages and modifications to this building's interior office partitions, lighting, ceilings, carpet, fixtures, driveways, entrance, paving, et cetera. Tenant agrees to pay this amount to Landlord by the expiration of the current lease on January 31, 2001. 4. Landlord to correct the flooding of the dock wells during heavy rains in the shipping and receiving areas by October 1, 1999. 5. Tenant will have all mechanical equipment in satisfactory operating condition at expiration of the original lease on January 31, 2001. 6. The rainspouts shall be either repaired or replaced by Landlord by October 31, 1999. 7. Landlord and Tenant to share on a 50-50 basis the cost of increasing the electrical load into the building from 800 amps to1200 amps by April 1, 2000. This cost is estimated to be in the range of $30,000. 8. Landlord to continue during the existing term and renewal of this lease to be responsible for roof maintenance for the warehouse and the two pump houses. 9. Property leased area describing the boundaries is per the attached drawings. 10. Converse has elected not to continue leasing the 30,000 square footage office building (return goods building). The costs for separating the utilities of the two buildings shall be shared on a 50-50 basis between Landlord and the Tenant. The sprinkler system for this 30,000 SF building to remain "as is" tied into Converse's fire protection lines. 24 11. All modification costs to the existing chain link fence are to be completed by January 31, 2001, the cost of which is to be shared on a 50-50 basis by Tenant and Landlord. 25 EX-10.2 3 FIFTH AMENDMENT, DATED 28, 1999, TO CREDIT AGREEMEMENT EXHIBIT 10.2 FIFTH AMENDMENT TO CREDIT AGREEMENT This Fifth Amendment to Credit Agreement (the "Amendment") is made on this 28th day of May, 1999 by and among Converse Inc. (the "Borrower"), BT Commercial Corporation, as Agent (in such capacity, the "Agent") and BT Commercial Corporation (in its capacity as lender, "BTCC"), Fleet Business Credit Corporation ("FBC"), LaSalle National Bank ("LaSalle"), BankBoston, N.A. ("BankBoston"), FINOVA Capital Corporation ("FINOVA"), BNY Financial Corporation ("BNY"), Fleet Capital Corporation ("Fleet"), NationsBank of Texas, N.A. ("NationsBank"), Heller Financial, Inc. (BT, FBC, LaSalle, BankBoston, FINOVA, BNY, Fleet, NationsBank, and Heller referred to collectively as "Lenders"). W I T N E S S E T H: WHEREAS, the Agent, the Lenders and the Borrower are parties to that certain Credit Agreement dated as of May 21, 1997, as amended by that certain First Amendment to Credit Agreement dated as of June 26, 1997, 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, and that certain Fourth Amendment to Credit Agreement dated as of September 16, 1998 (collectively, the "Credit Agreement"); and WHEREAS, the parties desire to amend the Credit Agreement, as more fully set forth herein. NOW, THEREFORE, in consideration of the mutual agreements herein contained and other good and valuable consideration, the adequacy is hereby acknowledged, and subject to the terms and conditions hereof, the parties hereto agree as follows: SECTION I. DEFINITIONS. Unless otherwise defined herein, all capitalized terms shall have the meaning given to them in the Credit Agreement. SECTION II. AMENDMENTS TO CREDIT AGREEMENT. 2.1 The defined term "Borrowing Base", which appears in Section 1.1 of the Credit Agreement, is hereby amended by deleting the period at the end of subsection (E), and inserting the following new subsection (F): ": plus (F) the sum of $6,000,000 for the period from May 28th, 1999 until the earlier to occur of (i) July 31, 1999, or (ii) the receipt by Borrower of proceeds from any additional issuance of Debt, equity, or any sale or disposition of assets in connection with any securitization of intellectual property and the related stream of royalty payments associated therewith. Only those Lenders whose names appear on Annex I-A hereto shall be obligated to fund Revolving Loans against that portion of the Borrowing Base which includes subsection (F), and then only in the amount of their commitment reflected on such Annex I-A." 2.2 Section 3.6(d) of the Credit Agreement is hereby amended by the addition of the following new final sentence: "Notwithstanding the provisions hereof, in the event of the receipt of any amounts by the Agent for distribution hereunder following the declaration of an Event of Default and an acceleration of the Obligations in accordance with the terms hereof, distributions with respect to the ratable payment of principal due on the Revolving Loans shall be made as if no amounts were outstanding under subsection (F) of the Borrowing Base, to the effect that all other advances outstanding on the Revolving Loans shall be paid prior to the payment of any Revolving Loans outstanding as a result of advances under subsection (F) of the Borrowing Base." 2.3 Annex I-A attached hereto is hereby added as Annex I-A to the Credit Agreement. SECTION III. CONDITIONS PRECEDENT. The effectiveness of this Amendment is expressly conditioned upon satisfaction of the following conditions precedent: 3.1 Agent shall have received copies of this Amendment duly executed by Borrower and Lenders constituting Required Lenders. 3.2 Borrower shall have paid to Agent for the prorata benefit of the Lenders who have committed to make advances pursuant to subsection (F) of the Borrowing Base, an amendment fee in the amount of $150,000. 3.3 Agent shall have received such other documents, certificates and assurances as it shall reasonably request. SECTION IV. REAFFIRMATION OF BORROWER. Borrower hereby represents and warrants to Agent and Lender that (i) the representations and warranties set forth in Section 5 of the Credit Agreement are true and correct on and as of the date hereof, except to the extent (a) that any such representations or warranties relate to a specific date, or (b) of changes thereto as a result of transactions for which Agent and Lender have granted their consent; (ii) Borrower is on the date 2 hereof in compliance with all of the terms and provisions set forth in the Credit Agreement as hereby amended; and (iii) upon execution hereof no Default or Event of Default has occurred and is continuing or has not previously been waived. SECTION V. FULL FORCE AND EFFECT. Except as herein amended, the Credit Agreement and all other Credit Documents shall remain in full force and effect. SECTION VI. COUNTERPARTS. This Amendment may be executed in two or more counterparts, each of which shall be deemed an original, but all of which together shall constitute one and the same document. IN WITNESS WHEREOF, the parties hereto have executed this Amendment on the day and year specified above. BORROWER: CONVERSE INC. By: /s/ Donald J. Camacho ---------------------------------- Name: Donald J. Camacho ---------------------------- Title: Senior Vice President --------------------------- AGENT: BT COMMERCIAL CORPORATION By: /s/ Frank Fazio ---------------------------------- Name: Frank Fazio ---------------------------- Title: Director --------------------------- LENDER: BT COMMERCIAL CORPORATION By: /s/ Frank Fazio ---------------------------------- Name: Frank Fazio ---------------------------- Title: Director --------------------------- 3 LENDER: FLEET BUSINESS CREDIT CORPORATION By: /s/ Jennifer S. Mellitt ---------------------------------- Name: Jennifer S. Mellitt ---------------------------- Title: Vice President --------------------------- LENDER: LASALLE NATIONAL BANK By: /s/ Christopher G. Clifford ---------------------------------- Name: Christopher G. Clifford ---------------------------- Title: Senior Vice President --------------------------- LENDER: BANKBOSTON, N.A. By: ---------------------------------- Name: ---------------------------- Title: --------------------------- LENDER: FINOVA CAPITAL CORPORATION By: /s/ Brian Rujewitz ---------------------------------- Name: Brian Rujewitz ---------------------------- Title: --------------------------- 4 LENDER: BNY FINANCIAL CORPORATION By: ---------------------------------- Name: ---------------------------- Title: --------------------------- LENDER: FLEET CAPITAL CORPORATION By: /s/ Jennifer S. Mellitt ---------------------------------- Name: Jennifer S. Mellitt ---------------------------- Title: Vice President --------------------------- LENDER: NATIONSBANK OF TEXAS, N.A. By: ---------------------------------- Name: ---------------------------- Title: --------------------------- LENDER: HELLER FINANCIAL, INC. By: ---------------------------------- Name: ---------------------------- Title: --------------------------- 5 ANNEX I-A LENDERS AND COMMITMENT AMOUNT With Respect to Subsection (F) of the Borrowing Base as of May ___, 1999 Name and Address of Lender Revolving Credit Commitment - -------------------------- --------------------------- BT COMMERCIAL CORPORATION $6,000,000 233 South Wacker Drive 84th Floor Chicago, Illinois 60606 Attention: Wayne D. Hillock Telecopy No.: (312) 993-8096 6 EX-10.3 4 SIXTH AMENDMENT, DATES JULY 30 1999, TO CREDIT AGREEMENT EXHIBIT 10.3 SIXTH AMENDMENT TO CREDIT AGREEMENT This Sixth Amendment to Credit Agreement (the "Amendment") is made on this 30th day of July, 1999 by and among Converse Inc. (the "Borrower"), BT Commercial Corporation, as Agent (in such capacity, the "Agent") and BT Commercial Corporation (in its capacity as lender, "BTCC"), Fleet Business Credit Corporation ("FBC"), LaSalle National Bank ("LaSalle"), BankBoston, N.A. ("BankBoston"), FINOVA Capital Corporation ("FINOVA"), BNY Financial Corporation ("BNY"), Fleet Capital Corporation ("Fleet"), NationsBank of Texas, N.A. ("NationsBank"), Heller Financial, Inc. (BT, FBC, LaSalle, BankBoston, FINOVA, BNY, Fleet, NationsBank, and Heller referred to collectively as "Lenders"). W I T N E S S E T H: WHEREAS, the Agent, the Lenders and the Borrower are parties to that certain Credit Agreement dated as of May 21, 1997, as amended by that certain First Amendment to Credit Agreement dated as of June 26, 1997, 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, and that certain Fifth Amendment to Credit Agreement dated as of May 28, 1999 (collectively, the "Credit Agreement"); and WHEREAS, the parties desire to amend the Credit Agreement, as more fully set forth herein. NOW, THEREFORE, in consideration of the mutual agreements herein contained and other good and valuable consideration, the adequacy is hereby acknowledged, and subject to the terms and conditions hereof, the parties hereto agree as follows: SECTION I. DEFINITIONS. Unless otherwise defined herein, all capitalized terms shall have the meaning given to them in the Credit Agreement. SECTION II. AMENDMENTS TO CREDIT AGREEMENT. 2.1 The defined term "Borrowing Base", which appears in Section 1.1 of the Credit Agreement, is hereby amended by deleting the reference to "July 31, 1999" contained in subsection (F)(i) thereof and inserting "October 31" in its stead. SECTION III. CONDITIONS PRECEDENT. The effectiveness of this Amendment is expressly conditioned upon satisfaction of the following conditions precedent: 1 3.1 Agent shall have received copies of this Amendment duly executed by Borrower and Lenders constituting Required Lenders. 3.2 Borrower shall have paid to Agent for the benefit of the Lenders who have committed to make advances pursuant to subsection (F) of the Borrowing Base, an amendment fee in the amount of $150,000. 3.3 Agent shall have received such other documents, certificates and assurances as it shall reasonably request. SECTION IV. REAFFIRMATION OF BORROWER. Borrower hereby represents and warrants to Agent and Lender that (i) the representations and warranties set forth in Section 5 of the Credit Agreement are true and correct on and as of the date hereof, except to the extent (a) that any such representations or warranties relate to a specific date, or (b) of changes thereto as a result of transactions for which Agent and Lender have granted their consent; (ii) to the best of Borrower's knowledge, on the date hereof it is in compliance with all of the terms and provisions set forth in the Credit Agreement as hereby amended; and (iii) to the best of Borrower's knowledge, upon execution hereof no Default or Event of Default has occurred and is continuing or has not previously been waived. SECTION V. FULL FORCE AND EFFECT. Except as herein amended, the Credit Agreement and all other Credit Documents shall remain in full force and effect. SECTION VI. COUNTERPARTS. This Amendment may be executed in two or more counterparts, each of which shall be deemed an original, but all of which together shall constitute one and the same document. IN WITNESS WHEREOF, the parties hereto have executed this Amendment on the day and year specified above. BORROWER: CONVERSE INC. By: /s/ Donald J. Camacho ---------------------------------- Name: Donald J. Camacho ---------------------------- Title: Senior Vice President --------------------------- 2 AGENT: BT COMMERCIAL CORPORATION By: /s/ Frank Fazio ---------------------------------- Name: Frank Fazio ---------------------------- Title: Director --------------------------- LENDER: BT COMMERCIAL CORPORATION By: /s/ Frank Fazio ---------------------------------- Name: Frank Fazio ---------------------------- Title: Director --------------------------- LENDER: FLEET BUSINESS CREDIT CORPORATION By: /s/ Jennifer S. Mellitt ---------------------------------- Name: Jennifer S. Mellitt ---------------------------- Title: Vice President --------------------------- LENDER: LASALLE NATIONAL BANK By: /s/ Christopher G. Clifford ---------------------------------- Name: Christopher G. Clifford ---------------------------- Title: Senior Vice President --------------------------- 3 LENDER: BANKBOSTON, N.A. By: /s/ Kathy A.Sweeney ---------------------------------- Name: Kathy A. Sweeney ---------------------------- Title: Vice President --------------------------- LENDER: FINOVA CAPITAL CORPORATION By: /s/ Brian Rujewitz ---------------------------------- Name: Brian Rujewitz ---------------------------- Title: --------------------------- LENDER: BNY FINANCIAL CORPORATION By: /s/ Anthony Viola ---------------------------------- Name: Anthony Viola ---------------------------- Title: Vice President --------------------------- LENDER: FLEET CAPITAL CORPORATION By: /s/ Jennifer S. Mellitt ---------------------------------- Name: Jennifer S. Mellitt ---------------------------- Title: Vice President --------------------------- 4 LENDER: NATIONSBANK OF TEXAS, N.A. By: ---------------------------------- Name: ---------------------------- Title: --------------------------- LENDER: HELLER FINANCIAL, INC. By: /s/ Sara Wrobel ---------------------------------- Name: Sara Wrobel ---------------------------- Title: Vice President --------------------------- 5 EX-27 5 FINANCIAL DATA SCHEDULE
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE COMPANY'S QUARTERLY REPORT ON FORM 10-Q AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000 6-MOS JAN-01-2000 JAN-03-1999 JUL-03-1999 2,317 0 57,370 1,801 77,723 142,200 36,613 16,728 194,025 143,411 74,265 0 0 17,437 (96,197) 194,025 127,219 137,001 93,426 134,334 (895) 0 10,515 (6,953) 1,866 (8,819) 0 0 0 (8,819) (0.51) (0.51)
-----END PRIVACY-ENHANCED MESSAGE-----