-----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, TsSH71MwWNVudR/YFw0A78UGKe9XVtmZr46WgPvP/w2hflPQmsMgqe7CIvhadPiU Gt5L4CJP+EoRIxIoiccfhw== 0000950130-97-002125.txt : 19970506 0000950130-97-002125.hdr.sgml : 19970506 ACCESSION NUMBER: 0000950130-97-002125 CONFORMED SUBMISSION TYPE: S-3/A PUBLIC DOCUMENT COUNT: 9 FILED AS OF DATE: 19970505 SROS: NYSE FILER: COMPANY DATA: COMPANY CONFORMED NAME: CONVERSE INC CENTRAL INDEX KEY: 0000716934 STANDARD INDUSTRIAL CLASSIFICATION: RUBBER & PLASTICS FOOTWEAR [3021] IRS NUMBER: 041419731 STATE OF INCORPORATION: MA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: S-3/A SEC ACT: 1933 Act SEC FILE NUMBER: 333-23791 FILM NUMBER: 97594943 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 S-3/A 1 AMENDMENT NO. 1 TO FORM S-3 AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON MAY 5, 1997 REGISTRATION NO. 333-23791 - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ----------- AMENDMENT NO. 1 TO FORM S-3 REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 ----------- CONVERSE INC. (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER) ----------- DELAWARE 3149 43-1419731 (STATE OR OTHER JURISDICTION (PRIMARY STANDARD (I.R.S. EMPLOYER OF INDUSTRIAL IDENTIFICATION NO.) INCORPORATION OR CLASSIFICATION CODE ORGANIZATION) NUMBER) ONE FORDHAM ROAD NORTH READING, MA 01864 (508) 664-1100 (ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES) ----------- JACK A. GREEN SENIOR VICE PRESIDENT AND GENERAL COUNSEL CONVERSE INC. ONE FORDHAM ROAD NORTH READING, MA 01864 (508) 664-1100 (NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF AGENT FOR SERVICE) COPIES TO PETER S. SARTORIUS BETH R. NECKMAN MORGAN, LEWIS & BOCKIUS LLP LATHAM & WATKINS 2000 ONE LOGAN SQUARE 885 THIRD AVENUE PHILADELPHIA, PA 19103 NEW YORK, NY 10022 (215) 963-5466 (212) 906-1200 APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as practicable after this Registration Statement becomes effective. If the only securities being registered on this Form are being offered pursuant to dividend or interest reinvestment plans, please check the following box. [_] If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, other than securities offered only in connection with dividend or interest reinvestment plans, check the following box. [_] If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, please check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. [_] If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration number of the earlier effective registration statement for the same offering. [_] If delivery of the prospectus is expected to be made pursuant to Rule 434, please check the following box. [_] ----------- CALCULATION OF REGISTRATION FEE - ------------------------------------------------------------------------------- - -------------------------------------------------------------------------------
TITLE OF EACH CLASS PROPOSED MAXIMUM PROPOSED MAXIMUM AMOUNT OF OF SECURITIES TO AMOUNT TO BE OFFERING PRICE AGGREGATE REGISTRATION BE REGISTERED REGISTERED(1) PER UNIT(2) OFFERING PRICE(2) FEE(3) - --------------------------------------------------------------------------------------------- % Convertible Subordinated Notes due 2004.................. $69,000,000 100% $69,000,000 $20,909 - --------------------------------------------------------------------------------------------- Common Stock, no par value per share....... (4) -- -- --
- ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- (1) Includes $9,000,000 principal amount of Notes which may be issued pursuant to an over-allotment option granted to the Underwriters. (2) Estimated solely for the purpose of calculating the registration fee. (3) The Registration Fee was previously paid by Converse Inc. in connection with the filing of the Registration Statement on March 24, 1997. (4) Such indeterminate number of shares of Common Stock of Converse Inc. as may be issuable upon conversion of the Notes being registered hereunder. Such shares of Common Stock will, if issued, be issued for no additional consideration, and therefore no registration fee is required. THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A), MAY DETERMINE. - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- ++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++ +INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A + +REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE + +SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY + +OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT + +BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR + +THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE + +SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE + +UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF + +ANY STATE. + ++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++ SUBJECT TO COMPLETION, DATED MAY 5, 1997 PROSPECTUS $60,000,000 CONVERSE INC. % CONVERTIBLE SUBORDINATED NOTES DUE 2004 INTEREST PAYABLE AND ------- The % Convertible Subordinated Notes due 2004 (the "Notes") offered hereby (the "Offering") are convertible into Common Stock of Converse Inc. ("Converse" or the "Company") at any time at or before maturity, unless previously redeemed, at a conversion price of $ per share, subject to adjustment in certain events. The Common Stock of the Company is traded on the New York Stock Exchange under the symbol "CVE." On May 1, 1997, the last reported sale price of the Common Stock on the New York Stock Exchange was $14 7/8 per share. The Notes do not provide for a sinking fund. The Notes are redeemable, at the option of the Company, in whole or in part, at any time on or after , 2000 at the redemption prices set forth in this Prospectus, together with accrued interest. The Notes are subject to purchase by the Company at the option of the holder upon a Change of Control (as defined herein) at 100% of the principal amount thereof, plus accrued interest. See "Description of Notes." The Notes are unsecured obligations of the Company and are subordinated to all present and future Senior Indebtedness (as defined herein) of the Company and will be effectively subordinated to all indebtedness and other liabilities of subsidiaries of the Company. The Indenture will not restrict the incurrence of any other indebtedness or liabilities by the Company or its subsidiaries. See "Description of Notes--Subordination." Application will be made to list the Notes on the New York Stock Exchange. ------- SEE "RISK FACTORS" BEGINNING ON PAGE 12 FOR A DISCUSSION OF CERTAIN FACTORS THAT SHOULD BE CONSIDERED BY PROSPECTIVE INVESTORS. ------- THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE. - -------------------------------------------------------------------------------- - --------------------------------------------------------------------------------
UNDERWRITING DISCOUNTS PROCEEDS TO PRICE TO PUBLIC (1) AND COMMISSIONS (2) COMPANY (3) - -------------------------------------------------------------------- Per Note % % % - -------------------------------------------------------------------- Total(4) $ $ $
- -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- (1) Plus accrued interest, if any, from , 1997. (2) For information regarding indemnification of the Underwriters, see "Underwriting." (3) Before deducting expenses estimated at $1,000,000 payable by the Company. (4) The Company has granted the Underwriters a 30-day option to purchase up to $9,000,000 principal amount of additional Notes solely to cover over- allotments, if any. See "Underwriting." If such option is exercised in full, the total Price to Public, Underwriting Discounts and Commissions and Proceeds to Company will be $ , $ and $ , respectively. ------- The Notes are being offered by the several Underwriters named herein, subject to prior sale, when, as and if accepted by them and subject to certain conditions. It is expected that delivery of the Notes will be made in book- entry form through the facilities of The Depository Trust Company on or about , 1997. ------- SMITH BARNEY INC. DILLON, READ & CO. INC. DONALDSON, LUFKIN & JENRETTE SECURITIES CORPORATION GOLDMAN, SACHS & CO. , 1997 [THE CONVERSE ALL STAR LOGO APPEARS ON THE PROSPECTUS COVER] BASKETBALL Converse(R) All Star(R) is the American performance brand with authentic sports heritage. As the creator of the original basketball shoe in 1917, it's only natural that today's Converse basketball products offer all of the innovative design and technology features made possible by 80 years of experience. [Picture of All Star 91 Shoe] ATHLEISURE The shoe that started it all provides the Converse brand with its heritage and authenticity. As the original basketball shoe, the canvas All Star with its world-famous ankle patch is now worn by athletes off the court, along with the numerous other authentic athleisure products whose origins are rooted in sports. [Picture of Chuck Taylor(R) All Star Shoe] CHILDREN'S Converse offers a full range of performance athletic footwear for each new generation of young athletes who aspire to be great. Whether it's playing pee wee basketball or hanging out in the park, Converse kids' products are worn by small athletes around the world. [Picture of All Star Desire Shoe] CROSS TRAINING The product category designed for the multiple sport athlete who wants a versatile performance shoe to meet the demanding needs of his/her workout no matter how diverse the fitness regimen. [Picture of Fit Star(TM) Shoe] ------------ CERTAIN PERSONS PARTICIPATING IN THE OFFERING MAY ENGAGE IN TRANSACTIONS THAT STABILIZE, MAINTAIN, OR OTHERWISE AFFECT THE MARKET PRICE OF THE NOTES, THE COMMON STOCK, OR BOTH. SPECIFICALLY, THE UNDERWRITERS MAY OVERALLOT IN CONNECTION WITH THE OFFERING, MAY BID FOR, AND PURCHASE, THE NOTES, THE COMMON STOCK, OR BOTH, IN THE OPEN MARKET AND MAY IMPOSE PENALTY BIDS. FOR A DESCRIPTION OF THESE ACTIVITIES, SEE "UNDERWRITING." [Pictures of Professional Basketball Players Appear Here] PROSPECTUS SUMMARY The following is a summary of certain information appearing elsewhere in this Prospectus. Reference is made to, and this summary is qualified in its entirety by, the more detailed information and financial statements, including the notes thereto, contained elsewhere or incorporated by reference in this Prospectus. As used in this Prospectus, unless the context indicates otherwise, the "Company" or "Converse" refers to Converse Inc. and its subsidiaries. Unless otherwise indicated, the information in this Prospectus assumes that the Underwriters' over-allotment option is not exercised. The Company's fiscal year end is the Saturday closest to December 31 in each year. The results of operations will periodically include a 53 week fiscal year. For purposes of financial information concerning the Company, First Quarter 1997 refers to the three months ended March 29, 1997, First Quarter 1996 refers to the three months ended March 30, 1996, 1996 refers to the 52-week period ended December 28, 1996, 1995 refers to the 52-week period ended December 30, 1995 and 1994 refers to the 52-week period ended December 31, 1994. THE COMPANY Converse is a leading global designer, manufacturer and marketer of high quality athletic footwear for men, women and children. The Company is also a global licensor of sports apparel, accessories and selected footwear. The Company, founded in 1908, began establishing its authentic footwear heritage with the introduction of its original canvas Chuck Taylor(R) basketball shoe in 1923. Throughout its nearly 90-year history, Converse has achieved a high level of brand name recognition due to its reputation for high performance products, quality, value and style. Through its well-known Converse(R) All Star(R) brand, the Company has consistently maintained its position as the American performance brand with authentic sports heritage. The Company's footwear is focused on four core categories: basketball, athleisure, children's and cross training, which represented approximately 34%, 31%, 22% and 8%, respectively, of the Company's 1996 net sales. The basketball category is comprised of high performance footwear for athletes and typically features Converse's proprietary REACT(R) shock absorption technology. Converse's athleisure footwear offerings are centered on the Converse Chuck Taylor All Star canvas athletic shoe, which management believes is the world's all time best-selling athletic shoe with over 550 million pairs sold since its introduction. Converse's rapidly growing children's category consists of children's-sized versions of the Company's basketball, athleisure and cross training shoes, as well as certain styles designed exclusively for children. Cross training, which is the fastest growing category in the athletic footwear industry, consists of high performance athletic shoes used for sports training and fitness. The Company's products are distributed in over 90 countries to approximately 9,000 customers, which include speciality athletic, sporting goods, department and shoe stores, as well as to 37 Company-operated retail outlet stores. In 1996, the Company's reported net sales were $349.3 million. However, this figure understates the total worldwide presence of Converse-branded products since a large portion is sold through licensees, and the Company recognizes only the percentage of these sales which it records as royalty income. Global wholesale sales of Converse-branded products, which include direct sales by the Company to retailers, sales by Converse distributors and sales of licensed products by Converse licensees, were approximately $800 million in 1996, of which over $560 million, or approximately 70%, were international sales. Although the Company's reported net sales declined from 1995 to 1996, global wholesale sales of Converse-branded products increased approximately 11% during this period. During 1996, Converse implemented a series of strategies designed to position the Company for long-term growth and profitability (the "1996 Repositioning"). These strategies included: (i) establishing a new management team, (ii) focusing on four core product categories, (iii) creating a single brand identity, (iv) coordinating marketing and product development and (v) streamlining operations. Primarily as a result of the 1996 Repositioning, net earnings for First Quarter 1997, excluding the one-time gain related to the Apex litigation settlements and bankruptcy plan confirmation described in this Prospectus Summary under "Recent Developments," were $4.7 million, or $0.26 per share, compared to a net loss of $3.3 million, or a $0.20 loss per share, in First Quarter 1996. The Company's net sales for First Quarter 1997 were $136.0 million compared to $86.6 million in First Quarter 1996, an increase of 57%. During First Quarter 1997, the Company recorded 3 substantial sales increases in each of its four product categories of basketball, athleisure, children's, and cross training of approximately 105%, 26%, 66% and 61%, respectively, compared to First Quarter 1996. The Company's gross profit margin also improved to 31.0% of net sales for First Quarter 1997 from 25.0% for First Quarter 1996. In addition, selling, general and administrative expenses, although increasing by $10.5 million in First Quarter 1997 compared to First Quarter 1996, decreased as a percentage of net sales to 27.0% from 30.4%. The foregoing factors enabled the Company to record earnings from operations of $12.3 million for First Quarter 1997 as compared to $0.2 million for First Quarter 1996. Converse's global backlog increased approximately 47% to $220.1 million at March 29, 1997 from $149.3 million at March 30, 1996. The backlog increases were approximately 32%, 83%, 40% and 14%, respectively, in the Company's categories of basketball, athleisure, children's and cross training. THE 1996 REPOSITIONING . Establishing a New Management Team. Since April 1996, the Company has recruited a new management team with proven experience in the athletic footwear and sporting goods industries. The Company appointed Glenn N. Rupp as Chairman and Chief Executive Officer, James E. Solomon as Senior Vice President, Marketing and Edward C. Frederick as Senior Vice President, Research and Development. Previously, Mr. Rupp was at Wilson Sporting Goods Co. for eight years and served as President from 1985 to 1991 and Chief Executive Officer from 1987 to 1991. From 1985 to 1991, net sales at Wilson more than doubled and operating performance significantly improved. Mr. Solomon had previously been President and Chief Operating Officer of Dansk International and, prior to holding that position, had significant experience in the athletic footwear industry with companies such as Avia and New Balance. Dr. Frederick has previously held senior product design and development positions at Nike and adidas. The Company believes that the strategies executed by the new management team have contributed significantly to the recent improvement in the Company's performance. . Focusing on Four Core Product Categories. The Company is focused on four core product categories: basketball, athleisure, children's and cross training. These four categories represented, industry-wide, over $7 billion in domestic retail athletic footwear sales in 1996, and management believes that each of these categories has strong growth potential for Converse All Star-branded products. During 1996, the Company completed its exit from the football, baseball, running, walking, tennis and outdoor categories. The decision to concentrate on the basketball and cross training categories was driven by management's belief that these categories are the two most important athletic footwear categories to the Company's target consumers, males and females ages 12 to 24. The decision to concentrate on the athleisure and children's categories was based on the Company's historic success in these two categories. The Company believes that its increased marketing, advertising, product development and selling focus on its four core product categories will lead to increased market share and profitability. . Creating a Single Brand Identity. Management has created a single new marketing and brand positioning statement that focuses the Company's global marketing efforts on the concept "Converse All Star is the American performance brand with authentic sports heritage." The Company believes that the Converse All Star brand name and the Chuck Taylor patch logo command significant consumer brand awareness generated by their nearly 80-year history. In addition, the Converse All Star brand is enhanced by the Company's position as the originator of the first basketball shoe, the canvas Chuck Taylor All Star. In an effort to capitalize on the Converse All Star brand's significant consumer recognition and authentic heritage, the Company will focus its marketing, advertising and product development to promote this single brand identity. Prior to 1996, the Company's products had been marketed under multiple brand names and logos with different marketing and advertising strategies for each brand. The Company's new singular focus on building one brand has resulted in higher consumer demand in relation to the Company's advertising and marketing expenditures. . Coordinating Marketing and Product Development. During 1996, the new management team greatly increased the Company's ability to develop products consistent with consumer preferences. As a result of consumer demand, the Company has increased the frequency of its product introductions as well as the depth of its products in each of its four core categories. Management anticipates introducing new products 4 every six to eight weeks, as compared to generally having introduced new products semi-annually in the past. The Company's consumer research is integral to the development of both the Company's new products and its advertising campaigns and in-store point of purchase materials. Each of the Company's products is now fully supported by a consistent, integrated marketing program, responsive to the demands of the Company's target customers. Management attributes the success of its Spring 1997 basketball line to its improved marketing and product development. Management believes that the Company's top four selling Spring 1997 basketball shoes will generate net sales in excess of $40 million, a level more than double the net sales of the Company's top four basketball shoes in any prior Spring basketball line. . Streamlining Operations. Due to the elimination of non-core categories, the creation of a single brand marketing strategy and the reduction of infrastructure, the Company's expenses declined substantially during 1996. Selling, general and administrative expenses in 1996 were $114.9 million, or 32.9% of net sales, as compared to $146.3 million, or 35.9% of net sales, in 1995. GROWTH STRATEGIES . Increasing Penetration in Core Categories. The Company continues to aggressively pursue market share increases from its strong base in each of Converse's four core categories, and the Company's Spring 1997 footwear offerings achieved significant market share gains in each category. Management believes that the Company's integrated marketing and product support programs, more frequent product introductions and increased depth of product offering will enable the Company to build on the recent market share gains achieved by Spring 1997 products such as the All Star 2000 canvas, the All Star Springfield, the All Star Tourney and the Dr. J 2000. As a result of the increasing penetration in each of Converse's four core categories in First Quarter 1997, the Company experienced increases in total business (net sales for First Quarter 1997 plus global backlog at March 29, 1997 compared to net sales for First Quarter 1996 plus global backlog at March 30, 1996) in its four core categories of basketball, athleisure, children's and cross training of approximately 53%, 57%, 49% and 29%, respectively. . Enhancing Retail Distribution. The Company views specialty athletic retailers as one of the most important outlets to reach the Company's target consumers. These retailers often showcase Converse-branded head- to-toe footwear and apparel products thereby strengthening the Converse All Star brand. These specialty athletic retailers include Athlete's Foot, Champs, Finish Line, FOOTACTION USA and Foot Locker, among others. Strong consumer demand for the Converse All Star brand has enabled the Company to dramatically increase its sales to this channel. As a result of the Company's increased focus on sales to specialty athletic retailers, the Company's net sales for First Quarter 1997 plus backlog at March 29, 1997 with these five retailers was more than six times greater than net sales for First Quarter 1996 plus backlog at March 30, 1996 with these five retailers. Management believes there are significant opportunities to further increase sales to specialty athletic retailers. . Improving Margins. Increased demand for the Company's products resulting from the successful 1996 Repositioning should enable Converse to realize higher prices, thereby improving gross margins. Due to changes in product mix and less discounting, the Company's average domestic suggested retail price for its Spring basketball line increased from $57 for Spring 1996 to $69 for Spring 1997. The Company's gross profit margin improved to 31.0% for First Quarter 1997 from 25.0% for First Quarter 1996. In addition, management expects to improve its operating margins through the realization of operating leverage as the Company grows its sales more rapidly than its fixed expenses. As a result, selling, general and administrative expenses increased by $10.5 million in First Quarter 1997 compared to First Quarter 1996, but decreased as a percentage of net sales to 27.0% from 30.4%. Furthermore, the Company has improved the percentage of orders taken in advance of delivery. This higher percentage of future orders to sales, combined with more frequent product introductions, should lead to better inventory management and fewer discounts. Management believes that over time the Company will achieve margins more consistent with those of its competitors. 5 . Continuing Focus on Licensing Opportunities. Through the licensing of sports apparel, accessories, and selected footwear, the Company anticipates strong Converse brand sales growth. Through its licensees, the Company provides consumers with Converse-branded products from head- to-toe. Management believes that the integrated apparel offerings provided by Converse's licensees enhance the sales of the Company's footwear and that Converse has strong long-term relationships with its licensees. Management attributes the growth in licensee royalty income from $17.3 million in 1995 to $27.6 million in 1996 and from $4.9 million in First Quarter 1996 to $6.4 million in First Quarter 1997 primarily to the strong consumer demand for Converse-branded apparel in the Pacific region. The Company believes that the strong consumer demand for Converse-branded apparel in the Pacific region is primarily attributable to the underlying strength of Converse's branded footwear sales in the region. Coordinating the licensed apparel effort more closely on a global basis should result in improved distribution of licensed products and increased royalty income. . Increasing International Sales. International wholesale sales of Converse-branded products by the Company and its distributors and licensees were over $560 million in 1996, representing approximately 70% of the approximately $800 million total Converse-branded global wholesale sales in 1996. Although the Company's reported international net sales declined from 1995 to 1996, such net sales increased $3.6 million in First Quarter 1997 from First Quarter 1996, representing an 8.4% increase. International wholesale sales of Converse-branded products increased 12% from approximately $500 million in 1995 to approximately $560 million in 1996. International wholesale sales of Converse-branded products increased 18% from approximately $118 million in First Quarter 1996 to approximately $139 million in First Quarter 1997. Management believes that the Company is well-positioned to continue to take advantage of additional growth opportunities in Europe and the Pacific Rim, as well as opportunities in the developing markets of Latin America and Eastern Europe. The Company also plans to target international consumers directly by customizing its products to suit specific customer needs and tastes in different markets. Management believes that with its experienced management team and focused marketing, product development and selling strategies in place, the Company will continue to build upon the momentum of its recent product successes in order to improve market share and profitability. 6 RECENT DEVELOPMENTS RECENT FINANCIAL RESULTS In the first four months of 1997, the Company's net sales were $163.5 million, a 48% increase from the comparable period of 1996, with substantial increases in all four core categories. The Company's global backlog increased to a record high of $227.9 million as of April 26, 1997, a 50% increase from $152.2 million as of April 27, 1996. Management attributes the improved performance of the Company to the 1996 Repositioning as well as the initial implementation of the Company's growth strategies. COMMITMENT FOR NEW CREDIT FACILITY On April 30, 1997, the Company accepted a commitment letter of BT Commercial Corporation to supply a new $150 million revolving credit facility (the "New Credit Facility"). The New Credit Facility will replace the Company's existing credit facility, will have a term of five years, will provide for borrowings and other credit accommodations in a manner similar to the existing credit facility and will be secured by substantially the same assets as the existing credit facility. Borrowings will initially bear interest at the rate currently provided for under the A Facility (as defined under "Use of Proceeds"), but such interest rate will be reduced in the event that the Company achieves certain financial ratios. The completion of the New Credit Facility is conditional upon completion of the Offering and other customary matters. However, the Offering is not conditioned on the New Credit Facility and no assurance can be given that the New Credit Facility will be completed. FAVORABLE RESOLUTION OF OUTSTANDING LITIGATION; CANCELLATION OF NOTES AND WARRANTS In January 1997, a New York State Supreme Court jury ruled unanimously in favor of Converse and awarded damages against certain former owners of Apex One, Inc. ("Apex") in a lawsuit between Converse and such former owners. Following this jury award, the Company was able to settle substantially all claims with the former owners of Apex. As part of these settlements, the former owners delivered to Converse $10.2 million of subordinated notes (discounted to approximately $8.9 million) and warrants to purchase 1.75 million shares of Converse Common Stock at $11.40 per share (valued at the time of issuance at approximately $3.5 million) and canceled $5.4 million of other contractual obligations, all of which Converse issued in connection with its 1995 acquisition of Apex. In addition, one former owner made a cash payment to Converse of $2.0 million. In February 1997, the United States Bankruptcy Court confirmed a plan of liquidation in connection with the Apex bankruptcy pursuant to which Converse made payments of approximately $4.5 million to the Apex estate and certain creditors of Apex. As a result of the litigation settlements and the bankruptcy plan confirmation, Converse recorded a net pretax gain of $13.1 million in First Quarter 1997. See "Business--Legal Proceedings." 7 THE OFFERING Securities Offered..... $60,000,000 aggregate principal amount of % Convertible Subordinated Notes due 2004 (the "Notes"). Maturity............... , 2004 Payment of Interest.... and , commencing on , 1997. Conversion............. The Notes are convertible at any time prior to maturity, unless previously redeemed, into Common Stock of the Company, at the option of the holder, at a conversion price of $ per share, subject to certain adjustments. See "Description of Notes-- Conversion Rights." Optional Redemption.... The Notes will be redeemable, in whole or in part, at the option of the Company at any time on or after , 2000 at the redemption prices set forth herein plus accrued interest to the date of redemption. See "Description of Notes--Optional Redemption." Repurchase upon Change of Upon a Change of Control (as defined herein), Control............... holders of the Notes will have the right, subject to certain conditions and restrictions, to require the Company to purchase all or part of their Notes at 100% of the principal amount thereof, plus accrued interest. See "Risk Factors--Certain Change of Control Matters" and "Description of Notes--Purchase of Notes at the Option of the Holder Upon a Change of Control." Subordination.......... The Notes are subordinated to all existing and future Senior Indebtedness (as defined herein) and will be effectively subordinated to all indebtedness and other liabilities of all subsidiaries of the Company. The Indenture governing the Notes will not restrict the incurrence of Senior Indebtedness or other indebtedness by the Company or its subsidiaries. On a pro forma basis after giving effect to the Offering and the application of the proceeds therefrom, as of March 29, 1997, there was approximately $117 million of Senior Indebtedness outstanding. See "Risk Factors--Subordination of Notes," "Capitalization" and "Description of Notes-- Subordination." Use of Proceeds........ The net proceeds from the Offering will be used to repay outstanding indebtedness. See "Use of Proceeds." Listing................ Application will be made to list the Notes on the New York Stock Exchange. Common Stock Trading... The Common Stock is traded on the New York Stock Exchange under the symbol "CVE." 8 Information contained or incorporated by reference in this Prospectus contains "forward-looking statements" which can be identified by the use of forward-looking terminology such as "believes," "expects," "may," "will," "should," or "anticipates" or the negative thereof or other variations thereon or comparable terminology, or by discussions of strategy. See, e.g., "The Company--The 1996 Repositioning," "The Company--Growth Strategies" and "Recent Developments" in this Prospectus Summary, "Management's Discussion and Analysis of Financial Condition and Results of Operations," "Business--The 1996 Repositioning" and "Business--Growth Strategies." No assurance can be given that the future results covered by the forward-looking statements will be achieved. The Risk Factors beginning on page 12 constitute cautionary statements identifying important factors with respect to such forward-looking statements, including certain risks and uncertainties, that could cause actual results to vary materially from the future results covered in such forward- looking statements. Other factors could also cause actual results to vary materially from the future results covered in such forward-looking statements. The Company undertakes no obligation to publicly release any revisions to these forward-looking statements to reflect any future events or occurrences. ------------ The Company is incorporated in Delaware, its principal executive offices are located at One Fordham Road, North Reading, Massachusetts 01864, and its telephone number at such location is (508) 664-1100. 9 SUMMARY HISTORICAL AND PRO FORMA FINANCIAL DATA The following summary historical and pro forma financial data of Converse are derived from and should be read in conjunction with Converse's consolidated financial statements and the notes thereto included elsewhere in this Prospectus.
FISCAL YEAR ENDED THREE MONTHS ENDED ------------------------------------------------------------ --------------------------------- DECEMBER 28, 1996 MARCH 29, 1997 -------------------- -------------------- JANUARY 1, DECEMBER 31, DECEMBER 30, PRO MARCH 30, PRO 1994 1994 1995 ACTUAL FORMA(1) 1996 ACTUAL FORMA(1) ---------- ------------ ------------ -------- -------- --------- -------- -------- (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) STATEMENT OF OPERATIONS DATA: Net sales................. $380,427 $437,307 $407,483 $349,335 $349,335 $ 86,551 $135,969 $135,969 Gross profit.............. 126,089 150,752 113,535 86,237 86,237 21,617 42,160 42,160 Selling, general and administrative expenses.. 108,059 128,876 146,332 114,888 114,888 26,306 36,765 36,765 Royalty income............ 10,808 14,212 17,257 27,638 27,638 4,928 6,377 6,377 Earnings (loss) from operations............... 28,838 36,088 (29,722) 164 164 239 12,336 12,336 Interest expense.......... 7,501 7,423 14,043 17,776 13,627 3,837 2,679 2,033 Net earnings (loss)....... 12,104 17,596 (71,747) (18,435) (15,946) (3,260) 12,680(2) 13,068(2) Net earnings (loss) per share.................... $ -- (3) $ 1.05 $ (4.30) $ (1.10) $ (0.95) $ (0.20) $ 0.71(2) $ 0.73(2) Weighted average number of shares of common stock... -- (3) 16,692 16,692 16,761 16,761 16,692 17,862 17,862 OTHER OPERATIONS DATA: Gross margin.............. 33.1% 34.5% 27.9 % 24.7 % 24.7 % 25.0 % 31.0% 31.0% Selling, general and administrative expenses (as a percentage of net sales)................... 28.4% 29.5% 35.9 % 32.9 % 32.9 % 30.4 % 27.0% 27.0% Earnings (loss) from operations (as a percentage of net sales)................... 7.6% 8.3% (7.3)% 0.0 % 0.0 % 0.3 % 9.1% 9.1% EBITDA(4)................. $ 27,387 $ 35,652 $(80,745) $ 3,087 $ 3,087 $ 646 $ 25,846 $ 25,846 EBITDA margin............. 7.2% 8.2.% (19.8)% 0.9 % 0.9 % 0.7 % 19.0% 19.0% Ratio of earnings to fixed charges(5)............... 3.17x 2.65x -- (6) -- (6) -- (6) -- (6) 7.52x 2.95x BALANCE SHEET DATA (AT PERIOD END): Working capital........... $111,080 $131,400 $ 89,680 $(32,648) $ 85,117 $ 91,054 $(32,323) $ 97,677 Total assets.............. 179,954 223,726 224,507 222,603 225,299 230,210 255,834 259,854 Long-term debt, including current maturities(7).... 70,313 77,087 119,148 127,409 132,209 123,420 154,777 160,327 Total stockholders' equity (deficiency)(8)... 10,270 44,987 (22,685) (38,868) (40,972) (25,962) (29,286) (30,816)
10 - -------- (1) Pro forma information reflects consummation of the Offering, application of the net proceeds thereof and execution and delivery of the New Credit Facility as of the first day of the period presented for Statement of Operations Data and Other Operations Data and at December 28, 1996 and March 29, 1997 for Balance Sheet Data. See "Selected Consolidated Historical and Pro Forma Financial Information" and "Use of Proceeds." (2) Net earnings for First Quarter 1997, excluding the one-time gain related to the Apex litigation settlements and bankruptcy plan confirmation, were $4,654, or $0.26 per share, and, on a pro forma basis excluding such one- time gain, would have been $5,042, or $0.28 per share. (3) Reflects the period prior to the Distribution (as defined herein). Converse was wholly-owned by Furniture Brands (as defined herein) throughout the year ended January 1, 1994. (4) "EBITDA" represents net earnings (loss) before interest expense, income taxes, depreciation and amortization and other income and expense. EBITDA is presented as supplemental disclosure because it is a widely utilized financial indicator of a company's ability to generate cash to meet debt service and other obligations. However, EBITDA should not be construed as an alternative to operating earnings or cash flows from operating activities as determined in accordance with generally accepted accounting principles as an indicator of the Company's operating performance. Because all companies and analysts do not calculate EBITDA in an identical manner, EBITDA as presented above is not necessarily comparable to similarly-titled measures of other companies. (5) For purposes of computing the ratio of earnings to fixed charges, "earnings" consist of income before income taxes plus fixed charges. "Fixed charges" consist of interest expense (including, in the case of pro forma information, interest capitalized in connection with the New Credit Facility and the Offering), amortization of deferred financing costs and one-third of rental expense (the portion deemed representative of the interest factor). (6) Earnings did not cover fixed charges by $17,445, $19,466 and $4,235 for the periods ended December 30, 1995, December 28, 1996 and March 30, 1996, respectively. Earnings did not cover fixed charges by $20,117 on a pro forma basis for the Fiscal Year ended December 28, 1996. (7) Long-term debt at December 30, 1995 and December 28, 1996 includes $8,870 of Apex-related debt that was delivered to the Company during First Quarter 1997 in satisfaction of the Company's indemnification claims against substantially all of the former owners of Apex. Long-term debt at March 29, 1997 excludes such amount. See "Business--Legal Proceedings." (8) Total stockholders' equity (deficiency) at December 30, 1995 and December 28, 1996 includes warrants to purchase 1.75 million shares of Common Stock at $11.40 per share (valued at the time of issuance at $3,528) issued in connection with the acquisition of Apex that were delivered to the Company during First Quarter 1997 in satisfaction of the Company's indemnification claims against substantially all of the former owners of Apex. Total stockholders' equity (deficiency) at March 29, 1997 excludes amounts relating to such warrants. See "Business--Legal Proceedings." 11 RISK FACTORS Prospective investors should carefully consider the following factors, together with other information contained and incorporated by reference in this Prospectus, in evaluating an investment in the shares of Common Stock. RECENT OPERATING LOSSES The Company sustained an operating loss of $29.7 million in 1995 and an operating gain of $0.2 million in 1996. The Company had an accumulated stockholders' deficit of $29.3 million at March 29, 1997. Although the earnings that the Company achieved in First Quarter 1997 and the improvements in backlog are encouraging, there can be no assurance that the Company's recent profitability will be maintained. LEVERAGE As of March 29, 1997, after giving pro forma effect to this Offering and the application of the net proceeds therefrom, the Company's consolidated long- term indebtedness would have been $135.6 million, and the Company would have had a total consolidated stockholders' deficit of $30.8 million. The Company's leveraged financial position poses substantial risks to holders of the Notes, including the risks that (i) a substantial portion of the Company's cash flow from operations will be dedicated to the payment of interest on the Notes, borrowings under then existing credit facilities and other indebtedness; (ii) the Company's leveraged position may impede its ability to obtain financing in the future; and (iii) the Company's leveraged financial position may make it more vulnerable to economic downturns and may limit its ability to withstand competitive pressures. See "Use of Proceeds" and "Capitalization." COMPETITION; CHANGES IN CONSUMER PREFERENCES The branded athletic footwear industry is highly competitive. Although worldwide industry data is unavailable, Nike, Inc. ("Nike"), Reebok International Ltd. ("Reebok") and adidas AG ("adidas") are considered the largest athletic footwear companies. Nike generates U.S. footwear revenues in excess of $2.5 billion annually and controls over 30% of the U.S. athletic footwear market. Reebok has U.S. footwear revenues in excess of $1.2 billion annually and controls over 15% of the U.S. athletic footwear market. These two companies, as well as a number of other companies, have full lines of product offerings, compete with Converse in the Far East for manufacturing sources and spend substantially more on product advertising than Converse. In addition, the general availability of offshore athletic shoe manufacturing capacity allows for rapid expansion by competitors and new entrants in the athletic footwear market. See "Business--Competition." The Company's success depends in part on its ability to anticipate and respond to changing merchandise trends and consumer preferences and demands in a timely manner. Accordingly, any failure by the Company to anticipate and respond to changing merchandise trends and consumer preferences and demands could materially adversely affect consumer acceptance of the Company's brand name and product lines, which in turn could materially adversely affect the Company's business, financial condition or results of operations. FOREIGN PRODUCTION Approximately 70% of the Company's footwear is manufactured to its specifications by independent producers located in the Far East, particularly China, Taiwan, Macau, Indonesia, Vietnam and the Philippines. The Company also operates a facility in Mexico for the stitching of canvas uppers for certain athleisure category footwear. As a result of the Company's continuing use of foreign manufacturing facilities, the Company's operations are subject to the customary risks of doing business abroad, including fluctuations in the value of currencies, import and export duties and trade barriers (including quotas), restrictions on the transfer of funds, work stoppage and, in certain parts of the world, political instability. To date, these factors have not had an adverse impact on the Company's operations. See "Business--Sourcing and Manufacturing." 12 ECONOMIC CONDITIONS AND SEASONALITY Converse and the footwear industry in general are dependent on the economic environment and levels of consumer spending which affect not only the ultimate consumer, but also retailers, Converse's primary direct customers. As a result, Converse's results may be adversely affected by downward trends in the economy or the occurrence of events that adversely affect the economy in general. There can be no assurance that any prolonged economic downturn would not have a material adverse effect on Converse. Sales of Converse's footwear products are somewhat seasonal in nature with the strongest sales generally occurring in the first and third quarters. See "Management's Discussion and Analysis of Financial Condition and Results of Operations." INTERNATIONAL SALES AND CURRENCY EXCHANGE International sales accounted for approximately 32%, 49%, 44% and 34% of Converse's net sales in 1994, 1995, 1996 and First Quarter 1997, respectively. Because a significant portion of Converse's international sales, particularly those in the Pacific region, are made through international distributors, Converse's future operating results will depend, in part, on the relationships with these companies. Additionally, Converse's international sales may be affected by changes in demand resulting from fluctuations in currency exchange rates. All foreign distributor agreements are denominated in U.S. dollars. As of the date of this Prospectus, all international sales are denominated in U.S. dollars, and an increase in the value of the U.S. dollar relative to foreign currencies could make Converse products less competitive in those markets. Converse does not currently engage in the use of currency hedges or any other derivative products in foreign currency exchange transactions, although it may engage in such activity in the future. International sales and operations may also be subject to risks such as the imposition of governmental controls, export license requirements, political instability, trade restrictions, changes in tariffs and difficulties in staffing and managing international operations and managing accounts receivable. In addition, the laws of certain countries do not protect Converse's products and intellectual property rights to the same extent as the laws of the United States. There can be no assurance that these factors will not have an adverse effect on Converse's future international sales and, consequently, on Converse's operating results. See "Management's Discussion and Analysis of Financial Condition and Results of Operations" and "Business--Sales and Distribution-- International." NATURE OF ENDORSEMENT CONTRACTS A key element of Converse's marketing strategy has been to obtain endorsements from prominent athletes, and management believes that this has proven to be an effective way to gain global brand exposure. See "Business-- Marketing." These endorsement contracts generally have three to five-year terms, and there can be no assurance that they will be renewed or that endorsers signed by the Company will continue to be effective promoters of the Company's products. If Converse were unable in the future to secure suitable athletes to endorse its products on terms it deemed reasonable, it would be required to modify its marketing plans and could have to rely more heavily on other forms of advertising and promotion, which might not prove to be as effective as endorsements. CONTROLLING STOCKHOLDERS Apollo Investment Fund, L.P. ("Apollo") and its affiliate Lion Advisors, L.P., on behalf of an investment account under management ("Lion"; Apollo and Lion together being referred to herein as the "Apollo Stockholders"), together beneficially owned approximately 65.1% of the outstanding Common Stock of the Company at March 29, 1997. By reason of their ownership of shares of Common Stock, the Apollo Stockholders have the power effectively to control or influence control of the Company, including in elections of the Board of Directors and other matters submitted to a vote of the Company's stockholders, including extraordinary corporate transactions such as mergers. The Apollo Stockholders may exercise such control from time to time. A majority of the Board of Directors consists of individuals associated with affiliates of Apollo and Lion. See "Management" and "Security Ownership of Certain Beneficial Owners and Management." 13 SHARES ELIGIBLE FOR FUTURE SALE The Company had 17,250,056 shares of Common Stock outstanding as of March 29, 1997. The Company, certain of its directors and officers and the Apollo Stockholders have agreed with the Underwriters that they will not, without the prior written consent of Smith Barney Inc., sell any Common Stock for a period of 120 days after the date of this Prospectus, subject to certain limited exceptions. See "Underwriting." Following the expiration of the lock-up period, the Apollo Stockholders could cause Converse to register the shares of Common Stock that they own pursuant to a registration rights agreement. See "Certain Transactions." Following the Offering, future sales of shares, or the availability of shares for future sale, could adversely affect the prevailing market prices of the Notes and the underlying Common Stock. SUBORDINATION OF NOTES The Notes are subordinated to all existing and future Senior Indebtedness (as defined in the Indenture) of the Company and will be effectively subordinated to all indebtedness and other liabilities of any subsidiaries of the Company. Moreover, the Indenture governing the Notes does not restrict the incurrence of Senior Indebtedness or other indebtedness by the Company or its subsidiaries. As a result of such subordination, in the event of insolvency of the Company, holders of Senior Indebtedness will be entitled to be paid in full prior to any payment to the holders of the Notes, and other creditors of the Company also may recover more, ratably, than the holders of the Notes. In addition, an event of default under the Indenture governing the Notes may trigger defaults under Senior Indebtedness of the Company, in which case the holders of such Senior Indebtedness will have the power to demand payment in full and to be paid prior to any payment to the holders of the Notes. Moreover, the absence of limitations in the Indenture on the issuance of Senior Indebtedness could increase the risk that sufficient funds will not be available to pay holders of the Notes after payment of amounts due to the holders of Senior Indebtedness. See "Description of Notes--Subordination." LACK OF PUBLIC MARKET The Company will apply to list the Notes on the New York Stock Exchange. However, the Notes are a new issue of securities, have no established trading market and may not be widely distributed. The Company has been advised by the Underwriters that they currently intend to make a market in the Notes. However, such entities are not obligated to do so, and any market making may be discontinued at any time without notice. There can be no assurance as to whether an active trading market for the Notes will develop. CERTAIN CHANGE OF CONTROL MATTERS The Indenture governing the Notes provides that in the event of a "Change of Control" (as defined in the Indenture), holders of the Notes will have the right, subject to certain conditions and restrictions, to require the Company to purchase all or part of their Notes at 100% of the principal amount thereof, plus accrued interest. In the event of any such Change of Control, there can be no assurance that the Company will have sufficient funds to pay the repurchase price for all Notes tendered for repurchase, or that such a repurchase would not constitute a default under Senior Indebtedness (as defined in the Indenture) entitling the holders of Senior Indebtedness to be paid in full prior to any payment on the Notes. The Company is obligated under the Indenture to comply with any applicable federal securities laws relating to tender offers in the event of any Note repurchase following a Change of Control. To the extent the Change of Control repurchase obligation of the Company increases the costs to, or presents additional burdens upon, any third party seeking to acquire a controlling interest in the Company, such repurchase obligation would have the effect of discouraging a takeover of the Company. See "Description of Notes--Purchase of Notes at the Option of the Holder Upon a Change of Control." ANTI-TAKEOVER PROVISIONS The Company's Restated Certificate of Incorporation contains certain provisions, including authorization to issue "blank check" preferred stock ("Preferred Stock"), prohibition of stockholder action by written consent and the requirement of 75% ("supermajority") stockholder vote to alter, amend, repeal or adopt certain 14 provisions of the Restated Certificate of Incorporation. In addition, the Company's Restated Certificate of Incorporation contains provisions limiting the ability of any person who is the beneficial owner of more than 10% of the outstanding voting stock to effect certain transactions involving the Company unless approved by a majority of the Disinterested Directors (as defined in the Restated Certificate of Incorporation of the Company). Such provisions could impede any merger, consolidation, takeover or other business combination involving the Company or discourage a potential acquiror from making a tender offer or otherwise attempting to obtain control of the Company. See "Description of Capital Stock." USE OF PROCEEDS The net proceeds to Converse from the sale of the Notes offered hereby are estimated to be $57.2 million ($65.9 million if the Underwriters' over- allotment option is exercised in full) after deducting the estimated expenses of the Offering and underwriting discounts and commissions. Converse will use a portion of these funds to repay all of the outstanding borrowings under the "B" portion (the "B Facility") of the Company's existing secured credit facility (the "Credit Facility") with BT Commercial Corporation ("BTCC"), as agent, and certain other institutional lenders (the "Banks"). At March 29, 1997, outstanding borrowings under the B Facility were $26.5 million. The remaining net proceeds will be used to reduce borrowings under the "A" portion (the "A Facility") of the Credit Facility, which at March 29, 1997 were $128.3 million. See "Management's Discussion and Analysis of Financial Condition and Results of Operations--Liquidity and Capital Resources--Financing Arrangements." Borrowings under the Credit Facility bear interest at floating rates that at March 29, 1997 were 8.26% for the A Facility and 11.24% for the B Facility. Indebtedness under the Credit Facility matures on November 17, 1997, subject to the right of the Company to extend it for an additional two years as long as the B Facility has been paid in full and no event of default exists. However, the Company anticipates replacing the Credit Facility with the New Credit Facility. See "Management's Discussion and Analysis of Financial Condition and Results of Operations--Liquidity and Capital Resources--Financing Arrangements." On a pro forma basis giving effect to the Offering and the New Credit Facility, interest expense of the Company for 1996 would have been reduced by approximately $4.1 million. See "Selected Consolidated Historical and Pro Forma Financial Information." CAPITALIZATION The following table sets forth the capitalization of the Company at March 29, 1997 on a historical basis and as adjusted to reflect the sale by the Company of the Notes offered hereby and the application of the net proceeds therefrom. See "Use of Proceeds." The information set forth in the table should be read in conjunction with the consolidated financial statements of the Company and the notes thereto included elsewhere in this Prospectus. See "Selected Consolidated Historical and Pro Forma Financial Information" and "Index to Consolidated Financial Statements."
MARCH 29, 1997 -------------------------- ACTUAL AS ADJUSTED ----------- ------------- (DOLLARS IN THOUSANDS) Long-term debt, including current maturities: Credit facility................................... $ 154,777 $ 100,327 % Convertible Subordinated Notes due 2004....... -- 60,000 ----------- ----------- Total long-term debt.............................. 154,777 160,327 ----------- ----------- Stockholders' equity (deficiency): Common Stock, $1.00 stated value, 50,000,000 shares authorized, 17,250,056 shares issued and outstanding...................................... 17,250 17,250 Additional paid-in capital and retained earnings (deficit)........................................ (46,536) (48,066) ----------- ----------- Total stockholders' equity (deficiency)......... (29,286) (30,816) ----------- ----------- Total capitalization................................ $ 125,491 $ 129,511 =========== ===========
15 PRICE RANGE OF COMMON STOCK AND DIVIDEND POLICY The Company's Common Stock is traded on the New York Stock Exchange under the symbol "CVE." The following table sets forth the range of high and low sales prices for the Common Stock as reported by the New York Stock Exchange for the periods indicated.
HIGH LOW ------- ------- 1995 First Quarter............................................ $11 3/4 $ 9 3/8 Second Quarter........................................... 9 7/8 6 5/8 Third Quarter............................................ 8 5/8 5 3/8 Fourth Quarter........................................... 5 3/4 3 1/2 1996 First Quarter............................................ $ 7 1/8 $ 4 1/8 Second Quarter........................................... 5 1/2 3 7/8 Third Quarter............................................ 6 7/8 4 1/8 Fourth Quarter........................................... 15 3/4 6 1997 First Quarter ........................................... $ 28 $13 7/8 Second Quarter (to May 1, 1997).......................... 18 7/8 13 3/4
On May 1, 1997, the last reported sale price of the Common Stock on the New York Stock Exchange was $14 7/8 per share. As of March 29, 1997, there were approximately 2,300 holders of record of the Company's Common Stock. The Company has not paid any dividends on its Common Stock during the periods indicated and does not anticipate paying any dividends on its Common Stock in the foreseeable future. In addition, both the Credit Facility and the New Credit Facility will restrict the payment of dividends. Any future payment of dividends will depend upon the financial condition, capital requirements, earnings and loan covenant restrictions of Converse, as well as upon other factors that the Board of Directors may deem relevant. 16 SELECTED CONSOLIDATED HISTORICAL AND PRO FORMA FINANCIAL INFORMATION The following selected consolidated historical and pro forma financial information of Converse should be read in conjunction with Converse's historical consolidated financial statements and the notes thereto included elsewhere in this Prospectus. The following selected historical consolidated financial data has been derived from the historical consolidated financial statements of Converse. Prior to the Distribution (as hereinafter defined) effected on November 17, 1994, Converse was a wholly-owned subsidiary of Furniture Brands (as hereinafter defined). The historical consolidated financial statements of Converse for 1994 may not reflect the results of operations or financial position that would have been obtained had Converse been a separate, independent company during such period. The financial statements at March 29, 1997 and for the three months ended March 30, 1996 and March 29, 1997 are unaudited but include all adjustments, consisting of normal recurring accruals, which management of the Company considers necessary for a fair presentation. Results for the three months ended March 29, 1997 are not necessarily indicative of the results to be expected for any other interim period or for the full year. The pro forma information is presented for comparative purposes only and is not necessarily indicative of what the Company's financial position or results of operations would have been if the Offering and the New Credit Facility had been completed on the dates indicated.
FISCAL YEAR ENDED THREE MONTHS ENDED ----------------------------------------------------------------- -------------------------------- DECEMBER 28, 1996 MARCH 29, 1997 ---------------------- -------------------- JANUARY 1, DECEMBER 31, DECEMBER 30, PRO MARCH 30, PRO 1994 1994 1995 ACTUAL FORMA(1) 1996 ACTUAL FORMA(1) ---------- ------------ ------------ -------- -------- --------- -------- -------- (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) STATEMENT OF OPERATIONS DATA: Net sales............. $380,427 $437,307 $407,483 $349,335 $349,335 $ 86,551 $135,969 $135,969 Cost of sales......... 254,338 286,555 293,948 263,098 263,098 64,934 93,809 93,809 -------- -------- -------- -------- -------- -------- -------- -------- Gross profit.......... 126,089 150,752 113,535 86,237 86,237 21,617 42,160 42,160 Selling, general and administrative expenses 108,059 128,876 146,332 114,888 114,888 26,306 36,765 36,765 Royalty income........ 10,808 14,212 17,257 27,638 27,638 4,928 6,377 6,377 Restructuring expense (credit)............. -- -- 14,182 (1,177) (1,177) -- (564) (564) -------- -------- -------- -------- -------- -------- -------- -------- Earnings (loss) from operations........... 28,838 36,088 (29,722) 164 164 239 12,336 12,336 Loss (credit) on investment in unconsolidated subsidiary........... -- -- 52,160 (1,362) (1,362) -- (13,051) (13,051) Interest expense...... 7,501 7,423 14,043 17,776 13,627 (2) 3,837 2,679 2,033 (3) Other expense, net.... 1,904 504 3,966 6,319 6,319 877 2,090 2,090 -------- -------- -------- -------- -------- -------- -------- -------- Earnings (loss) before income tax expense (benefit)............ 19,433 28,161 (99,891) (22,569) (18,420) (4,475) 20,618 21,264 Income tax expense (benefit)............ 7,329 10,565 (28,144) (4,134) (2,474)(4) (1,215) 7,938 8,196 (5) -------- -------- -------- -------- -------- -------- -------- -------- Net earnings (loss)... $ 12,104 $ 17,596 $(71,747) $(18,435) $(15,946) $ (3,260) $ 12,680(6) $ 13,068 (6) ======== ======== ======== ======== ======== ======== ======== ======== Net earnings (loss) per share............ $ -- (7) $ 1.05 $ (4.30) $ (1.10) $ (0.95) $ (0.20) $ 0.71(6) $ 0.73(6)(8) ======== ======== ======== ======== ======== ======== ======== ======== Weighted average number of shares of common stock......... -- (7) 16,692 16,692 16,761 16,761 16,692 17,862 17,862 OTHER OPERATIONS DATA: Gross margin.......... 33.1% 34.5% 27.9 % 24.7% 24.7% 25.0% 31.0% 31.0% Selling, general and administrative expenses (as a percentage of net sales)........... 28.4% 29.5% 35.9 % 32.9% 32.9% 30.4% 27.0% 27.0% Earnings (loss) from operations (as a percentage of net sales)............... 7.6% 8.3% (7.3)% 0.0% 0.0% 0.3% 9.1% 9.1% EBITDA(9)............. $ 27,387 $ 35,652 $(80,745) $ 3,087 $ 3,087 $ 646 $ 25,846 $ 25,846 EBITDA margin......... 7.2% 8.2% (19.8)% 0.9% 0.9% 0.7% 19.0% 19.0% Ratio of earnings to fixed charges(10).... 3.17x 2.65x -- (11) -- (11) -- (11) -- (11) 7.52x 2.95x BALANCE SHEET DATA (AT PERIOD END): Working capital....... $111,080 $131,400 $ 89,680 $(32,648) $ 85,117 $ 91,054 $(32,323) $ 97,677 (12) Total assets.......... 179,954 223,726 224,507 222,603 225,299 230,210 255,834 259,854 (13) Long-term debt, including current maturities(14) 70,313 77,087 119,148 127,409 132,209 123,420 154,777 160,327 (15) Total stockholders' equity (deficiency)(16) 10,270 44,987 (22,685) (38,868) (40,972) (25,962) (29,286) (30,816)(17)
17 - -------- (1) Pro forma information reflects consummation of the Offering, application of the net proceeds thereof and execution and delivery of the New Credit Facility as of the first day of the period presented for Statement of Operations Data and Other Operations Data and December 28, 1996 and March 29, 1997 for Balance Sheet Data. See "Use of Proceeds" and "Management's Discussion and Analysis of Financial Condition and Result of Operations-- Liquidity and Capital Resources--Financing Arrangements." (2) The pro forma interest expense reduction of $4,149 represents (i) elimination of actual 1996 B Facility interest expense of $3,574, (ii) elimination of actual 1996 A Facility interest expense of $1,916 based upon the average borrowings outstanding under the A Facility during 1996, (iii) elimination of actual 1996 Credit Facility fees and amortization of certain fees totaling $4,109 no longer applicable by reason of the termination of the Credit Facility, (iv) addition of interest payable under the Notes of $4,350 at an assumed rate of 7 1/4%, (v) addition of $400 representing amortization of estimated fees and expenses relating to the Notes and (vi) addition of $700 representing amortization of estimated bank fees relating to the New Credit Facility. (3) The pro forma interest expense reduction of $646 represents (i) elimination of actual First Quarter 1997 B Facility interest expense of $743, (ii) elimination of actual First Quarter 1997 A Facility interest expense of $630 based upon the average borrowings outstanding under the A Facility during First Quarter 1997, (iii) elimination of actual First Quarter 1997 Credit Facility fees and amortization of certain fees totaling $611 no longer applicable by reason of the termination of the Credit Facility, (iv) addition of interest payable under the Notes of $1,088 at an assumed rate of 7 1/4%, (v) addition of $100 representing amortization of estimated fees and expenses relating to the Notes and (vi) addition of $150 representing amortization of estimated bank fees relating to the New Credit Facility. (4) Reflects the pro forma tax effect of $1,660, at the estimated rate of 40%, of the pro forma interest expense reduction of $4,149 discussed in Note (2) above. (5) Reflects the pro forma tax effect of $258, at the estimated rate of 40%, of the pro forma interest expense reduction of $646 discussed in Note (3) above. (6) Net earnings for First Quarter 1997, excluding the one-time gain related to the Apex litigation settlements and bankruptcy plan confirmation, were $4,654, or $0.26 per share, and, on a pro forma basis excluding such one- time gain, would have been $5,042, or $0.28 per share. (7) Reflects the period prior to the Distribution (as defined herein). Converse was wholly-owned by Furniture Brands (as defined herein) throughout the year ended January 1, 1994. (8) Fully-diluted earnings per share calculated using the "if converted" method, based on weighted average shares outstanding of 21,141 (assuming a conversion price of $18.30 per share), would have been $0.65 on a pro forma basis for First Quarter 1997. Such calculation was anti-dilutive on a pro forma basis for the Fiscal Year ended December 28, 1996. (9) "EBITDA" represents net earnings (loss) before interest expense, income taxes, depreciation and amortization and other income and expense. EBITDA is presented as supplemental disclosure because it is a widely utilized financial indicator of a company's ability to generate cash to meet debt service and other obligations. However, EBITDA should not be construed as an alternative to operating earnings or cash flows from operating activities as determined in accordance with generally accepted accounting principles as an indicator of the Company's operating performance. Because all companies and analysts do not calculate EBITDA in an identical manner, EBITDA as presented above is not necessarily comparable to similarly-titled measures of other companies. (10) For purposes of computing the ratio of earnings to fixed charges, "earnings" consists of income before income taxes plus fixed charges. "Fixed charges" consist of interest expense (including, in the case of pro forma information, interest capitalized in connection with the New Credit Facility and the Offering), amortization of deferred financing costs and one-third of rental expense (the portion deemed representative of the interest factor). (11) Earnings did not cover fixed charges by $17,445, $19,466 and $4,235 for the periods ended December 30, 1995, December 28, 1996 and March 30, 1996, respectively. Earnings did not cover fixed charges by $20,117 on a pro forma basis for the Fiscal Year ended December 28, 1996. (12) At March 29, 1997, the Company had current maturities of long-term debt of $154,777, including all debt outstanding under the Credit Facility. As a result of the Offering and the New Credit Facility, $130,000 has been classified as long-term on a pro forma basis as of March 29, 1997, representing borrowings not expected to be paid within one year. (13) Represents (i) the elimination of $1,530 of prepaid Credit Facility fees no longer applicable as of March 29, 1997 on a pro forma basis, (ii) the addition of $2,850 of prepaid fees pertaining to the New Credit Facility, and (iii) the addition of $2,700 of prepaid issuance fees pertaining to the Notes. (14) Long-term debt at December 30, 1995 and December 28, 1996 includes $8,870 of Apex-related debt that was delivered to the Company during First Quarter 1997 in satisfaction of the Company's indemnification claims against substantially all of the former owners of Apex. Long-term debt at March 29, 1997 excludes such amount. See "Business--Legal Proceedings." (15) Represents additional pro forma debt incurred of $5,550 as of March 29, 1997 in conjunction with fees and issuance costs pertaining to the New Credit Facility and the Notes. (16) Total stockholders' equity (deficiency) at December 30, 1995 and December 28, 1996 includes warrants to purchase 1.75 million shares of Common Stock at $11.40 per share (valued at the time of issuance at $3,528) issued in connection with the acquisition of Apex that were delivered to the Company during First Quarter 1997 in satisfaction of the Company's indemnification claims against substantially all of the former owners of Apex. Stockholders' equity (deficiency) at March 29, 1997 excludes amounts relating to such warrants. See "Business--Legal Proceedings." (17) Represents the elimination of $1,530 of prepaid Credit Facility fees as a result of the New Credit Facility. 18 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following discussion is based upon and should be read in conjunction with the consolidated financial statements and the notes thereto of the Company included elsewhere herein. GENERAL Converse was founded in 1908, and operated as an independent family-owned company until 1971, when it was acquired by Eltra Corporation, a diversified holding company. In 1983, Converse became a publicly-traded company through an initial public offering. In 1986, Furniture Brands International, Inc. ("Furniture Brands"), then named INTERCO INCORPORATED, acquired Converse. On November 17, 1994, Furniture Brands distributed to its stockholders all of the outstanding Common Stock of Converse (the "Distribution"), and Converse became an independent publicly-traded company. Converse is a leading global designer, manufacturer and marketer of high quality athletic footwear for men, women and children. The Company is also a global licensor of sports apparel, accessories and selected footwear. The Company's products are distributed in over 90 countries to approximately 9,000 customers, which include athletic specialty, sporting goods, department and shoe stores, as well as to 37 Company-operated retail outlet stores. The primary costs and expenses of the Company result from the following: athletic products sourced from various Far East manufacturers, employee salaries and fringe benefits, advertising and promotion expenses and the purchase of raw materials used in the Company's manufacturing process. COMPANY STRATEGIES The Company has been repositioned based on a series of key business strategies including: (i) establishing a new management team; (ii) focusing on four core product categories; (iii) creating a single brand identity; (iv) coordinating marketing and product development; and (v) streamlining operations. Strategies implemented by management during late 1995 and 1996 are beginning to yield positive results. The Company believes that further growth will be achieved through the execution of the following strategies: (i) increasing penetration in core categories; (ii) enhancing retail distribution; (iii) improving margins; (iv) continuing focus on licensing opportunities; and (v) increasing international sales. RESULTS OF OPERATIONS The Company's fiscal year end is the Saturday closest to December 31 in each year. The results of operations will periodically include a 53 week fiscal year. For purposes of the Company's financial statements, First Quarter 1997 refers to the three months ended March 29, 1997 ("First Quarter 1997"), First Quarter 1996 refers to the three months ended March 30, 1996 ("First Quarter 1996"), fiscal 1996 refers to the 52-week period ended December 28, 1996 ("Fiscal 1996"), fiscal 1995 refers to the 52-week period ended December 30, 1995 ("Fiscal 1995"), and fiscal 1994 refers to the 52-week period ended December 31, 1994 ("Fiscal 1994"). 19 COMPARISON OF FIRST QUARTER 1997 AND FIRST QUARTER 1996 The following table sets forth certain items related to operations and such items as a percentage of net sales for First Quarter 1997 and First Quarter 1996.
THREE MONTHS ENDED ---------------------------------------------------------- MARCH 30, 1996 % MARCH 29, 1997 % ---------------------------- ---------------------------- (DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) Net sales............... $ 86,551 100.0 $135,969 100.0 Gross profit............ 21,617 25.0 42,160 31.0 Selling, general and administrative expenses............... 26,306 30.4 36,765 27.0 Royalty income.......... 4,928 5.7 6,377 4.7 Earnings from operations............. 239 0.3 12,336 9.1 Loss (credit) on investment in unconsolidated subsidiary............. -- -- (13,051) (9.6) Interest expense........ 3,837 4.4 2,679 2.0 Net earnings (loss)..... (3,260) (3.8) 12,680 9.3 Earnings (loss) per share.................. $ (0.20) $ 0.71
Net Sales Net sales for First Quarter 1997 increased to $136.0 million from $86.6 million for First Quarter 1996, a 57.0% increase. The $49.4 million improvement in net sales was attributable to increases of 104.9%, 26.2%, 65.8%, and 61.3% for First Quarter 1997 in the four core categories of basketball, athleisure, children's and cross training, respectively, as compared to First Quarter 1996. Net sales in the United States increased 105.3% to $89.3 million in First Quarter 1997 from $43.5 million for First Quarter 1996. Net sales increased 8.4% internationally to $46.7 million for First Quarter 1997 from $43.1 million for First Quarter 1996. First Quarter 1997 Pacific region net sales increased 61.0% from First Quarter 1996, partially offset by sales declines of 10.0% and 15.0% in Europe and Latin America, respectively. Gross Profit Gross profit increased to $42.2 million for First Quarter 1997 from $21.6 million for First Quarter 1996, a 95.4% improvement. Volume increases accounted for the majority of the gross profit improvement over this period, with the remaining improvement due to price increases, changes in product mix and a strong emphasis on future orders resulting in improved inventory controls. The Company's gross profit margin improved to 31% of net sales for First Quarter 1996 compared to 25% for First Quarter 1996. Selling, General and Administrative Expense Selling, general and administrative expenses increased 39.9% to $36.8 million for First Quarter 1997 from $26.3 million for First Quarter 1996. As a percentage of net sales, selling, general and administrative expenses decreased to 27.0% for First Quarter 1997 from 30.4% for the prior year period. This increase in selling, general and administrative expenses of $10.5 million was required to support the strong net sales growth and was primarily attributable to: (i) a 135.2% increase in United States advertising, (ii) a 31.0% increase in United States selling expenses to support a sales increase of approximately 105%, and (iii) a 22.7% increase in international sales and marketing expenditures. Royalty Income Royalty income increased by 30.6% to $6.4 million in First Quarter 1997 from $4.9 million in First Quarter 1996. Strong global demand for Converse apparel accounted for the majority of this increase. As a percentage of net sales, royalty income was 4.7% in First Quarter 1997 compared to 5.7% in First Quarter 1996. 20 Earnings from Operations The Company recorded earnings from operations of $12.3 million for First Quarter 1997 as compared to $0.2 million for First Quarter 1996. The improvement in earnings from operations was mainly attributable to the factors discussed above. As a percentage of net sales, First Quarter 1997 earnings from operations were 9.1% as compared to 0.3% for First Quarter 1996. Loss (Credit) on Investment in Unconsolidated Subsidiary In First Quarter 1997, Converse recorded a pretax gain totaling $13.1 million relating to the settlement of certain Apex-related litigation and the Apex bankruptcy plan confirmation. See Note 8 to the Company's March 29, 1997 Consolidated Financial Statements included herein. Interest Expense Interest expense for First Quarter 1997 decreased to $2.7 million from $3.8 million for First Quarter 1996, a 29% decline. The decrease is primarily attributable to the reversal of $1.4 million of interest payments paid into escrow relating to the subordinated notes issued to the former owners of Apex. See Note 8 to the Company's March 29, 1997 Consolidated Financial Statements included herein. Net Earnings (Loss) Due to the factors described above, the Company recorded net earnings of $12.7 million for First Quarter 1997 compared to a net loss of $3.3 million for First Quarter 1996. Net earnings for First Quarter 1997 included a gain of approximately $8,000, net of income taxes, pertaining to the settlement of outstanding litigation relating to Apex and the Apex bankruptcy plan confirmation. See Note 8 to the Company's March 29, 1997 Consolidated Financial Statements included herein. Earnings (Loss) Per Share The Company recorded net earnings per share of $0.71 for First Quarter 1997 compared to a $0.20 loss per share for First Quarter 1996. Earnings per share for First Quarter 1997 include $0.45 pertaining to the Apex litigation settlements and bankruptcy plan confirmation referred to above. COMPARISON OF FISCAL 1996 AND FISCAL 1995 The following table sets forth certain items related to operations and such items as a percentage of net sales for Fiscal 1996 and Fiscal 1995:
FISCAL YEAR ENDED -------------------------------------------------------------- DECEMBER 30, 1995 % DECEMBER 28, 1996 % ------------------------------ ------------------------------ (DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) Net sales............... $ 407,483 100.0 $ 349,335 100.0 Gross profit............ 113,535 27.9 86,237 24.7 Selling, general and ad- ministrative expenses.. 146,332 35.9 114,888 32.9 Royalty income.......... 17,257 4.2 27,638 7.9 Restructuring expenses (credit)............... 14,182 3.5 (1,177) (0.3) Earnings (loss) from op- erations............... (29,722) (7.3) 164 0.0 Loss (credit) on invest- ment in unconsolidated subsidiary............. 52,160 12.8 (1,362) (0.4) Interest expense........ 14,043 3.4 17,776 5.1 Income tax expense (ben- efit).................. (28,144) (6.9) (4,134) (1.2) Net earnings (loss)..... (71,747) (17.6) (18,435) (5.3) Earnings (loss) per share.................. $ (4.30) $ (1.10)
21 Net Sales Net sales for Fiscal 1996 decreased to $349.3 million from $407.5 million for Fiscal 1995, a decrease of 14.3%. The $58.2 million decrease in net sales was attributable to declines in the athleisure (31%), cross training (22%) and basketball (3%) categories. These declines were slightly offset by a 20% improvement in the children's category. Fiscal 1996 net sales for the Company's four core product categories decreased 12.5% from Fiscal 1995. This decline was primarily attributable to decreased net sales in the core categories in the first half of Fiscal 1996 and partially offset by increased net sales in the second half of Fiscal 1996. Total unit sales for Fiscal 1996 decreased by 13.8% for all categories. Unit sales for the Company's basketball, athleisure and cross training categories were down by a total of 3.1 million units, while the children's category increased 1.0 million units. Volume decreases accounted for essentially all the total net sales decrease over the prior fiscal year. The unit sales for the Company's four core product categories decreased 11.2% over the prior year. During Fiscal 1996 net sales in the United States decreased to $194.1 million from $208.0 million in Fiscal 1995, a decrease of $13.9 million or 6.7%. The Company's international net sales decreased from $199.5 million to $155.3 million over the same period, a decrease of $44.2 million or 22%. Fiscal 1996 international sales declines over the prior year period were recorded in the following geographic regions: Europe, Middle East and Africa (18.4%), Pacific (12.6%) and the Americas (47.0%). As a result of its decision to focus on its four core product categories, during 1996, the Company discontinued manufacturing footwear in the football, baseball, tennis, running, walking and outdoor categories (the "Non-Core Categories"). Net sales of the discontinued Non-Core Categories decreased to $2.8 million in Fiscal 1996 from $13.0 million in Fiscal 1995. Gross Profit Gross profit decreased to $86.2 million for Fiscal 1996 from $113.5 million for Fiscal 1995, a 24.0% decline. The Company's gross profit margin decreased to 24.7% for Fiscal 1996, as compared to 27.9% for the prior year. Weak sell- throughs of certain products, manufacturing losses relating to production declines and operating inefficiencies, the sell off of discontinued categories and increased air freight costs all contributed to the decline in gross profit. Gross profit on the discontinued Non-Core Categories decreased to a loss of $1.0 million in Fiscal 1996 from a profit of $1.2 million in Fiscal 1995. Selling, General and Administrative Expense Selling, general and administrative expenses, which are primarily comprised of advertising, promotion and selling expenses in addition to employee salaries and benefits and other overhead costs, decreased to $114.9 million for Fiscal 1996 from $146.3 million for Fiscal 1995, a 21.5% decline. The decrease in selling, general and administrative expenses of $31.4 million is a result of the expense reduction plan announced by the Company in November 1995 and was primarily attributable to: (i) a reduction in sports marketing spending as a result of refocused endorsement efforts; (ii) a decrease in worldwide advertising expenses; and (iii) a reduction in salary and benefit expenses related to a streamlining of the Company's operations. As a percentage of net sales, selling, general and administrative expenses decreased to 32.9% for Fiscal 1996 from 35.9% for the prior year. As a result of the discontinuation of the Non-Core Categories, selling, general and administrative expenses directly related to the discontinued categories decreased to $0.8 million in Fiscal 1996 from $5.0 million in Fiscal 1995. Royalty Income Despite the decrease in the Company's net sales in Fiscal 1996, there has been a substantial increase in royalty income in Fiscal 1996 which management primarily attributes to the strong consumer demand for Converse-branded apparel in the Pacific region. Royalty income increased to $27.6 million for Fiscal 1996 from 22 $17.3 million for Fiscal 1995, an increase of $10.3 million or 59.5%. As a percentage of net sales, royalty income grew to 7.9% for Fiscal 1996 from 4.2% for Fiscal 1995. The $10.3 million growth was mainly attributable to a $7.7 million increase in royalty income in the Pacific Region and a $1.7 million increase in royalty income in the United States primarily as a result of growth in licensed apparel sales in these markets. Restructuring Expenses (Credit) The Company established restructuring reserves during 1995 which included the sale of certain idle assets of the Company. One such asset, a distribution center in Chester, South Carolina was sold at a gain of $2.2 million in June 1996. The gain on the sale of this asset was partly offset by additional restructuring charges for severance and additional asset write-offs. See Note 4 to the Company's December 28, 1996 Consolidated Financial Statements included herein. Earnings (Loss) from Operations The Company recorded earnings from operations in Fiscal 1996 of $0.2 million, compared to a loss of $29.7 million in Fiscal 1995. This change was primarily due to the factors discussed above. Loss (Credit) on Investment in Unconsolidated Subsidiary In the fourth quarter of 1996, Converse reversed certain accruals totaling $1.9 million relating to the settlement of certain Apex-related obligations. These reversals were partly offset by other Apex-related expenses. See Notes 3 and 16 to the Company's December 28, 1996 Consolidated Financial Statements included herein. Interest Expense Interest expense for Fiscal 1996 increased to $17.8 million from $14.0 million in Fiscal 1995, a 27.1% increase. The increase is primarily attributable to (i) increased borrowing levels under the A Facility to finance normal business activities; (ii) an increase in the interest rate charged for the B Facility; (iii) interest paid into escrow on the subordinated notes delivered in connection with the purchase of Apex; and (iv) fees paid in conjunction with certain amendments to the Credit Facility. These increases were partly offset by an interest expense reduction due to decreased borrowing levels on the B Facility. See Note 9 to the Company's December 28, 1996 Consolidated Financial Statements included herein. Income Tax Benefit Income tax benefit recorded for Fiscal 1996 was $4.1 million as compared to an income tax benefit for Fiscal 1995 of $28.1 million. Deferred income tax assets have been established for net operating loss carryforwards and net temporary differences between the book and the tax basis of assets and liabilities. Based on the review of operating forecasts, historical operating results and the significant net operating loss carryforwards, the Company has recorded a valuation allowance of $11.6 million against these tax assets. Approximately $107.0 million of future taxable income will be necessary to realize the Company's net deferred tax assets of $35.0 million. See Note 10 to the Company's December 28, 1996 Consolidated Financial Statements included herein. Net Loss Due to the factors described above, the Company recorded a net loss of $18.4 million for Fiscal 1996, compared to a $71.7 million net loss in the prior year. Loss Per Share The Company recorded a loss per share of $1.10 in Fiscal 1996 versus a loss per share of $4.30 in Fiscal 1995. The weighted average number of shares outstanding in Fiscal 1996 was 16,760,620 compared to 16,692,156 in Fiscal 1995. 23 COMPARISON OF FISCAL 1995 AND FISCAL 1994 The following table sets forth certain items related to operations and such items as a percentage of net sales for Fiscal 1995 and Fiscal 1994:
FISCAL YEAR ENDED ------------------------------------------------------------ DECEMBER 31, 1994 % DECEMBER 30, 1995 % ----------------------------- ------------------------------ (DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) Net sales............... $ 437,307 100.0 $ 407,483 100.0 Gross profit............ 150,752 34.5 113,535 27.9 Selling, general and ad- ministrative expenses.. 128,876 29.5 146,332 35.9 Royalty income.......... 14,212 3.2 17,257 4.2 Restructuring expenses.. -- -- 14,182 3.5 Earnings (loss) from op- erations............... 36,088 8.3 (29,722) (7.3) Loss on investment in unconsolidated subsidi- ary.................... -- -- 52,160 12.8 Interest expense........ 7,423 1.7 14,043 3.4 Income tax expense (ben- efit).................. 10,565 2.4 (28,144) (6.9) Net earnings (loss)..... 17,596 4.0 (71,747) (17.6) Earnings (loss) per share.................. $ 1.05 $ (4.30)
Net Sales Net sales for Fiscal 1995 decreased to $407.5 million from $437.3 million for Fiscal 1994, a 6.8% decrease. The $29.8 million reduction in net sales was attributable to a 31.6% decrease in the Company's basketball category and a 4.5% decrease in its athleisure sales, partially offset by a 165.8% improvement in its cross training category, an 8.9% increase in its children's line, as well as $9.3 million of revenues realized from Converse's sale of inventory acquired from Apex. Volume decreases accounted for virtually all of the total net sales decrease over the prior year period, as unit sales of footwear decreased 6.0% over this period. Net sales in the United States decreased to $208.0 million from $297.8 million, a decrease of $89.8 million or 30.2%. Sales increased internationally in 1995 over 1994, improving to $199.5 million from $139.5 million, an increase of $60.0 million or 43.0%. Based on geographic location, net sales in Europe, Middle East and Africa increased by 84.8% over the prior year reflecting the success of the conversion to direct operating units of several of the Company's foreign independent distributors and the benefits of offering a complete product line in these markets. Net sales in the Pacific region improved 53.3% as consumer demand for the Company's athleisure product continued to increase. These international net sales improvements were partially offset by weakness in the Latin American market. Gross Profit Gross profit decreased to $113.5 million for Fiscal 1995 from $150.8 million in Fiscal 1994, a 24.7% reduction. The Company's gross profit margin decreased to 27.9% for Fiscal 1995 as compared to 34.5% for the prior year. Price decreases accounted for 39.1% of gross profit reduction over this period with the decrease due to poor U.S. sell-throughs of basketball and athleisure product making price reductions necessary, manufacturing losses related to capacity losses and operating inefficiencies, increased distribution costs incurred as a result of the international conversions of distributors to direct operating units, inventory writedowns related to product reserved for under a consumer product alert and unfavorable inventory purchasing variances. Selling, General and Administrative Expense Selling, general and administrative expenses increased to $146.3 million for Fiscal 1995 from $128.9 million for Fiscal 1994, a 13.5% increase. The increase in selling, general and administrative expenses of $17.4 million was primarily attributable to: (i) an increase in spending to convert and support international operations, as the Company supported the growth of its converted distributorships; and (ii) an increase in sports marketing 24 activities, in part related to expenses associated with Converse's designation as the official shoe of the National Football League and subsequent conversion of the arrangement to that of an authorized supplier of footwear to the NFL. The increase in 1995 was partially offset by a reduction in United States advertising expenses. As a percentage of net sales, such expenses increased to 35.9% of net sales for Fiscal 1995 from 29.5% for Fiscal 1994. Royalty Income Royalty income increased to $17.3 million for Fiscal 1995 from $14.2 million for Fiscal 1994, a 21.8% increase. As a percentage of net sales, royalty income increased to 4.2% for Fiscal 1995 from 3.2% for Fiscal 1994. The $3.1 million increase was mainly attributable to a $3.0 million improvement in royalty income in the Pacific region. Restructuring Expenses During Fiscal 1995, the Company took steps to streamline its operations and established reserves totaling $14.2 million related to the closing of its Mission, Texas manufacturing facility, the consolidation of its Europe, Middle East and Africa operations, worldwide reduction in workforce of 140 people, the estimated losses on the sale of certain idle assets of the Company and the refocusing of its marketing contractual spending. The Mission, Texas plant closing was completed in September 1995. See Note 4 to the Company's December 28, 1996 Consolidated Financial Statements included herein. Earnings (Loss) From Operations The Company recorded a loss from operations of $29.7 million for Fiscal 1995, as compared to earnings from operations of $36.1 million for Fiscal 1994. The recognition of a loss from operations was mainly attributable to the factors discussed above. Loss on Investment in Unconsolidated Subsidiary As a result of the acquisition of Apex and subsequent decision to cease funding of Apex's operations, Converse recorded a loss on its investment in Apex of $52.2 million during Fiscal 1995. See Notes 3 and 16 to the Company's December 28, 1996 Consolidated Financial Statements included herein. Interest Expense Interest expense for Fiscal 1995 increased to $14.0 million from $7.4 million in Fiscal 1994, a 89.2% increase. The level of interest expense in 1995 reflects increased borrowing levels under the Company's principal borrowing facilities and increased fees paid for maintaining these facilities during the period. Income Tax Expense (Benefit) Income tax benefit recorded for Fiscal 1995 was $28.1 million as compared to income tax expense for Fiscal 1994 of $10.6 million. Deferred income tax assets have been established for net operating loss carryforwards and net temporary differences between the book and the tax basis of assets and liabilities. Based on the review of operating forecasts, historical operating results and the significant net operating loss carryforwards, Converse recorded a valuation allowance of $6.6 million against these tax assets. Approximately $78.0 million of future taxable income will be necessary to realize the Company's net deferred tax assets of $29.4 million. See Note 10 to the Company's December 28, 1996 Consolidated Financial Statements included herein. Net Earnings (Loss) Due to the factors described above, the Company recorded a net loss of $71.7 million for Fiscal 1995 as compared to net earnings of $17.6 million for Fiscal 1994. 25 Net Earnings (Loss) Per Share The Company recorded a net loss per share of $4.30 for Fiscal 1995 compared to net earnings per share of $1.05 for Fiscal 1994. LIQUIDITY AND CAPITAL RESOURCES Cash Flow For First Quarter 1997 and First Quarter 1996, net cash required for operating activities was $41.4 million and $4.4 million, respectively. During these periods, cash was predominantly used to fund the Company's working capital requirements. Net cash used by investing activities was $0.8 million and $1.4 million for First Quarter 1997 and First Quarter 1996, respectively. Cash invested was used for additions to property, plant and equipment. Net cash provided by financing activities was $40.2 million and $5.3 million for First Quarter 1997 and First Quarter 1996, respectively. Cash provided by financing activities consisted almost entirely of net proceeds from the Company's seasonal borrowings. For Fiscal 1996 net cash required for operating activities was $8.0 million. The major requirements for operating activities were a net loss of $18.4 million, a decrease in the reserve for loss on investment in unconsolidated subsidiary of $4.8 million, a decrease in the reserve for restructuring actions of $6.5 million, and an increase in net deferred tax assets of $5.6 million. Major components of cash provided by operating activities were a decrease in refundable income taxes of $10.8 million and an increase in accounts payable and accrued expenses of $16.9 million. For Fiscal 1995, the net cash required for operating activities was $35.9 million due to a net loss of $52.8 million after adjustments for non-cash expenses and an increase in other long-term assets and liabilities of $1.0 million, offset by reductions in working capital requirements of $17.9 million. Net cash required for operating activities in Fiscal 1994 was $11.5 million due to increases in working capital of $29.0 million offset by net earnings, after adjustments for non-cash expenses, of $17.5 million. Net cash used by investing activities was $0.2 million in Fiscal 1996. Additions to property, plant and equipment of $5.3 million were offset by proceeds of $5.1 million received from the disposal of a distribution facility in Chester, South Carolina. Net cash used by investing activities was $5.8 million and $8.5 million for Fiscal 1995 and Fiscal 1994, respectively, to fund additions to property, plant and equipment. Net cash provided by financing activities of $10.9 million in Fiscal 1996 is attributable to net proceeds from debt of $8.5 million and proceeds from the exercise of stock options of $2.4 million. Net cash provided by financing activities was $40.3 million and $21.7 million in Fiscal 1995 and Fiscal 1994, respectively. In 1995, cash was provided entirely by net proceeds from debt. In 1994, cash was provided by net proceeds from debt of $12.6 million and capital contributed from Furniture Brands, prior to the Distribution, of $9.1 million. Working Capital As of March 29, 1997, the Company's working capital (net of cash) position increased to a deficit of $36.2 million from a deficit of $38.6 million at December 28, 1996. Accounts receivable increased $52.9 million as a result of significantly higher shipments in First Quarter 1997. This increase was financed in large part by a decrease in inventories of $8.5 million and an increase in seasonal borrowings of $40.0 million. The Company's working capital (net of cash) position decreased by $125.5 million from $86.9 million on December 30, 1995 to a deficit of $38.6 million on December 28, 1996. The decrease is primarily attributable to an increase in the current maturity of long-term debt of $111.4 million as a result of reclassifying all debt outstanding as of December 28, 1996 under the Company's Credit Facility to current. The Credit Facility matures in November 1997 with a Company option to extend the expiration date an additional two years provided certain conditions are met, including payment in full of the B Facility on or prior to November 17, 1997. The Company intends to repay the B Facility in full with a portion of the proceeds from the Offerings and to replace the Credit Facility with a new credit facility. See "Financing Arrangements" below. 26 As of December 28, 1996, total current assets (net of cash) were $170.7 million, a decrease of $5.8 million from prior year. The decrease was due primarily to the reduction in refundable income taxes by $10.8 million for federal income tax refunds received with respect to net operating loss carryback claims and overpayment of estimated taxes. Receivables decreased by $0.1 million from the prior year due to a reduction in trade receivables of $4.5 million as a result of a decrease in trade sales in the fourth quarter of Fiscal 1996 offset by an increase in licensee receivables of $4.4 million as a result of strength in licensee revenues. Offsetting these asset reductions were an increase in inventories of $4.9 million to $86.8 million, primarily to support a significant increase in customer orders for delivery in the first quarter of 1997, and an increase in prepaid expenses and other current assets of $0.2 million. Accounts payable increased $15.3 million due primarily to increased inventory purchases from foreign contract manufacturers. Accrued expenses decreased $8.2 million to $25.1 million due in large part to reductions in the provision for restructuring actions by $4.4 million and the provision for loss on investment in unconsolidated subsidiary by $4.8 million. Income taxes payable increased $1.6 million and short-term debt from the Company's foreign borrowing facilities decreased $0.5 million in 1996. The Company's sales to customers are somewhat seasonal in nature with peak shipments occurring in the first quarter for the spring season and in the third quarter for the back-to-school season. As a result, year-end or quarter- end levels of receivables and inventories are not necessarily representative of levels during the year. Year-end inventory levels are affected by order demand for the upcoming year as merchandise is received by the Company to ship to customers in the first quarter. Consequently, inventory levels can be significantly influenced by the timing of deliveries and shipments in any particular year. Financing Arrangements As of March 29, 1997, the Company had a $161.5 million secured credit facility (the "Credit Facility") with BT Commercial Corporation ("BTCC"), as agent, and certain other institutional lenders (collectively the "Banks"), comprised of an A Facility for $135.0 million, subject to a borrowing base formula, and a B Facility for $26.5 million of direct borrowings. The Credit Facility is secured by substantially all of the Company's assets located in the United States and Canada. As discussed below, the Company has received a commitment letter from BTCC to replace the Credit Facility with a new $150 million secured credit facility. Availability under the A Facility is determined on a formula basis by the amount of eligible collateral, principally accounts receivable and inventory from U.S. and Canadian operations (the "Borrowing Base"). The Borrowing Base was supplemented by $25.0 million in November 1995 with an irrevocable standby letter of credit issued for the account of Apollo, for the benefit of BTCC on behalf of the Banks. The standby letter of credit has an expiration date of June 30, 1997. In addition, in November 1996, the Banks agreed to provide a seasonal accommodation increase to the Borrowing Base of $10.0 million commencing November 15, 1996 and ending March 31, 1997. In March 1997, the Banks agreed to extend the seasonal accommodation and increase it to $15.0 million through October 15, 1997. In addition, the commitment of the Banks under the A Facility was increased from $135.0 million to $150.0 million. As of March 29, 1997, the Borrowing Base was $135.0 million, inclusive of availability as a result of the standby letter of credit and seasonal accommodation. As of March 29, 1997 utilization under the A Facility inclusive of the standby letter of credit and seasonal accommodation, consisted of revolving loans of $93.7 million, banker acceptances of $34.5 million and outstanding letters of credit of $3.6 million. As a result, $3.2 million of the maximum available Borrowing Base remained unutilized as of March 29, 1997. As of December 28, 1996, the Borrowing Base was $113.9 million, inclusive of availability as a result of the standby letter of credit and seasonal accommodation. As of December 28, 1996, utilization under the A Facility, inclusive of the standby letter of credit and seasonal accommodation, consisted of revolving loans of $78.5 million and banker acceptances of $11.0 million. In addition, outstanding letters of credit of $17.3 million as of December 28, 1996 were reserved against the maximum available Borrowing Base. As a result, $7.1 million of the maximum available Borrowing Base remained unutilized as of December 28, 1996. Revolving loans accrue interest at the Prime Lending Rate plus 1.25% or Adjusted LIBOR (as such terms are defined in the Credit Facility) plus 2.5%. The average weighted interest rate on the A Facility was 8.26% at March 29, 1997 and 8.20% at December 28, 1996. 27 The B Facility was reduced from $40.0 million outstanding at December 30, 1995 to $28.3 million at December 28, 1996 and to $26.5 million at March 29, 1997. The proceeds applied, as required under the Credit Facility, were $5.0 million for the sale of the Chester, South Carolina facility and an aggregate of $2.4 million pursuant to the exercise of various stock options. In February 1996, the Credit Facility was amended to require the prepayment of certain tax refunds to the outstanding balance of the B Facility and, commencing on September 30, 1996, to pay equal quarterly principal installments of one- twentieth ( 1/20th) of the then outstanding principal amount of the B Facility. Accordingly, tax refund proceeds of $2.7 million and the first quarterly installment payment of $1.6 million were also applied to the reduction of the B Facility during the year. During First Quarter 1997, the quarterly installment of $1.6 million was made and $0.2 million was applied from the exercise of stock options. Loans outstanding under the B Facility accrue interest at the Prime Lending Rate plus 4.0% or Adjusted LIBOR plus 5.5% at March 29, 1997 (subject to an increase of 0.5% in May 1997). The average weighted interest rate on the B Facility was 11.24% at March 29, 1997 and 10.95% at December 28, 1996. The Company is not permitted further borrowings against the B Facility. The Credit Facility is scheduled to expire during 1997. Accordingly, the total indebtedness outstanding pertaining to these debt instruments of $154.8 million at March 29, 1997 has been classified as current. However, the Company has the right to extend the Credit Facility for an additional two years if it has paid off the B Facility and there is no event of default. On April 30, 1997, the Company accepted a commitment letter of BTCC to supply a new $150 million revolving credit facility (the "New Credit Facility"). The New Credit Facility will have a term of five years, will provide for borrowings and other credit accommodations in a manner similar to the A Facility and will be secured by substantially the same assets. Borrowings will initially bear interest at the rates currently provided under the A Facility, but such interest rates will be reduced in the event that the Company achieves certain financial ratios. On a pro forma basis after giving effect to the New Credit Facility and application of the estimated net proceeds of the Offering, at March 29, 1997 the Company's unutilized availability under the New Credit Facility would have been approximately $22.0 million. The commitment letter is conditional upon completion of the Offering and other customary matters. The Company anticipates that the New Credit Facility will be completed at the same time as or shortly after completion of the Offering. However, the Offering is not conditioned on the New Credit Facility and no assurance can be given that the New Credit Facility will be completed. In the event that the New Credit Facility or a similar new facility is not completed for any reason, the Company would extend the term of the existing Credit Facility for two years as described above. The Credit Facility, as amended, requires compliance with certain financial covenants. As of December 28, 1996, the Company was in default of one financial covenant that was waived by the Banks in March 1997. The Credit Facility was amended in March 1997 to reset the financial covenants for the term of the agreement and to extend and increase the seasonal accommodation (discussed above). The Company maintains asset based financing arrangements in certain European countries with various lenders. Borrowings outstanding under these financing arrangements totaled $16.4 million at March 29, 1997 and $13.4 million as of December 28, 1996. Interest is payable at the respective lender's base rate plus 1.5% (6.0% to 8.25% at March 29, 1997 and December 28, 1996). The obligations are secured by a first priority lien on the respective European assets being financed. In conjunction with Converse's acquisition of 100% of the outstanding common stock of Apex (see Note 3 of the Notes to the December 28, 1996 Consolidated Financial Statements), Converse issued subordinated notes in the face amount of $11.0 million discounted at a rate of 12% to $9.6 million. The subordinated notes bear interest at a rate of 8% per annum for the first three years and increase to 10% and 12% in 1998 and 1999, respectively. The subordinated notes mature on May 18, 2003. As a result of the indemnification awards and claims against certain former owners of Apex and the related exchange and settlement agreements, no accretion of the subordinated note discount has been recorded in the December 28, 1996 Consolidated Financial Statements. The long-term debt of the Company as of December 28, 1996 includes $9.6 million of debt related to the Company's acquisition of Apex. In the first quarter of 1997 substantially all of these subordinated notes were delivered to the Company in full satisfaction of the Company's indemnification claims. See Note 16 to the Company's December 28, 1996 Consolidated Financial Statements included herein. 28 Capital Expenditures Capital expenditures were $0.8 million, $5.3 million, $5.8 million and $8.5 million in First Quarter 1997, Fiscal 1996, Fiscal 1995 and Fiscal 1994, respectively. During First Quarter 1997, the Company spent $0.5 million to maintain and upgrade the Company's manufacturing facility in Lumberton, North Carolina, $0.2 million to upgrade the Company's trade show booth and $0.1 million on various smaller projects and improvements. During Fiscal 1996, the Company spent $1.4 million on leasehold improvements primarily to open or remodel the Company's retail stores, $1.0 million to maintain and upgrade the Company's manufacturing facility in Lumberton, North Carolina, $0.9 million in information technology to support improvements in networking, retail store operations and international operations, $0.9 million to upgrade the Company's trade show booth and $1.1 million on various smaller projects and improvements. Fiscal 1995 investments included $2.3 million in new equipment and improvements to upgrade the Company's manufacturing facility in Lumberton, North Carolina, $0.8 million in computer equipment, $0.7 million to move the research and development offices to its present location, $0.7 million to support international expansion and $0.4 million to open four new retail stores. The remaining $0.9 million was invested in various smaller projects. Fiscal 1994 investments included $2.7 million in new equipment and improvements to upgrade the Company's manufacturing facility in Lumberton, North Carolina, $1.6 million to complete a new factory in Mission, Texas, $1.7 million in computer equipment, $1.0 million to upgrade distribution facilities and $0.4 million to open four new retail stores. The remaining $1.1 million was invested in various smaller projects. The Company expects that capital expenditures during Fiscal 1997 will be in the range of $6.0 million to $8.0 million. Backlog At March 29, 1997, the Company's global backlog was $220.1 million, as compared to $149.3 million at March 30, 1996, an increase of 47.4%. The amount of backlog at a particular time is affected by a number of factors, including the scheduling of the introduction of new products and the timing of the manufacturing and shipping of the Company's products. Accordingly, a comparison of backlog as of two different dates is not necessarily meaningful. 29 BUSINESS Converse is a leading global designer, manufacturer and marketer of high quality athletic footwear for men, women and children. The Company is also a global licensor of sports apparel, accessories and selected footwear. The Company, founded in 1908, began establishing its authentic footwear heritage with the introduction of its original canvas Chuck Taylor(R) basketball shoe in 1923. Throughout its nearly 90-year history, Converse has achieved a high level of brand name recognition due to its reputation for high performance products, quality, value and style. Through its well-known Converse(R) All Star(R) brand, the Company has consistently maintained its position as the American performance brand with authentic sports heritage. The Company's footwear is focused on four core categories: basketball, athleisure, children's and cross training, which represented approximately 34%, 31%, 22% and 8%, respectively, of the Company's 1996 net sales. The basketball category is comprised of high performance footwear for athletes and typically features Converse's proprietary REACT(R) shock absorption technology. Converse's athleisure footwear offerings are centered on the Converse Chuck Taylor All Star canvas athletic shoe, which management believes is the world's all time best-selling athletic shoe with over 550 million pairs sold since its introduction. Converse's rapidly growing children's category consists of children's-sized versions of the Company's basketball, athleisure and cross training shoes, as well as certain styles designed exclusively for children. Cross training, which is the fastest growing category in the athletic footwear industry, consists of high performance athletic shoes used for sports training and fitness. The Company's products are distributed in over 90 countries to approximately 9,000 customers, which include specialty athletic, sporting goods, department and shoe stores, as well as to 37 Company-operated retail outlet stores. In 1996, the Company's reported net sales were $349.3 million. However, this figure understates the total worldwide presence of Converse-branded products since a large portion is sold through licensees, and the Company recognizes only the percentage of these sales which it records as royalty income. Global wholesale sales of Converse-branded products, which include direct sales by the Company to retailers, sales by Converse distributors and sales of licensed products by Converse licensees, were approximately $800 million in 1996, of which over $560 million, or approximately 70%, were international sales. Although the Company's reported net sales declined from 1995 to 1996, global wholesale sales of Converse-branded products increased approximately 11% during this period. During 1996, Converse implemented a series of strategies designed to position the Company for long-term growth and profitability (the "1996 Repositioning"). These strategies included: (i) establishing a new management team, (ii) focusing on four core product categories, (iii) creating a single brand identity, (iv) coordinating marketing and product development and (v) streamlining operations. Primarily as a result of the 1996 Repositioning, net earnings for First Quarter 1997, excluding the one-time gain related to the Apex litigation settlements and bankruptcy plan confirmation described under "--Legal Proceedings," were $4.7 million, or $0.26 per share, compared to a net loss of $3.3 million, or a $0.20 loss per share in First Quarter 1996. The Company's net sales for First Quarter 1997 were $136.0 million compared to $86.6 million in First Quarter 1996, an increase of 57%. During First Quarter 1997, the Company recorded substantial sales increases in each of its four product categories of basketball, athleisure, children's, and cross training of approximately 105%, 26%, 66% and 61%, respectively, compared to First Quarter 1996. The Company's gross profit margin also improved to 31.0% of net sales for First Quarter 1997 from 25.0% for First Quarter 1996. In addition, selling, general and administrative expenses, although increasing by $10.5 million in First Quarter 1997 compared to First Quarter 1996, decreased as a percentage of net sales to 27.0% from 30.4%. The foregoing factors enabled the Company to record earnings from operations of $12.3 million for First Quarter 1997 as compared to $0.2 million for First Quarter 1996. Converse's global backlog increased approximately 47% to $220.1 million at March 29, 1997 from $149.3 million at March 30, 1996. The backlog increases were approximately 32%, 83%, 40% and 14%, respectively, in the Company's categories of basketball, athleisure, children's and cross training. 30 THE 1996 REPOSITIONING . Establishing a New Management Team. Since April 1996, the Company has recruited a new management team with proven experience in the athletic footwear and sporting goods industries. The Company appointed Glenn N. Rupp as Chairman and Chief Executive Officer, James E. Solomon as Senior Vice President, Marketing and Edward C. Frederick as Senior Vice President, Research and Development. Previously, Mr. Rupp was at Wilson Sporting Goods Co. for eight years and served as President from 1985 to 1991, and Chief Executive Officer from 1987 to 1991. From 1985 to 1991, net sales at Wilson more than doubled and operating performance significantly improved. Mr. Solomon had previously been President and Chief Operating Officer of Dansk International and, prior to holding that position, had significant experience in the athletic footwear industry with companies such as Avia and New Balance. Dr. Frederick has previously held senior product design and development positions at Nike and adidas. The Company believes that the strategies executed by the new management team have contributed significantly to the recent improvement in the Company's performance. . Focusing on Four Core Product Categories. The Company is focused on four core product categories: basketball, athleisure, children's and cross training. These four categories represented, industry-wide, over $7 billion in domestic retail athletic footwear sales in 1996, and management believes that each of these categories has strong growth potential for Converse All Star-branded products. During 1996, the Company completed its exit from the football, baseball, running, walking, tennis and outdoor categories. The decision to concentrate on the basketball and cross training categories was driven by management's belief that these categories are the two most important athletic footwear categories to the Company's target consumers, males and females ages 12 to 24. The decision to concentrate on the athleisure and children's categories was based on the Company's historic success in these two categories. The Company believes that its increased marketing, advertising, product development and selling focus on its four core product categories will lead to increased market share and profitability. . Creating a Single Brand Identity. Management has created a single new marketing and brand positioning statement that focuses the Company's global marketing efforts on the concept "Converse All Star is the American performance brand with authentic sports heritage." The Company believes that the Converse All Star brand name and the Chuck Taylor patch logo command significant consumer brand awareness generated by their nearly 80-year history. In addition, the Converse All Star brand is enhanced by the Company's position as the originator of the first basketball shoe, the canvas Chuck Taylor All Star. In an effort to capitalize on the Converse All Star brand's significant consumer recognition and authentic heritage, the Company will focus its marketing, advertising and product development to promote this single brand identity. Prior to 1996, the Company's products had been marketed under multiple brand names and logos with different marketing and advertising strategies for each brand. The Company's new singular focus on building one brand has resulted in higher consumer demand in relation to the Company's advertising and marketing expenditures. . Coordinating Marketing and Product Development. During 1996, the new management team greatly increased the Company's ability to develop products consistent with consumer preferences. As a result of consumer demand, the Company has increased the frequency of its product introductions as well as the depth of its products in each of its four core categories. Management anticipates introducing new products every six to eight weeks, as compared to generally having introduced new products semi-annually in the past. The Company's consumer research is integral to the development of both the Company's new products and its advertising campaigns and in-store point of purchase materials. Each of the Company's products is now fully supported by a consistent, integrated marketing program, responsive to the demands of the Company's target customers. Management attributes the success of its Spring 1997 basketball line to its improved marketing and product development. Management believes that the Company's top four selling Spring 1997 basketball shoes will generate net sales in excess of $40 million, a level more than double the net sales of the Company's top four basketball shoes in any prior spring basketball line. . Streamlining Operations. Due to the elimination of non-core categories, the creation of a single brand marketing strategy and the reduction of infrastructure, the Company's expenses declined substantially 31 during 1996. Selling, general and administrative expenses in 1996 were $114.9 million, or 32.9% of net sales, as compared to $146.3 million, or 35.9% of net sales, in 1995. GROWTH STRATEGIES . Increasing Penetration in Core Categories. The Company continues to aggressively pursue market share increases from its strong base in each of Converse's four core categories, and the Company's Spring 1997 footwear offerings achieved significant market share gains in each category. Management believes that the Company's integrated marketing and product support programs, more frequent product introductions and increased depth of product offering will enable the Company to build on the recent market share gains achieved by Spring 1997 products such as the All Star 2000 canvas, the All Star Springfield, the All Star Tourney and the Dr. J 2000. As a result of the increasing penetration in each of Converse's four core categories in First Quarter 1997, the Company experienced increases in total business (net sales for First Quarter 1997 plus global backlog at March 29, 1997 compared to net sales for First Quarter 1996 plus global backlog at March 30, 1996) in its four core categories of basketball, athleisure, children's and cross training of approximately 53%, 57%, 49% and 29%, respectively. . Enhancing Retail Distribution. The Company views specialty athletic retailers as one of the most important outlets to reach the Company's target consumers. These retailers often showcase Converse-branded head- to-toe footwear and apparel products thereby strengthening the Converse All Star brand. These specialty athletic retailers include Athlete's Foot, Champs, Finish Line, FOOTACTION USA and Foot Locker, among others. Strong consumer demand for the Converse All Star brand has enabled the Company to dramatically increase its sales to this channel. As a result of the Company's increased focus on sales to specialty athletic retailers, the Company's net sales for First Quarter 1997 plus backlog at March 29, 1997 with these five retailers was more than six times greater than net sales for First Quarter 1996 plus backlog at March 30, 1996 with these five retailers. Management believes there are significant opportunities to further increase sales to specialty athletic retailers. . Improving Margins. Increased demand for the Company's products resulting from the successful 1996 Repositioning should enable Converse to realize higher prices, thereby improving gross margins. Due to changes in product mix and less discounting, the Company's average domestic suggested retail price for its Spring basketball line increased from $57 for Spring 1996 to $69 for Spring 1997. The Company's gross profit margin improved to 31.0% for First Quarter 1997 from 25.0% for First Quarter 1996. In addition, management expects to improve its operating margins through the realization of operating leverage as the Company grows its sales more rapidly than its fixed expenses. As a result, selling, general and administrative expenses increased by $10.5 million in First Quarter 1997 compared to First Quarter 1996, but decreased as a percentage of net sales to 27.0% from 30.4%. Furthermore, the Company has improved the percentage of orders taken in advance of delivery. This higher percentage of future orders to sales, combined with more frequent product introductions, should lead to better inventory management and fewer discounts. Management believes that over time the Company will achieve margins more consistent with those of its competitors. . Continuing Focus on Licensing Opportunities. Through the licensing of sports apparel, accessories, and selected footwear, the Company anticipates strong Converse brand sales growth. Through its licensees, the Company provides consumers with Converse-branded products from head- to-toe. Management believes that the integrated apparel offerings provided by Converse's licensees enhance the sales of the Company's footwear and that Converse has strong long-term relationships with its licensees. Management attributes the growth in licensee royalty income from $17.3 million in 1995 to $27.6 million in 1996 and from $4.9 million in First Quarter 1996 to $6.4 million in First Quarter 1997 primarily to the strong consumer demand for Converse-branded apparel in the Pacific region. The Company believes that the strong consumer demand for Converse-branded apparel in the Pacific region is primarily attributable to the underlying strength of Converse's branded footwear sales in the region. Coordinating the licensed apparel effort more closely on a global basis should result in improved distribution of licensed products and increased royalty income. 32 . Increasing International Sales. International wholesale sales of Converse-branded products by the Company and its distributors and licensees were over $560 million in 1996, representing approximately 70% of the approximately $800 million total Converse-branded global wholesale sales in 1996. Although the Company's reported international net sales declined from 1995 to 1996, such net sales increased $3.6 million in First Quarter 1997 from First Quarter 1996, representing an 8.4% increase. International wholesale sales of Converse-branded products increased 12% from approximately $500 million in 1995 to approximately $560 million in 1996. International wholesale sales of Converse-branded products increased 18% from approximately $118 million in First Quarter 1996 to approximately $139 million in First Quarter 1997. Management believes that the Company is well-positioned to continue to take advantage of additional growth opportunities in Europe and the Pacific Rim, as well as opportunities in the developing markets of Latin America and Eastern Europe. The Company also plans to target international consumers directly by customizing its products to suit specific customer needs and tastes in different markets. Management believes that with its experienced management team and focused marketing, product development and selling strategies in place, the Company will continue to build upon the momentum of its recent product successes in order to improve market share and profitability. PRODUCTS As a result of the Company's 1996 Repositioning, Converse now focuses all of its marketing, product development and sales efforts on its four core categories: basketball, athleisure, children's and cross training. Basketball Converse's basketball footwear offerings are comprised of high performance footwear for athletes and typically feature Converse's proprietary REACT shock absorption technology. The Company's basketball footwear is worn by a number of NBA players, including endorsers such as Dennis Rodman, Latrell Sprewell, Kevin Johnson and Anthony Mason, and by many major NCAA basketball teams. The Company continues to introduce new state-of-the-art designs under the Converse All Star brand, such as the All Star Springfield and the All Star Tourney. Recently, many of Converse's successful basketball shoes, including the All Star 2000 canvas and the Dr. J. 2000, have featured design elements that trace their heritage to authentic Converse footwear of the 1950s, 1960s and 1970s. The Dr. J. 2000 and the All Star 2000 canvas shoes are designed for the performance needs of today's basketball players, yet are familiar to consumers who have known Converse products throughout the years. Both the Dr. J. 2000 and the All Star 2000 canvas incorporate the Company's REACT technology. Management believes that these top four Spring 1997 basketball shoes will generate net sales in excess of $40 million, a level of net sales that is more than double the net sales of the top four basketball shoes in any prior Spring basketball line. Management believes that the domestic branded retail market for basketball footwear was approximately $2.4 billion in 1996. The Company's basketball footwear sells in the U.S. at suggested retail prices ranging from $45.00 to $85.00 through an extensive network of athletic specialty, sporting goods, department and shoe stores. While the target consumers for Converse basketball shoes are males and females ages 12 to 24, the Company's basketball shoes appeal to a broad group of consumers. In First Quarter 1997, sales of the Company's basketball footwear were $54.5 million, a 105% increase from the prior year period. In addition, the Company's backlog for basketball footwear was $82.5 million as of March 29, 1997, a 32% increase from the Company's backlog of $62.5 million as of March 30, 1996. Athleisure Converse athleisure footwear offerings are centered on the Chuck Taylor All Star canvas athletic shoe, which management believes is the world's all time best-selling athletic shoe with over 550 million pairs sold 33 since its introduction in 1923 as the world's first basketball shoe. Converse's athleisure footwear encompasses both classic, time-tested athletic shoes and styles targeted at alternative sports enthusiasts. The Company believes that the main consumers for these products are male and female athletes that seek a more simply styled athletic shoe when not playing sports. Because these shoes have authentic sports heritage, many have remained unchanged since their inception and have become true American sports icons. The Company's athleisure products, which come in a wide variety of colors, sell in the U.S. at suggested retail prices ranging from $20.00 to $65.00 in athletic specialty, sporting goods, department and shoe stores, as well as specialty apparel retailers. The Company's Spring 1997 athleisure footwear offerings include the canvas Chuck Taylor All Star, the One Star, the Jack Purcell and the Boarderline. In First Quarter 1997, sales of the Company's athleisure footwear were $40.1 million, a 26% increase from the prior year period. In addition, the Company's backlog for athleisure footwear was $70.8 million as of March 29, 1997, a 83% increase from the Company's backlog of $38.7 million as of March 30, 1996. Children's Converse's rapidly growing children's category consists of children's-sized versions of the Company's basketball, athleisure and cross training shoes, as well as certain styles designed exclusively for children. The Company's children's footwear is rooted in sports, offering all the features and benefits of the adult models and the same unique styling that attracts adults to the Company's basketball, athleisure and cross training products. With the Company's current momentum in adult basketball shoes, there is a renewed interest on the part of retailers and consumers for children's versions of these popular offerings. Management believes that the domestic branded retail market for children's footwear was approximately $2.0 billion in 1996. The Company's children's footwear is generally sold in the U.S. at suggested retail prices ranging from $22 to $60 through athletic specialty, children's bootery, sporting goods and department stores. In First Quarter 1997, sales of the Company's children's footwear were $28.3 million, a 66% increase from the prior year period. In addition, the Company's backlog for children's footwear was $42.7 million as of March 29, 1997, a 40% increase from the Company's backlog of $30.6 million as of March 30, 1996. Cross Training Cross training, which is the fastest growing category in the athletic footwear industry, consists of high performance athletic shoes used for multiple sports activities. The Company believes this category represents a major growth opportunity since Converse's cross training and basketball products have similar target purchasers. With Converse's current positive momentum in the basketball category, the Company believes that there are significant opportunities to expand the sales of Converse's cross training products. Management believes that the domestic branded retail market for cross training footwear was approximately $1.7 billion in 1996. In addition, cross training is estimated by Converse to be a larger worldwide category than basketball. The Company's cross training footwear sells in the U.S. at suggested retail prices ranging from $50.00 to $75.00 through an extensive network of athletic specialty, sporting goods, department and shoe stores. The Company's Spring 1997 cross training footwear offerings include the One Star 2000 and the Fit Star. In First Quarter 1997, sales of the Company's cross training footwear were $8.6 million, a 61% increase from the prior year period. In addition, the Company's backlog for cross training footwear was $12.9 million as of March 29, 1997, a 14% increase from the Company's backlog of $11.3 million as of March 30, 1996. MARKETING AND PRODUCT DEVELOPMENT The Company's marketing strategy is centered on the Converse All Star brand, which is positioned as the American performance brand with authentic sports heritage. The Company believes that there are significant 34 opportunities to continue to build the brand, which commands high consumer awareness generated by its nearly 80-year history. As a result of its single brand marketing strategy, management believes that it will be able to build the Converse All Star brand in a more efficient and focused manner than in previous years. Management believes that the increased coordination between the Company's marketing and product development teams has greatly improved the Company's ability to develop products consistent with consumer preferences. As a result, the Company has been able to increase the frequency of its product introductions as well as the depth of its products in each of its four core categories. The Company's consumer research has become an integral part of its product development, advertising campaigns and in-store point of purchase materials. Each of the Company's products is now fully supported by a consistent, integrated marketing program, responsive to the demands of the Company's target customers. To complement its marketing strategies, Converse cultivates the endorsement and promotion of Converse footwear among athletes. In 1996, management rationalized its endorsement programs consistent with the Company's single brand strategy and focus on the Company's four core product categories. The Company's endorsers include both current NBA athletes, such as Dennis Rodman, Latrell Sprewell, Anthony Mason and Kevin Johnson and NBA athletes from an earlier era, including Julius "Dr. J" Erving and Larry Bird. The Company is also a leading supplier of athletic shoes to premier NCAA basketball teams, including the University of Arkansas, Clemson University, the University of Georgia, Indiana University, the University of Louisville, the University of New Mexico, Oklahoma University and the University of South Carolina. Management believes that there are substantial opportunities to utilize these endorsers to influence its target customers and further build the Converse All Star brand through the Company's focused and integrated marketing strategies. SALES AND DISTRIBUTION The Company's products are distributed in over 90 countries to approximately 9,000 customers, which include athletic specialty, sporting goods, department and shoe stores, as well as to 37 Company-operated retail outlet stores. Recently, the Company has significantly increased its distribution through specialty athletic retailers that showcase the Company's and its licensees' coordinated head-to-toe product offerings. United States The Company's 48 member U.S. sales force markets Converse footwear through approximately 4,200 active retail accounts. In 1996, domestic sales represented 55% of total Company net sales. The Company has recently refined its distribution strategy to increase its focus on key growth accounts such as specialty athletic retailers. National and large regional accounts are serviced by 12 account executives who are paid on a salary and bonus basis, and who focus on the product and merchandising needs of these retailers. A majority of the Company's domestic sales are served by an electronic data interface ("EDI") ordering system. In addition, a quick response system has been implemented with a number of the Company's highest volume accounts. The quick response system provides for the rapid replenishment of retailer stock through an inventory management process which produces constant "on-hand" inventory quantities. All sales to U.S. retailers other than the national or large regional accounts are serviced by the Company's 36 member direct sales force, which is compensated on a commission basis. The commission schedule is structured to reward future orders (orders placed four to five months before delivery), product mix, and profitability. This compensation structure is integral to the Company's inventory management program, which emphasizes future orders over "at once" orders to reduce inventory investment and risk. In 1996, two key accounts, Sears Roebuck and J.C. Penney, each contributed over $10 million to the Company's net sales. Together they accounted for 10.5% of the Company's total U.S. net sales in 1996 (as 35 compared to 7.5% in 1995) and 5.8% of 1996 worldwide net sales (as compared to 3.8% in 1995). The Company strives to maintain the integrity of the Converse image by controlling the distribution channels for its products based on criteria which include the retailer's image and ability to effectively promote the Company's products. The Company works with its retailers to display, stock and sell a greater volume of the Company's products. The Company operates 35 retail outlet stores in the United States which serve as a vehicle to close out inventory in a controlled manner. In addition, these stores showcase the Company's current product offerings. The retail outlets average 4,400 square feet each and contributed a total of $26.6 million to 1996 net sales. The Company continually upgrades the design and layout of its retail outlet stores to further promote the Converse brand image. International Management believes that the Company is well-positioned to continue to take advantage of additional international growth opportunities. Although the tradition of the Converse All Star brand as a high performance athletic brand is not as well known internationally as in the United States, the Company believes that because of the global reach of music, fashion, media and alternative sports, the styles and trends among the Company's target customer group internationally are similar in many ways to those in the United States. Management believes that the Company is well-positioned to continue to take advantage of additional growth opportunities in Europe and the Pacific Rim as well as opportunities in the developing markets of Latin America and Eastern Europe. In the key western European markets of France, Italy, Spain, Benelux, United Kingdom, Germany, Portugal, Scandinavia, Austria and Switzerland, Converse has converted its independent distributors to operating units of the Company to better control the distribution of its products in these markets. These Converse operating units are responsible for the marketing and distribution of Converse-branded footwear, apparel and accessories to sporting goods, department, and specialty stores within these territories. The Company operates two retail outlet stores in England. Sales in Eastern Europe, the Middle East and Africa are made through independent importer/distributors. Sales of footwear in the Pacific region are made through independent importer/distributors, the largest of which is Moon-Star Chemical Corporation, which is the Company's exclusive distributor of footwear in Japan. Moon-Star contributes approximately 12% to the Company's total net sales worldwide. Sales of Converse-branded apparel and accessories in the Pacific region are made by over 20 licensees who generated approximately $270 million in wholesale sales in 1996. The Pacific region contributes the largest percentage of international licensee income. See "Licensing Agreements." The Latin America market which is supplied by nine footwear importer/distributors and four apparel licensees, continues to show strong growth potential. LICENSING AGREEMENTS Converse utilizes licensees who manufacture or purchase and distribute sports apparel, accessories and selected footwear to provide consumers head- to-toe Converse-branded products globally. Converse has entered into 65 separate licensing agreements permitting the licensees to design and market specific products under the Converse brand name in specific markets. Under the terms of Converse's licensee arrangements, all products designed by licensees, as well as the related advertising, must be approved in advance by Converse. In addition, Converse has the right to monitor the quality of the licensed products on an ongoing basis. 36 The following table details sales by Converse's licensees that produced royalties to Converse for the years indicated and Converse's resulting royalty income:
FISCAL YEAR ENDED THREE MONTHS ENDED -------------------------------------- ------------------- DECEMBER 31, DECEMBER 30, DECEMBER 28, MARCH 30, MARCH 29, 1994 1995 1996 1996 1997 ------------ ------------ ------------ --------- --------- (DOLLARS IN THOUSANDS) Total sales by licensees: Footwear.............. $ 90,449 $ 84,231 $101,117 $23,012 $31,874 Apparel and accesso- ries................. 106,490 178,185 307,011 53,566 60,343 -------- -------- -------- ------- ------- Total................. $196,939 $262,416 $408,128 $76,578 $92,217 ======== ======== ======== ======= ======= Total royalty income: Footwear.............. $ 7,653 $ 7,046 $ 7,944 $ 1,723 $ 2,508 Apparel and accesso- ries................. 6,559 10,211 19,693 3,205 3,869 -------- -------- -------- ------- ------- Total................. $ 14,212 $ 17,257 $ 27,637 $ 4,928 $ 6,377 ======== ======== ======== ======= =======
In Japan, Converse has agreements with 10 licensees to produce Converse- branded apparel, accessories and selected footwear for the Japanese market. These Japanese licensees accounted for approximately 54.6% of total worldwide royalty income in 1996. Licensees in Australia and Taiwan contributed 15.2% of total worldwide royalty income in 1996. Licensee income generated in the U.S. represented approximately 9.7% of total worldwide royalty income in 1996. SOURCING AND MANUFACTURING The majority of the Company's footwear is sourced from various Far East factories. However, most of the Company's athleisure products are manufactured domestically. Sourcing In 1996, approximately 70% of all Converse footwear was sourced from a variety of Far East manufacturers on a per order basis. These manufacturers produce the Company's footwear according to the Company's own design specifications and quality standards. Sourcing is managed by the Company's corporate headquarters in the United States. In selecting subcontractors, Converse attempts to use manufacturers that specialize in the type of footwear being produced and to avoid overdependence on any particular supplier by having a sufficient diversity of sources. The Company utilizes one sourcing agent in Taiwan who assists the Company in selecting and overseeing third party contractors, ensuring quality, sourcing fabrics and monitoring quotas and other trade regulations. The Company's production staff and independent sourcing agent together oversee all aspects of manufacturing and production. Many of the manufacturers utilized by Converse are also used by the Company's competitors. Starting in 1995, the Company shifted a portion of its footwear production from Korea and Indonesia to China and other Pacific Rim countries to reduce costs while maintaining the Company's high product quality standards. In 1996, the Company purchased over 11.7 million pairs of shoes from 24 manufacturers located in China, Taiwan, Macau, Vietnam, Indonesia and the Philippines. While one manufacturer produces approximately 24% of the Company's products, the Company believes such manufacturer can be replaced, if necessary, subject to short-term supply disruptions. Manufacturing Converse is the largest manufacturer of athletic footwear in the United States, producing over 5.2 million pairs in 1996. Converse owns and operates manufacturing facilities in Lumberton, North Carolina and Reynosa, Mexico. During 1995, due to decreasing order volume, the Company closed its leased manufacturing facility in Mission, Texas and transferred all of its stitching operations to Reynosa, Mexico. During First Quarter 1997, 37 due to increased demand for athleisure products, the Company reopened the Mission facility for cutting and limited production. The Company manufactures most of its athleisure footwear at the Company's approximately 350,000 square foot Lumberton facility. The Lumberton factory produces components and is responsible for the final assembly of the Company's athleisure footwear. All stitching is done at the Reynosa facility to capitalize on lower labor costs. The Lumberton facility presently operates at approximately 55% of capacity. The Company is evaluating alternative ways to best utilize this excess capacity. The domestic manufacturing of Converse's athleisure products has enabled the Company to go on EDI/Quick response with some of its major customers. Converse's ability to produce its best-selling athleisure models with significantly shorter lead-times than foreign-sourced products is a competitive advantage. The principal materials used in Converse's athleisure footwear products are canvas, linen and rubber. The Company purchases its raw materials from diverse suppliers. While one supplier accounts for approximately 20% of raw materials purchases, the Company believes such supplier can be replaced, if necessary, subject to short term supply disruptions. RESEARCH AND DEVELOPMENT Converse is a leading innovator of new footwear technologies, an important factor in increasing sales to the Company's target customers. The Company spent $7.8 million, $8.6 million and $6.5 million on research and development in 1994, 1995 and 1996, respectively. Converse's state of the art biomechanics laboratory, located in a leased facility near the Company's headquarters, continually conducts research on new performance-enhancing technologies. The Company's biomechanical engineers are also involved in the design stages of athletic footwear to help develop new technologies and attributes to improve the function of shoes for specific sports. The Company maintains a full set of production equipment at its North Reading headquarters to develop prototypes, and to ensure that new products can be manufactured efficiently to Converse's specifications. In addition, Converse maintains a chemistry laboratory that develops and tests midsole and outsole compounds, adhesives and fabrics for use in its products. Many of Converse's basketball shoes use the patented REACT shock absorption technology. REACT gel is a polymer encapsulated in the midsoles of Converse basketball shoes in the heel and forefoot regions that attenuates shock as athletes run and jump and force pressure on their feet. Management believes that REACT technology attenuates shock better than the technologies of its competitors. Competitive athletes have reacted favorably to the comfort and performance of REACT technology. BACKLOG At March 29, 1997, the Company's global backlog was $220.1 million, as compared to $149.3 million at March 30, 1996, an increase of 47.4%. The amount of backlog at a particular time is affected by a number of factors, including the scheduling of the introduction of new products and the timing of the manufacturing and shipping of the Company's products. Accordingly, a comparison of backlog as of two different dates is not necessarily meaningful. COMPETITION The athletic footwear market is highly competitive. Industry participants compete with respect to fashion, price, quality, performance and durability. The athletic footwear industry in the United States can be broken down into several groups. Nike, with 1996 estimated U.S. footwear revenues exceeding $2.5 billion, controls over 30% of the U.S. athletic footwear market. Reebok, with 1996 estimated U.S. footwear revenues exceeding $1.2 billion, controls approximately 15% of the U.S. athletic footwear market. Each of these companies has full lines of product offerings, competes with Converse in the Far East for manufacturing sources, distributes to more than 10,000 outlets worldwide and spends substantially more on advertising and promotion than Converse. Fila 38 USA, Inc. has estimated U.S. footwear sales exceeding $500 million, and adidas, New Balance Athletic Shoe, Inc. and Stride Rite Corporation each have 1996 U.S. footwear revenues of between $200 million and $500 million. All of these companies also compete with Converse for access to foreign manufacturing facilities. In addition to these competitors, there are companies with U.S. revenues of under $200 million, including Airwalk, ASICS Tiger Corporation, British Knights, Inc., Etonic, Inc., Hyde Athletic Industries, Inc., K-Swiss, Inc., L.A. Gear, Inc. and Vans, Inc., among others. Some of these companies emphasize footwear in categories such as running, tennis or teamsports that are not produced by the Company. Worldwide footwear industry data is unavailable, but the largest companies worldwide are believed to be Nike, Reebok and adidas. TRADEMARKS AND PATENTS Converse utilizes trademarks on virtually all of its footwear and licensed apparel. Converse's main trademarks are "Converse(R) All Star(R)", "Chuck Taylor(R)" and "REACT(R)" name and design and the "Converse All Star Chuck Taylor Patch" and "All Star and Design" logos. In addition to those main trademarks, from time to time Converse registers and/or uses other special trademarks for special product lines or products or features. Converse believes that these trademarks are important in identifying its products with the Converse brand image, and the trademarks are often incorporated prominently in product designs. The Company believes the Converse brand to be among its most important and valuable assets for its marketing, and generally seeks protection for its trademarks in most countries where significant existing or potential markets for its products exist. Converse takes vigorous action to defend its trademarks in any jurisdiction where infringement is threatened or has occurred or others have tried to register them. It is impossible to estimate the amount of counterfeiting involving Converse products or the effect such counterfeiting may have on Converse's revenue and brand image. Accordingly, the Company maintains and preserves its trademarks and the related registrations and aggressively protects such rights by taking appropriate legal action against infringement, counterfeiting and misuse. The Company is not aware of any material claim of infringement or other challenges to the Company's right to use any of its trademarks, tradenames, or patents. The Company has a variety of patents, including a number of U.S. and foreign patents and patent applications on its REACT(R) technology. ENVIRONMENTAL MATTERS The Company's operations are subject to federal, state and local laws, regulations and ordinances relating to the operation and removal of underground storage tanks and the storage, handling, generation, treatment, emission, release, discharge and disposal of certain materials, substances and wastes. The nature of the Company's operations expose it to the risk of claims with respect to environmental matters and there can be no assurance that material costs or liabilities will not be incurred in connection with such claims. Based on the Company's experience to date, the Company believes that its future cost of compliance with environmental laws, regulations and ordinances, or exposure to liability for environmental claims, will not have a material adverse effect on the Company's business, operations, financial position or liquidity. However, future events, such as changes in existing laws and regulations, or unknown contamination of sites owned or operated by the Company (including contamination caused by prior owners and operators of such sites) may give rise to additional compliance costs which could have a material adverse effect on the Company's financial condition. EMPLOYEES As of December 28, 1996, Converse employed 2,249 individuals, of whom 1,220 were in manufacturing, and 1,029 were in sales, administration, development and distribution. Management believes its relationship with its employees to be good. Converse has not experienced any material work stoppages or strikes in recent 39 years. The Reynosa, Mexico manufacturing workforce, representing approximately 17% of Converse's work force, is represented by a union. LEGAL PROCEEDINGS In January 1997, a New York State Supreme Court jury ruled unanimously in favor of Converse and awarded damages against certain former owners of Apex in a lawsuit between Converse and such former owners. Following this jury award, the Company was able to settle substantially all claims with the former owners of Apex. As part of these settlements, the former owners delivered to Converse $10.2 million of subordinated notes (discounted to approximately $8.9 million) and warrants to purchase 1.75 million shares of Converse Common Stock at $11.40 per share (valued at the time of acquisition at approximately $3.5 million) and cancelled $5.4 million of other contractual obligations, all of which Converse issued in connection with its 1995 acquisition of Apex. In addition, one former owner made a cash payment to Converse of $2.0 million. As a result, the Company will save approximately $1.0 million in annual interest expense relating to these subordinated notes and there will be no stockholder dilution relating to the exercise of these warrants. In February 1997, the United States Bankruptcy Court confirmed a plan of liquidation in connection with the Apex bankruptcy. The plan confirmation process included settlements pursuant to which Converse made payments of approximately $4.5 million to the Apex estate and to certain creditors of Apex. Converse also relinquished its claims against Apex. The confirmed plan included an injunction which precludes Apex and its creditors from bringing or continuing any Apex-related claims against Converse. As a result of the litigation settlements and the bankruptcy plan confirmation discussed above, Converse recorded a net pretax gain of $13.1 million in First Quarter 1997. See Note 16 to the Company's December 28, 1996 Consolidated Financial Statements and Note 8 to the Company's March 29, 1997 Consolidated Financial Statements included herein. 40 MANAGEMENT DIRECTORS The directors of Converse are as follows:
NAME AGE PRINCIPAL OCCUPATION - ---- --- -------------------- Glenn N. Rupp......... 52 Chairman of the Board and Chief Executive Officer of Converse Donald J. Barr........ 62 Retired; formerly Executive Vice President of Time Inc. Leon D. Black......... 45 Officer and Director of Apollo Capital Management, Inc. and Lion Capital Management, Inc. Julius W. Erving...... 47 President, The Erving Group and Dr. J. Enterprises Robert H. Falk........ 58 Officer of Apollo Capital Management, Inc. and Lion Capital Management, Inc. Gilbert Ford.......... 65 Consultant; formerly Chairman of the Board and Chief Executive Officer of Converse Michael S. Gross...... 35 Officer of Apollo Capital Management, Inc. and Lion Capital Management, Inc. John J. Hannan........ 44 Officer and Director of Apollo Capital Management, Inc. and Lion Capital Management, Inc. Joshua J. Harris...... 32 Officer of Apollo Capital Management, Inc. and Lion Capital Management, Inc. John H. Kissick....... 55 Officer of Lion Capital Management, Inc. and advisor to Apollo Capital Management, Inc. Richard B. Loynd...... 69 Chairman of the Board of Furniture Brands International, Inc. and formerly its Chief Executive Officer Michael D. Weiner..... 44 Officer of Apollo Capital Management, Inc. and Lion Capital Management, Inc.
MR. RUPP was elected Chairman of the Board and Chief Executive Officer by Converse's Board of Directors on April 11, 1996. From August 1994 to April 1996, Mr. Rupp was the Acting Chairman of McKenzie Sports Products, Inc. and a Strategic Planning Advisor for CRC Industries, Inc. Mr. Rupp was President and Chief Executive Officer of Simmons Upholstered Furniture Inc. ("Simmons") from August 1991 until May 1994. Prior to 1991, Mr. Rupp held various positions with Wilson Sporting Goods Co., including President and Chief Executive Officer from 1987 to 1991. Mr. Rupp is also a director of Consolidated Papers, Inc. In July 1994, a voluntary petition for reorganization under Chapter 11 of the U.S. Bankruptcy Code was filed on behalf of Simmons. MR. BARR was elected a director of Converse on December 15, 1994. From October 1990 until his retirement in October 1996, Mr. Barr served as an Executive Vice President of Time Inc. Prior to 1990 Mr. Barr was the publisher of Sports Illustrated from 1985 to 1990 and Vice President of Time Inc. from 1987 to 1990. Mr. Barr was an employee of Time Inc. for 39 years. MR. BLACK has been a director of Converse since August 1994. Mr. Black is one of the founding principals of Apollo Advisors, L.P. ("Apollo Advisors"), which acts as general partner of Apollo and other private securities investment funds, of Lion, which acts as financial advisor to and representative for certain institutional investors with respect to securities investments, and of Apollo Real Estate Advisors, L.P. ("Apollo Real Estate Advisors"), which acts as general partner of Apollo Real Estate Investment Fund, L.P., a private real estate 41 oriented investment fund. Mr. Black has been director and officer of Apollo Capital Management, Inc. ("Apollo Capital") and Lion Capital Management, Inc. ("Lion Capital") since 1990 and of Apollo Real Estate Management, Inc. ("Apollo Real Estate") since 1993. Apollo Capital is the general partner of Apollo Advisors; Lion Capital is the general partner of Lion Advisors; and Apollo Real Estate is the managing general partner of Apollo Real Estate Advisors. Mr. Black also serves as a director of Big Flower Press, Inc., Culligan Water Technologies, Inc., Furniture Brands International, Inc., Samsonite Corporation, Telemundo Group, Inc. and Vail Resorts, Inc. MR. ERVING was elected a director of Converse in November 1994. Since 1979 Mr. Erving has been the President of The Erving Group and Dr. J. Enterprises. Mr. Erving is also a part owner of Philadelphia Coca-Cola Bottling Company and Television Station WKBW, Buffalo, New York. Mr. Erving also serves as an analyst for professional basketball for NBC Sports. He was a member of the Philadelphia 76'ers basketball team until April 1987 and has been an endorser of Converse's products since 1975. Mr. Erving is also a director of CoreStates Bank, N.A. and Philadelphia Coca-Cola Bottling Company. MR. FALK has been a director of Converse since August 1994. Mr. Falk has been an officer of Apollo Capital and Lion Capital since 1992. Prior thereto, Mr. Falk was a partner in the law firm of Skadden, Arps, Slate, Meagher & Flom. Mr. Falk is also a director of Culligan Water Technologies, Inc., Florsheim Group Inc. and Samsonite Corporation. MR. FORD has been a director of Converse since 1987. Mr. Ford served as Chief Executive Officer of Converse from October 1986 to April 1996 and as Chairman of the Board from September 1994 to April 1996. Mr. Ford served as Converse's Vice Chairman from April 1996 until his retirement in December 1996. Previously, Mr. Ford held various positions within Converse, including President from 1986 to 1994, Executive Vice President from 1981 to 1986, Vice President of Sales and Marketing from 1976 to 1981, Vice President of Sales from 1972 to 1976 and National Sales Manager from 1969 to 1972. Mr. Ford was an employee of Converse for over 34 years. MR. GROSS has been a director of Converse since 1992. Mr. Gross is one of the founding principals of Apollo Advisors and Lion Advisors and has served as an officer of Apollo Capital and Lion Capital since 1990. Mr. Gross is a director of Florsheim Group Inc., Furniture Brands International, Inc., Proffitt's Inc. and Urohealth, Inc. MR. HANNAN has been a director of Converse since August 1994. Mr. Hannan is one of the founding principals of Apollo Advisors, Lion Advisors and Apollo Real Estate Advisors and has served as an officer and director of Apollo Capital and Lion Capital since 1990 and of Apollo Real Estate since 1993. Mr. Hannan is a director of Aris Industries, Inc., Florsheim Group Inc., Furniture Brands International, Inc. and United Auto Group, Inc. MR. HARRIS has been a director of Converse since 1992. Mr. Harris is an officer of Apollo Capital and Lion Capital, having been associated with them since 1990. Mr. Harris is a director of Florsheim Group Inc. and Furniture Brands International, Inc. MR. KISSICK has been a director of Converse since August 1994. Mr. Kissick is one of the founding principals of Apollo Advisors and Lion Advisors and has served as an officer of Lion Capital and a consultant to Apollo Capital since 1991. Mr. Kissick is also a director of Continental Graphics Holdings, Inc., Florsheim Group Inc., Food 4 Less Holdings, Inc. and Furniture Brands International, Inc. MR. LOYND has been a director of Converse since 1982. Mr. Loynd was Chief Executive Officer of Furniture Brands International, Inc. from 1989 to October 1, 1996 and continues as Chairman of the Board. Mr. Loynd was also Chairman of the Board of Converse from 1982 to August 1994. Mr. Loynd is also a director of Emerson Electric Co. and Florsheim Group Inc. 42 MR. WEINER has been a director of Converse since 1996. Mr. Weiner has been an officer of Apollo Capital and Lion Capital since 1992 and of Apollo Real Estate since 1993. Prior to 1992, Mr. Weiner was a partner in the law firm of Morgan, Lewis & Bockius LLP. Mr. Weiner is also a director of Applause, Inc., Capital Apartment Properties, Inc., Continental Graphics Holdings, Inc., Florsheim Group Inc. and Furniture Brands International, Inc. EXECUTIVE OFFICERS The executive officers of Converse are as follows:
NAME AGE POSITION - ---- --- -------- Glenn N. Rupp......... 52 Chairman of the Board and Chief Executive Officer Donald J. Camacho..... 46 Senior Vice President and Chief Financial Officer Edward C. Frederick... 50 Senior Vice President, Research and Development Jack A. Green......... 51 Senior Vice President, General Counsel and Secretary Thomas L. Nelson...... 42 Senior Vice President, Sales/North America Herbert R. Rothstein.. 55 Senior Vice President, Production Ronald J. Ryan........ 55 Senior Vice President, Operations James E. Solomon...... 41 Senior Vice President, Marketing Alistair M. Thorburn.. 39 Senior Vice President, International James E. Lawlor....... 43 Vice President, Finance and Treasurer
MR. RUPP'S biography appears under "Directors." MR. CAMACHO has served as Senior Vice President and Chief Financial Officer since September 1994. Previously, Mr. Camacho held the positions of Vice President and Controller from 1992 to 1994, Controller from 1984 to 1992, Assistant Controller from 1980 to 1984, and several other positions of increasing responsibility since 1974. DR. FREDERICK has served as Senior Vice President, Research and Development since April 1997. From February 1996 to April 1997, Dr. Frederick was a consultant to Converse through his wholly-owned consulting company, Exeter Research, Inc. ("Exeter") and held the title of Chief Product Executive of Converse. Dr. Frederick has been the President of Exeter since 1987. Since 1995, Dr. Frederick has also served as an Adjunct Professor in the Department of Exercise Sciences, School of Public Health and Health Sciences, University of Massachusetts. Dr. Frederick worked as a consultant for adidas, AG in the fields of development, design and technology from 1991 to 1996. Previously, Dr. Frederick worked as the Director of Research for Nike from 1980 to 1986 and as a design consultant for Nike from 1978 to 1980 and from 1986 to 1990. MR. GREEN has served as Senior Vice President and General Counsel and Secretary since August 1985, having joined the Company as Vice President Legal in 1983. MR. NELSON joined Converse as Senior Vice President, Sales/North America on March 13, 1995. Before joining Converse, Mr. Nelson worked for The Rockport Company, a subsidiary of Reebok International Ltd., where he served as Senior Vice President of Sales/Operations from 1992 to 1995. Prior to that, Mr. Nelson worked for G.H. Bass & Company from 1983 to 1992 where he held several sales-related positions before being promoted to Senior Vice President of Sales in 1990. MR. ROTHSTEIN has served as Senior Vice President, Production since January 1996. Previously, Mr. Rothstein was Senior Vice President Sourcing from 1992 to 1996, Senior Vice President of Materials 43 Management and Manufacturing from 1991 to 1992 and Vice President of Materials Management from 1988 to 1991. Before joining Converse, Mr. Rothstein held several senior management positions with Reebok International Ltd. from 1985 to 1988, Morse Shoe Inc. from 1973 to 1985, BGS Shoe Corporation from 1969 to 1972 and Signet from 1964 to 1969. MR. RYAN has served as Senior Vice President, Operations since September 1994. Previously, Mr. Ryan held the position of Senior Vice President of Finance and Operations since May 1994, having joined the Company as Senior Vice President of Finance and Administration from 1990 to 1994. Prior thereto, Mr. Ryan served as Vice President of Finance and Business Planning for the Europe, Middle East and Africa divisions of the Bristol-Myers Squibb Company from 1984 to 1990. MR. SOLOMON has served as Senior Vice President, Marketing since October 1996. Previously, Mr. Solomon worked for Lenox Inc. from August 1990 to September 1996 in a number of senior positions, including president and chief operating officer of the Dansk International Design division from May 1994 to September 1996 and Gorham, Kirk-Stieff, Dansk division from July 1991 to May 1994. He also has experience in the athletic footwear industry, having served as Executive Vice President of Kangaroos USA from 1989 to 1990, Vice President, Marketing of Avia Athletic Footwear from 1985 to 1988, and Group Product Manager, New Balance Athletic Shoes from 1981 to 1983. MR. THORBURN has served as Senior Vice President, International since December 1993. Prior to joining the Company, Mr. Thorburn was Vice President Europe/Asia Pacific for the Wilson Sporting Goods Co., Ltd. from 1987 to 1993. MR. LAWLOR has served as Vice President, Finance of Converse since June 1995. Previously, Mr. Lawlor held the positions of Vice President and Treasurer from September 1994 to June 1995, Treasurer from 1984 to 1994 and other positions of increasing responsibility since 1975. CERTAIN TRANSACTIONS CONSULTING AGREEMENT The Company is a party to a consulting agreement (the "Consulting Agreement") with Apollo Advisors pursuant to which Apollo Advisors provides corporate advisory, financial and other consulting services to the Company. Fees under the Consulting Agreement are payable at an annual rate of $500,000, plus out-of-pocket expenses. The Consulting Agreement is for a term currently expiring on December 31, 1997 and is automatically renewable for successive one-year terms unless terminated by independent members of the Board of Directors. REGISTRATION RIGHTS AGREEMENT Converse has granted registration rights to the Apollo Stockholders with respect to their shares of Common Stock. The Apollo Stockholders can require Converse to file registration statements and to include the Apollo Stockholders' shares in registration statements otherwise filed by Converse. Costs and expenses of preparing such registration statements are required to be paid by Converse. CREDIT SUPPORT In November 1995, Apollo caused a standby letter of credit for the account of Apollo in the amount of $25 million to be provided to the Banks under Converse's Credit Facility, which had the effect of allowing Converse to borrow an additional $25 million above its borrowing base. This letter of credit was subsequently extended through June 30, 1997, and Apollo has agreed to cause it to be further extended to November 17, 1997, if required. In consideration of the foregoing, Apollo received a fee from the Company equal to 3% of the face amount of the letter of credit and a subsequent fee of $100,000 upon extension of the letter of credit. 44 ENDORSEMENT CONTRACT Mr. Erving has a contract with Converse whereby he has agreed to perform certain services. The agreement provides for Mr. Erving's endorsement of the Company's footwear and activewear, the right to use his name and likeness to advertise the Company's products, promotional appearances, advertising production and product development consulting. The agreement provides for an annual fee of $162,500 from October 1, 1995 through September 30, 1996 and $200,000 from October 1, 1996 through September 30, 1997 and beyond and expires on September 30, 2000. Mr. Erving is also entitled to receive a royalty of (i) 1% of the net sales for the first 500,000 pairs of the Dr. J 2000 shoe and 1.5% of net sales for all pairs of the Dr. J 2000 shoe sold in excess of 500,000, (ii) 1.5% of the net sales of apparel items which bear Mr. Erving's name or are designed to coordinate with shoes bearing Mr. Erving's name and (iii) 1% of the net sales of any shoes other than the Dr. J. 2000 which bear Mr. Erving's name or for which Mr. Erving is the Company's primary designated endorser. The agreement provides for a minimum royalty of $145,000 to be paid to Mr. Erving for all shoe and apparel net sales in 1997. Mr. Erving earned a total of $215,336 under this agreement in 1996. CONSULTING AGREEMENT Converse entered into a consulting agreement in February 1996 with Exeter whereby Exeter provides certain services to Converse in the fields of research and development and product design. Converse entered into an additional consulting agreement with Exeter in May 1996 to provide additional product development services. Exeter is owned by Edward C. Frederick, who was hired as the Company's Senior Vice President, Research and Development in April 1997. The consulting agreements with Exeter provide for an aggregate fee of $290,000 per year plus expenses. One of the consulting agreements, the fee for which was $200,000 per year, was terminated in April 1997 when Dr. Frederick was hired as an officer of the Company. The remaining consulting agreement relates to consulting services provided by employees of Exeter other than Dr. Frederick. Exeter was paid a total of $238,679 under these two agreements during 1996. TAX REFUND TRANSACTION In connection with the Distribution, Converse and Furniture Brands entered into a Tax Sharing Agreement (the "Tax Sharing Agreement") providing, among other things, for an equal allocation between Furniture Brands and Converse of benefits derived from a carryback of federal and state tax liabilities to periods prior to completion of the Distribution. On February 21, 1996, Converse and Furniture Brands executed an amendment to the Tax Sharing Agreement under which Converse agreed to carry back federal income tax operating losses for the years ended December 30, 1995 and December 28, 1996 to one or more Pre-Distribution tax periods. The amendment applies to the first $41 million of tax operating losses generated, which approximates the taxable income available in the carryback period. For the year ended December 30, 1995, tax operating losses of approximately $31 million were carried back generating a tax refund of approximately $10.8 million. In accordance with the Tax Sharing Agreement, as amended, Furniture Brands paid Converse $8 million on February 29, 1996 and in return Furniture Brands became entitled to the full amount of the tax refund. Furniture Brands is also entitled to any tax refunds resulting from the first $10 million of tax operating losses for the year ended December 28, 1996. Furniture Brands is not entitled to any refund of the $8 million payment in the event the ultimate tax refund it receives from the Internal Revenue Service is less than anticipated. 45 SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The following table sets forth certain information as of April 25, 1997 regarding the beneficial ownership of shares of Converse Common Stock by (i) each person known by Converse to beneficially own more than 5% of the outstanding shares of Converse Common Stock, (ii) each of the executive officers and directors of Converse and (iii) the directors and executive officers of Converse as a group.
NUMBER OF PERCENT OF SHARES COMMON STOCK BENEFICIALLY BENEFICIALLY OWNED OWNED ------------ ------------ Apollo Investment Fund, L.P. and Lion Advisors, L.P Two Manhattanville Road Purchase, New York 10577 (1)....................... 11,230,365 65.1% Glenn N. Rupp (2)................................... 105,000 * Donald J. Camacho (2)............................... 34,500 * Edward C. Frederick (2)............................. 20,000 * Jack A. Green (2)................................... 17,000 * James E. Lawlor (2)................................. 20,250 * Thomas L. Nelson (2)................................ 14,000 * Herbert R. Rothstein (2)............................ 4,000 * Ronald J. Ryan (2).................................. 28,250 * James E. Solomon (2)................................ 0 * Alistair M. Thorburn (2)............................ 32,250 * Donald J. Barr (2).................................. 7,500 * Leon D. Black (1)(3)................................ 11,230,365 65.1 Julius W. Erving (2)................................ 5,000 * Robert H. Falk (1)(3)............................... 11,230,365 65.1 Gilbert Ford........................................ 10,000 * Michael S. Gross (1)(3)............................. 11,230,365 65.1 John J. Hannan (1)(3)............................... 11,230,365 65.1 Joshua J. Harris (1)(3)............................. 11,230,365 65.1 John H. Kissick (1)(3).............................. 11,230,365 65.1 Richard B. Loynd (2)................................ 42,166 * Michael D. Weiner (1)(3)............................ 11,230,365 65.1 Directors and executive officers of the Company as a group (21 persons) (1)(3).......................... 11,570,281 72.6
- -------- * Indicates less than 1%. (1) Includes 5,616,306 shares beneficially owned by Apollo and 5,614,059 shares beneficially owned by Lion. Apollo Capital and Lion Capital, as the general partners of Apollo Advisors and Lion, respectively, are the entities having dispositive power and voting control over shares beneficially owned by Apollo and Lion. Messrs. Black and Hannan are directors, officers and the principal stockholders of Apollo Capital and Lion Capital. (2) Shares beneficially owned represent options to purchase Converse Common Stock that are exercisable within 60 days, except for shares held of record by the following: Mr. Rupp 5,000 shares, Mr. Camacho 2,500 shares, Mr. Lawlor 5,000 shares, Mr. Ryan 2,000 shares, Mr. Barr 2,500 shares and Mr. Loynd 37,166 shares. (3) Messrs. Black and Hannan are directors, officers and the principal stockholders of Apollo Capital and Lion Capital. Messrs. Falk, Gross, Harris and Weiner are officers of Apollo Capital and Lion Capital. Mr. Kissick is an officer of Lion Capital and a consultant to Apollo Capital. Each such director disclaims beneficial ownership of, and a personal pecuniary interest in, the shares beneficially owned by Apollo and Lion. 46 DESCRIPTION OF NOTES The Notes will be issued under an indenture dated as of , 1997 (the "Indenture") between the Company and First Union National Bank, as trustee (the "Trustee"). The following summaries of certain provisions of the Indenture and the Notes do not purport to be complete and are subject to, and are qualified in their entirety by reference to, all of the provisions of the Indenture, including the definition therein of certain terms. Whenever defined terms of the Indenture are referred to, such defined terms are incorporated herein by reference. A copy of the proposed form of Indenture is filed as an exhibit to the Registration Statement of which this Prospectus is a part. GENERAL The Notes will be unsecured, subordinated obligations of the Company, will be limited to $69,000,000 in aggregate principal amount (including the Notes issuable under the Underwriters' over-allotment option) and will mature on , 2004. The Notes will bear interest at the rate per annum shown on the front cover of this Prospectus from the date of original issuance of Notes pursuant to the Indenture, or from the most recent Interest Payment Date to which interest has been paid or provided for, payable semi-annually on and of each year, commencing , 1997, to the person in whose name the Note (or any predecessor Note) is registered at the close of business on the preceding or , as the case may be (whether or not a Business Day). Interest on the Notes will be paid on the basis of a 360-day year of twelve 30-day months. Principal of and premium, if any, and interest on the Notes will be payable and the conversion and transfer of Notes may be registered at the office of the Trustee in New York, New York. In addition, payment of interest may be made at the option of the Company by check mailed to the address of the persons entitled thereto as it appears in the Register for the Notes on the Regular Record Date for such interest. The Notes will be issued only in registered form, without coupons and in denominations of $1,000 or any integral multiple thereof. No service charge will be made for any transfer or exchange of the Notes, but the Company may require payment of a sum sufficient to cover any tax or other governmental charge and any other expenses (including the fees and expenses of the Trustee) payable in connection therewith. The Company is not required (i) to issue or register the transfer or exchange of any Notes during a period beginning at the opening of business 15 days before the day of the mailing of a notice of redemption and ending at the close of business on the day of such mailing, (ii) to register the transfer of or exchange of any Note selected for redemption in whole or in part, except the unredeemed portion of Notes being redeemed in part or (iii) to register the transfer or exchange of any Notes surrendered for conversion or repurchase upon the occurrence of a Change of Control. All monies paid by the Company to the Trustee or any Paying Agent for the payment of principal of and premium and interest on any Note which remain unclaimed for two years after such principal, premium or interest become due and payable may be repaid to the Company. Thereafter, the holder of such Note may, as an unsecured general creditor, look only to the Company for payment thereof. CONVERSION RIGHTS The Notes will be convertible, in whole or from time to time in part (in denominations of $1,000 or integral multiples thereof), into shares of Common Stock of the Company at any time prior to redemption or final maturity on , 2004 at the conversion price set forth on the cover page of this Prospectus, adjusted as described in the following paragraphs, except that if a Note or portion thereof is earlier called for redemption, 47 the conversion right with respect thereto will terminate at the close of business on the business day prior to the date fixed for redemption and will be lost if not exercised prior to that time, unless the Company shall default in payment of the redemption price. Fractional shares of Common Stock will not be delivered upon conversion, but a cash adjustment will be paid in respect of such fractional interests based on the Current Market Price (as defined in the Indenture) of the Company's Common Stock. The initial conversion price is subject to adjustment upon certain events, including (i) the issuance of Common Stock as a dividend or distribution on capital stock, including the Common Stock; (ii) a combination, subdivision or reclassification of Common Stock; (iii) the issuance to all holders of Common Stock of rights, warrants or options entitling them to subscribe for or purchase Common Stock (or securities convertible into Common Stock) at less than the Current Market Price; provided, however, that in the case of certain rights, warrants or options that are not exercisable until the occurrence of a specified event or events, the conversion price will not be adjusted until the occurrence of the earliest such specified event; (iv) the distribution to all holders of Common Stock of capital stock (other than Common Stock), evidences of indebtedness of the Company, assets (excluding regular periodic cash dividends paid from surplus), or rights or warrants to subscribe for or purchase securities of the Company (excluding the dividends, distributions, rights and warrants mentioned above); (v) a distribution consisting exclusively of cash (excluding any cash distributions referred to in (iv) above) to all holders of Common Stock in an aggregate amount that, together with (A) all other cash distributions (excluding any cash distributions referred to in (iv) above) made within the 12 months preceding such distribution and (B) any cash and the fair market value of other consideration payable in respect of any previous tender offer by the Company or a Subsidiary (as defined in the Indenture) for the Company's Common Stock consummated within the 12 months preceding such distribution, exceeds 10% of the Company's market capitalization (being the Current Market Price times the number of shares of Common Stock then outstanding) on the date fixed for determining the stockholders entitled to such distribution; (vi) the completion of a tender offer made by the Company or any Subsidiary for the Company's Common Stock involving an aggregate consideration that, together with (X) any cash and the fair market value of any other consideration paid or payable in respect of any previous tender offer by the Company or a Subsidiary for the Company's Common Stock consummated within the 12 months preceding the consummation of such tender offer and (Y) the aggregate amount of all cash distributions (excluding any cash distributions referred to in (iv) above) to all holders of Common Stock within the 12 months preceding the consummation of such tender offer exceeds 10% of the Company's market capitalization on the date of consummation of such tender offer; and (vii) issuances of Common Stock to an Affiliate (as defined in the Indenture) for a net consideration per share less than the Current Market Price (other than issuances of Common Stock under certain benefit plans of the Company). The Company will be permitted to make such reductions in the conversion price as it determines to be advisable in order that any stock dividend, subdivision of shares, distribution of rights to purchase stock or securities or distribution of securities convertible into or exchangeable for stock made by the Company to its stockholders will not be taxable to the recipients. Except as stated above, the conversion price will not be adjusted for the issuance of Common Stock, or any securities convertible into or exchangeable for Common Stock or carrying the right to purchase any of the foregoing, in exchange for cash, property or services. If at any time (a) the Company makes a distribution of property to its stockholders or purchases Common Stock in a tender offer and such distribution or purchase would be taxable to such stockholders as a dividend for federal income tax purposes (e.g., distributions of evidences of indebtedness or assets of the Company but generally not stock dividends or rights to subscribe for capital stock) and, pursuant to the antidilution provisions of the Indenture, the conversion price of the Notes is reduced or (b) the conversion price is reduced at the discretion of the Company, such reduction may be deemed to be the receipt of taxable income by holders of the Notes. Holders of Notes therefore could have taxable income as a result of an event in which they receive no cash or property. See "Certain United States Federal Tax Consequences--Adjustment of Conversion Price." 48 Subject to any applicable right of the holders to cause the Company to repurchase their Notes upon a Change of Control (as defined below), in the case of certain consolidations, mergers or statutory exchanges of securities with another corporation to which the Company is a party, or the sale or conveyance of the Company's assets substantially as an entirety, there will be no adjustment to the conversion price, but each holder will have the right, at the holder's option, to convert all or any portion of such holder's Notes into the kind and amount of securities, cash or other property receivable upon the consolidation, merger, statutory exchange or transfer by a holder of the number of shares of Common Stock into which such Note might have been converted immediately prior to such consolidation, merger, statutory exchange or transfer (assuming such holder failed to exercise any rights of election and received per share the kind and amount of consideration received per share by a plurality of non-electing shares). In the case of a cash merger of the Company into another corporation or any other cash transaction of the type mentioned above, the effect of these provisions would be that thereafter the Notes would be convertible at the conversion price in effect at such time into the same amount of cash per share into which the Notes would have been convertible had the Notes been converted into Common Stock immediately prior to the effective date of such cash merger or transaction. Depending upon the terms of such cash merger or transaction, the aggregate amount of cash into which the Notes would be converted could be more or less than the principal amount of the Notes. Notes surrendered for conversion after the close of business on a record date for payment of interest and before the close of business on the next succeeding interest payment date (unless such Notes have been called for redemption) must be accompanied by payment of an amount equal to the interest thereon that is to be paid on such interest payment date. Subject to the foregoing, no payments or adjustments will be made upon conversion on account of accrued interest on the Notes or for any dividends or distributions on any shares of Common Stock delivered upon such conversion. No adjustment of the conversion price will be required to be made in any case until cumulative adjustments amount to at least 1% of the conversion price, as last adjusted. Any adjustment that would otherwise be required to be made shall be carried forward and taken into account in any subsequent adjustment. SUBORDINATION The payment of the principal of and premium, if any, and interest on the Notes, including purchase at the option of a holder upon the occurrence of a Change of Control, is subordinated in right of payment, as set forth in the Indenture, to the prior payment in full of all Senior Indebtedness of the Company. Senior Indebtedness is defined as (a) the principal of, premium, if any, and accrued and unpaid interest on (i) indebtedness of the Company for money borrowed, whether outstanding on the date of execution of the Indenture or thereafter created, incurred or assumed, (ii) guarantees by the Company of indebtedness for money borrowed by any other person, or reimbursement obligations under letters of credit, in either case, whether outstanding on the date of execution of the Indenture or thereafter created, incurred or assumed, (iii) indebtedness evidenced by notes (other than the Notes), debentures, bonds or other instruments of indebtedness for the payment of which the Company is responsible or liable, by guarantees or otherwise, whether outstanding on the date of execution of the Indenture or thereafter created, incurred or assumed, (iv) obligations of the Company under interest rate and currency swaps, caps, floors, collars or similar agreements or arrangements intended to protect the Company against fluctuations in interest or currency rates, whether outstanding on the date of execution of the Indenture or thereafter created, incurred or assumed, and (v) obligations of the Company under any agreement to lease, or any lease of, any real or personal property, which obligations, whether outstanding on the date of execution of the Indenture or thereafter created, incurred or assumed, are required to be capitalized on the books of the Company in accordance with generally accepted accounting principles, or guarantees by the Company of similar obligations of others, and (b) modifications, renewals, extensions and refundings of any such indebtedness, obligations or guarantees; unless, in the instrument creating or evidencing the same or pursuant to which the same is outstanding, it is provided that such indebtedness, obligations or guarantees, or such modification, renewal, extension or refunding thereof, is not superior in right of payment to the Notes; provided, however, that Senior Indebtedness will not be deemed to include, and the Notes will rank pari passu in right of payment with, any obligation of the Company to any of its Subsidiaries. 49 In the event of (a) any insolvency or bankruptcy case or proceeding, or any receivership, liquidation, reorganization or other similar case or proceeding in connection therewith, relative to the Company or to its creditors, as such, or to its assets or (b) any liquidation, dissolution or other winding-up of the Company, whether total or partial, whether voluntary or involuntary and whether involving insolvency or bankruptcy, or (c) any assignment for the benefit of creditors or any other marshaling of assets and liabilities of the Company, the holders of all Senior Indebtedness will first be entitled to receive payment in full of all amounts due or to become due thereon or in respect thereof before the holders of the Notes are entitled to receive any payment on account of the principal of, or premium, if any, or interest on the Notes (other than payment (a "Permitted Payment") consisting solely of shares of stock, securities or indebtedness subordinated at least to the extent of the Notes provided by a plan of reorganization or adjustment that does not adversely alter the rights of holders of Senior Indebtedness). Following the occurrence of any of the events described above, if the Trustee or any holder of the Notes receives any payment or distribution of assets of the Company of any kind or character before all Senior Indebtedness is paid in full, then such payment or distribution (other than a Permitted Payment) will be required to be paid over or delivered to the trustee in bankruptcy, receiver, liquidating trustee, custodian, assignee, agent or other person making payment or distribution of the assets of the Company for application to the payment of all amounts payable on or in respect of Senior Indebtedness remaining unpaid, to the extent necessary to pay such amounts in full after giving effect to any concurrent payment or distribution to or for the holders of Senior Indebtedness. The Indenture also provides that in the event there shall have occurred and be continuing (i) any default in the payment when due of principal of, premium, if any, or interest on any Senior Indebtedness or (ii) any other event of default with respect to any Senior Indebtedness, then no payment shall be made by the Company on account of the principal of, premium, if any, or interest on the Notes or on account of the purchase or redemption or other acquisition of the Notes (x) in the case of any event of default described in clause (i) above, unless and until the Senior Indebtedness to which such default relates is discharged or such event of default shall have been cured or waived or shall have ceased to exist or the holders of such Senior Indebtedness or their agents shall have waived the benefits of this provision, and (y) in the case of any event of default specified in clause (ii) above, from the date the Company or the Trustee receives written notice of such default (a "Senior Default Notice") from the agent for the lenders under the Credit Facility or the New Credit Facility or any replacement thereof or from the holders of at least 25% in principal amount of any other kind or category of Senior Indebtedness to which such default relates or any representative of such holders until the earlier of (A) 180 days after such date or (B) the date, if any, on which the Senior Indebtedness to which such default relates is discharged or such default shall have been cured or waived or shall have ceased to exist or the holders of such Senior Indebtedness or their agents shall have waived the benefits of this provision; provided, however, that not more than one Senior Default Notice is permitted to be given during any period of 360 consecutive days, regardless of the number of defaults with respect to Senior Indebtedness during such 360-day period. Subject to the payment in full of all Senior Indebtedness, the holders of the Notes will be subrogated to the rights of the holders of Senior Indebtedness to receive payments or distributions of assets of the Company applicable to Senior Indebtedness until the Notes are paid in full. Notwithstanding anything in the Indenture to the contrary, neither the Trustee nor any holder of Notes may exercise any right either may have to accelerate the maturity of the Notes at any time when payment of any amount owing on the Notes is prohibited, in whole or in part, as described in the preceding paragraphs; provided, however, that such right may nevertheless be so exercised upon the earliest of the acceleration of the maturity of any Senior Indebtedness, the exercise by any holder of Senior Indebtedness of any remedies available to such holder upon a default or event of default with respect to such Senior Indebtedness or the occurrence of an Event of Default relating to certain events of bankruptcy, insolvency or reorganization. By reason of the subordination of the Notes, in the event of insolvency, creditors of the Company who are holders of Senior Indebtedness may recover more, ratably, than the holders of the Notes. In addition, the right of the Company, and, therefore, the right of creditors of the Company (including Noteholders), to participate in any distribution of assets of any subsidiary of the Company upon its liquidation or reorganization or otherwise is necessarily subject to the prior claims of creditors of the subsidiary, except to the extent that claims of the Company itself as a creditor of the subsidiary may be recognized. 50 The Indenture will not limit the amount of other indebtedness or securities that may be issued by the Company or any of its subsidiaries. OPTIONAL REDEMPTION The Notes may not be redeemed by the Company prior to , 2000. Thereafter, the Notes may be redeemed at the option of the Company, in whole or in part, at any time and from time to time, upon not less than 15 nor more than 60 days notice by mail at the applicable redemption prices (expressed in percentages of principal amount) set forth below. If redeemed during the twelve-month period beginning in the year indicated ( in the case of the year 2000), the redemption price shall be:
YEAR REDEMPTION PRICE ---- ---------------- 2000.................... 2001.................... 2002.................... 2003....................
together with interest accrued and unpaid thereon to the date fixed for redemption. If all accrued and payable interest on the Notes has not been paid, the Notes may not be redeemed in part and the Company may not purchase or acquire any Notes otherwise than pursuant to a purchase or exchange offer made on the same terms to all holders of the Notes. If less than all the Notes are to be redeemed, the Trustee will select those to be redeemed by lot or such other method as the Trustee in its discretion shall deem appropriate and fair. Notice of redemption will be given to holders of the Notes to be redeemed by first class mail at their last address appearing on the Register for the Notes. CONSOLIDATION, MERGER AND SALE OF ASSETS The Company will not consolidate with or merge into any other person or convey, transfer or lease its properties and assets substantially as an entirety to any person, and the Company will not permit any person to consolidate with or merge into the Company unless (a) if applicable, the person formed by such consolidation or into which the Company is merged or the person or corporation which acquires the properties and assets of the Company substantially as an entirety is a corporation, partnership or trust organized and validly existing under the laws of the United States or any state thereof or the District of Columbia and expressly assumes payment of the principal of and premium, if any, and interest on the Notes and performance and observance of each obligation of the Company under the Indenture, (b) after consummating such consolidation, merger, transfer or lease, no Event of Default or event which, after notice or lapse of time or both, would become an Event of Default will occur and be continuing, (c) such consolidation, merger, conveyance, transfer or lease does not adversely affect the validity or enforceability of the Notes and (d) the Company has delivered to the Trustee an Officers' Certificate and an Opinion of Counsel, each stating that such consolidation, merger, conveyance, transfer or lease complies with the provisions of the Indenture. PURCHASE OF NOTES AT THE OPTION OF THE HOLDER UPON A CHANGE OF CONTROL In the event of a Change of Control, each holder of Notes will have the right, at the holder's option, subject to the terms and conditions of the Indenture, to require the Company to purchase all or any part (provided that the principal amount must be $1,000 or an integral multiple thereof) of the holder's Notes on the date that is 40 business days after the occurrence of such Change of Control (the "Purchase Date") for a purchase price equal to 100% of the principal amount thereof, plus interest accrued and unpaid thereon to the Purchase Date. 51 Within 20 business days after the occurrence of the Change of Control, the Company shall mail to the Trustee and to each holder (and to beneficial owners as required by law) a notice of the occurrence of the Change of Control, setting forth, among other things, the terms and conditions of, and the procedures required for exercise of, the holder's right to require the purchase of such holder's Notes. To exercise the purchase right, a holder must deliver written notice of such exercise to the Trustee prior to the close of business on the Purchase Date, specifying the Notes with respect to which the right of purchase is being exercised. Such notice of exercise may be withdrawn by the holder by a written notice of withdrawal delivered to the Trustee at any time prior to the close of business on the Purchase Date. Under the Indenture, a "Change of Control" is deemed to have occurred at such time as (i) there shall be consummated a sale of all or substantially all of the Company's assets as an entirety, (ii) any Acquiring Person has become such Person or (iii) there shall be consummated by any consolidation or merger of the Company in which the Company is not the continuing or surviving corporation (other than a consolidation or merger with a wholly owned subsidiary of the Company in which all shares of Common Stock outstanding immediately prior to the effectiveness thereof are changed into or exchanged for the same consideration) or pursuant to which the Common Stock would be converted into cash, securities or other property, in each case, other than a consolidation or merger in which the holders of Common Stock immediately prior to the consolidation or merger have, directly or indirectly, at least a majority of common stock of the continuing or surviving corporation immediately after the consolidation or merger; provided, however, that a Change of Control shall not be deemed to have occurred if the last sale price of the Common Stock for any five trading days during the ten trading days immediately preceding the Change of Control is at least equal to 105% of the conversion price in effect immediately preceding the time of such Change of Control. "Acquiring Person" means any person or group (as defined in Section 13(d)(3) of the Exchange Act) who or which, together with all affiliates and associates (as defined in Rule 12b-2 under the Exchange Act), becomes the beneficial owner of shares of Common Stock or other voting securities of the Company having more than 50% of the total number of votes that may be cast for the election of directors of the Company; provided, however, that an Acquiring Person shall not include (w) the Apollo Stockholders and their affiliates, (x) the Company, (y) any Subsidiary of the Company or (z) any current or future employee benefit plan of the Company or any Subsidiary of the Company or any entity holding Common Stock of the Company for or pursuant to the terms of any such plan. Notwithstanding the foregoing, no person shall become an Acquiring Person as the result of an acquisition of Common Stock by the Company which, by reducing the number of shares outstanding, increases the proportionate number of shares beneficially owned by such Person to more than 50% of the Common Stock of the Company then outstanding; provided, however, that if a Person shall become the beneficial owner of 50% or more of the Common Stock of the Company then outstanding by reason of share purchases by the Company and shall, after such share purchases by the Company, become the beneficial owner of any additional shares of Common Stock of the Company, then such Person shall be deemed to be an Acquiring Person. The Company will comply with the provisions of Rule 13e-4, Rule 14e-1 and any other tender offer rules under the Exchange Act which may then be applicable, and will file Schedule 13E-4 or any other schedule required thereunder in connection with any offer by the Company to purchase Notes at the option of the holders upon a Change of Control. The Change of Control purchase feature of the Notes may in certain circumstances make more difficult or discourage a takeover of the Company and, thus, the removal of incumbent management. The Change of Control purchase feature is a standard term contained in other similar debt offerings, and the terms of such feature result from negotiations between the Company and the Underwriters. The right to require the Company to repurchase Notes as a result of a Change of Control could create an event of default under Senior Indebtedness of the Company as a result of which any repurchase could, absent a waiver, be blocked by the subordination provisions of the Notes. The Company's Board of Directors may not waive a Change of Control. Failure by the Company to repurchase the Notes when required will result in an 52 Event of Default with respect to the Notes whether or not such a repurchase is permitted by the subordination provisions. If a Change of Control were to occur, there can be no assurance that the Company would have sufficient funds to pay the Change of Control purchase price for all Notes tendered by the holders thereof. The Company's ability to make such payments may be limited by the terms of its then-existing borrowing and other agreements. EVENTS OF DEFAULT An Event of Default with respect to the Notes is defined in the Indenture as being default for 30 days in payment of any interest installment of the Notes (even if such payment is prohibited by the subordination provisions of the Indenture); default in payment of principal of or premium, if any, on the Notes either in connection with any redemption or otherwise (even if such payment is prohibited by the subordination provisions of the Indenture); default in the payment of the purchase price in respect of any Note on the Purchase Date therefor (even if such payment is prohibited by the subordination provisions of the Indenture); failure to provide timely notice of a Change of Control as required by the Indenture; failure to observe or perform for 45 days after notice thereof any other covenant in the Indenture; default in respect of any instrument or instruments evidencing or securing other indebtedness for borrowed money having an aggregate principal amount of $10,000,000 or more, which default (i) is caused by a failure to pay principal of or premium, if any, or interest on such indebtedness after the expiration of any applicable grace or forbearance period relating to such indebtedness or (ii) results in the acceleration of such indebtedness prior to its stated maturity, which acceleration shall not have been rescinded or annulled within 30 days after notice is given to the Company by the Trustee or to the Company and the Trustee by the holders of 25% or more in aggregate principal amount of the Notes; or certain events of bankruptcy, insolvency, reorganization, receivership or liquidation involving the Company or certain of its subsidiaries. The Company is required to file with the Trustee annually a written statement as to the fulfillment of its obligations under the Indenture. The Indenture provides that the Trustee may withhold notice to the holders of the Notes of any default (except in payment of principal of, premium, if any, or interest on the Notes) if the Trustee considers it in the interest of the holders of the Notes to do so. The Indenture provides that, if an Event of Default (other than an Event of Default resulting from bankruptcy, insolvency or reorganization) shall have occurred and be continuing, either the Trustee or the holders of 25% or more in aggregate principal amount of the Notes may declare the principal of all the Notes and the interest accrued thereon to be due and payable immediately, but if the Company shall cure all defaults (except the nonpayment of principal of and premium, if any, and accrued interest on Notes that shall have become due by acceleration) and certain other conditions are met, such declaration may be annulled and past defaults may be waived by the holders of a majority in aggregate principal amount of the Notes. Prior to a declaration of acceleration, certain Events of Default and past defaults may be waived by the holders of a majority in aggregate principal amount of the Notes. In the case of an Event of Default resulting from certain events of bankruptcy, insolvency or reorganization, all unpaid principal of and accrued interest on the Notes then outstanding shall be due and payable immediately without any declaration or other act on the part of the Trustee or the holders of Notes. Subject to the provisions of the Indenture relating to the duties of the Trustee in case an Event of Default should occur and be continuing, the Trustee shall be under no obligation to exercise any of the rights or powers under the Indenture at the request or direction of any of the Noteholders, unless such Noteholders have offered to the Trustee reasonable security or indemnity. Subject to such provision for security or indemnification, the holders of a majority in aggregate principal amount of the Notes will have the right to direct the time, method and place of conducting any proceeding for any remedy available to the Trustee, or exercising any trust or power conferred on the Trustee, provided that the Trustee shall have the right to decline to follow any such direction if the Trustee shall be advised by counsel that the action or proceeding so directed may not lawfully be taken or the Trustee shall determine that the action or proceeding so directed could involve the Trustee in personal liability or would be unduly prejudicial to the rights of the holders not joining in such directions or would conflict with the Indenture. 53 MODIFICATION OF THE INDENTURE The Indenture contains provisions permitting the Company and the Trustee, with the consent of the holders of not less than a majority of the aggregate principal amount of the Notes then outstanding, to execute a supplemental indenture to add provisions to, or change in any manner or eliminate any provisions of, the Indenture or modify in any manner the rights of the holders of the Notes, provided that no such supplemental indenture may, among other things, (1) extend the time for payment of principal of or any premium or interest on any Note or reduce the principal amount thereof or the interest thereon or any premium payable upon the redemption thereof or impair the right of any holder to institute suit for payment of the Notes, or make the principal thereof or any premium or interest thereon payable in any coin or currency other than that provided in the Indenture, or modify the subordination provisions of the Indenture in a manner adverse to the holders or impair the right to convert the Notes into Common Stock or to require the Company to repurchase the Notes upon the occurrence of a Change of Control without the consent of the holder of each outstanding Note so affected, or (2) reduce the aforesaid percentage of the aggregate principal amount of Notes, the holders of which must consent to authorize any such supplemental indenture, without the consent of the holders of all outstanding Notes. GOVERNING LAW The Indenture and the Notes will be governed by and construed in accordance with the laws of the State of New York, without giving effect to such state's conflicts of laws principles. BOOK-ENTRY The Notes will be issued in the form of a global note or notes (together, the "Global Note") deposited with, or on behalf of, The Depository Trust Company ("DTC") and registered in the name of Cede & Co. as DTC's nominee. Owners of beneficial interests in the Notes represented by the Global Note will hold such interests pursuant to the procedures and practices of DTC and must exercise any rights in respect of their interests (including any right to convert or require repurchase of their interests) in accordance with those procedures and practices. Such beneficial owners will not be deemed holders of Notes, and will not be entitled to any rights under the Global Note or the Indenture, with respect to the Global Note and the Company and the Trustee, and any of their respective agents, may treat DTC as the sole holder and owner of the Global Note. DTC has advised the Company as follows: DTC is a limited-purpose trust company organized under the New York Banking Law, a "banking organization" within the meaning of the New York Banking Law, a member of the Federal Reserve System, a "clearing corporation" within the meaning of the New York Uniform Commercial Code, and a "clearing agency" registered pursuant to the provisions of Section 17A of the Exchange Act. DTC holds securities that its participants deposit with DTC. DTC also facilitates the settlement among participants of securities transactions, such as transfers and pledges, in deposited securities through electronic computerized book-entry changes in participants' accounts, thereby eliminating the need for physical movement of securities certificates. Direct participants include securities brokers and dealers (including the Underwriters), banks, trust companies, clearing corporations, and certain other organizations. DTC is owned by a number of its direct participants and by the New York Stock Exchange, Inc., the American Stock Exchange, Inc., and the National Association of Securities Dealers, Inc. Access to the DTC system is also available to others such as securities brokers and dealers, banks, and trust companies that clear through or maintain a custodial relationship with a direct participant, either directly or indirectly. The rules applicable to DTC and its participants are on file with the Securities and Exchange Commission. Unless and until they are exchanged in whole or in part for certificated Notes in definitive form as set forth below, the Global Note may not be transferred except as a whole by DTC to a nominee of DTC, or by a nominee of DTC to DTC or another nominee of DTC. The Notes represented by the Global Note will not be exchangeable for certificated Notes, provided that if DTC is at any time unwilling, unable or ineligible to continue as depositary, the Company will issue individual Notes in definitive form in exchange for the Global Note. In addition, the Company may at any time and in its 54 sole discretion determine not to have a Global Note, and, in such event, will issue individual Notes in definitive form in exchange for the Global Note previously representing all such Notes. In such instances, an owner of a beneficial interest in a Global Note will be entitled to physical delivery of Notes in definitive form equal in principal amount to such beneficial interest and to have such Notes registered in its name. Individual Notes so issued in definitive form will be issued in denominations of $1,000 and any larger amount that is an integral multiple of $1,000 and will be issued in registered form only, without coupons. Payments of principal of and interest on the Notes will be made by the Company through the Trustee to DTC or its nominee, as the case may be, as the registered owner of the Global Note. Neither the Company nor the Trustee will have any responsibility or liability for any aspect of the records relating to or payments made on account of beneficial ownership interests of the Global Note or for maintaining, supervising or reviewing any records relating to such beneficial ownership interests. The Company expects that DTC, upon receipt of any payment of principal or interest in respect of the Global Note, will credit the accounts of the related participants with payment in amounts proportionate to their respective holdings in principal amount of beneficial interest in the Global Note as shown on the records of DTC. The Company also expects that payments by participants to owners of beneficial interests in the Global Note will be governed by standing customer instructions and customary practices, as is now the case with securities held for the accounts of customers in bearer form or registered in "street name," and will be the responsibility of such participants. So long as the Notes are represented by a Global Note, DTC or its nominee will be the only entity that can exercise a right to repayment pursuant to the holder's option to elect repayment of its Notes or the right of conversion of the Notes. Notice by participants or by owners of beneficial interests in a Global Note held through such participants of the exercise of the option to elect repayment, or the right of conversion, of beneficial interests in Notes represented by the Global Note must be transmitted to DTC in accordance with its procedures on a form required by DTC and provided to participants. In order to ensure that DTC's nominee will timely exercise a right to repayment, or the right of conversion, with respect to a particular Note, the beneficial owner of such Notes must instruct the broker or other participant through which it holds an interest in such Notes to notify DTC of its desire to exercise a right to repayment, or the right of conversion. Different firms have different cut-off times for accepting instructions from their customers and, accordingly, each beneficial owner should consult the broker or other participant through which it holds an interest in a Note in order to ascertain the cut-off time by which such an instruction must be given in order for timely notice to be delivered to DTC. The Company will not be liable for any delay in delivery of such notice to DTC. LISTING Application will be made to list the Notes on the New York Stock Exchange. DESCRIPTION OF CAPITAL STOCK GENERAL Pursuant to the Company's Restated Certificate of Incorporation (the "Converse Certificate"), the authorized capital stock of the Company consists of 50 million shares of Common Stock, without par value, and 10 million shares of Preferred Stock, without par value. The Common Stock has a stated value of $1.00 per share. As of March 29, 1997, there were 17,250,056 shares of Common Stock outstanding held of record by approximately 2,300 persons, and 1,666,300 shares of Common Stock reserved for issuance upon exercise of stock options granted to employees, consultants and non-employee directors. All of the outstanding shares of Common Stock are fully paid and non-assessable. No shares of Preferred Stock have been issued by Converse, and the Company has no present intention to issue shares of Preferred Stock. 55 COMMON STOCK Holders of shares of Common Stock are entitled to one vote per share on all matters to be voted upon by the stockholders and are not entitled to cumulate votes for the election of directors. Subject to preferences that may be applicable to any outstanding Preferred Stock, holders of shares of Common Stock are entitled to receive ratably such dividends, if any, as may be declared from time to time by the Board of Directors out of funds legally available therefor. In the event of liquidation, dissolution or winding up of Converse, the holders of shares of Common Stock are entitled to share ratably in all assets remaining after payment of liabilities, subject to prior distribution rights of Preferred Stock, if any, then outstanding. Shares of Common Stock have no preemptive, conversion or other subscription rights and there are no redemption or sinking fund provisions applicable to the Common Stock. Converse is not subject to the provisions of Section 203 of the Delaware General Corporation Law ("DGCL"). Subject to certain exceptions, Section 203 of the DGCL prohibits a publicly-held Delaware corporation from engaging in a "business combination" with an "interested stockholder" for a period of three years after the date of the transaction in which the person became an interested stockholder, unless the interested stockholder attained such status with the approval of the board of directors of Converse or unless the business combination is approved in a prescribed manner. A "business combination" includes mergers, asset sales and other transactions resulting in a financial benefit to the interested stockholder. Subject to certain exceptions, an interested stockholder is a person who, together with affiliates and associates, owns, or within three years did own, 15% or more of the corporation's voting stock. PREFERRED STOCK The Converse board of directors is authorized to provide for the issuance of such Preferred Stock in one or more series and to fix the dividend rate, conversion rights, voting rights, rights and terms of redemption, redemption price or prices, liquidation preferences and qualifications, limitations and restrictions thereof with respect to each series, without any further vote or action by the stockholders of Converse. Any Preferred Stock that is issued could have terms that adversely affect the holders of the Common Stock. Furthermore, because the terms of the Preferred Stock may be fixed by the Converse board of directors without stockholder action, the Preferred Stock could be issued quickly with terms calculated to defeat a proposed takeover of Converse, or to make the removal of management of Converse more difficult. See "Risk Factors--Anti-Takeover Provisions." TRANSFER AGENT AND REGISTRAR The transfer agent and registrar for the Common Stock is Boston EquiServe Limited Partnership, Canton, Massachusetts. LIMITATION OF LIABILITY As permitted by the DGCL, the Converse Certificate provides that directors of the Company shall not be personally liable to the Company or its stockholders for monetary damages for breach of fiduciary duty as a director, except for liability (i) for any breach of the director's duty of loyalty to the Company or its stockholders, (ii) for acts or omissions not in good faith or which involve intentional misconduct or a knowing violation of law, (iii) under Section 174 of the DGCL, relating to prohibited dividends or distributions or the repurchase or redemption of stock, or (iv) for any transaction from which the director derives an improper personal benefit. 56 CERTAIN UNITED STATES FEDERAL TAX CONSEQUENCES The following is a summary of certain United States federal income and estate tax considerations relating to the purchase, ownership and disposition of the Notes and the Common Stock into which Notes may be converted, but does not purport to be a complete analysis of all the potential tax considerations relating thereto. This summary is based on laws, regulations, rulings and decisions now in effect, all of which are subject to change. This summary deals only with holders that will hold Notes and Common Stock as capital assets and does not address tax considerations applicable to investors that may be subject to special tax rules, such as banks, tax-exempt organizations, insurance companies, dealers in securities or currencies, persons that will hold the Notes or Common Stock as part of an integrated investment (including a "straddle") comprised of Notes or shares of Common Stock and one or more other positions, persons that have a "functional currency" other than the U.S. dollar or holders of Notes that did not acquire the Notes in the initial distribution thereof at their original issue price. In addition, the following discussion does not address foreign, state or local tax consequences. Prospective investors are urged to consult their tax advisors regarding the U.S. federal tax consequences of acquiring, holding and disposition of Notes and Common Stock, as well as any tax consequences that may arise under the laws of any foreign, state, local or other taxing jurisdiction. UNITED STATES HOLDERS As used herein, the term "United States Holder" means the beneficial owner of a Note or Common Stock that is a United States person. A "United States person" is (1) a citizen or resident of the United States, (2) an entity created or organized in or under the laws of the United States or any political subdivision thereof that is classified as a corporation or as a partnership, (3) an estate the income of which is subject to United States federal income taxation regardless of its source, or (4) a trust if (i) a U.S. court is able to exercise primary supervision over the trust's administration and (ii) one or more U.S. fiduciaries have the authority to control all the trust's substantial decisions. The term "United States" means the United States of America (including the States and the District of Columbia). PAYMENT OF INTEREST Interest on a Note generally will be includible in the income of a United States Holder as ordinary income at the time such interest is received or accrued, in accordance with such holder's method of accounting for United States federal income tax purposes. SALE, EXCHANGE OR REDEMPTION OF THE NOTES Upon the sale, exchange or redemption of a Note, a United States Holder generally will recognize capital gain or loss equal to the difference between (i) the amount of cash proceeds and the fair market value of any property received on the sale, exchange or redemption (except to the extent such amount is attributable to accrued interest income, which is taxable as ordinary income) and (ii) such holder's adjusted tax basis in the Note. A United States Holder's adjusted tax basis in a Note generally will equal the cost of the Note to such holder. Such capital gain or loss will be long-term capital gain or loss if the holder's holding period in the Note was more than one year at the time of sale, exchange or redemption. CONVERSION OF THE NOTES A United States Holder generally will not recognize any income, gain, or loss upon conversion of a Note into Common Stock except with respect to cash received in lieu of a fractional Share of Common Stock. Such holder's basis in the Common Stock received on conversion of a Note will be the same as such holder's adjusted tax basis in the Note at the time of conversion (reduced by any basis allocable to a fractional share interest), and the holding period for the Common Stock received on conversion will generally include the holding period of the Note converted. 57 Cash received in lieu of a fractional share of Common Stock upon conversion will be treated as a payment in exchange for the fractional share of Common Stock. Accordingly, the receipt of cash in lieu of a fractional share of Common Stock generally should result in capital gain or loss (measured by the difference between the cash received for the fractional share and the United States Holder's adjusted basis in the fractional share). ADJUSTMENT OF CONVERSION PRICE If at any time (a) the Company makes a distribution of property to its stockholders or purchases Common Stock in a tender offer and such distribution or purchase would be taxable to such stockholders as a dividend for federal income tax purposes (e.g., distributions of evidences of indebtedness or assets of the Company but generally not stock dividends or rights to subscribe for capital stock) and, pursuant to the antidilution provisions of the Indenture, the conversion price of the Notes is reduced or (b) the conversion price is reduced at the discretion of the Company, such reduction may be deemed to be the receipt of taxable income by holders of the Notes. Holders of Notes therefore could have taxable income as a result of an event in which they receive no cash or property. Similarly, a failure to adjust the conversion price of the Notes to reflect a stock dividend or other event increasing the proportionate interest of the holders of outstanding Company Common Stock could in some circumstances give rise to deemed dividend income to United States Holders of such Common Stock. DIVIDENDS ON THE COMMON STOCK Dividends paid on the Common Stock generally will be includible in the income of a United States Holder as ordinary income to the extent of the Company's current or accumulated earnings and profits. Subject to certain limitations, a corporate taxpayer holding Common Stock that receives dividends thereon generally will be eligible for a dividends received deduction equal to 70 percent of the dividends received. Under legislation proposed as part of the Clinton administration's fiscal year 1998 budget proposal, the 70 percent dividends received deduction would be reduced to 50 percent for dividends paid or accrued more than 30 days after the date of enactment of the legislation. It is not clear whether such legislation would be enacted in the current form. SALE, EXCHANGE OR REDEMPTION OF COMMON STOCK Upon the sale, exchange or redemption of shares of Common Stock, a United States Holder generally should recognize capital gain or loss equal to the difference between (i) the amount of cash proceeds and the fair market value of any property received on the sale, exchange or redemption and (ii) such holder's adjusted tax basis in the Common Stock. Such capital gain or loss will be long-term capital gain or loss if the holder's holding period in the Common Stock was more than one year at the time of sale, exchange or redemption. INFORMATION REPORTING AND BACKUP WITHHOLDING TAX In general, information reporting requirements will apply to payments of principal, premium, if any, and interest on a Note, payments of dividends on Common Stock, and payments of the proceeds of the sale of a Note or Common Stock to certain non-corporate United States holders, and a 31% backup withholding tax may apply to such payments if the United States Holder (i) fails to furnish or certify its correct taxpayer identification number to the payer in the manner required, (ii) is notified by the Internal Revenue Service (the "IRS") that it has failed to report payments of interest and dividends properly, or (iii) under certain circumstances, fails to certify that it has not been notified by the IRS that it is subject to backup withholding for failure to report interest and dividend payments. Any amounts withheld under the backup withholding rules from a payment to a United States Holder will be allowed as a credit against such holder's United States federal income tax liability and may entitle the holder to a refund. NON-UNITED STATES HOLDERS Subject to the discussion of backup withholding below, payments of interest on the Notes to, or on behalf of, any beneficial owner of a Note that is not a United States Holder (a "Non-U.S. Holder") will not be subject to U.S. federal income or withholding taxes, provided that such interest income is not effectively connected with 58 a United States trade or business of the Non-U.S. Holder and provided that (i) such Non-U.S. Holder does not actually or constructively own 10 percent or more of the total combined voting power of all classes of stock of the Company, (ii) such Non-U.S. Holder is not a controlled foreign corporation for U.S. tax purposes that is related to the Company actually or constructively through stock ownership and (iii) the Non- U.S. Holder certifies, under penalties of perjury, that it is not a United States person and provides its name and address in compliance with applicable requirements. Except to the extent that an applicable treaty otherwise provides, a Non- U.S. Holder generally will be taxed in the same manner as a United States Holder with respect to interest paid on the Notes if the interest income is effectively connected with a United States trade or business of the Non-U.S. Holder. Effectively connected interest received by a corporate Non-U.S. Holder may also, under certain circumstances, be subject to an additional "branch profits tax" at a 30% rate (or, if applicable, a lower treaty rate). Even though such effectively connected interest is subject to income tax, and may be subject to the branch profits tax, it is not subject to withholding tax if the holder delivers IRS Form 4224 to the payor. Any capital gain realized on the sale, exchange, redemption or other disposition of a Note or of shares of Common Stock (including the receipt of cash in lieu of fractional shares upon conversion of a Note into shares of Common Stock) by a Non-U.S. Holder will not be subject to United States federal income or withholding taxes unless (1) in the case of an individual, such holder is present in the United States for 183 days or more in the taxable year of the sale, exchange, redemption, or other disposition or receipt and certain other conditions are met, (2) the gain is effectively connected with a United States trade or business of the Non-U.S. Holder, (3) the holder is subject to tax pursuant to the provisions of the Code applicable to certain United States expatriates, or (4) the Company is a United States real property holding corporation. The Company does not believe that it is or is likely to become a United States real property holding corporation. Except as described above with respect to the receipt of cash in lieu of fractional shares by certain Non-U.S. Holders upon conversion of a Note, no United States federal income or withholding taxes will be imposed upon the conversion of a Note into shares of Common Stock. Dividends paid (or deemed paid, as described under "United States Holders-- Adjustment of Conversion Price") on shares of Common Stock held by a Non-U.S. Holder (excluding dividends that are effectively connected with the conduct of a trade or business in the United States by such holder) will be subject to withholding of United States federal income tax at a 30 percent rate (or lower rate provided under any applicable tax treaty, assuming the holder of the Common Stock satisfies any certification or documentation requirements necessary to claim the benefits of such treaty). Except to the extent that an applicable tax treaty otherwise provides, a Non-U.S. Holder will be taxed in the same manner as a United States Holder on dividends paid (or deemed paid) that are effectively connected with the conduct of a trade or business in the United States by the Non-U.S. Holder. If such Non-U.S. Holder is a foreign corporation, it may also be subject to a United States branch profits tax at a 30% rate or such lower rate as may be specified by an applicable income tax treaty. Even though such effectively connected dividends are subject to income tax, and may be subject to the branch profits tax, they will not be subject to U.S. withholding tax if the holder delivers IRS Form 4224 to the payor. Payments made on a Note or shares of Common Stock and proceeds from the sale of a Note or shares of Common Stock received by a Non-U.S. Holder will generally not be subject to a backup withholding tax of 31% or to information reporting requirements unless, in general, the holder fails to comply with certain reporting procedures, the payment is received by a U.S. office of a U.S. or foreign broker or the holder otherwise fails to establish an exemption from such tax or reporting requirements under applicable provisions of the Code. On April 15, 1996, the Internal Revenue Service released proposed revisions (the "Proposed Regulations") to the regulations interpreting the withholding tax, information reporting and backup withholding tax rules described above. In general, the Proposed Regulations would require certain Non-U.S. Holders to provide additional information in order to establish an exemption from or reduce the rate of withholding tax or backup withholding tax, and in particular would require that foreign partnerships and partners of a foreign partnership 59 provide certain information and comply with certain certification requirements not required under existing law. The Proposed Regulations are proposed generally to be effective for payments made after December 31, 1997. It is not possible to predict whether, or in what form, the Proposed Regulations ultimately will be adopted. A Note will not be subject to United States federal estate tax as a result of the death of a holder who is not a citizen or resident of the United States at the time of death, provided that such holder did not at the time of death actually or constructively own 10 percent or more of the combined voting power of all classes of stock of the Company and, at the time of such holder's death, payments of interest on such Note would not have been effectively connected with the conduct by such holder of a trade or business in the United States. Shares of Common Stock held by an individual at the time of the individual's death (or previously transferred subject to certain retained rights or powers) will be subject to United States federal estate tax unless otherwise provided by an applicable estate tax treaty. 60 UNDERWRITING Under the terms and subject to the conditions contained in the Underwriting Agreement dated the date hereof (the "Underwriting Agreement"), each of the underwriters named below (the "Underwriters"), has severally agreed to purchase from the Company the principal amount of Notes set forth opposite the name of such Underwriter below:
PRINCIPAL AMOUNT UNDERWRITERS OF NOTES - ------------ ---------------- Smith Barney Inc............................................... Dillon, Read & Co. Inc......................................... Donaldson, Lufkin & Jenrette Securities Corporation............ Goldman, Sachs & Co............................................ ----------- Total........................................................ $60,000,000 ===========
The Underwriting Agreement provides that the obligations of the several Underwriters to pay for and accept delivery of the Notes offered hereby are subject to the approval of certain legal matters by counsel and to certain other conditions. The Underwriters are obligated to take and pay for all of the Notes offered hereby (other than those covered by the over-allotment option described below) if any such Notes are purchased. The Underwriters initially propose to offer part of the Notes offered hereby directly to the public at the public offering price set forth on the cover page of this Prospectus and part of the Notes offered hereby to certain dealers at a price which represents a concession not in excess of % of the principal amount per Note under the price to public. The Underwriters may allow, and such dealers may reallow, a concession not in excess of % of the principal amount per Note to certain other dealers. After the Offering, the public offering price and such concessions may be changed by the Underwriters. The Company has granted the Underwriters an option, exercisable for 30 days from the date of this Prospectus, to purchase up to $9,000,000 principal amount of additional Notes at the public offering price set forth on the cover page hereof less underwriting discounts and commissions. The Underwriters may exercise such option to purchase additional Notes solely for the purpose of covering over-allotments, if any, incurred in connection with the sales of the Notes offered hereby. To the extent such option is exercised, each Underwriter will become obligated, subject to certain conditions, to purchase approximately the same percentage of such additional Notes as the principal amount of Notes set forth opposite such Underwriter's name in the preceding Underwriters table bears to the total principal amount of Notes in such table. The Company, certain of its directors and officers and the Apollo Stockholders have agreed that, for a period of 120 days from the date of this Prospectus, they will not, without the prior written consent of Smith Barney Inc., offer, sell, contract to sell, or otherwise dispose of, any shares of Common Stock (or any securities convertible into or exercisable or exchangeable for, Common Stock), or grant any options or warrants to purchase Common Stock, except in certain circumstances. In connection with the Offering and in compliance with applicable law, the Underwriters may effect transactions which stabilize or maintain the market price of the Notes, the Common Stock, or both at levels above those which might otherwise prevail in the open market. Specifically, the Underwriters may overallot in connection with the Offering creating a short position in the Notes for their own account. For the purposes of covering a syndicate short position or stabilizing the price of the Notes, the Underwriters may place bids for the Notes, the Common Stock, or both or effect purchases of the Notes, the Common Stock, or both in the open market. A syndicate short position may also be covered by exercise of the over-allotment option described above. Finally, the Underwriters may impose a penalty bid on certain Underwriters and dealers. This means that the underwriting syndicate may reclaim selling concessions allowed to an Underwriter or a dealer for distributing the Notes in the Offering if the syndicate repurchases previously distributed Notes in transactions to cover 61 syndicate short positions, in stabilization transactions or otherwise. The Underwriters are not required to engage in any of these activities and any such activities, if commenced, may be discontinued at any time. Smith Barney Inc. has from time to time performed various investment banking services for the Company. In 1996, Smith Barney Inc. provided financial advisory services to the Company and received customary fees in respect of such services. The Company and the Underwriters have agreed to indemnify each other against certain liabilities, including liabilities under the Securities Act of 1933, as amended. The Company will apply to list the Notes on the New York Stock Exchange. However, the Notes are a new issue of securities, have no established trading market and may not be widely distributed. The Company has been advised by the Underwriters that they currently intend to make a market in the Notes. However, such entities are not obligated to do so, and any market making may be discontinued at any time without notice. There can be no assurance as to whether an active trading market for the Notes will develop. LEGAL MATTERS The validity of the Notes offered hereby and certain legal matters with respect to the Company will be passed upon by Morgan, Lewis & Bockius LLP, Philadelphia, Pennsylvania. Certain legal matters will be passed upon for the Underwriters by Latham & Watkins, New York, New York. EXPERTS The consolidated financial statements of Converse Inc. and subsidiaries as of December 28, 1996 and December 30, 1995 and for the years then ended have been included herein and in the Registration Statement (as defined below) in reliance upon the report of Price Waterhouse LLP, independent accountants as set forth in their report also included herein upon the authority of said firm as experts in accounting and auditing. The consolidated financial statements of Converse Inc. and subsidiaries for the year ended December 31, 1994 have been included herein and in the Registration Statement in reliance upon the report of KPMG Peat Marwick LLP, independent accountants, as set forth in their report also included herein and upon the authority of said firm as experts in accounting and auditing. 62 ADDITIONAL INFORMATION The Company is subject to the informational requirements of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), and in accordance therewith files reports, proxy statements and other information with the Securities and Exchange Commission (the "Commission"). Such reports, proxy statements and other information filed by the Company can be inspected and copied at the public reference facilities of the Commission, Judiciary Plaza, 450 Fifth Street, N.W., Washington, DC 20549, as well as at the following Commission Regional Offices: Seven World Trade Center, 13th Floor, New York, NY 10048 and Citicorp Center, 500 West Madison Street, Suite 1400, Chicago, Illinois 60661-2511. Copies can be obtained from the Commission by mail at prescribed rates. Requests should be directed to the Commission's Public Reference Branch, Judiciary Plaza, 450 Fifth Street, N.W., Washington, DC 20549. Such material can be inspected and copied at the offices of the New York Stock Exchange, 20 Broad Street, New York, New York, 10005, on which the Company's Common Stock is listed. Such material may also be accessed electronically by means of the Commission's home page on the Internet (http://www.sec.gov). This Prospectus constitutes a part of a registration statement on Form S-3 (herein, together with all exhibits thereto, referred to as the "Registration Statement") filed by the Company with the Commission under the Securities Act of 1933, as amended (the "Securities Act"), with respect to the securities offered hereby. This Prospectus does not contain all the information set forth in the Registration Statement, certain parts of which are omitted in accordance with the rules and regulations of the Commission. Reference is hereby made to the Registration Statement and to the exhibits thereto for further information with respect to the Company and the securities offered hereby. Copies of the Registration Statement and the exhibits thereto are on file at the offices of the Commission and may be obtained upon payment of the prescribed fee or may be examined without charge at the public reference facilities of the Commission described above. Statements contained herein concerning the provisions of documents are necessarily summaries of such documents, and each statement is qualified in its entirety by reference to the copy of the applicable document filed with the Commission. INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE The following documents filed by the Company with the Commission (File No. I-13430) are incorporated by reference in this Prospectus: (1) Annual Report on Form 10-K for the year ended December 28, 1996; (2) Quarterly Report on Form 10-Q for the quarter ended March 29, 1997; (3) Current Report on Form 8-K filed April 17, 1997; and (4) the description of the Company's Common Stock contained in its Form 10/A, Amendment No. 2, filed with the Commission on November 23, 1994. All documents filed by the Company pursuant to Section 13(a), 13(c), 14 or 15(d) of the Exchange Act subsequent to the date of this Prospectus and prior to the termination of the Offerings shall be deemed to be incorporated by reference into this Prospectus. Any statement contained in a document incorporated or deemed to be incorporated by reference herein shall be deemed to be modified or superseded for purposes of this Prospectus to the extent that a statement contained herein or in any other subsequently filed document which also is or is deemed to be incorporated by reference herein modifies or supersedes such statement. Any such statement so modified or superseded shall not be deemed, except as so modified or superseded, to constitute a part of this Prospectus. This Prospectus incorporates documents by reference which are not presented herein or delivered herewith. These documents (not including exhibits to the documents incorporated by reference unless such exhibits are specifically incorporated by reference into the information that the Prospectus incorporates) are available without charge to each person to whom a Prospectus is delivered upon written or oral request. Requests should be directed to Converse Inc., One Fordham Road, North Reading, Massachusetts 01864, Attention: Secretary (telephone number (508) 664-1100). 63 CONVERSE INC. AND SUBSIDIARIES INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
PAGE ---- AUDITED CONSOLIDATED FINANCIAL STATEMENTS: Report of Independent Accountants 1995 and 1996......................... F-2 Independent Auditors' Report 1994....................................... F-3 Consolidated Balance Sheet.............................................. F-4 Consolidated Statement of Operations.................................... F-5 Consolidated Statement of Cash Flows.................................... F-6 Consolidated Statement of Stockholders' Equity (Deficiency)............. F-7 Notes to Consolidated Financial Statements.............................. F-8 UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS: Condensed Consolidated Balance Sheet as of March 29, 1997 .............. F-30 Condensed Consolidated Statement of Operations for the Three Months Ended March 30, 1996 and March 29, 1997 ............................... F-31 Condensed Consolidated Statement of Cash Flows for the Three Months Ended March 30, 1996 and March 29, 1997 ............................... F-32 Notes to Consolidated Financial Statements ............................. F-33
F-1 REPORT OF INDEPENDENT ACCOUNTANTS To the Board of Directors andStockholders of Converse Inc. In our opinion, the accompanying consolidated balance sheet and the related consolidated statements of operations, cash flows and stockholders' equity (deficiency) present fairly, in all material respects, the financial position of Converse Inc. and its subsidiaries at December 30, 1995 and December 28, 1996, and the results of their operations and their cash flows for the years then ended in conformity with generally accepted accounting principles. These financial statements are the responsibility of the Company's management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these statements in accordance with generally accepted auditing standards which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for the opinion expressed above. Price Waterhouse LLP Boston, Massachusetts February 19, 1997, except as to Note 16, which is as of March 14, 1997 F-2 INDEPENDENT AUDITORS' REPORT The Board of DirectorsConverse Inc.: We have audited the consolidated statements of operations, cash flows and stockholders' equity (deficiency) of Converse Inc. and subsidiaries ("Converse") for the year ended December 31, 1994. These consolidated financial statements are the responsibility of Converse's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audit. We conducted our audit in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the results of operations and the cash flows of Converse for the year ended December 31, 1994 in conformity with generally accepted accounting principles. KPMG Peat Marwick LLP Boston, Massachusetts February 15, 1995 F-3 CONVERSE INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEET (DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
DECEMBER 30, 1995 DECEMBER 28, 1996 ----------------- ----------------- ASSETS ------ Current assets: Cash and cash equivalents................ $ 2,738 $ 5,908 Restricted cash.......................... 443 1,354 Receivables, less allowances of $2,237 and $1,994, respectively................ 61,688 61,546 Inventories (Note 5)..................... 81,903 86,799 Refundable income taxes (Note 10)........ 11,377 582 Prepaid expenses and other current assets (Note 10)............................... 21,059 20,383 -------- -------- Total current assets................... 179,208 176,572 Asset held for sale (Note 4)............... 3,066 -- Net property, plant and equipment (Note 6)........................................ 15,521 17,849 Other assets (Note 10)..................... 26,712 28,182 -------- -------- $224,507 $222,603 ======== ======== LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIENCY) ------------------------------------ Current liabilities: Short-term debt (Note 7)................. $ 13,906 $ 13,421 Current maturities of long-term debt (Note 9)................................ 6,324 117,765 Accounts payable......................... 34,208 49,503 Accrued expenses (Note 8)................ 33,295 25,124 Income taxes payable (Note 10)........... 1,795 3,407 -------- -------- Total current liabilities.............. 89,528 209,220 Long-term debt (Note 9).................... 112,824 9,644 Current assets in excess of reorganization value (Note 2)............................ 34,454 32,376 Deferred postretirement benefits other than pensions (Note 11)........................ 10,386 10,231 Commitments and contingencies (Note 14) Stockholders' equity (deficiency): Common stock, $1.00 stated value, 50,000,000 shares authorized, 16,692,156 and 17,213,157 shares issued and outstanding at December 30, 1995 and December 28, 1996, respectively......... 16,692 17,213 Preferred stock, no par value, 10,000,000 shares authorized, none issued and outstanding............................. -- -- Additional paid-in capital............... 3,528 5,392 Retained earnings (deficit).............. (41,830) (60,265) Foreign currency translation adjustment.. (1,075) (1,208) -------- -------- Total stockholders' equity (deficiency).......................... (22,685) (38,868) -------- -------- $224,507 $222,603 ======== ========
See accompanying notes to consolidated financial statements. F-4 CONVERSE INC. AND SUBSIDIARIES CONSOLIDATED STATEMENT OF OPERATIONS (DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
FISCAL YEAR ENDED ----------------------------------------------------- DECEMBER 31, 1994 DECEMBER 30, 1995 DECEMBER 28, 1996 ----------------- ----------------- ----------------- Net sales............... $437,307 $407,483 $349,335 Cost of sales........... 286,555 293,948 263,098 -------- -------- -------- Gross profit............ 150,752 113,535 86,237 Selling, general and administrative expenses............... 128,876 146,332 114,888 Royalty income.......... 14,212 17,257 27,638 Restructuring expense (credit) (Note 4)...... -- 14,182 (1,177) -------- -------- -------- Earnings (loss) from operations............. 36,088 (29,722) 164 Loss (credit) on investment in unconsolidated subsidiary (Note 3).... -- 52,160 (1,362) Interest expense........ 7,423 14,043 17,776 Other expense, net (Note 15).................... 504 3,966 6,319 -------- -------- -------- Earnings (loss) before income taxes........... 28,161 (99,891) (22,569) Income tax expense (benefit) (Note 10).... 10,565 (28,144) (4,134) -------- -------- -------- Net earnings (loss)..... $ 17,596 $(71,747) $(18,435) Net (loss) per share (Note 2)............... $ (4.30) $ (1.10) ======== ======== Pro forma net earnings per share (Note 2)..... $ 0.96 ========
See accompanying notes to consolidated financial statements. F-5 CONVERSE INC. AND SUBSIDIARIES CONSOLIDATED STATEMENT OF CASH FLOWS (DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
FISCAL YEAR ENDED ----------------------------------------------------- DECEMBER 31, 1994 DECEMBER 30, 1995 DECEMBER 28, 1996 ----------------- ----------------- ----------------- Cash flows from operating activities: Net earnings (loss)... $ 17,596 $(71,747) $(18,435) Adjustments to reconcile net earnings (loss) to net cash provided by (required for) operating activities: Loss on investment in unconsolidated subsidiary, less cash payments of $28,763 in Fiscal 1995 and $3,439 in Fiscal 1996................. -- 23,397 (4,801) Provision for restructuring actions, less cash payments of $1,230 in Fiscal 1995 and $5,316 in Fiscal 1996................. -- 12,952 (6,493) Depreciation of property, plant and equipment............ 1,493 2,744 3,100 Amortization of intangible assets.... 148 471 539 Amortization of current assets in excess of reorganization value................ (2,077) (2,078) (2,078) Deferred income taxes................ 326 (18,551) (5,614) Changes in assets and liabilities: Receivables........... (6,438) 7,940 (759) Inventories........... (15,644) 18,546 (5,844) Refundable income taxes................ -- (11,377) 10,795 Prepaid expenses and other current assets............... (5,453) 1,627 64 Accounts payable and accrued expenses..... (718) 912 16,889 Income taxes payable.. (747) 223 1,612 Other long-term assets and liabilities...... 10 (966) 3,009 -------- -------- -------- Net cash required for operating activities......... (11,504) (35,907) (8,016) -------- -------- -------- Cash flows from investing activities: Proceeds from disposal of assets............ 6 -- 5,101 Additions to property, plant and equipment.. (8,520) (5,760) (5,305) -------- -------- -------- Net cash used by investing activities......... (8,514) (5,760) (204) -------- -------- -------- Cash flows from financing activities: Net proceeds from short-term debt...... 5,813 7,861 231 Net proceeds from the A Facility........... 37,087 32,417 19,963 Proceeds from (payments on) the B Facility............. 40,000 -- (11,702) Payments made in conjunction with the Distribution......... (70,313) -- -- Net proceeds from exercise of stock options.............. -- -- 2,385 Net capital contribution from Furniture Brands..... 9,072 -- -- -------- -------- -------- Net cash provided by financing activities......... 21,659 40,278 10,877 -------- -------- -------- Effect of foreign currency rate fluctuations on cash and cash equivalents... -- (865) 513 -------- -------- -------- Net increase (decrease) in cash and cash equivalents............ 1,641 (2,254) 3,170 Cash and cash equivalents at beginning of period.... 3,351 4,992 2,738 -------- -------- -------- Cash and cash equivalents at end of period................. $ 4,992 $ 2,738 $ 5,908 ======== ======== ======== Supplemental disclosures: Cash payments for (refunds of) income taxes, net........... $ 10,469 $ 5,081 $(10,150) ======== ======== ======== Cash payments for interest............. $ 7,282 $ 12,276 $ 13,283 ======== ======== ======== Non cash activities: Contributions from Furniture Brands in the form of property, plant and equipment.......... $ 6,425 $ -- $ -- ======== ======== ======== Issuance of notes for Apex acquisition....... $ -- $ 9,644 $ -- ======== ======== ========
See accompanying notes to consolidated financial statements. F-6 CONVERSE INC. AND SUBSIDIARIES CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY (DEFICIENCY) (DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
FOREIGN ADDITIONAL RETAINED CURRENCY TOTAL COMMON PAID-IN EARNINGS INTER-COMPANY TRANSLATION STOCKHOLDERS' STOCK CAPITAL (DEFICIT) CAPITAL ACCOUNT ADJUSTMENT (DEFICIENCY) ------- ---------- --------- --------------- ----------- ------------- Balance, January 1, 1994................... $ 1,000 $ 3,926 $ 13,841 $(5,251) $(3,246) $ 10,270 Net earnings............ 17,596 17,596 Foreign currency translation............ 1,624 1,624 Adjustment to reflect common stock at stated value.................. 15,692 (14,172) (1,520) Other capital activity (Note 15).............. 10,246 5,251 15,497 ------- ------- -------- ------- ------- -------- Balance, December 31, 1994................... 16,692 -- 29,917 -- (1,622) 44,987 ======= ======= ======== ======= ======= ======== Net loss................ (71,747) (71,747) Foreign currency translation............ 547 547 Issuance of common stock warrants (Note 3)...... 3,528 3,528 ------- ------- -------- ------- ------- -------- Balance, December 30, 1995................... 16,692 3,528 (41,830) -- (1,075) (22,685) ======= ======= ======== ======= ======= ======== Net loss................ (18,435) (18,435) Foreign currency translation............ (133) (133) Exercise of common stock options.......... 521 1,864 2,385 ------- ------- -------- ------- ------- -------- Balance, December 28, 1996................... $17,213 $ 5,392 $(60,265) -- $(1,208) $(38,868) ======= ======= ======== ======= ======= ========
See accompanying notes to consolidated financial statements. F-7 CONVERSE INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) 1. SUMMARY OF BUSINESS OPERATIONS Converse Inc. ("Converse" or the "Company") is a leading global designer, manufacturer and marketer of high quality athletic footwear for men, women, and children. The Company is also a global licensor of sports apparel, accessories and selected footwear. Prior to November 17, 1994, Converse was a wholly-owned subsidiary of Furniture Brands International, Inc. ("Furniture Brands"), which until March 1, 1996 was named INTERCO INCORPORATED. Converse's principal markets are the United States, Europe and the Pacific Rim. Distribution On November 17, 1994, Furniture Brands distributed to the holders of Furniture Brands common stock all outstanding shares of common stock of Converse (the "Distribution"). The Distribution was part of a series of transactions that also included Converse entering into a $200,000 secured credit facility (the "Credit Facility") with BT Commercial Corporation ("BTCC"), as agent, and certain other institutional lenders (collectively, the "Banks") and (A) using $75,000 to repay an allocated portion of the outstanding joint and several indebtedness of Furniture Brands and its domestic subsidiaries issued in connection with their 1992 plan of reorganization and to repay an $8,000 industrial revenue bond and (B) using $5,000 of seasonal working capital borrowings under the Credit Facility, which was repaid in full prior to December 31, 1994, to repay other existing seasonal indebtedness. Subsequently, the total amount of the Credit Facility has been adjusted in connection with certain amendments to the facility. See Note 9. 1996 Operating Results and 1997 Outlook During 1996, Converse was adversely affected by weak U.S. and international market conditions and a decline in gross profit attributable to weak sell- through of certain products, sales of discontinued products and reduced manufacturing utilization and efficiencies. The 1996 operating results were favorably impacted by a reduction of selling, general and administrative expenses of approximately $31,400 as a result of the Company's previously announced restructuring plan and strong global royalty income growth. The Company's earnings from operations in Fiscal 1996 were approximately $200 compared to an operating loss of approximately $29,700 in the previous fiscal year. The Company has been repositioned based on a series of key business strategies including: (i) establishing a new management team; (ii) focusing on four core product categories; (iii) creating a single brand identity; (iv) coordinating marketing and product development; and (v) streamlining operations. Strategies implemented by the new management team during late 1995 and 1996 are beginning to yield positive results. The Company anticipates growth in future sales and profitability resulting from: (i) increasing penetration of the core categories; (ii) enhancing retail distribution; (iii) improving margins; (iv) continuing focus on licensing opportunities; and (v) increasing international sales. As discussed in Note 9, the Company's Credit Facility expires on November 17, 1997 and the Collateral Letter of Credit expires on June 30, 1997. As a result, total indebtedness outstanding at December 28, 1996 has been classified as current within the December 28, 1996 consolidated balance sheet. Converse expects that demands on its liquidity and credit resources will continue to be significant throughout 1997. The Company is currently pursuing various financing alternatives to address these liquidity constraints. F-8 CONVERSE INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) (DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) 2. SIGNIFICANT ACCOUNTING POLICIES The major accounting policies of Converse are set forth below. Fiscal Year Converse's fiscal year end is the Saturday closest to December 31 in each year. Principles of Consolidation The consolidated financial statements include the accounts of Converse and its subsidiaries. All material intercompany transactions are eliminated in consolidation. As more fully described in Note 3, effective May 18, 1995, Converse acquired 100% of the outstanding common stock of Apex One, Inc. ("Apex"). On August 11, 1995, Converse stopped funding the operations of Apex. As a result of this decision, Apex was unable to meet its obligations, ceased operations and on September 14, 1995 filed for Chapter 11 bankruptcy protection. Because Converse's control of Apex was temporary in nature, its investment in Apex has been recorded as an unconsolidated equity investment. Accordingly, the consolidated financial statements do not include the accounts of Apex. Accounting Estimates The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Cash and Cash Equivalents Converse considers all short-term investments with an original maturity of three months or less to be cash equivalents. Restricted Cash Restricted cash represents interest payments into escrow on outstanding subordinated notes issued in conjunction with the acquisition of Apex. See Note 16. Fair Value of Financial Instruments The carrying amount of cash, cash equivalents, trade receivables and trade payables approximates fair value because of the short maturity of these financial instruments. The fair value of Converse's long-term instruments is estimated based on market values for similar instruments and approximates their carrying value at December 30, 1995 and December 28, 1996. As described in Note 3, the Apex subordinated notes and common stock warrants are carried within the accompanying consolidated balance sheet at their originally recorded amounts of $9,644 and $3,528, respectively. In the first quarter of 1997, the Company prevailed in a breach of warranty lawsuit brought against several former owners of Apex. Subsequently, the Company entered into settlement agreements with substantially all of the former owners of Apex whereby these former owners delivered to Converse in full satisfaction of Converse's indemnification claims, their subordinated notes, common stock warrants, and other contractual obligations issued by Converse in connection with the Apex acquisition. Any remaining claims are not significant. See Note 16. Inventories Inventories are stated at the lower of cost (first-in, first-out) or market. F-9 CONVERSE INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) (DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) Property, Plant and Equipment Property, plant and equipment are recorded at cost when acquired. Expenditures for improvements are capitalized while normal repairs and maintenance are expensed as incurred. When properties are disposed of, the related cost and accumulated depreciation or amortization are removed from the accounts, and gains or losses on the dispositions are reflected in results of operations. For financial reporting purposes, Converse utilizes the straight- line method of computing depreciation and amortization while accelerated methods are used for tax purposes. Such expense is computed based on the estimated useful lives of the respective assets. Current Assets in Excess of Reorganization Value In 1992, in connection with a reorganization under the bankruptcy code, Furniture Brands and its domestic subsidiaries, including Converse, were required to adopt "fresh-start" reporting. As a result of adopting "fresh- start" reporting, Converse recorded current assets in excess of reorganization value of approximately $41,553. This deferred credit is being amortized on a straight-line basis over a 20 year period. Capital Stock In December 1994, Converse's Board of Directors fixed the stated value of common stock at $1.00 per share. This resulted in an adjustment to the additional paid-in capital and retained earnings. Foreign Currency Transactions Assets and liabilities of international operations are translated into U.S. dollars at current exchange rates. Income and expense accounts are translated into U.S. dollars at average rates of exchange prevailing during the period. Adjustments resulting from translating foreign functional currency financial statements into U.S. dollars are recorded in a separate component of stockholders' equity. Other foreign currency transaction gains and losses are included in the determination of net income. Converse entered into foreign currency contracts in 1995 in order to reduce the impact of foreign currency fluctuations. There were no open foreign currency contracts as of December 30, 1995 or December 28, 1996. For financial reporting purposes, any gains or losses are recognized as other income or expense. Aggregate foreign currency exchange gains (losses) were $(14), $403 and $(789) in Fiscal 1994, Fiscal 1995 and Fiscal 1996, respectively. Revenue Recognition Revenue from the sale of product is recognized at the time of shipment. Royalty income represents revenue from licensed products arising from domestic and foreign licensees who manufacture or source sports apparel, accessories and selected Converse-approved footwear using Converse trademarks and trade names. Royalty income is recognized by Converse upon the shipment of product by the licensees to the ultimate customer. Advertising Advertising production costs are expensed the first time an advertisement is run. Media placement costs, which include television, radio and print advertising, as well as co-operative advertising costs, are expensed as incurred. Total advertising costs included within prepaid expenses and other current assets were $914 and $934 as of December 30, 1995 and December 28, 1996, respectively. Endorsement Contracts Accounting for endorsement contracts is based upon specific contract provisions. Generally, endorsement payments are expensed uniformly over the term of the contract after giving recognition to periodic performance compliance provisions of the contracts. F-10 CONVERSE INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) (DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) Income Taxes Through November 17, 1994, the date of the Distribution, Converse's results of operations were included in Furniture Brands' consolidated income tax returns. In connection with the Distribution, Converse and Furniture Brands entered into a Tax Sharing Agreement providing, among other things, for an equal allocation between Furniture Brands and Converse of federal and state tax liabilities for all periods prior to completion of the Distribution. As described in Note 15, this agreement was amended to provide for the allocation of tax benefits relating to the carryback of certain net operating losses to periods prior to the Distribution. Earnings Per Share Net loss per share for Fiscal 1995 and Fiscal 1996 has been calculated based on 16,692,156 and 16,760,620 weighted average shares of common stock outstanding, respectively. Pro forma earnings per share for Fiscal 1994 are presented to give effect to the fees paid to Furniture Brands and Apollo Advisors, L.P., which together with its affiliates, is the majority owner of Converse's outstanding common stock (see Note 15), for consulting services, the increase in interest expense, and the decrease in income taxes resulting from the Distribution. Pro forma net earnings per share are calculated based on 16,692,156 weighted average shares of common stock outstanding, as outstanding stock options were not dilutive. Concentration of Risk Converse purchases dyed canvas raw material mainly from one dye house with the remaining balance supplied by two other dye houses. A change in dye houses could cause a delay in manufacturing; however, management does not expect such a change to impact long term supply due to alternative suppliers. Financial instruments which potentially expose the Company to concentrations of credit risk include trade accounts receivable. However, such risk is limited due to the large number of customers and their international dispersion. In addition, the Company maintains reserves for potential credit losses and such losses, in the aggregate, have not exceeded management expectations. Reclassifications Certain amounts in the prior year financial statements and related notes have been reclassified to conform with the Fiscal 1996 presentation. 3. LOSS ON INVESTMENT IN UNCONSOLIDATED SUBSIDIARY On May 18, 1995, Converse consummated the acquisition of Apex. Under the terms of the Securities Purchase Agreement, the total consideration paid by Converse to the sellers in exchange for 100% of the outstanding common stock consisted of: (i) promissory notes in the aggregate principal amount of $11,000 discounted to $9,644 at a rate of 12%; and (ii) warrants to purchase 1,750,000 shares of Converse common stock at an exercise price of $11.40. The warrants expire on May 18, 2000 and were valued at the time of acquisition at $3,528. Subsequent to the acquisition of Apex, Converse, through its integration of Apex's information systems and in-depth review of Apex operating procedures and financial condition, determined that the operating losses of Apex and its weak financial position could not be corrected without additional significant investment or financing. On August 11, 1995, Converse's Board of Directors voted to cease funding Apex's operations as of that date. F-11 CONVERSE INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) (DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) As a result of this decision, Apex ceased operations and was unable to meet its obligations and on September 14, 1995 filed for Chapter 11 bankruptcy protection. Because Converse's control of Apex was temporary in nature, its investment in Apex was recorded as an unconsolidated equity investment. During 1995, Converse recorded a loss on this unconsolidated subsidiary, comprised primarily of: (i) the Company's initial investment in Apex; (ii) additional funding advances; (iii) contractual obligations, bank guarantees, professional fees and other closing costs; and (iv) loss on the sale of Apex inventory purchased by Converse for sale to independent third parties. The following table summarizes the Fiscal 1995 and 1996 activity relating to each applicable component:
CONTRACTUAL OBLIGATIONS, FUNDING BANK GUARANTEES, LOSS ON INITIAL PROVIDED PROFESSIONAL SALE OF INVESTMENT MAY 18- FEES AND OTHER APEX IN APEX AUGUST 11, 1995 CLOSING COSTS INVENTORY TOTAL ---------- --------------- ---------------- --------- -------- Loss as of July 1, 1995................... $ 13,172 $ 10,422 $ 18,005 -- $ 41,599 Changes in estimates.... -- -- 2,680 7,881 10,561 Charges/write-offs...... (13,172) (10,422) (10,460) (7,881) (41,935) -------- -------- -------- ------ -------- December 30, 1995 Balance................ -- -- 10,225 -- 10,225 Changes in estimates.... -- -- (1,877) 515 (1,362) Charges/write-offs...... -- -- (2,924) (515) (3,439) -------- -------- -------- ------ -------- December 28, 1996 Balance................ -- -- $ 5,424 -- $ 5,424 ======== ======== ======== ====== ========
As of July 1, 1995, Converse recorded a $41,599 loss on its unconsolidated equity investment in Apex, as described above. During the fourth quarter of 1995, Converse recorded an additional $10,561 loss on its unconsolidated equity investment in Apex, resulting in a total loss of $52,160. This additional loss was comprised of unanticipated losses of $7,881 on the fourth quarter sale of Apex inventory purchased by Converse for sale to independent third parties and additional contractual obligations, professional fees and other closing costs of $2,680. This additional amount was a result of changes in estimates made during the fourth quarter of 1995 due to previously unanticipated events and circumstances. During the second quarter of 1996, the Company recorded an additional loss of $515 relating to unanticipated credits issued to customers to settle claims of discrepancies on shipments of the Apex inventory. During the fourth quarter of 1996, the Company entered into agreements with two of the former owners of Apex to settle certain obligations for $1,877 less than originally anticipated, thereby resulting in a reduction in the accrual for the loss on investment in unconsolidated subsidiary. In the first quarter of 1997, the Company prevailed in a breach of warranty lawsuit brought against several former owners of Apex. Subsequently, the Company entered into settlement agreements with substantially all of the former owners of Apex whereby these former owners delivered to Converse in full satisfaction of Converse's indemnification claims, their subordinated notes, common stock warrants, and other contractual obligations issued by Converse in connection with the Apex acquisition. Any remaining claims are not significant. See Note 16. F-12 CONVERSE INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) (DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) 4. RESTRUCTURING CHARGES During 1995 Converse recorded restructuring charges relating primarily to initiatives aimed at reducing future operating costs, including domestic manufacturing, global distribution, marketing, and general and administrative costs. The following table summarizes the Fiscal 1995 and 1996 activity relating to these initiatives:
LOSS REDUCTION IN CONTRACT (CREDIT) EMPLOYEE LEASE LIABILITY FOR TERMINATION ON ASSET SEVERANCE AND TERMINATION POSTRETIREMENT COSTS DISPOSALS RELATED COSTS COSTS BENEFITS TOTAL ----------- --------- ------------- ----------- -------------- ------- 1995 accrual............ $ 6,150 $ 4,807 $2,502 $1,453 $(730) $14,182 Charges/write-offs...... (415) (4,807) (815) -- 730 (5,307) ------- ------- ------ ------ ----- ------- December 30, 1995 Balance................ 5,735 -- 1,687 1,453 -- 8,875 Changes in estimates.... (1,000) (1,533) 1,356 -- -- (1,177) Charges/write-offs...... (3,233) 1,533 (587) (889) -- (3,176) ------- ------- ------ ------ ----- ------- December 28, 1996 Balance................ $ 1,502 -- $2,456 $ 564 -- $ 4,522 ======= ======= ====== ====== ===== =======
During the second quarter of 1995, Converse decided to close its Mission, Texas manufacturing facility and recorded a charge of $1,000. Converse completed the shutdown of the Mission facility during the third quarter of 1995. In the fourth quarter of 1995, Converse recorded a restructuring charge totaling $13,182. Principal costs included in the charge were: (i) contract termination costs relating to licensed apparel and certain marketing activities; (ii) estimated losses on the sale or disposal of assets, including a writedown for the proposed sale of a warehouse facility in Chester, South Carolina; (iii) costs for employee severance and related benefits for the termination of 140 employees; and (iv) lease termination costs relating to the shutdown of the manufacturing facility in Mission, Texas and a distribution facility in the United Kingdom. During the second quarter of 1996, the Company sold the warehouse facility in Chester, South Carolina. Proceeds from this sale exceeded the Company's estimates, resulting in a reversal of $2,209 of restructuring reserves. During the third quarter of 1996, certain contracts were terminated on terms more advantageous than originally anticipated resulting in a reversal of $1,000 of restructuring accruals. In addition, while implementing its fourth quarter 1995 restructuring plans, the company incurred additional severance charges of $1,000 and $356 in the third and fourth quarters of 1996, respectively, and additional asset write-offs of $676 during the fourth quarter of 1996. Such additional charges were in excess of previously estimated amounts. The remaining liabilities represent fixed amounts to be paid out over the next two years. 5. INVENTORIES Inventories are summarized as follows:
DECEMBER 30, 1995 DECEMBER 28, 1996 ----------------- ----------------- Retail merchandise....................... $ 5,766 $ 6,298 Finished products........................ 67,835 73,887 Work-in-process.......................... 4,226 3,320 Raw materials............................ 4,076 3,294 ------- ------- $81,903 $86,799 ======= =======
F-13 CONVERSE INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) (DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) 6. PROPERTY, PLANT AND EQUIPMENT Property, Plant and Equipment consisted of the following:
ESTIMATED USEFUL LIFE (YEARS) DECEMBER 30, 1995 DECEMBER 28, 1996 ---------------- ----------------- ----------------- Building and leasehold improvements........... 5-10 $ 4,288 $ 5,734 Machinery and equipment.............. 3-11 8,382 9,890 Furniture and fixtures.. 5-8 1,553 2,448 Office and computer equipment.............. 7 6,098 7,272 ------- ------- 20,321 25,344 Less accumulated depreciation........... 4,800 7,495 ------- ------- $15,521 $17,849 ======= =======
7. SHORT-TERM DEBT Converse maintains asset based financing arrangements in certain European countries with various lenders. In general, these financing arrangements allow the Company to borrow against varying percentages of eligible customer receivable balances based on pre-established credit lines, along with varying percentages of inventory, as defined. Borrowings outstanding under these financing arrangements totaled $13,906 and $13,421 as of December 30, 1995 and December 28, 1996, respectively. Interest is payable at the respective lender's base rate plus 1.5% (6.0% to 8.25% at December 28, 1996). The obligations are secured by a first priority lien on the respective European assets being financed. In addition, Converse has provided guarantees of these borrowings in certain of the European countries. 8. ACCRUED EXPENSES Accrued expenses consisted of the following:
DECEMBER 30, 1995 DECEMBER 28, 1996 ----------------- ----------------- Employee compensation.................. $ 6,223 $ 3,543 Advertising and promotion.............. 3,930 3,432 Customer deposits...................... 61 2,943 Accrued interest....................... 661 2,160 Restructuring charges.................. 8,875 4,522 Loss on investment in unconsolidated subsidiary............................ 10,225 5,424 Other.................................. 3,320 3,100 ------- ------- $33,295 $25,124 ======= =======
F-14 CONVERSE INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) (DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) 9. LONG-TERM DEBT Long-term debt consisted of the following:
DECEMBER 30, 1995 DECEMBER 28, 1996 ----------------- ----------------- Secured credit facility: A Facility............................. $ 69,504 $ 89,467 B Facility............................. 40,000 28,298 Subordinated notes..................... 9,644 9,644 -------- --------- 119,148 127,409 -------- --------- Less current maturities................ (6,324) (117,765) -------- --------- $112,824 $ 9,644 ======== =========
Credit Facility As of December 28, 1996, Converse maintained the Credit Facility in the amount of $163,298 (an "A Facility" for $135,000 and a "B Facility" for $28,298). The A Facility expires on November 17, 1997 with Converse's option to extend for an additional two-year period provided certain conditions are met, including payment in full of the B Facility on or prior to November 17, 1997. The amount of credit available to Converse at any time under the A Facility is determined by reference to Converse's borrowing base as set forth in the Credit Facility, consisting primarily of domestic accounts receivable and inventory. During November 1995, the Credit Facility was amended, thereby reducing the commitment of the Banks under the A Facility from $160,000 to $135,000. In addition, the amendment provided for borrowings by Converse under the A Facility above those supported by its defined borrowing base in an amount up to $25,000 provided a standby letter of credit was issued for the benefit of the Banks. Apollo Investment Fund, L.P. ("Apollo"), which together with its affiliates, is the beneficial owner of approximately 65.2% of Converse's outstanding common stock as of December 28, 1996, caused a standby letter of credit for the account of Apollo (the "Collateral Letter of Credit") to be provided to the Banks in the amount of $25,000 (See Note 15). The Collateral Letter of Credit expires on June 30, 1997. During November 1996, the Credit Facility was amended in order to provide seasonal borrowing ("Seasonal Accommodation") by Converse under the A Facility above those supported by its defined borrowing base and Collateral Letter of Credit in an amount up to $10,000. Subsequent to December 28, 1996, the Credit Facility was amended whereby the Seasonal Accommodation was increased to $15,000, expiring October 15, 1997. In addition, the commitment of the Banks under the A Facility was increased from $135,000 to $150,000. As further described herein, the Credit Facility, Collateral Letter of Credit and Seasonal Accommodation expire during 1997. Accordingly, the total indebtedness outstanding pertaining to these debt instruments of $117,765 as of December 28, 1996 has been classified as current within the accompanying consolidated balance sheet. As of December 28, 1996, approximately $113,898 was available under the A Facility borrowing base, inclusive of availability as a result of the Collateral Letter of Credit and Seasonal Accommodation, for borrowing which may be used for revolving loans, letters of credit, foreign exchange contracts and acceptances. The aggregate of letters of credit, foreign exchange contracts and acceptances may not exceed $100,000 at any time; revolving loans are limited only by the facility's maximum availability less any amount outstanding for letters of credit, foreign exchange contracts or acceptances. As of December 28, 1996, utilization under the A Facility, inclusive of the Collateral Letter of Credit and Seasonal Accommodation, consisted of revolving loans of $78,467 and bankers acceptances of $11,000. In addition, outstanding letters of credit of $17,299 as of December 28, F-15 CONVERSE INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) (DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) 1996 were reserved against the maximum available borrowing base. As a result, $7,132 of the maximum available borrowing base remained unutilized as of December 28, 1996. As of December 28, 1996, the B Facility, which also expires on November 17, 1997, had loans outstanding of $28,298. The Company is not permitted further borrowings against the B Facility. Loans under the A Facility bear interest either at the Prime Lending Rate (as defined therein) plus a margin of 1.25%, or at Adjusted LIBOR (as defined therein) plus a margin of 2.5% per annum. The foregoing LIBOR margin may be reduced following Converse's achievement of improved ratios under certain financial tests specified in the Credit Facility. At December 28, 1996, revolving loans outstanding under the A Facility bore interest at 8.20%, based upon the weighted average of the Prime and Adjusted LIBOR rates, as defined. Loans under the B Facility bear interest at the Prime Lending Rate plus a margin of 4%, or at Adjusted LIBOR plus a margin of 5.5% per annum. At successive six-month terms of the loan, the rate of interest on loans outstanding under the B Facility automatically increases 0.5%. At December 28, 1996, loans outstanding under the B Facility were Adjusted LIBOR rate loans bearing interest at 10.95%. On November 17, 1994, Converse paid to the Banks a closing and commitment fee and an agent fee of 2.5% of the total amount of the A Facility. Converse also paid a 3% commitment fee to the Banks for the B Facility. Additional fees of 1% and 2% of the B Facility were paid in September and November 1995, respectively, as defined, since loans against the entire availability of the B Facility remained outstanding as of those dates. As consideration for causing the Collateral Letter of Credit to be provided, Apollo received a fee from Converse equal to 3% of the amount of such letter of credit, and Converse agreed to reimburse Apollo for all of its expenses, including but not limited to expenses incurred in connection with obtaining the Collateral Letter of Credit. The Credit Facility also provides for certain other ongoing fees, including an unused line fee on the portion of the A Facility that is not utilized (equal to 0.5% per annum), fees with respect to letters of credit, foreign exchange contracts and acceptances issued under the Credit Facility (generally varying from 1.25% to 2.25% per annum) and an annual collateral management fee of $100. Obligations outstanding under the Credit Facility are secured by a first priority lien on substantially all of Converse's assets located in the United States and Canada. At December 28, 1996, Converse was in default of one financial covenant contained in the Credit Facility, as amended November 1996. Subsequent to December 28, 1996, the Banks waived Converse's default of this financial covenant as of December 28, 1996 and reset the financial covenants for the term of the A Facility. As such, Converse is currently in compliance with the amended covenants and believes that it will be in compliance with these amended financial covenants through the term of the A Facility. The Credit Facility requires Converse to pay the unpaid aggregate principal amount of the B Facility, in equal quarterly principal installments of one- twentieth of the then outstanding principal balance commencing September 30, 1996 and on each successive quarter end thereafter, with a final installment of any remaining unpaid principal then outstanding being due on November 17, 1997. Accordingly, on September 30, 1996, the Company paid the first principal installment totaling $1,598. The Credit Facility also required Converse to apply proceeds received during 1996 relating to the occurrence of specified events against the aggregate unpaid B Facility principal. During 1996, the Company remitted an additional $10,104 against the aggregate unpaid B Facility principal. In conjunction with Converse's acquisition of 100% of the outstanding common stock of Apex (see Note 3), Converse issued subordinated notes in the face amount of $11,000, discounted at a rate of 12%, to $9,644. F-16 CONVERSE INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) (DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) The notes bear interest at the rate of 8% per annum for the first three years and increase to 10% and 12% in 1998 and 1999, respectively. The notes mature on May 18, 2003. As a result of the indemnification awards and claims against certain former owners of Apex and the related exchange and settlement agreements, no accretion of the subordinated note discount has been recorded in the accompanying consolidated balance sheet. In the first quarter of 1997, the Company prevailed in a breach of warranty lawsuit brought against several former owners of Apex. Subsequently, the Company entered into settlement agreements with substantially all of the former owners of Apex whereby these former owners delivered to Converse in full satisfaction of Converse's indemnification claims, their subordinated notes, common stock warrants, and other contractual obligations issued by Converse in connection with the Apex acquisition. Any remaining claims are not significant. See Note 16. Converse has capitalized certain fees incurred in conjunction with the acquisition of these various financing arrangements. These costs are amortized over the term of the related agreements. Unamortized financing fees included within the other asset component of the consolidated balance sheet were $5,028 and $2,104 at December 30, 1995 and December 28, 1996, respectively. Total interest expense was comprised of the following:
FISCAL YEAR ENDED ----------------------------------------------------- DECEMBER 31, 1994 DECEMBER 30, 1995 DECEMBER 28, 1996 ----------------- ----------------- ----------------- Interest on borrowings.. $1,107 $ 9,220 $11,368 Interest on Furniture Brands borrowings...... 6,002 -- -- Credit line fees........ 146 2,504 2,398 Amortization of original Credit Facility financing fees......... 141 1,767 1,767 Credit Facility amendment and other fees................... 27 552 2,243 ------ ------- ------- $7,423 $14,043 $17,776 ====== ======= =======
10. INCOME TAXES The domestic and foreign components of income (loss) before income taxes were as follows:
FISCAL YEAR ENDED ----------------------------------------------------- DECEMBER 31, 1994 DECEMBER 30, 1995 DECEMBER 28, 1996 ----------------- ----------------- ----------------- Domestic.............. $14,926 $(84,482) $(17,967) Foreign............... 13,235 (15,409) (4,602) ------- -------- -------- $28,161 $(99,891) $(22,569) ======= ======== ========
F-17 CONVERSE INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) (DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) Income tax expense (benefit) was comprised of the following:
FISCAL YEAR ENDED ----------------------------------------------------- DECEMBER 31, 1994 DECEMBER 30, 1995 DECEMBER 28, 1996 ----------------- ----------------- ----------------- Current: Federal............. $ 7,926 $(12,666) $(3,617) State............... 1,151 417 299 Foreign............. 1,162 2,656 3,571 ------- -------- ------- 10,239 (9,593) 253 ------- -------- ------- Deferred: Federal............. 261 (16,557) (3,906) State............... 65 (1,994) (481) ------- -------- ------- 326 (18,551) (4,387) ------- -------- ------- $10,565 $(28,144) $(4,134) ======= ======== =======
The following table reconciles the differences between the Federal corporate statutory rate and Converse's effective income tax rate:
FISCAL YEAR ENDED ----------------------------------------------------- DECEMBER 31, 1994 DECEMBER 30, 1995 DECEMBER 28, 1996 ----------------- ----------------- ----------------- Federal corporate statutory tax rate (benefit).............. 35.0% (35.0)% (35.0)% State taxes (benefit), net of Federal tax effect............. 3.1 (1.5) (2.9) Foreign income taxes.... 2.5 1.7 10.1 Valuation allowance..... -- 6.7 12.7 Other................... (3.1) (0.1) (3.2) ---- ----- ----- Effective income tax (benefit) rate......... 37.5% (28.2)% (18.3)% ==== ===== =====
F-18 CONVERSE INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) (DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) Deferred income taxes reflect the effect of temporary differences between the tax basis of assets and liabilities and the reported amounts of assets and liabilities for financial reporting purposes. Deferred income taxes also reflect the value of net operating losses, net of any valuation allowance. Converse's deferred tax assets and liabilities at December 30, 1995 and December 28, 1996, consisted of the following:
DECEMBER 30, 1995 DECEMBER 28, 1996 ----------------- ----------------- Deferred tax assets: Tax benefit of loss carryforward..... $ 7,272 $ 22,263 Loss on investment in unconsolidated subsidiary.......................... 13,015 11,739 Restructuring accruals............... 2,900 1,524 Fair value adjustments............... 4,266 3,718 Employee postretirement benefits other than pensions................. 4,317 4,061 Expense accruals..................... 2,725 3,182 Receivable, inventory and other reserves............................ 3,628 3,399 Other................................ 689 341 ------- -------- Gross deferred tax assets.......... 38,812 50,227 Deferred tax liabilities: Depreciation......................... (702) -- Employee pension plans............... -- (762) Other................................ (2,033) (2,840) ------- -------- Net deferred tax assets before valuation allowance............... 36,077 46,625 Valuation allowance.................. (6,650) (11,584) ------- -------- Net deferred tax assets............ $29,427 $ 35,041 ======= ========
The net deferred tax assets are included in the consolidated balance sheet as follows:
DECEMBER 30, 1995 DECEMBER 28, 1996 ----------------- ----------------- Prepaid expenses and other current assets............................... $14,183 $14,491 Other assets.......................... 15,244 20,550 ------- ------- $29,427 $35,041 ======= =======
Statement of Financial Accounting Standards No. 109, "Accounting for Income Taxes," requires that a valuation allowance be recorded against deferred tax assets for which there is a greater than fifty percent chance that the tax assets will not be realized. In assessing the realizability of the deferred tax assets, Converse has based its judgment primarily on estimated future earnings. Converse believes these deferred tax assets will be realized. However, based on the weight of objective evidence including historical operating results, operating forecasts and significant net operating loss carryforwards, Converse has concluded that a valuation allowance of $11,584 is required as of December 28, 1996. At December 28, 1996, Converse had operating loss carryforwards of $52,864. The loss carryforwards expire between the years 2009 and 2011. 11. EMPLOYEE BENEFITS Converse sponsors or contributes to retirement plans covering substantially all domestic employees. Converse has defined benefit pension and postretirement plans in addition to other retirement plans and benefits. The annual cost for defined benefit plans is determined using the projected unit credit actuarial cost method F-19 CONVERSE INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) (DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) which includes significant actuarial assumptions and estimates which are subject to change in the near term. Prior service cost is amortized on a straight-line basis over the average remaining service period of employees expected to receive benefits. In certain foreign countries, contributions are made to defined contribution plans as well as to government sponsored plans, as required in the respective jurisdictions. Liabilities and expenses related to these foreign employees are not material. Defined Benefit Pension Plan Converse has a non-contributory defined benefit pension plan covering substantially all salaried employees at its domestic operations. Retirement benefits generally are based on years of service and final average compensation with employees generally becoming vested upon completion of five years of service. The plan is funded by company contributions to trust funds which are held for the sole benefit of the employees. It is Converse's practice to fund pension costs to the extent that such costs are tax deductible and in accordance with ERISA. The assets of the plan are primarily comprised of equity securities and fixed income investments. The table below summarizes the plan's funded status and amounts recognized in the balance sheet:
DECEMBER 30, 1995 DECEMBER 28, 1996 ----------------- ----------------- Actuarial present value of benefit obligations: Vested benefit obligation............ $38,467 $39,048 ======= ======= Accumulated benefit obligation....... 39,104 39,641 ======= ======= Projected benefit obligation......... 44,738 46,781 Fair value of plan assets............ 44,852 51,122 ------- ------- Plan assets in excess of projected benefit obligation.................. 114 4,341 Unrecognized net loss (gain)......... 323 (2,166) Unrecognized prior service cost...... (89) (82) ------- ------- Prepaid pension cost included in other assets........................ $ 348 $ 2,093 ======= =======
Net periodic pension cost for Fiscal 1994, 1995 and 1996 includes the following components:
FISCAL YEAR ENDED ----------------------------------------------------- DECEMBER 31, 1994 DECEMBER 30, 1995 DECEMBER 28, 1996 ----------------- ----------------- ----------------- Service cost-benefits earned during the period............. $ 1,204 $ 1,300 $ 1,410 Interest cost on the projected benefit obligation..... 2,830 3,309 3,375 Actual return on plan assets................. 664 (9,775) (6,365) Net amortization and deferral............... (3,986) 6,364 2,110 ------- ------- ------- Net periodic pension cost................... $ 712 $ 1,198 $ 530 ======= ======= =======
Measurement of the projected benefit obligation was based on a weighted average discount rate of 8.0%, 7.25%, and 7.50% in Fiscal 1994, 1995 and 1996, respectively, and a rate of increase in future compensation levels of 4.5% in each year. The expected long-term rate of return on plan assets used in determining net pension cost was 8.5%, 9.5% and 9.5% in Fiscal 1994, 1995 and 1996, respectively. F-20 CONVERSE INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) (DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) Defined Benefit Postretirement Plan In addition to pension benefits, certain retired employees are currently provided with specified health care and life insurance benefits. Eligibility requirements generally state that benefits are available to employees who retire after a certain age with specified years of service if they agree to contribute a portion of the cost. Converse has reserved the right to modify or terminate these benefits. Health care and life insurance benefits are provided to both retired and active employees through medical benefit trusts, third- party administrators and insurance companies. The following table sets forth the combined financial status of deferred postretirement benefits other than pensions:
DECEMBER 30, 1995 DECEMBER 28, 1996 ----------------- ----------------- Accumulated postretirement benefit obligation: Retirees............................ $ 4,501 $ 4,311 Fully eligible active plan participants....................... 91 128 Other active plan participants...... 1,441 1,564 ------- ------- Total............................... 6,033 6,003 Unrecognized net gain............... 1,635 1,735 Unrecognized prior service gain..... 2,718 2,493 ------- ------- Accrued postretirement benefit obligation......................... $10,386 $10,231 ======= =======
Net periodic postretirement benefit costs for Fiscal 1994, 1995 and 1996 include the following components:
FISCAL YEAR ENDED ----------------------------------------------------- DECEMBER 31, 1994 DECEMBER 30, 1995 DECEMBER 28, 1996 ----------------- ----------------- ----------------- Service cost-benefits earned during the period............. $ 96 $ 90 $ 105 Interest cost on the postretirement benefit obligation..... 359 362 421 Net amortization and deferral............... (387) (373) (305) ----- ----- ----- Net periodic postretirement benefit cost................... 68 79 221 Curtailment gains....... -- (730) -- ----- ----- ----- Total periodic postretirement benefit cost (income).......... $ 68 $(651) $ 221 ===== ===== =====
For measurement purposes, a 16.0%, 15.0% and 15.0% annual rate of increase in the cost of health care benefits for pre-age 65 retirees and 12.0%, 11.0% and 11.0% for post-age 65 retirees was assumed for Fiscal 1994, 1995 and 1996, respectively. For Fiscal 1994, 1995 and 1996, the rates are assumed to decrease gradually to 8.0% in the year 2002 for pre-age 65 retirees and to 7.0% in 1999 for post-age 65 retirees and remain at those levels thereafter. The health care cost trend rate assumption has an effect on amounts reported. Increasing the health care cost trend rate by one percentage point in each year would increase the accumulated postretirement benefit obligation as of December 28, 1996 by approximately $331 and the net periodic cost by $27 for the year. The unrecognized prior service gain resulted from a change in Converse's postretirement medical plan. Effective July 1, 1993, Converse required age and service related employee contributions and capped Converse's retiree medical costs at 1998 average claim levels. These changes apply to employees retiring after December 31, 1994. F-21 CONVERSE INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) (DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) Measurement of the accumulated postretirement benefit obligation was based upon a weighted average discount rate of 8.0%, 7.25% and 7.50% for Fiscal 1994, 1995 and 1996, respectively, and a long-term rate of compensation increase of 4.5% in each year. During 1995, Converse recognized curtailment gains resulting from workforce reductions. These gains are primarily due to the reduction of the accumulated postretirement benefit obligation associated with those employees' postretirement benefits and recognition of the prior service costs related to those employees. Other Retirement Plans and Benefits Converse has a non-contributory defined contribution plan covering all hourly employees with at least one year of service at their domestic manufacturing and warehouse facilities. Contributions under this plan are fixed at $0.37 per hour of service with a maximum contribution based on 2,000 hours per employee. The defined contribution expense was $662, $992 and $318 for Fiscal 1994, 1995 and 1996, respectively. Converse also sponsors a savings plan. The total cost of this plan for Fiscal 1994, 1995, and 1996 was $555, $609 and $329, respectively. 12. STOCK OPTION PLANS; WARRANTS Converse 1994 Stock Option Plan The Board of Directors of Converse adopted the Converse Inc. 1994 Stock Option Plan (the "1994 Plan") as a means to encourage ownership of Converse common stock by key employees and enable Converse to attract and retain the services of outstanding employees in competition with other employers. The 1994 Plan authorizes grants to key employees, including executive officers of Converse and its subsidiaries, and to its consultants, of incentive and non-qualified options to purchase shares of common stock. The plan administrator has discretion to grant non-qualified options at less than 100% of the fair market value per share of the common stock of Converse on the date of grant. The plan administrator has granted such below market exercise price options to certain Converse employees who held options to acquire Furniture Brands common stock in connection with the Distribution in exchange for such Furniture Brands options. Converse incentive stock options must be granted with an exercise price of not less than 100% of the fair market value per share of common stock of Converse on the date of grant. Option prices are payable, in full and in cash, upon the exercise of a stock option and the proceeds are added to the general funds of Converse. As of December 28, 1996, the number of shares of common stock which may be issued under the 1994 Plan is 2,300,000 subject to adjustment upon the occurrence of certain contingencies. The maximum number of shares with respect to which options may be granted to any individual during any calendar year and during the term of the 1994 Plan is 500,000 and 750,000, respectively. Options under the 1994 Plan expire nine years from the grant date. The 1994 Plan will terminate in October 2004, subject to the right of the Board of Directors to suspend or discontinue the 1994 Plan at any prior date and the rights of holders of options to exercise options after such date in accordance with the terms of such options. F-22 CONVERSE INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) (DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) The following table summarizes option activity under the 1994 Plan:
WEIGHTED EXERCISE AVERAGE NUMBER PRICE EXERCISE PRICE OF OPTIONS PER SHARE PER SHARE ---------- ------------ -------------- Outstanding at January 1, 1994...... -- -- -- Granted............................. 920,000 $5.27-$11.46 $ 8.66 --------- Outstanding at December 31, 1994.... 920,000 $5.27-$11.46 $ 8.66 Granted............................. 633,000 $5.00-$23.00 $ 9.64 Canceled............................ (429,000) $ 7.00 $ 7.00 --------- Outstanding at December 30, 1995.... 1,124,000 $5.00-$23.00 $ 7.71 Granted............................. 1,221,000 $4.00-$23.00 $ 7.17 Canceled............................ (520,200) $5.00-$23.00 $11.71 Exercised........................... (246,000) $5.00-$ 7.00 $ 5.57 --------- Outstanding at December 28, 1996.... 1,578,800 $4.00-$23.00 $ 6.31 ========= Exercisable at December 28, 1996.... 214,050 $ 7.15 ========= Available for future grants......... 475,200 =========
The following table summarizes information about the 1994 Plan stock options outstanding at December 28, 1996:
OPTIONS OUTSTANDING OPTIONS EXERCISABLE --------------------------- -------------------------- WEIGHTED AVERAGE NUMBER REMAINING WEIGHTED NUMBER WEIGHTED RANGE OF OUTSTANDING CONTRACTUAL AVERAGE EXERCISABLE AVERAGE EXERCISE PRICES AT 12/28/96 LIFE (YEARS) EXERCISE PRICE AT 12/28/96 EXERCISE PRICE --------------- ----------- ------------ -------------- ----------- -------------- $4.00-$5.00............. 511,000 8 $ 4.99 1,000 $ 5.00 $5.27................... 150,000 7 5.27 107,500 5.27 $5.63-$6.50............. 514,000 9 6.23 -- -- $7.00................... 275,800 8 7.00 57,800 7.00 $7.75-$8.65............. 26,000 9 7.96 -- -- $9.00-$23.00............ 102,000 8 12.69 47,750 11.64 --------- ------- 1,578,800 214,050 ========= =======
On June 2, 1995, Converse repriced certain stock options granted under the 1994 Plan. Options to purchase 854,000 shares of common stock were repriced at an exercise price of $7.00 per share, which represented the closing price of Converse's common stock on June 2, 1995. The original vesting schedules and expiration dates associated with these stock options were also amended to coincide with the stock option repricing date. None of the foregoing stock option grants had vested prior to the repricing date and they did not begin to vest until June 2, 1996. On September 5, 1996, Converse repriced certain additional stock options granted under the 1994 Plan. Options to purchase 105,000 shares of common stock at prices ranging from $5.00 to $23.00 per share were repriced to an exercise price of $6.375 per share, which represented the closing price of Converse's common stock on September 5, 1996. In connection with this repricing, options to purchase 45,000 shares of common stock were canceled. None of the repriced options had vested prior to the repricing date and they do not begin to vest until September 5, 1997. The above option activity table reflects all options at their amended price and vesting terms. F-23 CONVERSE INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) (DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) Converse 1995 Non-Employee Director Plan On March 22, 1995, the Board of Directors of Converse adopted the 1995 Non- Employee Directors Plan ("the 1995 Plan") as a means of fostering and promoting the long term financial success of Converse by attracting and retaining Non-Employee Directors of outstanding ability. Converse has reserved an aggregate of 45,000 shares for issuance under the 1995 Plan. Options to purchase 22,500 of these shares were granted during 1995 at the fair market value on the date of grant of $9.88. These stock options become exercisable in equal one-third increments beginning on March 22, 1996 and expire ten years from the date of grant. No such options were exercised during 1996. Other Stock Option Activity On October 13, 1995, in addition to the aforementioned option grants, Converse granted options to purchase an aggregate of 275,000 shares of common stock not pursuant to any formal plan. These options were granted in conjunction with a consulting agreement at the fair market value on the date of grant of $4.88 and were exercised during Fiscal 1996. Warrants Warrants to purchase 1,750,000 shares of Converse stock at an exercise price of $11.40 per share were issued in conjunction with the acquisition of Apex, as discussed in Note 3. These warrants expire on May 18, 2000 and were valued at the time of acquisition at $3,528. In the first quarter of 1997, the Company prevailed in a breach of warranty lawsuit brought against several former owners of Apex. Subsequently, the Company entered into settlement agreements with substantially all of the former owners of Apex whereby these former owners delivered to Converse in full satisfaction of Converse's indemnification claims, their subordinated notes, common stock warrants, and other contractual obligations issued by Converse in connection with the Apex acquisition. See Note 16. New Accounting Pronouncement The Company accounts for stock-based compensation using the method prescribed in Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees". Accordingly, no compensation cost has been recognized for the Company's stock option plans. The Company has adopted the disclosure-only provisions of Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based Compensation" ("SFAS 123"). Had compensation cost been determined based on the fair value at the grant dates for awards in 1995 and 1996 consistent with the provisions of SFAS 123, the Company's net income and earnings per share would have been reduced to the pro forma amounts indicated below:
FISCAL YEAR ENDED ----------------------------------- DECEMBER 30, 1995 DECEMBER 28, 1996 ----------------- ----------------- Net income--as reported.................. $(71,747) $(18,435) Net income--pro forma.................... (73,031) (19,559) Earnings per share--as reported.......... (4.30) (1.10) Earnings per share--pro forma............ (4.38) (1.17)
F-24 CONVERSE INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) (DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) The fair value of options granted at date of grant was estimated using the Black-Scholes model with the following weighted average assumptions:
FISCAL YEAR ENDED ----------------------------------- DECEMBER 30, 1995 DECEMBER 28, 1996 ----------------- ----------------- Expected life (years)................... 5.3 6.0 Interest rate........................... 6.45% 6.27% Volatility.............................. 75.00% 65.00% Dividend yield.......................... 0 0
The weighted average grant date fair value of options granted during Fiscal 1995 and Fiscal 1996 was $3.87 and $3.37, respectively. The pro forma net income and earnings per share amounts reflected above do not include a tax benefit for 1995 or 1996, as a full valuation allowance would have been provided against any such benefit. The pro forma effect on net income for Fiscal 1995 and Fiscal 1996 is not indicative of future amounts as it does not take into consideration pro forma compensation expense related to grants made prior to 1995. SFAS 123 does not apply to awards prior to 1995, and additional awards in future years are anticipated. 13. LEASE COMMITMENTS Substantially all of Converse's retail outlets and certain other real properties and equipment are operated under lease agreements expiring at various dates through the year 2012. Leases covering retail outlets and equipment generally require, in addition to stated minimums, contingent rentals based on retail sales and equipment usage. Generally, the leases provide for renewal for various periods at stipulated rates. Rental expense under operating leases was as follows:
FISCAL YEAR ENDED ----------------------------------------------------- DECEMBER 31, 1994 DECEMBER 30, 1995 DECEMBER 28, 1996 ----------------- ----------------- ----------------- Minimum rentals......... $3,681 $3,901 $4,244 Contingent rentals...... 962 1,088 825 ------ ------ ------ 4,643 4,989 5,069 Less: sublease rentals.. 135 -- -- ------ ------ ------ $4,508 $4,989 $5,069 ====== ====== ======
Future minimum lease payments under operating leases are $3,720, $3,208, $2,450, $1,933 and $1,244 for 1997 through 2001, respectively. 14. COMMITMENTS AND CONTINGENCIES In December 1995, Converse issued a consumer alert relating to the RAW Energy and RAW Power product lines. This alert informed the public about the potential for the products' technology to fail under continuous, competitive strain. All retailers and consumers were given the option to return these products to Converse for a full credit. As a result of this action, as of December 30, 1995 Converse reversed sales with a gross margin impact of $2,400, provided $413 to repair the defective units and recorded a writedown of $4,354 relating to the inventory carrying value of the defective units. During 1996, the returns and repair processes were completed, resulting in $400 of previously provided reserves being reversed to income. F-25 CONVERSE INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) (DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) For discussion of Apex related litigation see Note 16. Converse is or may become a defendant in a number of pending or threatened legal proceedings in the ordinary course of its business. Converse believes the ultimate outcome of any such proceedings will not have a material adverse effect on its financial position or results of operations. 15. RELATED PARTY TRANSACTIONS In connection with the Distribution, Converse and Furniture Brands entered into a Tax Sharing Agreement (the "Agreement") providing, among other things, for an equal allocation between Furniture Brands and Converse of benefits derived from a carryback of federal and state tax liabilities to periods prior to completion of the Distribution. On February 21, 1996, Converse amended this Agreement with Furniture Brands, under which Converse agreed to carryback certain federal income tax operating losses for the years ended December 30, 1995 and December 28, 1996 to one or more Pre-Distribution tax periods. For the year ended December 30, 1995, the amendment applies to the first $41,000 of tax operating losses generated, which approximates the taxable income available in the carryback period. For the year ended December 30, 1995, tax operating losses of approximately $31,000 were carried back generating a tax refund of $10,832. In accordance with the Agreement, as amended, Furniture Brands paid Converse $8,000 on February 29, 1996 and in return Furniture Brands is entitled to the full amount of the tax refund. Furniture Brands is not entitled to any refund of the $8,000 payment in the event the ultimate tax refund it receives from the Internal Revenue Service is less than anticipated. In accordance with the Agreement, Furniture Brands is also entitled to tax refunds resulting from the carryback of approximately $10,000 of the Company's Fiscal 1996 tax operating losses. The $2,832 excess of the 1995 tax refund over Furniture Brands' payment to Converse and the $3,616 tax refund associated with the aforementioned $10,000 of 1996 tax operating losses of Converse being carried back to Furniture Brands have been recorded by Converse as other expense in Fiscal 1995 and 1996, respectively. In addition, Furniture Brands and Converse shared, on an equal basis, 1994 tax carryback benefits totaling $1,380. Furniture Brands' share of this amount, $690, was recorded by Converse as other expense for Fiscal 1995. Prior to the Distribution, Furniture Brands provided services to Converse, including legal, administration of benefit and insurance programs, income tax management and cash management and treasury services. The accompanying consolidated financial statements include a charge for Furniture Brands' administrative expenses totaling $500 for Fiscal 1994. Management believes the basis used to charge corporate administrative expenses to Converse was reasonable and representative of the amount of expenses that would have been incurred on a stand-alone basis. In connection with the Distribution, Converse and Furniture Brands entered into a Distribution and Services Agreement for Fiscal 1995 relating to the continued provision of certain of the services described above by Furniture Brands to Converse as well as additional advisory services, support and consulting as a result of Converse being a public company. In November 1995, this Agreement was amended to decrease the amount of fees payable from Converse to Furniture Brands. For the year ended December 30, 1995, Converse paid $210 to Furniture Brands for these services. As more fully described in Note 9, in November 1995, Apollo caused a standby letter of credit to be provided to the Banks to enable Converse to borrow an additional $25,000 under the A Facility above its defined borrowing base. On November 17, 1994, Converse entered into a consulting agreement with Apollo Advisors, L.P., an affiliate of Apollo, pursuant to which Apollo Advisors, L.P. will provide corporate advisory, financial and other consulting services to Converse. Fees under the agreement are payable at an annual rate of $500 plus out-of-pocket expenses for an unlimited period unless terminated by the Converse Board of Directors. F-26 CONVERSE INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) (DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) 16. APEX LITIGATION AND SUBSEQUENT EVENTS As a result of significant operational and financial difficulties discovered subsequent to the acquisition of Apex, Converse performed an investigation of potential breaches of representations and warranties by Apex and its former owners in connection with Converse's purchase of Apex. In November 1995, Converse paid into escrow, as opposed to paying the former owners directly, the first interest payment of $443 pertaining to the subordinated notes issued as part of the Apex purchase price. Converse also paid the May 1996 and November 1996 interest payments into escrow, bringing the total in escrow, including accumulated interest, at December 28, 1996 to $1,354. In January, 1996, certain former owners of Apex filed suit against Converse seeking a declaratory judgment that they were entitled to payment of this interest. In March 1996, Converse filed counter claims against these former Apex owners for breach of warranty and other claims relating to the Apex purchase (together, the "State Court Action"). In May 1996, the Company filed suit in U.S. District Court, Southern District of New York against certain former owners of Apex for violation of the federal securities laws. In a separate suit filed the same day, several former owners of Apex asserted certain securities law and other claims against Converse (together the "Federal Court Action"). In January 1997, a jury ruled unanimously in favor of Converse and against each of the four former owners of Apex who were parties to the State Court Action. In connection with the favorable jury verdict, the Company was awarded damages against these four former Apex owners. Subsequently, the Company entered into settlement agreements with three of these parties, whereby subordinated notes, common stock warrants and other contractual obligations issued to such parties by Converse in connection with the acquisition of Apex were delivered to the Company, together with a cash payment of $2,000 by one of the former owners to Converse in satisfaction of Converse's indemnification claims. Separately, the Company entered into settlement agreements with all of the remaining former owners of Apex who were not parties to the State Court Action, whereby these former owners acknowledged their obligations to Converse for indemnification claims under the Securities Purchase Agreement. As part of these settlements, the former owners delivered to Converse in full satisfaction of Converse's indemnification claims their subordinated notes, common stock warrants, and other contractual obligations issued by Converse to these parties in connection with the acquisition of Apex. In addition, the settling former owners of Apex referred to above have agreed to forego all claims against Converse related to the Federal Court Action. As a result of the above, during the first quarter of 1997, Converse will realize a pretax gain of approximately $17,800. The settlements with the former owners referred to above will result in the reduction during the first quarter of 1997 of subordinated notes, common stock warrants, and accrued liabilities for other contractual obligations of $8,870, $3,528 and $5,424 respectively, from those amounts recorded at December 28, 1996. As of March 14, 1997, only one former owner of Apex has not settled with Converse. The jury award in the State Court Action included an indemnification award against this party in the amount of $750, which was the maximum indemnification obligation of this party to Converse under the Securities Purchase Agreement. This former owner holds subordinated notes in the amount of $774. Converse continues to pursue its claims against this remaining party in the Federal Court Action and believes it will prevail based upon, among other things, the jury award in the State Court Action. As described in Note 3, on September 14, 1995, Apex filed for Chapter 11 bankruptcy protection. As a result of the Chapter 11 bankruptcy filing, various lawsuits were filed against Converse alleging that the Company was liable for the debts of Apex. Claims in connection with these lawsuits totaled approximately $6,500. Despite Converse's belief that it had valid defenses to the claims made, the Company entered into settlement discussions with the Apex estate in order to avoid defending these lawsuits and incurring the associated legal fees. In February 1997, the United States Bankruptcy Court confirmed the Apex plan of liquidation pursuant to which Converse made a $4,000 payment to the Apex estate and a $500 payment to certain F-27 CONVERSE INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) (DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) creditors of Apex during the first quarter of 1997, resulting in a pretax loss of approximately $4,500. In addition, Converse relinquished its claims against Apex. The confirmed plan also included injunction and release provisions which preclude Apex or its creditors from bringing or continuing any Apex related claims against Converse. As a result of the State Court Action, the settlement agreements with certain former owners of Apex and the Apex bankruptcy payments, Converse will record a net pretax gain of approximately $13,300 during the first quarter of 1997. 17. OTHER FINANCIAL DATA Items charged to earnings during Fiscal 1994, 1995 and 1996 include the following:
FISCAL YEAR ENDED ----------------------------------------------------- DECEMBER 31, 1994 DECEMBER 30, 1995 DECEMBER 28, 1996 ----------------- ----------------- ----------------- Advertising and promotion.............. $51,339 $49,884 $28,544 Research and development............ 7,847 8,617 6,503
18. BUSINESS SEGMENT INFORMATION Converse operates in one industry segment; designing, manufacturing and marketing of athletic and leisure footwear. Converse has a diversified customer base with one customer accounting for 12% of the Company's net sales in both Fiscal 1995 and Fiscal 1996. Converse's products are distributed in the United States and internationally.
FISCAL YEAR ENDED ----------------------------------------------------- DECEMBER 31, 1994 DECEMBER 30, 1995 DECEMBER 28, 1996 ----------------- ----------------- ----------------- Total Revenues: United States......... $328,334 $277,241 $254,255 Europe, Middle East, Africa............... 70,575 115,788 96,613 Pacific............... 32,607 49,979 43,695 Americas (excluding United States)....... 40,010 36,577 19,374 Less: Inter-Geographic Revenues............. (34,219) (72,102) (64,602) -------- -------- -------- $437,307 $407,483 $349,335 ======== ======== ======== Operating Income (Loss): United States......... $ 20,404 $(38,922) $(12,367) Europe, Middle East, Africa............... (3,694) (12,131) (11,253) Pacific............... 14,356 18,276 23,576 Americas (excluding United States)....... 5,022 3,055 208 -------- -------- -------- $ 36,088 $(29,722) $ 164 ======== ======== ======== Identifiable Assets: United States......... $127,394 $ 85,147 $ 99,724 Europe, Middle East, Africa............... 49,558 83,358 72,293 Pacific............... 24,155 33,780 35,611 Americas (excluding United States)....... 22,619 22,222 14,975 -------- -------- -------- $223,726 $224,507 $222,603 ======== ======== ========
F-28 CONVERSE INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONCLUDED) (DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
FISCAL YEAR ENDED ----------------------------------------------------- DECEMBER 31, 1994 DECEMBER 30, 1995 DECEMBER 28, 1996 ----------------- ----------------- ----------------- United States Export Sales: (included in geographic revenues above) Europe, Middle East, Africa............... $ 35,354 $15,984 $12,203 Pacific............... 32,607 31,171 23,570 Americas (excluding United States)....... 40,011 20,758 11,415 -------- ------- ------- $107,972 $67,913 $47,188 ======== ======= =======
Beginning in Fiscal 1995, the Company began converting certain international independent distributors to operating units of Converse. Accordingly, United States export sales began to decline in Fiscal 1995. Inter-Geographic sales are accounted for based on established sales prices between the related companies and pertain primarily to sales from the United States to various foreign operations. 19. QUARTERLY FINANCIAL INFORMATION (UNAUDITED) Following is a summary of unaudited quarterly information:
FIRST SECOND THIRD FOURTH QUARTER QUARTER QUARTER QUARTER -------- -------- -------- -------- Year ended December 30, 1995: Net sales......................... $131,196 $ 89,324 $110,121 $ 76,842 Gross profit...................... 45,669 29,815 29,338 8,713 Net earnings (loss)............... $ 8,509 $(32,353) $ (6,583) $(41,320) ======== ======== ======== ======== Net earnings (loss) per share..... $ 0.51 $ (1.94) $ (0.39) $ (2.48) ======== ======== ======== ======== Year ended December 28, 1996: Net sales......................... $ 86,551 $ 79,907 $113,318 $ 69,559 Gross profit...................... 21,617 22,887 29,930 11,803 Net earnings (loss)............... $ (3,260) $ (3,743) $ (3,011) $ (8,421) ======== ======== ======== ======== Net earnings (loss) per share..... $ (0.20) $ (0.22) $ (0.18) $ (0.50) ======== ======== ======== ========
F-29 CONVERSE INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEET (DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) (UNAUDITED)
MARCH 29, 1997 -------------- ASSETS Current assets: Cash and cash equivalents..................................... $ 3,913 Receivables, less allowance of $2,357 ........................ 114,419 Inventories (Note 3).......................................... 78,290 Refundable income taxes....................................... 582 Prepaid expense and other current assets...................... 13,529 -------- Total current assets........................................ 210,733 Net property, plant and equipment............................... 17,746 Other assets.................................................... 27,355 -------- $255,834 ======== LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIENCY) Current liabilities: Short-term debt............................................... $16,366 Current maturities of long-term debt (Note 4)................. 154,777 Accounts payable.............................................. 52,758 Accrued expenses.............................................. 15,319 Income taxes payable.......................................... 3,836 -------- Total current liabilities................................... 243,056 Long-term debt, less current maturities (Note 4)................ -- Current assets in excess of reorganization value................ 31,857 Deferred postretirement benefits other than pensions............ 10,207 Stockholders' equity (deficiency): Common stock, $1.00 stated value, 50,000,000 shares authorized, 17,250,056 shares issued and outstanding at March 29, 1997..................................................... 17,250 Preferred stock, no par value, 10,000,000 shares authorized, none issued and outstanding.................................. -- Additional paid-in capital.................................... 2,049 Retained earnings (deficit)................................... (47,585) Foreign currency translation adjustment....................... (1,000) -------- Total stockholders' equity (deficiency)..................... (29,286) -------- $255,834 ========
See accompanying notes to condensed consolidated financial statements. F-30 CONVERSE INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS (DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) (UNAUDITED)
THREE MONTHS ENDED ----------------------------- MARCH 30, 1996 MARCH 29, 1997 -------------- -------------- Net sales....................................... $86,551 $135,969 Cost of sales................................... 64,934 93,809 ------- -------- Gross profit.................................... 21,617 42,160 Selling, general and administrative expenses.... 26,306 36,765 Royalty income.................................. 4,928 6,377 Restructuring expense (credit)(Note 6).......... -- (564) ------- -------- Earnings from operations........................ 239 12,336 Loss (credit) on investment in unconsolidated subsidiary..................................... -- (13,051) Interest expense, net........................... 3,837 2,679 Other (income) expense, net..................... 877 2,090 ------- -------- Earnings (loss) before income tax............... (4,475) 20,618 Income tax expense (benefit).................... (1,215) 7,938 ------- -------- Net earnings (loss)............................. $(3,260) $ 12,680 ======= ======== Net earnings (loss) per share................... $ (0.20) $ 0.71 ======= ======== Weighted average number of common shares (Note 2)............................................. 16,692 17,862 ======= ========
See accompanying notes to condensed consolidated financial statements. F-31 CONVERSE INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS (DOLLARS IN THOUSANDS) (UNAUDITED)
THREE MONTHS ENDED ----------------------------- MARCH 30, 1996 MARCH 29, 1997 -------------- -------------- Cash flows from operating activities: Net earnings (loss)............................. $ (3,260) $ 12,680 Adjustments to reconcile net earnings (loss) to net cash required for operating activities: (Credit) on investment in unconsolidated sub- sidiary ($13,051) less cash payments of $7,207........................................ -- (20,258) Provision for restructuring actions............ -- (564) Depreciation of property, plant and equipment.. 818 860 Amortization of intangible assets.............. 108 118 Amortization of current assets in excess of re- organization value............................ (519) (519) Deferred tax benefit........................... (3,086) 6,948 Changes in assets and liabilities: Receivables.................................... (15,714) (52,873) Inventories.................................... 221 8,509 Refundable income taxes........................ 11,377 -- Prepaid expenses and other current assets...... 1,254 1,397 Accounts payable and accrued expenses.......... 3,337 1,100 Income taxes payable........................... 910 429 Other long-term assets and liabilities......... 191 756 -------- -------- Net cash required for operating activities... (4,363) (41,417) -------- -------- Cash flows from investing activities: Additions to property, plant and equipment..... (1,422) (757) -------- -------- Net cash used by investing activities........ (1,422) (757) -------- -------- Cash flows from financing activities: Net proceeds from exercise of stock options.... -- 222 Net proceeds from short-term debt.............. 1,051 2,945 Net proceeds from the A Facility............... 6,958 38,819 Payments on the B Facility..................... (2,686) (1,807) -------- -------- Net cash provided by financing activities.... 5,323 40,179 Net decrease in cash and cash equivalents........ (462) (1,995) Cash and cash equivalents at beginning of peri- od.............................................. 2,738 5,908 -------- -------- Cash and cash equivalents at end of period....... $ 2,276 $ 3,913 ======== ========
See accompanying notes to condensed consolidated financial statements. F-32 CONVERSE INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (DOLLARS IN THOUSANDS) (UNAUDITED) 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 December 28, 1996. The Company's consolidated results of operations for the three months ended March 29, 1997 are not necessarily indicative of the results to be expected for any other interim period or the entire fiscal year. 2. NET EARNINGS (LOSS) PER COMMON SHARE Net earnings (loss) per common share is computed based on the weighted average number of common shares and common equivalent shares, if dilutive, assumed outstanding for the applicable period. Net earnings for the first quarter of 1997 included a gain of approximately $8,000, net of income taxes, pertaining to the settlement of outstanding litigation relating to Apex One, Inc. (see Note 8). Earnings per share for the first quarter of 1997 of $0.71 includes $0.45 pertaining to these litigation settlements. 3. INVENTORIES Inventories are summarized as follows:
MARCH 29, 1997 -------------- Retail merchandise............................................ $ 6,610 Finished products............................................. 64,336 Work in process............................................... 4,070 Raw materials................................................. 3,274 ------- $78,290 =======
4. DEBT As more fully described in Note 9 to the Consolidated Financial Statements for the year ended December 28, 1996 the Company maintains a $161,490 secured credit facility (comprising an "A Facility" for $135,000 and a "B Facility" for $26,490) (the "Credit Facility") with a group of participating lenders (the "Banks"). The amount of credit available to the Company under the A Facility at any time is determined by reference to the Company's borrowing base set forth in the Credit Facility, consisting primarily of domestic accounts receivable and inventory. In addition, in conjunction with certain amendments to the Credit Facility in November 1995 and February 1996, the borrowing base was increased by an additional $25,000 under the A Facility, provided a standby letter of credit is issued for the benefit of the Banks. Apollo Investment Fund, LP ("Apollo"), which together with its affiliates, is the beneficial owner of approximately 65.1% of the Company's outstanding common stock as of March 29, 1997, caused a standby letter of credit (the "Collateral Letter of Credit") to be provided to the Banks in the amount of $25,000. This additional $25,000 of availability to the Company under the A Facility will expire on June 30, 1997. During November 1996, the Credit Facility was amended in order to provide seasonal borrowing ("Seasonal Accommodation") by Converse under the A Facility above those supported by its defined borrowing base and Collateral Letter of Credit in an amount up to $10,000. Effective March 31, 1997, the Credit Facility was amended whereby the Seasonal Accommodation was increased to $15,000, expiring October 15, 1997. In addition, the commitment of the Banks under the A Facility was increased from $135,000 to $150,000. F-33 CONVERSE INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) (DOLLARS IN THOUSANDS) (UNAUDITED) As further described herein, the Credit Facility, Collateral Letter of Credit and Seasonal Accommodation expire during 1997. Accordingly, the total indebtedness outstanding pertaining to these debt instruments of $154,777 as of March 29, 1997 has been classified as current within the accompanying consolidated balance sheet. As of March 29, 1997, approximately $135,000 was available under the A Facility borrowing base, inclusive of availability as a result of the Collateral Letter of Credit and Seasonal Accommodation, for borrowing which may be used for revolving loans, letters of credit, foreign exchange contracts and acceptances. The aggregate of letters of credit, foreign exchange contracts and acceptances may not exceed $100,000 at any time; revolving loans are limited only by the facility's maximum availability less any amount outstanding for letters of credit, foreign exchange contracts or acceptances. As of March 29, 1997, utilization under the A Facility, inclusive of the Collateral Letter of Credit and Seasonal Accommodation, consisted of revolving loans of $93,741 and bankers acceptances of $34,546. In addition, outstanding letters of credit of $3,559 as of March 29, 1997 were reserved against the maximum available borrowing base. As a result, $3,154 of the maximum available borrowing base remained unutilized as of March 29, 1997. As of March 29, 1997, the B Facility, which also expires on November 17, 1997, had loans outstanding of $26,490. The Company is not permitted further borrowings against the B Facility. Loans under the A Facility bear interest either at the Prime Lending Rate (as defined therein) plus a margin of 1.25%, or at Adjusted LIBOR (as defined therein) plus a margin of 2.5% per annum. The foregoing LIBOR margin may be reduced following Converse's achievement of improved ratios under certain financial tests specified in the Credit Facility. At March 29, 1997, revolving loans outstanding under the A Facility bore interest at 8.26%, based upon the weighted average of the Prime and Adjusted LIBOR rates, as defined. Loans under the B Facility bear interest at the Prime Lending Rate plus a margin of 4%, or at Adjusted LIBOR plus a margin of 5.5% per annum. At successive six- month terms of the loan, the rate of interest on loans outstanding under the B Facility automatically increases 0.5%. At March 29, 1997, loans outstanding under the B Facility were Adjusted LIBOR rate loans bearing interest at 11.24%. Subsidiaries of the Company maintain asset based financing arrangements in certain European countries with various lenders. In general, these financing arrangements allow the subsidiaries to borrow against varying percentages of eligible customer receivable balances based on pre-established credit lines, along with varying percentages of inventory, as defined, at varying interest rates. As of March 29, 1997, total short-term borrowings outstanding under these financing arrangements totaled $16,366. The obligations are secured by a first priority lien on the respective European assets being financed. In addition, Converse Inc. has provided guarantees of these borrowings outstanding in certain of the European countries, as defined in such agreements. In conjunction with the Company's acquisition of 100% of the outstanding common stock of Apex One, Inc. ("Apex"), Converse issued promissory notes in the face amount of $11,000, discounted at a rate of 12% to $9,644. The notes bear interest at the rate of 8% per annum for the first three years and increase to 10% and 12% in 1998 and 1999, respectively. On December 28, 1996, $9,644 of these notes were outstanding. As of March 29, 1997, substantially all of these remaining notes have been delivered to the Company by the former owners of Apex in conjunction with the lawsuit settlement agreements. See Note 8. 5. LOSS ON INVESTMENT IN UNCONSOLIDATED SUBSIDIARY As more fully described in Note 3 to the Consolidated Financial Statements for the year ended December 28, 1996, on August 11, 1995 the Company ceased funding the operations of its unconsolidated subsidiary, Apex. At December 28, 1996, an accrual of $5,424 remained, which represented the Company's estimates of its F-34 CONVERSE INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) (DOLLARS IN THOUSANDS) (UNAUDITED) liabilities relating to Apex. During the first quarter of 1997, this remaining accrual was reversed in conjunction with the Apex litigation settlements. See Note 8. 6. RESTRUCTURING As more fully described in Note 4 to the Consolidated Financial Statements for the year ended December 28, 1996, during 1995 the Company recorded restructuring charges relating primarily to initiatives aimed at reducing future operating costs. The following table presents the restructuring reserves remaining at March 29, 1997:
DECEMBER 28, CHARGES/ MARCH 29, 1996 WRITE- CHANGES IN 1997 BALANCE OFFS ESTIMATES BALANCE ------------ -------- ---------- --------- Contract termination costs......... $1,502 $ 858 -- $ 644 Employee severance and related costs............................. 2,456 646 -- 1,810 Lease termination costs............ 564 -- (564) -- ------ ------ ----- ------ $4,522 $1,504 $(564) $2,454 ====== ====== ===== ======
During the first quarter of 1997, the Company re-opened the manufacturing facility located in Mission, Texas for cutting and limited production due to an unexpected increase in demand for athleisure products. Accordingly, the remaining lease termination restructuring reserve was reversed. The remaining liabilities represent fixed amounts to be paid out over the next two years. 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 operations. 8. APEX ONE, INC. LITIGATION RESOLUTION As more fully described in Note 16 to the Consolidated Financial Statements for the year ended December 28, 1996, during the first quarter of 1997, the Company settled substantially all claims with the former owners of Apex as well as substantially all claims with former Apex creditors and the Apex bankruptcy estate. As a result of these settlements, the Company recorded a net pretax gain of approximately $13,051 during the first quarter of 1997. As of April 1997, one former owner of Apex has not settled with Converse. Subsequent to December 28, 1996, the Supreme Court of the State of New York issued a judgment in favor of Converse against this former owner. This former owner of Apex continues to hold subordinated notes issued by Converse in the amount of $774. This amount is included within accrued expenses in the accompanying March 29, 1997 consolidated balance sheet, offset by a receivable of $774. As of March 29, 1997, there are no remaining material claims against Converse relating to its 1995 acquisition of Apex. 9. RECENTLY ISSUED ACCOUNTING STANDARDS During 1997, the Financial Accounting Standards Board issued Statement No. 128, "Earnings per Share" (FAS 128). FAS 128 requires the Company to disclose a basic and diluted earnings per share calculation. Basic earnings per share excludes common stock equivalents from the EPS calculation, while diluted EPS is calculated consistent with the Company's primary earnings per share calculation. The Company will adopt the provisions of FAS 128 within the 1997 year-end consolidated financial statements. Basic and diluted earnings per share, as computed under FAS 128, would have been $0.74 and $0.71 per share, respectively, for the period ended March 29, 1997. F-35 CONVERSE INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) (DOLLARS IN THOUSANDS) (UNAUDITED) 10. SUBSEQUENT EVENT On April 30, 1997, the Company accepted a commitment letter of BT Commercial Corporation ("BTCC") to supply a new $150,000,000 revolving credit facility (the "New Credit Facility"), which will replace the Company's existing Credit Facility. The New Credit Facility will have term of five years, will provide for borrowings and other credit accommodations in a manner similar to the A Facility under the Company's existing Credit Facility and will be secured by substantially the same assets. Borrowings will initially bear interest at the rates currently provided under the A Facility but will have provisions for reduction in the event the Company achieves certain financial ratios. See Note 4. The commitment letter is conditioned upon receipt by the Company of a specified amount from the sale of equity or subordinated debt securities and other customary matters. F-36 [All American Logo] [All Original Logo] [All Authentic Logo] [All Sports Logo] [Converse All Star Logo] - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- NO DEALER, SALESPERSON, OR OTHER INDIVIDUAL HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY REPRESENTATIONS NOT CONTAINED IN THIS PROSPECTUS IN CONNECTION WITH THE OFFERING COVERED BY THIS PROSPECTUS. IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN AU- THORIZED BY THE COMPANY OR THE UNDERWRITERS. THIS PROSPECTUS DOES NOT CONSTI- TUTE AN OFFER TO SELL, OR A SOLICITATION OF AN OFFER TO BUY, ANY OF THE NOTES OFFERED HEREBY IN ANY JURISDICTION WHERE, OR TO ANY PERSON TO WHOM, IT IS UN- LAWFUL TO MAKE SUCH OFFER OR SOLICITATION. NEITHER THE DELIVERY OF THIS PRO- SPECTUS NOR ANY OFFER OR SALE MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE AN IMPLICATION THAT THERE HAS NOT BEEN ANY CHANGE IN THE FACTS SET FORTH IN THIS PROSPECTUS OR IN THE AFFAIRS OF THE COMPANY SINCE THE DATE HERE- OF. ----------- TABLE OF CONTENTS
PAGE ---- Prospectus Summary....................................................... 3 Risk Factors............................................................. 12 Use of Proceeds.......................................................... 15 Capitalization........................................................... 15 Price Range of Common Stock and Dividend Policy.......................... 16 Selected Consolidated Historical and Pro Forma Financial Information......................................... 17 Management's Discussion and Analysis of Financial Condition and Results of Operations........................................................... 19 Business................................................................. 30 Management............................................................... 41 Certain Transactions..................................................... 44 Security Ownership of Certain Beneficial Owners and Management........... 46 Description of Notes..................................................... 47 Description of Capital Stock............................................. 55 Certain United States Federal Tax Consequences........................... 57 Underwriting............................................................. 61 Legal Matters............................................................ 62 Experts.................................................................. 62 Additional Information................................................... 63 Incorporation of Certain Documents by Reference.......................... 63 Index to Consolidated Financial Statements............................... F-1
- ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- $60,000,000 CONVERSE INC. % CONVERTIBLE SUBORDINATED NOTES DUE 2004 ------- PROSPECTUS , 1997 ------- SMITH BARNEY INC. DILLON, READ & CO. INC. DONALDSON, LUFKIN & JENRETTE SECURITIES CORPORATION GOLDMAN, SACHS & CO. - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- PART II INFORMATION NOT REQUIRED IN PROSPECTUS ITEM 14. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION. The following table sets forth the estimated expenses to be incurred by Converse Inc. (the "Company") in connection with the offering of the Notes pursuant to this Registration Statement.
PAYABLE BY THE COMPANY -------------- Securities and Exchange Commission registration fee........... $ 31,364 NASD filing fee............................................... 10,850 Printing and engraving expenses............................... 350,000 Accounting fees and expenses.................................. 250,000 Legal fees and expenses....................................... 250,000 Trustee fees and expenses..................................... 6,000 Blue Sky fees and expenses.................................... 10,000 Miscellaneous................................................. 91,786 ---------- Total....................................................... $1,000,000 ==========
The Securities and Exchange Commission filing fee and National Association of Securities Dealers, Inc. filing fee are exact. All other amounts are estimates. ITEM 15. INDEMNIFICATION OF DIRECTORS AND OFFICERS. Section 145 of the Delaware General Corporation Law ("Section 145") permits indemnification of directors, officers, agents and controlling persons of a corporation under certain conditions and subject to certain limitations, the Company's By-Laws provides for the indemnification of directors, officers and other authorized representatives of the Company to the maximum extent permitted by the Delaware General Corporation Law. Section 145 empowers a corporation to indemnify any person who was or is a party or is threatened to be made a party to any threatened, pending or completed action, suit or proceedings, whether civil, criminal, administrative or investigative, by reason of the fact that he is or was a director, officer or agent of the corporation or another enterprise if serving at the request of the corporation. Depending on the character of the proceeding, a corporation may indemnify against expenses (including attorneys' fees), judgments, fines and amounts paid in settlement actually and reasonably incurred in connection with such action, suit or proceeding if the person indemnified acted in good faith and in a manner he reasonably believed to be in or not opposed to, the best interests of the corporation, and, with respect to any criminal action or proceeding, had no reasonable cause to believe his conduct was unlawful. In the case of an action by or in the right of the corporation, no indemnification may be made with respect to any claim, issue or matter as to which such person shall have been adjudged to be liable to the corporation unless and only to the extent that the Court of Chancery or the court in which such action or suit was brought shall determine that despite the adjudication of liability such person is fairly and reasonably entitled to indemnity for such expenses which the court shall deem proper. Section 145 further provides that to the extent a director or officer of a corporation has been successful in the defense of any action, suit or proceeding referred to above or in the defense of any claim, issue or matter therein, he shall be indemnified against expenses (including attorneys' fees) actually and reasonably incurred by him in connection therewith. The Company's By-Laws permit it to purchase insurance on behalf of any such person against any liability asserted against him and incurred by him in any such capacity, or arising out of his status as such, whether or not the Company would have the power to indemnify him against such liability under the foregoing provision of the By-Laws. II-1 ITEM 16. EXHIBITS See Exhibit Index. ITEM 17. UNDERTAKINGS (a) The undersigned registrant hereby undertakes that, for purposes of determining any liability under the Securities Act of 1933, each filing of the registrant's annual report pursuant to Section 13(a) or Section 15(d) of the Securities Exchange Act of 1934 (and, where applicable, each filing of an employee benefit plan, annual report pursuant to Section 15(d) of the Securities Exchange Act of 1934) that is incorporated by reference in the registration statement shall be deemed to be a new registration statement relating to the securities offered therein, and the Offerings or such securities at that time shall be deemed to be the initial bona fide offering thereof. (b) Insofar as indemnification for liabilities arising under the Securities Act of 1933 may be permitted to directors, officers and controlling persons of the registrant pursuant to the foregoing provisions, or otherwise, the undersigned registrant has been advised that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the Act and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the registrant of expenses incurred or paid by a director, officer or controlling person of the registrant in the successful defense of any action, suit or proceeding) is asserted by a director, officer or controlling person in connection with the securities being registered, the registrant will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Act and will be governed by the final adjudication of such issue. (c) The undersigned registrant hereby undertakes that: (1) For purposes of determining any liability under the Securities Act of 1933, the information omitted from the form of prospectus filed as part of this Registration Statement in reliance upon Rule 430A and contained in a form of prospectus filed by the registrant pursuant to Rule 424(b)(1) or (4) or 497(h) under the Securities Act shall be deemed to be part of this Registration Statement as of the time it was declared effective. (2) For the purpose of determining any liability under the Securities Act of 1933, each post-effective amendment that contains a form of prospectus shall be deemed to be a new Registration Statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof. II-2 SIGNATURES PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, AS AMENDED, THE REGISTRANT CERTIFIES THAT IT HAS REASONABLE GROUNDS TO BELIEVE THAT IT MEETS ALL OF THE REQUIREMENTS FOR FILING ON FORM S-3 AND HAS DULY CAUSED THIS AMENDMENT TO THE REGISTRATION STATEMENT TO BE SIGNED ON ITS BEHALF BY THE UNDERSIGNED, THEREUNTO DULY AUTHORIZED, IN NORTH READING, MASSACHUSETTS ON MAY 2, 1997. Converse Inc. /s/ Glenn N. Rupp By: _________________________________ CHAIRMAN OF THE BOARD AND CHIEF EXECUTIVE OFFICER PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, AS AMENDED, THIS AMENDMENT TO THE REGISTRATION STATEMENT HAS BEEN SIGNED BY THE FOLLOWING PERSONS IN THE CAPACITIES AND ON THE DATE INDICATED. SIGNATURE TITLE DATE /s/ Glenn N. Rupp Chairman of the - ------------------------------------- Board and Chief May 2, 1997 GLENN N. RUPP Executive Officer (Principal Executive Officer) /s/ Donald J. Camacho Senior Vice - ------------------------------------- President and Chief May 2, 1997 DONALD J. CAMACHO Financial Officer (Principal Financial and Accounting Officer) * Director May 2, 1997 - ------------------------------------- DONALD J. BARR * Director May 2, 1997 - ------------------------------------- LEON D. BLACK Director May 2, 1997 - ------------------------------------- JULIUS W. ERVING * Director May 2, 1997 - ------------------------------------- ROBERT H. FALK II-3 SIGNATURE TITLE DATE * Director May 2, 1997 - ------------------------------------- GILBERT FORD * Director May 2, 1997 - ------------------------------------- MICHAEL S. GROSS * Director May 2, 1997 - ------------------------------------- JOHN J. HANNAN * Director May 2, 1997 - ------------------------------------- JOSHUA J. HARRIS Director May 2, 1997 - ------------------------------------- JOHN H. KISSICK * Director - ------------------------------------- May 2, 1997 RICHARD B. LOYND Director May 2, 1997 - ------------------------------------- MICHAEL D. WEINER /s/ Donald J. Camacho *By _________________________________ DONALD J. CAMACHO,ATTORNEY-IN-FACT II-4 CONVERSE INC. EXHIBIT INDEX 1 Form of Underwriting Agreement. 4.1 Form of Indenture between the Registrant, as issuer, and First Union National Bank, as trustee. 4.2 Form of Note (included in Exhibit 4.1). 5 Opinion of Morgan, Lewis & Bockius LLP. 12 Statement re: Computation of Ratio of Earnings to Fixed Charges. 23.1 Consent of Price Waterhouse LLP. 23.2 Consent of KPMG Peat Marwick LLP. 23.3 Consent of Morgan, Lewis & Bockius LLP (included in Exhibit 5). 24 Power of Attorney. 25 Form T-1 Statement of Eligibility under the Trust Indenture Act of 1939 by First Union National Bank.
EX-1 2 FORM OF UNDERWRITING AGREEMENT EXHIBIT 1 $60,000,000 CONVERSE INC. ___% Convertible Subordinated Notes Due 2004 UNDERWRITING AGREEMENT ---------------------- May , 1997 SMITH BARNEY INC. DILLON, READ & CO. INC. DONALDSON, LUFKIN & JENRETTE SECURITIES CORPORATION GOLDMAN, SACHS & CO. c/o SMITH BARNEY INC. 388 Greenwich Street New York, New York 10013 Dear Sirs: Converse Inc., a Delaware corporation (the "Company"), proposes, upon the terms and conditions set forth herein, to issue and sell $60,000,000 aggregate principal amount of its ___% Convertible Subordinated Notes due 2004 (the "Firm Notes") to Smith Barney Inc., Dillon, Read & Co., Inc., Donaldson, Lufkin & Jenrette Securities Corporation and Goldman, Sachs & Co. (the "Underwriters"). The Company also proposes to issue and sell to the Underwriters, upon the terms and conditions set forth in Section 2 hereof, up to an additional $9,000,000 aggregate principal amount of its _____% Convertible Subordinated Notes due 2004 (the "Additional Notes"). The Firm Notes and the Additional Notes are hereinafter collectively referred to as the "Notes". The Notes will be issued pursuant to the provisions of an Indenture to be dated as of May ___, 1997 (the "Indenture") between the Company and First Union National Bank, as Trustee (the "Trustee"). The Company's common stock, without par value, is hereinafter referred to as the "Common Stock." The Company wishes to confirm as follows its agreement with you in connection with the several purchases of the Notes by the Underwriters. 1. Registration Statement and Prospectus. The Company has prepared ------------------------------------- and filed with the Securities and Exchange Commission (the "Commission") in accordance with provisions of the Securities Act of 1933, as amended, and the rules and regulations of the Commission thereunder (collectively, the "Act"), a registration statement on Form S-3 under the Act (the "registration statement"), including a prospectus subject to completion relating to the Notes and the shares of Common Stock issuable upon conversion of the Notes. The term "Registration Statement" as used in this Agreement means the registration statement (including all financial schedules and exhibits), as amended at the time it becomes effective, or, if the registration statement became effective prior to the execution of this Agreement, as supplemented or amended prior to the execution of this Agreement. If it is contemplated, at the time this Agreement is executed, that a post-effective amendment to the registration statement will be filed and must be declared effective before the offering of the Notes may commence, the term "Registration Statement" as used in this Agreement means the registration statement as amended by said post-effective amendment. If an abbreviated registration statement is prepared and filed with the Commission in accordance with Rule 462(b) under the Act (an "Abbreviated Registration Statement"), the term "Registration Statement" as used in this Agreement includes the Abbreviated Registration Statement. The term "Prospectus" as used in this Agreement means the prospectus in the form included in the Registration Statement, or, if the prospectus included in the Registration Statement omits information in reliance on Rule 430A under the Act and such information is included in a prospectus filed with the Commission pursuant to Rule 424(b) under the Act, the term "Prospectus" as used in this Agreement means the prospectus in the form included in the Registration Statement as supplemented by the addition of the Rule 430A information contained in the prospectus filed with the Commission pursuant to Rule 424(b). The term "Prepricing Prospectus" as used in this Agreement means the prospectus subject to completion in the form included in the registration statement at the time of the initial filing of the registration statement with the Commission, and as such prospectus shall have been amended from time to time prior to the date of the Prospectus. Any reference in this Agreement to the registration statement, the Registration Statement, any Prepricing Prospectus or the Prospectus shall be deemed to refer to and include the documents incorporated by reference therein pursuant to Item 12 of Form S-3 under the Act, as of the date of the registration statement, the Registration Statement, such Prepricing Prospectus or the Prospectus, as the case may be, and any reference to any amendment or supplement to the registration statement, the Registration Statement, any Prepricing Prospectus or the Prospectus shall be deemed to refer to and include any documents filed after such date under the Securities Exchange Act of 1934, as amended (the "Exchange Act") which, upon filing, are incorporated by reference therein, as required by paragraph (b) of Item 12 of Form S-3. As used herein, the term "Incorporated Documents" means the documents which at the time are incorporated by reference in the registration statement, the Registration Statement, any Prepricing Prospectus, the Prospectus, or any amendment or supplement thereto. 2. Agreements to Sell and Purchase. The Company hereby agrees, ------------------------------- subject to all the terms and conditions set forth herein, to issue and sell to each Underwriter and, upon the basis of the representations, warranties and agreements of the Company herein contained and subject to all the terms and conditions set forth herein, each Underwriter agrees, severally and not jointly, to purchase from the Company, at a purchase price of ___% of the principal amount -2- thereof, the principal amount of Notes set forth opposite the name of such Underwriter in Schedule I hereto (or such principal amount of Notes increased as set forth in Section 10 hereof). The Company also agrees, subject to all the terms and conditions set forth herein, to sell to the Underwriters, and, upon the basis of the representations, warranties and agreements of the Company herein contained and subject to all the terms and conditions set forth herein, the Underwriters shall have the right to purchase from the Company, pursuant to an option (the "over- allotment option") which may be exercised at any time and from time to time prior to 9:00 P.M., New York City time, on the 30th day after the date of the Prospectus (or, if such 30th day shall be a Saturday or Sunday or a holiday, on the next business day thereafter when the New York Stock Exchange is open for trading), up to $9,000,000 aggregate principal amount of Additional Notes. The purchase price of any Additional Notes which the Underwriters may elect to purchase shall be the same as the purchase price of the Firm Notes, plus accrued interest, if any, from the date of issuance of the Firm Notes to the date of delivery of and payment for the Additional Notes. Additional Notes may be purchased only for the purpose of covering over-allotments made in connection with the offering of the Firm Notes. Upon any exercise of the over-allotment option, each Underwriter, severally and not jointly, agrees to purchase from the Company the principal amount of Additional Notes which bears the same proportion to the aggregate principal amount of Additional Notes to be purchased by the Underwriters as the principal amount of Firm Notes set forth opposite the name of such Underwriter in Schedule I hereto (or such principal amount of Firm Notes increased as set forth in Section 10 hereof) bears to the aggregate principal amount of Firm Notes. 3. Terms of Public Offering. The Company has been advised by you ------------------------ that you propose to make a public offering of your respective portions of the Notes as soon after the Registration Statement and this Agreement have become effective as in your judgment is advisable and initially to offer the Notes upon the terms set forth in the Prospectus. 4. Delivery of the Notes and Payment Therefor. Delivery to you of ------------------------------------------ and payment for the Firm Notes shall be made at the office of Smith Barney Inc., 388 Greenwich Street, New York, NY 10013, at 10:00 A.M., New York City time, on __________________ ,1997 (the "Closing Date"). The place of closing for the Firm Notes and the Closing Date may be varied by agreement between you and the Company. Delivery to you of and payment for any Additional Notes to be purchased by you shall be made at the aforementioned office of Smith Barney Inc. at such time on such date (the "Option Closing Date"), which may be the same as the Closing Date but shall in no event be earlier than the Closing Date nor earlier than two nor later than ten business days after the giving of the notice hereinafter referred to, as shall be specified in a written notice from you to the Company of your determination to purchase a number, specified in such notice, of Additional Notes. The place of closing for any Additional Notes and the Option Closing Date for such Notes may be varied by agreement between you and the Company. -3- The Firm Notes and any Additional Notes which you may elect to purchase will be delivered to you for your several accounts against payment of the purchase price therefor in immediately available funds and registered in such names and in such denominations as you shall request prior to 1:00 P.M., New York City time, on the third business day preceding the Closing Date or the Option Closing Date, as the case may be. The Notes to be delivered to you shall be made available to you in New York City for inspection and packaging not later than 9:30 A.M., New York City time, on the business day next preceding the Closing Date or the Option Closing Date, as the case may be. 5. Agreements of the Company. The Company agrees with each of you as ------------------------- follows: (a) If, at the time this Agreement is executed and delivered, it is necessary for the Registration Statement or a post-effective amendment thereto or any Abbreviated Registration Statement to be declared effective before the offering of the Notes may commence, the Company will endeavor to cause the Registration Statement or such post-effective amendment to become effective as soon as possible and will advise you promptly and, if requested by you, will confirm such advice in writing, when the Registration Statement or such post- effective amendment has become effective. (b) The Company will advise you promptly and, if requested by you, will confirm such advice in writing: (i) of any request by the Commission for amendment of or a supplement to the Registration Statement, any Prepricing Prospectus or the Prospectus or for additional information; (ii) of the issuance by the Commission of any stop order suspending the effectiveness of the Registration Statement or of the suspension of qualification of the Notes for offering or sale in any jurisdiction or the initiation of any proceeding for such purpose; and (iii) within the period of time referred to in paragraph (f) below, of any change in the Company's condition (financial or other), business, prospects, properties, net worth or results of operations, or of the happening of any event, which makes any statement of a material fact made in the Registration Statement or the Prospectus (as then amended or supplemented) untrue or which requires the making of any additions to or changes in the Registration Statement or the Prospectus (as then amended or supplemented) in order to state a material fact required by the Act or the regulations thereunder to be stated therein or necessary in order to make the statements therein not misleading, or of the necessity to amend or supplement the Prospectus (as then amended or supplemented) to comply with the Act or any other law. If at any time the Commission shall issue any stop order suspending the effectiveness of the Registration Statement, the Company will make every reasonable effort to obtain the withdrawal of such order at the earliest possible time. (c) The Company will furnish to you, without charge (i) five signed copies of the registration statement as originally filed with the Commission and of each amendment thereto, including financial statements and all exhibits to the registration statement, (ii) such number of conformed copies of the registration statement as originally filed and of each amendment thereto, but without exhibits, as you may reasonably request, (iii) such number of -4- copies of the Incorporated Documents, without exhibits, as you may reasonably request, and (iv) five copies of the exhibits to the Incorporated Documents. (d) The Company will not file any amendment to the Registration Statement or make any amendment or supplement to the Prospectus or, prior to the end of the period of time referred to in the first sentence in subsection (f) below, file any document which, upon filing becomes an Incorporated Document, of which you shall not previously have been advised or to which, after you shall have received a copy of the document proposed to be filed, you shall reasonably object. (e) Prior to the execution and delivery of this Agreement, the Company has delivered to you, without charge, in such quantities as you have requested, copies of each form of the Prepricing Prospectus. The Company consents to the use, in accordance with the provisions of the Act and with the securities or Blue Sky laws of the jurisdictions in which the Notes are offered by you and by dealers, prior to the date of the Prospectus, of each Prepricing Prospectus so furnished by the Company. (f) As soon after the execution and delivery of this Agreement as possible and thereafter from time to time for such period as in the opinion of counsel for the Underwriters a Prospectus is required by the Act to be delivered in connection with sales by any Underwriter or dealer, the Company will expeditiously deliver to each Underwriter and each dealer, without charge, as many copies of the Prospectus (and of any amendment or supplement thereto) as you may reasonably request. The Company consents to the use of the Prospectus (and of any amendment or supplement thereto) in accordance with the provisions of the Act and with the securities or Blue Sky laws of the jurisdictions in which the Notes are offered by the Underwriters and by all dealers to whom Notes may be sold, both in connection with the offering and sale of the Notes and for such period of time thereafter as the Prospectus is required by the Act to be delivered in connection with sales by any Underwriter or dealer. If during such period of time any event shall occur that in the judgment of the Company or in the opinion of counsel for the Underwriters is required to be set forth in the Prospectus (as then amended or supplemented) or should be set forth therein in order to make the statements therein, in the light of the circumstances under which they were made, not misleading, or if it is necessary to supplement or amend the Prospectus (or to file under the Exchange Act any document which, upon filing, becomes an Incorporated Document) in order to comply with the Act or any other law, the Company will forthwith prepare and, subject to the provisions of paragraph (d) above, file with the Commission an appropriate supplement or amendment thereto (or to such document), and will expeditiously furnish to the Underwriters and dealers a reasonable number of copies thereof. In the event that the Company and you agree that the Prospectus should be amended or supplemented, the Company, if requested by you, will promptly issue a press release announcing or disclosing the matters to be covered by the proposed amendment or supplement. (g) The Company will cooperate with you and with your counsel in connection with the registration or qualification of the Notes for offering and sale by the Underwriters and by dealers under the securities or Blue Sky laws of such jurisdictions as you -5- may designate and will file such consents to service of process or other documents necessary or appropriate in order to effect such registration or qualification; provided that in no event shall the Company be obligated to qualify to do business in any jurisdiction where it is not now so qualified or to take any action which would subject it to service of process in suits, other than those arising out of the offering or sale of the Notes, in any jurisdiction where it is not now so subject. (h) The Company will make generally available to its security holders a consolidated earnings statement, which need not be audited, covering a twelve month period commencing after the effective date of the Registration Statement and ending not later than 15 months thereafter, as soon as practicable after the end of such period, which consolidated earnings statement shall satisfy the provisions of Section 11(a) of the Act and Rule 158 thereunder. (i) During the period of five years hereafter, the Company will furnish to you (i) as soon as available, a copy of each report of the Company mailed to stockholders or filed with the Commission, and (ii) from time to time such other information concerning the Company as you may reasonably request. (j) If this Agreement shall terminate or shall be terminated after execution pursuant to any provisions hereof (otherwise than pursuant to the second paragraph of Section 10 hereof or by notice given by you terminating this Agreement pursuant to Section 10 or Section 11 hereof) or if this Agreement shall be terminated by you because of any failure or refusal on the part of the Company to comply with the terms or fulfill any of the conditions of this Agreement, the Company agrees to reimburse you for all out-of-pocket expenses (including reasonable fees and expenses of your counsel) incurred by you in connection herewith. (k) The Company will apply the net proceeds from the sale of the Notes substantially in accordance with the description set forth in the Prospectus. (l) If Rule 430A of the Act is employed, the Company will timely file the Prospectus pursuant to Rule 424(b) under the Act and will advise you of the time and manner of such filing. (m) The Company will not sell, contract to sell or otherwise dispose of any Common Stock or any securities convertible into or exercisable or exchangeable for Common Stock, or grant any options or warrants to purchase Common Stock, for a period of 120 days after the date hereof, without the prior written consent of Smith Barney Inc., except for sales to the Underwriters pursuant to this Agreement and issuances of Common Stock upon conversion of the Notes. The foregoing sentence shall not apply to (i) the issuance of shares of Common Stock upon exercise of options outstanding under the Company's 1994 Stock Option Plan, as amended and restated (the "1994 Plan") or the Company's 1995 Non-Employee Director Stock Option Plan (the "1995 Plan") and (ii) the grant of options to purchase shares of Common Stock under the 1994 Plan or the 1995 Plan in an aggregate amount not to exceed 1,000,000 shares. -6- (n) The Company has furnished or will furnish to you "lock-up" letters, in form and substance satisfactory to you, signed by the officers, directors and stockholders listed on Schedule II hereto. (o) Except as stated in this Agreement and in the Prepricing Prospectus and Prospectus, the Company has not taken, nor will it take, directly or indirectly, any action designed to or that might reasonably be expected to cause or result in stabilization or manipulation of the price of the Common Stock to facilitate the sale or resale of the Notes. (p) The Company will use its best efforts to have the Notes and the shares of Common Stock issuable upon conversion of the Notes listed, subject to notice of issuance, on the New York Stock Exchange on or before the Closing Date. 6. Representations and Warranties of the Company. The Company --------------------------------------------- represents and warrants to each of you that: (a) Each Prepricing Prospectus included as part of the registration statement as originally filed or as part of any amendment or supplement thereto, or filed pursuant to Rule 424 under the Act, complied when so filed in all material respects with the provisions of the Act. The Commission has not issued any order preventing or suspending the use of any Prepricing Prospectus. (b) The Company and the transactions contemplated by this Agreement meet the requirements for using Form S-3 under the Act. The Registration Statement in the form in which it became or becomes effective and also in such form as it may be when any post-effective amendment thereto shall become effective and the Prospectus and any supplement or amendment thereto when filed with the Commission under Rule 424(b) under the Act, complied or will comply in all material respects with the provisions of the Act and will not at any such times contain an untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary to make the statements therein not misleading, except that this representation and warranty does not apply to (i) statements in or omissions from the Registration Statement or the Prospectus made in reliance upon and in conformity with information relating to you furnished to the Company in writing by you or on your behalf expressly for use therein, or (ii) the Trustee's Statement of Eligibility and Qualification (Form T-1) under the Trust Indenture Act of 1939, as amended (the "1939 Act"). (c) The Incorporated Documents heretofore filed, when they were filed (or, if any amendment with respect to any such document was filed, when such amendment was filed), conformed in all material respects with the requirements of the Exchange Act and the rules and regulations thereunder, any further Incorporated Documents so filed will, when they are filed, conform in all material respects with the requirements of the Exchange Act and the rules and regulations thereunder; no such document when it was filed (or, if an amendment with respect to any such document was filed, when such amendment was filed), contained an untrue statement of a material fact or omitted to state a material fact required to be stated therein or necessary in -7- order to make the statements therein not misleading; and no such further document, when it is filed, will contain an untrue statement of a material fact or will omit to state a material fact required to be stated therein or necessary in order to make the statements therein not misleading. (d) The Indenture has been duly and validly authorized and, upon its execution and delivery by the Company and assuming due execution and delivery by the Trustee, will be a valid and binding agreement of the Company, enforceable in accordance with its terms, except as enforcement thereof may be limited by bankruptcy, insolvency or other similar laws affecting creditors' rights generally, and has been (or will have been) duly qualified under the 1939 Act and conforms to the description thereof in the Registration Statement and the Prospectus. (e) The Notes have been duly authorized and, when executed by the Company and authenticated by the Trustee in accordance with the Indenture and delivered to you against payment therefor in accordance with the terms hereof, will have been validly issued and delivered, and will constitute valid and binding obligations of the Company entitled to the benefits of the Indenture and enforceable in accordance with their terms, except as enforcement thereof may be limited by bankruptcy, insolvency or other similar laws affecting the enforcement of creditors' rights generally, and the Notes will conform to the description thereof in the Registration Statement and the Prospectus. (f) All the outstanding shares of Common Stock of the Company have been duly authorized and validly issued, are fully paid and nonassessable and are free of any preemptive or similar rights; the shares of Common Stock issuable upon conversion of the Notes have been duly authorized and reserved for issuance and, when delivered upon conversion of the Notes, will have been validly issued and fully paid and will be nonassessable and free of any preemptive or similar rights; and the capital stock of the Company conforms to the description thereof in the Registration Statement and the Prospectus. (g) The Company is a corporation duly organized and validly existing in good standing under the laws of the State of Delaware with full corporate power and authority to own, lease and operate its properties and to conduct its business as described in the Registration Statement and the Prospectus, and is duly registered and qualified to conduct its business and is in good standing in each jurisdiction or place where the nature of its properties or the conduct of its business requires such registration or qualification, except where the failure so to register or qualify does not have a material adverse effect on the condition (financial or other), business, properties, net worth or results of operations of the Company and the Subsidiaries (as hereinafter defined) taken as a whole (a "Material Adverse Effect"); and the States of Massachusetts, North Carolina and Texas are the only States where the nature of the Company's properties or the conduct of its business requires such registration and qualification. (h) All the Company's subsidiaries (collectively, the "Subsidiaries") are listed in an exhibit to the Company's Annual Report on Form 10-K which is incorporated by reference into the Registration Statement. Each Subsidiary is a corporation duly organized, validly -8- existing and in good standing in the jurisdiction of its incorporation, with full corporate power and authority to own, lease and operate its properties and to conduct its business as described in the Registration Statement and the Prospectus, and is duly registered and qualified to conduct its business and is in good standing in each jurisdiction or place where the nature of its properties or the conduct of its business requires such registration or qualification, except where the failure so to register or qualify does not have a Material Adverse Effect; all the outstanding shares of capital stock of each of the Subsidiaries have been duly authorized and validly issued, are fully paid and nonassessable, and are owned by the Company directly, or indirectly through one of the other Subsidiaries (except that with respect to certain foreign Subsidiaries a nominal number of shares is owned by qualified residents of countries in which such Subsidiaries are located), free and clear of any lien, adverse claim, security interest, equity, or other encumbrance (except the pledge to secure the Company's obligations under the Credit Agreement (as defined in the Prospectus)). (i) There are no legal or governmental proceedings pending or, to the knowledge of the Company, threatened, against the Company or any of the Subsidiaries, or to which the Company or any of the Subsidiaries, or to which any of their respective properties is subject, that are required to be described in the Registration Statement or the Prospectus but are not described as required, and there are no agreements, contracts, indentures, leases or other instruments that are required to be described in the Registration Statement or the Prospectus or to be filed as an exhibit to the Registration Statement or any Incorporated Document that are not described or filed as required by the Act or the Exchange Act. (j) Neither the Company nor any of the Subsidiaries is in violation of its certificate or articles of incorporation or by-laws, or other organizational documents, or of any law, ordinance, administrative or governmental rule or regulation applicable to the Company or any of the Subsidiaries (except for violations that would not have a Material Adverse Effect) or of any decree of any court or governmental agency or body having jurisdiction over the Company or any of the Subsidiaries or in default in any material respect in the performance of any obligation, agreement or condition contained in any bond, debenture, note or any other evidence of indebtedness or in any material agreement, indenture, lease or other instrument to which the Company or any of the Subsidiaries is a party or by which any of them or any of their respective properties may be bound (except where any such default or defaults would not, individually or in the aggregate, have a Material Adverse Effect). (k) Neither the issuance and sale of the Notes, the issuance of Common Stock upon conversion of the Notes, the execution, delivery or performance of this Agreement or the Indenture by the Company nor the consummation by the Company of the transactions contemplated hereby and thereby (i) requires any consent, approval, authorization or other order of or registration or filing with, any court, regulatory body, administrative agency or other governmental body, agency or official (except such as may be required for the registration of the Notes under the Act and the Exchange act, registration under the Act of the shares of Common Stock issuable upon conversion of the Notes, qualification of the Indenture under the 1939 Act, and compliance with the securities or Blue Sky laws of various jurisdictions, all of which have -9- been or will be effected in accordance with this Agreement) or conflicts or will conflict with or constitutes or will constitute a breach of, or a default under, the certificate or articles of incorporation or bylaws, or other organizational documents, of the Company or any of the Subsidiaries or (ii) conflicts or will conflict with or constitutes or will constitute a breach of, or a default under, any agreement, indenture, lease or other instrument to which the Company or any of the Subsidiaries is a party or by which any of them or any of their respective properties may be bound, or violates or will violate any statute, law, regulation or filing (except the securities or Blue Sky laws of the various jurisdictions, as to which no representation or warranty is made) or judgment, injunction, order or decree applicable to the Company or any of the Subsidiaries or any of their respective properties, or will result in the creation or imposition of any lien, charge or encumbrance upon any property or assets of the Company or any of the Subsidiaries pursuant to the terms of any agreement or instrument to which any of them is a party or by which any of them may be bound or to which any of the property or assets of any of them is subject. (l) The accountants, Price Waterhouse LLP and KPMG Peat Marwick LLP, who have certified or shall certify the financial statements included or incorporated by reference in the Registration Statement and the Prospectus (or any amendment or supplement thereto) are independent public accountants as required by the Act. (m) The historical and pro forma financial statements, together with related schedules and notes, included or incorporated by reference in the Registration Statement and the Prospectus (and any amendment or supplement thereto), comply as to form in all material respects with the requirements of the Act. Such historical financial statements present fairly in accordance with generally accepted accounting principals the consolidated financial position, results of operations and cash flows of the Company and the Subsidiaries on the basis stated in the Registration Statement at the respective dates or for the respective periods to which they apply. Such historical statements and related schedules and notes have been prepared in accordance with generally accepted accounting principles consistently applied throughout the periods involved, except as disclosed therein. The pro forma financial statements included or incorporated by reference in the Registration Statement and the Prospectus (and any amendment or supplement thereto), have been prepared on a basis consistent with such historical financial statements, except for the pro forma adjustments specified therein, and give effect to assumptions made on a reasonable basis and present fairly in accordance with generally accepted accounting principals the historical and proposed transactions contemplated by this Agreement and the Prospectus (and any amendment or supplement thereto). The other financial and statistical information and data included or incorporated by reference in the Registration Statement and the Prospectus (and any amendment or supplement thereto) are accurately presented and prepared on a basis consistent with such financial statements and the books and records of the Company and the Subsidiaries. (n) The execution and delivery of, and the performance by the Company of its obligations under, this Agreement have been duly and validly authorized by the Company, and this Agreement has been duly executed and delivered by the Company and constitutes the valid and legally binding agreement of the Company, enforceable against the Company in accordance -10- with its terms, except as rights to indemnity and contribution hereunder may be limited by federal or state securities laws and subject to the qualification that the enforceability of the Company's obligations hereunder may be limited by bankruptcy, fraudulent conveyance, insolvency, reorganization, moratorium, and other laws relating to or affecting creditors' rights generally, and by general equitable principles. (o) Except as disclosed in the Registration Statement and the Prospectus (or any amendment or supplement thereto), subsequent to the respective dates as of which such information is given in the Registration Statement and the Prospectus (or any amendment or supplement thereto), neither the Company nor any of the Subsidiaries has incurred any liability or obligation, direct or contingent, or entered into any transaction, not in the ordinary course of business, that is material to the Company and the Subsidiaries taken as a whole, and there has not been any change in the capital stock, or material increase in the short-term debt or long-term debt, of the Company or any of the Subsidiaries, or any material adverse change, or any development involving or which may reasonably be expected to involve, a prospective material adverse change, in the condition (financial or other), business, net worth or results of operations of the Company and the Subsidiaries, taken as a whole. (p) With only such exceptions as would not have a Material Adverse Effect, each of the Company and the Subsidiaries has good and, in the case of real property, marketable title to all property (real and personal) owned by it, free and clear of all liens, claims, security interests or other encumbrances except such as are described in the Registration Statement and the Prospectus or in a document filed as an exhibit to the Registration Statement and all the property being held under lease by each of the Company and the Subsidiaries is held by it under valid, subsisting and enforceable leases. (q) The Company has not distributed and, prior to the later to occur of (i) the Closing Date and (ii) completion of the distribution of the Notes, will not distribute any offering material in connection with the offering and sale of the Notes other than the Registration Statement, the Prepricing Prospectus, the Prospectus or other materials, if any, permitted by the Act. (r) The Company and each of the Subsidiaries has such material permits, licenses, franchises and authorizations of governmental or regulatory authorities ("permits") as are necessary to own its respective properties and to conduct its business in the manner described in the Prospectus, subject to such qualifications as may be set forth in the Prospectus; the Company and each of the Subsidiaries has fulfilled and performed all its material obligations with respect to such permits and no event has occurred which allows, or after notice or lapse of time would allow, revocation or termination thereof or results in any other material impairment of the rights of the holder of any such permit, subject in each case to such qualification as may be set forth in the Prospectus; and, except as described in the Prospectus, none of such permits contains any restriction that is materially burdensome to the Company or any of the Subsidiaries. -11- (s) The Company maintains a system of internal accounting controls sufficient to provide reasonable assurances that (i) transactions are executed in accordance with management's general or specific authorization; (ii) transactions are recorded as necessary to permit preparation of financial statements in conformity with generally accepted accounting principles and to maintain accountability for assets; (iii) access to assets is permitted only in accordance with management's general or specific authorization; and (iv) the recorded accountability for assets is compared with existing assets at reasonable intervals and appropriate action is taken with respect to any differences. (t) To the Company's knowledge, neither the Company nor any of its Subsidiaries nor any employee or agent of the Company or any Subsidiary has made any payment of funds of the Company or any Subsidiary or received or retained any funds in violation of any law, rule or regulation, which payment, receipt or retention of funds is of a character required to be disclosed in the Prospectus. (u) The Company and each of the Subsidiaries have filed all material tax returns required to be filed, which returns are complete and correct in all material respects, and neither the Company nor any Subsidiary is in default in the payment of any taxes which were payable pursuant to said returns or any assessments with respect thereto. (v) Except as has been waived, no holder of any security of the Company has any right to require registration of shares of Common Stock or any other security of the Company because of the filing of the Registration Statement or consummation of the transactions contemplated by this Agreement. (w) The Company and the Subsidiaries own or possess all patents, trademarks, trademark registrations, service marks, service mark registrations, trade names, copyrights, licenses, inventions, trade secrets and rights described in the Prospectus as being owned by them or any of them or necessary for the conduct of their respective businesses, and the Company is not aware of any claim to the contrary or any challenge by any other person to the rights of the Company and the Subsidiaries with respect to the foregoing which would have a Material Adverse Effect. (x) The Company has complied with all provisions of Florida Statutes, Section 517.075, relating to issuers doing business with Cuba. (y) The Company and each of the Subsidiaries are insured by insurers of recognized financial responsibility against such losses and risks and in such amounts as are customary in the businesses in which they are engaged; all policies of insurance and fidelity or surety bonds insuring the Company or any of the Subsidiaries or their respective businesses, assets, employees, officers and directors are in full force and effect; the Company and the Subsidiaries are in compliance with the terms of such policies and instruments in all material respects; and there are no material claims by the Company or any of the Subsidiaries under any -12- such policy or instrument as to which any insurance company is denying liability or defending under a reservation of rights clause. (z) To the Company's knowledge, no labor problem exists with its employees or with employees of any Subsidiary or is imminent that could materially adversely affect the Company and the Subsidiaries, taken as a whole, and the Company is not aware of any existing or imminent labor disturbance by the employees of any of its or the Subsidiaries' principal suppliers, contractors or customers that could be expected to have a Material Adverse Effect. (aa) The Company, and the Subsidiaries are (i) in compliance with any and all applicable foreign, federal, state and local laws and regulations relating to the protection of human health and safety, the environment or hazardous or toxic substances or wastes, pollutants or contaminants ("Environmental Laws"), (ii) have received all permits, licenses or other approvals required of them under applicable Environmental Laws to conduct their respective businesses and (iii) are in compliance with all terms and conditions of any such permit, license or approval, except where such noncompliance with Environmental Laws, failure to receive required permits, licenses or other approvals or failure to comply with the terms and conditions of such permits, licenses or approvals would not, singly or in the aggregate, have a Material Adverse Effect. Neither the Company nor any of the Subsidiaries have been named as a "potentially responsible party" under the Comprehensive Environmental Response Compensation and Liability Act of 1980, as amended ("CERCLA"). (bb) In the ordinary course of its business, the Company conducts a periodic review of the effect of Environmental Laws on its and its Subsidiaries business, operations and properties, in the course of which it identifies and evaluates associated costs and liabilities (including, without limitation, any capital or operating expenditures required for clean-up, closure of properties or compliance with Environmental Laws, or any permit, license or approval, any related constraints on operating activities and any potential liabilities to third parties). On the basis of such review, the Company has reasonably concluded that such associated costs and liabilities would not have a Material Adverse Effect. (cc) Converse Europe, Inc. and Converse Japan, Inc. (the "Material Subsidiaries") are the only significant subsidiaries of the Company, as such term is defined in Rule 1-02 of Regulation S-X. 7. Indemnification and Contribution. (a) The Company agrees to -------------------------------- indemnify and hold harmless each of the Underwriters and each person, if any, who controls any Underwriter within the meaning of Section 15 of the Act or Section 20 of the Exchange Act from and against any and all losses, claims, damages, liabilities and expenses (including reasonable costs of investigation) arising out of or based upon any untrue statement or alleged untrue statement of a material fact contained in any Prepricing Prospectus or in the Registration Statement or the Prospectus or in any amendment or supplement thereto, or arising out of or based upon any omission or alleged omission to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading, except insofar as such losses, -13- claims, damages, liabilities or expenses arise out of or are based upon any untrue statement or omission or alleged untrue statement or omission which has been made therein or omitted therefrom in reliance upon and in conformity with the information relating to such Underwriter furnished in writing to the Company by or on behalf of any Underwriter expressly for use in connection therewith; provided, however, that the indemnification contained in this paragraph (a) with respect to any Prepricing Prospectus shall not inure to the benefit of any Underwriter (or to the benefit of any person controlling such Underwriter) on account of any such loss, claim, damage, liability or expense arising from the sale of the Notes by such Underwriter to any person if a copy of the Prospectus shall not have been delivered or sent to such person within the time required by the Act and the regulations thereunder, and the untrue statement or alleged untrue statement or omission or alleged omission of a material fact contained in such Prepricing Prospectus was corrected in the Prospectus, provided that the Company has delivered the Prospectus to the Underwriters in requisite quantity on a timely basis to permit such delivery or sending. The foregoing indemnity agreement shall be in addition to any liability which the Company may otherwise have. (b) If any action, suit or proceeding shall be brought against any Underwriter or any person controlling any Underwriter in respect of which indemnity may be sought against the Company, such Underwriter or such controlling person shall promptly notify the Company in writing and the Company shall assume the defense thereof, including the employment of counsel and payment of all fees and expenses. Such Underwriter or any such controlling person shall have the right to employ separate counsel in any such action, suit or proceeding and to participate in the defense thereof, but the fees and expenses of such counsel shall be at the expense of such Underwriter or such controlling person unless (i) the Company has agreed in writing to pay such fees and expenses, (ii) the Company has failed to assume the defense and employ counsel, or (iii) the named parties to any such action, suit or proceeding (including any impleaded parties) include both such Underwriter or such controlling person and the Company and such Underwriter or such controlling person shall have been advised by its counsel in writing, with a copy furnished to the Company, that representation of such indemnified party and the Company by the same counsel would be inappropriate under applicable standards of professional conduct (whether or not such representation by the same counsel has been proposed) due to actual or potential differing interests between them (in which case the Company shall not have the right to assume the defense of such action, suit or proceeding on behalf of such Underwriter or such controlling person). It is understood, however, that the Company shall, in connection with any one such action, suit or proceeding or separate but substantially similar or related actions, suits or proceedings in the same jurisdiction arising out of the same general allegations or circumstances, be liable for the reasonable fees and expenses of only one separate firm of attorneys (in addition to any local counsel) at any time for all such Underwriters and controlling persons not having actual or potential differing interests with you or among themselves, which firm shall be designated in writing by Smith Barney Inc., and that all such fees and expenses shall be reimbursed as they are incurred. The Company shall not be liable for any settlement of any such action, suit or proceeding effected without its written consent, but if settled with such written consent, or if there be a final judgment for the plaintiff in any such action, suit or proceeding, the Company agrees to indemnify and hold harmless any Underwriter, to the extent provided in the -14- preceding paragraph, and any such controlling person from and against any loss, claim, damage, liability or expense by reason of such settlement or judgment. (c) Each Underwriter agrees, severally and not jointly, to indemnify and hold harmless the Company, its directors, its officers who sign the Registration Statement, and any person who controls the Company within the meaning of Section 15 of the Act or Section 20 of the Exchange Act, to the same extent as the foregoing indemnity from the Company to each Underwriter, but only with respect to information relating to such Underwriter furnished in writing by or on behalf of such Underwriter expressly for use in the Registration Statement, the Prospectus or any Prepricing Prospectus, or any amendment or supplement thereto. If any action, suit or proceeding shall be brought against the Company, any of its directors, any such officer, or any such controlling person based on the Registration Statement, the Prospectus or any Prepricing Prospectus, or any amendment or supplement thereto, and in respect of which indemnity may be sought against any Underwriter pursuant to this paragraph (c), such Underwriter shall have the rights and duties given to the Company by paragraph (b) above (except that if the Company shall have assumed the defense thereof such Underwriter shall not be required to do so, but may employ separate counsel therein and participate in the defense thereof, but the fees and expenses of such counsel shall be at such Underwriter's expense), and the Company, its directors, any such officer, and any such controlling person shall have the rights and duties given to the Underwriters by paragraph (b) above. The foregoing indemnity agreement shall be in addition to any liability which the Underwriters may otherwise have. (d) If the indemnification provided for in this Section 7 is unavailable to an indemnified party under paragraphs (a) or (c) hereof in respect of any losses, claims, damages, liabilities or expenses referred to therein, then an indemnifying party, in lieu of indemnifying such indemnified party, shall contribute to the amount paid or payable by such indemnified party as a result of such losses, claims, damages, liabilities or expenses (i) in such proportion as is appropriate to reflect the relative benefits received by the Company on the one hand and the Underwriters on the other hand from the offering of the Notes, or (ii) if the allocation provided by clause (i) above is not permitted by applicable law, in such proportion as is appropriate to reflect not only the relative benefits referred to in clause (i) above but also the relative fault of the Company on the one hand and the Underwriters on the other in connection with the statements or omissions that resulted in such losses, claims, damages, liabilities or expenses, as well as any other relevant equitable considerations. The relative benefits received by the Company on the one hand and the Underwriters on the other shall be deemed to be in the same proportion as the total net proceeds from the offering (before deducting expenses) received by the Company bear to the total underwriting discounts and commissions received by the Underwriters, in each case as set forth in the table on the cover page of the Prospectus; provided, that in the event the Underwriters shall have purchased any Additional Notes hereunder, any determination of the relative benefits received by the Company or the Underwriters from the offering of the Notes shall include the net proceeds (before deducting expenses) received by the Company and the underwriting discounts and commissions received by the Underwriters, from the sale of such Additional Notes, in each case computed on the basis of the respective amounts set forth in the notes to the table on the cover page of the Prospectus. The relative fault of the Company on the -15- one hand and the Underwriters on the other hand shall be determined by reference to, among other things, whether the untrue or alleged untrue statement of a material fact or the omission or alleged omission to state a material fact relates to information supplied by the Company on the one hand or by the Underwriters on the other hand and the parties' relative intent, knowledge, access to information and opportunity to correct or prevent such statement or omission. (e) The Company and the Underwriters agree that it would not be just and equitable if contribution pursuant to this Section 7 were determined by a pro rata allocation (even if the Underwriters were treated as one entity for such purpose) or by any other method of allocation that does not take account of the equitable considerations referred to in paragraph (d) above. The amount paid or payable by an indemnified party as a result of the losses, claims, damages, liabilities and expenses referred to in paragraph (d) above shall be deemed to include, subject to the limitations set forth above, any legal or other expenses reasonably incurred by such indemnified party in connection with investigating any claim or defending any such action, suit or proceeding. Notwithstanding the provisions of this Section 7, no Underwriter shall be required to contribute any amount in excess of the amount by which the total price of the Notes underwritten by it and distributed to the public exceeds the amount of any damages which such Underwriter has otherwise been required to pay by reason of such untrue or alleged untrue statement or omission or alleged omission. No person guilty of fraudulent misrepresentation (within the meaning of Section 11(f) of the Act) shall be entitled to contribution from any person who was not guilty of such fraudulent misrepresentation. The Underwriters' obligations to contribute pursuant to this Section 7 are several in proportion to the respective principal amounts of Firm Notes set forth opposite their names in Schedule I hereto (or such principal amounts of Firm Notes increased as set forth in Section 10 hereof) and not joint. (f) No indemnifying party shall, without the prior written consent of the indemnified party, effect any settlement of any pending or threatened action, suit or proceeding in respect of which any indemnified party is or could have been a party and indemnity could have been sought hereunder by such indemnified party, unless such settlement includes an unconditional release of such indemnified party from all liability on claims that are the subject matter of such action, suit or proceeding. (g) Any losses, claims, damages, liabilities or expenses for which an indemnified party is entitled to indemnification or contribution under this Section 7 shall be paid by the indemnifying party to the indemnified party as such losses, claims, damages, liabilities or expenses are incurred. The indemnity and contribution agreements contained in this Section 7 and the representations and warranties of the Company set forth in this Agreement shall remain operative and in full force and effect, regardless of (i) any investigation made by or on behalf of any Underwriter or any person controlling any Underwriter, the Company, its directors or officers, or any person controlling the Company, (ii) acceptance of any Notes and payment therefor hereunder, and (iii) any termination of this Agreement. A successor to any Underwriter or any person controlling any Underwriter, or to the Company, its directors or officers, or any -16- person controlling the Company, shall be entitled to the benefits of the indemnity, contribution and reimbursement agreements contained in this Section 7. 8. Conditions of Underwriters' Obligations. The several obligations --------------------------------------- of the Underwriters to purchase the Firm Notes hereunder are subject to the following conditions: (a) If, at the time this Agreement is executed and delivered, it is necessary for the Registration Statement or a post-effective amendment thereto (or an Abbreviated Registration Statement) to be declared effective before the offering of the Notes may commence, the Registration Statement or such post- effective amendment or Abbreviated Registration Statement shall have become effective not later than 5:30 P.M., New York City time, on the date hereof, or at such later date and time as shall be consented to in writing by you, and all filings, if any, required by Rules 424 and 430A under the Act shall have been timely made; no stop order suspending the effectiveness of the registration statement shall have been issued and no proceeding for that purpose shall have been instituted or, to the knowledge of the Company or any Underwriter, threatened by the Commission, and any request of the Commission for additional information (to be included in the Registration Statement or the Prospectus or otherwise) shall have been complied with to your reasonable satisfaction. (b) Subsequent to the effective date of this Agreement, there shall not have occurred (i) any change, or any development involving a prospective change, in or affecting the condition (financial or other), business, properties, net worth, or results of operations of the Company or the Subsidiaries not contemplated by the Prospectus, which in your opinion, would materially adversely affect the market for the Notes, or (ii) any event or development relating to or involving the Company or any officer or director of the Company which makes any statement made in the Prospectus untrue or which, in the opinion of the Company and its counsel or the Underwriters and their counsel, requires the making of any addition to or change in the Prospectus in order to state a material fact required by the Act or any other law to be stated therein or necessary in order to make the statements therein not misleading, if amending or supplementing the Prospectus to reflect such event or development would, in your reasonable opinion, materially adversely affect the market for the Notes. (c) You shall have received on the Closing Date, an opinion of Morgan, Lewis & Bockius LLP, counsel for the Company, dated the Closing Date and addressed to you, to the effect that: (i) The Company is a corporation duly incorporated and validly existing in good standing under the laws of the State of Delaware with all necessary corporate power and authority to own, lease and operate its properties and to conduct its business as described in the Registration Statement and the Prospectus (and any amendment or supplement thereto), and is duly registered and qualified to conduct its business and is in good standing in the States of Massachusetts, North Carolina and Texas; -17- (ii) Each of the Material Subsidiaries is a corporation duly incorporated and validly existing in good standing under the laws of the jurisdiction of its incorporation, with all necessary corporate power and authority to own, lease, and operate its properties and to conduct its business as described in the Registration Statement and the Prospectus (and any amendment or supplement thereto); and all the outstanding shares of capital stock of each of the Material Subsidiaries have been duly authorized and validly issued, are fully paid and nonassessable, and are owned by the Company directly, or indirectly through one of the other Material Subsidiaries, free and clear of any perfected security interest (except the pledge to secure obligations of the Company under the Credit Agreement (as defined in the Prospectus), or, to the knowledge of such counsel, any other security interest, lien, adverse claim, equity or other encumbrance; (iii) The authorized and outstanding capital stock of the Company is as set forth under the caption "Capitalization" in the Prospectus; and the authorized capital stock of the Company conforms in all material respects as to legal matters to the description thereof contained in the Prospectus under the caption "Description of Capital Stock"; (iv) The Indenture has been duly and validly authorized, executed and delivered by the Company and, assuming due execution and delivery by the Trustee, is a valid and binding agreement of the Company, enforceable in accordance with its terms except as enforcement thereof may be limited by bankruptcy, insolvency or other similar laws affecting creditors' rights generally, and has been duly qualified under the 1939 Act; (v) The Notes have been duly and validly authorized and executed by the Company and, assuming due authentication of the Notes by the Trustee, upon delivery to the Underwriters against payment therefor in accordance with the terms hereof, will have been validly issued and delivered, and will constitute valid and binding obligations of the Company entitled to the benefits of the Indenture; (vi) The Notes and the Indenture conform in all material respects to the descriptions thereof contained in the Prospectus; (vii) The shares of Common Stock issuable upon conversion of the Notes have been validly authorized and reserved for issuance and, when delivered upon conversion of the Notes, will have been validly issued and fully paid and will be nonassessable and free of preemptive or similar rights; (viii) The Registration Statement and all post-effective amendments, if any, have become effective under the Act and, to the knowledge of such counsel, no stop order suspending the effectiveness of the Registration Statement has been issued and no proceedings for that purpose are pending before or contemplated by the Commission; and any required filing of the Prospectus pursuant to Rule 424(b) has been made in accordance with Rule 424(b); (ix) The Company has corporate power and authority to enter into the Underwriting Agreement and to issue, sell and deliver the Notes to the Underwriters as provided therein, and the Underwriting Agreement has been duly authorized, executed and delivered by -18- the Company and is a valid, legal and binding agreement of the Company, enforceable against the Company in accordance with its terms, except as enforcement of rights to indemnity and contribution thereunder may be limited by Federal or state securities laws or principles of public policy and subject to the qualification that the enforceability of the Company's obligations thereunder may be limited by bankruptcy, fraudulent conveyance, insolvency, reorganization, moratorium, and other laws relating to or affecting creditors' rights generally, and by general equitable principles; (x) Neither the offer, sale or delivery of the Notes, the issuance of Common Stock upon conversion of the Notes, the execution, delivery or performance of the Underwriting Agreement or the Indenture, compliance by the Company with the provisions of the Underwriting Agreement or the Indenture nor consummation by the Company of the transactions contemplated by the Underwriting Agreement or by the Indenture conflicts or will conflict with or constitutes or will constitute a breach of, or a default under, the certificate or articles of incorporation or bylaws, or other organizational documents, of the Company or any of the Material Subsidiaries or any agreement, indenture, lease or other instrument to which the Company or any of the Material Subsidiaries is a party or by which any of them or any of their respective properties is bound that is an exhibit to the Registration Statement or to any Incorporated Document, or is known to such counsel or will result in the creation or imposition of any lien, charge or encumbrance upon any property or assets of the Company or any of the Material Subsidiaries, nor will any such action result in any violation of any existing law, regulation, ruling (assuming compliance with all applicable state securities and Blue Sky laws), judgment, injunction, order or decree known to such counsel, applicable to the Company, the Material Subsidiaries or any of their respective properties; (xi) No consent, approval, authorization or other order of, or registration or filing with, any court, regulatory body, administrative agency or other governmental body, agency, or official is required on the part of the Company (except as have been obtained under the Act or the 1939 Act or such as may be required under state securities or Blue Sky laws governing the purchase and distribution of the Notes and the shares of Common Stock issuable upon conversion of the Notes) for the valid issuance and sale of the Notes to the Underwriters as contemplated by the Underwriting Agreement; (xii) The Registration Statement and the Prospectus and any supplements or amendments thereto (except for the financial statements and the notes thereto and the schedules and other financial and statistical data included therein, as to which such counsel need not express any opinion) comply as to form in all material respects with the requirements of the Act; and each of the Incorporated Documents (except for the financial statements and the notes thereto and the schedules and other financial and statistical data included therein, as to which counsel need not express any opinion) complies as to form in all material respects with the Exchange Act and the rules and regulations of the Commission thereunder; (xiii) To the knowledge of such counsel, (A) other than as described or contemplated in the Prospectus (or any supplement thereto), there are no legal or governmental -19- proceedings pending or threatened against the Company or any of the Material Subsidiaries, or to which the Company or any of the Material Subsidiaries, or any of their property, is subject, which are required to be described in the Registration Statement or Prospectus (or any amendment or supplement thereto) and (B) there are no agreements, contracts, indentures, leases or other instruments, that are required to be described in the Registration Statement or the Prospectus (or any amendment or supplement thereto) or to be filed as an exhibit to the Registration Statement or any Incorporated Document that are not described or filed as required, as the case may be; (xiv) The statements in (a) the Prospectus under the captions "Prospectus Summary-Recent Developments-Favorable Resolution of Outstanding Litigation", "Risk Factors-Anti-Takeover Provisions", "Management's Discussion and Analysis of Financial Condition and Results of Operations-Financing Arrangements", "Business-Legal Proceedings", "Certain Transactions", "Description of Capital Stock" and "Certain United States Tax Consequences", (b) the Company's Annual Report on Form 10-K for the year ended December 28, 1996 under the captions "Risk Factors-Anti-Takeover Provisions", "Legal Proceedings- A. Apex-related Litigation" and "Management's Discussion and Analysis of Financial Condition and Results of Operations-Financing Arrangements", and (c) the Company's Form 10/A, Amendment No. 2 filed with the Commission on November 23, 1994 under the caption "Description of Capital Stock-Converse Common Stock", insofar as they are descriptions of contracts, agreements or other legal documents, or refer to statements of law or legal conclusions, are accurate and present fairly the information required to be shown; and (xv) Although counsel has not undertaken, except as otherwise indicated in their opinion, to determine independently, and does not assume any responsibility for, the accuracy or completeness of the statements in the Registration Statement, such counsel has participated in the preparation of the Registration Statement and the Prospectus, including review and discussion of the contents thereof (including review and discussion of the contents of all Incorporated Documents), and nothing has come to the attention of such counsel that has caused them to believe that the Registration Statement (including the Incorporated Documents) at the time the Registration Statement became effective, or the Prospectus, as of its dates and as of the Closing Date or the Option Closing Date, as the case may be, contained an untrue statement of a material fact or omitted to state a material fact required to be stated therein or necessary to make the statements therein not misleading or that any amendment or supplement to the Prospectus, as of its respective date, and as of the Closing Date or the Option Closing Date, as the case may be, contained any untrue statement of a material fact or omitted to state a material fact necessary in order to make the statements therein, in the light of the circumstances under which they were made, not misleading (it being understood that such counsel need express no belief with respect to the financial statements and the notes thereto and the schedules and other financial and statistical data included in the Registration Statement or the Prospectus or any Incorporated Document). -20- In rendering such opinion as aforesaid, counsel may limit their opinion to the federal laws of the United States, the General Corporation Law of the State of Delaware and the laws of the State of New York. (d) You shall have received on the Closing Date, an opinion of Jack A. Green, Esq., General Counsel of the Company, dated the Closing Date and addressed to you, to the effect that: (i) The Company and each of the Subsidiaries has all necessary corporate power and authority, and, to such counsel's knowledge, all necessary governmental authorizations, approvals, orders, licenses, certificates, franchises and permits of and from all governmental regulatory officials and bodies (except where the failure so to have any such authorizations, approvals, orders, licenses, certificates, franchises or permits would not have a Material Adverse Effect), to own their respective properties and to conduct their respective businesses as now being conducted, as described in the Prospectus; (ii) Except as disclosed in the Prospectus, the Company owns of record, directly or indirectly, all the outstanding shares of capital stock of each of the Subsidiaries (except that with respect to certain foreign Subsidiaries a nominal number of shares is owned by qualified residents of the countries in which such Subsidiaries are located) free and clear of any lien, adverse claim, security interest, equity, or other encumbrance (except the pledge to secure the Company's obligations under the Credit Agreement (as defined in the Prospectus)); (iii) Other than as described or contemplated in the Prospectus (or any supplement thereto), there are no legal or governmental proceedings pending or, to such counsel's knowledge, threatened against the Company or any of the Subsidiaries, or to which the Company or any of the Subsidiaries, or any of their property, is subject, which are required to be described in the Registration Statement or Prospectus (or any amendment or supplement thereto); (iv) To such counsel's knowledge, there are no agreements, contracts, indentures, leases or other instruments, that are required to be described in the Registration Statement or the Prospectus (or any amendment or supplement thereto) or to be filed as an exhibit to the Registration Statement or any Incorporated Document that are not described or filed as required, as the case may be; (v) The Company and the Subsidiaries own all patents, trademarks, trademark registrations, and other intellectual property described in the Prospectus as being owned by them or any of them or necessary for the conduct of their respective businesses, and such counsel is not aware of any claim to the contrary or any challenge by any other person to the rights of the Company and the Subsidiaries with respect to the foregoing that would have a Material Adverse Effect; (vi) To such counsel's knowledge, neither the Company nor any of the Subsidiaries is in violation of any law, ordinance, administrative or governmental rule or regulation applicable to the Company or any of the Subsidiaries or of any decree of any court or -21- governmental agency or body having jurisdiction over the Company or any of the Subsidiaries except for any such violations that would not have a Material Adverse Effect; (vii) Except as described in the Prospectus, to such counsel's knowledge there are no outstanding options, warrants or other rights calling for the issuance of, and such counsel does not know of any commitment, plan or arrangement to issue, any shares of capital stock of the Company or any security convertible into or exchangeable or exercisable for capital stock of the Company; (viii) Except as described in the Prospectus, to the knowledge of such counsel, there is no holder of any security of the Company or any other person who has the right, contractual or otherwise, to cause the Company to sell or otherwise issue to them, or to permit them to underwrite the sale of, the Notes or the right to have any Common Stock or other securities of the Company included in the Registration Statement or the right, as a result of the filing of the Registration Statement, to require registration under the Act of any shares of Common Stock or other securities of the Company. (ix) Neither the Company nor any of the Material Subsidiaries is in violation of its respective certificate or articles of incorporation or bylaws, or other organizational documents, or to the knowledge of such counsel, is in default in the performance of any material obligation, agreement or condition contained in any bond, debenture, note or other evidence of indebtedness, except as may be disclosed in the Prospectus; and (x) All the shares of capital stock of the Company outstanding prior to the issuance of the Notes have been duly authorized and validly issued, and are fully paid and nonassessable. (e) You shall have received on the Closing Date an opinion of Latham & Watkins, counsel for the Underwriters, dated the Closing Date and addressed to you, with respect to the matters referred to in clauses (iv) through (ix), (xii) and (xv) of the foregoing paragraph (c) and such other related matters as you may reasonably request. (f) You shall have received letters addressed to you, and dated the date hereof and the Closing Date from Price Waterhouse LLP and KPMG Peat Marwick LLP, independent certified public accountants, substantially in the forms heretofore approved by you. (g) (i) No stop order suspending the effectiveness of the Registration Statement shall have been issued and no proceedings for that purpose shall have been taken or, to the knowledge of the Company, shall be contemplated by the Commission at or prior to the Closing Date; (ii) there shall not have been any change in the capital stock of the Company nor any material increase in the short-term or long-term debt of the Company (other than in the ordinary course of business) from that set forth or contemplated in the Registration Statement or the Prospectus (or any amendment or supplement thereto); (iii) there shall not have been, since the respective dates as of which information is given in the Registration Statement and the Prospectus (or any amendment or supplement thereto), except as may otherwise be stated in the -22- Registration Statement and Prospectus (or any amendment or supplement thereto), any material adverse change in the condition (financial or other), business, prospects, properties, net worth or results of operations of the Company and the Subsidiaries taken as a whole; (iv) the Company and the Subsidiaries shall not have any liabilities or obligations, direct or contingent (whether or not in the ordinary course of business), that are material to the Company and the Subsidiaries, taken as a whole, other than those reflected in the Registration Statement or the Prospectus (or any amendment or supplement thereto); and (v) all the representations and warranties of the Company contained in this Agreement shall be true and correct on and as of the date hereof and on and as of the Closing Date as if made on and as of the Closing Date, and you shall have received a certificate, dated the Closing Date and signed by the chief executive officer and the chief financial officer of the Company (or such other officers as are acceptable to you), to the effect set forth in this Section 8(g) and in Section 8(h) hereof. (h) The Company shall not have failed at or prior to the Closing Date to have performed or complied with any of its agreements herein contained and required to be performed or complied with by it hereunder at or prior to the Closing Date. (i) Prior to the Closing Date the Notes and the shares of Common Stock issuable upon conversion of the Notes shall have been listed, subject to notice of issuance, on the New York Stock Exchange. (j) The Company shall have furnished or caused to be furnished to you such further certificates and documents as you shall have reasonably requested. All such opinions, certificates, letters and other documents will be in compliance with the provisions hereof only if they are reasonably satisfactory in form and substance to you and your counsel. Any certificate or document signed by any officer of the Company and delivered to you, or to counsel for the Underwriters, shall be deemed a representation and warranty by the Company to each Underwriter as to the statements made therein. The several obligations of the Underwriters to purchase Additional Notes hereunder are subject to the satisfaction on and as of any Option Closing Date of the conditions set forth in this Section 8, except that, if any Option Closing Date is other than the Closing Date, the certificates, opinions and letters referred to in paragraphs (c) through (g) shall be dated the Option Closing Date in question and the opinions called for by paragraphs (c), (d) and (e) shall be revised to reflect the sale of Additional Notes. 9. Expenses. The Company agrees to pay the following costs and -------- expenses and all other costs and expenses incident to the performance by it of its obligations hereunder: (i) the preparation, printing or reproduction, and filing with the Commission of the registration statement (including financial statements and exhibits thereto), each Prepricing Prospectus, the Prospectus, each amendment or supplement to any of them, this Agreement, the Indenture and the Statement of Eligibility and Qualification of the Trustee; (ii) the printing (or reproduction) and delivery (including postage, air freight charges and charges for counting and packaging) of such copies of the registration statement, each Prepricing Prospectus, the Prospectus, the Incorporated Documents, and all amendments or supplements to any of them, as may be reasonably requested for use in connection with the offering and sale of the Notes; (iii) the preparation, printing, authentication, issuance and delivery of the Notes, including any stamp taxes in connection with the original issuance and sale of the Notes; (iv) the printing (or reproduction) -23- and delivery of this Agreement, the preliminary and supplemental Blue Sky Memoranda and all other agreements or documents printed (or reproduced) and delivered in connection with the offering of the Notes; (v) the registration of the Notes under the Exchange Act and the listing of the Notes and the shares of Common Stock issusable upon conversion of the Notes on the New York Stock Exchange; (vi) the registration or qualification of the Notes and the shares of Common Stock issuable upon conversion of the Notes for offer and sale under the securities or Blue Sky laws of the several states as provided in Section 5(g) hereof (including the reasonable fees, expenses and disbursements of counsel for the Underwriters relating to the preparation, printing or reproduction, and delivery of the preliminary and supplemental Blue Sky Memoranda and such registration and qualification); (vii) the filing fees in connection with any filings required to be made with the National Association of Securities Dealers, Inc.; (viii) the fees and expenses of the Trustee; (ix) the fees and expenses associated with obtaining ratings for the Notes from nationally recognized statistical rating organizations; (x) the transportation and other expenses incurred by or on behalf of Company representatives in connection with presentations to prospective purchasers of the Notes; and (xi) the fees and expenses of the Company's accountants and the fees and expenses of counsel (including local and special counsel) for the Company. 10. Effective Date of Agreement. This Agreement shall become --------------------------- effective: (i) upon the execution and delivery hereof by the parties hereto; or (ii) if, at the time this Agreement is executed and delivered, it is necessary for the registration statement or a post-effective amendment thereto to be declared effective before the offering of the Notes may commence, when notification of the effectiveness of the registration statement or such post- effective amendment has been released by the Commission. Until such time as this Agreement shall have become effective, it may be terminated by the Company, by notifying you, or by you, by notifying the Company. If any one or more of the Underwriters shall fail or refuse to purchase Firm Notes which it or they are obligated to purchase hereunder on the Closing Date, and the aggregate principal amount of Firm Notes which such defaulting Underwriter or Underwriters are obligated but fail or refuse to purchase is not more than one-tenth of the aggregate principal amount of Firm Notes, each non-defaulting Underwriter shall be obligated, severally, in the proportion which the principal amount of Firm Notes set forth opposite its name in Schedule I hereto bears to the aggregate principal amount of Firm Notes set forth opposite the names of all non-defaulting Underwriters or in such other proportion as you may specify in accordance with Section 20 of the Master Agreement Among Underwriters of Smith Barney Inc., to purchase the Firm Notes which such defaulting Underwriter or Underwriters are obligated, but fail or refuse, to purchase. If any one or more of the Underwriters shall fail or refuse to purchase Firm Notes -24- which it or they are obligated to purchase on the Closing Date and the aggregate principal amount of Firm Notes with respect to which such default occurs is more than one-tenth of the aggregate principal amount of Firm Notes and arrangements satisfactory to you and the Company for the purchase of such Firm Notes by one or more non-defaulting Underwriters or other party or parties approved by you and the Company are not made within 36 hours after such default, this Agreement will terminate without liability on the part of any non-defaulting Underwriter or the Company. In any such case which does not result in termination of this Agreement, either you or the Company shall have the right to postpone the Closing Date, but in no event for longer than seven days, in order that the required changes, if any, in the Registration Statement and the Prospectus or any other documents or arrangements may be effected. Any action taken under this paragraph shall not relieve any defaulting Underwriter from liability in respect of any such default of any such Underwriter under this Agreement. The term " Underwriter" as used in this Agreement includes, for all purposes of this Agreement, any party not listed in Schedule I hereto who, with your approval and the approval of the Company, purchases Notes which a defaulting Underwriter is obligated, but fails or refuses, to purchase. Any notice under this Section 10 may be given by telegram, telecopy or telephone but shall be subsequently confirmed by letter. 11. Termination of Agreement. This Agreement shall be subject to ------------------------ termination in your absolute discretion, without liability on the part of any Underwriter to the Company by notice to the Company, if prior to the Closing Date or any Option Closing Date (if different from the Closing Date and then only as to the Additional Notes), as the case may be, (i) trading in securities generally on the New York Stock Exchange, the American Stock Exchange or the Nasdaq National Market shall have been suspended or materially limited, (ii) a general moratorium on commercial banking activities in New York shall have been declared by either federal or state authorities, or (iii) there shall have occurred any outbreak or escalation of hostilities or other international or domestic calamity, crisis or change in political, financial or economic conditions, the effect of which on the financial markets of the United States is such as to make it, in your judgment, impracticable or inadvisable to commence or continue the offering of the Notes on the terms set forth on the cover page of the Prospectus or to enforce contracts for the resale of the Notes by the Underwriters. Notice of such termination may be given to the Company by telegram, telecopy or telephone and shall be subsequently confirmed by letter. 12. Information Furnished by the Underwriters. The statements set ----------------------------------------- forth in the last paragraph on the cover page, the stabilization legend on the inside front cover, and the statements in the first, third and sixth paragraphs under the caption "Underwriting" in any Prepricing Prospectus and in the Prospectus, constitute the only information furnished by you or on your behalf as such information is referred to in Sections 6(b) and 7 hereof. 13. Miscellaneous. Except as otherwise provided in Sections 5, 10 ------------- and 11 hereof, notice given pursuant to any provision of this Agreement shall be in writing and shall be delivered (i) if to the Company, at the office of the Company at One Fordham Road, North Reading, MA 01864, Attention: Jack A. Green, General Counsel; or (ii) if to you, care of Smith -25- Barney Inc., 388 Greenwich Street, New York, New York 10013, Attention: Manager, Investment Banking Division. This Agreement has been and is made solely for the benefit of the Underwriters, the Company, its directors and officers, and the other controlling persons referred to in Section 7 hereof and their respective successors and assigns, to the extent provided herein, and no other person shall acquire or have any right under or by virtue of this Agreement. Neither the term "successor" nor the term "successors and assigns" as used in this Agreement shall include a purchaser from any Underwriter of any of the Notes in his status as such purchaser. 14. Applicable Law; Counterparts. This Agreement shall be governed ---------------------------- by and construed in accordance with the laws of the State of New York applicable to contracts made and to be performed within the State of New York. This Agreement may be signed in various counterparts which together constitute one and the same instrument. If signed in counterparts, this Agreement shall not become effective unless at least one counterpart hereof shall have been executed and delivered on behalf of each party hereto. -26- Please confirm that the foregoing correctly sets forth the agreement between the Company and you. Very truly yours, CONVERSE INC. By ________________________________ Chairman of the Board and Chief Executive Officer Confirmed as of the date first above mentioned. SMITH BARNEY INC. DILLON, READ & CO. INC. DONALDSON, LUFKIN & JENRETTE SECURITIES CORPORATION GOLDMAN, SACHS & CO. By SMITH BARNEY INC. By________________________________ Managing Director -27- SCHEDULE I CONVERSE INC. Principal Amount Underwriter of Notes ----------- ---------------- Smith Barney Inc. . Dillon, Read & Co. Inc. Donaldson, Lufkin & Jenrette Securities Corporation Goldman, Sachs & Co. ___________ Total $60,000,000 =========== -28- SCHEDULE II =========== Lock-up Letters Glenn N. Rupp Donald J. Camacho Edward C. Frederick Apollo Investment Fund, L.P. Lion Advisors, L.P. -29- EX-4.1 3 FORM OF INDENTURE EXHIBIT 4.1 Form of Indenture ----------------- ================================================================================ CONVERSE INC. as Issuer TO FIRST UNION NATIONAL BANK, as Trustee INDENTURE Dated as of ______________, 1997 $69,000,000 ___% Convertible Subordinated Notes Due 2004 ================================================================================ Certain Sections of this Indenture relating to Sections 310 through 318 of the Trust Indenture Act of 1939: (S)310(a)(1).............................................. 609 (a)(2).............................................. 609 (a)(3).............................................. Not Applicable (a)(4).............................................. Not Applicable (a)(5).............................................. 609 (b)................................................. 608 (c)................................................. Not Applicable (S)311(a)................................................. 613 (b)................................................. 613 (c)................................................. Not Applicable (S)312(a)................................................. 701 ................................................. 702(a) (b)................................................. 702(b) (c)................................................. 702(c) (S)313(a)................................................. 703(a) (b)(1).............................................. Not Applicable (b)(2).............................................. 703(a) (c)................................................. 703(a) (d)................................................. 703(b) (S)314(a)................................................. 704 (a)(4).............................................. 1004 (b)................................................. Not Applicable (c)(1).............................................. 102 (c)(2).............................................. 102 (c)(3).............................................. Not Applicable (d)................................................. Not Applicable (e)................................................. 102 (f)................................................. Not Applicable (S)315(a)................................................ 601 (b)................................................. 602 (c)................................................. 601 (d)................................................. 601 (e)................................................. 514 (S)316(a)(1)(A)........................................... 502 512 (a)(1)(B)........................................... 513 (a)(2).............................................. Not Required (a) (last sentence)....................................... definition of Outstanding (b)................................................. 508 (c)................................................. 104(c) (S)317(a)(1).............................................. 503 (a)(2).............................................. 504 (b)................................................. 1003 (S)318(a)................................................. 107
- ---------------------- Note: This reconciliation and tie shall not, for any purpose, be deemed to be a part of the Indenture. TABLE OF CONTENTS*
Page ---- ARTICLE 1........................................................... 1 Section 101 Definitions.......................................... 1 Acquiring Person................................................ 2 Act............................................................. 2 Affiliate....................................................... 2 Apollo Stockholders............................................. 2 Authenticating Agent............................................ 2 Beneficial Owner................................................ 2 Board of Directors.............................................. 2 Board Resolution................................................ 2 Business Day.................................................... 3 Change in Control............................................... 3 Close of business............................................... 3 Commission...................................................... 3 Common Stock.................................................... 4 Company......................................................... 4 Company Request................................................. 4 Company Order................................................... 4 Corporate Trust Office.......................................... 4 Corporation..................................................... 4 Current Market Price............................................ 4 Daily Market Price.............................................. 4 Defaulted Interest.............................................. 5 Event of Default................................................ 5 Exchange Act.................................................... 5 Holder.......................................................... 5 Indenture....................................................... 5 Interest Payment Date........................................... 5 Maturity........................................................ 5 Officers' Certificate........................................... 5 Opinion of Counsel.............................................. 5 Outstanding..................................................... 5 Paying Agent.................................................... 6 Person.......................................................... 6 Predecessor Security............................................ 6 Record Date..................................................... 6 Redemption Date................................................. 6 Redemption Price................................................ 6 Regular Record Date............................................. 6
- ------------------ *Note: This table of contents shall not, for any purposes, be deemed to be a part of the Indenture. i Repurchase Date................................................. 6 Security Register............................................... 6 Senior Indebtedness............................................. 7 Significant Subsidiary.......................................... 7 Special Record Date............................................. 7 Stated Maturity................................................. 7 Subsidiary...................................................... 7 Time of Determination........................................... 7 Trust Indenture Act............................................. 8 Trustee......................................................... 8 Vice President.................................................. 8 Section 102 Compliance Certificates and Opinions................. 8 Section 103 Form of Documents Delivered to Trustee............... 8 Section 104 Acts of Holders; Record Dates........................ 9 Section 105 Notices, Etc., to Trustee and Company................ 10 Section 106 Notice to Holders; Waiver............................ 10 Section 107 Conflict with Trustee Indenture...................... 11 Section 108. Effect of Headings and Table of Contents............ 11 Section 109 Successors and Assigns............................... 11 Section 110 Separability Clause.................................. 11 Section 111 Benefits of Indenture................................ 11 Section 112. Governing Law....................................... 12 Section 113 Legal Holidays....................................... 12 Section 114 No Security Interest Created......................... 12 Section 115 Limitation on Individual Liability................... 12 ARTICLE 2........................................................... 13 Section 201 Forms Generally...................................... 13 Section 202 Form of Face of Security............................. 13 Section 203 Form of Reverse of Security.......................... 14 Section 204 Form of Trustee's Certificate of Authentication...... 20 ARTICLE 3........................................................... 20 Section 301 Title and Terms...................................... 20 Section 302 Denominations........................................ 21 Section 303 Execution, Authentication, Delivery and Dating....... 21 Section 304 Temporary Securities................................. 21 Section 305 Registration, Registration of Transfer and Exchange.. 22 Section 306 Mutilated, Destroyed, Lost and Stolen Securities..... 23 Section 307 Payment of Interest; Interest Rights Preserved....... 24 Section 308 Persons Deemed Owners................................ 25 Section 309 Cancellation......................................... 25 Section 310 Computation of Interest.............................. 25 ARTICLE 4........................................................... 26 Section 401 Satisfaction and Discharge of Indenture.............. 26 Section 402 Application of Trust Money........................... 27 Section 403 Reinstatement........................................ 27
ii ARTICLE 5....................................................................... 27 Section 501 Events of Default................................................ 27 Section 502 Acceleration of Maturity; Recession and Annulment................ 29 Section 503 Collection of Indebtedness and Suits for Enforcement by Trustee.. 30 Section 504 Trustee May, File Proofs of Claim................................ 31 Section 505 Trustee May Enforce Claims Without Possession of Securities...... 32 Section 506 Application of Money Collecte.................................... 32 Section 507 Limitation on Suits.............................................. 32 Section 508 Unconditional Right of Holders to Receive Principal, Premium and Interest to Convert............................................ 33 Section 509 Restoration of Rights and Remedies............................... 33 Section 510 Rights and Remedies Cumulative................................... 33 Section 511 Delay or Omission Not Waiver..................................... 34 Section 512 Control by Holders............................................... 34 Section 513 Waiver of Past Defaults.......................................... 34 Section 514 Undertaking for Costs............................................ 35 Section 515 Waiver of Stay or Extension Laws................................. 35 ARTICLE 6....................................................................... 36 Section 601 Certain Defaults and Responsibilities............................ 36 Section 602 Notice of Defaults............................................... 36 Section 603 Certain Rights of Trustee........................................ 36 Section 604 Not Responsible for Recitals or Issuance of Securities........... 37 Section 605 May Hold Securities.............................................. 37 Section 606 Money Held in Trust.............................................. 37 Section 607 Compensation and Reimbursement................................... 38 Section 608 Disqualification; Conflicting Interest........................... 38 Section 609 Corporate Trustee Required; Eligibility.......................... 38 Section 610 Resignation and Removal; Appointment of Successor................ 39 Section 611 Acceptance of Appointment by Successor........................... 40 Section 612 Merger, Conversion, Consolidation or Succession to Business...... 40 Section 613 Preferential Collection of Claims Against Company................ 40 Section 614 Appointment of Authenticating Agent.............................. 41 ARTICLE 7....................................................................... 42 Section 701 Company to Furnish Trustee Names and Addresses of Holders........ 42 Section 702 Preservation of Information; Communication to Holders............ 43 Section 703 Reports by Trustee............................................... 43 Section 704 Reports by Company............................................... 43 ARTICLE 8....................................................................... 44 Section 801 Company May Consolidate Etc., Only on Certain Terms.............. 44 Section 802 Successor Substituted............................................ 44 ARTICLE 9....................................................................... 45 Section 901 Supplemental Indentures Without Consent of Holders............... 45 Section 902 Supplemental Indentures with Consent of Holders.................. 45 Section 903 Execution of Supplemental Indentures............................. 46 Section 904 Effect of Supplemental Indentures................................ 46
iii Section 905 Conformity with Trust Indenture Act.............................. 47 Section 906 Reference in Securities to Supplemental Indentures............... 47 Section 907 Notice of Supplemental Indenture................................. 47 ARTICLE 10...................................................................... 47 Section 1001 Payment of Principal, Premium and Interest...................... 47 Section 1002 Maintenance of Office or Agency................................. 47 Section 1003 Money for Security Payments to Be Held in Trust................. 48 Section 1004 Statement by Officers as to Defaul.............................. 49 Section 1005 Existence....................................................... 49 Section 1006 Waiver of Certain Covenants..................................... 49 ARTICLE 11...................................................................... 50 Section 1101 Right of Redemption............................................. 50 Section 1102 Applicability of Article........................................ 50 Section 1103 Election to Redeem; Notice to Trustee........................... 50 Section 1104 Selection by Trustee of Securities to be Redeemed.............. 50 Section 1105 Notice of Redemption............................................ 51 Section 1106 Deposit of 'Redemption Price.................................... 51 Section 1107 Securities Payable on Redemption Date........................... 52 Section 1108 Securities Redeemed in Part..................................... 52 Section 1109 Conversion Arrangements on Call for Redemption.................. 52 ARTICLE 12...................................................................... 53 Section 1201 Securities Subordinated to Senior Indebtedness.................. 53 Section 1202 Payment Over Proceeds Upon Dissolution, Etc..................... 53 Section 1203 Acceleration of Securities...................................... 54 Section 1204 No Payment When Senior Indebtedness in Default.................. 55 Section 1205 Subrogation to Rights of Holders of Senior Indebtedness......... 55 Section 1206 Provisions Solely to Define Relative Rights..................... 56 Section 1207 Trustee to Effectuate Subordination............................. 56 Section 1208 No Waiver of Subordination Provisions........................... 56 Section 1209 Notice to Trustee............................................... 57 Section 1210 Reliance on Judicial Order or Certificate of Liquidating Agent.. 57 Section 1211 Trustee Not Fiduciary for Holders of Senior Indebtedness........ 58 Section 1212 Rights of Trustee as Holder of Senior Indebtedness; Preservation of Trustee's Rights.............................. 58 Section 1213 Article Applicable to Paying Agents............................. 58 Section 1214 Rights with respect to Conversion and Certain Payments.......... 58 ARTICLE 13...................................................................... 59 Section 1301 Conversion Privilege and Conversion Price....................... 59 Section 1302 Exercise of Conversion Privilege................................ 59 Section 1303 Fractions of Shares............................................. 60 Section 1304 Adjustment of Conversion Price.................................. 60 Section 1305 Notice of Adjustments of Conversion Price....................... 65 Section 1306 Notice of Certain Corporate Action.............................. 65 Section 1307 Company to Reserve Common Stock................................. 66 Section 1308 Taxes on Conversions............................................ 66
iv Section 1309 Covenant as to Common Stock..................................... 66 Section 1310 Cancellation of Converted Securities............................ 67 Section 1311 Provisions as to Consolidation, Merger or Sale of Assets........ 67 Section 1312 Disclaimer of Responsibility for Certain Matters................ 68 ARTICLE 14...................................................................... 68 Section 1401 Right to Require repurchase..................................... 68 Section 1402 Notice; Method of Exercising Repurchase Right................... 68 Section 1403 Deposit of Repurchase Price..................................... 69 Section 1404 Securities Not Repurchased on Repurchase Date................... 70 Section 1405 Securities Repurchased in Part.................................. 70
Testimonium Signatures and Seals Acknowledgments v INDENTURE, dated as of _______________, 1997 between CONVERSE, INC., a corporation duly organized and existing under the laws of the State of Delaware (herein called the "Company"), having its principal executive offices at One Fordham Road, North Reading, Massachusetts 01864, and First Union National Bank as Trustee (herein called the "Trustee"). RECITALS OF THE COMPANY The Company has duly authorized the creation of an issue of its _____% Convertible Subordinated Notes Due 2004 (herein called the "Securities") of substantially the tenor and amount hereinafter set forth, and to provide therefor the Company has duly authorized the execution and delivery of this Indenture. All things necessary to make the Securities, when executed by the Company and authenticated and delivered hereunder and duly issued by the Company, the valid obligations of the Company, and to make this Indenture a valid agreement of the Company, in accordance with their and its terms, have been done. NOW, THEREFORE, THIS INDENTURE WITNESSETH: For and in consideration of the premises and the purchase of the Securities by the Holders thereof, it is mutually agreed, for the equal and proportionate benefit of all Holders of the Securities, as follows: ARTICLE 1. DEFINITIONS AND OTHER PROVISIONS of GENERAL APPLICATION Section 101 Definitions. For all purposes of this Indenture, except as otherwise expressly provided or unless the context otherwise requires: (a) the terms defined in this Article have the meanings assigned to them in this Article and include the plural as well as the singular; (b) all other terms used herein which are defined in the Trust Indenture Act, either directly or by reference therein, have the meanings assigned to them therein; (c) all accounting terms not otherwise defined herein have the meanings assigned to them in accordance with United States generally accepted accounting principles, and, except as otherwise herein expressly provided, the term "generally accepted accounting principles" with respect to any computation required and permitted hereunder shall mean United States accounting principles as are generally accepted at the date of this Indenture; and 1 (d) the words "herein", "hereof" and "hereunder" and other words of similar import refer to this Indenture as a whole and not to any particular Article, Section or other subdivision. Certain terms used in either Article Twelve or Thirteen are defined in such Article. "Acquiring Person" means any person or group (as defined in Section 13(d)(3) of the Exchange Act) who or which, together with all affiliates and associates (as defined in Rule 12b-2 under the Exchange Act), becomes the beneficial owner of shares of Common Stock or other voting securities of the Company having more than 50% of the total number of votes that may be cast for the election of directors of the Company; provided, however, that an Acquiring Person shall not include (i) the Apollo Stockholders, (ii) the Company, (iii) any Subsidiary of the Company or (iv) any current or future employee benefit plan of the Company or any Subsidiary of the Company or any entity holding Common Stock of the Company for or pursuant to the terms of any such plan. Notwithstanding the foregoing, no person shall become an Acquiring Person as the result of an acquisition of Common Stock by the Company which, by reducing the number of shares outstanding, increases the proportionate number of shares beneficially owned by such Person to more than 50% of the Common Stock of the Company then outstanding; provided, however, that if a Person shall become the beneficial owner of 50% or more of the Common Stock of the Company then outstanding by reason of share purchases by the Company and shall, after such share purchases by the Company, become the beneficial owner of any additional shares of Common Stock of the Company, then such Person shall be deemed to be an Acquiring Person. "Act", when used with respect to any Holder, has the meaning specified in Section 104. "Affiliate" of any specified Person means any other Person directly or indirectly controlling or controlled by or under direct or indirect common control with such specified Person. For the purposes of this definition, "control" when used with respect to any specified Person means the power to direct the management and policies of such Person, directly or indirectly, whether through the ownership of voting securities, by contract or otherwise; and the terms "controlling" and "controlled" have meanings correlative to the foregoing. "Apollo Stockholders" means ____________________________________. "Authenticating Agent" means any Person authorized by the Trustee pursuant to Section 614 to act on behalf of the Trustee to authenticate Securities. The term "Beneficial Owner" is determined in accordance with Rule 13d-3 promulgated by the Commission under the Exchange Act. "Board of Directors" means either the board of directors of the Company or any duly authorized committee of that board. "Board Resolution" means a copy of a resolution certified by the Secretary or an Assistant Secretary of the Company to have been duly adopted by the Board of Directors and to be in full force and effect on the date of such certification and delivered to the Trustee. 2 "Business Day" means each Monday, Tuesday, Wednesday, Thursday and Friday which is not a day on which banking institutions in New York, New York or the city in which the Corporate Trust Office is located are authorized or obligated to close by law or executive order. "Change in Control" means any of the following events: (a) There shall be consummated any consolidated or merger of the Company (1) in which the Company is not the continuing or surviving corporation (other than a consolidation or merger with a wholly-owned Subsidiary of the Company in which all shares of Common Stock outstanding immediately prior to the effectiveness thereof are changed into or exchanged for the same consideration) or (2) pursuant to which the Common Stock is converted into cash, securities or other property, in each case, other than a consolidation or merger of the Company in which the holders of Common Stock immediately prior to the consolidation or merger hold, directly or indirectly, at least a majority of the common stock of the continuing or surviving corporation immediately after such consolidation or merger; (b) Any Acquiring Person shall have become such Person; or (c) There shall be consummated a sale of all or substantially all of the Company's assets as an entirety. Notwithstanding anything to the contrary set forth in this definition, a Change in Control shall not be deemed to have occurred (A) under paragraph (b) above, solely by virtue of the Company, any Subsidiary, any employee stock ownership plan or any other employee benefit plan of the Company or any Subsidiary or any Person holding securities of the Company for or pursuant to the terms of any such employee benefit plan, filing or becoming obligated to file a report under or in response to Schedule 13D or Schedule 14D-1 (or any successor schedule, form or report) under the Exchange Act disclosing beneficial ownership by it of shares of securities of the Company, whether in excess of 50% or otherwise, or (B) under paragraphs (a), (b) and (c) above, if either (1) the last reported sale price of the Common Stock on the New York Stock Exchange Composite Tape for any five trading days during the ten trading days immediately preceding the Change in Control is at least equal to 105% of the conversion price in effect immediately preceding the time of such Change in Control or (2) the consideration in the transaction giving rise to such Change in Control, to the holders of Common Stock consists of cash, securities that are, or immediately upon issuance will be, listed on a national securities exchange or quoted in the NASDAQ National Market System, or a combination of cash and such securities, and the aggregate fair market value of such consideration (which, in the case of such securities, shall be equal to the average of the last sale prices of such securities during the ten consecutive trading days commencing with the sixth trading day following consummation of such transaction) is at least 105% of the conversion price in effect on the date immediately preceding the closing date of such transaction.. "Close of Business" means 5:00 p.m. in New York, New York. "Commission" means the Securities and Exchange Commission as from time to time constituted, created under the Exchange Act, or, if at any time after the execution of this 3 instrument such Commission is not existing and performing the duties now assigned to it under the Trust Indenture Act, then the body performing such duties at such time. "Common Stock" includes any stock of any class of the Company which has no preference in respect of dividends or of amounts payable in the event of any voluntary or involuntary liquidation, dissolution or winding-up of the Company and which is not subject to redemption by the Company. However, subject to the provisions of Section 1311, shares issuable on conversion of Securities shall include only shares of the class designated as Common Stock of the Company at the date of this Indenture or shares of any class or classes resulting from any reclassification or reclassifications thereof and which have no preference in respect of dividends or of amounts payable in the event of any voluntary or involuntary liquidation, dissolution or winding-up of the Company and which are not subject to redemption by the Company; provided, that if at any time there shall be more than one such resulting class, the shares of each such class then so issuable shall be substantially in the proportion which the total number of shares of such class resulting from all such reclassifications bears to the total number of shares of all such classes resulting from all such reclassifications. "Company" means the Person named as the "Company" in the first paragraph of this instrument until a successor Person shall have become such pursuant to the applicable provisions of this Indenture, and thereafter "Company" shall mean such successor Person. "Company Request" or "Company Order" means a written request or order delivered to the Trustee and signed in the name of the Company by one each of (a) the Chairman of the Board, the Chief Executive Officer, the President or any Vice President of the Company and (b) the Treasurer, any Assistant Treasurer, the Secretary or any Assistant Secretary of the Company. "Corporate Trust Office" means the office of the Trustee in New York, New York, which initially shall be ___________________, New York, New York _____, at which at any particular time its corporate trust business shall be principally administered. "Corporation" means a corporation, association, company, joint-stock company or business trust. "Credit Facility" means the Credit Agreement dated as of November 17, 1994 among the Company, its Subsidiaries, BT Commercial Corporation, as agent, and certain other banks party thereto. "Current Market Price" has the meaning specified in Section 1304. "Daily Market Price": The term "Daily Market Price" when used with reference to the Common Stock shall mean the price of a share of Common Stock on the relevant date, determined on the basis of the last reported sale price regular way of the Common Stock as reported on the composite tape, or similar reporting system, for issues listed on the New York Stock Exchange (or if the Common Stock is not then listed on that Exchange, for issues listed on such other national securities exchange upon which the Common Stock is listed as may be designated by the Board of Directors from time to time for the purposes hereof) or, if there is no 4 such reported sale on the day in question, on the basis of the average of the closing bid and asked quotations regular way as so reported, or, if the Common Stock is not listed on any national securities exchange, on the basis of the average of the high bid and low asked quotations regular way on the day in question in the over-the-counter market as reported by the National Association of Securities Dealers Automated Quotation System, or if not so quoted, as reported by National Quotation Bureau, Incorporated, or a similar organization. "Defaulted Interest" has the meaning specified in Section 307. "Event of Default" has the meaning specified in Section 501. "Exchange Act" means the Securities Exchange Act of 1934, as amended. "Holder" means a Person in whose name a Security is registered in the Security Register. "Indenture" means this instrument as originally executed or as it may from time to time be supplemented or amended by one or more indentures supplemental hereto entered into pursuant to the applicable provisions hereof, including, for all purposes of this instrument and any such supplemental indenture, the provisions of the Trust Indenture Act that are deemed to be a part of and govern this instrument and any such supplemental indenture, respectively. "Interest Payment Date" means the Stated Maturity of an installment of interest on the Securities. "Maturity", when used with respect to any Security, means the date on which the principal of such Security becomes due and payable as therein or herein provided, whether at the Stated Maturity thereof or by declaration of acceleration, redemption or otherwise. "Officers' Certificate'" means a certificate delivered to the Trustee and signed by one each of (a) the Chairman of the Board, the Chief Executive Officer, the President or any Vice President of the Company and (b) the Treasurer, any Assistant Treasurer, the Secretary or any Assistant Secretary of the Company. One of the officers signing an Officers' Certificate given pursuant to Section 1004 shall be the principal executive, financial or accounting officer of the Company. "Opinion of Counsel" means a written opinion of counsel, who may be counsel for or an employee of the Company, and who shall be reasonably acceptable to the Trustee. "Outstanding", when used with respect to Securities, means, as of the date of determination, all Securities theretofore authenticated and delivered under this Indenture, except: (i) Securities theretofore canceled by the Trustee or delivered to the Trustee for cancellation; (ii) Securities, or portions thereof, for the payment or redemption of which moneys in the necessary amount have been theretofore deposited with the Trustee or any Paying Agent (other than the Company) in trust or set aside and segregated in trust by the Company (if the 5 Company shall act as its own Paying Agent) for the Holders of such Securities; provided, that if such Securities, or portions thereof, are to be redeemed, notice of such redemption has been duly given pursuant to this Indenture or provision therefor satisfactory to the Trustee has been made; and (iii) Securities which have been paid pursuant to Section 306 or in exchange for or in lieu of which other Securities have been authenticated and delivered pursuant to this Indenture, other than any such Securities in respect of which there shall have been presented to the Trustee proof satisfactory to it that such Securities are held by a bona fide purchaser in whose hands such Securities are valid obligations of the Company; provided, however, that in determining whether the Holders of the requisite principal amount of the Outstanding Securities have given any request, demand, authorization, direction, notice, consent or waiver hereunder, Securities owned by the Company or any other obligor upon the Securities or any Affiliate of the Company or of such other obligor shall be disregarded and deemed not to be Outstanding, except that, in determining whether the Trustee shall be protected in relying upon any such request, demand, authorization, direction, notice, consent or waiver, only Securities which the Trustee knows to be so owned shall be so disregarded. Securities so owned which have been pledged in good faith may be regarded as Outstanding if the pledgee establishes to the satisfaction of the Trustee the pledgee's right so to act with respect to such Securities and that the pledgee is not the Company or any other obligor upon the Securities or any Affiliate of the Company or of such other obligor. "Paying Agent" means any Person authorized by the Company to pay the principal of and premium, if any, or interest on any Securities on behalf of the Company. "Person" means any individual, corporation, partnership, joint venture, trust, unincorporated organization or government or any agency or political subdivision thereof. "Predecessor Security" of any particular Security means every previous Security evidencing all or a portion of the same debt as that evidenced by such particular Security; and, for the purposes of this definition, any Security authenticated and delivered under Section 306 in exchange for or in lieu of a mutilated, destroyed, lost or stolen Security shall be deemed to evidence the same debt as the mutilated, destroyed, lost or stolen Security. "Record Date" means either a Regular Record Date or a Special Record Date, as applicable. "Redemption Date", when used with respect to any Security to be redeemed, means the date fixed for such redemption by or pursuant to this Indenture. "Redemption Price", when used with respect to any Security to be redeemed, means the price at which it is to be redeemed pursuant to this Indenture on the applicable Redemption Date. "Regular Record Date", for the interest payable on any Interest Payment Date means the ______________ or ______________ (whether or not a Business Day), as the case may be, next preceding such Interest Payment Date. 6 "Repurchase Date" has the meaning specified in Section 1401. "Security Register" and "Security Registrar" have the respective meanings specified in Section 305. "Senior Indebtedness" means principal of, premium, if any, and accrued and unpaid interest (including interest accruing on or after the filing of any petition in bankruptcy or for reorganization relating to the Company) on (i) indebtedness of the Company for money borrowed, whether outstanding on the date of execution of this Indenture or thereafter created, incurred or assumed, (ii) guarantees by the Company of indebtedness for money borrowed by any other person, or reimbursement obligations under letters of credit, in either case, whether outstanding on the date of execution of this Indenture or thereafter created, incurred or assumed, (iii) indebtedness evidenced by notes, debentures (other than the Securities), bonds or other instruments of indebtedness for the payment of which the Company is responsible or liable, by guarantees or otherwise, whether outstanding on the date of execution of this Indenture or thereafter created, incurred or assumed, (iv) obligations of the Company under interest rate and currency swaps, caps, floors, collars or similar agreements or arrangements intended to protect the Company against fluctuations in interest or currency rates, whether outstanding on the date of execution of this Indenture or thereafter created, incurred or assumed, and (v) obligations of the Company under any agreement to lease, or any lease of, any real or personal property, which obligations, whether outstanding on the date of execution of this Indenture or thereafter created, incurred or assumed, are required to be capitalized on the books of the Company in accordance with generally accepted accounting principles, or guarantees by the Company of similar obligations of others, and (b) modifications, renewals, extensions and refundings of any such indebtedness, obligations or guarantees; unless, in the instrument creating or evidencing the same or pursuant to which the same is outstanding, it is provided that such indebtedness, obligations or guarantees or such modification, renewal, extension or refunding thereof are not superior in right of payment to the Securities; provided, however, that Senior Indebtedness shall not be deemed to include, and the Securities will rank pari passu in right of payment with any obligation of the Company to any Subsidiary. "Significant Subsidiary" has the meaning ascribed to it under Regulation C promulgated under the Securities Act of 1933, as amended. "Special Record Date" for the payment of any Defaulted Interest means a date fixed by the Trustee pursuant to Section 307. "Stated Maturity", when used with respect to any Security or any installment of interest thereon, means the date specified in such Security as the fixed date on which the principal of such Security or such installment of interest is due and payable. "Subsidiary" means a corporation more than 50% of the outstanding voting stock of which is owned, directly or indirectly, by the Company or by one or more other Subsidiaries or by the Company and one or more other Subsidiaries. For the purposes of this definition, "voting stock" means stock which ordinarily has voting power for the election of directors, whether at all 7 times or only so long as no senior class of stock has such voting power by reason of any contingency. "Time of Determination" means (1) for purposes of Section 13.4(b) or (c), the time and date of the earlier of (a) the record date for determining stockholders entitled to receive the rights, warrants or distributions referred to in Section 13.4(b) and (c), or (b) the commencement of "ex-dividend" trading on the exchange or market referred to in the definition of the term "Daily Market Price"; (2) for purposes of Section 13.4(d), the date of issuance of Common Stock to the relevant Affiliate; and (3) for purposes of Section 13.4(e) the Expiration Time (as defined in Section 13.4(e)). "Trust Indenture Act" means the Trust Indenture Act of 1939 as in force at the date as of which this instrument was executed; provided, however, that in the event the Trust Indenture Act of 1939 is amended after such date, "Trust Indenture Act" means, to the extent required by any such amendment, the Trust Indenture Act of 1939 as so amended. "Trustee" means the Person named as the "Trustee" in the first paragraph of this instrument until a successor Trustee shall have become such pursuant to the applicable provisions of this Indenture, and thereafter "Trustee" shall mean such successor Trustee. "Vice President", when used with respect to the Company means any vice president, whether or not designated by a number or a word or words added before or after the title "vice president". Section 102 Compliance Certificates and Opinions. Upon any application or request by the Company to the Trustee to take any action under any provision of this Indenture, the Company shall furnish to the Trustee such certificates and opinions as may be required under the Trust Indenture Act. Each such certificate or opinion shall be given in the form of an Officers' Certificate, if to be given by an officer of the Company, or an Opinion of Counsel, if to be given by counsel, and shall comply with the requirements of the Trust Indenture Act and any other requirement set forth in this Indenture. Every certificate or opinion with respect to compliance with a condition or covenant provided for in this Indenture shall include: (a) a statement that each individual signing such certificate or opinion has read such covenant or condition and the definitions herein relating thereto;(b)a brief statement as to the nature and scope of the examination or investigation upon which the statements or opinions contained in such certificate or opinion are based;(c)a statement that, in the opinion of each such individual, he has made such examination or investigation as is necessary to enable him to express an informed opinion as to whether or not such covenant or condition has been complied with; and (d) a statement as to whether, in the opinion of each such individual, such condition or covenant has been complied with. 8 Section 103 Form of Documents Delivered to Trustee. In any case where several matters are required to be certified by or covered by an opinion of any specified Person, it is not necessary that all such matters be certified by, or covered by the opinion of, only one such Person, or that they be so certified or covered by only one document, but one such Person may certify or give an opinion with respect to some matters and one or more other such Persons as to other matters, and any Person may certify or give an opinion as to such matters in one or several documents. Any certificate or opinion of an officer of the Company may be based, insofar as it relates to legal matters, upon a certification or Opinion of Counsel unless such officer knows, or in the exercise of reasonable care should know, that the certificate or opinion with respect to the matters upon which his certificate or opinion is based are erroneous. Any such certificate or Opinion of Counsel may be based, insofar as it relates to factual matters, upon a certificate of public officials or upon a certificate or opinion of, or representations by, an officer or officers of the Company stating that the information with respect to such factual matters is in the possession of the Company, unless such counsel knows, or in the exercise of reasonable care should know, that the certificate or opinion or representations with respect to such matters are erroneous. Where any Person is required to make, give or execute two or more applications, requests, consents, certificates, statements, opinions or other instruments under this Indenture, they may, but need not, be consolidated and form one instrument. Section 104 Acts of Holders; Record Dates. (a) Any request, demand, authorization, direction, notice, consent, waiver or other action provided by this Indenture to be given or taken by Holders may be embodied in and evidenced by one or more instruments of substantially similar tenor signed by such Holders in person or by agents duly appointed in writing; and, except as herein otherwise expressly provided, such action shall 1. become effective when such instrument or instruments are delivered to the Trustee and, where it is hereby expressly required, to the Company. Such instrument or instruments (and the action embodied therein and evidenced thereby) are herein sometimes referred to as the "Act" of the Holders signing such instrument or instruments. Proof of execution of any such instrument or of a writing appointing any such agent shall be sufficient for any purpose of this Indenture and (subject to Section 601) conclusive in favor of the Trustee and the Company, if made in the manner provided in this Section. (b) The fact and date of the execution by any Person of any such instrument or writing may be proved by the affidavit of a witness of such execution or by a certificate of a notary public or other officer authorized by law to take acknowledgments of deeds, certifying that the individual signing such instrument or writing acknowledged to him the execution thereof. Where such execution is by a signer acting in a capacity other than his individual capacity, such certificate or affidavit shall also constitute sufficient proof of his authority. The fact and date of the execution of any such instrument or writing, or the authority of the Person executing the same, may also be proved in any other manner which the Trustee deems sufficient. 9 (c) The Company may, in the circumstances permitted by the Trust Indenture Act, fix any day as the record date for the purpose of determining the Holders entitled to give or take any request, demand, authorization, direction, notice, consent, waiver or other action, or to vote on any action, authorized or permitted to be given or taken by Holders. If not set by the Company prior to the first solicitation of a Holder made by any Person in respect of any such action, or, in the case of any such vote, prior to such vote, the record date for any such action or vote shall be the 30th day (or, if later, the date of the most recent list of Holders required to be provided pursuant to Section 701) prior to such first solicitation or vote, as the case may be. With regard to any record date, only the Holders on such date (or their duly designated proxies) shall be entitled to give or take, or vote on, the relevant action. Notwithstanding the foregoing, the Company shall not set a record date for, and the provisions of this paragraph shall not apply with respect to, any Act by the Holders pursuant to Section 501, 502 or 512. (d) The ownership of Securities shall be proved by the Security Register.(e)Any Act of the Holder of any Security shall bind every future Holder of the same Security and the Holder of every Security issued upon the registration of transfer therefor or in exchange therefor or in lieu thereof in respect of anything done, omitted or suffered to be done by the Trustee or the Company in reliance thereon, whether or not notation of such action is made upon such Security. (f) Without limiting the foregoing, a Holder entitled hereunder to give or take any action hereunder with regard to any particular Security may do so with regard to all or any part of the principal amount of such Security or by one or more duly appointed agents each of which may do so pursuant to such appointment with regard to all or any different part of such principal amount. Section 105 Notices, Etc., to Trustee and Company. Any Act of Holders or other documents provided or permitted by this Indenture to be made upon, given or furnished to, or filed with, (a) the Trustee by any Holder or by the Company shall be sufficient for every purpose hereunder if made, given, furnished or filed in writing to or with the Trustee at its Corporate Trust Office, Attention: Corporate Trust Department, or (b) the Company by the Trustee or by any Holder shall be sufficient for every purpose hereunder (unless otherwise herein expressly provided) if in writing and mailed, first-class postage prepaid, to the Company, addressed to it at the address of its principal executive offices specified in the first paragraph of this instrument or at any other address previously furnished in writing to the Trustee by the Company. Section 106 Notice to Holders; Waiver. Where this Indenture provides for notice to Holders of any event, such notice shall be sufficiently given (unless otherwise herein expressly provided) if in writing and mailed, first-class postage prepaid, to each Holder affected by such event, at his address as it appears in the Security Register, not later than the latest date (if any), and not earlier than the earliest date 10 (if any), prescribed for the giving of such notice. In any case where notice to Holders is given by mail, neither the failure to mail any notice, nor any defect in any notice so mailed, to any particular Holder shall affect the sufficiency of such notice with respect to other Holders. Where this Indenture provides for notice in any manner, such notice may be waived in writing by the Person entitled to receive such notice, either before or after the event, and such waiver shall be the equivalent of such notice. Waivers of notice by Holders shall be filed with the Trustee, but such filing shall not be a condition precedent to the validity of any action taken in reliance upon such waiver. In case by reason of the suspension of regular mail service or by reason of any other cause it shall be impracticable to give such notice by mail, then such notification as shall be made with the approval of the Trustee shall constitute a sufficient notification for every purpose hereunder. Section 107 Conflict with Trust Indenture Act. If any provision hereof limits, qualifies or conflicts with a provision of the Trust Indenture Act that is required under such Act to be a part of and govern this Indenture, the latter provision shall control. If any provision of this Indenture modifies or excludes any provision of the Trust Indenture Act that may be so modified or excluded, the latter provision shall be deemed to apply to this Indenture as so modified or to be excluded, as the case may be. Section 108 Effect of Headings and Table of Contents. The Article and Section headings herein and the Table of Contents are for convenience only and shall not affect the construction hereof. Section 109 Successors and Assigns. All covenants and agreements in this Indenture by the Company shall bind its successors and assigns, whether so expressed or not. Section 110 Separability Clause. In case any provision in this Indenture or in the Securities shall be invalid, illegal or unenforceable, the validity, legality and enforceability of the remaining provisions shall not in any way be affected or impaired thereby. Section 111 Benefits of Indenture. Nothing in this Indenture or in the Securities, express or implied, shall give to any Person, other than the parties hereto and their successors hereunder, the holders of Senior Indebtedness and the Holders of Securities, any benefit or any legal or equitable right, remedy or claim under this Indenture. 11 Section 112 Governing Law. This Indenture and the Securities shall be governed by and construed in accordance with the laws of the State of New York, but without regard to the principles of conflicts of laws of such State. Section 113 Legal Holidays. In any case where any Interest Payment Date, Redemption Date or Stated Maturity of any Security or the last date on which a Holder has the right to convert his Securities shall not be a Business Day, then (notwithstanding any other provision of this Indenture or of the Securities) payment of interest or principal and premium if any, or conversion of the Securities need not be made on such date, but may be made on the next succeeding Business Day with the same force and effect as if made on the Interest Payment Date or Redemption Date, or at the Stated Maturity, or on such last day for conversion; provided, that no interest shall accrue for the period from and after such Interest Payment Date, Redemption Date, Stated Maturity or last day for conversion, as the case may be. Section 114 No Security Interest Created. Nothing in this Indenture or in the Securities, express or implied, shall be construed to constitute a security interest under the Uniform Commercial Code or similar legislation, as now or hereafter enacted and in effect in any jurisdiction where property of the Company or its Subsidiaries is or may be located. Section 115 Limitation on Individual Liability. No recourse under or upon any obligation, covenant or agreement contained in this Indenture or in any Security, or for any claim based thereon or otherwise in respect thereof, shall be had against any incorporator, shareholder, officer or director, as such, past, present or future, of the Company or any successor corporation, either directly or through the Company, whether by virtue of any constitution, statute or rule of law, or by the enforcement of any assessment or penalty or otherwise; it being expressly understood that this Indenture and the obligations issued hereunder are solely corporate obligations, and that no such personal liability whatever shall attach to, or is or shall be incurred by, the incorporators, shareholders, officers or directors, as such, of the Company or any successor Person, or any of them, because of the creation of the indebtedness hereby authorized, or under or by reason of the obligations, covenants or agreements contained in this Indenture or in any Security or implied therefrom; and that any and all such personal liability of every name and nature, either at common law or in equity or by constitution or statute, of, and any and all such rights and claims against, every such incorporator, shareholder, officer or director, as such, because of the creation of the indebtedness hereby authorized, or under or by reason of the obligations, covenants or agreements contained in this Indenture or in any Security or implied therefrom, are hereby expressly waived and released as a condition of, and as a consideration for, the execution of this Indenture and the issuance of such Security. 12 ARTICLE 2. SECURITY FORMS Section 201 Forms Generally. The Securities and the Trustee's certificates of authentication shall be in substantially the forms set forth in this Article, with such appropriate insertions, omissions, substitutions and other variations as are required or permitted by this Indenture, and may have such letters, numbers or other marks of identification and such legends or endorsements placed thereon as may be required to comply with any law or with the rules of any securities exchange on which the Securities are listed or as may, consistently herewith, be determined by the officers executing such Securities, as evidenced by their execution of the Securities. The definitive Securities shall be printed, lithographed or engraved or produced by any combination of these methods on steel engraved borders or may be produced in any other manner permitted by the rules of any securities exchange on which the Securities may be listed, all as determined by the officers executing such Securities, as evidenced by their execution of such Securities. Section 202 Form of Face of Security. CONVERSE INC. ___% Convertible Subordinated Notes Due 2004 No. ________ $___________ Converse, Inc., a corporation duly organized and existing under the laws of the State of Delaware (herein called the "Company", which term includes any successor Person under the Indenture hereinafter referred to), for value received, hereby promises to pay to __________________________, or registered assigns, upon presentment and surrender hereof, the principal sum of ________________ Dollars on _________, 2004, and to pay interest thereon from and including the date of the initial issuance of Securities under this Indenture or from and including the most recent Interest Payment Date to which interest has been paid or duly provided for, semi-annually on ___________ and __________ in each year, commencing _______, 1997 at the rate of ___% per annum, until the principal hereof is paid or made available for payment. The interest so payable, and punctually paid or duly provided for, on any Interest Payment Date will, as provided in such Indenture, be paid to the Person in whose name this Security (or one or more Predecessor Securities) is registered at the close of business on the Regular Record Date for such interest, which shall be the ____________ or ___________ (whether or not a Business Day), as the case may be, next preceding such Interest Payment Date. Any such interest not so punctually paid or duly provided for will forthwith cease to be payable to the Holder on such Regular Record Date and may either be paid to the Person in whose name this Security (or one or more Predecessor Securities) is registered at the close of business on a Special Record Date for the payment of such Defaulted Interest to be fixed by the Trustee or be 13 paid at any time in any other lawful manner not inconsistent with the requirements of any securities exchange on which the Securities may be listed and upon such notice as may be required by such exchange, all as more fully provided in said Indenture. Notice of a Special Record Date shall be given to Holders of Securities not less than ten days prior to such Special Record Date. Payment of the principal of and premium, if any, and interest on this Security will be made at the office or agency of the Company maintained for that purpose pursuant to Section 1002 of the Indenture, in such coin or currency of the United States of America as at the time of payment is legal tender for payment of public and private debts; provided, however, that at the option of the Company payment of interest may be made by check mailed to the address of the Person entitled thereto as such address shall appear in the Security Register. Reference is hereby made to the further provisions of this Security set forth on the reverse hereof, which further provisions shall for all purposes have the same effect as if set forth at this place. Unless the certificate of authentication hereon has been executed by the Trustee referred to on the reverse hereof by manual signature, this Security shall not be entitled to any benefit under the Indenture or be valid or obligatory for any purpose. IN WITNESS WHEREOF, the Company has caused this instrument to be duly executed under its corporate seal. Dated: _________________ CONVERSE INC. Attest: By _________________________ Name: ________________________ Title: Section 203 Form of Reverse of Security. This Security is one of a duly authorized issue of Securities of the Company designated as its _____% Convertible Subordinated Notes Due 2004 (herein called the "Securities"), limited in aggregate principal amount to $69,000,000 (including the underwriters' over-allotment option), issued and to be issued under an Indenture, dated as of _________ ___, 1997 (herein called the "Indenture"), between the Company and First Union National Bank, as Trustee (herein called the "Trustee", which term includes any successor trustee under the Indenture), to which Indenture and all indentures supplemental thereto reference is hereby made for a statement of the respective rights, limitations of rights, duties and immunities thereunder of the Company, the Trustee, the holders of Senior Indebtedness and the Holders of the Securities and of the terms upon which the Securities are, and are to be, authenticated and delivered. Subject to and upon compliance with the provisions of the Indenture, the Holder of this Security is entitled, at his option, at any time on or before the close of business on the Business Day next preceding ___________, 2004, or in case this Security or a portion hereof is called for 14 redemption, then in respect of this Security or such portion hereof until and including, but (unless the Company defaults in making the payment due upon redemption) not after, the close of business on the Business Day immediately preceding the Redemption Date, to convert this Security (or any portion of the principal amount hereof which is $1,000 or an integral multiple thereof), at the principal amount hereof, or of such portion, into fully paid and non-assessable shares (calculated as to each conversion to the nearest 1/100th of a share) of Common Stock of the Company at a conversion price equal to $_______ principal amount for each share of Common Stock (or at the current adjusted conversion price if an adjustment has been made as provided in the Indenture) by surrender of this Security, duly endorsed or assigned to the Company or in blank, to the Company at its office or agency maintained for that purpose pursuant to Section 1002 of the Indenture, accompanied by written notice to the Company in the form provided in this Security (or such other notice as is acceptable to the Company) that the Holder hereof elects to convert this Security, or if less than the entire principal amount hereof is to be converted, the portion hereof to be converted, and, in case such surrender shall be made after the close of business on any Regular Record Date next preceding any Interest Payment Date and before the close of business on such Interest Payment Date (unless there exists a default in the payment of interest on this Security or this Security or the portion thereof being converted has been called for redemption on a Redemption Date within such period), also accompanied by payment in funds acceptable to the Company of an amount equal to the interest payable on such Interest Payment Date on the principal amount of this Security then being converted. Subject to the aforesaid requirement for payment and, in the case of a conversion after the Regular Record Date next preceding any Interest Payment Date and on or before such Interest Payment Date, to the right of the Holder of this Security (or any Predecessor Security) of record at such Regular Record Date to receive an installment of interest (with certain exceptions provided in the Indenture), no payment or adjustment is to be made upon conversion on account of any interest accrued hereon or on account of any dividends on the Common Stock issued upon conversion. No fractional shares or scrip representing fractions of shares will be issued on conversion, but instead of any fractional share the Company shall pay a cash adjustment as provided in the Indenture. The conversion price is subject to adjustment as provided in the Indenture. In addition, the Indenture provides that in case of certain consolidations, mergers or statutory exchanges of securities with another corporation to which the Company is a party or the sale or conveyance of the assets of the Company substantially as an entirety, the Indenture shall be amended, without the consent of any Holders of Securities, so that this Security, if then outstanding, will be convertible thereafter, during the period this Security shall be convertible as specified above, only into the kind and amount of securities, cash and other property receivable upon the consolidation, merger, statutory exchange or transfer by a holder of the number of shares of Common Stock into which this Security was convertible immediately prior to such consolidation, merger, statutory exchange or transfer (assuming such holder of Common Stock failed to exercise any rights of election and received per share the kind and amount of consideration received per share by a plurality of non-electing shares). The Securities are subject to redemption upon not less than 15 and not more than 60 days' notice by mail, at any time on or after _______ __, 2000, as a whole or in part, at the election of the Company, at the following Redemption Prices (expressed as percentages of the principal amount) plus accrued interest to the Redemption Date, provided that interest 15 installments whose Maturity is on or prior to such Redemption Date will be payable to the Holders of such Securities, or one or more Predecessor Securities, of record at the close of business on the relevant Record Dates, all as provided in the Indenture. If redeemed during the 12-month period beginning ___________ in the year indicated, (_________ in the case of 2000) the Redemption Price shall be:
Redemption Year Price ---- ---------- 2000 2001 2002 2003 2004
If all accrued interest on the Securities has not been paid, the Securities may not be redeemed in part and the Company may not purchase or acquire any Security otherwise than pursuant to a purchase or exchange offer made on the same terms to all holders of the Securities. In certain circumstances involving the occurrence of a Change in Control (as defined in the Indenture), the Holder hereof shall have the right to require the Company to repurchase this Security (or any portion of the principal amount hereof which is $1,000 or an integral multiple thereof) at 100% of the principal amount hereof (or of such portion), together with accrued interest to the Repurchase Date, but interest installments whose Stated Maturity is on or prior to such Repurchase Date will be payable to the Holders of such Securities, or one or more Predecessor Securities, of record at the close of business on the relevant Record Dates referred to on the face hereof, all as provided in the Indenture. In the event of redemption, conversion or repurchase of this Security in part only, a new Security or Securities for the unredeemed, unconverted or unpurchased portion hereof will be issued in the name of the Holder hereof upon the cancellation hereof. Any Securities called for redemption, unless surrendered for conversion by the close of business on the Business Day immediately preceding the date fixed for redemption, are subject to being purchased from the Holder of such Securities at the redemption price by one or more investment banking firms or other purchasers who may agree with the Company to purchase such Securities and convert them into Common Stock. The indebtedness evidenced by this Security is, to the extent provided in the Indenture, subordinate and subject in right of payment to the prior payment in full of all Senior Indebtedness, and this Security is issued subject to the provisions of the Indenture with respect thereto. Each Holder of this Security, by accepting the same, (a) agrees to and shall be bound by such provisions, (b) authorizes and directs the Trustee on his behalf to take such action as may be necessary or appropriate to effectuate the subordination so provided, and (c) appoints the Trustee his attorney-in-fact for any and all such purposes. 16 If an Event of Default shall occur and be continuing, the principal of all the Securities may be declared due and payable in the manner and with the effect provided in the Indenture. The Indenture permits, with certain exceptions as therein provided, the amendment thereof and the modification of the rights and obligations of the Company and the rights of the Holders of the Securities under the Indenture at any time by the Company and the Trustee with the consent of the Holders of not less than a majority in aggregate principal amount of the Securities at the time Outstanding. The Indenture also contains provisions permitting the Holders of specified percentages in aggregate principal amount of the Securities at the time Outstanding, on behalf of the Holders of all the Securities, to waive compliance by the Company with certain provisions of the Indenture and certain past defaults under the Indenture and their consequences. Any such consent or waiver by the Holder of this Security shall be conclusive and binding upon such Holder and upon all future Holders of this Security and of any Security issued upon the registration of transfer hereof or in exchange herefor or in lieu hereof, whether or not notation of such consent or waiver is made upon this Security. No reference herein to the Indenture and no provision of this Security or of the Indenture shall alter or impair the obligation of the Company, which is absolute and unconditional, to pay the principal of and premium, if any, and interest on this Security at the times, place and rate, and in the coin or currency, herein prescribed or to convert this Security as provided in the Indenture. As provided in the Indenture and subject to certain limitations therein set forth, the transfer of this Security is registrable in the Security Register, upon surrender of this Security for registration of transfer at the office or agency of the Company in any place where the principal of and premium, if any, and interest on this Security are payable, duly endorsed by, or accompanied by a written instrument of transfer in form satisfactory to the Company and the Security Registrar duly executed by, the Holder hereof or his attorney duly authorized in writing, in each case, with an appropriate signature guarantee, and thereupon one or more new Securities, of authorized denominations and for the same aggregate principal amount, will be issued to the designated transferee or transferees. The Securities are issuable only in fully registered form without coupons in denominations of $1,000 and any integral multiple thereof. As provided in the Indenture and subject to certain limitations therein set forth, Securities are exchangeable for a like aggregate principal amount of Securities of a different authorized denomination, as requested by the Holder surrendering the same. No service charge shall be made for any such registration of transfer or exchange except as provided in the Indenture. The Company may require payment of a sum sufficient to cover any tax or other governmental charge payable in connection therewith. Prior to due presentment of this Security for registration of transfer, the Company, the Trustee and any agent of the Company or the Trustee may treat the Person in whose name this Security is registered as the owner hereof for all purposes, except as provided in this Security, whether or not this Security be overdue, and neither the Company, the Trustee nor any such agent shall be affected by notice to the contrary. 17 All terms used in this Security which are defined in the Indenture shall have the meanings assigned to them in the Indenture. [FORM OF CONVERSION NOTICE] TO CONVERSE INC.: The undersigned registered owner of this Security hereby irrevocably exercises the option to convert this Security, or the portion hereof (which is $1,000 or a multiple thereof) designated below, into shares of Common Stock in accordance with the terms of the Indenture referred to in this Security, and directs that the shares issuable and deliverable upon the conversion, together with any check in payment for a fractional share and any Security representing any unconverted principal amount hereof, be issued and delivered to the registered owner hereof unless a different name has been provided below. If this Notice is being delivered on a date after the close of business on a Regular Record Date and before the close of business on the related Interest Payment Date, this Notice is accompanied by payment in funds acceptable to the Company, of an amount equal to the interest payable on such Interest Payment Date on the principal of this Security to be converted. If shares or any portion of this Security not converted are to be issued in the name of a person other than the undersigned, the undersigned will pay all transfer taxes payable with respect thereto. Dated: _________________________ _________________________ _________________________ Signature(s) 18 Signature(s) must be guaranteed by a commercial bank or trust company or a member firm of a national stock exchange or of the National Association of Securities Dealers, Inc. if shares of Common Stock are to be delivered, or Securities to be issued, other than to and in the name of the registered owner. - ----------------------------- Signature Guarantee Fill in for registration of shares of Common Stock if they are to be delivered, or Securities if they are to be issued, other than to and in the name of the registered owner: - ----------------------------- (Name) - ----------------------------- (Street Address) - ----------------------------- (City, State and Zip code) (Please print name and address) Register: _____ Common Stock _____ Securities (Check appropriate line(s)). Principal amount to be converted (if less than all): $__________,000 ___________________________ Social Security or other Taxpayer Identification Number of owner 19 Section 204 Form of Trustee's Certificate of Authentication. The Trustee's certificate of authentication shall be in substantially the following form: This is one of the Securities referred to in the within-mentioned Indenture. First Union National Bank, as Trustee By ____________________________ Authorized Officer ARTICLE 3. THE SECURITIES Section 301 Title and Terms. The aggregate principal amount of Securities which may be authenticated and delivered under this Indenture is limited to $69,000,000 (including $9,000,000 aggregate principal amount of Securities that may be sold by the Company pursuant to the over-allotment option granted pursuant to the Underwriting Agreement, dated _________, 1997, among the Company, Smith Barney, Inc., Dillon, Read & Co. Inc., Donaldson, Lufkin & Jenrette Securities Corporation and Goldman, Sachs & Co., except for Securities authenticated and delivered upon registration of transfer of, or in exchange for, or in lieu of, other Securities pursuant to Section 304, 305, 306, 906, 1108, 1302 or 1405. The Securities shall be known and designated as the "____% Convertible Subordinated Debentures Due 2004" of the Company. Their Stated Maturity shall be ______, 2004 and they shall bear interest at the rate of ____% per annum, from and including the date of the initial issuance of Securities under this Indenture or from and including the most recent Interest Payment Date to which interest has been paid or duly provided for, as the case may be, payable semi- annually on _________ and _______ commencing ________, 1997, until the principal thereof is paid or made available for payment. Each payment of interest shall include interest accrued to but excluding the Interest Payment Date on which payment is to be made. The principal of and premium, if any, and interest on the Securities shall be payable at the office or agency of the Company maintained for such purpose pursuant to Section 1002; provided, however, that at the option of the Company payment of interest may be made by check mailed to the address of the Person entitled thereto as such address shall appear in the Security Register. The Securities shall be redeemable as provided in Article Eleven. 20 The Securities shall be subordinated in right of payment to Senior Indebtedness as provided in Article Twelve. The Securities shall be convertible as provided in Article Thirteen. The Securities shall be subject to repurchase at the option of the Holder as provided in Article Fourteen. Section 302 Denominations. The Securities shall be issuable only in fully registered form without coupons and only in denominations of $1,000 and any integral multiple thereof. Section 303 Execution, Authentication, Delivery and Dating. The Securities shall be executed on behalf of the Company by its Chairman of the Board, its Chief Executive Officer, its President or one of its Vice Presidents, under its corporate seal or a facsimile thereof reproduced thereon attested by its Secretary or one of its Assistant Secretaries. The signature of any of these officers on the Securities may be manual or facsimile. Securities bearing the manual or facsimile signatures of individuals who were at any time the proper officers of the Company shall bind the Company, notwithstanding that such individuals or any of them have ceased to hold such offices prior to the authentication and delivery of such Securities or did not hold such offices at the date of such Securities. At any time and from time to time after the execution and delivery of this Indenture, the Company may deliver Securities executed by the Company to the Trustee for authentication, together with a Company Order for the authentication and delivery of such Securities; and the Trustee in accordance with such Company Order shall either at one time or from time to time pursuant to such instructions as may be described therein authenticate and deliver such Securities as in this Indenture provided and not otherwise. Each Security shall be dated the date of its authentication. No Security shall be entitled to any benefit under this Indenture or be valid or obligatory for any purpose unless there appears on such Security a certificate of authentication substantially in the form provided for herein duly executed by the Trustee by manual signature, and such certificate upon any Security shall be conclusive evidence, and the only evidence, that such Security has been duly authenticated and delivered hereunder and is entitled to the benefits of the Indenture. Section 304 Temporary Securities. Pending the preparation of definitive Securities, the Company may execute, and upon receipt of a Company Order the Trustee shall authenticate and deliver, temporary Securities which are printed, lithographed, typewritten, mimeographed or otherwise produced, in any authorized denomination, substantially of the tenor of the definitive Securities in lieu of which 21 they are issued and with such appropriate insertions, omissions, substitutions and other variations as the officers executing such Securities may determine, as evidenced by their execution of such Securities. Every such temporary Security shall be executed by the Company and shall be authenticated and delivered by the Trustee upon the same conditions and in substantially the same manner, and with the same effect, as the definitive Security or Securities in lieu of which it is issued. If temporary Securities are issued, the Company will cause definitive Securities to be prepared without unreasonable delay. After the preparation of definitive Securities, the temporary Securities shall be exchangeable for definitive Securities upon surrender of the temporary Securities at any office or agency of the Company designated pursuant to Section 1002, without charge to the Holder. Upon surrender for cancellation of any one or more temporary Securities the Company shall execute and the Trustee shall authenticate and deliver in exchange therefor one or more definitive Securities of a like principal amount of authorized denominations. Until so exchanged the temporary Securities shall in all respects be entitled to the same benefits under this Indenture as definitive Securities. Section 305 Registration, Registration of Transfer and Exchange. (a) The Company shall cause to be kept at the Corporate Trust Office of the Trustee a register (the "Security Register") in which, subject to such reasonable regulations as it may prescribe, the Company shall provide for the registration of Securities and of transfers of Securities. The Trustee is hereby appointed "Security Registrar" for the purpose of registering Securities and transfers of Securities as herein provided. At all reasonable times the Security Register shall be open for inspection by the Company. Upon surrender for registration of transfer of any Security at an office or agency of the Company designated pursuant to Section 1002 for such purpose, the Company shall execute, and the Trustee shall authenticate and deliver, in the name of the designated transferee or transferees, one or more new Securities of any authorized denominations and of a like aggregate principal amount. At the option of the Holder, Securities may be exchanged for other Securities of any authorized denominations and of a like aggregate principal amount, upon surrender of the Securities to be exchanged at the office or agency maintained for that purpose. Whenever any Securities are so surrendered for exchange, the Company shall execute, and the Trustee shall authenticate and deliver, the Securities which the Holder making the exchange is entitled to receive. (b) All Securities issued upon any registration of transfer or exchange of Securities shall be the valid obligations of the Company, evidencing the same debt, and entitled to the same benefits under this Indenture, as the Securities surrendered upon such registration of transfer or exchange. Every Security presented or surrendered for registration of transfer or for exchange shall (if so required by the Company or the Trustee) be duly endorsed, or be accompanied by a written instrument of transfer in form satisfactory to the Company and the Security Registrar 22 duly executed, by the Holder thereof or his attorney duly authorized in writing, and, in the case of a transfer, with an appropriate guarantee of signature. No service charge shall be made for any registration of transfer or exchange of Securities except as provided in Section 306. The Company may require payment of a sum sufficient to cover any tax or other governmental charge that may be imposed in connection with any registration of transfer or exchange of Securities, other than exchanges pursuant to Section 304, 906, 1108, 1302 or 1405 not involving any transfer. The Company shall not be required (i) to issue, register the transfer of or exchange any Security during a period beginning at the opening of business 15 days before the day of the mailing of a notice of redemption of Securities selected for redemption under Section 1104 and ending at the close of business on the day of such mailing, or (ii) to register the transfer of or exchange any Security so selected for redemption in whole or in part, except the unredeemed portion of any Security being redeemed in part. Section 306 Mutilated, Destroyed, Lost and Stolen Securities. If any mutilated Security is surrendered to the Trustee, the Company shall execute and the Trustee shall authenticate and deliver in exchange therefor a new Security of like tenor and principal amount and bearing a number not contemporaneously outstanding. If there shall be delivered to the Company and the Trustee (a) evidence to their satisfaction of the destruction, loss or theft of any Security and (b) such security or indemnity as may be required by them to save each of them and any agent of either of them harmless, then, in the absence of notice to the Company or the Trustee that such Security has been acquired by a bona fide purchaser, the Company shall execute and the Trustee shall authenticate and deliver, in lieu of any such destroyed, lost or stolen Security, a new Security of like tenor and principal amount and bearing a number not contemporaneously outstanding. In case any such mutilated, destroyed, lost or stolen Security has become or is about to become due and payable, the Company in its discretion may, instead of issuing a new Security, pay such Security. Upon the issuance of any new Security under this Section, the Company may require the payment of a sum sufficient to cover any tax or other governmental charge that may be imposed in relation thereto and any other expenses (including the fees and expenses of the Trustee) connected therewith. Every new Security issued pursuant to this Section in lieu of any destroyed, lost or stolen Security shall constitute an original additional contractual obligation of the Company, whether or not the destroyed, lost or stolen Security shall be at any time enforceable by anyone, and shall be entitled to all the benefits of this Indenture equally and proportionately with any and all other Securities duly issued hereunder. 23 The provisions of this Section are exclusive and shall preclude (to the extent lawful) all other rights and remedies with respect to the replacement or payment of mutilated, destroyed, lost or stolen Securities. Section 307 Payment of Interest; Interest Rights Preserved. Interest on any Security which is payable, and is punctually paid or duly provided for, on any Interest Payment Date shall be paid to the Person in whose name that Security (or one or more Predecessor Securities) is registered at the close of business on the Regular Record Date for such interest. At the option of the Company, interest on any Security may be paid by mailing checks to the addresses of the Holders thereof as such addresses appear in the Securities Register. Any interest on any Security which is payable, but is not punctually paid or duly provided for, on any Interest Payment Date (herein called "Defaulted Interest") shall forthwith cease to be payable to the Holder on the relevant Regular Record Date by virtue of having been such Holder, and such Defaulted Interest may be paid by the Company, at its election in each case, as provided in Clause (a) or (b) below: (a) The Company may elect to make payment of any Defaulted Interest to the Persons in whose names the Securities (or their respective Predecessor Securities) are registered at the close of business on a Special Record Date for the payment of such Defaulted Interest which shall be fixed in the following manner. The Company shall notify the Trustee in writing of the amount of Defaulted Interest proposed to be paid on each Security and the date of the proposed payment, and at the same time the Company shall deposit with the Trustee an amount of money equal to the aggregate amount proposed to be paid in respect of such Defaulted Interest or shall make arrangements satisfactory to the Trustee for such deposit prior to the date of the proposed payment, such money when deposited to be held in trust for the benefit of the Persons entitled to such Defaulted Interest as in this Clause provided. Thereupon, the Trustee shall fix a Special Record Date for the payment of such Defaulted Interest which shall be not more than 15 days and not less than 10 days prior to the date of the proposed payment and not less than 10 days after the receipt by the Trustee of the notice of the proposed payment. The Trustee shall promptly notify the Company of such Special Record Date and, in the name and at the expense of the Company, shall cause notice of the proposed payment of such Defaulted Interest and the Special Record Date therefor to be mailed, first-class postage prepaid, to each Holder at his address as it appears in the Security Register, not less than 10 days prior to such Special Record Date. Notice of the proposed payment of such Defaulted Interest and the Special Record Date therefor having been so mailed, such Defaulted Interest shall be paid to the Persons in whose names the Securities (or their respective Predecessor Securities) are registered at the close of business on such Special Record Date and shall no longer be payable pursuant to the following Clause (b). (b) The Company may make payment of any Defaulted Interest in any other lawful manner not inconsistent with the requirements of any securities exchange on which the Securities may be listed, and upon such notice as may be required by such exchange, if, after notice given by the Company to the Trustee of the proposed payment pursuant to this Clause, such manner of payment shall be deemed practicable by the Trustee. 24 Subject to the foregoing provisions of this Section, each Security delivered under this Indenture upon registration of transfer of or in exchange for or in lieu of any other Security shall carry the rights to interest accrued and unpaid, and to accrue, which were carried by such other Security. In the case of any Security which is converted after any Regular Record Date and on or prior to the next succeeding Interest Payment Date (other than any Security whose Maturity is prior to such Interest Payment Date), interest whose Stated Maturity is on such Interest Payment Date shall be payable on such Interest Payment Date notwithstanding such conversion, and such interest (whether or not punctually paid or duly provided for) shall be paid to the Person in whose name that Security (or one or more Predecessor Securities) is registered at the close of business on such Regular Record Date; provided, however, that Securities so surrendered for conversion shall (except in the case of Securities or portions thereof which have been called for redemption on a Redemption Date within such period) be accompanied by payment in funds acceptable to the Company of an amount equal to the interest payable on such Interest Payment Date on the principal amount being surrendered for conversion. Except as otherwise expressly provided in the immediately preceding sentence, in the case of any Security which is converted, interest whose Stated Maturity is after the date of conversion of such Security shall not be payable. Section 308 Persons Deemed Owners. Prior to due presentment of a Security for registration of transfer, the Company, the Trustee and any agent of the Company or the Trustee may treat the Person in whose name such Security is registered as the owner of such Security for the purpose of receiving payment of principal of and premium, if any, and (subject to Section 307) interest on such Security and for all other purposes whatsoever, whether or not such Security be overdue, and neither the Company, the Trustee nor any agent of the Company or the Trustee shall be affected by notice to the contrary. Section 309 Cancellation. All Securities surrendered for payment, redemption, registration of transfer, exchange or conversion shall, if surrendered to any Person other than the Trustee, be delivered to the Trustee and shall be promptly canceled by it. The Company may at any time deliver to the Trustee for cancellation any Securities previously authenticated and delivered hereunder which the Company may have acquired in any manner whatsoever, and all Securities so delivered shall be promptly canceled by the Trustee. No Securities shall be authenticated in lieu of or in exchange for any Securities canceled as provided in this Section, except as expressly permitted by this Indenture. All canceled Securities held by the Trustee shall be disposed of as directed by a Company Order. Section 310 Computation of Interest. Interest on the Securities shall be computed on the basis of a 360-day year of twelve 30-day months. 25 ARTICLE 4. SATISFACTION and DISCHARGE Section 401 Satisfaction and Discharge of Indenture. This Indenture shall upon Company Request cease to be of further effect (except as to any surviving rights of conversion or registration of transfer or exchange of Securities herein expressly provided for), and the Trustee, at the expense of the Company, shall execute proper instruments acknowledging satisfaction and discharge of this Indenture, when (a) either (i) all Securities theretofore authenticated and delivered (other than (A) Securities which have been destroyed, lost or stolen and which have been replaced or paid as provided in Section 306 and (B) Securities for whose payment money has theretofore been deposited in trust or segregated and held in trust by the Company and thereafter repaid to the Company or discharged from such trust, as provided in Section 1003) have been delivered to the Trustee for cancellation; or (ii) all such Securities not theretofore delivered to the Trustee for cancellation (A) have become due and payable, or (B) will become due and payable at their Stated Maturity within one year, or (C) are to be called for redemption within one year under arrangements satisfactory to the Trustee for the giving of notice of redemption by the Trustee in the name, and at the expense, of the Company, or (D) are delivered to the Trustee for conversion in accordance with Article Thirteen, and the Company, in the case of (A), (B), (C) or (D) above, has deposited or caused to be deposited with the Trustee as trust funds in trust for the purpose an amount sufficient to pay and discharge the entire indebtedness on such Securities not theretofore delivered to the Trustee for cancellation for principal and premium, if any, and interest to the date of such deposit (in the case of Securities which have become due and payable) or to the Stated Maturity or Redemption Date, as the case may be; (b) the Company has paid or caused to be paid all other sums payable hereunder by the Company; and (c) the Company has delivered to the Trustee an Officers' Certificate and an Opinion of Counsel, each stating that all conditions precedent herein provided for relating to the satisfaction and discharge of this Indenture have been complied with. Notwithstanding the satisfaction and discharge of this Indenture, the obligations of the Company to the Trustee under 26 Section 607, the obligations of the Trustee to any Authenticating Agent under Section 614 and, if money shall have been deposited with the Trustee pursuant to subclause (ii) of Clause (a) of this Section, the obligations of the Trustee under Section 402 and the last paragraph of Section 1003 shall survive. Section 402 Application of Trust Money. Subject to the provisions of the last paragraph of Section 1003, all money deposited with the Trustee pursuant to Section 401 shall be held in trust and applied by it, in accordance with the provisions of the Securities and this Indenture, to the payment, either directly or through any Paying Agent (including the Company acting as its own Paying Agent) as the Trustee may determine, to the Persons entitled thereto, of the principal and premium, if any, and interest for whose payment such money has been deposited with the Trustee. All moneys deposited with the Trustee pursuant to Section 401 (and held by it or any Paying Agent) for the payment of Securities subsequently converted shall be returned to the Company upon Company Request. Section 403 Reinstatement. If the Trustee or the Paying Agent is unable to apply any money in accordance with this Article Four by reason of any order or judgment of any court or governmental authority enjoining, restraining or otherwise prohibiting such application, then the Company's obligations under this Indenture and the Securities shall be revived and reinstated as though no deposit had occurred pursuant to this Article Four until such time as the Trustee or Paying Agent is permitted to apply all money held in trust with respect to the Securities; provided, however, that if the Company makes any payment of principal of or any premium or interest on any Security following the reinstatement of its obligations, the Company shall be subrogated to the rights of the Holders of the Securities to receive such payment from the money so held in trust. ARTICLE 5. REMEDIES Section 501 Events of Default. "Event of Default", wherever used herein, means any one of the following events (whatever the reason for such Event of Default and whether it shall be occasioned by the provisions of Article Twelve or be voluntary or involuntary or be effected by operation of law or pursuant to any judgment, decree or order of any court or any order, rule or regulation of any administrative or governmental body): (a) default in the payment of any interest upon any Security when it becomes due and payable, whether or not such payment is prohibited by the provisions of Article Twelve, and continuance of such default for a period of 30 days; or (b) default in the payment of the principal of or premium, if any, on any Security at its Maturity, whether or not such payment is prohibited by the provisions of Article Twelve; or 27 (c) default in the payment of the Repurchase Price in respect of any Security on the Repurchase Date, whether or not such payment is prohibited by the provisions of Article Twelve or failure to provide timely notice of a Change in Control as required by Section 1402; or (d) default in the performance, or breach, of any covenant or warranty of the Company in this Indenture (other than a covenant or warranty a default in whose performance or whose breach is elsewhere in this Section specifically dealt with), and continuance of such default or breach for a period of 45 days after there has been given, by registered or certified mail, to the Company by the Trustee or to the Company and the Trustee by the Holders of at least 25% in principal amount of the Outstanding Securities a written notice specifying such default or breach and requiring it to be remedied and stating that such notice is a "Notice of Default" hereunder; or (e) a default under any bond, debenture, note or other evidence of indebtedness for money borrowed by the Company or any Significant Subsidiary or under any mortgage, indenture or instrument under which there may be issued or by which there may be secured or evidenced any indebtedness for money borrowed by the Company or any Significant Subsidiary having an aggregate principal amount of $10,000,000 or more, which default (i) is caused by, whether such indebtedness now exists or shall hereafter be created, which default shall constitute a failure to pay the principal of or premium, if any, or interest on such indebtedness when due and payable after the expiration of any applicable grace period with respect thereto or (ii) shall have resulted in such indebtedness becoming or being declared due and payable prior to the date on which it would otherwise have become due and payable, without such indebtedness having been discharged, or such acceleration having been rescinded or annulled, within a period of 30 days after there shall have been given, by registered or certified mail, to the Company by the Trustee or to the Company and the Trustee by the Holders of at least 25% in principal amount of the Outstanding Securities a written notice specifying such default and requiring the Company to cause such indebtedness to be discharged or cause such acceleration to be rescinded or annulled and stating that such notice is a "Notice of Default" hereunder; or (f) a final judgment or final judgments for the payment of money against the Company or any Significant Subsidiary the entry by a court or courts of competent jurisdiction of which remain undischarged for a period (during which execution shall not be effectively stayed, the posting of any required bond not being deemed an execution for purposes hereof) of 30 days, provided that the aggregate amount of all such judgments exceeds $[10,000,000] (net of amounts to which the Company or such Subsidiary is entitled pursuant to insurance policies which can reasonably be expected to be paid in the ordinary course); or (g) the entry by a court having jurisdiction in the premises of (i) a decree or order for relief in respect of the Company or any Significant Subsidiary in an involuntary case or proceeding under any applicable Federal or State bankruptcy, insolvency, reorganization or other similar law or (ii) a decree or order adjudging the Company or any Significant Subsidiary a bankrupt or insolvent, or approving as properly filed a petition seeking reorganization, arrangement, adjustment or composition of or in respect of the Company or any Significant Subsidiary under any applicable Federal or State law, or appointing a custodian, receiver, 28 liquidator, assignee, trustee, sequestrator or other similar official of the Company or any Significant Subsidiary or of any substantial part of its property, or ordering the winding up or liquidation of its affairs, and the continuance of any such decree or order for relief or any such other decree or order unstayed and in effect for a period of 90 consecutive days; or (h) the commencement by the Company or any Significant Subsidiary of a voluntary case or proceeding under any applicable Federal or State bankruptcy, insolvency, reorganization or other similar law or of any other case or proceeding to be adjudicated a bankrupt or insolvent, or the consent by it to the entry of a decree or order for relief in respect of the Company or any Significant Subsidiary in an involuntary case or proceeding under any applicable Federal or State bankruptcy, insolvency, reorganization or other similar law or to the commencement of any bankruptcy or insolvency case or proceeding against it, or the filing by it of a petition or answer or consent seeking reorganization or relief under any applicable Federal or State law, or the consent by it to the filing of such petition or to the appointment of or taking possession by a custodian, receiver, liquidator, assignee, trustee, sequestrator or other similar official of the Company or any Significant Subsidiary or of any substantial part of its property, or the making by it of an assignment for the benefit of creditors, or the admission by it in writing of its inability to pay its debts generally as they become due, or the taking of corporate action by the Company or any Significant Subsidiary in furtherance of any such action. Upon receipt by the Trustee of any Notice of Default pursuant to this Section 501, a record date shall automatically and without any other action by any Person be set for the purpose of determining the Holders of Outstanding Securities entitled to join in such Notice of Default, which record date shall be the close of business on the day the Trustee receives such Notice of Default. The Holders of Outstanding Securities on such record date (or their duly appointed agents), and only such Persons, shall be entitled to join in such Notice of Default, whether or not such Holders remain Holders after such record date: provided, that unless such Notice of Default shall have become effective by virtue of the Holders of the requisite principal amount of Outstanding Securities on such record date (or their duly appointed agents) having joined therein on or prior to the 90th day after such record date, such Notice of Default shall automatically and without any action by any Person be canceled and of no further force or effect. Section 502 Acceleration of Maturity; Rescission and Annulment. If an Event of Default (other than an Event of Default specified in Section 501(g) or (h)) occurs and is continuing, then and in every such case the Trustee or the Holders of not less than 25% in principal amount of the Outstanding Securities may declare the principal of all the Securities to be due and payable immediately, by a notice in writing to the Company (and to the Trustee if given by Holders), and upon any such declaration such principal plus any interest accrued on the Securities to the date of declaration shall become immediately due and payable. In the case of an Event of Default specified in Section 501(g) or (h), all unpaid principal of and accrued interest on the Securities then outstanding shall be due and payable immediately without any declaration or other act on the part of the Trustee or the holders of Securities. 29 At any time after such a declaration of acceleration has been made and before a judgment or decree for payment of the money due has been obtained by the Trustee as hereinafter in this Article provided, the Holders of a majority in principal amount of the Outstanding Securities, by written notice to the Company and the Trustee, may rescind and annul such declaration and its econsequences if: (a) the Company has paid or deposited with the Trustee a sum sufficient to pay (i) all overdue interest on all Securities, (ii) the principal of and premium, if any, on any Securities which have become due otherwise than by such declaration of acceleration and interest thereon at the rate borne by the Securities, (iii) to the extent that payment of such interest is lawful, interest upon overdue interest at the rate borne by the Securities, and (iv) all sums paid or advanced by the Trustee hereunder and the reasonable compensation, expenses, disbursements and advances of the Trustee, its agents and counsel; and (b) all Events of Default, other than the nonpayment of the principal of Securities which has become due solely by such declaration of acceleration, have been cured or waived as provided in Section 513. No such rescission and waiver shall affect any subsequent default or impair any right consequent thereon. Upon receipt by the Trustee of any declaration of acceleration, or any rescission and annulment of any such declaration, pursuant to this Section 502, a record date shall automatically and without any other action by any Person be set for the purpose of determining the Holders of Outstanding Securities entitled to join in such declaration, or rescission and annulment, as the case may be, which record date shall be the close of business on the day the Trustee receives such declaration, or rescission and annulment, as the case may be. The Holders of Outstanding Securities on such record date (or their duly appointed agents), and only such Persons, shall be entitled to join in such declaration, or rescission and annulment, as the case may be, whether or not such Holders remain Holders after such record date; provided, that unless such declaration, or rescission and annulment, as the case may be, shall have become effective by virtue of Holders of the requisite principal amount of Outstanding Securities on such record date (or their duly appointed agents) having joined therein on or prior to the 90th day after such record date, such declaration, or rescission and annulment, as the case may be, shall automatically and without any action by any Person be canceled and of no further force or effect. Section 503 Collection of Indebtedness and Suits for Enforcement by Trustee. The Company covenants that if (a) default is made in the payment of any interest on any Security when such interest becomes due and payable and such default continues for a period of 30 days, or(b)default is made in the payment of the principal of or premium, if any, on any Security at the Maturity thereof, the Company will, upon demand of the Trustee, pay to it, for the benefit of the Holders of such 30 Securities, the whole amount then due and payable on such Securities for principal and premium, if any, and interest, and, to the extent that payment of such interest shall be legally enforceable, interest on any overdue principal and premium, if any, and on any overdue interest, at the rate borne by the Securities, and, in addition thereto, such further amount as shall be sufficient to cover the costs and expenses of collection, including the reasonable compensation, expenses, disbursements and advances of the Trustee, its agents and counsel. If an Event of Default specified in Section 503(a) or (b) occurs and is continuing with respect to the Securities, the Trustee may recover judgment in its own name and as trustee of an express trust against the Company for the collection of such sums due and unpaid. If an Event of Default occurs and is continuing, the Trustee may in its discretion proceed to protect and enforce its rights and the rights of the Holders by such appropriate judicial proceedings as the Trustee shall deem most effectual to protect and enforce any such rights, whether for the specific enforcement of any covenant or agreement in this Indenture or in aid of the exercise of any power granted herein, or to enforce any other proper remedy. Section 504 Trustee May File Proofs of Claim. In case of any judicial proceeding relative to the Company (or any other obligor upon the Securities), its property or its creditors, the Trustee shall be entitled and empowered, by intervention in such proceeding or otherwise, including filing proofs of claim in federal bankruptcy proceedings, to take any and all actions authorized under the Trust Indenture Act in order to have the claims of the Holders and the Trustee allowed in any such proceeding. In particular, the Trustee shall be authorized to collect and receive any moneys or other property payable or deliverable on any such claims and to distribute the same; and any custodian, receiver, assignee, trustee, liquidator, sequestrator or other similar official in any such judicial proceeding is hereby authorized by each Holder to make such payments to the Trustee and, in the event that the Trustee shall consent to the making of such payments directly to the Holders, to pay to the Trustee any amount due it for the reasonable compensation, expenses, disbursements and advances of the Trustee, its agents and counsel, and any other amounts due the Trustee under Section 607. No provision of this Indenture shall be deemed to authorize the Trustee to authorize or consent to or accept or adopt on behalf of any Holder any plan of reorganization, arrangement, adjustment or composition affecting the Securities or the rights of any Holder thereof or to authorize the Trustee to vote in respect of the claim of any Holder in any such proceeding; provided, however, that the Trustee may, on behalf of the Holders, vote for the election of a trustee in bankruptcy or similar official and may be a member of the Creditors' Committee. 31 Section 505 Trustee May Enforce Claims Without Possession of Securities. All rights of action and claims under this Indenture or the Securities may be prosecuted and enforced by the Trustee without the possession of any of the Securities or the production thereof in any proceeding relating thereto, and any such proceeding instituted by the Trustee shall be brought in its own name as trustee of an express trust, and any recovery of judgment shall, after provision for the payment of the reasonable compensation, expenses, disbursements and advances of the Trustee, its agents and counsel, be for the ratable benefit of the Holders of the Securities in respect of which such judgment has been recovered. Section 506 Application of Money Collected. Subject to Article Twelve, any money collected by the Trustee pursuant to this Article shall be applied in the following order, at the date or dates fixed by the Trustee and, in case of the distribution of such money on account of principal or premium, if any, or interest, upon presentation of the Securities and the notation thereon of the payment if only partially paid and upon surrender thereof if fully paid: FIRST: To payment of all amounts due the Trustee under Section 607; SECOND: To the payment of the amounts then due and unpaid for principal of and premium, if any, and interest on the Securities in respect of which or for the benefit of which such money has been collected, ratably, without preference or priority of any kind, according to the amounts due and payable on such Securities for principal and premium, if any, and interest, respectively; and THIRD: The balance, if any, to the Company or any other Person or Persons determined to be entitled thereto. Section 507 Limitation on Suits. No Holder of any Security shall have any right to institute any proceeding, judicial or otherwise, with respect to this Indenture, or for the appointment of a receiver or trustee, or for any other remedy hereunder, unless (a) such Holder has previously given written notice to the Trustee of a continuing Event of Default;(b)the Holders of not less than 25% in principal amount of the Outstanding Securities shall have made written request to the Trustee to institute proceedings in respect of such Event of Default in its own name as Trustee hereunder;(c)such Holder or Holders have offered to the Trustee reasonable indemnity against the costs, expenses and liabilities to be incurred in compliance with such request; (d) the Trustee for 60 days after its receipt of such notice, request and offer of indemnity has failed to institute any such proceeding; and(e)no direction inconsistent with such written request has been given to the Trustee during such 60-day period by the Holders of a majority in principal amount of the Outstanding Securities; it being understood and intended that 32 no one or more Holders shall have any right in any manner whatever by virtue of, or by availing of, any provision of this Indenture to affect, disturb or prejudice the rights of any other Holders, or to obtain or to seek to obtain priority or preference over any other Holders or to enforce any right under this Indenture, except in the manner herein provided and for the equal and ratable benefit of all the Holders. Section 508 Unconditional Right of Holders to Receive Principal, Premium and Interest and to Convert. Notwithstanding any other provision in this Indenture, the Holder of any Security shall have the right, which is absolute and unconditional, to receive payment of the principal of and premium, if any, and (subject to Section 307) interest on such Security on the respective Stated Maturities expressed in such Security (or, in the case of redemption, on the Redemption Date or, in the case of a repurchase pursuant to Article Fourteen, on the Repurchase Date) and to convert such Security in accordance with Article Thirteen and to institute suit for the enforcement of any such payment and right to convert, and such rights shall not be impaired without the consent of such Holder. Section 509 Restoration of Rights and Remedies. If the Trustee or any Holder has instituted any proceeding to enforce any right or remedy under this Indenture and such proceeding has been discontinued or abandoned for any reason, or has been determined adversely to the Trustee or to such Holder, then and in every such case, subject to any determination in such proceeding, the Company, the Trustee and the Holders shall be restored severally and respectively to their former positions hereunder and thereafter all rights and remedies of the Trustee and the Holders shall continue as though no such proceeding had been instituted. Section 510 Rights and Remedies Cumulative. Except as otherwise provided with respect to the replacement or payment of mutilated, destroyed, lost or stolen Securities in Section 306, no right or remedy herein conferred upon or reserved to the Trustee or to the Holders is intended to be exclusive of any other right or remedy, and every right and remedy shall, to the extent permitted by law, be cumulative and in addition to every other right and remedy given hereunder or now or hereafter existing at law or in equity or otherwise. The assertion or employment of any right or remedy hereunder, or otherwise, shall not prevent the concurrent assertion or employment of any other appropriate right or remedy. 33 Section 511 Delay or Omission Not Waiver. No delay or omission of the Trustee or of any Holder of any Security to exercise any right or remedy accruing upon any Event of Default shall impair any such right or remedy or constitute a waiver of any such Event of Default or an acquiescence therein. Every right and remedy given by this Article or by law to the Trustee or to the Holders may be exercised from time to time, and as often as may be deemed expedient, by the Trustee or by the Holders, as the case may be. Section 512 Control by Holders. The Holders of a majority in principal amount of the Outstanding Securities shall have the right to direct the time, method and place of conducting any proceeding for any remedy available to the Trustee or exercising any trust or power conferred on the Trustee; provided, that (a) such direction shall not be in conflict with any rule of law or with this Indenture; and (b) the Trustee may take any other action deemed proper by the Trustee which is not inconsistent with such direction; and (c) subject to the provisions of Section 601, the Trustee shall have the right to decline to follow any such direction if the Trustee in good faith shall determine that the action so directed would involve the Trustee in personal liability or would be unduly prejudicial to Holders not joining in such direction. Upon receipt by the Trustee of any such direction, a record date shall automatically and without any other action by any Person be set for the purpose of determining the Holders of Outstanding Securities entitled to join in such direction, which record date shall be the close of business on the day the Trustee receives such direction. The Holders of Outstanding Securities on such record date (or their duly appointed agents), and only such Persons, shall be entitled to join in such direction, whether or not such Holders remain Holders after such record date; provided, that unless such direction shall have become effective by virtue of Holders of the requisite principal amount of Outstanding Securities on such record date (or their duly appointed agents) having joined therein on or prior to the 90th day after such record date, such direction shall automatically and without any action by any Person be canceled and of no further force or effect. Section 513 Waiver of Past Defaults. The Holders of not less than a majority in principal amount of the Outstanding Securities may on behalf of the Holders of all the Securities waive any past default hereunder and its consequences, except a default 34 (a) in the payment of the principal of or premium, if any, or interest on any Security, or, without the consent of the Holder of the Security affected, in the repurchase of any Security or part thereof in accordance with Article Fourteen, or (b) in respect of a covenant or provision hereof which under Article Nine cannot be modified or amended without the consent of the Holder of each Outstanding Security affected. Upon any such waiver, such default shall cease to exist, and any Event of Default arising therefrom shall be deemed to have been cured, for every purpose of this Indenture; but no such waiver shall extend to any subsequent or other default or impair any right consequent thereon. Section 514 Undertaking for Costs. In any suit for the enforcement of any right or remedy under this Indenture, or in any suit against the Trustee for any action taken, suffered or omitted by it as Trustee, a court in its discretion may require any party litigant in such suit to file an undertaking to pay the costs of such suit, and may assess reasonable costs against any such party litigant, including reasonable attorneys' fees, in the manner and to the extent provided in the Trust Indenture Act; provided, that this Section shall not be deemed to authorize any court to require such an undertaking or to make such an assessment in any suit instituted by the Company or in any suit for the enforcement of the right to convert any Security in accordance with Article Thirteen. Section 515 Waiver of Stay or Extension Laws. The Company covenants (to the extent that it may lawfully do so) that it will not at any time insist upon, or plead, or in any manner whatsoever claim or take the benefit or advantage of, any stay or extension law wherever enacted, now or at any time hereafter in force, which may affect the covenants or the performance of this Indenture; and the Company (to the extent that it may lawfully do so) hereby expressly waives all benefit or advantage of any such law and covenants that it will not hinder, delay or impede the execution of any power herein granted to the Trustee, but will suffer and permit the execution of every such power as though no such law had been enacted. 35 ARTICLE 6. THE TRUSTEE Section 601 Certain Duties and Responsibilities. The duties and responsibilities of the Trustee shall be as provided by the Trust Indenture Act. Notwithstanding the foregoing, no provision of this Indenture shall require the Trustee to expend or risk its own funds or otherwise incur any financial liability in the performance of any of its duties hereunder, or in the exercise of any of its rights or powers, if it shall have reasonable grounds for believing that repayment of such funds or adequate indemnity against such risk or liability is not reasonably assured to it. Whether or not therein expressly so provided, every provision of this Indenture relating to the conduct or affecting the liability of or affording protection to the Trustee shall be subject to the provisions of this Section. Section 602 Notice of Defaults. The Trustee shall give the Holders notice of any default hereunder in the manner and to the extent provided by the Trust Indenture Act; provided, however, that in the case of any default of the character specified in Section 501(d), no such notice to Holders shall be given until at least 30 days after the occurrence thereof. For the purpose of this Section, the term "default" means any event which is, or after notice or lapse of time or both would become, an Event of Default. Notwithstanding the foregoing, the Trustee shall be entitled to withhold notice of any default hereunder to the extent permitted by Section 315(b) of the Trust Indenture Act. Section 603 Certain Rights of Trustee. Subject to the provisions of Section 601: (a) the Trustee may rely and shall be protected in acting or refraining from acting upon any resolution, certificate, statement, instrument, opinion, report, notice, request, direction, consent, order, bond, debenture, note, other evidence of indebtedness or other paper or document believed by it to be genuine and to have been signed or presented by the proper party or parties; (b) any request or direction of the Company mentioned herein shall be sufficiently evidenced by a Company Request or Company Order and any resolution of the Board of Directors may be sufficiently evidenced by a Board Resolution;(c)whenever in the administration of this Indenture the Trustee shall deem it desirable that a matter be proved or established prior to taking, suffering or omitting any action hereunder, the Trustee (unless other evidence be herein specifically prescribed) may, in the absence of bad faith on its part, rely upon an Officers' Certificate; (d) the Trustee may consult with counsel satisfactory to it and the written advice of such counsel or any Opinion of Counsel shall be full and complete authorization and protection in respect of any action taken, suffered or omitted by it hereunder in good faith and in reliance thereon; 36 (e) the Trustee shall be under no obligation to exercise any of the rights or powers vested in it by this Indenture at the request or direction of any of the Holders pursuant to this Indenture, unless such Holders shall have offered to the Trustee reasonable security or indemnity against the costs, expenses and liabilities which might be incurred by it in compliance with such request or direction;(f)the Trustee shall not be bound to make any investigation into the facts or matters stated in any resolution, certificate, statement, instrument, opinion, report, notice, request, direction, consent, order, bond, debenture, note, other evidence of indebtedness or other paper or document, but the Trustee, in its discretion, may make such further inquiry or investigation into such facts or matters as it may see fit, and, if the Trustee shall determine to make such further inquiry or investigation, it shall be entitled to examine the books, records and premises of the Company, personally or by agent or attorney; (g) the Trustee may execute any of the trusts or powers hereunder or perform any duties hereunder either directly or by or through agents or attorneys and the Trustee shall not be responsible for any misconduct or negligence on the part of any agent or attorney appointed with due care by it hereunder; and(h)the Trustee shall not be required to give any bond or surety in respect of the performance of its powers and duties hereunder. Section 604 Not Responsible for Recitals or Issuance of Securities. The recitals contained herein and in the Securities, except the Trustee's certificate of authentication, shall be taken as the statements of the Company, and the Trustee and any Authenticating Agent assume no responsibility for their correctness. The Trustee makes no representations as to the validity or sufficiency of this Indenture or of the Securities. The Trustee and any Authenticating Agent shall not be accountable for the use or application by the Company of Securities or the proceeds thereof. Section 605 May Hold Securities. The Trustee, any Authenticating Agent, any Paying Agent, any Security Registrar or any other agent of the Company, in its individual or any other capacity, may become the owner or pledgee of Securities and, subject to Sections 608 and 613, may otherwise deal with the Company with the same rights it would have if it were not Trustee, Authenticating Agent, Paying Agent, Security Registrar or such other agent. Section 606 Money Held in Trust. Money held by the Trustee or any Paying Agent in trust hereunder need not be segregated from other funds except to the extent required by law. The Trustee or any Paying Agent shall be under no liability for interest on any money received by it hereunder except as otherwise agreed with the Company. 37 Section 607 Compensation and Reimbursement. The Company agrees: (a) to pay to the Trustee from time to time reasonable compensation for all services rendered by it hereunder as may be mutually agreed upon in writing by the Company and the Trustee (which compensation shall not be limited by any provision of law in regard to the compensation of a trustee of an express trust); (b) except as otherwise expressly provided herein, to reimburse the Trustee upon its request for all reasonable expenses, disbursements and advances incurred or made by the Trustee in accordance with any provision of this Indenture (including the reasonable compensation and the expenses and disbursements of its agents and counsel) except to the extent any such expense, disbursement or advance may be attributable to its negligence or bad faith; and (c) to indemnify the Trustee for, and to hold it harmless against, any loss, liability or expense incurred without negligence or bad faith on its part, arising out of or in connection with the acceptance or administration of this trust, including the costs and expenses of defending itself against any claim or liability in connection with the exercise or performance of any of its powers or duties hereunder. As security for the performance of the obligations of the Company under this Section 607, the Trustee shall have a lien prior to the Securities upon all property and funds held or collected by the Trustee as such, except funds held in trust for the benefit of the Holders of particular Securities. Section 608 Disqualification; Conflicting Interests. If the Trustee has or shall acquire a conflicting interest within the meaning of the Trust Indenture Act, the Trustee shall either eliminate such interest or resign, to the extent and in the manner provided by, and subject to the provisions of, the Trust Indenture Act and this Indenture. Section 609 Corporate Trustee Required; Eligibility. There shall at all times be a Trustee hereunder which shall be a corporation organized and doing business under the laws of the United States of America, or any State or Territory or the District of Columbia that (a) is eligible pursuant to the Trust Indenture Act to act as such, (b) has (or, in the case of a corporation included in a bank holding company system, whose related bank holding company has) a combined capital and surplus of at least $50,000,000 and (c) has a Corporate Trust Office in the Borough of Manhattan, The City of New York. If such corporation publishes reports of condition at least annually, pursuant to law or to the requirements of a Federal or state supervising or examining authority, then for the purposes of this Section, the combined capital and surplus of such corporation shall be deemed to be its combined capital and surplus as set forth in its most recent report of condition so published. No obligor upon the Securities or Affiliate of such obligor shall serve as Trustee upon the Securities. If at any time 38 the Trustee shall cease to be eligible in accordance with the provisions of this Section, it shall resign immediately in the manner and with the effect hereinafter specified in this Article. Section 610 Resignation and Removal; Appointment of Successor. (a) No resignation or removal of the Trustee and no appointment of a successor Trustee pursuant to this Article shall become effective until the acceptance of appointment by the successor Trustee in accordance with the applicable requirements of Section 611. (b) The Trustee may resign at any time by giving written notice thereof to the Company. If an instrument of acceptance by a successor Trustee required by Section 611 shall not have been delivered to the resigning Trustee within 30 days after the giving of such notice of resignation, the resigning Trustee may petition any court of competent jurisdiction for the appointment of a successor Trustee. (c) The Trustee may be removed at any time by an Act of the Holders of a majority in principal amount of the Outstanding Securities delivered to the Trustee and to the Company. (d) If at any time: (i) the Trustee shall fail to comply with Section 608 after written request therefor by the Company or by any Holder who has been a bona fide Holder of a Security for the last six months, or (ii) the Trustee shall cease to be eligible under Section 609 and shall fail to resign after written request therefor by the Company or by any such Holder, or (iii) the Trustee shall become incapable of acting or shall be adjudged a bankrupt or insolvent or a receiver of the Trustee or of its property shall be appointed or any public officer shall take charge or control of the Trustee or of its property or affairs for the purpose of rehabilitation, conservation or liquidation, then, in any such case, (A) the Company by a Board Resolution may remove the Trustee, or (B) subject to Section 514, any Holder who has been a bona fide Holder of a Security for at least six months may, on behalf of himself and all others similarly situated, petition any court of competent jurisdiction for the removal of the Trustee and the appointment of a successor Trustee. (e) If the Trustee shall resign, be removed or become incapable of acting, or if a vacancy shall occur in the office of Trustee for any cause, the Company, by a Board Resolution, shall promptly appoint a successor Trustee and such successor Trustee shall comply with the applicable requirements of Section 611. If, within one year after such resignation, removal or incapability, or the occurrence of such vacancy, a successor Trustee shall be appointed by Act of the Holders of a majority in principal amount of the Outstanding Securities delivered to the Company and the retiring Trustee, the successor Trustee so appointed shall, forthwith upon its acceptance of such appointment in accordance with the applicable requirements of Section 611 become the successor Trustee and supersede the successor Trustee appointed by the Company. If 39 no successor Trustee shall have been so appointed by the Company or the Holders and accepted appointment in the manner required by Section 611, any Holder who has been a bona fide Holder of a Security for at least six months may, on behalf of himself and all others similarly situated, petition any court of competent jurisdiction for the appointment of a successor Trustee. (f) The Company shall give notice of each resignation and each removal of the Trustee and each appointment of a successor Trustee to all Holders in the manner provided in Section 106. Each notice shall include the name of the successor Trustee and the address of its Corporate Trust Office. Section 611 Acceptance of Appointment by Successor. Every successor Trustee appointed hereunder shall execute, acknowledge and deliver to the Company and to the retiring Trustee an instrument accepting such appointment, and thereupon the resignation or removal of the retiring Trustee shall become effective and such successor Trustee, without any further act, deed or conveyance, shall become vested with all the rights, powers, trusts and duties of the retiring Trustee; but, on request of the Company or the successor Trustee, such retiring Trustee shall, upon payment of its charges, execute and deliver an instrument transferring to such successor Trustee all the rights, powers and trusts of the retiring Trustee and shall duly assign, transfer and deliver to such successor Trustee all property and money held by such retiring Trustee hereunder. Upon request of any such successor Trustee, the Company shall execute any and all instruments for more fully and certainly vesting in and confirming to such successor Trustee all such rights, powers and trusts. No successor Trustee shall accept its appointment unless at the time of such acceptance such successor Trustee shall be qualified and eligible under this Article. Section 612 Merger, Conversion, Consolidation or Succession to Business. Any corporation into which the Trustee may be merged or converted or with which it may be consolidated, or any corporation resulting from any merger, conversion or consolidation to which the Trustee shall be a party, or any corporation succeeding to all or substantially all the corporate trust business of the Trustee, shall be the successor of the Trustee hereunder, provided such corporation shall be otherwise qualified and eligible under this Article, without the execution or filing of any paper or any further act on the part of any of the parties hereto. In case any Securities shall have been authenticated, but not delivered, by the Trustee then in office, any successor by merger, conversion or consolidation to such authenticating Trustee may adopt such authentication and deliver the Securities so authenticated with the same effect as if such successor Trustee had itself authenticated such Securities. Section 613 Preferential Collection of Claims Against Company. The Trustee shall comply with Section 311 of the Trust Indenture Act, excluding any creditor relationship listed in Section 311(b) of the Trust Indenture Act. A Trustee who has resigned or been removed shall be subject to Section 311 of the Trust Indenture Act to the extent indicated therein. 40 Section 614 Appointment of Authenticating Agent. The Trustee may appoint an Authenticating Agent or Agents which shall be authorized to act on behalf of the Trustee to authenticate Securities issued upon original issue and upon exchange, registration of transfer, partial conversion or partial redemption, and Securities so authenticated shall be entitled to the benefits of this Indenture and shall be valid and obligatory for all purposes as if authenticated by the Trustee hereunder. Wherever reference is made in this Indenture to the authentication and delivery of Securities by the Trustee or the Trustee's certificate of authentication, such reference shall be deemed to include authentication and delivery on behalf of the Trustee by an Authenticating Agent and a certificate of authentication executed on behalf of the Trustee by an Authenticating Agent. Each Authenticating Agent shall be acceptable to the Company and shall at all times be a Person organized and doing business under the laws of the United States of America, any State thereof or the District of Columbia, authorized under such laws to act as Authenticating Agent, having a combined capital and surplus of not less than $50,000,000 and subject to supervision or examination by Federal or State authority. If such Authenticating Agent publishes reports of condition at least annually, pursuant to law or to the requirements of said supervising or examining authority, then for the purposes of this Section, the combined capital and surplus of such Authenticating Agent shall be deemed to be its combined capital and surplus as set forth in its most recent report of condition so published. If at any time an Authenticating Agent shall cease to be eligible in accordance with the provisions of this Section, such Authenticating Agent shall resign immediately in the manner and with the effect specified in this Section. Any Person into which an Authenticating Agent may be merged or converted or with which it may be consolidated, or any Person resulting from any merger, conversion or consolidation to which such Authenticating Agent shall be a party, or any Person succeeding to the corporate agency or corporate trust business of an Authenticating Agent, shall continue to be an Authenticating Agent, provided such Person shall be otherwise eligible under this Section, without the execution or filing of any paper or any further act on the part of the Trustee or the Authenticating Agent. An Authenticating Agent may resign at any time by giving written notice thereof to the Trustee and to the Company. The Trustee may at any time terminate the agency of an Authenticating Agent by giving written notice thereof to such Authenticating Agent and to the Company. Upon receiving such a notice of resignation or upon such a termination, or in case at any time such Authenticating Agent shall cease to be eligible in accordance with the provisions of this Section, the Trustee may appoint a successor Authenticating Agent which shall be acceptable to the Company and shall mail notice of such appointment by first-class mail, postage prepaid, to all Holders as their names and addresses appear in the Security Register. Any successor Authenticating Agent upon acceptance of its appointment under this Section shall become vested with all the rights, powers and duties of its predecessor hereunder, with like effect as if originally named as an Authenticating Agent. No successor Authenticating Agent shall be appointed unless eligible to act as such under the provisions of this Section. 41 Any Authenticating Agent by the acceptance of its appointment shall be deemed to have represented to the Trustee that it is eligible for appointment as Authenticating Agent under this Section and to have agreed with the Trustee that: it will perform and carry out the duties of an Authenticating Agent as herein set forth, including among other things the duties to authenticate Securities when presented to it in connection with the original issuance and with exchanges, registrations of transfer or redemptions or conversions thereof or pursuant to Section 306; it will keep and maintain, and furnish to the Trustee from time to time as requested by the Trustee, appropriate records of all transactions carried out by it as Authenticating Agent and will furnish the Trustee such other information and reports as the Trustee may reasonably require; and it will notify the Trustee promptly if it shall cease to be eligible to act as Authenticating Agent in accordance with the provisions of this Section. Any Authenticating Agent by the acceptance of its appointment shall be deemed to have agreed with the Trustee to indemnify the Trustee against any loss, liability or expense incurred by the Trustee and to defend any claim asserted against the Trustee by reason of any acts or failures to act of such Authenticating Agent, but such Authenticating Agent shall have no liability for any action taken by it in accordance with the specific written direction of the Trustee. The Trustee agrees to pay to each Authenticating Agent from time to time reasonable compensation for its services under this Section, and the Trustee shall be entitled to be reimbursed for such payments, subject to the provisions of Section 607. If an appointment is made pursuant to this Section, the Securities may have endorsed thereon, in addition to the Trustee's certificate of authentication, an alternative certificate of authentication in the following form: This is one of the Securities described in the within-mentioned Indenture. _________________________, As Trustee By ________________________________ As Authenticating Agent By _____________________________ Authorized Officer ARTICLE 7. HOLDERS' LISTS AND REPORTS BY TRUSTEE AND COMPANY Section 701 Company to Furnish Trustee Names and Addresses of Holders. The Company will furnish or cause to be furnished to the Trustee: (a) semi-annually, not more than 15 days after each Regular Record Date, a list, in such form as the Trustee may reasonably require containing all the information in the possession 42 or control of the Company, or any of its Paying Agents, other than the Trustee, as to the names and addresses of the Holders as of such Regular Record Date, and (b) at such other times as the Trustee may request in writing, within 30 days after the receipt by the Company of any such request, a list of similar form and content as of a date not more than 15 days prior to the time such list is furnished. Notwithstanding the foregoing, so long as the Trustee is the Security Registrar, no such list shall be required to be furnished. Section 702 Preservation of Information; Communication to Holders. (a) The Trustee shall preserve, in as current a form as is reasonably practicable, the names and addresses of Holders contained in the most recent list furnished to the Trustee as provided in Section 701 and the names and addresses of Holders received by the Trustee in its capacity as Security Registrar. The Trustee may destroy any list furnished to it as provided in Section 701 upon receipt of a new list so furnished. (b) The rights of Holders to communicate with other Holders with respect to their rights under this Indenture or under the Securities, and the corresponding rights and duties of the Trustee, shall be as provided by the Trust Indenture Act.(c)The Company, the Trustee and any other Person shall have the protection of Section 312(c) of the Trust Indenture Act. Section 703 Reports by Trustee. (a) The Trustee shall transmit to Holders such reports concerning the Trustee and its actions under this Indenture as may be required pursuant to the Trust Indenture Act at the times and in the manner provided pursuant thereto. (b) A copy of each such report shall, at the time of such transmission to Holders, be filed by the Trustee with each stock exchange upon which the Securities are listed, with the Commission and with the Company. The Company will notify the Trustee when the Securities are listed on any stock exchange. Section 704 Reports by Company. The Company shall file with the Trustee and the Commission, and transmit to Holders, such information, documents and other reports, and such summaries thereof, as may be required pursuant to the Trust Indenture Act at the times and in the manner provided pursuant to such Act; provided, that any such information, documents or reports required to be filed with the Commission pursuant to Section 13 or 15(d) of the Exchange Act, as amended, shall be filed with the Trustee within 15 days after the same is so required to be filed with the Commission. 43 ARTICLE 8. CONSOLIDATION, MERGER, CONVEYANCE, TRANSFER or LEASE Section 801 Company May Consolidate, Etc., Only on Certain Terms. The Company shall not consolidate with or merge into any other Person or convey, transfer or lease its properties and assets substantially as an entirety to any Person, and the Company shall not permit any Person to consolidate with or merge into the Company, unless: (a) in case the Company shall consolidate with or merge into another Person or convey, transfer or lease its properties and assets substantially as an entirety to any Person, the Person formed by such consolidation or into which the Company is merged or the Person which acquires by conveyance or transfer, or which leases, the properties and assets of the Company substantially as an entirety shall be a corporation, partnership or trust, shall be organized and validly existing under the laws of the United States of America, any State thereof or the District of Columbia and shall expressly assume, by an indenture supplemental hereto, executed and delivered to the Trustee, in form satisfactory to the Trustee, the due and punctual payment of the principal of and premium, if any, and interest on all the Securities and the performance or observance of every covenant of this Indenture on the part of the Company to be performed or observed and shall have provided for conversion rights in accordance with Section 1311; (b) immediately after giving effect to such transaction, no Event of Default, and no event which, after notice or lapse of time or both, would become an Event of Default, shall have happened and be continuing;(c)such consolidation, merger, conveyance, transfer or lease does not adversely affect the validity or enforceability of the Securities; and(d)the Company has delivered to the Trustee an Officers' Certificate and an Opinion of Counsel, each stating that such consolidation, merger, conveyance, transfer or lease and, if a supplemental indenture is required in connection with such transaction, such supplemental indenture comply with this Article and that all conditions precedent herein provided for relating to such transaction have been complied with. Section 802 Successor Substituted. Upon any consolidation of the Company with, or merger of the Company into, any other Person or any conveyance, transfer or lease of the properties and assets of the Company substantially as an entirety in accordance with Section 801, the successor Person formed by such consolidation or into which the Company is merged or to which such conveyance, transfer or lease is made shall succeed to, and be substituted for, and may exercise every right and power of, the Company under this Indenture with the same effect as if such successor Person had been named as the Company herein, and thereafter, except in the case of a lease, the predecessor Person shall be relieved of all obligations and covenants under this Indenture and the Securities. 44 ARTICLE 9. SUPPLEMENTAL INDENTURES Section 901 Supplemental Indentures Without Consent of Holders. Without the consent of any Holders, the Company, when authorized by a Board Resolution, and the Trustee, at any time and from time to time, may enter into one or more indentures supplemental hereto, in form satisfactory to the Trustee, for any of the following purposes: (a) to evidence the succession of another Person to the Company, or successive successions, and the assumption by any such successor of the covenants of the Company herein and in the Securities; or (b) to add to the covenants of the Company for the benefit of the Holders or an additional Event of Default, or to surrender any right or power herein conferred upon the Company; or (c) to secure the Securities; or (d) to make provision with respect to the conversion rights of Holders pursuant to the requirements of Section 1311; or (e) to evidence and provide for the acceptance of appointment hereunder by a successor Trustee with respect to the Securities; or(f)to cause the Indenture and the Securities to comply with applicable law, including the Trust Indenture Act; or (g) to cure any ambiguity, to correct or supplement any provision herein which may be defective or inconsistent with any other provision herein, or to make any other provisions with respect to matters or questions arising under this Indenture which shall not be inconsistent with the provisions of this Indenture; provided, that such action pursuant to this clause (g) shall not adversely affect the interests of the Holders in any material respect. Section 902 Supplemental Indentures with Consent of Holders. With the consent of the Holders of not less than a majority in principal amount of the Outstanding Securities, by Act of said Holders delivered to the Company and the Trustee, the Company, when authorized by a Board Resolution, and the Trustee may enter into an indenture or indentures supplemental hereto for the purpose of adding any provisions to or changing in any manner or eliminating any of the provisions of this Indenture or of modifying in any manner the rights of the Holders under this Indenture; provided, however, that no such supplemental indenture shall, without the consent of the Holder of each outstanding Security affected thereby, (a) change the Stated Maturity of the principal of, or any installment of interest on, any Security, or reduce the principal amount thereof or the rate of interest thereon or any premium payable upon the redemption thereof, or impair the right to institute suit for the 45 enforcement of any such payment on or after the Stated Maturity thereof (or, in the case of redemption, on or after the Redemption Date), or make the principal thereof or any premium or interest thereon payable in any coin or currency other than that provided for in the form of Security hereinabove set forth or modify the provisions of this Indenture with respect to the subordination of the Securities in a manner adverse to the Holders, or impair the right to convert the Securities into Common Stock or to require the Company to repurchase the Securities upon the occurrence of a Change in Control, subject to the terms set forth herein, or (b) reduce the percentage in principal amount of the Outstanding Securities, the consent of whose Holders is required for any such supplemental indenture, or the consent of whose Holders is required for any waiver of compliance with certain provisions of this Indenture or certain defaults hereunder and their consequences provided for in this Indenture, or (c) modify any of the provisions of this Section, Section 513 or Section 1006, except to increase any such percentage or to provide that certain other provisions of this Indenture cannot be modified or waived without the consent of the Holder of each Outstanding Security affected thereby; provided, however, that this Clause shall not be deemed to require the consent of any Holder with respect to changes in the references to "the Trustee" and concomitant changes in this Section and Section 1006, or the deletion of this proviso, in accordance with the requirements of Section 901(e). It shall not be necessary for any Act of Holders under this Section to approve the particular form of any proposed supplemental indenture, but it shall be sufficient if such Act shall approve the substance thereof. Section 903 Execution of Supplemental Indentures. In executing, or accepting the additional trusts created by, any supplemental indenture permitted by this Article or the modifications thereby of the trusts created by this Indenture, the Trustee shall be entitled to receive, and (subject to Section 601) shall be fully protected in relying upon, an Opinion of Counsel stating that the execution of such supplemental indenture is authorized or permitted by this Indenture. The Trustee may, but shall not (except to the extent required in the case of a supplemental indenture entered into under 901(f)) be obligated to, enter into any such supplemental indenture which adversely affects in a material way the Trustee's own rights, duties or immunities under this Indenture or otherwise. Section 904 Effect of Supplemental Indentures. Upon the execution of any supplemental indenture under this Article, this Indenture shall be modified in accordance therewith, and such supplemental indenture shall form a part of this Indenture for all purposes; and every Holder of Securities theretofore or thereafter authenticated and delivered hereunder shall be bound thereby. 46 Section 905 Conformity with Trust Indenture Act. Every supplemental indenture executed pursuant to this Article shall conform to the requirements of the Trust Indenture Act, as then in effect. Section 906 Reference in Securities to Supplemental Indentures. Securities authenticated and delivered after the execution of any supplemental indenture pursuant to this Article may, and shall if required by the Trustee, bear a notation in form approved by the Trustee as to any matter provided for in such supplemental indenture. If the Company shall so determine, new Securities so modified as to conform, in the opinion of the Trustee and the Company, to any such supplemental indenture may be prepared and executed by the Company and authenticated and delivered by the Trustee in exchange for Outstanding Securities. Section 907 Notice of Supplemental Indenture. Promptly after the execution by the Company and the Trustee of any supplemental indenture pursuant to Section 902, the Company shall transmit to the Holders a notice setting forth the substance of such supplemental indenture. ARTICLE 10 COVENANTS Section 1001 Payment of Principal, Premium and Interest. The Company will duly and punctually pay the principal of and premium, if any, and interest on the Securities in accordance with the terms of the Securities and this Indenture. Section 1002 Maintenance of Office or Agency. The Company will maintain in New York, New York an office or agency (which may be the Corporate Trust Office or other office of the Trustee) where Securities may be presented or surrendered for payment, where Securities may be surrendered for registration of transfer, where Securities may be surrendered for exchange, conversion or repurchase in accordance with the terms of this Indenture and where notices and demands to or upon the Company in respect of the Securities and this Indenture may be served. The Company will give prompt written notice to the Trustee of the location, and any change in the location, of any such office or agency. If at any time the Company shall fail to maintain any such required office or agency or shall fail to furnish the Trustee with the address thereof, such presentations, surrenders, notices and demands may be made or served at the Corporate Trust Office of the Trustee, and the Company hereby appoints the Trustee as its agent to receive all such presentations, surrenders, notices and demands. The Company may also from time to time designate one or more other offices or agencies where the Securities may be presented or surrendered for any or all such purposes and may from 47 time to time rescind such designations; provided, however, that no such designation or rescission shall in any manner relieve the Company of its obligation to maintain an office or agency in New York, New York for such purposes. The Company will give prompt written notice to the Trustee of any such designation or rescission and of any change in the location of any such other office or agency. Section 1003 Money for Security Payments to Be Held in Trust. If the Company shall at any time act as its own Paying Agent, on or before each due date of the principal of and premium, if any, or interest on any of the Securities, the Company will segregate and hold in trust for the benefit of the Persons entitled thereto a sum sufficient to pay the principal and premium, if any, or interest so becoming due until such sums shall be paid to such Persons or otherwise disposed of as herein provided and will promptly notify the Trustee of its action or failure so to act. Whenever the Company shall have one or more Paying Agents, on or prior to each due date of the principal of and premium, if any, or interest on any Securities, the Company will deposit with a Paying Agent a sum sufficient to pay the principal and any premium and interest so becoming due, such sum to be held as provided by the Trust Indenture Act, and (unless such Paying Agent is the Trustee) the Company will promptly notify the Trustee of its action or failure so to act. The Company will cause each Paying Agent other than the Trustee to execute and deliver to the Trustee an instrument in which such Paying Agent shall agree with the Trustee, subject to the provisions of this Section, that such Paying Agent will (a) comply with the provisions of the Trust Indenture Act applicable to it as a Paying Agent and hold all sums held by it for the payment of principal of or any premium or interest on the Securities in trust for the benefit of the Persons entitled thereto until such sums shall be paid to such Persons or otherwise disposed of as herein provided; and (b) at any time during the continuance of any default by the Company (or any other obligor upon the Securities) in the making of any payment in respect of the Securities, upon the written request of the Trustee, forthwith pay to the Trustee all sums held in trust by such Paying Agent for payment in respect of the Securities. The Company may at any time, for the purpose of obtaining the satisfaction and discharge of this Indenture or for any other purpose, pay, or by Company Order direct any Paying Agent to pay, to the Trustee all sums held in trust by the Company or such Paying Agent, such sums to be held by the Trustee upon the same trusts as those upon which such sums were held by the Company or such Paying Agent; and, upon such payment by any Paying Agent to the Trustee, such Paying Agent shall be released from all further liability with respect to such money. Any money deposited with the Trustee or any Paying Agent, or then held by the Company, in trust for the payment of the principal of and premium, if any, or interest on any Security and remaining unclaimed for two years after such principal and premium, if any, or interest has become due and payable shall be paid to the Company on Company Request, or (if then held by the Company) shall be discharged from such trust; and the Holder of such Security 48 shall thereafter, as an unsecured general creditor, look only to the Company for payment thereof, and all liability of the Trustee or such Paying Agent with respect to such trust money, and all liability of the Company as trustee thereof, shall thereupon cease; provided, however, that the Trustee or such Paying Agent, before being required to make any such repayment, may at the expense of the Company cause to be published once, in a newspaper published in the English language, customarily published on each Business Day and of general circulation in New York, New York, notice that such money remains unclaimed and that, after a date specified therein, which shall not be less than 30 days from the date of such publication, any unclaimed balance of such money then remaining will be repaid to the Company. Section 1004 Statement by Officers as to Default. The Company will deliver to the Trustee, within 120 days after the end of each fiscal year of the Company ending after the date hereof, an Officers' Certificate stating whether or not to the best knowledge of the signers thereof the Company is in compliance with all conditions and covenants under this Indenture (without regard to any period of grace or requirement of notice provided hereunder) and, if the Company shall be in default, specifying all such defaults and the nature and status thereof of which they may have knowledge. Section 1005 Existence. Subject to Article Eight, the Company will do or cause to be done all things necessary to preserve and keep in full force and effect its corporate existence, rights (charter and statutory) and franchises and the existence, rights (charter and statutory) and franchises of each Subsidiary; provided, however, that the Company shall not be required to preserve any such right or franchise, whether relating to the Company or any Subsidiary, if the Board of Directors shall determine that the preservation thereof is no longer desirable in the conduct of the business of the Company and that the loss thereof is not disadvantageous in any material respect to the Holders. Section 1006 Waiver of Certain Covenants. The Company may omit in any particular instance to comply with any covenant or condition set forth in Section 1005, if before the time for such compliance the Holders of at least a majority in principal amount of the Outstanding Securities shall, by Act of such Holders, either waive such compliance in such instance or generally waive compliance with such covenant or condition, but no such waiver shall extend to or affect such covenant or condition except to the extent so expressly waived, and, until such waiver shall become effective, the obligations of the Company and the duties of the Trustee in respect of any such covenant or condition shall remain in full force and effect. 49 ARTICLE 11. REDEMPTION OF SECURITIES Section 1101 Right of Redemption. The Securities may be redeemed at the election of the Company, in whole or from time to time in part, at any time on or after ________________ __, 2000 at the Redemption Prices specified in the form of Security hereinbefore set forth, together with accrued interest, to the Redemption Date; provided, however, that if all accrued interest on the Securities has not been paid, the Securities may not be redeemed in part and the Company may not redeem any Security other than pursuant to a purchase or exchange offer to all holders of the Securities. Section 1102 Applicability of Article. Redemption of Securities at the election of the Company as permitted by any provision of this Indenture shall be made in accordance with such provision and this Article. Section 1103 Election to Redeem; Notice to Trustee. The election of the Company to redeem any Securities pursuant to Section 1101 shall be evidenced by a Board Resolution. In case of any redemption at the election of the Company of less than all the Securities, the Company shall, at least 60 days prior to the Redemption Date fixed by the Company (unless a shorter period shall be satisfactory to the Trustee), notify the Trustee of such Redemption Date and of the principal amount of Securities to be redeemed. In case of any redemption at the election of the Company of all of the Securities, the Company shall, at least 45 days prior to the Redemption Date fixed by the Company (unless a shorter period shall be satisfactory to the Trustee), notify the Trustee of such Redemption Date. Section 1104 Selection by Trustee of Securities to be Redeemed. If less than all the Securities are to be redeemed, the particular Securities to be redeemed shall be selected not more than 60 days prior to the Redemption Date by the Trustee, from the Outstanding Securities not previously called for redemption, by lot or pro rata or by such other method as the Trustee shall deem fair and appropriate and which may provide for the selection for redemption of portions (equal to $1,000 or any integral multiple thereof) of the principal amount of Securities of a denomination larger than $1,000; provided, however, that any partial redemption of Securities shall be in an amount not less than $1,000,000 principal amount of Securities. If any Security selected for partial redemption is converted in part before termination of the conversion right with respect to the portion of the Security so selected, the converted portion of such Security shall be deemed (so far as may be) to be the portion selected for redemption. Securities which have been converted during a selection of Securities to be redeemed shall be treated by the Trustee as Outstanding for the purpose of such selection. In any case where more 50 than one Security is registered in the same name, the Trustee in its discretion may treat the aggregate principal amount so registered as if it were represented by one Security. The Trustee shall promptly notify the Company and each Security Registrar in writing of the Securities selected for redemption and, in the case of any Securities selected for partial redemption, the principal amount thereof to be redeemed. For all purposes of this Indenture, unless the context otherwise requires, all provisions relating to the redemption of Securities shall relate, in the case of any Securities redeemed or to be redeemed only in part, to the portion of the principal amount of such Securities which has been or is to be redeemed. Section 1105 Notice of Redemption. Notice of redemption shall be given by first-class mail, postage prepaid, mailed not less than 15 nor more than 60 days prior to the Redemption Date, to each Holder of Securities to be redeemed, at his address appearing in the Security Register. All notices of redemption shall state: (a) the Redemption Date, (b) the Redemption Price, (c) if less than all the Outstanding Securities are to be redeemed, the identification (and, in the case of partial redemption of any Securities, the principal amounts) of the particular Securities to be redeemed, (d) that on the Redemption Date the Redemption Price will become due and payable upon each such Security to be redeemed and that interest thereon will cease to accrue on and after said date, (e) the conversion price, the date on which the right to convert the Securities to be redeemed will terminate and the place or places where such Securities may be surrendered for conversion, and (f) the place or places where such Securities are to be surrendered for payment of the Redemption Price. Notice of redemption of Securities to be redeemed at the election of the Company shall be given by the Company or, at the Company's request, by the Trustee in the name and at the expense of the Company. Section 1106 Deposit of Redemption Price. At or prior to the close of business on any Redemption Date, the Company shall deposit with the Trustee or with a Paying Agent (or, if the Company is acting as its own Paying Agent, segregate and hold in trust as provided in Section 1003) an amount of money sufficient to pay on such date the Redemption Price of, and (except if the Redemption Date shall be an Interest 51 Payment Date) accrued interest on, all the Securities or portions thereof which are to be redeemed on that date other than any Securities called for redemption on that date which have been converted prior to the Redemption Date. If any Security called for redemption is converted, any money deposited with the Trustee or with any Paying Agent or so segregated and held in trust for the redemption of such Security shall (subject to any right of the Holder of such Security or any Predecessor Security to receive interest as provided in the last paragraph of Section 307) be paid to the Company upon Company Request or, if then held by the Company, shall be discharged from such trust. Section 1107 Securities Payable on Redemption Date. Notice of redemption having been given as aforesaid, the Securities so to be redeemed shall, on the Redemption Date, become due and payable at the Redemption Price therein specified, and from and after such date (unless the Company shall default in the payment of the Redemption Price and accrued interest) such Securities shall cease to bear interest. Upon surrender of any such Security for redemption in accordance with said notice, such Security shall be paid by the Company at the Redemption Price, together with accrued interest to the Redemption Date, on the later of the Redemption Date or the date such Security is surrendered; provided, however, that installments of interest whose Maturity is on or prior to the Redemption Date shall be payable to the Holders of such Securities, or one or more Predecessor Securities, registered as such at the close of business on the relevant Record Dates according to their terms and the provisions of Section 307. If any Security called for redemption shall not be so paid upon surrender thereof for redemption as provided herein, the principal and premium, if any, shall, until paid, bear interest from the Redemption Date at the rate borne by the Security. The Company shall be deemed to have made payment as provided herein if checks are mailed to the appropriate Persons not later than the Business Day next subsequent to the Redemption Date. Section 1108 Securities Redeemed in Part. Any Security which is to be redeemed only in part shall be surrendered at an office or agency of the Company maintained for that purpose pursuant to Section 1002 (with, if the Company or the Trustee so requires, due endorsement by, or a written instrument of transfer in form satisfactory to the Company and the Trustee duly executed by, the Holder thereof or his attorney duly authorized in writing), and the Company shall execute, and the Trustee shall authenticate and deliver to the Holder of such Security without service charge, a new Security or Securities, of any authorized denomination as requested by such Holder, in an aggregate principal amount equal to and in exchange for the unredeemed portion of the principal of the Security so surrendered. Section 1109 Conversion Arrangements on Call for Redemption. In connection with any redemption of Securities, the Company may arrange for the purchase and conversion of any Securities surrendered for redemption by an agreement with one 52 or more investment banking firms or other purchasers to purchase such Securities by paying to the Holders thereof, or to the Trustee or Paying Agent in trust for such Holders, on or before the close of business on the date fixed for redemption, an amount not less than the redemption price, together with interest accrued to the date fixed for redemption, payable by the Company on redemption of such Securities. Notwithstanding anything to the contrary contained in this Article Eleven, the obligation of the Company to pay the redemption price of such Securities, together with interest accrued to the date fixed for redemption, shall be satisfied and discharged to the extent such amount is so paid by such purchasers. Pursuant to such an agreement, any Securities tendered by the Holder thereof for redemption or not duly surrendered for conversion by such Holder shall be deemed acquired by such purchasers from such Holders and surrendered by such purchasers for conversion, all as of immediately prior to the close of business on the date fixed for redemption, subject to payment of the above amount as aforesaid. ARTICLE 12. SUBORDINATION OF SECURITIES Section 1201 Securities Subordinated to Senior Indebtedness. The Company covenants and agrees, and each Holder of a Security, by his acceptance thereof, likewise covenants and agrees, that, to the extent and in the manner hereinafter set forth in this Article, the indebtedness represented by the Securities and the payment of the principal of and premium, if any, and interest on each and all of the Securities, and the amount, if any, of the Repurchase Price payable in respect of Securities pursuant to Article XIV, are hereby expressly made subordinate and subject in right of payment to the prior payment in full of all Senior Indebtedness. Section 1202 Payment Over of Proceeds Upon Dissolution, Etc. In the event of (a) any insolvency or bankruptcy case or proceeding, or any receivership, liquidation, reorganization or other similar case or proceeding, relative to the Company or to its creditors, as such, or to a substantial part of its assets, or (b) any proceeding for the liquidation, dissolution or other winding up of the Company, whether total or partial, whether voluntary or involuntary and whether or not involving insolvency or bankruptcy, or (c) any assignment for the benefit of creditors or any other marshalling of assets and liabilities of the Company, then and in any such event the holders of Senior Indebtedness shall be entitled to receive payment in full of all amounts due or to become due on or in respect of all Senior Indebtedness; before the Holders of the Securities are entitled to receive any payment or distribution of any kind or character, whether in cash, property or securities, on account of principal of or premium, if any, or interest on the Securities, or the amount, if any, of the Repurchase Price payable in respect of Securities pursuant to Article XIV, and to that end the holders of Senior Indebtedness shall be entitled to receive, for application to the payment thereof, any payment or distribution of any kind or character, whether in cash, property or securities, including any such payment or distribution which may be payable or deliverable by reason of the payment of any other indebtedness of the Company being subordinated to the payment of the Securities, which may be payable or 53 deliverable in respect of the Securities in any such case, proceeding, dissolution, liquidation or other winding up or event. In the event that, notwithstanding the foregoing provisions of this Section, the Trustee or the Holder of any Security shall have received any payment or distribution of assets of the Company of any kind or character, whether in cash, property or securities, prohibited by the foregoing, including any such payment or distribution which may be payable or deliverable by reason of the payment of any other indebtedness of the Company being subordinated to the payment of the Securities, before all Senior Indebtedness is paid in full, then and in such event such payment or distribution shall be paid over or delivered forthwith to the trustee in bankruptcy, receiver, liquidating trustee, custodian, assignee, agent or other Person making payment or distribution of assets of the Company for application to the payment of all Senior Indebtedness remaining unpaid, to the extent necessary to pay all Senior Indebtedness in full, after giving effect to any concurrent payment or distribution to or for the holders of Senior Indebtedness. For purposes of this Article only, the words "cash, property or securities" shall not be deemed to include securities of the Company as reorganized or readjusted, or securities of the Company or any other corporation provided for by a plan of reorganization or readjustment that does not adversely alter the rights of holders of Senior Indebtedness which are subordinated in right of payment to all Senior Indebtedness which may at the time be outstanding to substantially the same extent as, or to a greater extent than, the Securities are so subordinated as provided in this Article. The consolidation of the Company with, or the merger of the Company into, another Person or the liquidation or dissolution of the Company following the conveyance or transfer of its properties and assets substantially as an entirety to another Person upon the terms and conditions set forth in Article Eight shall not be deemed a dissolution, winding up, liquidation, reorganization, assignment for the benefit of creditors or marshalling of assets and liabilities of the Company for the purposes of this Section if the Person formed by such consolidation or into which the Company is merged or which acquires by conveyance or transfer such properties and assets substantially as an entirety, as the case may be, shall, as a part of such consolidation, merger, conveyance or transfer, comply with the conditions set forth in Article Eight. Section 1203 Acceleration of Securities. Notwithstanding anything in this Indenture to the contrary, neither the Trustee nor any Holder shall exercise any right either may have to accelerate the maturity of the Securities at any time when payment of any amount owing on the Securities is prohibited, in whole or in part, pursuant to Section 12.2 or 12.4; provided, however, that such right may nevertheless be so exercised upon the earliest of (i) the acceleration of the maturity of any Senior Indebtedness, (ii) the exercise by any holder of Senior Indebtedness of any remedies available to it upon a default with respect to Senior Indebtedness, or (iii) the occurrence of an Event of Default described in Section 501(g) or (h). 54 Section 1204 No Payment When Senior Indebtedness in Default. (a) In the event (i) and during the continuation of any default in the payment of principal of, premium, if any, or interest on any Senior Indebtedness, whether at the date of a required payment, maturity, upon mandatory prepayment redemption or otherwise, or (ii) that any other default with respect to any Senior Indebtedness shall have occurred and be continuing, then no payment (including any payment which may be payable by reason of the payment of any other indebtedness of the Company being subordinated to the payment of the Securities) shall be made by the Company on account of the principal of or premium, if any, or interest on the Securities or on account of the purchase, redemption or other acquisition of Securities (x) in the case of any default described in subclause (i) above, unless and until the Senior Indebtedness to which such default relates is discharged or such default shall have been cured or waived or shall have ceased to exist or the holders of such Senior Indebtedness or their agents have waived the benefits of this Section 12.4(a), and (y) in the case of any default specified in clause (ii) above, from the date the Company or the Trustee receives written notice of such default (a "Senior Default Notice") from the (1) the agent for the Lenders if such default relates to the Credit Facility or any replacement thereof, or (2) holders of at least 25% in principal amount of the kind or category of Senior Indebtedness to which such default relates or any representative of such holders if such default does not relate to the Credit Facility, or any replacement thereof until the earlier of (A) 180 days after such date or (B) the date, if any, on which the Senior Indebtedness to which such default relates is discharged or such default shall have been cured or waived or shall have ceased to exist or the holders of such Senior Indebtedness or their agents shall have waived the benefits of this Section 12.4(a); provided, however, that not more than one Senior Default Notice shall be given during any period of 360 consecutive days, regardless of the number of defaults with respect to Senior Indebtedness during such 360-day period. (b) In the event that, notwithstanding the foregoing, the Company shall make any payment to the Trustee or the Holder of any Security prohibited by the foregoing provisions of this Section, then and in such event such payment shall be paid over and delivered forthwith to the Company. The provisions of this Section shall not apply to any payment with respect to which Section 1202 would be applicable. Section 1205 Subrogation to Rights of Holders of Senior Indebtedness. Subject to the payment in full of all amounts due on or in respect of Senior Indebtedness, the Holders of the Securities shall be subrogated to the extent of the payments or distributions made to the holders of such Senior Indebtedness pursuant to the provisions of this Article (equally and ratably with the holders of all indebtedness of the Company which by its express terms is subordinated to other indebtedness of the Company to substantially the same extent as the Securities are subordinated and is entitled to like rights of subrogation) to the rights of the holders of such Senior Indebtedness to receive payments and distributions of cash, property and securities applicable to the Senior Indebtedness until the principal of and premium, if any, and interest on the Securities shall be paid in full. For purposes of such subrogation, no payments or 55 distributions to the holders of the Senior Indebtedness of any cash, property or securities to which the Holders of the Securities or the Trustee would be entitled except for the provisions of this Article, and no payments over pursuant to the provisions of this Article to the holders of Senior Indebtedness by Holders of the Securities or the Trustee, shall, as among the Company, its creditors other than holders of Senior Indebtedness and the Holders of the Securities, be deemed to be a payment or distribution by the Company to or on account of the Senior Indebtedness. Section 1206 Provisions Solely to Define Relative Rights. The provisions of this Article are and are intended solely for the purpose of defining the relative rights of the Holders of the Securities on the one hand and the holders of Senior Indebtedness on the other hand. Nothing contained in this Article or elsewhere in this Indenture or in the Securities is intended to or shall (a) impair, as among the Company, its creditors other than holders of Senior Indebtedness and the Holders of the Securities, the obligation of the Company, which is absolute and unconditional, to pay to the Holders of the Securities the principal of and premium, if any, and interest on the Securities as and when the same shall become due and payable in accordance with their terms; or (b) affect the relative rights against the Company of the Holders of the Securities and creditors of the Company other than the holders of Senior Indebtedness; or (c) prevent the Trustee or the Holder of any Security from exercising all remedies otherwise permitted by applicable law upon default under this Indenture, subject to the rights, if any, under this Article of the holders of Senior Indebtedness to receive cash, property and securities otherwise payable or deliverable to the Trustee or such Holder. Section 1207 Trustee to Effectuate Subordination. Each holder of a Security by his acceptance thereof authorizes and directs the Trustee on his behalf to take such action as may be necessary or appropriate to effectuate the subordination provided in this Article and appoints the Trustee his attorney-in-fact for any and all such purposes. Section 1208 No Waiver of Subordination Provisions. No right of any present or future holder of any Senior Indebtedness to enforce subordination as herein provided shall at any time in any way be prejudiced or impaired by any act or failure to act on the part of the Company or by any noncompliance by the Company with the terms, provisions and covenants of this Indenture, regardless of any knowledge thereof any such holder may have or be otherwise charged with. Without in any way limiting the generality of the foregoing paragraph, the holders of Senior Indebtedness may, at any time and from time to time, without the consent of or notice to the Trustee or the Holders of the Securities, without incurring responsibility to the Holders of the Securities and without impairing or releasing the subordination provided in this Article or the obligations hereunder of the Holders of the Securities to the holders of Senior Indebtedness, do any one or more of the following: (i) change the manner, place or terms of payment or extend the time of payment of, or renew or alter, Senior Indebtedness, or otherwise amend or 56 supplement in any manner Senior Indebtedness or any instrument evidencing the same or any agreement under which Senior Indebtedness is outstanding; (ii) sell, exchange, release or otherwise deal with any property pledged, mortgaged or otherwise securing Senior Indebtedness; (iii) release any Person liable in any manner for the collection of Senior Indebtedness; and (iv) exercise or refrain from exercising any rights against the Company and any other Person. Section 1209 Notice to Trustee. The Company shall give prompt written notice to the Trustee of any fact known to the Company which would prohibit the making of any payment to or by the Trustee in respect of the Securities. Notwithstanding the provisions of this Article or any other provision of this Indenture, the Trustee shall not be charged with knowledge of the existence of any facts which would prohibit the making of any payment to or by the Trustee in respect of the Securities, unless and until the Trustee shall have received written notice thereof from the Company or a holder of Senior Indebtedness or from any trustee therefor; and, prior to the receipt of any such written notice, the Trustee, subject to the provisions of Section 601, shall be entitled in all respects to assume that no such facts exist. Subject to the provisions of Section 601, the Trustee shall be entitled to rely on the delivery to it of a written notice by a Person representing himself to be a holder of Senior Indebtedness (or a trustee therefor) to establish that such notice has been given by a holder of Senior Indebtedness (or a trustee therefor). In the event that the Trustee determines in good faith that further evidence is required with respect to the right of any Person as a holder of Senior Indebtedness to participate in any payment or distribution pursuant to this Article, the Trustee may request such Person to furnish evidence to the reasonable satisfaction of the Trustee as to the amount of Senior Indebtedness held by such Person, the extent to which such Person is entitled to participate in such payment or distribution and any other facts pertinent to the rights of such Person under this Article, and if such evidence is not furnished, the Trustee may defer any payment to such Person pending judicial determination as to the right of such Person to receive such payment. Section 1210 Reliance on Judicial Order or Certificate of Liquidating Agent. Upon any payment or distribution of assets of the Company referred to in this Article, the Trustee, subject to the provisions of Section 601, and the Holders of the Securities shall be entitled to rely upon any order or decree entered by any court of competent jurisdiction in which such insolvency, bankruptcy, receivership, liquidation, reorganization, dissolution, winding up or similar case or proceeding is pending, or a certificate of the trustee in bankruptcy, receiver, liquidating trustee, custodian, assignee for the benefit of creditors, agent or other person making such payment or distribution, delivered to the Trustee or to the Holders of Securities, for the purpose of ascertaining the Persons entitled to participate in such payment or distribution, the holders of the Senior Indebtedness and other indebtedness of the Company, the amount thereof or payable thereon, the amount or amounts paid or distributed thereon and all other facts pertinent thereto or to this Article. 57 Section 1211 Trustee Not Fiduciary for Holders of Senior Indebtedness. The Trustee shall not be deemed to owe any fiduciary duty to the holders of Senior Indebtedness and shall not be liable to any such holders if it shall in good faith mistakenly pay over or distribute to Holders of Securities or to the Company or to any other Person cash, property or securities to which holders of Senior Indebtedness shall be entitled by virtue of this Article or otherwise. Section 1212 Rights of Trustee as Holder of Senior Indebtedness; Preservation of Trustee's Rights. The Trustee in its individual capacity shall be entitled to all the rights set forth in this Article with respect to any Senior Indebtedness which may at any time be held by it, to the same extent as any other holder of Senior Indebtedness, and nothing in this Indenture shall deprive the Trustee of any of its rights as such holder. Nothing in this Article shall apply to claims of, or payments to, the Trustee under or pursuant to Section 607. Section 1213 Article Applicable to Paying Agents. In case at any time any Paying Agent other than the Trustee shall have been appointed by the Company and be then acting hereunder, the term "Trustee" as used in this Article shall in such case (unless the context otherwise requires) be construed as extending to and including such Paying Agent within its meaning as fully for all intents and purposes as if such Paying Agent were named in this Article in addition to or in place of the Trustee; provided, however, that Section 1213 shall not apply to the Company or any Affiliate of the Company if it or such Affiliate acts as Paying Agent. Section 1214 Rights with respect to Conversion and Certain Payments. Nothing contained in this Article or elsewhere in this Indenture, or in any of the Securities, shall prevent (x) the application by the Trustee or any paying agent (including by the Company if the Company shall then be acting as paying agent) of any moneys deposited with it hereunder to the payment of or on account of the principal of and premium, if any, or interest on Securities, including, without limitation, redemptions or repurchases pursuant to Articles Eleven or Fourteen, if, at the time of such deposit (provided that the time of such deposit was not more than 10 days prior to the time of such payment), such payment would not have been prohibited by the foregoing provisions of this Article, or (y) conversion of Securities. 58 ARTICLE 13. CONVERSION OF SECURITIES Section 1301 Conversion Privilege and Conversion Price. Subject to and upon compliance with the provisions of this Article, at the option of the Holder thereof, any Security or any portion of the principal amount thereof which equals $1,000 or any integral multiple thereof may be converted at the principal amount thereof, or of such portion thereof, into fully paid and nonassessable shares (calculated as to each conversion to the nearest 1/100 of a share) of Common Stock, at the conversion price, determined as hereinafter provided, in effect at the time of conversion. Such conversion right shall expire at the close of business on the Business Day immediately preceding ___________, 2004. In case a Security or portion thereof is called for redemption, such conversion right in respect of the Security or portion so called shall expire at the close of business on the Business Day immediately preceding the Redemption Date, unless the Company defaults in making the payment due upon redemption. The price at which shares of Common Stock shall be delivered upon conversion (herein called the "conversion price") shall be initially $_______ per share of Common Stock. The conversion price shall be adjusted in certain instances as provided in paragraphs (a), (b), (c), (d), (e), (f) and (i) of Section 1304. Section 1302 Exercise of Conversion Privilege. In order to exercise the conversion privilege, the Holder of any Security shall surrender such Security, duly endorsed or assigned to the Company or in blank, at any office or agency of the Company maintained pursuant to Section 1002, accompanied by written notice to the Company in the form provided in the Security (or such other notice as is acceptable to the Company) at such office or agency that the Holder elects to convert such Security or, if less than the entire principal amount thereof is to be converted, the portion thereof to be converted. In the case of any Security which is surrendered for conversion during the period from the close of business on any Regular Record Date through and including the next succeeding Interest Payment Date (other than any Security whose Maturity is prior to such Interest Payment Date), interest whose Stated Maturity is on such Interest Payment Date shall be payable on such Interest Payment Date notwithstanding such conversion, and such interest shall be paid to the Person in whose name that Security (or one or more Predecessor Securities) is registered at the close of business on such Regular Record Date (unless the Company shall default in the payment of interest on such Interest Payment Date, in which case such amount shall be paid to the person who made the payment referred to below); provided, however, that Securities so surrendered for conversion shall be accompanied by payment in funds acceptable to the Company of an amount equal to the interest payable on such Interest Payment Date on the principal amount being surrendered for conversion; provided, however, that no such payment need be made if there shall exist at the time of conversion a default in the payment of interest on the Securities; provided, further, however, that no such payment need be made if such Security or portion thereof being converted shall have been called for redemption and the Redemption Date for such Security falls 59 during the period beginning immediately after the close of business on such Regular Record Date and ending at the close of business on such Interest Payment Date. Except as provided in the immediately preceding sentence, in the case of any Security which is converted (a) interest whose Stated Maturity is after the date of conversion of such Security shall not be payable and (b) no payment or adjustment shall be made upon conversion on account of any dividends on the Common Stock issued upon conversion. Securities shall be deemed to have been converted immediately prior to the close of business on the day of surrender of such Securities for conversion in accordance with the foregoing provisions, and at such time the rights of the Holders of such Securities as Holders shall cease, and the Person or Persons entitled to receive the Common Stock issuable upon conversion shall be treated for all purposes as the record holder or holders of such Common Stock as and after such time. As promptly as practicable on or after the conversion date, the Company shall issue and shall deliver at any office or agency of the Company maintained pursuant to Section 1002 a certificate or certificates for the number of full shares of Common Stock issuable upon conversion, together with payment in lieu of any fraction of a share, as provided in Section 1303. In the case of any Security which is converted in part only, upon such conversion the Company shall execute and the Trustee shall authenticate and deliver to the Holder thereof, at the expense of the Company, a new Security or Securities of authorized denominations in aggregate principal amount equal to the unconverted portion of the principal amount of such Security. Section 1303 Fractions of Shares. No fractional share of Common Stock shall be issued upon conversion of Securities. If more than one Security shall be surrendered for conversion at one time by the same Holder, the number of full shares which shall be issuable upon conversion thereof shall be computed on the basis of the aggregate principal amount of the Securities (or specified portions thereof) so surrendered. Instead of any fractional share of Common Stock which would otherwise be issuable upon conversion of any Security or Securities (or specified portions thereof), the Company shall pay a cash adjustment in respect of such fractional share in an amount equal to such fraction multiplied by the Closing Price (as hereinafter defined) at the close of business on the day of conversion (or, if such day is not a Trading Day (as hereafter defined), on the Trading Day immediately preceding such day). Section 1304 Adjustment of Conversion Price. (a) In case the Company shall (i) pay a dividend or make a distribution on its capital stock in shares of Common Stock, (ii) subdivide its outstanding shares of Common Stock into a greater number of shares, (iii) combine its outstanding shares of Common Stock into a smaller number of shares or (iv) issue by reclassification of its Common Stock any shares of capital stock of the Company, the conversion price in effect immediately prior to such action shall be adjusted so that the holder of any Security thereafter surrendered for conversion shall be entitled to receive the number of shares of Common Stock or other capital stock of the Company that it would have owned or been entitled to receive immediately following such action had such 60 Security been converted immediately prior to the occurrence of such action. An adjustment made pursuant to this subsection (a) shall become effective immediately after the record date, in the case of a dividend or distribution, or immediately after the effective date, in the case of a subdivision, combination or reclassification. If, as a result of an adjustment made pursuant to this subsection (a), the holder of any Securities thereafter surrendered for conversion shall become entitled to receive shares of two or more classes of capital stock or shares of Common Stock and other capital stock of the Company, the Board of Directors (whose determination shall be conclusive and shall be described in a statement filed by the Company with the Trustee and with any conversion agent as soon as practicable) shall determine the allocation of the adjusted conversion price between or among shares of such classes of capital stock or shares of Common Stock and other capital stock. (b) In case the Company shall issue rights, warrants or options to all holders of its outstanding shares of Common Stock entitling them to subscribe for or purchase shares of Common Stock at a price per share less than the Current Market Price per share (as determined pursuant to subsection (g) of this Section 1304) of the Common Stock, the conversion price in effect immediately prior thereto shall be adjusted so that it shall equal the price determined by multiplying the conversion price in effect immediately prior to the date of issuance of such rights, warrants or options by a fraction of which the numerator shall be the number of shares of Common Stock outstanding on the date of issuance of such rights, warrants or options (immediately prior to such issuance) plus the number of shares that the aggregate offering price of the total number of shares so offered would purchase at such Current Market Price, and of which the denominator shall be the number of shares of Common Stock outstanding on the date of issuance of such rights, warrants or options immediately prior to such issuance) plus the number of additional shares of Common Stock offered for subscription or purchase. Such adjustment shall be made successively whenever any rights, warrants or options are issued, and shall become effective immediately after the record date for the determination of stockholders entitled to receive such rights, warrants or options. In determining whether any rights, warrants or options entitle the holders to subscribe for or purchase shares of Common Stock at less that such Current Market Price, and in determining the aggregate offering price of such shares of Common Stock, there shall be taken into account any consideration received by the Company for such rights, warrants or options, the value of such consideration, if other than cash, to be determined by the Board of Directors (whose determination shall be conclusive and shall be described in a certificate filed by the Company with the Trustee and with any conversion agent as soon as practicable); provided, however, that rights, warrants or options issued by the Company to all holders of its Common Stock entitling the holders thereof to subscribe for or purchase shares of Common Stock, which rights, warrants or options (i) are deemed to be transferred with such shares of Common Stock, (ii) are not exercisable and (iii) are also issued in respect of future issuance of Common Stock, in each case in clauses (i) through (iii) until the occurrence of a specified event or events, shall, for purposes of this Section 1304, not be deemed issued until the occurrence of the earliest such specified event. (c) In case the Company shall distribute to all holders of its outstanding Common Stock any shares of a capital stock (other than Common Stock), evidence of its indebtedness or assets (including securities and cash, but excluding any regular periodic cash dividend paid from 61 surplus of the Company and dividends or distributions payable in stock for which adjustment is made pursuant to subsection (a) of this Section 1304) or rights, warrants or options to subscribe for or purchase securities of the Company (excluding those referred to in subsection (b) of this Section 1304), then in each such case the conversion price shall be adjusted sot that the same shall equal the price determined by multiplying the conversion price in effect immediately prior to the record date of such distribution by a fraction of which the numerator shall be the Current Market Price per share (as determined pursuant to the subsection (g) of this Section 1304 of the Common Stock less the fair market value on such record date (as determine by the Board of Directors, whose determination shall be conclusive and shall be described in a certificate filed by the Company with the Trustee and with any conversion agent as soon as practicable) of the portion of the capital stock or the evidence of indebtedness or the assets so distributed to the holder of one share of Common Stock or of such subscription rights, warrants or options applicable to one share of Common Stock, and of which the denominator shall be such Current Market Price per share of Common Stock. Such adjustment shall become effective immediately after the record date for the determination of stockholders entitled to receive such distribution; provided, however, that rights, warrants or options issued by the Company to all holders of its Common Stock entitling the holders thereof to subscribe for or purchase shares of securities of the Company (excluding those referred to in subsection (b) of this Section 1304), which rights, warrants or options (i) are deemed to be transferred with such shares of Common Stock, (ii) are not exercisable and (iii) are also issued in respect of future issuance of Common Stock, in each case in clauses (i) through (iii) until the occurrence of a specified events or events, shall, for purposes of this Section 1304, not be deemed issued until the occurrence of the earliest such specified event. (d) In case the Company shall issue to an Affiliate shares of its Common Stock at a net price per share less than the Current Market Price per share (as determined pursuant to subsection (g) of this Section 1304) on the date the Company fixes the offering price of such additional shares, the conversion price shall be reduced immediately thereafter so that the same shall equal the price determined by multiplying such conversion price in effect immediately prior thereto by a fraction of which the numerator shall be number of shares of Common Stock outstanding immediately prior to the issuance of such additional shares plus the number of shares of Common Stock that the aggregate offering price of the total number of shares of Common Stock so offered would purchase at the Current Market Price and the denominator shall be the number of shares of Common Stock outstanding immediately after the issuance of such additional shares. Such adjustment shall be made successively whenever such an issuance is made. This subsection (d) shall not apply to Common Stock issued to any Affiliate under a bonafide employee or director benefit plan adopted by the Board of Directors and approved by the holders of Common Stock when required by law. (e) In case the Company shall, by dividend or otherwise, at any time distribute to all holders of the Company's Common Stock cash (excluding any cash that is distributed as part of a distribution referred to in subsection (c) of this Section 1304) (or in connection with a transaction to which Section 1311 applies) in an aggregate amount that, together with (A) the aggregate amount of any other distributions to all holders of the Company's Common Stock made exclusively in cash (excluding any cash that was distributed as part of a distribution referred to in 62 subsection (c) or in connection with a transaction to which Section 1311 applies) within the 12 months preceding the date fixed for the determination of shareholders entitled to such distribution and in respect of which no conversion price adjustment pursuant to this subsection (e) has been made and (B) the aggregate of any cash plus the fair market value (as determined in good faith by the board of Directors, whose determination shall be conclusive and shall be described in a certificate filed by the Company with the Trustee and with any conversion agent as soon as practicable) of other consideration payable in respect of any previous tender offer by the Company or a Subsidiary for the Company's Common Stock consummated within the 12 months preceding such distribution and in respect of which no adjustment pursuant to subsection (f) of this Section 1304 has been made, exceeds 10% of the product of the Current Market Price per share (determined pursuant to subsection (g) of this Section 1304) of the Common Stock on such date of determination times the number of shares of Common outstanding on such date the conversion price shall be reduced by multiplying the conversion price in effect immediately prior to the close of business on such date of determination by a fraction of which the numerator shall be the Current Market Price per share (determined pursuant to subsection (g) of this Section 1304) of Common Stock on such date of determination less the amount of cash to be distributed at such time applicable to one share of Common Stock and the denominator of which shall be such Current Market Price, such reduction to become effective immediately prior to the opening of business on the day after such date of determination. (f) In case a tender offer made by the Company or any Subsidiary for all or any portion of the Company's Common Stock shall be consummated and such tender offer shall involve an aggregate consideration having a fair market value (as determined in good faith by the Board of Directors, whose determination shall be conclusive and shall be described in a certificate filed by the Company with the Trustee and with any conversion agent as soon as practicable) on the last time (the "Expiration Time") tenders may be made pursuant to such tender offer (as it may have been amended) that, together with the aggregate of the cash plus the fair market value (as determined in good faith by the Board of Directors, whose determination shall be conclusive and shall be described in a certificate filed by the Company with the Trustee and with any conversion agent as soon as practicable), of other consideration paid or payable in respect of any previous tender offer by the Company or a Subsidiary for all or any portion of the Company's Common Stock consummated within the 12 months preceding the consummation of such tender offer and in respect of which no conversion price adjustment pursuant to this paragraph (f) has been made, such cash plus the fair market value of other consideration to be calculated in each case as of the expiration of each such previous tender offer, exceeds 10% of the product of the Current market Price per share (determined pursuant to subsection (g) of this Section 1304) of the Common Stock at the Expiration Time times the number of shares of Common Stock outstanding (including any tendered shares) at the Expiration Time, the conversion price shall be reduced so that the same shall equal the price determined by multiplying the conversion price in effect immediately prior to the Expiration Time by a fraction of which the numerator shall be (i) the product of the Current Market Price per share (determined pursuant to subsection (g) of this Section 1304) of the Common Stock at the Expiration Time times the number of shares of Common Stock outstanding (including any tendered shares) at the Expiration Time minus (ii) the fair market value (determined as aforesaid) of the aggregate consideration paid or payable to stockholders based on the number of validly tendered shares to 63 be purchased and not withdrawn prior to the Expiration Time (the number of shares so purchased being hereinafter referred to as the "Purchased Shares") and the denominator of which shall be the product of (i) such Current Market Price per share on the Expiration Time times (ii) such number of outstanding shares on the Expiration Time less the number of Purchased Shares, such reduction to become effective immediately prior to the opening of business on the day following the Expiration Time. (g) For the purpose of any computation under subsections (b), (c), (d), (e) and (f) of this Section 1304, the Current Market Price per share of Common Stock on any date shall be deemed to be the average of the Daily Market Prices for the shorter of (i) 30 consecutive Business Days ending on the last full trading day on the exchange or market referred to in determining such daily market prices prior to the Time of Determination or (ii) the period commencing on the date next succeeding the first public announcement of the issuance of such rights or warrants, such distribution, such issuance of Common Stock to an Affiliate or such tender offer, as the case may be, through such last full trading day prior to the Time of Determination. (h) In any case in which this Section 1304 shall require that an adjustment be made immediately following a record date or an effective date, the Company may elect to defer (but only until five Business Days following the filing by the Company with the Trustee and any conversion agent of the certificate required by Section 1305) issuing to the holder of any Security converted after such record date or effective date the shares of Common Stock issuable upon such conversion over and above the shares of Common Stock issuable upon such conversion on the basis of the conversion price prior to adjustment, and paying to such holder any amount of cash in lieu of a fractional share. (i) No adjustment in the conversion price shall be required to be made unless such adjustment would require an increase or decrease of at least 1% of such price; provided, however, that any adjustments that by reason of this subsection (i) are not required to be made shall be carried forward and taken into account in any subsequent adjustment. All calculations under this Section 1304 shall be made to the nearest cent or to the nearest 1/100th of a share, as the case may be. Anything in this Section 1304 to the contrary notwithstanding, the Company shall be entitled to make such reduction in the conversion price, in addition to those adjustments required by this Section 1304, as it in its discretion shall determine to be advisable in order that any stock dividend, subdivision of shares, distribution of rights to purchase stock or securities or distribution of securities convertible into or exchangeable for stock hereafter made by the Company to its shareholders shall not be taxable to the recipients. (j) In the event that at any time as a result of an adjustment made pursuant to subsection (a) of this Section 1304, the holder of any Security thereafter surrendered for conversion shall become entitled to receive any shares of the Company other than shares of Common Stock, thereafter the conversion price of such other shares so receivable upon conversion of any Security shall be subject to adjustment from time to time in a manner and on terms as nearly equivalent as practicable to the provisions with respect to Common Stock contained in this Article Thirteen. 64 Section 1305 Notice of Adjustments of Conversion Price. Whenever the conversion price is adjusted as herein provided: (a) the Company shall compute the adjusted conversion price in accordance with Section 1304 and shall prepare a certificate signed by the Treasurer or Chief Financial Officer of the Company setting forth the adjusted conversion price and showing in reasonable detail the facts upon which such adjustment is based, and such certificate shall forthwith be filed (with a copy to the Trustee) at each office or agency maintained for the purpose of conversion of Securities pursuant to Section 1002; and (b) a notice stating that the conversion price has been adjusted and setting forth the adjusted conversion price shall forthwith be prepared, and as soon as practicable after it is prepared, such notice shall be furnished by the Company to the Trustee and mailed by the Company at its expense to all Holders at their last addresses as they shall appear in the Security Register. Section 1306 Notice of Certain Corporate Action. In case: (a) the Company shall take an action that would require a conversion price adjustment pursuant to Section 1304(c), (d), (e) or (f); or (b) the Company shall authorize the granting to the holders of its Common Stock of rights or warrants to subscribe for or purchase any shares of capital stock of any class or of any other rights (excluding shares of capital stock or options for capital stock issued pursuant to a benefit plan for employees, officers or directors of the Company); or (c) of any reclassification of the Common Stock (other than a subdivision or combination of the outstanding shares of Common Stock), or of any consolidation, merger or share exchange to which the Company is a party and for which approval of any shareholders of the Company is required, or of the sale or transfer of all or substantially all of the assets of the Company; or (d) of the voluntary or involuntary dissolution, liquidation or winding up of the Company; or (e) the Company or any Subsidiary shall commence a tender offer for all or a portion of the outstanding shares of Common Stock (or shall amend any such tender offer to change the maximum number of shares being sought or the amount or type of consideration being offered therefor); then the Company shall cause to be filed at each office or agency maintained pursuant to Section 1002, and shall cause to be mailed to all Holders at their last addresses as they shall appear in the Security Register, at least 21 days (or 11 days in any case specified in clause (a), (b) 65 or (e) above) prior to the applicable record, effective or expiration date hereinafter specified, a notice stating (x) the date on which a record is to be taken for the purpose of such dividend, distribution or granting of rights or warrants, or, if a record is not to be taken, the date as of which the holders of Common Stock of record who will be entitled to such dividend, distribution, rights or warrants are to be determined, (y) the date on which such reclassification, consolidation, merger, share exchange, sale, transfer, dissolution, liquidation or winding up is expected to become effective, and the date as of which it is expected that holders of Common Stock of record shall be entitled to exchange their shares of Common Stock for securities, cash or other property deliverable upon such reclassification, consolidation, merger, share exchange, sale, transfer, dissolution, liquidation or winding up, or (z) the date on which such tender offer commenced, the date on which such tender offer is scheduled to expire unless extended, the consideration offered and the other material terms thereof (or the material terms of any amendment thereto). Neither the failure to give any such notice nor any defect therein shall affect the legality or validity of any action described in clauses (a) through (e) of this Section 1306. Section 1307 Company to Reserve Common Stock. The Company shall at all times reserve and keep available, free from preemptive rights, out of the authorized but unissued Common Stock or out of the Common Stock held in treasury, for the purpose of effecting the conversion of Securities, the full number of shares of Common Stock then issuable upon the conversion of all outstanding Securities. Before taking any action that would cause an adjustment reducing the conversion price below the then par value (if any) of the shares of Common Stock deliverable upon conversion of the Securities, the Company will take any corporate action that may, in the opinion of its counsel, be necessary in order that the Company may validly and legally issue fully paid and non-assessable shares of Common Stock at such adjusted conversion price. Section 1308 Taxes on Conversions. The Company will pay any and all original issuance, transfer, stamp and other similar taxes that may be payable in respect of the issue or delivery of shares of Common Stock on conversion of Securities pursuant hereto. The Company shall not, however, be required to pay any tax which may be payable in respect of any transfer involved in the issue and delivery of shares of Common Stock in a name other than that of the Holder of the Security or Securities to be converted, and no such issue or delivery shall be made unless and until the Person requesting such issue has paid to the Company the amount of any such tax, or has established to the satisfaction of the Company that such tax has been paid. Section 1309 Covenant as to Common Stock. The Company covenants that all shares of Common Stock which may be issued upon conversion of Securities will upon issue be validly issued, fully paid and nonassessable. 66 The Company further covenants that for so long as the Common Stock shall be listed on the New York Stock Exchange or any other national securities exchange, the Company will, if permitted by the rules of such exchange, list and keep listed all Common Stock issuable upon conversion of the Securities. Section 1310 Cancellation of Converted Securities. All Securities delivered for conversion shall be delivered to the Trustee to be canceled by or at the direction of the Trustee, which shall dispose of the same as provided in Section 309. Section 1311 Provisions as to Consolidation, Merger or Sale of Assets. Notwithstanding any other provision herein to the contrary, in case of any consolidation or merger to which the Company is a party (other than a merger or consolidation in which the Company is the continuing corporation and in which the Company's Common Stock outstanding immediately prior to the merger or consolidation is not exchanged for cash or the securities or other property of another corporation), or in case of any sale or conveyance to another corporation of the property of the Company as an entirety or substantially as an entirety, or in the case of any statutory exchange of securities with another corporation (other than in connection with a merger or acquisition), the corporation formed by such consolidation or the corporation whose securities, cash or other property will immediately after the merger or consolidation be owned, by virtue of the merger or consolidation by the holders of Common Stock of the Company immediately prior to the merger, or the corporation that shall have acquired such assets or securities of the Company, as the case may be, shall promptly execute and deliver to the Trustee a supplemental indenture providing that the holder of each Security then outstanding shall have the right thereafter to convert such Security into the kind and amount of securities, cash or other property receivable upon such consolidation, merger, statutory exchange, sale or conveyance by a holder of the number of shares of Common Stock into which such Security might have been converted immediately prior to such consolidation, merger, statutory exchange, sale or conveyance assuming such holder of Common Stock did not exercise its rights of election, if any, as to the kind or amount of securities, cash or other property receivable upon such consolidation, merger, statutory exchange, sale or conveyance (provided that, if the kind or amount of securities, cash or other property receivable upon such consolidation, merger, statutory exchange, sale or conveyance is not the same for each share of Common Stock in respect of which such rights of election shall not have been exercised (a "non-electing share"), then for the purposes of this Section 1311, the kind and amount of securities, cash or other property receivable upon such consolidation, merger, statutory exchange, sale or conveyance for each non-electing share shall be deemed to be the kind and amount so receivable per share by a plurality of the non-electing shares). Such supplemental indenture shall provide for appropriate adjustment with respect to the rights of the holders of the Securities, to the end that the provisions set forth in this Article Thirteen shall thereafter correspondingly be made applicable, as nearly as may reasonably be, in relation to any shares of stock or other securities or property thereafter deliverable on the conversion of the Securities. Any such adjustment shall be evidenced by a certificate delivered to the Trustee and any paying agent. 67 The above provisions of this Section 1311 shall similarly apply to successive consolidations, mergers, statutory exchanges, sales or conveyances. The Company shall give notice of the execution of such a supplemental indenture to the holders of Securities in the manner provided in Section 1006 within 30 days after the execution thereof; provided, however, that such notice need not be given if such information has been provided prospectively in the notice given pursuant to Section 1306. Failure to give such notice, or any defects therein, shall not affect the legality or validity of any such supplemental indenture. Section 1312 Disclaimer of Responsibility for Certain Matters. Neither the Trustee nor any conversion agent shall at any time be under any duty or responsibility to any holder of Securities to determine whether any facts exist that may require any adjustment of the conversion price, or with respect to the nature or extent of any such adjustment when made, or with respect to the method employed, or herein or in any supplemental indenture provided to be employed, in making the same. Neither the Trustee nor any conversion agent shall be accountable with respect to the listing referred to in Section 1309 or the validity or value (or the kind or amount) of any shares of Common Stock, or of any securities, cash or other property that may at any time be issued or delivered upon the conversion of any Security; and neither the Trustee nor any conversion agent makes any representation with respect thereto. Neither the Trustee nor any conversion agent shall be responsible for any failure of the Company to issue, transfer or deliver any shares of Common Stock or stock certificates or other securities or property or to make any cash payment upon the surrender of any Security for the purpose of conversion or, subject to the provisions of Section 601, to comply with any of the covenants contained in this Article Thirteen. ARTICLE 14. RIGHT TO REQUIRE REPURCHASE Section 1401 Right to Require Repurchase. In the event that there shall occur a Change in Control, then each Holder shall have the right, at such Holder's option, to require the Company to purchase, and upon the exercise of such right, the Company shall, subject to the provisions of Article Twelve, purchase all (or any portion with a principal amount equal to $1,000 or an integral multiple thereof) of such Holder's Securities on the date (the "Repurchase Date") that is 40 Business Days after the occurrence of the Change in Control at a price (the "Repurchase Price") equal to 100% of the principal amount thereof, together with accrued and unpaid interest to the Repurchase Date. Section 1402 Notice; Method of Exercising Repurchase Right. (a) On or before the 20th Business Day after the occurrence of a Change in Control, the Company, or at the request of the Company, the Trustee (in the name and at the expense of the Company), shall give notice of the occurrence of the Change in Control and of the repurchase right set forth herein arising as a result thereof by first-class mail, postage prepaid, to each 68 Holder of the Securities at such Holder's address appearing in the Security Register. The Company shall also deliver a copy of such notice of a repurchase right to the Trustee. Each notice of a repurchase right shall state: (i) the event constituting the Change in Control and the date thereof, (ii) the Repurchase Date, (iii) the date by which the repurchase right must be exercised, (iv) the Repurchase Price, and (v) the instructions a Holder must follow to exercise a repurchase right. No failure of the Company to give the foregoing notice shall limit any Holder's right to exercise a repurchase right. The Trustee shall have no affirmative obligation to determine if there shall have occurred a Change in Control. (b) To exercise a repurchase right, a Holder shall deliver to the Company (or an agent designated by the Company for such purpose in the notice referred to in (a) above) and to the Trustee on or before the close of business on the Repurchase Date (i) written notice of the Holder's exercise of such right, which notice shall set forth the name of the Holder, the principal amount of the Security or Securities (or portion of a Security which is $1,000 or an integral multiple thereof) to be repurchased, and a statement that an election to exercise the repurchase right is being made thereby, and (ii) the Security or Securities with respect to which the repurchase right is being exercised, duly endorsed for transfer to the Company. Such written notice may be withdrawn at any time on or before the close of business on the Repurchase Date. If the Repurchase Date falls between any Regular Record Date and the next succeeding Interest Payment Date, Securities to be repurchased must be accompanied by payment from the Holder of an amount equal to the interest thereon which the registered Holder thereof is to receive on such Interest Payment Date. (c) In the event a repurchase right shall be exercised in accordance with the terms hereof, the Company shall on or promptly following the Repurchase Date pay or cause to be paid in cash to the Holder thereof the Repurchase Price of the Security or Securities as to which the repurchase right had been exercised. Section 1403 Deposit of Repurchase Price. On or prior to the close of business on the Repurchase Date the Company shall deposit with the Trustee or with a Paying Agent (or, if the Company is acting as its own Paying Agent, segregate and hold in trust as provided in Section 1003) an amount of money sufficient to pay the Repurchase Price of the Securities which are to be repaid on or promptly following the Repurchase Date. 69 Section 1404 Securities Not Repurchased on Repurchase Date. Interest on any Security surrendered for repurchase shall cease to accrue from and after the Repurchase Date unless the Company shall default in the payment of any such Security at the purchase price, together with interest accrued thereon to the Repurchase Date. Section 1405 Securities Repurchased in Part. Any Security which is to be repurchased only in part shall be surrendered at any office or agency of the Company designated for that purpose pursuant to Section 1002 (with, if the Company or the Trustee so requires, due endorsement by, or written instrument of transfer in form satisfactory to the Company and the Trustee duly executed by, the Holder thereof or his attorney duly authorized in writing), and the Company shall execute, and the Trustee shall authenticate and deliver to the Holder of such Security without service charge, a new Security or Securities of any authorized denomination as requested by such Holder, in an aggregate principal amount equal to and in exchange for the repurchased portion of the principal of the Security so surrendered. This instrument may be executed in any number of counterparts, each of which when so executed shall be deemed to be an original, but all such counterparts shall together constitute but one and the same instrument. IN WITNESS WHEREOF, the parties hereto have caused this Indenture to be duly executed, and their respective corporate seals to be hereunto affixed and attested, all as of the day and year first above written. CONVERSE INC. By _________________________________ Name: Title: Attest: __________________________ Name: Title: FIRST UNION NATIONAL BANK, as Trustee By _________________________________ Name: Title: Attest: 70 ______________________ Name: Title: 71 ) )ss. ) On the ______ day of ______________, 1997, before me personally came ___________________________________, to me known, who, being by me duly sworn, did depose and say that he is _____________________ of CONVERSE, INC., a Delaware corporation described in and which executed the foregoing instrument; that he knows the seal of said entity; that the seal affixed to said instrument is such seal; that it was so affixed by authority of the Board of Directors of said entity; and that he signed his name thereto by like authority. ________________________________ ) ) ss.: ) On the ________ day of _________________, 199_, before me personally came __________________, to me known, who, being by me duly sworn, did depose and say that he is a ______________________ of FIRST UNION NATIONAL BANK, a ________________ described in and which executed the foregoing instrument as trustee; that he knows the seal of said entity; that the seal affixed to said instrument is such seal; that it was so affixed by authority of the Board of Directors of said entity; and that he signed his name thereto by like authority. _____________________________ 72 EX-5 4 OPINION OF MORGAN, LEWIS & BOCKIUS LLP EXHIBIT 5 Morgan, Lewis & Bockius LLP Philadelphia, PA 19103-6993 215-963-5000 Fax: 215-963-5299 May 5, 1997 Converse Inc. One Fordham Road North Reading, MA 01864 Re: Form S-3 Registration Statement (File No. 333-23791) Ladies and Gentlemen: We have acted as counsel to Converse Inc., a Delaware corporation (the "Company"), in connection with the registration under the Securities Act of 1933, as amended (the "Securities Act"), of up to $69,000,000 aggregate principal amount of the Company's % Convertible Subordinated Notes due 2004 (the "Notes"), which includes $9,000,000 principal amount of Notes that may be issued pursuant to an over-allotment option granted to the underwriters, and such indeterminate number of shares of common stock, no par value, stated value $1.00 per share (the "Common Stock"), of the Company as may be issuable upon conversion of the Notes, all pursuant to a registration statement on Form S-3 (File No. 333-23791) initially filed with the Securities and Exchange Commission (the "Commission") on March 24, 1997, and amended by Amendment No. 1 thereto filed on the date hereof (the "Registration Statement"). We have examined and are familiar with the Restated Certificate of Incorporation and the Bylaws of the Company and have examined the originals, or copies certified or otherwise identified to our satisfaction, of corporate records, including resolutions adopted by the Board of Directors of the Company. We have also examined copies of (a) the Registration Statement, (b) proposed form of the Indenture (the "Indenture") to be entered into by the Company and First Union National Bank, as trustee, filed as Exhibit 4.1 to the Registration Statement and (c) such statutes and other records, instruments and documents that we have deemed necessary for the purposes of this opinion. On the basis of and in reliance upon the foregoing, we are of the opinion that: 1. When (a) the Registration Statement shall have become effective pursuant to the provisions of the Securities Act, (b) the Indenture shall have been qualified pursuant to the provisions of the Trust Indenture Act of 1939, as amended, and shall have been duly executed and delivered by the parties thereto, (c) the Company shall have received payment in full for the Notes and (d) the Notes shall have been issued in the form and containing the terms described in the Registration Statement, the Indenture and the resolutions of the Company's Board of Directors (and any authorized committee thereof) authorizing the foregoing, the Notes will be valid and binding obligations of the Company. 2. The shares of Common Stock into which the Notes will be convertible, when issued and delivered upon conversion of the Notes in accordance with the terms of the Notes and the Indenture, will be legally issued, fully paid and nonassessable. The opinions set forth herein are limited to the Delaware General Corporation Law, the laws of the State of New York and the federal laws of the United States. Converse Inc. May 5, 1997 Page 2 We hereby consent to the filing of this opinion as an exhibit to the Registration Statement and to the reference to our Firm under the caption "Legal Matters" in the prospectus included in the Registration Statement, but we do not thereby admit that we are within the category of persons whose consent is required under Section 7 of the Securities Act, or the rules and regulations promulgated by the Securities and Exchange Commission thereunder. Very truly yours, /s/ Morgan, Lewis & Bockius LLP 2 EX-12 5 COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES EXHIBIT 12 CONVERSE INC. COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES (DOLLARS IN THOUSANDS)
FISCAL YEAR ENDED THREE MONTHS ENDED ------------------------------------------------------- -------------------------- DECEMBER 28, 1996 MARCH 29, 1997 ------------------ ---------------- JANUARY 1, DECEMBER 31, DECEMBER 30, PRO MARCH 30, PRO 1994 1994 1995 ACTUAL FORMA(1) 1996 ACTUAL FORMA(1) ---------- ------------ ------------ -------- -------- --------- ------- -------- Pre-tax earnings (loss) from continuing operations............. $19,433 $28,161 $(99,891) $(22,569) $(18,420) $(4,475) $20,618 $21,264 Fixed charges: Interest expense and amortization of debt expense relating to indebtedness.......... 7,501 7,423 14,043 17,776 13,627 3,837 2,679 2,033 Capitalized interest.... -- 5,056 1,739 -- 4,800 -- -- 5,550 Appropriate portion ( 1/3) of rent expense... 1,459 1,503 1,663 1,690 1,690 398 485 485 ------- ------- -------- -------- -------- ------- ------- ------- Total fixed charges..... 8,960 13,982 17,445 19,466 20,117 4,235 3,164 8,068 ------- ------- -------- -------- -------- ------- ------- ------- Earnings (loss) before income taxes and fixed charges (excluding capitalized interest).. $28,393 $37,087 $(84,185) $ (3,103) $ (3,103) $ (240) $23,782 $23,782 ======= ======= ======== ======== ======== ======= ======= ======= Ratio of earnings to fixed charges.......... 3.17 2.65 -- (2) -- (2) -- (2) -- (2) 7.52 2.95
- -------- (1) Pro forma information reflects consummation of the Offering, application of the net proceeds thereof and execution and delivery of the New Credit Facility as of the first day of the period presented for Statement of Operations Data and Other Operations Data. See "Selected Consolidated Historical and Pro Forma Financial Information" and "Use of Proceeds." (2) As a result of the loss incurred in these periods, the Company was unable to fully cover the indicated fixed charges. EX-23.1 6 CONSENT OF PRICE WATERHOUSE LLP EXHIBIT 23.1 CONSENT OF INDEPENDENT ACCOUNTANTS We hereby consent to the use in the Prospectus constituting part of this Registration Statement on Form S-3 of our report dated February 19, 1997, except as to Note 16, which is as of March 14, 1997, relating to the financial statements of Converse Inc. for the two year period ended December 28, 1996, which appears in such Prospectus. We also consent to the application of such report to the Financial Statement Schedule for the two years ended December 28, 1996, which is included in Converse Inc.'s Annual Report on Form 10-K, when such schedule is read in conjunction with the financial statements referred to in our report. The audits referred to in such report also included this Financial Statement Schedule. We also consent to the reference to us under the heading "Experts" in such Prospectus. Price Waterhouse LLP Boston, Massachusetts May 2, 1997 EX-23.2 7 CONSENT OF KPMG PEAT MARWICK LLP EXHIBIT 23.2 INDEPENDENT AUDITORS' CONSENT The Board of Directors Converse Inc.: We consent to the use of our report included herein and to the reference to our firm under the heading "Experts" in the prospectus. KPMG Peat Marwick LLP Boston, Massachusetts May 2, 1997 EX-24 8 POWER OF ATTORNEY EXHIBIT 24 POWER OF ATTORNEY KNOW ALL BY ME THESE PRESENTS that each of the undersigned does hereby nominate, constitute and appoint Glenn N. Rupp, Jack A. Green or Donald J. Camacho, or any of them, as his agent and attorney-in-fact, in his name to execute on behalf of the undersigned a Registration Statement on Form S-3 (or an amendment to the Company's existing Registration Statement No. 333-23791) to be filed with the Securities and Exchange Commission under the Securities Act of 1933, as amended, in connection with the registration under such Act of up to $69,000,000 principal amount of convertible subordinated notes of the Company (the "Notes") and the shares of common stock, no par value, of the Company, issuable upon conversion of any or all of the Notes, the authority herein given to include execution of amendments of any part of such Registration Statement and generally to do and perform all things necessary to be done in the premises as fully and effectively in all respects as the undersigned could do if personally present. IN WITNESS WHEREOF this Power of Attorney has been executed in counterparts by individuals listed below as of the 2nd day of May, 1997. /s/ Donald J. Barr /s/ John J. Hannan - ------------------------------------------- ------------------------------------------- DONALD J. BARR JOHN J. HANNAN /s/ Leon D. Black /s/ Joshua J. Harris - ------------------------------------------- ------------------------------------------- LEON D. BLACK JOSHUA J. HARRIS - ------------------------------------------- ------------------------------------------- JULIUS W. ERVING JOHN H. KISSICK /s/ Robert H. Falk /s/ Richard B. Loynd - ------------------------------------------- ------------------------------------------- ROBERT H. FALK RICHARD B. LOYND /s/ Gilbert Ford /s/ Glenn N. Rupp - ------------------------------------------- ------------------------------------------- GILBERT FORD GLENN N. RUPP /s/ Michael S. Gross - ------------------------------------------- ------------------------------------------- MICHAEL S. GROSS MICHAEL D. WEINER
EX-25 9 FORM T-1 STATEMENT OF ELIGIBILITY EXHIBIT 25 SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM T-1 STATEMENT OF ELIGIBILITY UNDER THE TRUST INDENTURE ACT OF 1939 OF A CORPORATION DESIGNATED TO ACT AS TRUSTEE CHECK IF AN APPLICATION TO DETERMINE ELIGIBILITY OF A TRUSTEE PURSUANT TO SECTION 305(b)(2) __ FIRST UNION NATIONAL BANK (Name of Trustee) 22-1147033 (I.R.S. Employer Identification No.) 102 PENNSYLVANIA AVENUE, AVONDALE, PENNSYLVANIA (Address of Principal Executive Offices) 19311 (Zip Code) CONVERSE INC. (Exact name of registrants as specified in their charters) DELAWARE (State of Incorporation) 43-1419731 (I.R.S. Employer Identification No.) ONE FORDHAM ROAD NORTH READING, MA 01864 (508-664-1100) (Address of Principal Executive Offices) $69,000,000 % CONVERTIBLE SUBORDINATED NOTES DUE 2004 (Title of Indenture Securities) 1. GENERAL INFORMATION. FURNISH THE FOLLOWING INFORMATION AS TO THE TRUSTEE: (a) NAME AND ADDRESS OF EACH EXAMINING OR SUPERVISORY AUTHORITY TO WHICH IT IS SUBJECT: Comptroller of the Currency United States Department of the Treasury Washington, D.C. 20219 Federal Reserve Bank (3rd District) Philadelphia, Pennsylvania 19106 Federal Deposit Insurance Corporation Washington, D.C. 20429 (b) WHETHER IT IS AUTHORIZED TO EXERCISE CORPORATE TRUST POWERS. Yes. 2. AFFILIATIONS WITH OBLIGOR. IF THE OBLIGOR IS AN AFFILIATE OF THE TRUSTEE, DESCRIBE EACH SUCH AFFILIATION. None. 3. VOTING SECURITIES OF THE TRUSTEE. FURNISH THE FOLLOWING INFORMATION AS TO EACH CLASS OF VOTING SECURITIES OF THE TRUSTEE: Not applicable - see answer to item 13. 4. TRUSTEESHIPS UNDER OTHER INDENTURES. IF THE TRUSTEE IS A TRUSTEE UNDER ANOTHER INDENTURE UNDER WHICH ANY OTHER SECURITIES, OR CERTIFICATES OF INTEREST OR PARTICIPATION IN ANY OTHER SECURITIES, OF THE OBLIGOR ARE OUTSTANDING, FURNISH THE FOLLOWING INFORMATION: Not applicable - see answer to item 13. 2 5. INTERLOCKING DIRECTORATES AND SIMILAR RELATIONSHIPS WITH THE OBLIGOR OR UNDERWRITERS. IF THE TRUSTEE OR ANY OF THE DIRECTORS OR EXECUTIVE OFFICERS OF THE TRUSTEE IS A DIRECTOR, OFFICER, PARTNER, EMPLOYEE, APPOINTEE, OR REPRESENTATIVE OF THE OBLIGOR OR OF ANY UNDERWRITER FOR THE OBLIGOR, IDENTIFY EACH SUCH PERSON HAVING ANY SUCH CONNECTION AND STATE THE NATURE OF EACH SUCH CONNECTION. Not applicable - see answer to item 13. 6. VOTING SECURITIES OF THE TRUSTEE OWNED BY THE OBLIGOR OR ITS OFFICIALS. FURNISH THE FOLLOWING INFORMATION AS TO THE VOTING SECURITIES OF THE TRUSTEE OWNED BENEFICIALLY BY THE OBLIGOR AND EACH DIRECTOR, PARTNER, AND EXECUTIVE OFFICER OF THE OBLIGOR: Not applicable - see answer to item 13. 7. VOTING SECURITIES OF THE TRUSTEE OWNED BY UNDERWRITERS OR THEIR OFFICIALS. FURNISH THE FOLLOWING INFORMATION AS TO THE VOTING SECURITIES OF THE TRUSTEE OWNED BENEFICIALLY BY EACH UNDERWRITER FOR THE OBLIGOR AND EACH DIRECTOR, PARTNER, AND EXECUTIVE OFFICER OF EACH SUCH UNDERWRITER: Not applicable - see answer to item 13. 8. SECURITIES OF THE OBLIGOR OWNED OR HELD BY THE TRUSTEE. FURNISH THE FOLLOWING INFORMATION AS TO SECURITIES OF THE OBLIGOR OWNED BENEFICIALLY OR HELD AS COLLATERAL SECURITY FOR OBLIGATIONS IN DEFAULT BY THE TRUSTEE: Not applicable - see answer to item 13. 9. SECURITIES OF UNDERWRITERS OWNED OR HELD BY THE TRUSTEE. IF THE TRUSTEE OWNS BENEFICIALLY OR HOLDS AS COLLATERAL SECURITY FOR OBLIGATIONS IN DEFAULT ANY SECURITIES OF AN UNDERWRITER FOR THE OBLIGOR, FURNISH THE FOLLOWING INFORMATION AS TO EACH CLASS OF SECURITIES OF SUCH UNDERWRITER ANY OF WHICH ARE SO OWNED OR HELD BY THE TRUSTEE: Not applicable - see answer to item 13. 3 10. OWNERSHIP OR HOLDINGS BY THE TRUSTEE OF VOTING SECURITIES OF CERTAIN AFFILIATES OR SECURITY HOLDERS OF THE OBLIGOR. IF THE TRUSTEE OWNS BENEFICIALLY OR HOLDS AS COLLATERAL SECURITY FOR OBLIGATIONS IN DEFAULT VOTING SECURITIES OF A PERSON WHO, TO THE KNOWLEDGE OF THE TRUSTEE (1) OWNS 10 PERCENT OR MORE OF THE VOTING STOCK OF THE OBLIGOR OR (2) IS AN AFFILIATE, OTHER THAN A SUBSIDIARY, OF THE OBLIGOR, FURNISH THE FOLLOWING INFORMATION AS TO THE VOTING SECURITIES OF SUCH PERSON: Not applicable - see answer to item 13. 11. OWNERSHIP OR HOLDINGS BY THE TRUSTEE OF ANY SECURITIES OF A PERSON OWNING 50 PERCENT OR MORE OF THE VOTING SECURITIES OF THE OBLIGOR. IF THE TRUSTEE OWNS BENEFICIALLY OR HOLDS AS COLLATERAL SECURITY FOR OBLIGATIONS IN DEFAULT ANY SECURITIES OF A PERSON WHO, TO THE KNOWLEDGE OF THE TRUSTEE, OWNS 50 PERCENT OR MORE OF THE VOTING SECURITIES OF THE OBLIGOR, FURNISH THE FOLLOWING INFORMATION AS TO EACH CLASS OF SECURITIES OF SUCH PERSON ANY OF WHICH ARE SO OWNED OR HELD BY THE TRUSTEE: Not applicable - see answer to item 13. 12. INDEBTEDNESS OF THE OBLIGOR TO THE TRUSTEE. EXCEPT AS NOTED IN THE INSTRUCTIONS, IF THE OBLIGOR IS INDEBTED TO THE TRUSTEE, FURNISH THE FOLLOWING INFORMATION: Not applicable - see answer to item 13. 13. DEFAULTS BY THE OBLIGOR. (a) STATE WHETHER THERE IS OR HAS BEEN A DEFAULT WITH RESPECT TO THE SECURITIES UNDER THIS INDENTURE. EXPLAIN THE NATURE OF ANY SUCH DEFAULT. None. (b) IF THE TRUSTEE IS A TRUSTEE UNDER ANOTHER INDENTURE UNDER WHICH ANY OTHER SECURITIES, OR CERTIFICATES OF INTEREST OR PARTICIPATION IN ANY OTHER SECURITIES, OF THE OBLIGOR ARE OUTSTANDING, OR IS TRUSTEE FOR MORE THAN ONE OUTSTANDING SERIES OF SECURITIES UNDER THE INDENTURE, STATE WHETHER THERE HAS BEEN A DEFAULT UNDER ANY SUCH INDENTURE OR SERIES, IDENTIFY THE INDENTURE OR SERIES AFFECTED, AND EXPLAIN THE NATURE OF ANY SUCH DEFAULT. None. 4 14. AFFILIATIONS WITH THE UNDERWRITERS. IF ANY UNDERWRITER IS AN AFFILIATE OF THE TRUSTEE, DESCRIBE EACH SUCH AFFILIATION. Not applicable - see answer to item 13. 15. FOREIGN TRUSTEE. IDENTIFY THE ORDER OR RULE PURSUANT TO WHICH THE TRUSTEE IS AUTHORIZED TO ACT AS SOLE TRUSTEE UNDER INDENTURES QUALIFIED OR TO BE QUALIFIED UNDER THE ACT. Not applicable - trustee is a national banking association organized under the laws of the United States. 16. LIST OF EXHIBITS. LIST BELOW ALL EXHIBITS FILED AS PART OF THIS STATEMENT OF ELIGIBILITY. X 1. Copy of Articles of Association of the trustee as now in effect. --- ___ 2. Copy of the Certificate of the Comptroller of the Currency dated January 11, 1994, evidencing the authority of the trustee to transact business.* ___ 3. Copy of the authorization of the trustee to exercise fiduciary powers.* X 4. Copy of existing by-laws of the trustee. - --- ___ 5. Copy of each indenture referred to in Item 4, if the obligor is in default, not applicable. X 6. Consent of the trustee required by Section 321(b) of the Act. - --- X 7. Copy of report of condition of the trustee at the close of business on - --- March 31, 1997, published pursuant to the requirements of its supervising authority. ___ 8. Copy of any order pursuant to which the foreign trustee is authorized to act as sole trustee under indentures qualified or to be qualified under the Act, not applicable. 5 ___ 9. Consent to service of process required of foreign trustees pursuant to Rule 10a-4 under the Act, not applicable. _____________________ *Previously filed with the Securities and Exchange Commission on February 11, 1994 as an exhibit to Form T-1 in connection with Registration Statement No. 22-73340 and incorporated herein by reference. NOTE The trustee disclaims responsibility for the accuracy or completeness of information contained in this Statement of Eligibility and Qualification not known to the trustee and not obtainable by it through reasonable investigation and as to which information it has obtained from the obligor and has had to rely or will obtain from the principal underwriters and will have to rely. SIGNATURE Pursuant to the requirements of the Trust Indenture Act of 1939, the trustee, First Union National Bank, a national banking association organized and existing under the laws of the United States of America, has duly caused this Statement of Eligibility to be signed on its behalf by the undersigned, thereunto duly authorized, all in the City of Philadelphia and Commonwealth of Pennsylvania, on the 2nd day of May, 1997. FIRST UNION NATIONAL BANK By:_____________________ John H. Clapham Vice President 6 EXHIBIT 1 -------- FIRST UNION NATIONAL BANK ------------------------- ARTICLES OF ASSOCIATION (EFFECTIVE JULY 11, 1996) For purposes of organizing an Association to carry on the business of banking under the laws of the United States, the undersigned do enter into the following Articles of Association: FIRST. The title of this Association shall be First Union National Bank. SECOND. The Main Office of the Association shall be in Avondale, County of Chester, State of Pennsylvania. The general business of the Association shall be conducted at its main office and its branches. THIRD. The Board of Directors of this Association shall consist of not less than five nor more than twenty-five persons, the exact number to be fixed and determined from time to time by resolution of a majority of the full Board of Directors or by resolution of the shareholders at any annual or special meeting thereof. Each Director, during the full term of his directorship, shall own a minimum of (a) $1,000 par value of stock of this Association or (b) preferred or common stock of First Fidelity Bancorporation having (i) aggregate par value equal to or greater than $1,000, (ii) aggregate shareholders' equity equal to or greater than $1,000 or (iii) aggregate fair market value equal to or greater than $1,000. Any vacancy in the Board of Directors may be filled by action of the Board of Directors. FOURTH. There shall be an annual meeting of the shareholders the purpose of which shall be the election of Directors and the transaction of whatever other business may be brought before said meeting. It shall be held at the main office or other convenient place as the Board of Directors may designate, on the day of each year specified therefor in the By-laws, but if no election is held on that day, it may be held on any subsequent day according to such lawful rules as may be presented by the Board of Directors. FIFTH. (A) General. The amount of capital stock of this Association shall ------- be (i) 25,000,000 shares of common stock of the par value of twenty dollars ($20.00) each (the "Common Stock") and (ii) 160,540 shares of preferred stock of the par value of one dollar ($1.00) each (the "Non-Cumulative Preferred Stock"), having the rights, privileges and preferences set forth below, but said capital stock may be increased or decreased from time to time in accordance with the provisions of the laws of the United States. (B) Terms of the Non-Cumulative Preferred Stock. ------------------------------------------- 1. General. Each share of Non-Cumulative Preferred Stock shall be ------- identical in all respects with the other shares of Non-Cumulative Preferred Stock. The authorized number of shares of Non-Cumulative Preferred Stock may from time to time be increased or decreased (but not below the number then outstanding) by the Board of Directors. Shares of Non-Cumulative Preferred Stock redeemed by the Association shall be canceled and shall revert to authorized but unissued shares of Non-Cumulative Preferred Stock. 2. Dividends. --------- (a) General. The holders of Non-Cumulative Preferred Stock shall be ------- entitled to receive, when, as and if declared by the Board of Directors, but only out of funds legally available therefor, non-cumulative cash dividends at the annual rate of $83.75 per share, and no more, payable quarterly on the first days of December, March, June and September, respectively, in each year with respect to the quarterly dividend period (or portion thereof) ending on the day preceding such respective dividend payment date, to shareholders of record on the respective date, not exceeding fifty days preceding such dividend payment date, fixed for that purpose by the Board of Directors in advance of payment of each particular 2 dividend. Notwithstanding the foregoing, the cash dividend to be paid on the first dividend payment date after the initial issuance of Non-Cumulative Preferred Stock and on any dividend payment date with respect to a partial dividend period shall be $83.75 per share multiplied by the fraction produced by dividing the number of days since such initial issuance or in such partial dividend period, as the case may be, by 360. (b) Non-cumulative Dividends. Dividends on the shares of Non-Cumulative ------------------------ Stock shall not be cumulative and no rights shall accrue to the holders of shares of Non-Cumulative Preferred Stock by reason of the fact that the Association may fail to declare or pay dividends on the shares of Non-Cumulative Preferred Stock in any amount in any quarterly dividend period, whether or not the earnings of the Association in any quarterly dividend period were sufficient to pay such dividends in whole or in part, and the Association shall have no obligation at any time to pay any such dividend. (c) Payment of Dividends. So long as any share of Non-Cumulative Preferred -------------------- Stock remains outstanding, no dividend whatsoever shall be paid or declared and no distribution made on any junior stock other than a dividend payable in junior stock, and no shares of junior stock shall be purchased, redeemed or otherwise acquired for consideration by the Association, directly or indirectly (other than as a result of a reclassification of junior stock, or the exchange or conversion of one junior stock for or into another junior stock, or other than through the use of the proceeds of a substantially contemporaneous sale of other junior stock), unless all dividends on all shares of Non-Cumulative Preferred Stock and non-cumulative Preferred Stock ranking on a parity as to dividends with the shares of Non-Cumulative Preferred Stock for the most recent dividend period ended prior to the date of such payment or declaration shall have been paid in full and all dividends on all shares of cumulative Preferred Stock ranking on a parity as to dividends with the 3 shares of Non-Cumulative Preferred Stock for the most recent dividend period ended prior to the date of such payment or declaration shall have been paid in full and all dividends on all shares of Non-Cumulative Stock (not withstanding that dividends on such stock are cumulative) for all past dividend periods shall have been paid in full. Subject, to the foregoing, and not otherwise, such dividends (payable in cash, stock or otherwise) as may be determined by the Board of Directors may be declared and paid on any junior stock from time to time out of any funds legally available therefor, and the Non-Cumulative Stock shall not be entitled to participate in any such dividends, whether payable in cash, stock or otherwise. No dividends shall be paid or declared upon any shares of any class or series of stock of the Association ranking on a parity (whether dividends on such stock are cumulative or non-cumulative) with the Non- Cumulative Preferred Stock in the payment of dividends for any period unless at or prior to the time of such payment or declaration all dividends payable on the Non-Cumulative Preferred Stock for the most recent dividend period ended prior to the date of such payment or declaration shall have been paid in full. When dividends are not paid in full, as aforesaid, upon the Non-Cumulative Preferred Stock and any other series of Preferred Stock ranking on a parity as to dividends (whether dividends on such stock are cumulative or non-cumulative) with the Non-Cumulative Preferred Stock, all dividends declared upon the Non- Cumulative Preferred Stock and any other series of Preferred Stock ranking on a parity as to dividends with the Non-Cumulative Preferred Stock shall be declared pro rata so that the amount of dividends declared per share on the Non- Cumulative Preferred Stock and such other Preferred Stock shall in all cases bear to each other the same ratio that accrued dividends per share on the Non- Cumulative Preferred Stock (but without any accumulation in respect of any unpaid dividends for prior dividend periods on the shares of Non-Cumulative Stock) and such other Preferred Stock bear to 4 each other. No interest, or sum of money in lieu of interest, shall be payable in respect of any dividend payment or payments on the Non-Cumulative Preferred Stock which may be in arrears. 3. Voting. The holders of Non-Cumulative Preferred Stock shall not have ------ any right to vote for the election of directors or for any other purpose. 4. Redemption. ---------- (a) Optional Redemption. The Association, at the option of the Board of ------------------- Directors, may redeem the whole or any part of the shares of Non-Cumulative Preferred Stock at the time outstanding, at any time or from time to time after the fifth anniversary of the date of original issuance of the Non-Cumulative Preferred Stock, upon notice given as hereinafter specified, at the redemption price per share equal to $1,000 plus an amount equal to the amount of accrued and unpaid dividends from the immediately preceding dividend payment date (but without any accumulation for unpaid dividends for prior dividend periods on the shares of Non-Cumulative Preferred Stock) to the redemption date. (b) Procedures. Notice of every redemption of shares of Non-Cumulative ---------- Preferred Stock shall be mailed by first class mail, postage prepaid, addressed to the holders of record of the shares to be redeemed at their respective last addresses as they shall appear on the books of the Association. Such mailing shall be at least 10 days and not more than 60 days prior to the date fixed for redemption. Any notice which is mailed in the manner herein provided shall be conclusively presumed to have been duly given, whether or not the shareholder receives such notice, and failure duly to give such notice by mail, or any defect in such notice, to any holder of shares of Non-Cumulative Preferred Stock designated for redemption shall not affect the validity of the proceedings for the redemption of any other shares of Non-Cumulative Preferred Stock. 5 In case of redemption of a part only of the shares of Non-Cumulative Preferred Stock at the time outstanding the redemption may be either pro rata or by lot or by such other means as the Board of Directors of the Association in its discretion shall determine. The Board of Directors shall have full power and authority, subject to the provisions herein contained, to prescribe the terms and conditions upon which shares of the Non-Cumulative Preferred Stock shall be redeemed from time to time. If notice of redemption shall have been duly given, and, if on or before the redemption date specified therein, all funds necessary for such redemption shall have been set aside by the Association, separate and apart from its other funds, in trust for the pro rata benefit of the holders of the shares called for redemption, so as to be and continue to be available therefor, then, notwithstanding that any certificate for shares so called for redemption shall not have been surrendered for cancellation, all shares so called for redemption shall no longer be deemed outstanding on and after such redemption date, and all rights with respect to such shares shall forthwith on such redemption date cease and terminate, except only the right of the holders thereof to receive the amount payable on redemption thereof, without interest. If such notice of redemption shall have been duly given or if the Association shall have given to the bank or trust company hereinafter referred to irrevocable authorization promptly to give such notice, and, if on or before the redemption date specified therein, the funds necessary for such redemption shall have been deposited by the Association with such bank or trust company in trust for the pro rata benefit of the holders of the shares called for redemption, then, notwithstanding that any certificate for shares so called for redemption shall not have been surrendered for cancellation, from and after the time of such deposit, all shares so called for redemption shall no longer be deemed to be 6 outstanding and all rights with respect to such shares shall forthwith cease and terminate, except only the right of the holders thereof to receive from such bank or trust company at any time after the time of such deposit the funds so deposited, without interest. The aforesaid bank or trust company shall be organized and in good standing under the laws of the United States of America or any state thereof, shall have capital, surplus and undivided profits aggregating at least $50,000,000 according to its last published statement of condition, and shall be identified in the notice of redemption. Any interest accrued on such funds shall be paid to the Association from time to time. In case fewer than all the shares of Non-Cumulative Preferred Stock represented by a stock certificate are redeemed, a new certificate shall be issued representing the unredeemed shares without cost to the holder thereof. Any funds so set aside or deposited, as the case may be, and unclaimed at the end of the relevant escheat period under applicable state law from such redemption date shall, to the extent permitted by law, be released or repaid to the Association, after which repayment the holders of the shares so called for redemption shall look only to the Association for payment thereof. 5. Liquidation. ----------- (a) Liquidation Preference. In the event of any voluntary liquidation, ---------------------- dissolution or winding up of the affairs of the Association, the holders of Non- Cumulative Preferred Stock shall be entitled, before any distribution or payment is made to the holders of any junior stock, to be paid in full an amount per share equal to an amount equal to $1,000 plus an amount equal to the amount of accrued and unpaid dividends per share from the immediately preceding dividend payment date (but without any accumulation for unpaid dividends for prior dividend periods on the shares of Non-Cumulative Preferred Stock) per share to such distribution or payment date (the "liquidation amount"). 7 In the event of any involuntary liquidation, dissolution or winding up of the affairs of the Association, then, before any distribution or payment shall be made to the holders of any junior stock, the holders of Non-Cumulative Preferred Stock shall be entitled to be paid in full an amount per share equal to the liquidation amount. If such payment shall have been made in full to all holders of shares of Non-Cumulative Preferred Stock, the remaining assets of the Association shall be distributed among the holders of junior stock, according to their respective rights and preferences and in each case according to their respective numbers of shares. (b) Insufficient Assets. In the event that, upon any such voluntary or ------------------- involuntary liquidation, dissolution or winding up, the available assets of the Association are insufficient to pay such liquidation amount on all outstanding shares of Non-Cumulative Preferred Stock, then the holders of Non-Cumulative Preferred Stock shall share ratably in any distribution of assets in proportion to the full amounts to which they would otherwise be respectively entitled. (c) Interpretation. For the purposes of this paragraph 5, the -------------- consolidation or merger of the Association with any other corporation or association shall not be deemed to constitute a liquidation, dissolution or winding up of the Association. 6. Preemptive Rights. The Non-Cumulative Preferred Stock is not entitled ----------------- to any preemptive, subscription, conversion or exchange rights in respect of any securities of the Association. 7. Definitions. As used herein with respect to the Non-Cumulative ----------- Preferred Stock, the following terms shall have the following meanings: (a) The term "junior stock" shall mean the Common Stock and any other class or series of shares of the Association hereafter authorized over which the Non- Cumulative Preferred Stock has preference or priority in the 8 payment of dividends or in the distribution of assets on any liquidation, dissolution or winding up of the Association. (b) The term "accrued dividends", with respect to any share of any class or series, shall mean an amount computed at the annual dividend rate for the class or series of which the particular share is a part, from, if such share is cumulative, the date on which dividends on such share became cumulative to and including the date to which such dividends are to be accrued, less the aggregate amount of all dividends theretofore paid thereon and, if such share is non- cumulative, the relevant date designated to and including the date to which such dividends are accrued, less the aggregate amount of all dividends theretofore paid with respect to such period. (c) The term "Preferred Stock" shall mean all outstanding shares of all series of preferred stock of the Association as defined in this Article Fifth of the Articles of Association, as amended, of the Association. 8. Restriction on Transfer. No shares of Non-Cumulative Preferred Stock, ----------------------- or any interest therein, may be sold, pledged, transferred or otherwise disposed of without the prior written consent of the Association. The foregoing restriction shall be stated on any certificate for any shares of Non-Cumulative Preferred Stock. 9. Additional Rights. The shares of Non-Cumulative Preferred Stock shall ----------------- not have any relative, participating, optional or other special rights and powers other than as set forth herein. SIXTH. The Board of Directors shall appoint one of its members President of this Association, who shall be Chairperson of the Board, unless the Board appoints another director to be the Chairperson. The Board of Directors shall have the power to appoint one or more Vice Chairmen and Vice Presidents and such other officers and employees as may 9 be required to transact the business of this Association. The Board of Directors shall have the power to define the duties of the officers and employees of the Association; to fix the salaries to be paid to them; to dismiss them; to require bonds from them and to fix the penalty thereof; to regulate the manner in which any increase of the capital of the Association shall be made; to manage and administer the business and affairs of the Association; to make all By-laws that it may be lawful for them to make; and generally to do and perform all acts that it may be legal for a Board of Directors to do and perform. SEVENTH. The Board of Directors shall have the power to change the location of the main office to any other place permitted by law, but subject to the approval of the Comptroller of the Currency; and shall have the power to establish or change the location of any branch or branches of the Association to any other location, without the approval of the shareholders, but subject to the approval of the Comptroller of the Currency. EIGHTH. The corporate existence of this Association shall continue until terminated in accordance with the laws of the United States. NINTH. The Board of Directors of this Association, or any one or more shareholders owning, in the aggregate, not less than 25 percent of the stock of this Association, may call a special meeting of shareholders at any time. Unless otherwise provided by the laws of the United States, a notice of the time, place, and purpose of every annual and special meeting of the shareholders shall be given by first-class mail, postage prepaid, mailed at least ten days prior to the date of such meeting, to each shareholder of record at his address as shown upon the books of this Association. TENTH. (A) Indemnification of Directors. ---------------------------- The Association shall, to the fullest extent permitted by applicable banking, corporate and other law and regulation, indemnify any person who 10 is or was a director of the Association from and against any and all expenses, liabilities or other losses arising in connection with any action, suit, appeal or other proceeding, by reason of the fact that such person is or was serving as a director of the Association and may, to the fullest extent permitted by applicable banking, corporate and other law and regulation, advance monies to such persons for expenses incurred in defending any such action, suit, appeal or other proceeding on such terms as the Association's Board of Directors shall determine and as are required by applicable banking, corporate and other law or regulation or interpretation by the applicable banking regulators. The Association may purchase insurance for the purpose of indemnifying such persons and/or reimbursing the Association upon payment of indemnification to such persons to the extent that indemnification is authorized by the preceding sentences, except that insurance coverage and corporate indemnification shall not be available in connection with a formal order by a court or judicial or governmental body assessing civil money penalties against such person or in the event that such coverage or indemnification would be prohibited by applicable banking, corporate and other law or regulation. (B) Indemnification of Officers, Employees and Agents. ------------------------------------------------- The Association shall indemnify any person who is or was an officer, employee or agent of the Association or who is or was a director, general partner, trustee or principal of another entity serving as such at the request of the Association from and against any and all expenses, liabilities or other losses arising in connection with any action, suit, appeal or other proceeding, by reason of the fact that such person is or was serving as an officer, employee or agent of the Association or as a director of another entity at the request of the Association, to the extent authorized by the corporate policy of the Association, as adopted and modified from time to time by the shareholders of the Association, except to the extent that such indemnification would be prohibited by 11 applicable banking, corporate and other law or regulation. The Association may advance monies to such persons for expenses incurred in defending any such action, suit, appeal or other proceeding in accordance with the corporate policy of the Association, as adopted and modified from time to time by the shareholders of the Association, under such terms and procedures as are required by applicable banking, corporate and other law or regulation or interpretation by the applicable banking regulators, except to the extent that such advancement would be prohibited by applicable banking, corporate and other law or regulation. The Association may purchase insurance for the purpose of indemnifying such persons and/or reimbursing the Association upon payment of indemnification to such person to the extent that indemnification is authorized by the preceding sentence, except that insurance coverage and corporate indemnification shall not be available in connection with a formal order by a court or judicial or governmental body assessing civil money penalties against such person or in the event that such coverage or indemnification would be prohibited by applicable banking, corporate and other law or regulation. ELEVENTH. These Articles of Association may be amended at any regular or special meeting of the shareholders by the affirmative vote of the holders of a majority of the stock of this Association, unless the vote of the holders of a greater amount of stock is required by law, and in that case by the vote of the holders of such greater amount. 12 EXHIBIT 4 FIRST UNION NATIONAL BANK (EFF. 1/1/96) (formerly First Fidelity Bank, National Association) BYLAWS ------ ADOPTED: JANUARY 10, 1994; AMENDED APRIL 19, 1994 AMENDED APRIL 18, 1995; AMENDED SEPTEMBER 3, 1996: ARTICLE I --------- Meetings of Shareholders ------------------------ Section 1.1. Annual Meeting. The regular annual meeting of the --------------- shareholders for the election of directors and transaction of whatever other business may properly come before the meeting, shall be held at the Main Office of the Association, or such other place as the Board of Directors may designate, at 10:00 A.M., on the second Thursday of April of each year or such other time within 90 days as may be set by the Board of Directors. If, from any cause, an election of directors is not made on the said day, the Board of Directors shall order the election to be held on some subsequent day, as soon thereafter as practicable, according to the provisions of the law; and notice thereof shall be given in the manner herein provided for the annual meeting. Section 1.2. Special Meetings. Except as otherwise specifically provided ---------------- by statute, special meetings of the shareholders may be called for any purpose at any time by the Board of Directors or by any one or more shareholders owning, in the aggregate, not less than twenty-five percent of the stock of the Association. Section 1.3. Notice of Meetings. Notice of Annual and Special meetings ------------------ shall be mailed, postage prepaid, at least ten days prior to the date thereof, addressed to each shareholder at his address appearing on the books of the Association; but any failure to mail such notice, or any irregularity therein, shall not affect the validity of such meeting, or of any of the proceedings thereat. A shareholder may waive any such notice. Section 1.4. Organization of Meetings. The Chairman shall preside at all ------------------------ meetings of shareholders. In his absence, the President, or a director designated by the Chairman shall preside at such meeting. 1 Section 1.5. Proxies. Shareholders may vote at any meeting of the ------- shareholders by proxies duly authorized in writing. Proxies shall be valid only for one meeting to be specified therein, and any adjournments of such meeting. Proxies shall be dated and shall be filed with the records of the meeting. Section 1.6. Quorum. A majority of the outstanding capital stock, ------ represented in person or by proxy, shall constitute a quorum at any meeting of shareholders, unless otherwise provided by law. A majority of the votes cast shall decide every question or matter submitted to the shareholders at any meeting, unless otherwise provided by law or by the Articles of Association. ARTICLE II ---------- Directors --------- Section 2.1. Board of Directors. The Board of Directors (hereinafter ------------------ referred to as the "Board"), shall have power to manage and administer the business and affairs of the Association. Except as expressly limited by law, all corporate powers of the Association shall be vested in and may be exercised by said Board. Section 2.2. Number. The Board shall consist of not less than five nor ------ more than twenty-five persons, the exact number within such minimum and maximum limits to be fixed and determined from time to time by resolution of a majority of the full Board or by resolution of the shareholders at any meeting thereof; provided, however, that a majority of the full Board may not increase the number of directors to a number which: (a) exceeds by more than two the number of directors last elected by shareholders where such number was fifteen or less; and (b) to a number which exceeds by more than four the number of directors last elected by shareholders where such number was sixteen or more, but in no event shall the number of directors exceed twenty-five. 2 Section 2.3. Organization Meeting. A meeting shall be held for the -------------------- purpose of organizing the new Board and electing and appointing officers of the Association for the succeeding year on the day of the Annual Meeting of Shareholders or as soon thereafter as practicable, and, in any event, within thirty days thereof. If, at the time fixed for such meeting, there shall not be a quorum present, the directors present may adjourn the meeting, from time to time, until a quorum is obtained. Section 2.4. Regular Meetings. The regular meetings of the Board shall be ---------------- held on such days and time as the directors may, by resolution, designate; and written notice of any change thereof shall be sent to each member. When any regular meeting of the Board falls upon a legal holiday, the meeting shall be held on such other day as the Board may designate. Section 2.5. Special Meetings. Special meetings of the Board may be called ---------------- by the Chairman of the Board, or President, or at the request of three or more directors. Each director shall be given notice of each special meeting, except the organization meeting, at least one day before it is to be held by facsimile, telephone, telegram, letter or in person. Any director may waive any such notice. Section 2.6. Quorum. A majority of the directors shall constitute a quorum ------ at any meeting, except when otherwise provided by law; but a less number may adjourn any meeting, from time to time, and the meeting may be held, as adjourned without further notice. Section 2.7. Term of Office and Vacancy. Directors shall hold office for -------------------------- one year and until their successors are elected and have qualified. No person shall stand for election as a director of this Association if at the date of his election he will have passed his seventieth birthday; provided, however, this prohibition shall not apply to persons who are active officers of this Association, an affiliate bank, or its parent corporation, or a former chief executive officer of the Association. No person, who is not an officer or former officer of this Association, an affiliate bank, or its parent corporation and who has discontinued the principal position or activity the person held when initially elected, shall be recommended to the shareholders for 3 reelection; provided, however, that exceptions may be made because of a change in principal position or activity which would be compatible with continued service to this Association. No person elected as a director may exercise any of the powers of his office until he has taken the oath of office as prescribed by law. When any vacancy occurs among the directors, the remaining members of the Board, in accordance with the laws of the United States, may appoint a director to fill such vacancy at any regular meeting of the Board, or at a special meeting called for that purpose. Section 2.8. Nominations. Nominations for election to the Board may be ----------- made by the Executive Committee or by any stockholder of any outstanding class of capital stock of the Association entitled to vote for the election of directors. Section 2.9. Communications Equipment. Any or all directors may ------------------------ participate in a meeting of the Board by means of conference telephone or any means of communication by which all persons participating in the meeting are able to hear each other. Section 2.10. Action Without Meeting. Any action required or permitted ----------------------- to be taken by the Board or committee thereof by law, the Association's Articles of Association, or these Bylaws may be taken without a meeting, if, prior or subsequent to the action, all members of the Board or committee shall individually or collectively consent in writing to the action. Each written consent or consents shall be filed with the minutes of the proceedings of the Board or committee. Action by written consent shall have the same force and effect as a unanimous vote of the directors, for all purposes. Any certificate or other documents which relates to action so taken shall state that the action was taken by unanimous written consent of the Board or committee without a meeting. ARTICLE III ----------- Committees of the Board ----------------------- Section 3.1. Executive Committee. The Board may by resolution adopted by a ------------------- majority of the entire Board designate an Executive Committee 4 consisting of the Chairman of the Board, the President, and not less than two other directors. Subject to the national banking laws and the Association's Articles of Association, the Executive Committee may exercise all the powers of the Board of Directors with respect to the affairs of the Association, except that the Executive Committee may not: 1. (a) exercise such powers while a quorum of the Board of Directors is actually convened for the conduct of business, (b) exercise any power specifically required to be exercised by at least a majority of all the directors, (c) act on matters committed by the Bylaws or resolution of the Board of Directors to another committee of the board, or (d) amend or repeal any resolution theretofore adopted by the Board of Directors which by its terms is amendable or repealable only by the Board; 2. amend the Articles of Association or make, alter or repeal any Bylaw of the Association; 3. elect or appoint any director, create or fill any vacancies in the Board of Directors or remove any director, or authorize or approve any change in the compensation of any officer of the Association who is also a director of the Association; 4. authorize or approve issuance or sale or contract for sale of shares of stock of the Association, or determine the designation and relative rights, preferences and limitations of a class or series of shares; 5. adopt an agreement of merger or consolidation, or submit to shareholders any action that requires shareholder approval, including any recommendation to the shareholders concerning the sale, lease or exchange of all or substantially all the Association's property and assets, a dissolution of the Association or a revocation of a previously approved dissolution; or 6. authorize an expenditure by the Association in excess of $10 million for any one item or group of related items. The committee shall hold regular meetings at such times as the members 5 shall agree and whenever called by the chairman of the committee. A majority of the committee shall constitute a quorum for the transaction of business. The committee shall keep a record of its proceedings and shall report these proceedings to the Board at the regular meetings thereof. The committee shall serve as the nominating committee for nominations to the Board. The committee shall provide oversight on all Community Reinvestment Act ("CRA") matters pertaining to the Association. The committee shall also be responsible for monitoring the CRA activities of the Association on an on-going basis and making periodic reports on such CRA activity to the Board. Section 3.2. Chairman of the Executive Committee. The Board may designate ----------------------------------- one of its members to be Chairman of the Executive Committee who shall preside at the meetings thereof and shall perform such duties as the Board shall assign to him from time to time. Section 3.3. Audit Committee. The Board shall appoint a committee of three --------------- or more persons exclusive of the officers of this Association which committee shall be known as the Audit Committee. It shall be the duty of this committee at least once in every twelve months to examine the affairs of the Association, and determine whether it is in a sound and solvent condition and to recommend to the Board such changes in the manner of doing business, etc., as may seem to be desirable. The committee may cause such examination to be made in its behalf and under its supervision by outside accountants and may also use the services of any other persons either inside or outside the Association to assist in its work. The results of each examination shall be reported in writing to the Board. Section 3.4. Audit of Trust Department. The Audit Committee shall, at ------------------------- least once during each calendar year and within fifteen months of the last such audit make suitable audits of the Trust Department or cause suitable audits to be made by auditors responsible only to the Board, and at such time shall ascertain whether the department has been administered in accordance with law, Part 9 of the Regulations of the Comptroller of the Currency, and sound fiduciary principles. In lieu of such periodic audit the Audit Committee, at the election of the Board, may conduct or 6 cause to be conducted by auditors responsible only to the Board an adequate continuous audit system adopted by the Board. A written report of such periodic or continuous audit shall be made to the Board. Section 3.5. Other Committees. The Board may appoint from time to time ---------------- other committees composed of one or more persons each, for such purposes and with such powers as the Board may determine. The Chairman of the Board shall have the power to designate another person to serve on any committee during the absence or inability of any member thereof so to serve. Section 3.6. Directors' Emeritus. The Board may designate one or more ------------------- persons to serve as Director Emeritus. Such Director Emeritus shall have the right to attend any and all meetings of the Board, but shall have no vote at such meetings. A person designated as Director Emeritus may serve in that capacity for a period of three years. Section 3.7. Alternate Committee Members. The Board may, from time to --------------------------- time, appoint one or more, but no more than three persons to serve as alternate members of a committee, each of whom shall be empowered to serve on that committee in place of a regular committee member in the event of the absence or disability of that committee member. An alternate committee member shall, when serving on a committee, have all of the powers of a regular committee member. Alternate committee members shall be notified of, and requested to serve at, a particular meeting or meetings, or for particular periods of time, by or at the direction of the chairman of the committee or the Chairman of the Board. ARTICLE IV ---------- Officers -------- Section 4.1a. Appointment. The senior officers of this Association shall ----------- be chosen by the Board and shall be the Chairman of the Board, one or more Vice Chairmen, the President, the Chief Financial Officer and such 7 other officers as in the judgment of the Board may be from time to time required. The Chairman of the Board and the President shall be chosen from the Directors. The Board may designate a person to serve as secretary of all meetings of the Board and of the shareholders and the persons so designated shall keep accurate minutes of such meetings. Section 4.1b. Other Officers. The Chairman, the President, the Chief -------------- Executive Officer, any Vice Chairman or any Senior Executive Vice President may appoint such other officers with such titles and duties as he may designate. Section 4.2. Term of Office. The officers who are required by the articles -------------- of association or the bylaws to be members of the Board shall hold their respective offices until the Organization meeting of the Board following the annual meeting of shareholders or until their respective successors shall have been elected, unless they shall resign, become disqualified or be removed from office. Each other officer shall hold office at the pleasure of the Board. Any officer may be removed at any time by the Board. Section 4.3. Chairman of the Board. The chairman of the board shall be --------------------- designated as Chairman of the Board. He shall preside at all meetings of the stockholders and directors and he shall be a member of all committees of the Board except the Audit Committee. He shall have such other powers and perform such other duties as may be prescribed from time to time by the Board. He shall be subject only to the direction and control of the Board. Section 4.4. President. The president shall be the chief executive officer --------- of the Association and he shall be designated as President and Chief Executive Officer. In the absence of the Chairman the President shall preside at all meetings of the Board. The President shall be a member of each committee of the Board except the Audit Committee. He 8 shall have the powers and perform the duties conferred or imposed upon the President by the national banking laws, and he shall have such other powers and perform such other duties as may from time to time be imposed upon or assigned to him by the Board. Section 4.5. Chief Financial Officer. The Chief Financial Officer shall ----------------------- have such title as may be designated by the Board and he shall be responsible for all monies, funds and valuables of this Association, provide for the keeping of proper records of all transactions of the Association, report to the Board at each regular meeting the condition of the Association, submit to the Board, when requested, a detailed statement of the income and expenses, be responsible for the conduct and efficiency of all persons employed under him, and perform such other duties as may be from time to time assigned to him by the Board. Section 4.6. Other Officers. All other officers shall respectively -------------- exercise such powers and perform such duties as generally pertain to their several offices, or as may be conferred upon or assigned to them by the Board, the Chairman of the Board or the President. Section 4.7. Bond. Each officer and employee, if so required by the Board, ---- shall give bond with surety to be approved by the Board, conditioning for the honest discharge of his duties as such officer or employee. In the discretion of the Board, such bonds may be individual, schedule or blanket form, and the premiums may be paid by the Association. Section 4.8 Officers Acting as Assistant Secretary. Notwithstanding --------------------------------------- section 4.1a of this Article IV, any Senior Vice President, Vice President or Assistant Vice President shall have, by virtue of his office, and by authority of the Bylaws, the authority from time to time to act as an Assistant Secretary of the Association, and to such extent, said officers are appointed to the Office of Assistant Secretary. ARTICLE V --------- 9 Trust Department ---------------- Section 5.1. Trust Department. There shall be a department of the ---------------- Association known as the Trust Department which shall perform the fiduciary responsibilities of the Association. Opinions of counsel shall be retained on file in the Trust Department in connection with all important matters pertaining to fiduciary activities. Section 5.3. Trust Investment. Funds held in a fiduciary capacity shall be ---------------- invested in accordance with the instrument establishing the fiduciary relationship and local law. Where such instrument does not specify the character and class of the investments to be made and does not vest in the Association a discretion in the matter, funds held pursuant to such instrument shall be invested in investments in which corporate fiduciaries may invest under local law. ARTICLE VI ---------- Stock Certificates and Transfers -------------------------------- Section 6.1. Stock Certificates. Ownership of capital stock of the ------------------ Association shall be evidenced by certificates of stock signed by the Chairman or President, and the Secretary, or an Assistant Secretary. Each certificate shall state upon its face that the stock is transferable only upon the books of the Association by the holder thereof, or by duly authorized attorney, upon the surrender of such certificate, and shall meet the requirements of Section 5139, United States Revised Statutes, as amended. Section 6.2. Transfers. The stock of this Association shall be assignable --------- and transferable only on the books of this Association, subject to the restrictions and provisions of the national banking laws; and a transfer book shall be provided in which all assignments and transfers of stock shall be made. When stock is transferred, the certificates thereof shall be returned to the Association, canceled, preserved and new 10 certificates issued. Section 6.3. Dividends. Dividends shall be paid to the shareholders in --------- whose names the stock shall stand at the close of business on the day next preceding the date when the dividends are payable, provided, however, that the directors may fix another date as a record date for the determination of the shareholders entitled to receive payment thereof. ARTICLE VII ----------- Increase of Stock ----------------- Section 7.1. Capital Stock. Shares of the capital stock of the ------------- Association, which have been authorized but not issued, may be issued from time to time for such consideration, not less than the par value thereof, as may be determined by the Board. ARTICLE VIII ------------ Corporate Seal -------------- Section 8.1. Seal. The seal, an impression of which appears below, is the ---- seal of the Association as adopted by the Board of Directors: [Seal] The Chairman of the Board, the Vice Chairman, the President, Senior Executive Vice President, Executive Vice President, Senior Vice President, Vice President, each Assistant Vice President, the Chief Financial Officer, the Secretary, each Assistant Secretary, each Trust Officer, each Assistant Trust Officer or each Assistant Cashier, shall have the authority to affix the corporate seal of this Association and to attest to the same. ARTICLE IX ---------- 11 Miscellaneous Provisions ------------------------ Section 9.1. Fiscal Year. The fiscal year of the Association shall be the ----------- calendar year. Section 9.2. Execution of Instruments. All agreements, contracts, ------------------------ indentures, mortgages, deeds, conveyances, transfers, certificates, declarations, receipts, discharges, releases, satisfactions, settlements, petitions, schedules, accounts, affidavits, bonds, undertakings, proxies and other instruments or documents may be signed, executed, acknowledged, verified, delivered or accepted in behalf of the Association by the Chairman of the Board, or any Vice Chairman, or the President, or Senior Executive Vice President, or Executive Vice President, or Senior Vice President, or Vice President, or Assistant Vice President, or Chief Financial Officer, or the Secretary, or Assistant Secretary, or, if in connection with the exercise of fiduciary powers of the Association, by any of said officers or by any Trust Officer or Assistant Trust Officer, to the extent authorized by the corporate policy of the Association, as adopted and modified from time to time. Any such instruments may also be executed, acknowledged, verified, delivered, or accepted in behalf of the Association in such other manner and by such other officers as the Board may from time to time direct. Section 9.3. Records. The organization papers of this Association, the ------- articles of association, the bylaws and any amendments thereto, the proceedings of all regular and special meetings of the shareholders and of the directors, the returns of the judges of elections, and the reports of the committees of directors shall be recorded in an appropriate minute book, and the minutes of each meeting shall be signed by the Secretary or any other officer appointed to act as secretary of the meeting. Section 9.4. Banking Hours. This Association and its branch offices shall ------------- be open on such days and during such hours as shall be fixed from 12 time to time by the Board. Section 9.5. Voting Shares of Other Corporations. The Chairman, any Vice ----------------------------------- Chairman, the President, or any Vice President is authorized to vote, represent and exercise on behalf of this Association all rights incident to any and all shares of stock of any other corporation standing in the name of the Association. The authority granted herein may be exercised by such officers in person or by proxy or by power of attorney duly executed by said officer. ARTICLE X --------- Bylaws ------ Section 10.1. Inspection. A copy of the Bylaws, with all amendments ---------- thereto, shall at all times be kept in a convenient place at the Head Office of the Association, and shall be open for inspection to all shareholders, during banking hours. Section 10.2. Amendments. These Bylaws may be changed or amended at any ---------- regular or special meeting of the Board by the vote of a majority of the Directors. 13 EXHIBIT 6 CONSENT OF TRUSTEE Pursuant to the requirements of Section 321(b) of the Trust Indenture Act of 1939, and in connection with the proposed issue of Converse Inc.. we hereby consent that reports of examinations by Federal, State, Territorial or District authorities may be furnished by such authorities to the Securities and Exchange Commission upon request therefor. FIRST UNION NATIONAL BANK By: ___________________ John H. Clapham Vice President Philadelphia, PA May 2, 1997 REPORT OF CONDITION EXHIBIT 7 Consolidating domestic and foreign subsidiaries of the First Union National Bank, Avondale, Pennsylvania, at the close of business on March 31, 1997, published in response to call made by Comptroller of the Currency, under title 12, United States Code, Section 161. Charter Number 33869 Comptroller of the Currency Northeastern District. STATEMENT OF RESOURCES AND LIABILITIES ASSETS Thousand of Dollars ------------------- Cash and balance due from depository institutions: Noninterest-bearing balances and currency and coin......... 1,589,725 Interest-bearing balances.................................. 144,932 Securities.................................................. ///////// Hold-to-maturity securities............................... 406,600 Available-for-sale securities..............................2,331,814 Federal funds sold and securities purchased under agreements////////// to resell..................................................2,102,868 Loans and lease financing receivables: Loan and leases, net of unearned income......19,281,909 LESS: Allowance for loan and lease losses.......243,522 LESS: Allocated transfer risk reserve.................0 Loans and leases, net of unearned income, allowance, and reserve........................................................ 19,038,387 Assets held in trading accounts................................ 0 Premises and fixed assets (including capitalized leases)....... 405,170 Other real estate owned........................................ 49,059 Investment in unconsolidated subsidiaries and associated ////////// companies........................................................ 32,905 Customer's liability to this bank on acceptances outstanding. 45,474 Intangible assets........................................... 411,739 Other assets................................................ 642,043 Total assets............................................... 27,200,716 LIABILITIES Deposits: In domestic offices...................................... 21,310,047 Noninterest-bearing......................4,381,335 interest-bearing........................16,928,712 In foreign offices, Edge and Agreement subsidiaries, and IBFs................................................. 519,225 Noninterest-bearing............................215 Interest-bearing.........................,,519,010 Federal funds purchased and securities sold under agreements to repurchase 1,771,997 Demand notes issued to the U.S. Treasury...................... 99,991 Trading liabilities........................................... 0 Other borrowed money:...................................... ///////// With original maturity of one year or less.............. 12,151 With original maturity of more than one year.......... 14,852 Not Applicable //////// Bank's liability on acceptances executed and outstanding..... 45,884 Subordinated notes and debentures........................... 450,000 Other liabilities............................................ 642,872 Total liabilities............................................24,867,019 Limited-life preferred stock and related surplus............. 0 EQUITY CAPITAL Perpetual preferred stock and related surplus................ 160,540 Common Stock................................................. 452,156 Surplus...................................................... 1,300,080 Undivided profits and capital reserves....................... 452,724 Net unrealized holding gains (losses) on available-for-sale ///////// securities.................................................. (31,803) Cumulative foreign currency translation adjustments.......... 0 Total equity capital......................................... 2,333,697 Total liabilities, limited-life preferred stock and equity... ///////// capital....................................................27,200,716 -----END PRIVACY-ENHANCED MESSAGE-----