<PAGE>
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
Form 10-Q
Quarterly Report Pursuant to Section 13 or 15(d) of
The Securities Exchange Act of 1934
For the quarterly period ended March 29, 1997
Commission File Number 1-13430
Converse Inc.
(Exact name of registrant as specified in its charter)
Delaware 43-1419731
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
One Fordham Road 01864
North Reading, Massachusetts (Zip Code)
(Address of principal executive offices)
Registrant's telephone number, including area code: (508) 664-1100
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Act of 1934 during
the preceding 12 months (or for such shorter period that registrant was required
to file such reports); and (2) has been subject to such filing requirements for
the past 90 days.
Yes [X] No [_]
Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practical date.
As of March 29, 1997, 17,250,056 shares of common stock were outstanding.
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
<S> <C> <C>
PART I: FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements
A. Consolidated Balance Sheet 1
B. Consolidated Statement of Operations 2
C. Consolidated Statement of Cash Flows 3
D. Notes to Consolidated Financial Statements 4
Item 2. Management's Discussion and Analysis of 9
Financial Condition and Results of Operations
PART II: OTHER INFORMATION
Item 1. Legal Proceedings 12
Item 2. Changes in Securities 12
Item 3. Defaults Upon Senior Securities 12
Item 4. Submission of Matters to a Vote of
Security Holders 12
Item 5. Other Information 13
Item 6. Exhibits and Reports on Form 8-K 13
SIGNATURE 13
</TABLE>
<PAGE>
PART I - FINANCIAL INFORMATION
Item 1. FINANCIAL STATEMENTS
CONVERSE INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEET
(Dollars in thousands, except per share amounts)
(Unaudited)
<TABLE>
<CAPTION>
December 28, 1996 March 29, 1997
---------------- --------------
<S> <C> <C>
Assets
Current assets:
Cash and cash equivalents.................................................... $ 5,908 $ 3,913
Restricted cash.............................................................. 1,354 ---
Receivables, less allowances of $1,994 and $2,357, respectively.............. 61,546 114,419
Inventories (Note 3)......................................................... 86,799 78,290
Refundable income taxes...................................................... 582 582
Prepaid expense and other current assets..................................... 20,383 13,529
------- -------
Total current assets.................................................... 176,572 210,733
Net property, plant and equipment................................................. 17,849 17,746
Other assets...................................................................... 28,182 27,355
------- -------
$222,603 $255,834
======= =======
Liabilities and Stockholders' Equity (Deficiency)
Current liabilities:
Short-term debt.............................................................. $ 13,421 $ 16,366
Current maturities of long-term debt (Note 4)................................ 117,765 154,777
Accounts payable............................................................. 49,503 52,758
Accrued expenses............................................................. 25,124 15,319
Income taxes payable......................................................... 3,407 3,836
------- -------
Total current liabilities............................................... 209,220 243,056
Long-term debt, less current maturities (Note 4).................................. 9,644 ---
Current assets in excess of reorganization value.................................. 32,376 31,857
Deferred postretirement benefits other than pensions.............................. 10,231 10,207
Stockholders' equity (deficiency):
Common stock, $1.00 stated value, 50,000,000 shares
authorized, 17,213,157 and 17,250,056 shares issued and outstanding at
December 28, 1996 and March 29, 1997, respectively.......................... 17,213 17,250
Preferred stock, no par value, 10,000,000 shares authorized
none issued and outstanding................................................. --- ---
Additional paid-in capital................................................... 5,392 2,049
Retained earnings (deficit).................................................. (60,265) (47,585)
Foreign currency translation adjustment...................................... (1,208) (1,000)
------- -------
Total stockholders' equity (deficiency)................................. (38,868) (29,286)
------- -------
$222,603 $255,834
======= =======
</TABLE>
See accompanying notes to condensed consolidated financial statements.
1
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CONVERSE INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
(Dollars in thousands, except per share amounts)
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended
------------------
March 30, 1996 March 29, 1997
-------------- --------------
<S> <C> <C>
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
======== ========
</TABLE>
See accompanying notes to condensed consolidated financial statements.
2
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CONVERSE INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
(Dollars in thousands)
(Unaudited)
<TABLE>
<CAPTION>
Three months ended
------------------
March 30, 1996 March 29, 1997
-------------- --------------
<S> <C> <C>
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 subsidiary
($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 reorganization
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
Payment 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 period.............................................. 2,738 5,908
--------- ---------
Cash and cash equivalents at end of period.................................................... $ 2,276 $ 3,913
========= =========
</TABLE>
See accompanying notes to condensed consolidated financial statements.
3
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CONVERSE INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands)
1. Summary of Significant Accounting Policies
Basis of presentation:
In the opinion of management, the accompanying unaudited condensed
consolidated financial statements contain all adjustments, consisting of normal
recurring accruals, considered necessary for a fair presentation. This interim
financial information and notes thereto should be read in conjunction with the
Company's annual report on Form 10-K for the year ended 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 First Quarter 1997 included a gain of approximately
$8,000, net of income taxes, pertaining to the settlement of outstanding
litigation and claims relating to Apex One, Inc. ("Apex"). See Note 8.
Earnings per share for First Quarter 1997 of $0.71 include $0.45 pertaining to
these litigation settlements.
3. Inventories
Inventories are summarized as follows:
<TABLE>
<CAPTION>
December 28, 1996 March 29, 1997
----------------- --------------
<S> <C> <C>
Retail merchandise.................... $ 6,298 $ 6,610
Finished products..................... 73,887 64,336
Work in process....................... 3,320 4,070
Raw materials......................... 3,294 3,274
-------- --------
$ 86,799 $ 78,290
======== ========
</TABLE>
4
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4. Debt
As more fully described in Note 9 to the Consolidated Financial Statements
for the year ended December 28, 1996 included within the Company's annual report
on Form 10-K, 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.
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.
5
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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, 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 the 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 included within the Company's annual report
on Form 10-K, on August 11, 1995 the Company ceased funding the operations of
its unconsolidated subsidiary, Apex. At December 28, 1996, an accrual of $5,424
remained, which represented the Company's estimates of its 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 included within the Company's annual report
on Form 10-K, during 1995
6
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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:
<TABLE>
<CAPTION>
December 28, March 29,
1996 Charges/ Changes in 1997
Balance Write-offs Estimates Balance
------- ---------- --------- -------
<S> <C> <C> <C> <C>
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
===== ===== ==== =====
</TABLE>
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 Litigation and Claims Resolution
As more fully described in Note 16 to the Consolidated Financial Statements
for the year ended December 28, 1996 included within the Company's annual report
on Form 10-K, 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 $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 and awarded damages 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.
7
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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.
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 a 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.
8
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
The following table sets forth certain items relating to the Company's
operating results as a percentage of net sales for the three months ended March
30, 1996 ("First Quarter 1996") and for the three months ended March 29, 1997
("First Quarter 1997").
<TABLE>
<CAPTION>
Three Months Ended
------------------
March 30, 1996 % March 29, 1997 %
-------------- --- -------------- ---
<S> <C> <C> <C> <C>
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, net ................. 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 ---
</TABLE>
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 the 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 price
increases, changes in product mix and a strong emphasis on future orders
resulting in improved inventory controls contributing the difference. The
Company's gross profit margin improved to 31% of net sales for First Quarter
1997 compared to 25% for First Quarter 1996.
9
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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.
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 was 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 obligations. See
Note 8 to the Consolidated Financial Statements of the Company 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 made into
escrow relating to the subordinated notes issued to the former owners of Apex.
See Note 8 to the Consolidated Financial Statements of the Company included
herein.
10
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Net Earnings (Loss)
Due to the business factors described above, the Company recorded net
earnings of $12.7 million for the First Quarter 1997 compared to a net loss of
$3.3 million for the 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 and claims relating to Apex and the Apex
bankruptcy plan confirmation. See Note 8 to the Consolidated Financial
Statements of the Company included herein.
Earnings (Loss) Per Share
The Company recorded a 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 includes $0.45 pertaining to the Apex related
settlements and bankruptcy plan confirmation referred to above.
Liquidity and Capital Resources
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 the 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.
Total borrowings under the Company's Credit Facility and asset based
financing arrangements increased to $171.2 million at March 29, 1997 from $131.2
million at December 28, 1996, primarily to fund the working capital requirements
discussed above. See Note 4 to Consolidated Financial Statements of the Company
included herein. The Company has accepted a commitment letter relating to
replacement of its existing Credit Facility. See Part II, Item 5 herein.
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 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.
Subsequent to March 29, 1997 the Company accepted a commitment letter of BT
Commercial Corporation ("BTCC") to supply a new $150 million revolving credit
facility which will replace the existing Credit Facility. See Note 10 to the
Consolidated Financial Statements of the Company included herein.
11
<PAGE>
Backlog
At the end of First Quarter 1997, the Company's global backlog was $220.1
million, compared to $149.3 million at the end of First Quarter 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.
Forward-looking statements
Information contained in this Report 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 negatives
thereof or other variations thereon or comparable terminology, or by discussion
of strategy. No assurance can be given that future results covered by the
forward-looking statements will be achieved. The risk factors contained in the
Company's annual report for the year ended December 28, 1996 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.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings.
There have been no material changes from the information previously
reported under Item 3 of the Company's annual report on Form 10-K for
the fiscal year ended December 28, 1996.
Item 2. Changes in Securities.
Not Applicable
Item 3. Defaults Upon Senior Securities.
Not Applicable
Item 4. Submission of Matters to a Vote of Security-Holders.
Not Applicable.
12
<PAGE>
Item 5. Other Information.
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 a
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 to the Consolidated Financial Statements of the Company
included herein. 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.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits. The following exhibits are contained in this report:
10.1 Employment Agreement between Converse and Edward C.
Frederick
10.2 Consultant's Agreement between Converse and Exeter
Research, Inc.
10.3 Letter reporting joint basketball promotion between
Converse, Footlocker and Julius Erving.
11.1 Statement Regarding Computation of Per Share Earnings.
27 Financial Data Schedule
(b) Reports on Form 8-K.
There were no reports on Form 8-K filed during the quarter ended
March 29, 1997.
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Dated: May 5, 1997 Converse Inc.
By: /s/ Donald J. Camacho
---------------------------
Donald J. Camacho
Senior Vice President and
Chief Financial Officer
13
<PAGE>
EXHIBIT INDEX
Exhibit No. Description
- ----------- -----------
10.1 Employment Agreement between Converse and
Edward C. Frederick
10.2 Consultant's Agreement between Converse and
Exeter Research, Inc.
10.3 Letter reporting joint basketball promotion
between Converse, Footlocker and Julius
Erving
11.1 Statement Regarding Computation of Per Share
Earnings
27 Financial Data Schedule
<PAGE>
AGREEMENT
---------
THIS AGREEMENT is made and entered into effective this 14th day of April,
1997 by and between CONVERSE INC., a Delaware corporation (hereinafter
"Converse"), and EDWARD C. FREDERICK (hereinafter "Employee").
WHEREAS, Employee presently serves as an executive officer of Converse; and
WHEREAS, it is in the best interests of Converse to assure that it will
have the continued dedication of Employee.
NOW THEREFORE, for good and valuable consideration and in order to induce
Employee to remain in the employ of Converse, the parties covenant and agree as
follows:
1. Definitions. For all purposes of this Agreement, the following terms
-----------
shall have the meanings specified in this Section unless the context clearly
otherwise requires:
"Base Salary" means the highest annual salary rate paid to Employee by
-----------
Converse at any time during a period of two (2) years immediately preceding the
date of termination of employment.
"Cause" means (a) willful misconduct, (b) repeated, serious and
-----
substantial infractions of Converse rules or policies, (c) insubordination, (d)
conviction for a felony involving moral turpitude or (e) willful material breach
of this Agreement by Employee.
"Disability" means the incapacity to attend to and perform effectively
----------
one's duties and responsibilities which, at least twenty-six (26) weeks after
its commencement, is determined to be total and permanent by a physician
selected by Converse.
2. Severance. If Employee's employment with Converse is terminated by
---------
Converse (other than for Cause or as a result of Employee's death or
Disability), then Converse will,
<PAGE>
Page 2
subject to compliance by Employee with the further provisions of this Agreement,
pay to Employee a single payment on Employee's date of termination that is
comprised of the following components:
(a) Fifty-two (52) weeks of Base Salary; and
(b) The actuarial present value (as determined by Converse in its sole
discretion) of participation by Employee in the Converse Inc.
Retirement Plan for one (1) year following the date of
termination, assuming Employee continued to earn the same base pay
Employee is earning as of Employee's termination date; and
(c) The amount to cover Converse's share of the cost of Employee's
medical and dental insurance, as in effect on the date of
termination of employment, for twelve (12) months, plus an amount
equal to twenty-eight percent (28%) of such payment. Said payment
shall not affect Employee's COBRA rights in effect on the date of
Employee's termination.
Any applicable payment to Employee under the Converse Executive Incentive
Plan, as it may then be in effect, for the calendar year in which Employee's
employment with Converse is terminated shall be made in accordance with the
terms of said Plan.
3. Confidential Information.
------------------------
(a) Employee acknowledges that, by reason of Employee's employment by
Converse, Employee has access to confidential information of Converse,
including, without limitation, information and knowledge pertaining to products,
inventions, discoveries, improvements, innovations, designs, ideas, trade
secrets, proprietary information, manufacturing, packaging, advertising,
distribution and sales methods, sales and profit figures, customer and client
lists and relationships between Converse and dealers, distributors, sales
representatives, wholesalers, customers, clients, suppliers and others who have
business dealings with them ("Confidential Information"). Employee acknowledges
that such Confidential Information is a
<PAGE>
Page 3
valuable and unique asset of Converse and covenants that, both during and after
the term of this Agreement, Employee will not disclose any Confidential
Information to any person (except as Employee's duties as an officer of Converse
may require) without the prior written authorization of the board of directors
of Converse. The obligations of confidentiality imposed by this Section 3 shall
not apply to information that becomes generally known in the industry through no
act of Employee in breach of this Agreement.
(b) Employee acknowledges that all documents, files and other
materials received from Converse during his employment (with the exception of
documents relating to Employee's compensation or benefits to which Employee is
entitled following his employment) are for use by Employee solely in discharging
Employee's duties and responsibilities hereunder and that Employee has no claim
or right to the continued use or possession of such documents, files or other
materials following termination of Employee's employment by Converse. Employee
agrees that, upon termination of employment, Employee will not retain any such
documents, files or other materials and will promptly return to Converse any
documents, files or other materials in Employee's possession or custody, except
that Employee shall be entitled to retain a copy of correspondence written by
him so long as Converse also has a copy and such correspondence does not contain
Confidential Information.
4. Non-Disparagement. Employee agrees that he will not issue any
-----------------
communication, written, oral or otherwise, that disparages, criticizes or
otherwise reflects adversely upon Converse or any of its officers, directors or
employees or which encourages the taking of any action by any person or entity
adverse to Converse, unless required by law.
5. Miscellaneous. This Agreement shall be binding upon and inure to the
-------------
benefit of Employee's heirs, executors, administrators and legal
representatives, and shall be binding upon
<PAGE>
Page 4
and inure to the benefit of Converse and its successors and assigns. This
Agreement shall supersede and stand in place of any and all other agreements
between Employee and Converse regarding severance pay and/or any and all
severance pay benefits pursuant to any plan or practice of Converse. This
Agreement shall take effect as of the day and year first above set forth, and
its validity, interpretation, construction and performance shall be governed by
the laws of the Commonwealth of Massachusetts.
IN WITNESS WHEREOF, the parties hereto have each executed this Agreement as
of the date set forth above.
CONVERSE INC.
By /s/ Glenn N. Rupp
-------------------------------------
GLENN N. RUPP,
Chairman and Chief Executive Officer
/s/ Edward C. Frederick
----------------------------------------
EDWARD C. FREDERICK
<PAGE>
Exhibit 10.2
CONSULTANT'S AGREEMENT PRIVATE
AGREEMENT made as of this 15th day of May, 1996 between EXETER RESEARCH
(hereinafter referred to as "you" or "consultant"), and CONVERSE INC.
(hereinafter referred to as "we" or "Company"), a Delaware corporation. You are
hereby retained by us as a consultant on the following terms and conditions:
1. You, as an independent contractor, shall perform research, consulting
and testing of advanced footwear products; concept development, functional
design, prototype development, research and testing of concepts and designs, as
well as other similar and appurtenant duties as may be assigned to you while
performing said services; but you are not authorized hereby to operate equipment
owned or controlled by this Company. You shall be advised of the applicable
policies of this Company and agree to comply with such policies in your
performance of services hereunder.
2. You shall perform the work at any location or locations mutually agreed
upon as a base of operations. Consultant shall perform his duties hereunder at
the direction of John Healy, or such other person as may be designated in
writing by the Company from time to time.
3. As full and complete compensation for your services for consultation
required by us and for the discharge of all your obligations hereunder we shall
pay you a fee of One Hundred Eighty Thousand Dollars ($180,000.00) for the two
(2) year contract term, payable to you on a quarterly basis in the amount of
Twenty-two Thousand Five Hundred Dollars ($22,500.00) within thirty (30) days
after receipt of your invoice covering services rendered hereunder during the
preceding month. Total expenses as described in paragraph 4, shall not exceed
Five Hundred Dollars ($500.00) per month, unless approved in advance by
Converse.
<PAGE>
Page 2
4. We shall reimburse you for all out-of-pocket expenses (transportation,
hotel, meals, telephone) necessarily incurred by you in connection with any trip
made at our request and with our prior approval. Reimbursement shall be made by
payment within twenty (20) days after receipt of invoice rendered by you. All
invoices submitted for payment shall be in the name of the Consultant which is
party to this Agreement. Any expenses incurred or disbursements paid to third
parties by the Consultant shall be authorized in advance by this Company and an
itemized bill submitted to this Company for payment.
5. In the performance of all services hereunder: (a) you shall be deemed
to be and shall be an independent contractor and as such you shall not be
entitled to any benefits applicable to employees of this Company; (b) you shall
comply with all applicable governmental (U.S. and foreign) laws and regulations;
(c) you shall have sole responsibility for the payment of all applicable
governmental taxes including Federal, State and local income taxes and for all
employment and disability insurance, Social Security and other similar taxes;
and (d) you shall maintain public liability insurance in amounts not less than
$500,000.00 for injuries to persons and $100,000.00 for damage to property and
provide the Company with certificates evidencing the fact that such insurance is
in full force and effect.
6. Subject to the "Exceptions" stated below, during the term of this
----------
Agreement, in the case of any Competing Business (defined below), Consultant
shall not, unless acting with the prior written consent of Converse, directly or
indirectly, own, manage, operate, finance, join, control or participate in the
ownership, management, operation, financing or control of, or be connected as an
officer, director, employee, partner, principal, agent, representative,
<PAGE>
Page 3
consultant or otherwise with, or use or permit Consultant's name to be used in
connection with such a Competing Business.
The term "Competing Business" shall mean any business or enterprise,
engaged in the business of designing, manufacturing, distributing, marketing or
selling athletic footwear or athleisure footwear within (i) any state of the
United States or the District of Columbia or (ii) any foreign country in which
Converse or any of its subsidiaries engage in such business.
In the event that the provisions of this paragraph 8 should ever be
adjudicated to exceed the time, geographic, product or other limitations
permitted by applicable law in any jurisdiction, then such provisions shall be
deemed reformed in such jurisdiction to the maximum time, geographic, product or
other limitations permitted by applicable law.
"Exceptions". Notwithstanding the foregoing, the following are all
----------
excepted from this Non-Competition provision so that Consultant shall be
permitted to do all of the following without violating this Agreement:
(i) Render services as a consultant to Benetton Sports System, SPA;
(ii) Design, manufacture and/or sell sport shoe test equipment and
ultimate frisbee shoes;
(iii) Render services required under pre-existing contractual obligations
to Nike and Adidas, which contracts require Consultant to cooperate
with said two (2) corporations should either or both of them seek
patent protection or to enforce property rights in connection with
discoveries or
<PAGE>
Page 4
inventions conceived by Consultant, acting alone or jointly with
others, while Consultant rendered prior services for Nike and/or
Adidas;
(iv) Services rendered to Lotto, S.P.A. and Wilson Sporting Goods, Inc.,
which services are to be fully completed by February 29, 1996."
7. We hereby state that we do not desire to acquire from you any secret or
confidential know-how or information which you may have acquired from others.
Accordingly, you represent and warrant that you are free to divulge to this
Company, without any obligation to, or violation of any right of others, any and
all information, practices or techniques which you will describe, demonstrate,
divulge or in any other manner make known to this Company during your
performance of services hereunder. You shall exonerate, indemnify and hold
harmless this Company from and against any and all liability, loss, cost,
expense, damage, claims or demands for actual or alleged violation of the rights
of others in any trade secret, know-how or other confidential information by
reason of this Company's receipt or use of the services or information described
above, or otherwise in connection therewith.
8. You shall promptly and fully disclose and assign to us or our designee
all inventions and discoveries conceived or made by you in any degree resulting
from or arising out of your services hereunder and will assist us in every
proper way (entirely at our expense) to obtain for our own or our designee's
benefit patents on any such resulting inventions in any and all countries; and
such inventions and discoveries to be and remain our property whether or not
disclosed, assigned or patented.
<PAGE>
Page 5
9. The information and knowledge divulged to you by this Company or which
you acquire in connection with or as a result of your services hereunder shall
be regarded by you as confidential. Without limiting the generality of the
foregoing, you recognize that, unless and until published, all features of the
compounds, compositions, formulations, apparatus, processes and application
methods heretofore or hereafter used or developed by us (or by any of our
predecessors in business) are and shall be our trade secrets. Trade secrets
shall also be deemed to include all information related to the Company's
promotional activities and endorsement agreements. You shall not use, nor shall
you disclose, any such information, knowledge or trade secrets to any person
either during or after the period of this agreement, except to our employees as
may be necessary in the regular course of your duties hereunder, or except as
otherwise authorized by us.
10. You recognize that all records and copies of records relating to our
operations, investigations and business made or received by you during the
period of this Agreement are and shall be our property exclusively, and you
shall keep the same at all times in your custody and subject to your control,
and shall surrender the same at the termination of this Agreement if not before.
11. You shall exonerate, indemnify and hold harmless this Company from and
against any and all liability, loss, cost, expense, damage, claims or demands on
account of injuries (including death) to you or any of your employees or loss or
damage to your property or that of any of your employees, arising out of or
resulting in any manner from or occurring in connection with your performance of
services hereunder.
<PAGE>
Page 6
12. You shall not assign this Agreement or any part thereof without our
prior written consent, and any such purported assignment shall be void. This
Agreement shall be binding on your heirs, executors, legal representatives,
successors and permitted assigns and shall inure to the benefit or our
successors and assigns.
13. This Agreement shall be effective as of the date first above written
and shall continue for a period of two (2) years, ending May 15, 1998, subject
to the right of either party to terminate at any time upon not less than ninety
(90) days' prior written notice to the other party and subject to our right to
cancel for good cause immediately at any time. Such termination shall not
affect your obligations under the above paragraphs 7 through 11, inclusive.
14. Any notices or communications hereunder shall be in writing, addressed
as follows:
If to us: Converse Inc.
One Fordham Road
North Reading, MA 01864
Attention: Jack A. Green
Senior Vice President, General Counsel and
Secretary
If to you: Exeter Research, Inc.
8 Chestnut Street
Exeter, NH 03833
15. This Agreement shall be governed by and construed in accordance with
the laws of the Commonwealth of Massachusetts.
16. This Agreement contains the entire agreement and understanding between
the parties hereto with respect to the subject matter hereof, and merges and
supersedes all prior discussions
<PAGE>
Page 7
and writings with respect thereto. No modification or alteration of this
Agreement shall be effective unless made in writing and signed by both parties
hereto.
17. Consultant agrees that the services described above will not be
performed by Edward C. Frederick.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of
the date first above written.
WITNESS: CONVERSE INC.
Josephine LaBelle By (SIGNATURE APPEARS HERE)
- ------------------------ -----------------------------
WITNESS: EXETER RESEARCH
(SIGNATURE APPEARS HERE)
- ------------------------ --------------------------------
Tax Identification No. 51-0304748
<PAGE>
Exhibit 10.3
[LETTERHEAD OF CONVERSE INC. APPEARS HERE]
December 10, 1996
Mr. Julius W. Erving, President
The Erving Group, Inc.
636 Creighton Road
Villanova, PA 19085
RE: FOOTLOCKER BASKETBALL PROMOTION
-------------------------------
Dear Julius:
This shall confirm our November 21 understanding with respect to the
Footlocker/Converse Dr. J 2000 Purchase with Purchase Basketball Promotion in
the United States (the "Promotion") as follows:
1. The name and nickname Julius Erving and Dr. J will appear on a
Converse/Footlocker basketball for the Promotion (the
"Basketball").
2. A maximum of twenty-five thousand (25,000) Basketballs will be
sold by Converse to Footlocker in the United States and a maximum
of one thousand (1,000) to Footlocker in Canada for $3.30 (the
"Wholesale Price") for resale by Footlocker for approximately
$6.99 as part of the Promotion.
3. Converse will pay you a royalty of five percent (5%) of the
Wholesale Price for each Basketball sold by Converse to
Footlocker. Said royalty shall be paid to you no later than April
15, 1997.
4. All promotional and point of sale material for the Promotion will
be forwarded to you for approval.
If the above properly reflects our understanding please sign both copies
of this letter and return one to me. Thank you and best personal regards.
Very truly yours,
[SIGNATURE APPEARS HERE]
AGREED:
THE ERVING GROUP, INC.
By /s/ Julius W. Erving, Pres.
----------------------------
JULIUS W. ERVING, President
/s/ Julius W. Erving
- ------------------------------
JULIUS W. ERVING
c.c. Glenn Rupp
Jim Solomon
Joe Turco
<PAGE>
Exhibit 11.1
CONVERSE INC. AND SUBSIDIARIES
STATEMENT REGARDING COMPUTATION OF PER SHARE EARNINGS
(Amounts in thousands, except per share amounts)
<TABLE>
<CAPTION>
Three Months Ended
------------------
March 29, 1997 March 30, 1996
<S> <C> <C>
Earnings per share:
Income (loss) available to common stockholders...... $ 12,680 $ (3,260)
========= ==========
Weighted average number of common shares
outstanding.................................... 17,233 16,692
Weighted average incremental shares from assumed
conversion of common stock equivalents......... 629 ---
--------- ----------
17,862 16,692
========= ==========
Primary earnings (loss) per share................... $0.71 $(0.20)
Fully diluted earnings (loss) per share............. $0.71 $(0.20)
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM FORM 10Q AND
IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> JAN-03-1998
<PERIOD-START> DEC-29-1996
<PERIOD-END> MAR-29-1997
<CASH> 3,913
<SECURITIES> 0
<RECEIVABLES> 116,776
<ALLOWANCES> 2,357
<INVENTORY> 78,290
<CURRENT-ASSETS> 210,733
<PP&E> 26,101
<DEPRECIATION> 8,355
<TOTAL-ASSETS> 255,834
<CURRENT-LIABILITIES> 243,056
<BONDS> 0
0
0
<COMMON> 17,250
<OTHER-SE> (46,536)
<TOTAL-LIABILITY-AND-EQUITY> 255,834
<SALES> 135,969
<TOTAL-REVENUES> 142,346
<CGS> 93,809
<TOTAL-COSTS> 138,010
<OTHER-EXPENSES> (10,961)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 2,679
<INCOME-PRETAX> 20,618
<INCOME-TAX> 7,938
<INCOME-CONTINUING> 12,680
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 12,680
<EPS-PRIMARY> 0.710
<EPS-DILUTED> 0.710
</TABLE>
