<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON MAY 15, 1997
REGISTRATION NO. 333-23791
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
-----------
AMENDMENT NO. 2
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. [_]
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.
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<PAGE>
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+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 15, 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 14, 1997, the last reported sale price
of the Common Stock on the New York Stock Exchange was $17 3/4 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. On a pro forma basis, after giving effect to
the Offering and the application of the net proceeds therefrom, at March 29,
1997 borrowings of the Company constituting Senior Indebtedness would have been
approximately $100 million, and indebtedness and other liabilities of
subsidiaries would have been approximately $30 million. The Indenture will not
restrict the incurrence of any other indebtedness or liabilities by the Company
or its subsidiaries. See "Description of Notes--Subordination."
The Notes have been authorized for listing 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.
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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.
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<TABLE>
<CAPTION>
UNDERWRITING DISCOUNTS PROCEEDS TO
PRICE TO PUBLIC (1) AND COMMISSIONS (2) COMPANY (3)
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<S> <C> <C> <C>
Per Note % % %
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Total(4) $ $ $
</TABLE>
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(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
<PAGE>
[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."
<PAGE>
[Pictures of Professional Basketball Players Appear Here]
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
. 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
<PAGE>
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
<PAGE>
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, at March 29, 1997, borrowings of the
Company constituting Senior Indebtedness would
have been approximately $100 million, and
indebtedness and other liabilities of
subsidiaries would have been approximately $30
million. 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.....................
The Notes have been authorized for listing 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
<PAGE>
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
<PAGE>
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.
<TABLE>
<CAPTION>
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)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
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) $ 22,552 $ 91,054 $(32,323) $ 22,127
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)
</TABLE>
10
<PAGE>
- --------
(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
<PAGE>
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, including current maturities, would have been $160.3
million, and the Company would have had a total consolidated stockholders'
deficit of $30.8 million. On a pro forma basis, after giving effect to the New
Credit Facility and the application of the estimated net proceeds of the
Offering, at March 29, 1997 the Company's unutilized borrowing availability
under the New Credit Facility would have been approximately $22 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
<PAGE>
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
<PAGE>
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 90 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. Both the Credit Facility and the New Credit Facility would
constitute Senior Indebtedness. Furthermore, the Notes would be effectively
subordinated to the indebtedness outstanding under the Credit Facility and the
New Credit Facility because such indebtedness is secured by substantially all
of the Company's U.S. assets. On a pro forma basis, after giving effect to the
Offering and the application of the net proceeds therefrom, at March 29, 1997
borrowings of the Company constituting Senior Indebtedness would have been
approximately $100 million, and indebtedness and other liabilities of
subsidiaries would have been approximately $30 million. 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. Although the
occurrence of an event of default under any Senior Indebtedness could result
in a default under the Indenture governing the Notes, such event could also
result in the Company being prevented from paying principal or interest on 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 Notes are authorized for listing 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
14
<PAGE>
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 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."
15
<PAGE>
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, the application of the net proceeds
therefrom and the execution and delivery of the New Credit Facility. 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."
<TABLE>
<CAPTION>
MARCH 29, 1997
--------------------------
ACTUAL AS ADJUSTED
----------- -------------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
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
=========== ===========
</TABLE>
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.
<TABLE>
<CAPTION>
HIGH LOW
------- -------
<S> <C> <C>
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 14, 1997)......................... 18 7/8 12 3/4
</TABLE>
On May 14, 1997, the last reported sale price of the Common Stock on the New
York Stock Exchange was $17 3/4 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
<PAGE>
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.
<TABLE>
<CAPTION>
FISCAL YEAR ENDED
-----------------------------------------------------------------
DECEMBER 28, 1996
----------------------
JANUARY 1, DECEMBER 31, DECEMBER 30, PRO
1994 1994 1995 ACTUAL FORMA(1)
---------- ------------ ------------ -------- --------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C>
STATEMENT OF
OPERATIONS DATA:
Net sales.......... $380,427 $437,307 $407,483 $349,335 $349,335
Cost of sales...... 254,338 286,555 293,948 263,098 263,098
-------- -------- -------- -------- --------
Gross profit....... 126,089 150,752 113,535 86,237 86,237
Selling, general
and
administrative expenses.. 108,059 128,876 146,332 114,888 114,888
Royalty income..... 10,808 14,212 17,257 27,638 27,638
Restructuring
expense (credit).. -- -- 14,182 (1,177) (1,177)
-------- -------- -------- -------- --------
Earnings (loss)
from operations... 28,838 36,088 (29,722) 164 164
Loss (credit) on
investment in
unconsolidated
subsidiary........ -- -- 52,160 (1,362) (1,362)
Interest expense... 7,501 7,423 14,043 17,776 13,627 (2)
Other expense,
net............... 1,904 504 3,966 6,319 6,319
-------- -------- -------- -------- --------
Earnings (loss)
before income tax
expense
(benefit)......... 19,433 28,161 (99,891) (22,569) (18,420)
Income tax expense
(benefit)......... 7,329 10,565 (28,144) (4,134) (2,474)(4)
-------- -------- -------- -------- --------
Net earnings
(loss)............ $ 12,104 $ 17,596 $(71,747) $(18,435) $(15,946)
======== ======== ======== ======== ========
Net earnings (loss)
per share......... $ -- (7) $ 1.05 $ (4.30) $ (1.10) $ (0.95)(8)
======== ======== ======== ======== ========
Weighted average
number of shares
of common stock... -- (7) 16,692 16,692 16,761 16,761
OTHER OPERATIONS
DATA:
Gross margin....... 33.1% 34.5% 27.9 % 24.7% 24.7%
Selling, general
and
administrative expenses
(as a percentage
of net sales)..... 28.4% 29.5% 35.9 % 32.9% 32.9%
Earnings (loss)
from operations
(as a percentage
of net sales)..... 7.6% 8.3% (7.3)% 0.0% 0.0%
EBITDA(9).......... $ 27,387 $ 35,652 $(80,745) $ 3,087 $ 3,087
EBITDA margin...... 7.2% 8.2% (19.8)% 0.9% 0.9%
Ratio of earnings
to fixed
charges(10)....... 3.17x 2.65x -- (11) -- (11) -- (11)
BALANCE SHEET DATA
(AT PERIOD END):
Working capital.... $111,080 $131,400 $ 89,680 $(32,648) $ 22,552 (12)
Total assets....... 179,954 223,726 224,507 222,603 225,299
Long-term debt,
including
current maturities(14).. 70,313 77,087 119,148 127,409 132,209
Total stockholders'
equity (deficiency)(16).. 10,270 44,987 (22,685) (38,868) (40,972)
<CAPTION>
THREE MONTHS ENDED
-----------------------------------
MARCH 29, 1997
--------------------
MARCH 30, PRO
1996 ACTUAL FORMA(1)
--------- -------- --------
<S> <C> <C> <C>
STATEMENT OF
OPERATIONS DATA:
Net sales.......... $ 86,551 $135,969 $135,969
Cost of sales...... 64,934 93,809 93,809
-------- -------- --------
Gross profit....... 21,617 42,160 42,160
Selling, general
and
administrative expenses.. 26,306 36,765 36,765
Royalty income..... 4,928 6,377 6,377
Restructuring
expense (credit).. -- (564) (564)
-------- -------- --------
Earnings (loss)
from operations... 239 12,336 12,336
Loss (credit) on
investment in
unconsolidated
subsidiary........ -- (13,051) (13,051)
Interest expense... 3,837 2,679 2,033 (3)
Other expense,
net............... 877 2,090 2,090
-------- -------- --------
Earnings (loss)
before income tax
expense
(benefit)......... (4,475) 20,618 21,264
Income tax expense
(benefit)......... (1,215) 7,938 8,196 (5)
-------- -------- --------
Net earnings
(loss)............ $ (3,260) $ 12,680(6) $13,068 (6)
======== ======== ========
Net earnings (loss)
per share......... $ (0.20) $ 0.71(6) $ 0.73 (6)(8)
======== ======== ========
Weighted average
number of shares
of common stock... 16,692 17,862 17,862
OTHER OPERATIONS
DATA:
Gross margin....... 25.0% 31.0% 31.0%
Selling, general
and
administrative expenses
(as a percentage
of net sales)..... 30.4% 27.0% 27.0%
Earnings (loss)
from operations
(as a percentage
of net sales)..... 0.3% 9.1% 9.1%
EBITDA(9).......... $ 646 $ 25,846 $ 25,846
EBITDA margin...... 0.7% 19.0% 19.0%
Ratio of earnings
to fixed
charges(10)....... -- (11) 7.52x 2.95x
BALANCE SHEET DATA
(AT PERIOD END):
Working capital.... $ 91,054 $(32,323) $ 22,127 (12)
Total assets....... 230,210 255,834 259,854 (13)
Long-term debt,
including
current maturities(14).. 123,420 154,777 160,327 (15)
Total stockholders'
equity (deficiency)(16).. (25,962) (29,286) (30,816)(17)
</TABLE>
17
<PAGE>
- --------
(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.
All borrowings under the New Credit Facility will be classified as
current maturities of long-term debt because the New Credit Facility is
expected to provide for both a lockbox arrangement (whereby payments by
the Company's customers are deposited in a lockbox controlled by the
lenders) and certain subjective clauses concerning the eligibility of
collateral that could cause a mandatory repayment. This classification is
required by Emerging Issues Task Force 95-22, "Balance Sheet
Classification of Borrowings Outstanding under Revolving Credit Agreement
that Includes both a Subjective Acceleration Clause and a Lockbox
Arrangement."
(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
<PAGE>
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.
According to independently compiled statistics, the Company is the seventh
largest manufacturer of branded athletic footwear based on 1996 U.S.,
international and licensed wholesale sales. Based on independent market
research, Converse was also ranked as one of the top four U.S. basketball
footwear brands in 1996 and the fourth largest brand in the Children's
footwear category. Although there are no independently prepared data available
for athleisure footwear, based on the Company's review of the published
results of its principal competitors in this category, the Company believes
that it is one of the largest sellers of athleisure footwear and the only
seller of athleisure footwear with significant manufacturing facilities in the
United States. 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
<PAGE>
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.
<TABLE>
<CAPTION>
THREE MONTHS ENDED
----------------------------------------------------------
MARCH 30, 1996 % MARCH 29, 1997 %
---------------------------- ----------------------------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<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........ 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 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
<PAGE>
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:
<TABLE>
<CAPTION>
FISCAL YEAR ENDED
--------------------------------------------------------------
DECEMBER 30, 1995 % DECEMBER 28, 1996 %
------------------------------ ------------------------------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C>
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)
</TABLE>
21
<PAGE>
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
<PAGE>
$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
<PAGE>
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:
<TABLE>
<CAPTION>
FISCAL YEAR ENDED
------------------------------------------------------------
DECEMBER 31, 1994 % DECEMBER 30, 1995 %
----------------------------- ------------------------------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C>
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)
</TABLE>
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
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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.
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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.
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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.
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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.
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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.
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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.
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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
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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.
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<PAGE>
. 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
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<PAGE>
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
<PAGE>
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
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<PAGE>
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.
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<PAGE>
The following table details sales by Converse's licensees that produced
royalties to Converse for the years indicated and Converse's resulting royalty
income:
<TABLE>
<CAPTION>
FISCAL YEAR ENDED THREE MONTHS ENDED
-------------------------------------- -------------------
DECEMBER 31, DECEMBER 30, DECEMBER 28, MARCH 30, MARCH 29,
1994 1995 1996 1996 1997
------------ ------------ ------------ --------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
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
======== ======== ======== ======= =======
</TABLE>
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,
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<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
MANAGEMENT
DIRECTORS
The directors of Converse are as follows:
<TABLE>
<CAPTION>
NAME AGE PRINCIPAL OCCUPATION
- ---- --- --------------------
<S> <C> <C>
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.
</TABLE>
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
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<PAGE>
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
<PAGE>
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:
<TABLE>
<CAPTION>
NAME AGE POSITION
- ---- --- --------
<S> <C> <C>
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
</TABLE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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.
<TABLE>
<CAPTION>
NUMBER OF PERCENT OF
SHARES COMMON STOCK
BENEFICIALLY BENEFICIALLY
OWNED OWNED
------------ ------------
<S> <C> <C>
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
</TABLE>
- --------
* 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
<PAGE>
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
<PAGE>
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 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, warrants or options 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 or made in connection with a merger or similar transaction) 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
<PAGE>
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 there exists a default in the payment
of interest on such Notes or 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
<PAGE>
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.
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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:
<TABLE>
<CAPTION>
YEAR REDEMPTION PRICE
---- ----------------
<S> <C>
2000....................
2001....................
2002....................
2003....................
</TABLE>
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.
REPURCHASE 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 repurchase 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 "Repurchase Date") for a repurchase price equal to
100% of the principal amount thereof, plus interest accrued and unpaid thereon
to the Repurchase Date.
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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
repurchase of such holder's Notes.
To exercise the repurchase right, a holder must deliver written notice of
such exercise to the Trustee prior to the close of business on the Repurchase
Date, specifying the Notes with respect to which the right of repurchase 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 Repurchase 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 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 repurchase 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
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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 of the Company or any Significant
Subsidiary 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; entry of a final judgment or judgments against the Company or any
Significant Subsidiary in the amount of at least $10,000,000 that remain
undischarged and unstayed for a period of 30 days; or certain events of
bankruptcy, insolvency, reorganization, receivership or liquidation involving
the Company or any Significant 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.
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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
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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
The Notes have been authorized for listing 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.
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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.
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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.
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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
<PAGE>
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
<PAGE>
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
<PAGE>
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:
<TABLE>
<CAPTION>
PRINCIPAL AMOUNT
UNDERWRITERS OF NOTES
- ------------ ----------------
<S> <C>
Smith Barney Inc...............................................
Dillon, Read & Co. Inc.........................................
Donaldson, Lufkin & Jenrette Securities Corporation............
Goldman, Sachs & Co............................................
-----------
Total........................................................ $60,000,000
===========
</TABLE>
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 90 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
<PAGE>
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 Notes are authorized for listing 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
<PAGE>
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
<PAGE>
CONVERSE INC. AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
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
</TABLE>
F-1
<PAGE>
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
<PAGE>
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
<PAGE>
CONVERSE INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
DECEMBER 30, 1995 DECEMBER 28, 1996
----------------- -----------------
<S> <C> <C>
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
======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
F-4
<PAGE>
CONVERSE INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF OPERATIONS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
FISCAL YEAR ENDED
-----------------------------------------------------
DECEMBER 31, 1994 DECEMBER 30, 1995 DECEMBER 28, 1996
----------------- ----------------- -----------------
<S> <C> <C> <C>
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
========
</TABLE>
See accompanying notes to consolidated financial statements.
F-5
<PAGE>
CONVERSE INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
FISCAL YEAR ENDED
-----------------------------------------------------
DECEMBER 31, 1994 DECEMBER 30, 1995 DECEMBER 28, 1996
----------------- ----------------- -----------------
<S> <C> <C> <C>
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 $ --
======== ======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
F-6
<PAGE>
CONVERSE INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY (DEFICIENCY)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
FOREIGN
ADDITIONAL RETAINED CURRENCY TOTAL
COMMON PAID-IN EARNINGS INTER-COMPANY TRANSLATION STOCKHOLDERS'
STOCK CAPITAL (DEFICIT) CAPITAL ACCOUNT ADJUSTMENT (DEFICIENCY)
------- ---------- --------- --------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
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)
======= ======= ======== ======= ======= ========
</TABLE>
See accompanying notes to consolidated financial statements.
F-7
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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:
<TABLE>
<CAPTION>
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
---------- --------------- ---------------- --------- --------
<S> <C> <C> <C> <C> <C>
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
======== ======== ======== ====== ========
</TABLE>
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
<PAGE>
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:
<TABLE>
<CAPTION>
LOSS REDUCTION IN
CONTRACT (CREDIT) EMPLOYEE LEASE LIABILITY FOR
TERMINATION ON ASSET SEVERANCE AND TERMINATION POSTRETIREMENT
COSTS DISPOSALS RELATED COSTS COSTS BENEFITS TOTAL
----------- --------- ------------- ----------- -------------- -------
<S> <C> <C> <C> <C> <C> <C>
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
======= ======= ====== ====== ===== =======
</TABLE>
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:
<TABLE>
<CAPTION>
DECEMBER 30, 1995 DECEMBER 28, 1996
----------------- -----------------
<S> <C> <C>
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
======= =======
</TABLE>
F-13
<PAGE>
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:
<TABLE>
<CAPTION>
ESTIMATED USEFUL
LIFE (YEARS) DECEMBER 30, 1995 DECEMBER 28, 1996
---------------- ----------------- -----------------
<S> <C> <C> <C>
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
======= =======
</TABLE>
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:
<TABLE>
<CAPTION>
DECEMBER 30, 1995 DECEMBER 28, 1996
----------------- -----------------
<S> <C> <C>
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
======= =======
</TABLE>
F-14
<PAGE>
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:
<TABLE>
<CAPTION>
DECEMBER 30, 1995 DECEMBER 28, 1996
----------------- -----------------
<S> <C> <C>
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
======== =========
</TABLE>
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
<PAGE>
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
<PAGE>
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:
<TABLE>
<CAPTION>
FISCAL YEAR ENDED
-----------------------------------------------------
DECEMBER 31, 1994 DECEMBER 30, 1995 DECEMBER 28, 1996
----------------- ----------------- -----------------
<S> <C> <C> <C>
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
====== ======= =======
</TABLE>
10. INCOME TAXES
The domestic and foreign components of income (loss) before income taxes
were as follows:
<TABLE>
<CAPTION>
FISCAL YEAR ENDED
-----------------------------------------------------
DECEMBER 31, 1994 DECEMBER 30, 1995 DECEMBER 28, 1996
----------------- ----------------- -----------------
<S> <C> <C> <C>
Domestic.............. $14,926 $(84,482) $(17,967)
Foreign............... 13,235 (15,409) (4,602)
------- -------- --------
$28,161 $(99,891) $(22,569)
======= ======== ========
</TABLE>
F-17
<PAGE>
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:
<TABLE>
<CAPTION>
FISCAL YEAR ENDED
-----------------------------------------------------
DECEMBER 31, 1994 DECEMBER 30, 1995 DECEMBER 28, 1996
----------------- ----------------- -----------------
<S> <C> <C> <C>
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)
======= ======== =======
</TABLE>
The following table reconciles the differences between the Federal corporate
statutory rate and Converse's effective income tax rate:
<TABLE>
<CAPTION>
FISCAL YEAR ENDED
-----------------------------------------------------
DECEMBER 31, 1994 DECEMBER 30, 1995 DECEMBER 28, 1996
----------------- ----------------- -----------------
<S> <C> <C> <C>
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)%
==== ===== =====
</TABLE>
F-18
<PAGE>
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:
<TABLE>
<CAPTION>
DECEMBER 30, 1995 DECEMBER 28, 1996
----------------- -----------------
<S> <C> <C>
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
======= ========
</TABLE>
The net deferred tax assets are included in the consolidated balance sheet
as follows:
<TABLE>
<CAPTION>
DECEMBER 30, 1995 DECEMBER 28, 1996
----------------- -----------------
<S> <C> <C>
Prepaid expenses and other current
assets............................... $14,183 $14,491
Other assets.......................... 15,244 20,550
------- -------
$29,427 $35,041
======= =======
</TABLE>
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
<PAGE>
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:
<TABLE>
<CAPTION>
DECEMBER 30, 1995 DECEMBER 28, 1996
----------------- -----------------
<S> <C> <C>
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
======= =======
</TABLE>
Net periodic pension cost for Fiscal 1994, 1995 and 1996 includes the
following components:
<TABLE>
<CAPTION>
FISCAL YEAR ENDED
-----------------------------------------------------
DECEMBER 31, 1994 DECEMBER 30, 1995 DECEMBER 28, 1996
----------------- ----------------- -----------------
<S> <C> <C> <C>
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
======= ======= =======
</TABLE>
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
<PAGE>
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:
<TABLE>
<CAPTION>
DECEMBER 30, 1995 DECEMBER 28, 1996
----------------- -----------------
<S> <C> <C>
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
======= =======
</TABLE>
Net periodic postretirement benefit costs for Fiscal 1994, 1995 and 1996
include the following components:
<TABLE>
<CAPTION>
FISCAL YEAR ENDED
-----------------------------------------------------
DECEMBER 31, 1994 DECEMBER 30, 1995 DECEMBER 28, 1996
----------------- ----------------- -----------------
<S> <C> <C> <C>
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
===== ===== =====
</TABLE>
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
<PAGE>
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
<PAGE>
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:
<TABLE>
<CAPTION>
WEIGHTED
EXERCISE AVERAGE
NUMBER PRICE EXERCISE PRICE
OF OPTIONS PER SHARE PER SHARE
---------- ------------ --------------
<S> <C> <C> <C>
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
=========
</TABLE>
The following table summarizes information about the 1994 Plan stock options
outstanding at December 28, 1996:
<TABLE>
<CAPTION>
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
--------------- ----------- ------------ -------------- ----------- --------------
<S> <C> <C> <C> <C> <C>
$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
========= =======
</TABLE>
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
<PAGE>
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:
<TABLE>
<CAPTION>
FISCAL YEAR ENDED
-----------------------------------
DECEMBER 30, 1995 DECEMBER 28, 1996
----------------- -----------------
<S> <C> <C>
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)
</TABLE>
F-24
<PAGE>
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:
<TABLE>
<CAPTION>
FISCAL YEAR ENDED
-----------------------------------
DECEMBER 30, 1995 DECEMBER 28, 1996
----------------- -----------------
<S> <C> <C>
Expected life (years)................... 5.3 6.0
Interest rate........................... 6.45% 6.27%
Volatility.............................. 75.00% 65.00%
Dividend yield.......................... 0 0
</TABLE>
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:
<TABLE>
<CAPTION>
FISCAL YEAR ENDED
-----------------------------------------------------
DECEMBER 31, 1994 DECEMBER 30, 1995 DECEMBER 28, 1996
----------------- ----------------- -----------------
<S> <C> <C> <C>
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
====== ====== ======
</TABLE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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:
<TABLE>
<CAPTION>
FISCAL YEAR ENDED
-----------------------------------------------------
DECEMBER 31, 1994 DECEMBER 30, 1995 DECEMBER 28, 1996
----------------- ----------------- -----------------
<S> <C> <C> <C>
Advertising and
promotion.............. $51,339 $49,884 $28,544
Research and
development............ 7,847 8,617 6,503
</TABLE>
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.
<TABLE>
<CAPTION>
FISCAL YEAR ENDED
-----------------------------------------------------
DECEMBER 31, 1994 DECEMBER 30, 1995 DECEMBER 28, 1996
----------------- ----------------- -----------------
<S> <C> <C> <C>
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
======== ======== ========
</TABLE>
F-28
<PAGE>
CONVERSE INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONCLUDED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
FISCAL YEAR ENDED
-----------------------------------------------------
DECEMBER 31, 1994 DECEMBER 30, 1995 DECEMBER 28, 1996
----------------- ----------------- -----------------
<S> <C> <C> <C>
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
======== ======= =======
</TABLE>
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:
<TABLE>
<CAPTION>
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER
-------- -------- -------- --------
<S> <C> <C> <C> <C>
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)
======== ======== ======== ========
</TABLE>
F-29
<PAGE>
CONVERSE INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEET
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
<TABLE>
<CAPTION>
MARCH 29, 1997
--------------
<S> <C>
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
========
</TABLE>
See accompanying notes to condensed consolidated financial statements.
F-30
<PAGE>
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.
F-31
<PAGE>
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 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
======== ========
</TABLE>
See accompanying notes to condensed consolidated financial statements.
F-32
<PAGE>
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:
<TABLE>
<CAPTION>
MARCH 29, 1997
--------------
<S> <C>
Retail merchandise............................................ $ 6,610
Finished products............................................. 64,336
Work in process............................................... 4,070
Raw materials................................................. 3,274
-------
$78,290
=======
</TABLE>
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
<PAGE>
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
<PAGE>
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:
<TABLE>
<CAPTION>
DECEMBER 28, CHARGES/ MARCH 29,
1996 WRITE- CHANGES IN 1997
BALANCE 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 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
<PAGE>
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
<PAGE>
[All American Logo]
[All Original Logo]
[All Authentic Logo]
[All Sports Logo]
[Converse All Star Logo]
<PAGE>
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
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
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary....................................................... 3
Risk Factors............................................................. 12
Use of Proceeds.......................................................... 15
Capitalization........................................................... 16
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
</TABLE>
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$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.
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
<PAGE>
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.
<TABLE>
<CAPTION>
PAYABLE BY THE
COMPANY
--------------
<S> <C>
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
==========
</TABLE>
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
<PAGE>
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
<PAGE>
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
14, 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 14, 1997
GLENN N. RUPP Executive Officer
(Principal
Executive Officer)
/s/ Donald J. Camacho Senior Vice
- ------------------------------------- President and Chief May 14, 1997
DONALD J. CAMACHO Financial Officer
(Principal
Financial and
Accounting Officer)
* Director
- ------------------------------------- May 14, 1997
DONALD J. BARR
* Director
- ------------------------------------- May 14, 1997
LEON D. BLACK
Director
- ------------------------------------- May 14, 1997
JULIUS W. ERVING
* Director
- ------------------------------------- May 14, 1997
ROBERT H. FALK
II-3
<PAGE>
SIGNATURE TITLE DATE
* Director
- ------------------------------------- May 14, 1997
GILBERT FORD
* Director
- ------------------------------------- May 14, 1997
MICHAEL S. GROSS
* Director
- ------------------------------------- May 14, 1997
JOHN J. HANNAN
* Director
- ------------------------------------- May 14, 1997
JOSHUA J. HARRIS
Director
- ------------------------------------- May 14, 1997
JOHN H. KISSICK
* Director
- ------------------------------------- May 14, 1997
RICHARD B. LOYND
Director
- ------------------------------------- May 14, 1997
MICHAEL D. WEINER
/s/ Donald J. Camacho
*By _________________________________
DONALD J. CAMACHO,ATTORNEY-IN-FACT
II-4
<PAGE>
CONVERSE INC.
EXHIBIT INDEX
<TABLE>
<C> <S>
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.*
</TABLE>
- --------
* Previously filed
<PAGE>
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 the 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
<PAGE>
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, and the rules and regulations of the Commission thereunder (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 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).
-2-
<PAGE>
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.
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 9:30 A.M.,
New York City time, on the second business day
-3-
<PAGE>
preceding the Closing Date or any 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 copies
of the Incorporated Documents, without exhibits, as you may reasonably request,
and (iv) five copies of the exhibits to the Incorporated Documents.
-4-
<PAGE>
(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 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
-5-
<PAGE>
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 reasonably
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 at the address specified in Section 13 hereof or at such other
address as you may specify (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 90 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-
<PAGE>
(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 or the Notes 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
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<PAGE>
a material fact or omitted to state a material fact required to be stated
therein or necessary in 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 execution and delivery of, and the performance by the
Company of its obligations under, the Indenture have been duly and validly
authorized by the Company and, upon its execution and delivery by the Company
and assuming due execution and delivery by the Trustee, will be the valid and
legally binding agreement of the Company, enforceable against the Company in
accordance with its terms, subject to the qualification that the enforceability
of the Company's obligations under the Indenture 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, and has been (or will have been) duly qualified under the 1939 Act
and the Indenture will conform to the description thereof in the Registration
Statement and the Prospectus.
(e) The execution and delivery of, and the performance by the
Company of its obligations under, the Notes have been duly authorized by the
Company 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 be the valid and legally binding obligations of the Company entitled to
the benefits of the Indenture and enforceable against the Company in accordance
with their terms, subject to the qualification that the enforceability of the
Company's obligations under the Notes 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, 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 in accordance with the
terms of the Indenture, 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,
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<PAGE>
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 Schedule III hereto sets forth (i) each such jurisdiction in which
the Company is required to be so registered and qualified, except where the
failure so to register or qualify does not have a Material Adverse Effect, and
(ii) the nature of the properties or business requiring 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 (other than Apex One, Inc., as to which no representation or warranty
is made) is a corporation duly organized, validly 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 of which 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 the
performance of any obligation, agreement or condition contained in any bond,
debenture, note or any other evidence of indebtedness or in 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
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<PAGE>
properties may be bound (except where any such default or defaults would not
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 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 principles 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
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<PAGE>
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 principles 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 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
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<PAGE>
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.
(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 as conducted on the date hereof,
and the Company is not aware of any claim to the contrary or any challenge by
any
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<PAGE>
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 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.
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<PAGE>
(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, 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
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<PAGE>
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 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
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<PAGE>
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. The relative fault of the Company on the 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
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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 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
-17-
<PAGE>
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,
California and Texas;
(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 Company has the corporate power and authority to enter
into the Indenture and to perform its obligations thereunder and the Indenture
has been duly authorized, executed and delivered by the Company and, assuming
due execution and delivery by the Trustee, is a valid, legal and binding
agreement of the Company, enforceable against the Company in accordance with its
terms, subject to the qualification that the enforceability of the Company's
obligations thereunder may be limited by bankruptcy, fraudulent conveyance,
insolvency, reorganization, moratorium or other laws relating to or affecting
creditors' rights generally and by general equitable principles, and has been
duly qualified under the 1939 Act;
(v) The Company has the corporate power and authority to issue
the Notes and to perform its obligations thereunder and the Notes have been duly
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, legal and binding obligations of the
Company entitled to the benefits of the Indenture and enforceable against the
Company in accordance with their terms, subject to the qualification that the
enforceability of the Company's obligations thereunder may be limited by
bankruptcy, fraudulent conveyance, insolvency, reorganization, moratorium or
other laws relating to or affecting creditors' rights generally and by general
equitable principles;
-18-
<PAGE>
(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 in accordance with the terms of the Indenture, will
have been validly issued and fully paid and will be nonassessable and free of
any preemptive or, to the knowledge of such counsel, similar rights that will
entitle any person to acquire any shares of Common Stock upon issuance thereof
by the Company;
(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 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;
-19-
<PAGE>
(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 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-Commitment for New Credit Facility",
"Prospectus Summary-Recent Developments- Favorable Resolution of Outstanding
Litigation; Cancellation of Notes and Warrants", "Risk Factors-Anti-Takeover
Provisions", "Management's Discussion and Analysis of Financial Condition and
Results of Operations-Liquidity and Capital Resources-Financing Arrangements",
"Business-Legal Proceedings", "Certain Transactions", "Description of Capital
Stock" and "Certain United States Federal 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-Liquidity and Capital Resources-Financing
Arrangements", (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" and (d) the Company's definitive proxy statement
for the Annual Meeting of Stockholders to be held June 18, 1997 under the
captions "Employment Contracts", "Executive Compensation and Stock Option
Committee Report", "Compensation Committee Interlocks and Insider Participation"
and "Certain Transactions",
-20-
<PAGE>
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 date 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).
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 (other than
Subsidiaries organized under the laws of foreign countries, as to which no
opinion need be expressed) 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 of which is owned by qualified
residents of the countries in which such Subsidiaries are located) free and
-21-
<PAGE>
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), to such counsel's knowledge, there are no legal or
governmental proceedings pending or 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 under the caption "Business-Trademarks and Patents" as being owned by
them or any of them, 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 or any other intellectual property
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 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; and
-22-
<PAGE>
(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.
(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), (v),
(vii), (viii), (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
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.
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<PAGE>
(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) 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 issuable 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 Blue Sky
Memoranda and such registration and qualification); (vii) the filing fees in
connection with any filings required to be
-24-
<PAGE>
made with the National Association ofSecurities 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, 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
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.
-25-
<PAGE>
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 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
-26-
<PAGE>
effective unless at least one counterpart hereof shall have been executed and
delivered on behalf of each party hereto.
-27-
<PAGE>
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
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<PAGE>
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
===========
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<PAGE>
SCHEDULE II
Lock-up Letters
Glenn N. Rupp
Donald J. Camacho
Edward C. Frederick
Apollo Investment Fund, L.P.
Lion Advisors, L.P.
-30-
<PAGE>
SCHEDULE III
Jurisdictions in which the Company is required to be registered and qualified
to do business
State Nature of Properties or Business
- ----- --------------------------------
Arizona Retail Store
Arkansas Retail Store
California Retail Store & Sales Office
District of Columbia Former Retail Store
Florida Retail Stores
Georgia Former Retail Store
Hawaii Retail Store
Idaho Retail Store
Illinois Former Sales Office
Kansas Retail Store
Louisiana Retail Store
Maine Retail Store
Massachusetts Corporate Headquarters & 2
Retail Stores
Nebraska Retail Store
New Hampshire Retail Store
New Jersey Former Sales Office
New Mexico Retail Store
New York Retail Store
Nevada Retail Store
North Carolina Retail Store & Manufacturing/
Distribution Facilities
Oklahoma Retail Store
Oregon Retail Store
Rhode Island Retail Store
South Carolina Former Warehouse
Tennessee Retail Store
Texas 2 Retail Stores and
Manufacturing Facility
Virginia Retail Store
Washington Retail Store
-31-
<PAGE>
================================================================================
CONVERSE, INC.,
AS ISSUER
TO
FIRST UNION NATIONAL BANK
AS TRUSTEE
INDENTURE
Dated as of May ______________, 1997
$69,000,000
(including $9,000,000 issuable upon exercise of an over-allotment
granted by the Issuer to certain underwriters)
% Convertible Subordinated Notes Due 2004
================================================================================
<PAGE>
Certain Sections of this Indenture relating to
Sections 310 through 318 of the
Trust Indenture Act of 1939:
Section 310(a)(1) .................................... 609
(a)(2) .................................... 609
(a)(3) .................................... Not Applicable
(a)(4) .................................... Not Applicable
(a)(5) .................................... 609
(b) .................................... 608
(c) .................................... Not Applicable
Section 311(a) .................................... 613
(b) .................................... 613
(c) .................................... Not Applicable
Section 312(a) .................................... 701
.................................... 702(a)
(b) .................................... 702(b)
(c) .................................... 702(c)
Section 313(a) .................................... 703(a)
(b)(1) .................................... Not Applicable
(b)(2) .................................... 703(a)
(c) .................................... 703(a)
(d) .................................... 703(b)
Section 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
Section 315(a) .................................... 601
(b) .................................... 602
(c) .................................... 601
(d) .................................... 601
(e) .................................... 514
Section 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)
Section 317(a)(1) .................................... 503
(a)(2) .................................... 504
(b) .................................... 1003
Section 318(a) .................................... 107
- ----------
Note: This reconciliation and tie shall not, for any purpose, be deemed to be
a part of the Indenture.
<PAGE>
TABLE OF CONTENTS*
............................................................................Page
ARTICLE 1.
DEFINITIONS AND OTHER PROVISIONS OF GENERAL APPLICATION
Section 101 Definitions..................................................... 1
Acquiring Person................................................ 2
Act............................................................. 2
Affiliate....................................................... 2
Agent Member......................................................
Applicable Procedures.............................................
Agent Member......................................................
Applicable Procedures.............................................
Apollo Stockholders............................................. 2
Authenticating Agent............................................ 3
Beneficial Owner................................................ 3
Board of Directors.............................................. 3
Board Resolution................................................ 3
Business Day.................................................... 3
Change in Control............................................... 3
Close of Business............................................... 4
Commission...................................................... 4
Common Stock.................................................... 4
Company......................................................... 4
Company Request................................................. 4
Company Order................................................... 4
Corporate Trust Office.......................................... 5
Corporation..................................................... 5
Current Market Price............................................ 5
Daily Market Price.............................................. 5
Defaulted Interest.............................................. 5
Depositary........................................................
Depositary DTC....................................................
Event of Default................................................ 5
Exchange Act.................................................... 5
Global Security...................................................
Holder.......................................................... 6
Indenture....................................................... 6
Interest Payment Date........................................... 6
Maturity........................................................ 6
Officers' Certificate........................................... 6
Opinion of Counsel.............................................. 6
Outstanding..................................................... 6
Paying Agent.................................................... 7
Person.......................................................... 7
Predecessor Security............................................ 7
- ----------
* Note: This Table of Contents shall not, for any purposes, be deemed to
be a part of the Indenture.
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Record Date..................................................... 7
Redemption Date................................................. 7
Redemption Price................................................ 7
Regular Record Date............................................. 7
Repurchase Date................................................. 7
Security Register............................................... 7
Security Registrar.............................................. 7
Senior Indebtedness............................................. 7
Significant Subsidiary.......................................... 8
Special Record Date............................................. 8
Stated Maturity................................................. 8
Subsidiary...................................................... 9
Time of Determination........................................... 9
Trust Indenture Act............................................. 9
Trustee......................................................... 9
Vice President.................................................. 9
SECTION 102 COMPLIANCE CERTIFICATES AND OPINIONS............................ 9
SECTION 103 FORM OF DOCUMENTS DELIVERED TO TRUSTEE..........................10
SECTION 104 ACTS OF HOLDERS; RECORD DATES...................................10
SECTION 105 NOTICES, ETC., TO TRUSTEE AND COMPANY...........................11
SECTION 106 NOTICE TO HOLDERS; WAIVER.......................................12
SECTION 107 CONFLICT WITH TRUST INDENTURE ACT...............................12
SECTION 108 EFFECT OF HEADINGS AND TABLE OF CONTENTS........................12
SECTION 109 SUCCESSORS AND ASSIGNS..........................................13
SECTION 110 SEPARABILITY CLAUSE.............................................13
SECTION 111 BENEFITS OF INDENTURE...........................................13
SECTION 112 GOVERNING LAW...................................................13
SECTION 113 LEGAL HOLIDAYS..................................................13
SECTION 114 NO SECURITY INTEREST CREATED....................................13
SECTION 115 LIMITATION ON INDIVIDUAL LIABILITY..............................13
ARTICLE 2.
SECURITY FORMS
Section 201 Forms Generally.................................................14
SECTION 202 FORM OF FACE OF SECURITY........................................14
SECTION 203 FORM OF REVERSE OF SECURITY.....................................16
SECTION 204 FORM OF TRUSTEE'S CERTIFICATE OF AUTHENTICATION.................22
ARTICLE 3.
THE SECURITIES
Section 301 Title and Terms.................................................22
SECTION 302 DENOMINATIONS...................................................23
SECTION 303 EXECUTION, AUTHENTICATION, DELIVERY AND DATING..................23
SECTION 304 TEMPORARY SECURITIES............................................23
SECTION 305 REGISTRATION, REGISTRATION OF TRANSFER AND EXCHANGE.............24
SECTION 306 MUTILATED, DESTROYED, LOST AND STOLEN SECURITIES................26
SECTION 307 PAYMENT OF INTEREST; INTEREST RIGHTS PRESERVED..................27
SECTION 308 PERSONS DEEMED OWNERS...........................................28
SECTION 309 CANCELLATION....................................................28
SECTION 310 COMPUTATION OF INTEREST.........................................29
SECTION 311 CUSIP NUMBER....................................................29
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ARTICLE 4.
SATISFACTION and DISCHARGE
Section 401 SATISFACTION AND DISCHARGE OF INDENTURE.........................29
SECTION 402 APPLICATION OF TRUST MONEY......................................30
SECTION 403 REINSTATEMENT...................................................30
ARTICLE 5.
REMEDIES
Section 501 EVENTS OF DEFAULT...............................................31
SECTION 502 ACCELERATION OF MATURITY; RESCISSION AND ANNULMENT..............33
SECTION 503 COLLECTION OF INDEBTEDNESS AND SUITS FOR ENFORCEMENT BY TRUSTEE.34
SECTION 504 TRUSTEE MAY FILE PROOFS OF CLAIM................................35
SECTION 505 TRUSTEE MAY ENFORCE CLAIMS WITHOUT POSSESSION OF SECURITIES.....35
SECTION 506 APPLICATION OF MONEY COLLECTED..................................35
SECTION 507 LIMITATION ON SUITS.............................................36
SECTION 508 UNCONDITIONAL RIGHT OF HOLDERS TO RECEIVE PRINCIPAL, PREMIUM AND
INTEREST AND TO CONVERT.........................................36
SECTION 509 RESTORATION OF RIGHTS AND REMEDIES..............................36
SECTION 510 RIGHTS AND REMEDIES CUMULATIVE..................................37
SECTION 511 DELAY OR OMISSION NOT WAIVER....................................37
SECTION 512 CONTROL BY HOLDERS..............................................37
SECTION 513 WAIVER OF PAST DEFAULTS.........................................38
SECTION 514 UNDERTAKING FOR COSTS...........................................38
SECTION 515 WAIVER OF STAY OR EXTENSION LAWS................................38
ARTICLE 6.
THE TRUSTEE
Section 601 CERTAIN DUTIES AND RESPONSIBILITIES.............................39
SECTION 602 NOTICE OF DEFAULTS..............................................39
SECTION 603 CERTAIN RIGHTS OF TRUSTEE.......................................39
SECTION 604 NOT RESPONSIBLE FOR RECITALS OR ISSUANCE OF SECURITIES..........40
SECTION 605 MAY HOLD SECURITIES.............................................40
SECTION 606 MONEY HELD IN TRUST.............................................41
SECTION 607 COMPENSATION AND REIMBURSEMENT..................................41
SECTION 608 DISQUALIFICATION; CONFLICTING INTERESTS.........................41
SECTION 609 CORPORATE TRUSTEE REQUIRED; ELIGIBILITY.........................41
SECTION 610 RESIGNATION AND REMOVAL; APPOINTMENT OF SUCCESSOR...............42
SECTION 611 ACCEPTANCE OF APPOINTMENT BY SUCCESSOR..........................43
SECTION 612 MERGER, CONVERSION, CONSOLIDATION OR SUCCESSION TO BUSINESS.....43
SECTION 613 PREFERENTIAL COLLECTION OF CLAIMS AGAINST COMPANY...............44
SECTION 614 APPOINTMENT OF AUTHENTICATING AGENT.............................44
ARTICLE 7.
HOLDERS' LIST AND REPORTS BY TRUSTEE AND COMPANY
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<PAGE>
SECTION 701 COMPANY TO FURNISH TRUSTEE NAMES AND ADDRESSES OF HOLDERS.......46
SECTION 702 PRESERVATION OF INFORMATION; COMMUNICATION TO HOLDERS...........46
SECTION 703 REPORTS BY TRUSTEE..............................................46
SECTION 704 REPORTS BY COMPANY..............................................47
ARTICLE 8.
CONSOLIDATION, MERGER, CONVEYANCE, TRANSFER or LEASE
Section 801 COMPANY MAY CONSOLIDATE, ETC., ONLY ON CERTAIN TERMS............47
SECTION 802 SUCCESSOR SUBSTITUTED...........................................48
ARTICLE 9.
SUPPLEMENTAL INDENTURES
Section 901 SUPPLEMENTAL INDENTURES WITHOUT CONSENT OF HOLDERS..............48
SECTION 902 SUPPLEMENTAL INDENTURES WITH CONSENT OF HOLDERS.................49
SECTION 903 EXECUTION OF SUPPLEMENTAL INDENTURES............................49
SECTION 904 EFFECT OF SUPPLEMENTAL INDENTURES...............................50
SECTION 905 CONFORMITY WITH TRUST INDENTURE ACT.............................50
SECTION 906 REFERENCE IN SECURITIES TO SUPPLEMENTAL INDENTURES..............50
SECTION 907 NOTICE OF SUPPLEMENTAL INDENTURE................................50
ARTICLE 10.
COVENANTS
SECTION 1001 PAYMENT OF PRINCIPAL, PREMIUM AND INTEREST......................50
SECTION 1002 MAINTENANCE OF OFFICE OR AGENCY.................................51
SECTION 1003 MONEY FOR SECURITY PAYMENTS TO BE HELD IN TRUST.................51
SECTION 1004 STATEMENT BY OFFICERS AS TO DEFAULT.............................52
SECTION 1005 EXISTENCE.......................................................52
SECTION 1006 WAIVER OF CERTAIN COVENANTS.....................................53
ARTICLE 11.
REDEMPTION OF SECURITIES
SECTION 1101 RIGHT OF REDEMPTION.............................................53
SECTION 1102 APPLICABILITY OF ARTICLE........................................53
SECTION 1103 ELECTION TO REDEEM; NOTICE TO TRUSTEE...........................53
SECTION 1104 SELECTION BY TRUSTEE OF SECURITIES TO BE REDEEMED...............53
SECTION 1105 NOTICE OF REDEMPTION............................................54
SECTION 1106 DEPOSIT OF REDEMPTION PRICE.....................................55
SECTION 1107 SECURITIES PAYABLE ON REDEMPTION DATE...........................55
SECTION 1108 SECURITIES REDEEMED IN PART.....................................55
SECTION 1109 CONVERSION ARRANGEMENTS ON CALL FOR REDEMPTION..................56
ARTICLE 12.
SUBORDINATION OF SECURITIES
SECTION 1201 SECURITIES SUBORDINATED TO SENIOR INDEBTEDNESS..................56
SECTION 1202 PAYMENT OVER OF PROCEEDS UPON DISSOLUTION, ETC..................56
SECTION 1203 ACCELERATION OF SECURITIES......................................58
SECTION 1204 NO PAYMENT WHEN SENIOR INDEBTEDNESS IN DEFAULT..................58
SECTION 1205 SUBROGATION TO RIGHTS OF HOLDERS OF SENIOR INDEBTEDNESS.........59
SECTION 1206 PROVISIONS SOLELY TO DEFINE RELATIVE RIGHTS.....................59
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SECTION 1207 TRUSTEE TO EFFECTUATE SUBORDINATION.............................59
SECTION 1208 NO WAIVER OF SUBORDINATION PROVISIONS...........................60
SECTION 1209 NOTICE TO TRUSTEE...............................................60
SECTION 1210 RELIANCE ON JUDICIAL ORDER OR CERTIFICATE OF LIQUIDATING AGENT..61
SECTION 1211 TRUSTEE NOT FIDUCIARY FOR HOLDERS OF SENIOR INDEBTEDNESS........61
SECTION 1212 RIGHTS OF TRUSTEE AS HOLDER OF SENIOR INDEBTEDNESS; PRESERVATION
OF TRUSTEE'S RIGHTS.............................................61
SECTION 1213 ARTICLE APPLICABLE TO PAYING AGENTS.............................62
SECTION 1214 RIGHTS WITH RESPECT TO CONVERSION AND CERTAIN PAYMENTS..........62
ARTICLE 13.
CONVERSION OF SECURITIES
SECTION 1301 CONVERSION PRIVILEGE AND CONVERSION PRICE.......................62
SECTION 1302 EXERCISE OF CONVERSION PRIVILEGE................................63
SECTION 1310 CANCELLATION OF CONVERTED SECURITIES............................70
SECTION 1311 PROVISIONS AS TO CONSOLIDATION, MERGER OR SALE OF ASSETS........70
SECTION 1312 DISCLAIMER OF RESPONSIBILITY FOR CERTAIN MATTERS................71
ARTICLE 14.
RIGHT TO REQUIRE REPURCHASE
SECTION 1401 RIGHT TO REQUIRE REPURCHASE.....................................72
SECTION 1402 NOTICE; METHOD OF EXERCISING REPURCHASE RIGHT...................72
SECTION 1403 DEPOSIT OF REPURCHASE PRICE.....................................73
SECTION 1404 SECURITIES NOT REPURCHASED ON REPURCHASE DATE...................73
SECTION 1405 SECURITIES REPURCHASED IN PART..................................74
Testimonium
Signatures and Seals
Acknowledgments
v
<PAGE>
INDENTURE, dated as of May __, 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,
a national banking association, as Trustee (herein called the "Trustee"), having
an office at 123 South Broad Street, Philadelphia, Pennsylvania 19109.
RECITALS OF THE COMPANYRECITALS 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 otherise 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 herien expressly provided, the term
"generally accepted accounting principles" with
<PAGE>
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
(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 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.
"Agent Member" means any member of, or participant in, the Depositary.
"Applicable Procedures" means, with respect to any transfer or
transaction involving a Global Security or beneficial interest therein, the
rules and procedures of the Depositary for such Global Security to the extent
applicable to such transaction and as in effect from time to time.
"Apollo StockholdersApollo Stockholders " means Apollo Advisors, L.P.,
Lion Advisors, L.P., any Affiliate of either thereof (including without
limitation, Apollo Investment Fund, L.P.), and all accounts
2
<PAGE>
managed by any of them for so long as any of them holds the power of disposition
and voting with respect thereto.
"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 OwnerBeneficial Owner " is determined in accordance
with Rule 13d-3 promulgated by the Commission under the Exchange Act.
"Board of DirectorsBoard of Directors " means either the board of
directors of the Company or any duly authorized committee of that board.
"Board ResolutionBoard 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.
"Business DayBusiness 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 ControlChange in Control " means any of the following events:
(a) There shall be consummated any consolidation 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)
3
<PAGE>
above, if 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.
"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 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 (a) the
Chairman of the Board, 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 40 Broad Street, Suite 530, New York, New
York 10004.
"Corporation" means a corporation, association, company, joint-stock
company or business trust.
"Credit Facility" means the Credit Agreement dated as of May 15, 1997
among the Company, BT Commercial Corporation, as agent, and certain financial
institutions party thereto,
4
<PAGE>
as amended from time to time, and any agreement evidencing the refinancing,
replacement, renewal or refunding therof.
"Current Market Price" has the meaning specified in Section 1304.
"Daily Market Price" means 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, on the principal national securities
exchange upon which the Common Stock is listed or, if not listed on any national
securities exchange, on the Nasdaq National Market, if the Common Stock shall be
listed thereon or, if there is no 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 or on the Nasdaq National Market, 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.
"Depositary" means, with respect to any Global Securities, a clearing
agency that is registered as such under the Exchange Act and is designated by
the Company to act as a Depositary for such Global Securities (or any successor
securities clearing agency so registered).
"DTC" means the Depository Trust Company, a New York corporation
"Event of Default" has the meaning specified in Section 501.
"Exchange Act" means the Securities Exchange Act of 1934, as amended.
"Global Security" means a Security that is registered in the Security
Register in the name of a Depositary or nominee thereof.
"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.
5
<PAGE>
"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 (a) the Chairman of the Board, 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 not be unacceptable 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 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.
6
<PAGE>
"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.
"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 (a) 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 (other than
the Securities), 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 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
7
<PAGE>
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
S-X promulgated under the Securities Exchange Act.
"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 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 1304(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 1304(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 1304(d), the date of issuance of
Common Stock to the relevant Affiliate; and (3) for purposes of Section 1304(e)
the Expiration Time (as defined in Section 1304(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.
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"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.
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
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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 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.
(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.
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(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 the address specified in the first paragraph of this Indenture or
such other address as previously furnished in writing by the Trustee ,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 (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
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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.
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
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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.
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
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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 (other than a Global Security) 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.
A legend in substantially the following form shall also appear on the
face of each Global Security:
THIS SECURITY IS A GLOBAL SECURITY WITHIN THE MEANING OF THE INDENTURE
REFERRED TO BELOW AND IS REGISTERED IN THE NAME OF THE DEPOSITARY OR A NOMINEE
OF THE DEPOSITARY, WHICH MAY BE TREATED BY THE COMPANY, THE TRUSTEE AND ANY
AGENT THEREOF AS THE OWNER AND HOLDER OF THIS SECURITY FOR ALL PURPOSES.
A legend in substantially the following form shall also appear on the
face of each Global Security for which the Depository Trust Company is to be the
Depositary:
UNLESS THIS CERTIFICATE IS PRESENTED BY AN AUTHORIZED REPRESENTATIVE OF
THE DEPOSITORY TRUST COMPANY, A NEW YORK CORPORATION ("DTC") TO THE COMPANY OR
ITS AGENT FOR REGISTRATION OF TRANSFER, EXCHANGE OR PAYMENT, AND ANY CERTIFICATE
ISSUED IS REGISTERED IN THE NAME OF CEDE & CO. OR IN SUCH OTHER NAME AS IS
REQUESTED BY AN AUTHORIZED REPRESENTATIVE OF DTC (AND ANY PAYMENT IS MADE TO
CEDE & CO. OR TO SUCH OTHER ENTITY AS IS REQUESTED BY AN AUTHORIZED
REPRESENTATIVE OF DTC), ANY TRANSFER, PLEDGE OR OTHER USE HEREOF FOR VALUE OR
OTHERWISE BY OR TO ANY PERSON IS WRONGFUL INASMUCH AS THE REGISTERED OWNER
HEREOF, CEDE & CO., HAS AN INTEREST HEREIN.
UNLESS AND UNTIL IT IS EXCHANGED IN WHOLE OR IN PART FOR
REGISTERED SECURITIES IN DEFINITIVE REGISTERED FORM, THIS GLOBAL SECURITY MAY
NOT BE TRANSFERRED EXCEPT AS A WHOLE BY THE DEPOSITARY TO A NOMINEE OF THE
DEPOSITARY OR BY A NOMINEE OF THE DEPOSITARY TO THE DEPOSITARY OR ANOTHER
NOMINEE OF THE DEPOSITARY OR BY THE DEPOSITARY OR ANY SUCH NOMINEE TO A
SUCCESSOR DEPOSITARY OR A NOMINEE OF SUCH SUCCESSOR DEPOSITARY
CONVERSE INC.
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___% 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 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.
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Attest: By _________________________
[Title]
- ------------------------
[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 $9,000,000 principal amount of the Securities issuable upon exercise
of an underwriters' over-allotment option), issued and to be issued under an
Indenture, dated as of May ___, 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 May ___, 2004, or in case this Security or a portion hereof
is called for 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, 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
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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 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 the year 2000), the Redemption Price shall
be:
Redemption
Year Price
2000 %
2001 %
2002 %
2003 %
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
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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.
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.
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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.
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. Except
as otherwise provided in the Indenture, 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
19
<PAGE>
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)
20
<PAGE>
Signature(s) must be guaranteed by an Eligible Guarantor Institution
with membership in an approved signature guarantee program pursuant to Rule
17Ad-15 under the Securities Exchange Act of 1934.
- ----------------------------------------------------
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
Section 204. Form of Trustee's Certificate of Authentication.
The Trustee's certificate of authentication shall be in substantially the
following form:
<PAGE>
This is one of the Securities referred to in the within-mentioned Indenture.
First Union National Bank,
as Trustee
By ____________________________
Authorized Signatory
ARTICLE 2.
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 May ___, 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 Notes 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.
The Securities shall be subordinated in right of payment to Senior
Indebtedness as provided in Article Twelve.
<PAGE>
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 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 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
23
<PAGE>
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.
For purposes of this Section 304 each Global Security shall be
considered a definitive Security.
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
24
<PAGE>
written instrument of transfer in form satisfactory to the Company and the
Security Registrar 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, (ii) to register the transfer of or exchange of any
Security so selected for redemption in whole or in part, except the unredeemed
portion of any Security being redeemed in part, or (iii) to register the
transfer or exchange of any Securities surrendered for conversion or repurchase
upon the occurrence of a Change in Control.
The provisions of clauses (1), (2), (3), (4) and (5) below shall apply
only to Global Securities;
(1) Each Global Security authenticated under this Indenture shall be
registered in the name of the Depositary designated for such Global Security or
a nominee thereof and delivered to such Depositary or a nominee thereof or
custodian therefor, and each such Global Security shall constitute a single
Security for all purposes of this Indenture.
(2) Notwithstanding any other provision in this Indenture, no Global
Security may be exchanged in whole or in part for Securities registered, and no
transfer of a Global Security in whole or in part may be registered, in the name
of any Person other than the Depositary for such Global Security or a nominee
thereof unless such Depositary (i) has notified the Company that it is unwilling
or unable to continue as Depositary for such Global Note or (ii) has ceased to
be a clearing agency registered under the Exchange Act.
(3) Subject to Clause (2) above, any exchange of a Global Security for
other Securities may be made in whole or in part, and all Securities issued in
exchange for a Global Security or any portion thereof shall be registered in
such names as the Depositary for such Global Security shall direct.
(4) Every Security authenticated and delivered upon registration of
transfer of, or in exchange for or in lieu of, a Global Security or any portion
thereof, whether pursuant to this Article Three or otherwise, shall be
authenticated and delivered in the form of, and shall be, a Global Security,
unless such Security is registered in the name of a Person other than the
Depositary for such Global Security or a nominee thereof.
25
<PAGE>
(5) The Depositary or its nominee, as registered owner of a Global
Security, shall be the Holder of such Global Security for all purposes under
this Indenture and the Securities, and owners of beneficial interests in a
Global Security shall hold such interests pursuant to the Applicable Procedures.
Accordingly, any such owner's beneficial interest in a Global Security will be
shown only on, and the transfer of such interest shall be effected only through
records maintained by the Depositary or its nominee or its Agent Members and
such owners of beneficial interests in a Global Security will not be considered
the owners or holders thereof. Neither the Company nor the Trustee will have any
responsibility or obligation to the Depositary or any of its Agent Members with
respect to (i) the accuracy of any records maintained by the Depositary (ii) the
payment by the Depositary or any Agent Members of any amount due to any owner of
beneficial interests in a Global Security in respect of any Securities, (iii)
the delivery of any notice by the Depositary or any Agent Member, or (iv) any
other action taken by the Depositary or any Agent Members.
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.
26
<PAGE>
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, which payment date shall be at least 30 calendar days after
such notice delivered by the Company to the Trustee (or such shorter period as
is satisfactory to the Trustee), 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
27
<PAGE>
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.
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 (i) which have been called for redemption or
(ii) as to which there exists a default in the payment of interest thereon) 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.
28
<PAGE>
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.
Section 311. CUSIP Number.
The Company in issuing the Securities may use a "CUSIP" number and, if
it does so, the Trustee shall use the CUSIP number in notices of redemption or
exchange as a convenience to Holders; provided that such notice may state that
no representation is made as to the correctness or accuracy of the CUSIP number
printed in the notice or on the Securities and that reliance may be placed only
on the other identification numbers printed on the Securities. The Company shall
promptly notify the Trustee of any change in the CUSIP number.
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
29
<PAGE>
(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 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
30
<PAGE>
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
(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, 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 or forebearance 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 acceleration
31
<PAGE>
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 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 Significant 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, 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,
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<PAGE>
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.
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
consequences 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.
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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 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.
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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.
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
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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 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
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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.
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
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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
(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
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the Trustee, but will suffer and permit the execution of every such power as
though no such law had been enacted.
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;
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(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;
(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.
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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.
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 an
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office in the Borough of Manhattan, The City of New York as required by Section
1002. 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 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.
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(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 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
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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.
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
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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.
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 lieu of 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 ________________________________
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Authorized Officer
ARTICLE 7.
HOLDERS' LIST 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 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 dated as of May
15 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.
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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.
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.
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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.
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
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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 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
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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.
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.
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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 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,
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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 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; provided, however,
that the Company shall not be required to preserve any such right or franchise,
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.
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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.
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 May __, 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, the Company shall, at least 30 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.
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.
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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 practical) 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 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.
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Section 1106. Deposit of Redemption Price.
At or prior to 10:00 am 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 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
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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 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, at or before 10:00 a.m. on the
Redemption Date, an amount not less than the Redemption Price, together with
interest accrued to the Redemption Date, 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 Redemption Date, 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 Redemption Date, 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 Fourteen,
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
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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, (including the
Repurchase Price payable in respect of Securities pursuant to Article Fourteen),
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 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,
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pursuant to Section 1202 or 1204; 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).
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
1204(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 under the Credit
Facility 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 1204(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; provided, however, that the
Trustee shall only be required to return to the Company such payment or any
portion of such payment that is held by the Trustee.
The provisions of this Section shall not apply to any payment with
respect to which Section 1202 would be applicable.
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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 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.
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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 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
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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.
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.
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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 1212 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.
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 ___________, 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.
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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 there exists a default in the
payment of interest on such Security or such Security or portion thereof being
converted shall have been called for redemption. 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.
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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) issue Common Stock as a dividend or
distribution on its capital stock, including the Common Stock, (ii) combine its
outstanding shares of Common Stock into a smaller number of shares, (iii)
subdivide its outstanding shares of Common Stock into a greater 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 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 (or securities convertible into 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
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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), evidences of its indebtedness or assets (including securities and cash,
but excluding any regular periodic cash dividend paid from 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 so 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 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) of the portion
of the capital stock or the evidences of indebtedness or the assets so
distributed to the holder of one share of Common Stock or of such 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
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(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 consideration 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
make a distribution to all holders of the Company's Common Stock consisting
exclusively of 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
distributions referred to in subsection (c) of this Section 1304 or in
connection with a transaction to which Section 1311 applies) made within the 12
months preceding 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 the date fixed for determining the stockholders entitled to such distribution
times the number of shares of Common Stock 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.
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(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 (X) 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, and (Y) the aggregate amount of
all cash distributions to holders of the Company's Common Stock (excluding any
cash that is distributed as part of a distribution referred to in subsection (c)
of this Section 1304) 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, 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 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
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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.
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
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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(b), (c), (e) or (f); or
(b) the Company shall grant to the holders of its Common Stock rights or
warrants to subscribe for or purchase any shares of capital stock of any class
(excluding shares of capital stock or options for capital stock issued pursuant
to a benefit plan for employees, officers or directors of the Company and
excluding rights or warrants described in the provisos to Sections 1304(b) and
1304(c)); 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 stockholders 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
20 days (or 10 days in any case specified in clause (a), (b) 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
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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.
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.
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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.
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.
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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 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,
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(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.
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.
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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:
- ----------------------
Name:
Title:
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