<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON MARCH 24, 1997
REGISTRATION NO.
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
-----------
FORM S-3
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
-----------
CONVERSE INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
-----------
DELAWARE 3149 43-1419731
(STATE OR OTHER JURISDICTION (PRIMARY STANDARD (I.R.S. EMPLOYER
OF INDUSTRIAL IDENTIFICATION NO.)
INCORPORATION OR CLASSIFICATION CODE
ORGANIZATION) NUMBER)
ONE FORDHAM ROAD
NORTH READING, MA 01864
(508) 664-1100
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING
AREA CODE, OF REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
-----------
JACK A. GREEN
SENIOR VICE PRESIDENT AND GENERAL COUNSEL
CONVERSE INC.
ONE FORDHAM ROAD
NORTH READING, MA 01864
(508) 664-1100
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING
AREA CODE, OF AGENT FOR SERVICE)
COPIES TO
PETER S. SARTORIUS BETH R. NECKMAN
MORGAN, LEWIS & BOCKIUS LLP LATHAM & WATKINS
2000 ONE LOGAN SQUARE 885 THIRD AVENUE
PHILADELPHIA, PA 19103 NEW YORK, NY 10022
(215) 963-5466 (212) 906-1200
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as
practicable after this Registration Statement becomes effective.
If the only securities being registered on this Form are being offered
pursuant to dividend or interest reinvestment plans, please check the
following box. [_]
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, other than securities offered only in connection with dividend or
interest reinvestment plans, check the following box. [_]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following
box and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [_]
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration number of the earlier effective registration statement for the
same offering. [_]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [_]
CALCULATION OF REGISTRATION FEE
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<TABLE>
<CAPTION>
PROPOSED
PROPOSED MAXIMUM
TITLE OF EACH CLASS OF AMOUNT MAXIMUM AGGREGATE AMOUNT OF
SECURITIES TO BE TO BE OFFERING PRICE OFFERING REGISTRATION
REGISTERED REGISTERED(1) PER SHARE(2) PRICE(2) FEE
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<S> <C> <C> <C> <C>
Common Stock, without
par value............. 5,175,000 shares $20.00 $103,500,000 $31,364
</TABLE>
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(1) Includes 675,000 shares that may be sold pursuant to an over-allotment
option granted to the Underwriters.
(2) Estimated solely for the purpose of calculating the registration fee
pursuant to Rule 457(c), based upon the average of the high and low prices
of the Common Stock, as reported on the New York Stock Exchange on March
19, 1997.
-----------
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 MARCH 24, 1997
PROSPECTUS
4,500,000 SHARES
CONVERSE INC.
COMMON STOCK
--------
All of the shares of Common Stock, without par value (the "Common Stock"),
offered hereby are being sold by Converse Inc. ("Converse" or the "Company").
Of the 4,500,000 shares of Common Stock offered hereby, a total of 3,600,000
shares are being offered for sale in the United States and Canada (the "U.S.
Offering") by the U.S. Underwriters (as defined) and a total of 900,000 shares
are being offered by the Managers (as defined) in a concurrent international
offering outside the United States and Canada (the "International Offering"
and, together with the U.S. Offering, the "Offerings"). All of the net proceeds
from the Offerings will be used to repay indebtedness. See "Use of Proceeds."
The Common Stock is listed on the New York Stock Exchange under the symbol
"CVE." On March 19, 1997, the closing price of the Common Stock on the New York
Stock Exchange was $20 1/8 per share.
--------
SEE "RISK FACTORS" BEGINNING ON PAGE 9 FOR A DISCUSSION OF CERTAIN FACTORS
THAT SHOULD BE CONSIDERED BY PROSPECTIVE INVESTORS.
--------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
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<TABLE>
<CAPTION>
UNDERWRITING DISCOUNTS PROCEEDS TO
PRICE TO PUBLIC AND COMMISSIONS (1) COMPANY (2)
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<S> <C> <C> <C>
Per Share........... $ $ $
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Total(3)............ $ $ $
</TABLE>
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- --------------------------------------------------------------------------------
(1) For information regarding indemnification of the U.S. Underwriters and the
Managers, see "Underwriting."
(2) Before deducting expenses estimated at $ payable by the Company.
(3) The Company has granted the U.S. Underwriters a 30-day option to purchase
up to 675,000 additional shares of Common Stock 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 shares of Common Stock are being offered by the several U.S. Underwriters
and Managers named herein, subject to prior sale, when, as and if accepted by
them and subject to certain conditions. It is expected that certificates for
the shares of Common Stock offered hereby will be available for delivery on or
about , 1997 at the offices of Smith Barney Inc., 333 West 34th Street, New
York, New York 10013.
--------
SMITH BARNEY INC.
DILLON, READ & CO. INC.
DONALDSON, LUFKIN & JENRETTE
SECURITIES CORPORATION
, 1997
<PAGE>
[THE CONVERSE ALL STAR LOGO APPEARS ON THE PROSPECTUS COVER]
[PICTURES]
------------
CERTAIN PERSONS PARTICIPATING IN THE OFFERINGS MAY ENGAGE IN TRANSACTIONS
THAT STABILIZE, MAINTAIN, OR OTHERWISE AFFECT THE PRICE OF THE COMMON STOCK.
SPECIFICALLY, THE UNDERWRITERS MAY OVERALLOT IN CONNECTION WITH THE OFFERINGS,
MAY BID FOR, AND PURCHASE, SHARES OF THE COMMON STOCK IN THE OPEN MARKET AND
MAY IMPOSE PENALTY BIDS. FOR A DESCRIPTION OF THESE ACTIVITIES, SEE
"UNDERWRITING."
2
<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 U.S.
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, 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, the
Company's backlog was approximately 39% higher at the end of 1996 as compared
to 1995, with increases in the four core categories of basketball, athleisure,
children's and cross training of approximately 68%, 17%, 42% and 66%,
respectively. As a result, management believes that net sales for the first
quarter of 1997 will be approximately 50% greater than the first quarter of
1996, reflecting substantial net sales increases across all four core
categories.
3
<PAGE>
THE 1996 REPOSITIONING
. Establishing a New Management Team. In 1996, the Company 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 and James E. Solomon as Senior Vice
President, Marketing and also engaged Ned Frederick to oversee product
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. Mr. 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 during
1996. Selling, general and administrative expenses were reduced by
approximately $31 million, or 21%, as compared to 1995.
4
<PAGE>
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.
. 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. The Company's
order backlog with these five retailers as of December 28, 1996 was more
than six times greater than such backlog as of December 30, 1995.
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 increase
its prices, thereby improving gross margins. The Company already has
increased the average domestic suggested retail price for its Spring
basketball line from $57 for Spring 1996 to $69 for Spring 1997. 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. 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 primarily to the
strong consumer demand for Converse-branded apparel in the Pacific
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, international wholesale sales of Converse-
branded products grew from approximately $500 million in 1995 to
approximately $560 million in 1996, representing a 12% increase.
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.
5
<PAGE>
RECENT DEVELOPMENTS
FINANCIAL RESULTS THROUGH FEBRUARY 28, 1997
In the first two months of 1997, the Company's net sales increased to $74.4
million, a 65% increase from the prior year period with substantial increases
in all four core categories. The Company also improved its gross margin in the
first two months of 1997 as compared to the prior year period. The Company's
global backlog increased to a record high of $222.1 million as of February 28,
1997, a 49% increase from $148.8 million as of February 28, 1996, with
increases of approximately 70%, 47%, 43%, and 18% in the four core categories
of basketball, athleisure, children's and cross training, respectively. As a
consequence of the increases in net sales and backlog, management believes that
net sales for the first quarter of 1997 will be approximately 50% greater than
the first quarter of 1996. Management attributes the improved performance of
the Company to the 1996 Repositioning as well as the initial implementation of
its growth strategies.
FAVORABLE RESOLUTION OF OUTSTANDING LITIGATION
In January 1997, a New York State Court jury ruled unanimously in favor of
Converse 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 a payment of
approximately $4.5 million to the Apex estate and certain creditors of Apex. As
a result of the litigation settlements and the bankruptcy confirmation,
Converse will record a net pretax gain of $13.3 million in the first quarter of
1997. See "Business--Legal Proceedings."
6
<PAGE>
THE OFFERINGS
<TABLE>
<S> <C>
Common Stock offered in the
Offerings:
U.S. Offering................... 3,600,000 shares
International Offering.......... 900,000 shares
Total......................... 4,500,000 shares
Common Stock to be outstanding
after the Offerings.............. 21,713,157 shares of Common Stock(1)
Use of Proceeds................... The proceeds of the Offerings will be used
to repay outstanding indebtedness. See "Use
of Proceeds."
New York Stock Exchange symbol.... "CVE"
</TABLE>
- --------
(1) Based on shares outstanding as of December 28, 1996, excluding shares
issuable pursuant to options to acquire 1,601,300 shares of Common Stock,
221,550 of which were exercisable as of such date. See "Description of
Capital Stock."
------------
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 9 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.
7
<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
---------------------------------------------------------------------------
DECEMBER 28, 1996
-----------------------
JANUARY 1, 1994 DECEMBER 31, 1994 DECEMBER 30, 1995 ACTUAL PRO FORMA(1)
--------------- ----------------- ----------------- -------- ------------
(DOLLARS 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
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
Earnings (loss) from
operations..................... 28,838 36,088 (29,722) 164 164
Interest expense................ 7,501 7,423 14,043 17,776 6,864
Net earnings (loss)............. 12,104 17,596 (71,747) (18,435) (11,888)
Net earnings (loss) per share... $ -- (2) $ 1.05 $ (4.30) $ (1.10) $ (0.56)
OTHER OPERATIONS DATA
(AS A PERCENTAGE OF NET SALES):
Gross profit.................... 33.1% 34.5% 27.9 % 24.7 %
Selling, general and
administrative expenses........ 28.4% 29.5% 35.9 % 32.9 %
Earnings (loss) from
operations..................... 7.6% 8.3% (7.3)% 0.0 %
BALANCE SHEET DATA
(AT PERIOD END):
Working capital................. $111,080 $131,122 $ 89,680 $(32,648) $ 85,117
Total assets.................... 179,954 223,726 224,507 222,603 221,530
Long-term debt, including
current maturities(3).......... 69,262 77,087 119,148 127,409 38,634
Total stockholders'
equity (deficiency)(4)......... 10,270 44,987 (22,685) (38,868) 48,834
</TABLE>
- --------
(1) Pro forma information reflects consummation of the Offerings at an assumed
price of $21 per share and application of the net proceeds as of the first
day of the period presented for Statement of Operations Data and at
December 28, 1996 for Balance Sheet Data. See "Selected Consolidated
Historical and Pro Forma Financial Information" and "Use of Proceeds."
(2) 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.
(3) 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 the first
quarter of 1997 in satisfaction of the Company's indemnification claims
against substantially all of the former owners of Apex. See "Business--
Legal Proceedings."
(4) 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 the first quarter of 1997 in satisfaction of the Company's
indemnification claims against substantially all of the former owners of
Apex. As a result of the Apex litigation settlements and Apex bankruptcy
confirmation, Converse will report a net pretax gain of approximately
$13,300 in the first quarter of 1997. See "Business--Legal Proceedings."
8
<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 $38.9 million at December 28, 1996. Although recent
improvements in backlog are encouraging, there can be no assurance that any
profitability that is achieved will be maintained.
LEVERAGE
The Company has a capital structure that includes significant debt. As of
December 28, 1996, the Company's debt under its existing Credit Facility (as
defined herein under "Use of Proceeds") was $117.8 million and additional
foreign working capital borrowings were approximately $13.4 million. After
giving effect to the Offerings, the Company's debt under the Credit Facility
will be reduced to approximately $29.0 million, although under the terms of
the Credit Facility the Company has the right to reborrow amounts thereunder.
See "Management's Discussion and Analysis of Financial Condition and Results
of Operations--Liquidity and Capital Resources."
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."
9
<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."
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 65.2% of the outstanding Common Stock of the
Company at December 28, 1996 and will continue to own a majority of the
outstanding Common Stock of the Company after giving effect to the Offerings.
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."
SHARES ELIGIBLE FOR FUTURE SALE
Upon completion of the Offerings, the Company will have 21,713,157 shares of
Common Stock outstanding (22,388,157 shares if the U.S. Underwriters' over-
allotment option is exercised in full), based on the number of shares
outstanding on December 28, 1996. The Company, certain of its directors and
officers and the Apollo Stockholders have agreed with the Underwriters that
they will not, without the prior written consent of Smith Barney Inc., sell
any Common Stock for a period of 120 days after the date of this Prospectus,
subject to certain limited exceptions. See "Underwriting." Following the
expiration of the lock-up period, the Apollo Stockholders could cause Converse
to register the shares of Common Stock that they own pursuant to a
registration rights agreement. See "Certain Transactions." Following the
Offerings, future sales of shares, or the availability of shares for future
sale, could adversely affect the prevailing market prices for the Common
Stock.
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."
10
<PAGE>
USE OF PROCEEDS
The net proceeds to Converse from the Offerings are estimated to be $88.8
million ($102.2 million if the U.S. Underwriters' over-allotment option is
exercised in full), assuming an offering price of $21 per share and after
deducting the estimated expenses of the Offerings 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 secured credit facility (the "Credit Facility") with BT Commercial
Corporation ("BTCC"), as agent, and certain other institutional lenders (the
"Banks"). At December 28, 1996, outstanding borrowings under the B Facility
were $28.3 million. The remaining net proceeds will be used to reduce
borrowings under the "A" portion (the "A Facility") of the Credit Facility,
which at December 28, 1996 were $89.5 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 December 28, 1996 were 8.20%
for the A Facility and 10.95% 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.
CAPITALIZATION
The following table sets forth the capitalization of the Company at December
28, 1996 on a historical basis and as adjusted to reflect the consummation of
the Offerings and the application of the net proceeds therefrom (at an assumed
offering price of $21 per share). 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>
DECEMBER 28, 1996
--------------------------
ACTUAL AS ADJUSTED
----------- -------------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Long-term debt, including current maturities(1)...... $ 127,409 $ 38,634
Stockholders' equity (deficiency):
Common Stock, $1.00 stated value, 50,000,000 shares
authorized, 17,213,157 shares issued and
outstanding, actual, and 21,713,157 shares issued
and outstanding, as adjusted...................... 17,213 21,713
Additional paid-in capital and retained earnings
(deficit) (2)..................................... (56,081) 28,194
----------- ----------
Total stockholders' equity (deficiency).......... (38,868) 49,907
----------- ----------
Total capitalization................................. $ 88,541 $ 88,541
=========== ==========
</TABLE>
- --------
(1) Long-term debt includes $8,870 of Apex-related debt that was delivered to
the Company during the first quarter of 1997 in satisfaction of Converse's
indemnification claims against substantially all of the former owners of
Apex. See "Business--Legal Proceedings."
(2) Additional paid-in capital includes warrants to purchase 1.75 million
shares of Common Stock at $11.40 per share (valued at $3,528 at the time
of issuance), issued in connection with the acquisition of Apex that were
delivered to the Company during the first quarter of 1997 in satisfaction
of the Company's indemnification claims against substantially all of the
former owners of Apex. As a result of the Apex litigation settlements and
Apex bankruptcy confirmation, Converse will report a net pretax gain of
$13,300 in the first quarter of 1997. See "Business--Legal Proceedings."
11
<PAGE>
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 (to March 19, 1997).......................... 28 13 7/8
</TABLE>
On March 19, 1997, the last reported sale price of the Common Stock on the
New York Stock Exchange was $20 1/8 per share. As of December 28, 1996, 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. 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.
12
<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 pro forma information at December 28, 1996 and for the fiscal year then
ended have been derived from the historical consolidated financial statements
of Converse and give effect to the consummation of the Offerings and the
application of the estimated net proceeds therefrom to repay indebtedness as
if such transactions occurred on December 31, 1995 for Statement of Operations
Data and at December 28, 1996 for Balance Sheet Data. 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 Offerings 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)
---------- ------------ ------------ -------- ---------
(DOLLARS 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 6,864 (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) (11,657)
Income tax expense (benefit).... 7,329 10,565 (28,144) (4,134) 231 (3)
-------- -------- -------- -------- --------
Net earnings (loss)............. $ 12,104 $ 17,596 $(71,747) $(18,435) $(11,888)
======== ======== ======== ======== ========
Net earnings (loss) per share... $ -- (4) $ 1.05 $ (4.30) $ (1.10) $ (0.56)
OTHER OPERATIONS DATA
(AS A PERCENTAGE OF NET SALES):
Gross profit.................... 33.1% 34.5% 27.9 % 24.7%
Selling, general and
administrative expenses........ 28.4% 29.5% 35.9 % 32.9%
Earnings (loss) from
operations..................... 7.6% 8.3% (7.3)% 0.0%
BALANCE SHEET DATA (AT PERIOD
END):
Working capital................. $111,080 $131,122 $ 89,680 $(32,648) $ 85,117 (5)
Total assets.................... 179,954 223,726 224,507 222,603 221,530 (6)
Long-term debt, including
current maturities(7).......... 69,262 77,087 119,148 127,409 38,634 (5)
Total stockholders'
equity (deficiency)(8)......... 10,270 44,987 (22,685) (38,868) 48,834 (9)
</TABLE>
- -------
(1) Pro forma information reflects consummation of the Offerings at an assumed
price of $21 per share and application of the net proceeds as of the first
day of the period presented for Statement of Operations Data and at
December 28, 1996 for Balance Sheet Data. See "Use of Proceeds."
(2) The pro forma interest expense reduction of $10,912 represents (i)
elimination of actual 1996 B Facility interest expense of $3,574, (ii)
reduction of actual 1996 A Facility interest expense of $4,539 based upon
the average borrowings outstanding under the A Facility during 1996,
reduced by the net proceeds from the Offerings to be applied to the A
Facility, at the average interest rate on the A Facility during 1996 and
(iii) elimination of actual 1996 Credit Facility fees and amortization of
certain fees totalling $2,799 no longer applicable as a result of the
Credit Facility reductions discussed above.
(3) Reflects the pro forma tax effect of $4,365, at the estimated rate of 40%,
of the pro forma interest expense reduction of $10,912 discussed in Note
(2) above.
(4) 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.
(5) At December 28, 1996, the Company had current maturities of long-term debt
of $117,765. Net proceeds of the Offerings of $88,775 will be used to
reduce this debt, resulting in a remaining balance of $28,990 as of
December 28, 1996 on a pro forma basis. As a result of the repayment of
the entire B Facility, the Company has the option to extend the A Facility
for an additional two-year period as long as there is no event of default.
Accordingly, the $28,990 has been classified as long-term on a pro forma
basis as of December 28, 1996.
(6) Represents the elimination of $1,073 of prepaid Credit Facility fees no
longer applicable as of December 28, 1996 on a pro forma basis due
primarily to the repayment of the B Facility, as described in Notes (2)
and (5) above.
(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 the first
quarter of 1997 in satisfaction of the Company's indemnification claims
against substantially all of the former owners of Apex. 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 the first quarter of 1997 in satisfaction of the Company's
indemnification claims against substantially all of the former owners of
Apex. As a result of the Apex litigation settlements and Apex bankruptcy
confirmation, Converse will report a net pretax gain of $13,300 in the
first quarter of 1997. See "Business--Legal Proceedings."
(9) Represents the net proceeds from the Offerings of $88,775, offset by the
elimination of the prepaid Credit Facility fees described in Note (6)
above.
13
<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. 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, 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").
14
<PAGE>
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
(Credit)/loss 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>
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%).
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.
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
15
<PAGE>
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.
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 $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 Consolidated Financial Statements of the Company 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.
(Credit) Loss 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 Consolidated Financial Statements of the Company 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 Consolidated Financial Statements
of the Company 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 Consolidated Financial Statements of the Company 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.
16
<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
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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
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 Consolidated
Financial Statements of the Company 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
Consolidated Financial Statements of the Company 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 of
the Notes to 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.
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.
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LIQUIDITY AND CAPITAL RESOURCES
Cash Flow
Net cash required for operating activities was $8.0 million for Fiscal 1996.
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
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 (see "Financing Arrangements" below
for a discussion of the Credit Facility). The Company intends to repay the B
Facility in full with a portion of the proceeds from the Offerings.
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.
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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 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 December 28, 1996, the Company had a $163.3 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 $28.3 million of direct borrowings. The Credit
Facility is secured by substantially all of the Company's assets located in
the United States and Canada.
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.
Management believes after the completion of the Offerings, the Company will
not need the availability resulting from the standby letter of credit or the
seasonal accommodation increase to the Borrowing Base. 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
8.20% per annum at December 28, 1996.
During 1996, the B Facility was reduced from $40.0 million outstanding at
December 30, 1995 to $28.3 million at December 28, 1996. 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. Loans outstanding under the B Facility accrue interest at the Prime
Lending Rate plus 4.0% or Adjusted LIBOR plus 5.5% at December 28, 1996
(subject to an increase of 0.5% in May 1997). The average weighted interest
rate on the B Facility was 10.95% per annum 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 $117.8
million as of December 28, 1996 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. The
Company will repay the B Facility with a portion of the proceeds of the
Offerings. Accordingly, management anticipates that subsequent to the
Offerings, the remaining indebtedness under the Credit Facility will be
classified as long term.
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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 believes that it will be in compliance with
these amended financial covenants through the current term of the facility.
The Company maintains asset based financing arrangements in certain European
countries with various lenders. Borrowings outstanding under these financing
arrangements totaled $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
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 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 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 Consolidated Financial
Statements of the Company included herein.
Capital Expenditures
Capital expenditures were $5.3 million, $5.8 million and $8.5 million in
Fiscal 1996, Fiscal 1995 and Fiscal 1994, respectively. During 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 the end of Fiscal 1996, the Company's global backlog was $183.3 million,
compared to $131.9 million at the end of Fiscal 1995. 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, the
Company's backlog was approximately 39% higher at the end of 1996 as compared
to 1995, with increases in the four core categories of basketball, athleisure,
children's and cross training of approximately 68%, 17%, 42% and 66%,
respectively. As a result, management believes that net sales for the first
quarter of 1997 will be approximately 50% greater than the first quarter of
1996.
THE 1996 REPOSITIONING
. Establishing a New Management Team. In 1996, the Company 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 and James E. Solomon as Senior Vice
President, Marketing and also engaged Ned Frederick to oversee product
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. Mr. 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.
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. 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 during
1996. Selling, general and administrative expenses were reduced by
approximately $31 million, or 21%, as compared to 1995.
GROWTH STRATEGIES
Having successfully repositioned the Company in 1996, Converse has
implemented a number of growth strategies to enhance sales and profitability
in 1997 and beyond. These strategies include:
. 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
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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.
. 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. The Company's
order backlog with these five retailers as of December 28, 1996 was more
than six times greater than such backlog as of December 30, 1995.
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 increase
its prices, thereby improving gross margins. The Company already has
increased the average domestic suggested retail price for its Spring
basketball line from $57 for Spring 1996 to $69 for Spring 1997. 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. 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 strong growth in licensee royalty
income from $17.3 million in 1995 to $27.6 million in 1996 primarily to
the consumer demand for Converse-branded apparel in the Pacific 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, international wholesale sales of Converse-
branded products grew from approximately $500 million in 1995 to
approximately $560 million in 1996, representing a 12% increase.
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
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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 retail market for basketball footwear
was approximately $2.3 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.
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 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.
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 retail market for children's footwear
was approximately $1.9 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.
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.
25
<PAGE>
Management believes that the domestic 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.
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 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.
26
<PAGE>
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 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.
27
<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
--------------------------------------
DECEMBER 31, DECEMBER 30, DECEMBER 28,
1994 1995 1996
------------ ------------ ------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Total sales by licensees:
Footwear............................... $ 90,449 $ 84,231 $101,117
Apparel and accessories................ 106,490 178,185 307,011
-------- -------- --------
Total.................................. $196,939 $262,416 $408,128
======== ======== ========
Total royalty income:
Footwear............................... $ 7,653 $ 7,046 $ 7,944
Apparel and accessories................ 6,559 10,211 19,693
-------- -------- --------
Total.................................. $ 14,212 $ 17,257 $ 27,637
======== ======== ========
</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. The Company plans to reopen the Mission
facility in 1997 for cutting and limited production.
28
<PAGE>
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. Over the past
three years, the Company has spent a total of $23.0 million on research and
development. 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 the end of Fiscal 1996, the Company's global backlog was $183.3 million,
compared to $131.9 million at the end of Fiscal 1995. 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 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,
29
<PAGE>
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 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 Court jury ruled unanimously in favor of
Converse against certain former owners of Apex in a lawsuit between Converse
and such former owners. Following this jury award, the
30
<PAGE>
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 pursuant to which Converse
made a $4.0 million payment to the Apex estate and an approximately $0.5
million payment to certain creditors of Apex and 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 confirmation
discussed above, Converse will record a net pretax gain of $13.3 million in
the first quarter of 1997. See Note 16 to the Company's consolidated financial
statements included herein.
31
<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 38 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 oriented investment fund. Mr. Black has been
director and officer of Apollo Capital Management, Inc. ("Apollo
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<PAGE>
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.,
Profitt'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.
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.
33
<PAGE>
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
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.
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 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.
34
<PAGE>
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.
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 current agreement provides
for an annual fee of $162,500 in 1996 and $200,000 in 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 was paid a total of $196,586 under this agreement in 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
35
<PAGE>
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.
36
<PAGE>
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information as of March 10, 1997
(except as otherwise stated) 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>
PERCENT OF
NUMBER OF PERCENT OF COMMON STOCK
SHARES COMMON STOCK BENEFICIALLY
BENEFICIALLY BENEFICIALLY OWNED AFTER
OWNED OWNED OFFERINGS
------------ ------------ ------------
<S> <C> <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% 51.6%
Vinik Partners, L.P., Vinik Asset
Management L.P.,
Jeffrey N. Vinik, Michael S. Gordon,
Mark D. Hosletter,
VGII Partners, L.L.C. and Vinik Asset
Management L.L.C.,
260 Franklin Street
Boston, Massachusetts 02110 (2)....... 1,252,000 7.3 5.8
Glenn N. Rupp (3)...................... 105,000 *
Donald J. Camacho (3).................. 28,500 * *
Jack A. Green (3)...................... 16,000 * *
James E. Lawlor (3).................... 18,250 * *
Thomas L. Nelson (3)................... 7,000 * *
Herbert R. Rothstein (3)............... 3,000 * *
Ronald J. Ryan (3)..................... 27,250 * *
James E. Solomon (3)................... 0 * *
Alistair M. Thorburn (3)............... 29,250 * *
Donald J. Barr (3)..................... 7,500 * *
Leon D. Black (1)(4)................... 11,230,365 65.1 51.6
Julius W. Erving (3)................... 5,000 * *
Robert H. Falk (1)(4).................. 11,230,365 65.1 51.6
Gilbert Ford........................... 10,000 * *
Michael S. Gross (1)(4)................ 11,230,365 65.1 51.6
John J. Hannan (1)(4).................. 11,230,365 65.1 51.6
Joshua J. Harris (1)(4)................ 11,230,365 65.1 51.6
John H. Kissick (1)(4)................. 11,230,365 65.1 51.6
Richard B. Loynd (3)................... 42,166 * *
Michael D. Weiner (1)(4)............... 11,230,365 65.1 51.6
Directors and executive officers of the
Company as a group
(20 persons) (1)(4)................... 12,800,281 72.6 57.8
</TABLE>
- --------
* Indicates less than 1%.
(1) Includes 5,616,306 shares beneficially owned by Apollo and 5,614,059
shares beneficially owned by Lion.
(2) Information is as of March 4, 1997 and is based on the Amendment to
Schedule 13D, dated March 4, 1997 filed with the Securities and Exchange
Commission by Vinik Partners L.P. ("Vinik Partners"), Vinik Asset
Management, L.P. ("VAM, L.P."), Jeffrey N. Vinik ("Vinik"), Michael S.
Gordon ("Gordon"), Mark D. Hosletter ("Hosletter"), VGH Partners, L.L.C.
("VGH") and Vinik Asset Management, L.L.C. ("VAM, L.L.C."). These shares
include (i) 521,400 shares beneficially owned by Vinik Partners, (ii)
730,600 shares which may be deemed to be beneficially owned by VAM, L.P.,
(iii) 1,252,000 shares which may be deemed to be beneficially owned by
Messrs. Vinik, Gordon and Hosletter, (iv) 521,400 shares which may be
deemed to be beneficially owned by VGH, and (v) 730,600 shares which may
be deemed to be beneficially owned by VAM, L.L.C. The general partner of
VAM, L.P. is VAM, L.L.C. Mr. Vinik is the senior managing member, and
Messrs. Gordon and Hosletter are managing members of VGII and VAM L.L.C.
(3) 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.
(4) Messrs. Black and Hannan are directors and officers 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.
37
<PAGE>
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 December 28, 1996, there were 17,213,157 shares of Common Stock
outstanding held of record by approximately 2,300 persons, and 1,601,300
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.
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 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. 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
38
<PAGE>
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.
CERTAIN U.S. TAX CONSEQUENCES TO NON-U.S. STOCKHOLDERS
The following is a general discussion of the material Federal income and
estate tax consequences of the ownership and disposition of a share of Common
Stock by beneficial owner of such shares that is not a U.S. person for U.S.
Federal income tax purposes (a "non-U.S. holder"). For purposes of this
discussion, a "U.S. person" means a citizen or resident of the United States,
a corporation or partnership created or organized in the United States or
under the laws of the United States or of any State or political subdivision
of the foregoing, or any estate or trust whose income is includible in gross
income for U.S. Federal income tax purposes regardless of its source. The
discussion does not address all aspects of Federal income and estate taxation
nor any aspects of state, local, or foreign tax laws. The discussion does not
consider any specific facts or circumstances that may apply to particular non-
U.S. holders (including insurance companies, tax-exempt organizations,
financial institutions, broker dealers or certain U.S. expatriates).
Furthermore, the following discussion is based on current provisions of the
Code, the regulations promulgated thereunder and administrative and judicial
interpretations as of the date hereof, all of which are subject to change,
possibly with retroactive effect. Treasury regulations were recently proposed
that would, if adopted in their present form, revise in certain respects the
rules applicable to non-U.S. holders of Common Stock (the "Proposed
Regulations"). The Proposed Regulations are generally proposed to be effective
with respect to payments made after December 31, 1997. It is not certain
whether, or in what form, the Proposed Regulations will be adopted as final
regulations. Each prospective investor is urged to consult its own tax adviser
as to its personal tax situation with respect to the U.S. Federal, state and
local consequences of owning and disposing of a share of Common Stock, as well
as any tax consequences arising under the laws of any other taxing
jurisdiction.
U.S. INCOME TAX CONSEQUENCES
It is not currently contemplated that the Company will pay dividends on the
Common Stock in the foreseeable future. If the Company were to pay a dividend
in the future, such a dividend paid to a non-U.S. holder would be subject to
U.S. withholding tax at a 30% rate, or if applicable, a lower treaty rate,
unless the dividend is effectively connected with the conduct of a trade or
business in the United States by a non-U.S. holder (and, if certain tax
treaties apply, is attributable to a United States permanent establishment
maintained by such non-U.S. holder). A dividend that is effectively connected
with the conduct of a trade or business in the United States by the non-U.S.
holder (and, if certain tax treaties apply, is attributable to a United States
permanent establishment maintained by such non-U.S. holder) will generally be
exempt from the withholding tax described above and subject instead (i) to the
U.S. Federal income tax on net income that applies to U.S. persons and (ii)
with respect to corporate holders under certain circumstances, a 30% (or, if
applicable, lower treaty rate) branch profits tax that in general is imposed
on its "effectively connected earnings and profits" (within the meaning of the
Code) for the taxable year, as adjusted for certain items.
Under current Treasury Regulations, dividends paid to an address in a
foreign country are presumed to be paid to a resident of that country (unless
the payor has knowledge to the contrary) for purposes of the withholding
discussed above and, under the current interpretation of the Treasury
Regulations, for purposes of determining the applicability of a tax treaty
rate. Under the Proposed Regulations, however, a non-U.S. holder of Common
Stock who wishes to claim the benefit of an applicable treaty rate would be
required to satisfy applicable certification and other requirements. In the
case of a foreign partnership, the certification requirement would generally
be applied to the partners of the partnership. In addition, the Proposed
Regulations also would require the partnership to provide certain information,
including a United States taxpayer identification number, and would provide
look-through rules for tiered partnerships. A non-U.S. holder that is eligible
for a reduced rate of U.S. withholding tax pursuant to an income tax treaty
may obtain a refund of any excess amounts withheld by filing an appropriate
claim for refund with the Internal Revenue Service (the "IRS").
39
<PAGE>
Under current law, a non-U.S. holder generally will not be subject to U.S.
Federal income tax on any gain recognized on a sale or other disposition of a
share of Common Stock unless (i) the gain is effectively connected with the
conduct of a trade or a business within the United States of the non-U.S.
holder and, if certain tax treaties apply, is attributable to a United States
permanent establishment maintained by the non-U.S. holder, (ii) the gain is
not described in clause (i) above, the non-U.S. holder is an individual who
holds the share as a capital asset, is present in the United States for 183
days or more in the taxable year of the disposition and either (a) such
individual has a "tax home" (as defined for U.S. Federal income tax purposes)
in the United States or (b) the gain is attributable to an office or other
fixed place of business maintained in the United States by such individual, or
(iii) the Company is or has been a United States real property holding
corporation a "USRPHC") for United States federal income tax purposes (which
the Company does not believe that it is or is likely to become) at any time
within the shorter of the five year period preceding such disposition or such
non-U.S. holder's holding period. If the Company were to become a USRPHC,
gains realized upon a disposition of Common Stock by a non-U.S. holder which
did not directly or indirectly own more than 5% of the Common Stock during the
shorter of the periods described above generally would not be subject to
United States federal income tax, provided that the Common Stock is regularly
traded on an established securities market. In case of a non-U.S. holder that
is described under clause (i) above its gain will be subject to the U.S.
Federal income tax on net income that applies to U.S. persons and, in
addition, if such non-U.S. holder is a foreign corporation, it may be subject
to the branch profits tax as described in the second preceding paragraph. An
individual non-U.S. holder that is described under clause (ii) above will be
subject to a flat 30% tax on the gain derived from the sale, which may be
offset by certain U.S. capital losses (notwithstanding the fact that he or she
is not considered a resident of the United States). Thus, individual non-U.S.
holders who have spent 183 days or more in the United States in the taxable
year in which they contemplate a sale of the Common Stock are urged to consult
their tax advisers as to the tax consequences of such sale.
U.S. ESTATE TAX CONSEQUENCES
Shares of Common Stock owned at the time of his or her death by an
individual non-U.S. holder will be includible in his or her gross estate for
U.S. Federal estate tax purposes unless an applicable estate tax treaty
provides otherwise, and may be subject to U.S. Federal estate tax.
BACK-UP WITHHOLDING AND INFORMATION REPORTING
Dividends
Except as provided below, the Company must report annually to the IRS and to
each non-U.S. holder the amount of dividends paid to and the tax withheld with
respect to such holder. These information reporting requirements apply
regardless of whether withholding was reduced or eliminated by an applicable
tax treaty. Copies of these information returns may also be available under
the provisions of a specific treaty or agreement with the tax authorities in
the country in which the non-U.S. holder resides. In general, backup
withholding at a rate of 31% and additional information reporting will apply
to dividends paid on shares of Common Stock to holders that are not "exempt
recipients" and that fail to provide in the manner required certain
identifying information (such as the holder's name, address and taxpayer
identification number). Generally, individuals are not exempt recipients,
whereas corporations and certain other entities generally are exempt
recipients. However, dividends that are subject to U.S. withholding tax at the
30% statutory rate or at a reduced tax treaty rate are exempt from backup
withholding of U.S. Federal income tax and such additional information
reporting.
Broker Sales
If a non-U.S. holder sells shares of Common Stock through a U.S. office of a
U.S. or foreign broker, the broker is required to file an information return
and is required to withhold 31% of the sale proceeds unless the non-U.S.
holder is an exempt recipient or has provided the broker with the information
and statements, under penalties of perjury, necessary to establish an
exemption from backup withholding. If payment of the proceeds of the sale of a
share by a non-U.S. holder is made to or through the foreign office of a
broker, that broker will
40
<PAGE>
not be required to backup withhold or, except as provided in the next
sentence, to file information returns. In the case of proceeds from a sale of
a share by a non-U.S. holder paid to or through the foreign office of a U.S.
broker or a foreign office of a foreign broker that is (i) a controlled
foreign corporation for U.S. tax purposes or (ii) a person 50% or more of
whose gross income for the three-year period ending with the close of the
taxable year preceding the year of payment (or for the part of that period
that the broker has been in existence) is effectively connected with the
conduct of a trade or business within the United States (a "Foreign U.S.
Connected Broker"), information reporting is required unless the broker has
documentary evidence in its files that the payee is not a U.S. person and
certain other conditions are met, or the payee otherwise establishes an
exemption.
Refunds
Any amounts withheld under the backup withholding rules from a payment to a
non-U.S. holder may be refunded or credited against the non-U.S. holder's U.S.
Federal income tax liability, provided that the required information is
furnished to the IRS.
41
<PAGE>
UNDERWRITING
Under the terms and subject to the conditions contained in the U.S.
Underwriting Agreement dated the date hereof (the "U.S. Underwriting
Agreement"), each of the underwriters of the U.S. Offering named below (the
"U.S. Underwriters"), for whom Smith Barney Inc., Dillon, Read & Co. Inc. and
Donaldson, Lufkin & Jenrette Securities Corporation are acting as the
representatives (the "Representatives"), has severally agreed to purchase from
the Company the number of shares of Common Stock set forth opposite the name
of such U.S. Underwriter below.
<TABLE>
<CAPTION>
U.S. UNDERWRITERS NUMBER OF SHARES
- ----------------- ----------------
<S> <C>
Smith Barney Inc...............................................
Dillon, Read & Co. Inc.........................................
Donaldson, Lufkin & Jenrette Securities Corporation............
---------
Total........................................................ 3,600,000
=========
</TABLE>
Under the terms and subject to the conditions contained in the International
Underwriting Agreement dated the date hereof (the "International Underwriting
Agreement"), each of the managers of the concurrent International Offering
named below (the "Managers"), for whom Smith Barney Inc., Dillon, Read & Co.
Inc. and Donaldson, Lufkin & Jenrette Securities Corporation are acting as
lead managers (the "Lead Managers"), has severally agreed to purchase from the
Company the numbers of shares of Common Stock set forth opposite the name of
such Manager below.
<TABLE>
<CAPTION>
MANAGERS NUMBER OF SHARES
- -------- ----------------
<S> <C>
Smith Barney Inc...............................................
Dillon, Read & Co. Inc.........................................
Donaldson, Lufkin & Jenrette Securities Corporation............
-------
Total........................................................ 900,000
=======
</TABLE>
Each of the U.S. Underwriting Agreement and the International Underwriting
Agreement provides that the obligations of the several U.S. Underwriters and
the several Managers to pay for and accept delivery of the shares of Common
Stock offered hereby are subject to the approval of certain legal matters by
counsel and to certain other conditions. The U.S. Underwriters and the
Managers are obligated to take and pay for all shares of Common Stock offered
hereby (other than those covered by the over-allotment option described below)
if any such shares are taken.
The U.S. Underwriters and the Managers (collectively, the "Underwriters")
initially propose to offer part of the shares offered hereby directly to the
public at the public offering price set forth on the cover page of this
Prospectus and part of the shares offered hereby to certain dealers at a price
which represents a concession not in excess of $ per share under the price to
public. The U.S. Underwriters and the Managers may allow, and such dealers may
reallow, a concession not in excess of $ per share to other U.S.
Underwriters or Managers, respectively, or to certain other dealers. After the
Offerings, the public offering price and such concessions may be changed by
the U.S. Underwriters and the Managers.
42
<PAGE>
The Company has granted the U.S. Underwriters an option, exercisable for 30
days from the date of this Prospectus, to purchase up to an aggregate of
675,000 additional shares of Common Stock at the public offering price set
forth on the cover page hereof less underwriting discounts and commissions.
The U.S. Underwriters may exercise such option to purchase additional shares
solely for the purpose of covering over-allotments, if any, incurred in
connection with the sales of the shares of Common Stock offered hereby. To the
extent such option is exercised, each U.S. Underwriter will become obligated,
subject to certain conditions, to purchase approximately the same percentage
of such additional shares as the number of shares set forth opposite such U.S.
Underwriter's name in the preceding U.S. Underwriters table bears to the total
number of shares in such table.
The Company, certain of its directors and officers and the Apollo
Stockholders have agreed that, for a period of 120 days from the date of this
Prospectus, they will not, without the prior written consent of Smith Barney
Inc., offer, sell, contract to sell, or otherwise dispose of, any shares of
Common Stock (or any securities convertible into or exercisable or
exchangeable for, Common Stock), or grant any options or warrants to purchase
Common Stock, except in certain circumstances.
The U.S. Underwriters and the Managers have entered into an Agreement
between U.S. Underwriters and Managers pursuant to which each U.S. Underwriter
has agreed that as part of the distribution of the shares offered in the U.S.
Offering, (i) it is not purchasing any such shares for the account of anyone
other than a U.S. or Canadian Person (as defined below), and (ii) it has not
offered or sold, and will not offer, sell, resell or deliver, directly or
indirectly, any of such shares or distribute any prospectus relating to the
U.S. Offering outside the United States or Canada or to anyone other than a
U.S. or Canadian Person. In addition, each Manager has agreed that as part of
the distribution of the shares offered in the International Offering: (i) it
is not purchasing any such shares for the account of any U.S. or Canadian
Person, and (ii) it has not offered or sold, and will not offer, sell, resell
or deliver, directly or indirectly any of such shares or distribute any
prospectus relating to the International Offering in the United States or
Canada or to any U.S. or Canadian Person. Each Manager has also agreed that it
will offer to sell shares only in compliance with all relevant requirements of
any applicable laws.
The foregoing limitations do not apply to stabilization transactions or to
certain other transactions specified in the U.S. Underwriting Agreement, the
International Underwriting Agreement and the Agreement between U.S.
Underwriters and Managers, including (i) certain purchases and sales between
the U.S. Underwriters and the Managers, (ii) certain offers, sales, resales,
deliveries or distributions to or through investment advisors or other persons
exercising investment discretion, (iii) purchases, offers or sales by a U.S.
Underwriter who is also acting as a Manager or by a Manager who is also acting
as a U.S. Underwriter, and (iv) other transactions specifically approved by
the Representatives and the Lead Managers. As used herein, "U.S. or Canadian
Person" means any resident or national of the United States or Canada, any
corporation, partnership or other entity created or organized in or under the
laws of the United States or Canada or any estate or trust the income of which
is subject to U.S. or Canadian income taxation regardless of the source of its
income (other than the foreign branch of any U.S. or Canadian Person) and
includes any U.S. or Canadian branch of a person other than a U.S. or Canadian
Person.
Any offer of shares in Canada will be made only pursuant to an exemption
from the requirement to file a prospectus in the relevant province of Canada
in which such offer is made.
Each Manager agrees that (i) it will not offer or sell any shares to persons
in the United Kingdom, except to persons whose ordinary activities involve
them in acquiring or disposing of investments as principal or agent for the
purposes of their business or otherwise in circumstances which will not
involve an offer to the public in the United Kingdom within the meaning of the
Public Offers of Securities Regulations 1995 (the "Regulations"), (ii) it will
comply with all applicable provisions of the Financial Services Act 1986 and
the Regulations with respect to anything done by it in relation to the shares
in, from, or otherwise involving, the United Kingdom, and (iii) it will only
issue or pass on to any person in the United Kingdom any document received by
it in connection with the offer of the shares if that person is of a kind
described in Article 11(3) of the Financial Services Act 1986 (Investment
Advertisements) (Exemptions) Order 1995 or is a person to whom the
documentation may otherwise lawfully be issued or passed on.
43
<PAGE>
No action has been or will be taken in any jurisdiction by the Company, the
U.S. Underwriters or the Managers that would permit any offering to the
general public of the Common Stock offered hereby in any jurisdiction other
than the United States.
Purchasers of the Common Stock offered hereby may be required to pay stamp
taxes and other charges in accordance with the laws and practices of the
country of purchase in addition to the offering price set forth on the cover
page hereof.
Pursuant to the Agreement between U.S. Underwriters and Managers, sales may
be made between the U.S. Underwriters and the Managers of such number of
shares of Common Stock as may be mutually agreed. The price of any shares so
sold shall be the public offering price as then in effect for Common Stock
being sold by the U.S. Underwriters and the Managers, less all or any part of
the selling concession, unless otherwise determined by mutual agreement. To
the extent that there are sales between the U.S. Underwriters and the Managers
pursuant to the Agreement between U.S. Underwriters and Managers, the number
of shares initially available for sale by the U.S. Underwriters and by the
Managers may be more or less than the number of shares appearing on the front
cover of this Prospectus.
In connection with the Offerings and in compliance with applicable law, the
Underwriters may effect transactions which stabilize or maintain the market
price of the Common Stock at levels above those which might otherwise prevail
in the open market. Specifically, the Underwriters may overallot in connection
with the Offerings, creating a short position in the Common Stock for their
own account. For the purposes of covering a syndicate short position or
stabilizing the price of the Common Stock, the Underwriters may place bids for
the Common Stock or effect purchases of the Common Stock in the open market. A
syndicate short position may also be covered by exercise of the over-allotment
option described above. Finally, the Representatives or the Managers 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 Common Stock in the Offerings, if
the syndicate repurchases previously distributed Common Stock in transactions
to cover 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, the U.S. Underwriters and the Managers have agreed to indemnify
each other against certain liabilities, including liabilities under the
Securities Act of 1933, as amended.
LEGAL MATTERS
The validity of the shares 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.
44
<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; and
(2) 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).
45
<PAGE>
CONVERSE INC. AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
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
</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 cash proceeds from
debt................. 12,587 40,278 8,492
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.
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 is recognized as
earned.
Advertising
Advertising production costs are expensed the first time an advertisement is
run. Media placement costs are expensed in the month the advertising appears.
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 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
F-27
<PAGE>
CONVERSE INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
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>
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
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, THE COMMON STOCK
IN ANY JURISDICTION WHERE, OR TO ANY PERSON TO WHOM, IT IS UNLAWFUL TO MAKE
SUCH OFFER OR SOLICITATION. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY
OFFER OR SALE MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE AN IMPLI-
CATION THAT THERE HAS NOT BEEN ANY CHANGE IN THE FACTS SET FORTH IN THIS PRO-
SPECTUS OR IN THE AFFAIRS OF THE COMPANY SINCE THE DATE HEREOF.
-----------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary....................................................... 3
Risk Factors............................................................. 9
Use of Proceeds.......................................................... 11
Capitalization........................................................... 11
Price Range of Common Stock and Dividend Policy.......................... 12
Selected Consolidated Historical and Pro Forma Financial Information..... 13
Management's Discussion and Analysis of Financial Condition and Results
of Operations........................................................... 14
Business................................................................. 22
Management............................................................... 32
Certain Transactions..................................................... 35
Security Ownership of Certain Beneficial Owners and Management........... 37
Description of Capital Stock............................................. 38
Certain U.S. Tax Consequences to Non-U.S. Stockholders................... 39
Underwriting............................................................. 42
Legal Matters............................................................ 44
Experts.................................................................. 44
Additional Information................................................... 45
Incorporation of Certain Documents by Reference.......................... 45
Index to Consolidated Financial Statements............................... F-1
</TABLE>
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
4,500,000 SHARES
CONVERSE INC.
COMMON STOCK
-------
PROSPECTUS
, 1997
-------
SMITH BARNEY INC.
DILLON, READ & CO. INC.
DONALDSON, LUFKIN & JENRETTE
SECURITIES CORPORATION
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
<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 shares of the
Company's Common Stock 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
New York Stock Exchange listing fee........................... *
Transfer Agent fees and expenses.............................. *
Printing and engraving expenses............................... *
Accounting fees and expenses.................................. *
Legal fees and expenses....................................... *
Blue Sky fees and expenses.................................... *
Miscellaneous
-------
Total....................................................... $ *
=======
</TABLE>
- --------
* To be completed by amendment.
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
REGISTRATION STATEMENT TO BE SIGNED ON ITS BEHALF BY THE UNDERSIGNED,
THEREUNTO DULY AUTHORIZED, IN NORTH READING, MASSACHUSETTS ON MARCH 21, 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
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 March 21, 1997
- ------------------------------------- Board and Chief
GLENN N. RUPP Executive Officer
(Principal
Executive Officer)
/s/ Donald J. Camacho Senior Vice March 21, 1997
- ------------------------------------- President and Chief
DONALD J. CAMACHO Financial Officer
(Principal
Financial and
Accounting Officer)
* Director March 21, 1997
- -------------------------------------
DONALD J. BARR
* Director March 21, 1997
- -------------------------------------
LEON D. BLACK
* Director March 21, 1997
- -------------------------------------
JULIUS W. ERVING
Director March 21, 1997
- -------------------------------------
ROBERT H. FALK
II-3
<PAGE>
SIGNATURE TITLE DATE
* Director March 21, 1997
- -------------------------------------
GILBERT FORD
* Director March 21, 1997
- -------------------------------------
MICHAEL S. GROSS
Director March 21, 1997
- -------------------------------------
JOHN J. HANNAN
* Director March 21, 1997
- -------------------------------------
JOSHUA J. HARRIS
* Director March 21, 1997
- -------------------------------------
JOHN H. KISSICK
Director March 21, 1997
- -------------------------------------
RICHARD B. LOYND
* Director March 21, 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(a) Form of U.S. Underwriting Agreement.* *
1(b) Form of International Underwriting Agreement.* *
5 Opinion of Morgan, Lewis & Bockius LLP.*
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.**
</TABLE>
- --------
* To be filed by amendment.
** Filed herewith.
<PAGE>
EXHIBIT 1.A
3,600,000 Shares
CONVERSE INC.
Common Stock
U.S. UNDERWRITING AGREEMENT
---------------------------
May , 1997
SMITH BARNEY INC.
DILLON, READ & CO. INC.
DONALDSON, LUFKIN & JENRETTE
SECURITIES CORPORATION
As Representatives of the Several U.S. Underwriters
c/o SMITH BARNEY INC.
388 Greenwich Street
New York, New York 10013
Dear Sirs:
Converse Inc., a Delaware corporation (the "Company"), proposes to
issue and sell an aggregate of 3,600,000 shares (the "Firm Shares") of its
common stock, without par value, to the several Underwriters named in Schedule I
hereto (the " U.S. Underwriters"). The Company also proposes to sell to the
U.S. Underwriters, upon the terms and conditions set forth in Section 2 hereof,
up to an additional 675,000 shares (the "Additional Shares") of the Company's
common stock. The Firm Shares and the Additional Shares are hereinafter
collectively referred to as the "Shares". The Company's common stock, without
par value, including the Shares and the International Shares (as defined
herein), is hereinafter referred to as the "Common Stock."
It is understood that the Company is concurrently entering into an
International Underwriting Agreement, dated the date hereof (the "International
Underwriting Agreement"), providing for the sale of 900,000 shares of the
Common Stock (the "International Shares") through arrangements with certain
underwriters outside the United States and Canada (the "Managers"), for whom
Smith Barney Inc., Dillon, Read & Co. Inc. and Donaldson, Lufkin & Jenrette
Securities
<PAGE>
Corporation are acting as Lead Managers (the "Lead Managers"). The International
Shares and the Shares, collectively, are herein called the "Underwritten
Shares."
The Company also understands that the Representatives (as defined
below) and the Lead Managers have entered into an agreement (the "Agreement
Between U.S. Underwriters and Managers") contemplating the coordination of
certain transactions between the U.S. Underwriters and the Managers and that,
pursuant thereto and subject to the conditions set forth therein, the U.S.
Underwriters may purchase from the Managers a portion of the International
Shares or sell to the Managers a portion of the Shares. The Company understands
that any such purchases and sales between the U.S. Underwriters and the Managers
shall be governed by the Agreement Between U.S. Underwriters and Managers and
shall not be governed by the terms of this Agreement or the International
Underwriting Agreement.
The Company wishes to confirm as follows its agreement with you (the
"Representatives") and the other several U.S. Underwriters on whose behalf you
are acting, in connection with the several purchases of the Shares by the U.S.
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
Underwritten Shares. 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 Shares may commence, the term
"Registration Statement" as used in this Agreement means the registration
statement as amended by said post-effective amendment. The term "Prospectuses"
as used in this Agreement means the prospectuses in the forms included in the
Registration Statement, or, if the prospectuses included in the Registration
Statement omit information in reliance on Rule 430A under the Act and such
information is included in prospectuses filed with the Commission pursuant to
Rule 424(b) under the Act, the term "Prospectuses" as used in this Agreement
means the prospectuses in the forms included in the Registration Statement as
supplemented by the addition of the Rule 430A information contained in the
prospectuses filed with the Commission pursuant to Rule 424(b). 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 "Prepricing
Prospectuses" as used in this Agreement means the prospectuses 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
prospectuses shall have been amended from time to time prior to the date of the
Prospectuses. Any reference in this Agreement to the registration statement,
the Registration Statement, any Prepricing Prospectuses or the Prospectuses
shall be
-2-
<PAGE>
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 Prospectuses
or the Prospectuses, as the case may be, and any reference to any amendment or
supplement to the registration statement, the Registration Statement, any
Prepricing Prospectuses or the Prospectuses shall be deemed to refer to and
include any documents filed after such date under the Securities Exchange Act of
1934, as amended (the "Exchange Act") which, upon filing, are incorporated by
reference therein, as required by paragraph (b) of Item 12 of Form S-3. As used
herein, the term "Incorporated Documents" means the documents which at the time
are incorporated by reference in the registration statement, the Registration
Statement, any Prepricing Prospectuses, the Prospectuses, or any amendment or
supplement thereto.
It is understood that two forms of Prepricing Prospectus and two forms
of Prospectus are to be used in connection with the offering and sale of the
Underwritten Shares: a Prepricing Prospectus and a Prospectus relating to the
Shares that are to be offered and sold in the United States (as defined herein)
or Canada (as defined herein) to U.S. or Canadian Persons (as defined herein)
(the "U.S. Prepricing Prospectus" and the "U.S. Prospectus," respectively), and
a Prepricing Prospectus and a Prospectus relating to the International Shares
that are to be offered and sold outside the United States or Canada to persons
other than U.S. or Canadian Persons (the "International Prepricing Prospectus"
and the "International Prospectus," respectively). The U.S. Prospectus and the
International Prospectus are herein collectively called the "Prospectuses," and
the U.S. Prepricing Prospectus and the International Prepricing Prospectus are
herein called the "Prepricing Prospectuses." For purposes of this Agreement:
"Rules and Regulations" means the rules and regulations adopted by the
Commission under either the Act or the Securities Exchange Act of 1934, as
amended (the "Exchange Act"), as applicable; "U.S. or Canadian Person" means any
resident or national of the United States or Canada, any corporation,
partnership or other entity created or organized in or under the laws of the
United States or Canada or any estate or trust the income of which is subject to
United States or Canadian income taxation regardless of the source of its income
(other than the foreign branch of any U.S. or Canadian Person), and includes any
United States or Canadian branch of a person other than a U.S. or Canadian
Person; "United States" means the United States of America (including the states
thereof and the District of Columbia) and its territories, its possessions and
other areas subject to its jurisdiction; and "Canada" means Canada and its
territories, its possessions and other areas subject to its jurisdiction.
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 U.S. 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 U.S. Underwriter agrees, severally and not
jointly, to purchase from the Company, at a purchase price of $__________ per
Share (the "purchase price per share"), the number of Firm Shares set forth
opposite the name of such U.S. Underwriter in Schedule I hereto (or such number
of Firm Shares increased as set forth in Section 10 hereof).
-3-
<PAGE>
The Company also agrees, subject to all the terms and conditions set
forth herein, to sell to the U.S. 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 U.S. Underwriters
shall have the right to purchase from the Company, at the purchase price per
share, 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 U.S. 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 an
aggregate of 675,000 Additional Shares. Additional Shares may be purchased
only for the purpose of covering over-allotments made in connection with the
offering of the Firm Shares. Upon any exercise of the over-allotment option,
each U.S. Underwriter, severally and not jointly, agrees to purchase from the
Company the number of Additional Shares (subject to such adjustments as you may
determine in order to avoid fractional shares) which bears the same proportion
to the number of Additional Shares to be purchased by the U.S. Underwriters as
the number of Firm Shares set forth opposite the name of such U.S. Underwriter
in Schedule I hereto (or such number of Firm Shares increased as set forth in
Section 10 hereof) bears to the aggregate number of Firm Shares.
Each U.S. Underwriter represents, warrants, covenants and agrees that,
except as contemplated under Section 2 of the Agreement Between U.S.
Underwriters and Managers, (i) it is not purchasing any Shares for the account
of anyone other than a U.S. or Canadian Person, (ii) it has not offered or sold,
and will not offer, sell, resell or deliver, directly or indirectly, any Shares
or distribute any U.S. Prospectus outside the United States or Canada or to
anyone other than a U.S. or Canadian Person, and (iii) any offer of Shares in
Canada will be made only pursuant to an exemption from the requirement to file a
prospectus in the relevant province of Canada in which such offer is made.
3. Terms of Public Offering. The Company has been advised by you
------------------------
that the U.S. Underwriters propose to make a public offering of their respective
portions of the Shares as soon after the Registration Statement and this
Agreement have become effective as in your judgment is advisable and initially
to offer the Shares upon the terms set forth in the U.S. Prospectus.
4. Delivery of the Shares and Payment Therefor. Delivery to the U.S.
-------------------------------------------
Underwriters of and payment for the Firm Shares 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 May ______, 1997 (the "Closing Date"). The place of closing
for the Firm Shares and the Closing Date may be varied by agreement between you
and the Company.
Delivery to the U.S. Underwriters of and payment for any Additional
Shares to be purchased by the U.S. Underwriters 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 on behalf of the U.S.
Underwriters to the Company of the U.S.
-4-
<PAGE>
Underwriters' determination to purchase a number, specified in such notice, of
Additional Shares. The place of closing for any Additional Shares and the Option
Closing Date for such Shares may be varied by agreement between you and the
Company.
Certificates for the Firm Shares and for any Additional Shares to be
purchased hereunder shall be 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 preceding the Closing Date or any Option Closing Date, as the case
may be. Such certificates 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. The certificates evidencing the Firm Shares and any Additional
Shares to be purchased hereunder shall be delivered to you on the Closing Date
or the Option Closing Date, as the case may be, against payment of the purchase
price therefor in immediately available funds.
5. Agreements of the Company. The Company agrees with the several
-------------------------
U.S. Underwriters 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 Shares 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
Prospectuses or the Prospectuses 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 Shares 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 Prospectuses (as then amended or supplemented)
untrue or which requires the making of any additions to or changes in the
Registration Statement or the Prospectuses (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 Prospectuses (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.
-5-
<PAGE>
(c) The Company will furnish to you, without charge (i) four 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 request, (iii) such number of copies of the
Incorporated Documents, without exhibits, as you may request, and (iv) four
copies of the exhibits to the Incorporated Documents.
(d) The Company will not file any amendment to the Registration
Statement or make any amendment or supplement to the Prospectuses 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 U.S. 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 Shares are offered by the
several U.S. Underwriters and by dealers, prior to the date of the U.S.
Prospectus, of each U.S. 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 U.S. Underwriters a U.S. Prospectus is required by the Act to be
delivered in connection with sales by any U.S. Underwriter or dealer, the
Company will expeditiously deliver to each U.S. Underwriter and each dealer,
without charge, as many copies of the U.S. Prospectus (and of any amendment or
supplement thereto) as you may request. The Company consents to the use of the
U.S. 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 Shares are offered by the several U.S. Underwriters
and by all dealers to whom Shares may be sold, both in connection with the
offering and sale of the Shares and for such period of time thereafter as the
U.S. Prospectus is required by the Act to be delivered in connection with sales
by any U.S. 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 U.S. Underwriters is required to be set forth in the U.S. 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 U.S.
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
U.S. Underwriters and dealers a reasonable number of copies thereof. In the
event that the Company and you, as Representatives of the several U.S.
Underwriters, agree that the U.S. Prospectus should be amended or supplemented,
the Company, if requested by you, will promptly issue a
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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 counsel for the U.S.
Underwriters in connection with the registration or qualification of the Shares
for offering and sale by the several U.S. 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 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 Shares, in any jurisdiction where it is not now so
subject.
(h) The Company will make generally available to its security holders
a consolidated earnings statement, which need not be audited, covering a twelve-
month period commencing after the effective date of the Registration Statement
and ending not later than 15 months thereafter, as soon as practicable after the
end of such period, which consolidated earnings statement shall satisfy the
provisions of Section 11(a) of the Act.
(i) During the period of five years hereafter, the Company will
furnish to you (i) as soon as available, a copy of each report of the Company
mailed to stockholders or filed with the Commission, and (ii) from time to time
such other information concerning the Company as you may 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 the U.S. Underwriters 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 the
Representatives for all out-of-pocket expenses (including fees and expenses of
counsel for the U.S. Underwriters) incurred by you in connection herewith.
(k) The Company will apply the net proceeds from the sale of the
Shares substantially in accordance with the description set forth in the
Prospectuses.
(l) If Rule 430A of the Act is employed, the Company will timely file
the Prospectuses pursuant to Rule 424(b) under the Act and will advise you of
the time and manner of such filing.
(m) The Company will not sell, contract to sell or otherwise dispose
of any Common Stock or any securities convertible into or exercisable or
exchangeable for Common Stock, or grant any options or warrants to purchase
Common Stock, for a period of 120 days after the date hereof, without the prior
written consent of Smith Barney Inc., except for sales to the
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U.S. Underwriters pursuant to this Agreement and the Managers pursuant to the
International Underwriting Agreement.
(n) The Company has furnished or will furnish to you "lock-up"
letters, in form and substance satisfactory to you, signed by each of its
current officers and directors and each of its stockholders designated by you.
(o) Except as stated in this Agreement and in the International
Underwriting Agreement and in the Prepricing Prospectuses and Prospectuses, the
Company has not taken, nor will it take, directly or indirectly, any action
designed to or that might reasonably be expected to cause or result in
stabilization or manipulation of the price of the Common Stock to facilitate the
sale or resale of the Shares.
(p) The Company will use its best efforts to have the shares of Common
Stock which it agrees to sell under this Agreement 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 U.S. Underwriter that:
(a) Each U.S. 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 Prospectuses 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 statements in or omissions from the Registration Statement or the
Prospectuses made in reliance upon and in conformity with information relating
to any U.S. Underwriter or Manager furnished to the Company in writing by or on
behalf of any U.S. Underwriter through the Representatives or by or on behalf
of any Manager through the Lead Managers expressly for use therein.
(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
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regulations thereunder; no such document when it was filed (or, if an amendment
with respect to any such document was filed, when such amendment was filed),
contained an untrue statement of a material fact or omitted to state a material
fact required to be stated therein or necessary in 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) 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 have been duly
authorized and, when issued and delivered to the U.S. Underwriters against
payment therefor in accordance with the terms hereof, will be validly issued,
fully paid and 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 Prospectuses.
(e) 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 Prospectuses, and is
duly registered and qualified to conduct its business and is in good standing in
each jurisdiction or place where the nature of its properties or the conduct of
its business requires such registration or qualification, except where the
failure so to register or qualify does not have a material adverse effect on the
condition (financial or other), business, properties, net worth or results of
operations of the Company and the Subsidiaries (as hereinafter defined) taken as
a whole.
(f) All the Company's subsidiaries (collectively, the "Subsidiaries")
are listed in an exhibit to the Company's Annual Report on Form 10-K which is
incorporated by reference into the Registration Statement. Each Subsidiary is a
corporation duly organized, validly 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 Prospectuses, and is duly registered and
qualified to conduct its business and is in good standing in each jurisdiction
or place where the nature of its properties or the conduct of its business
requires such registration or qualification, except where the failure so to
register or qualify does not have a material adverse effect on the condition
(financial or other), business, properties, net worth or results of operations
of such Subsidiary; 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, free and clear of any lien, adverse claim, security
interest, equity, or other encumbrance.
(g) 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 Prospectuses but are not described as
required, and there are no agreements, contracts, indentures, leases or other
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instruments that are required to be described in the Registration Statement or
the Prospectuses 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.
(h) 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 or of any decree
of any court or governmental agency or body having jurisdiction over the Company
or any of the Subsidiaries, or in default in any material respect in the
performance of any obligation, agreement or condition contained in any bond,
debenture, note or any other evidence of indebtedness or in any material
agreement, indenture, lease or other instrument to which the Company or any of
the Subsidiaries is a party or by which any of them or any of their respective
properties may be bound.
(i) Neither the issuance and sale of the Shares, the execution,
delivery or performance of this Agreement or the International Underwriting
Agreement 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 Shares
under the 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 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.
(j) 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 Prospectuses (or
any amendment or supplement thereto) are independent public accountants as
required by the Act.
(k) The historical and pro forma financial statements, together with
related schedules and notes, included or incorporated by reference in the
Registration Statement and the Prospectuses (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 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
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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 Prospectuses
(and any amendment or supplement thereto), have been prepared on a basis
consistent with such historical financial statements, except for the pro forma
adjustments specified therein, and give effect to assumptions made on a
reasonable basis and present fairly the historical and proposed transactions
contemplated by this Agreement and the Prospectuses (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
Prospectuses (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.
(l) The execution and delivery of, and the performance by the Company
of its obligations under, this Agreement and the International Underwriting
Agreement have been duly and validly authorized by the Company, and each of this
Agreement and the International Underwriting 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 or thereunder
may be limited by federal or state securities laws.
(m) Except as disclosed in the Registration Statement and the
Prospectuses (or any amendment or supplement thereto), subsequent to the
respective dates as of which such information is given in the Registration
Statement and the Prospectuses (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.
(n) Each of the Company and the Subsidiaries has good and marketable
title to all property (real and personal) described in the Prospectuses as being
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
Prospectuses or in a document filed as an exhibit to the Registration Statement
and all the property described in the Prospectuses as being held under lease by
each of the Company and the Subsidiaries is held by it under valid, subsisting
and enforceable leases.
(o) 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 Shares,
will not distribute any offering material in connection with the offering and
sale of the Shares other than the Registration
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Statement, the Prepricing Prospectuses, the Prospectuses or other materials, if
any, permitted by the Act.
(p) The Company and each of the Subsidiaries has such 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 Prospectuses, subject to
such qualifications as may be set forth in the Prospectuses; 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 Prospectuses; and, except as described in the Prospectuses, none of such
permits contains any restriction that is materially burdensome to the Company or
any of the Subsidiaries.
(q) 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.
(r) 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
Prospectuses.
(s) The Company and each of the Subsidiaries have filed all tax
returns required to be filed, which returns are complete and correct, 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.
(t) 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 or the International Underwriting
Agreement.
(u) 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 Prospectuses as being owned by them or any of them or necessary
for the conduct of their respective businesses, and the Company
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<PAGE>
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.
(v) The Company has complied with all provisions of Florida Statutes,
Section 517.075, relating to issuers doing business with Cuba.
(w) 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 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.
(x) To the Company's knowledge, no labor problem exists with its
employees or with employees of any Subsidiary or is imminent that could
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 materially adversely affect the condition
(financial or other), business, properties, net worth or results of operations
of the Company and the Subsidiaries, taken as a whole.
(y) 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 on the condition (financial or other), business, properties, net
worth or results of operations of the Company and the Subsidiaries, taken as a
whole. 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").
(z) 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
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basis of such review, the Company has reasonably concluded that such associated
costs and liabilities would not, singly or in the aggregate, have a material
adverse effect on the condition (financial or other), business, properties, net
worth or results of operations of the Company and the Subsidiaries, taken as a
whole.
7. Indemnification and Contribution. (a) The Company agrees to
--------------------------------
indemnify and hold harmless each of you and each other U.S. Underwriter and each
person, if any, who controls any U.S. 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 U.S. Prepricing Prospectus
or in the Registration Statement or the U.S. 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 U.S. Underwriter furnished in writing to
the Company by or on behalf of such U.S. Underwriter through you expressly for
use in connection therewith; provided, however, that the indemnification
contained in this paragraph (a) with respect to any U.S. Prepricing Prospectus
shall not inure to the benefit of any U.S. Underwriter (or to the benefit of any
person controlling such U.S. Underwriter) on account of any such loss, claim,
damage, liability or expense arising from the sale of the Shares by such U.S.
Underwriter to any person if a copy of the U.S. 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 U.S.
Prepricing Prospectus was corrected in the U.S. Prospectus, provided that the
Company has delivered the U.S. Prospectus to the several U.S. 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
U.S. Underwriter or any person controlling any U.S. Underwriter in respect of
which indemnity may be sought against the Company, such U.S. Underwriter or such
controlling person shall promptly notify the Company and the Company shall
assume the defense thereof, including the employment of counsel and payment of
all fees and expenses. Such U.S. 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 U.S. 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 U.S. Underwriter or such
controlling person and the Company and such U.S. Underwriter or such controlling
person shall have been advised by its counsel that representation of such
indemnified party and the Company
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by the same counsel would be inappropriate under applicable standards of
professional conduct (whether or not such representation by the same counsel has
been proposed) due to actual or potential differing interests between them (in
which case the Company shall not have the right to assume the defense of such
action, suit or proceeding on behalf of such Underwriter or such controlling
person). It is understood, however, that the Company shall, in connection with
any one such action, suit or proceeding or separate but substantially similar or
related actions, suits or proceedings in the same jurisdiction arising out of
the same general allegations or circumstances, be liable for the reasonable fees
and expenses of only one separate firm of attorneys (in addition to any local
counsel) at any time for all such U.S. 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 U.S.
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 U.S. 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 U.S. Underwriter, but
only with respect to information relating to such U.S. Underwriter furnished in
writing by or on behalf of such U.S. Underwriter through you expressly for use
in the Registration Statement, the U.S. Prospectus or any U.S. 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
U.S. Prospectus or any U.S. Prepricing Prospectus, or any amendment or
supplement thereto, and in respect of which indemnity may be sought against any
U.S. Underwriter pursuant to this paragraph (c), such U.S. 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 U.S. 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 U.S. 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 U.S. Underwriters by paragraph (b) above. The foregoing
indemnity agreement shall be in addition to any liability which the U.S.
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 U.S.
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Underwriters on the other hand from the Offerings, or (ii) if the allocation
provided by clause (i) above is not permitted by applicable law, in such
proportion as is appropriate to reflect not only the relative benefits referred
to in clause (i) above but also the relative fault of the Company on the one
hand and the U.S. 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 U.S. Underwriters on
the other shall be deemed to be in the same proportion as the total net proceeds
from the Offerings (before deducting expenses) received by the Company bear to
the total underwriting discounts and commissions received by the U.S.
Underwriters, in each case as set forth in the table on the cover page of the
U.S. Prospectus. The relative fault of the Company on the one hand and the U.S.
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 U.S. 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 U.S. 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 U.S. 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 U.S.
Underwriter shall be required to contribute any amount in excess of the amount
by which the total price of the Shares underwritten by it and distributed to the
public exceeds the amount of any damages which such U.S. 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 U.S. Underwriters' obligations to contribute pursuant to
this Section 7 are several in proportion to the respective numbers of Firm
Shares set forth opposite their names in Schedule I hereto (or such numbers of
Firm Shares 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
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by the indemnifying party to the indemnified party as such losses, claims,
damages, liabilities or expenses are incurred. The indemnity and contribution
agreements contained in this Section 7 and the representations and warranties of
the Company set forth in this Agreement shall remain operative and in full force
and effect, regardless of (i) any investigation made by or on behalf of any U.S.
Underwriter or any person controlling any U.S. Underwriter, the Company, its
directors or officers, or any person controlling the Company, (ii) acceptance of
any Shares and payment therefor hereunder, and (iii) any termination of this
Agreement. A successor to any U.S. Underwriter or any person controlling any
U.S. 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 U.S. Underwriters' Obligations. The several
--------------------------------------------
obligations of the U.S. Underwriters to purchase the Firm Shares 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 Shares 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 U.S. Underwriter,
threatened by the Commission, and any request of the Commission for additional
information (to be included in the Registration Statement or the U.S. Prospectus
or otherwise) shall have been complied with to your 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 Prospectuses, which in your opinion, as
Representatives of the several U.S. Underwriters, would materially adversely
affect the market for the Shares, 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 Prospectuses untrue or which, in the opinion of the
Company and its counsel or the U.S. Underwriters and their counsel, requires the
making of any addition to or change in the Prospectuses 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 Prospectuses to reflect such event or development would, in
your opinion, as Representatives of the several U.S. Underwriters, materially
adversely affect the market for the Shares.
(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, as Representatives of the several U.S. Underwriters, to the
effect that:
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(i) 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 Prospectuses (and
any amendment or supplement thereto), and is duly registered and qualified to
conduct its business and is in good standing in each jurisdiction or place where
the nature of its properties or the conduct of its business requires such
registration or qualification, except where the failure so to register or
qualify does not have a material adverse effect on the condition (financial or
other), business, properties, net worth or results of operations of the Company
and the Subsidiaries taken as a whole;
(ii) Each of the Subsidiaries is a corporation duly organized and
validly existing in good standing under the laws of the jurisdiction of its
organization, 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 Prospectuses (and any amendment or supplement thereto); and
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, free and clear of any perfected security interest, or, to the best
knowledge of such counsel after reasonable inquiry, 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 Prospectuses; and the
authorized capital stock of the Company conforms in all material respects as to
legal matters to the description thereof contained in the Prospectuses under the
caption "Description of Capital Stock";
(iv) All the shares of capital stock of the Company outstanding prior
to the issuance of the Shares have been duly authorized and validly issued, and
are fully paid and nonassessable;
(v) The Underwritten Shares have been duly authorized and, when issued
and delivered to the Underwriters and Managers against payment therefor in
accordance with the terms of the U.S. Underwriting Agreement and the
International Underwriting Agreement, will be validly issued, fully paid and
nonassessable and free of any preemptive, or to the best knowledge of such
counsel after reasonable inquiry, similar rights that entitle or will entitle
any person to acquire any Shares upon the issuance thereof by the Company;
(vi) The form of certificates for the Shares conforms to the
requirements of the Delaware General Corporation Law;
(vii) The Registration Statement and all post-effective amendments,
if any, have become effective under the Act and, to the best knowledge of such
counsel after reasonable inquiry, 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
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any required filing of the Prospectuses pursuant to Rule 424(b) has been made in
accordance with Rule 424(b);
(viii) The Company has corporate power and authority to enter into
the U.S. Underwriting Agreement and the International Underwriting Agreement and
to issue, sell and deliver the Underwritten Shares to the U.S. Underwriters and
Managers as provided therein, and each of the U.S. Underwriting Agreement and
the International 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;
(ix) Neither the Company nor any of the Subsidiaries is in violation
of its respective certificate or articles of incorporation or bylaws, or other
organizational documents, or to the best knowledge of such counsel after
reasonable inquiry, 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 Prospectuses;
(x) Neither the offer, sale or delivery of the Underwritten Shares,
the execution, delivery or performance of the U.S. Underwriting Agreement or the
International Underwriting Agreement, compliance by the Company with the
provisions of the U.S. Underwriting Agreement or the International Underwriting
Agreement nor consummation by the Company of the transactions contemplated
hereby or by the International Underwriting Agreement 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 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 is bound that is an exhibit to the Registration Statement or to any
Incorporated Document, or is known to such counsel after reasonable inquiry, 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, 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 after reasonable
inquiry, applicable to the Company, the Subsidiaries or any of their respective
properties;
(xi) No consent, approval, authorization or other order of, or
registration or filing with, any court, regulatory body, administrative agency
or other governmental body, agency, or official is required on the part of the
Company (except as have been obtained under the Act or such as may be required
under state securities or Blue Sky laws governing the purchase and distribution
of the Shares) for the valid issuance and sale of the Shares to the U.S.
Underwriters as contemplated by the U.S. Underwriting Agreement;
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(xii) The Registration Statement and the Prospectuses 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 best knowledge of such counsel after reasonable inquiry,
(A) other than as described or contemplated in the Prospectuses (or any
supplement thereto), 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 Prospectuses (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 Prospectuses(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) To the best knowledge of such counsel after reasonable inquiry,
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;
(xv) The statements in the Registration Statement and Prospectuses,
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
(xvi) 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 Prospectuses, 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 Prospectuses, as of their respective dates and as of the Closing Date or
the Option Closing Date, as the case may be, contained an untrue statement of a
material fact or omitted to state a material fact required to be stated therein
or necessary to make the statements therein not misleading or that any amendment
or supplement to the Prospectuses, 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
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under which they were made, not misleading (it being understood that such
counsel need express no opinion 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 Prospectuses or any Incorporated
Document).
In rendering their opinion as aforesaid, counsel may rely upon an
opinion or opinions, each dated the Closing Date, of other counsel retained by
them or the Company as to laws of any jurisdiction other than the United States
or the State of New York, provided that (1) each such local counsel is
acceptable to the Representatives, (2) such reliance is expressly authorized by
each opinion so relied upon and a copy of each such opinion is delivered to the
Representatives and is, in form and substance satisfactory to them and their
counsel, and (3) counsel shall state in their opinion that they believe that
they and the U.S. Underwriters are justified in relying thereon.
(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, as Representatives of the several U.S. Underwriters, to the
effect that:
(i) The Company and each of the Subsidiaries has full corporate power
and authority, and 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, singly or in the aggregate, have a material adverse effect on the
condition (financial or other), business, properties, net worth or results of
operations of the Company and the Subsidiaries taken as a whole), to own their
respective properties and to conduct their respective businesses as now being
conducted, as described in the Prospectuses;
(ii) Except as disclosed in the Prospectuses, the Company owns of
record, directly or indirectly, all the outstanding shares of capital stock of
each of the Subsidiaries free and clear of any lien, adverse claim, security
interest, equity, or other encumbrance;
(iii) Other than as described or contemplated in the Prospectuses (or
any supplement thereto), 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 Prospectuses (or
any amendment or supplement thereto);
(iv) There are no agreements, contracts, indentures, leases or other
instruments, that are required to be described in the Registration Statement or
the Prospectuses (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, service marks, service mark registrations, trade names,
copyrights, licenses, inventions, trade secrets and rights described in the
Prospectuses as being owned by them or any
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of them or necessary for the conduct of their respective businesses, and such
counsel is not aware of any claim to the contrary or any challenge by any other
person to the rights of the Company and the Subsidiaries with respect to the
foregoing;
(vi) 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;
(vii) Except as described in the Prospectuses, 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; and
(viii) Except as described in the Prospectuses, 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 Shares 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.
(e) You shall have received on the Closing Date an opinion of Latham &
Watkins, counsel for the U.S. Underwriters, dated the Closing Date and addressed
to you, as Representatives of the several U.S. Underwriters, with respect to the
matters referred to in clauses (v), (vii), (viii), (xii) and (xvi) of the
foregoing paragraph (c) and such other related matters as you may request.
(f) You shall have received letters addressed to you, as
Representatives of the several U.S. Underwriters, 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 Prospectuses (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 Prospectuses (or any amendment or supplement
thereto), except as may otherwise be stated in the Registration Statement and
Prospectuses (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
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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 Prospectuses (or any amendment or
supplement thereto); and (v) all the representations and warranties of the
Company contained in this Agreement shall be true and correct on and as of the
date hereof and on and as of the Closing Date as if made on and as of the
Closing Date, and you shall have received a certificate, dated the Closing Date
and signed by the chief executive officer and the chief financial officer of the
Company (or such other officers as are acceptable to you), to the effect set
forth in this Section 8(g) and in Section 8(h) hereof.
(h) The Company shall not have failed at or prior to the Closing Date
to have performed or complied with any of its agreements herein contained and
required to be performed or complied with by it hereunder at or prior to the
Closing Date.
(i) Prior to the Closing Date the Shares shall have been listed,
subject to notice of issuance, on the New York Stock Exchange.
(j) The closing under the International Underwriting Agreement shall
have occurred concurrently with the closing hereunder on the Closing Date.
(k) The Company shall have furnished or caused to be furnished to you
such further certificates and documents as you shall have requested.
All such opinions, certificates, letters and other documents will be
in compliance with the provisions hereof only if they are 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, as Representatives of the U.S. Underwriters, or to counsel for
the U.S. Underwriters, shall be deemed a representation and warranty by the
Company to each U.S. Underwriter as to the statements made therein.
The several obligations of the U.S. Underwriters to purchase
Additional Shares 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 Shares.
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 Prospectuses,
and each amendment or supplement to any of them; (ii) the printing (or
reproduction) and delivery (including postage, air freight charges and charges
for counting and
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packaging) of such copies of the registration statement, each U.S. Prepricing
Prospectus, the U.S. 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 Shares; (iii) the preparation,
printing, authentication, issuance and delivery of certificates for the Shares,
including any stamp taxes in connection with the original issuance and sale of
the Shares; (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 Shares; (v) the listing of the Shares on the New York Stock Exchange;
(vi) the registration or qualification of the Shares 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 U.S. Underwriters and Managers relating to the preparation,
printing or reproduction, and delivery of the preliminary and supplemental Blue
Sky Memoranda and such registration and qualification); (vii) the filing fees
and the fees and expenses of counsel for the U.S. Underwriters and Managers in
connection with any filings required to be made with the National Association of
Securities Dealers, Inc.; (viii) the transportation and other expenses incurred
by or on behalf of Company representatives in connection with presentations to
prospective purchasers of the Shares; and (ix) 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 Shares 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, as Representatives of the several U.S.
Underwriters, by notifying the Company.
If any one or more of the U.S. Underwriters shall fail or refuse to
purchase Shares which it or they are obligated to purchase hereunder on the
Closing Date, and the aggregate number of Shares which such defaulting U.S.
Underwriter or Underwriters are obligated but fail or refuse to purchase is not
more than one-tenth of the aggregate number of Shares which the U.S.
Underwriters are obligated to purchase on the Closing Date, each non-defaulting
U.S. Underwriter shall be obligated, severally, in the proportion which the
number of Firm Shares set forth opposite its name in Schedule I hereto bears to
the aggregate number of Firm Shares set forth opposite the names of all non-
defaulting U.S. Underwriters or in such other proportion as you may specify in
accordance with Section 20 of the Master Agreement Among Underwriters of Smith
Barney Inc., to purchase the Shares which such defaulting U.S. Underwriter or
Underwriters are obligated, but fail or refuse, to purchase. If any one or more
of the U.S. Underwriters shall fail or refuse to purchase Shares which it or
they are obligated to purchase on the Closing Date and the aggregate number of
Shares with respect to which such default occurs is more than one-tenth of the
aggregate number of Shares which the U.S. Underwriters are obligated to purchase
on the Closing Date and arrangements satisfactory to you and the Company
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for the purchase of such Shares by one or more non-defaulting U.S. 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 U.S. 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 Prospectuses or any other documents or
arrangements may be effected. Any action taken under this paragraph shall not
relieve any defaulting U.S. Underwriter from liability in respect of any such
default of any such U.S. Underwriter under this Agreement. The term "U.S.
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 Shares which a defaulting U.S.
Underwriter is obligated, but fails or refuses, to purchase.
Any notice under this Section 10 may be given by telegram, telecopy or
telephone but shall be subsequently confirmed by letter.
11. Termination of Agreement. This Agreement shall be subject to
------------------------
termination in your absolute discretion, without liability on the part of any
U.S. 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 Shares), 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 or
Massachusetts 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 Shares at the offering
price to the public set forth on the cover page of the U.S. Prospectus or to
enforce contracts for the resale of the Shares by the U.S. 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 U.S. 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 and fourth paragraphs
under the caption "Underwriting" in any U.S. Prepricing Prospectus and in the
U.S. Prospectus, constitute the only information furnished by or on behalf of
the U.S. Underwriters through you 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, as
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Representatives of the several U.S. Underwriters, 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
several U.S. 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 U.S. Underwriter of any of the Shares in his
status as such purchaser.
14. Applicable Law; Counterparts. This Agreement shall be governed
----------------------------
by and construed in accordance with the laws of the State of New York applicable
to contracts made and to be performed within the State of New York.
This Agreement may be signed in various counterparts which together
constitute one and the same instrument. If signed in counterparts, this
Agreement shall not become effective unless at least one counterpart hereof
shall have been executed and delivered on behalf of each party hereto.
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Please confirm that the foregoing correctly sets forth the agreement
between the Company and the several U.S. Underwriters.
Very truly yours,
CONVERSE INC.
By _________________________________
Chairman of the Board
Confirmed as of the date first
above mentioned on behalf of
themselves and the other several U.S.
Underwriters named in Schedule I
hereto.
SMITH BARNEY INC.
DILLON, READ & CO. INC.
DONALDSON, LUFKIN & JENRETTE
SECURITIES CORPORATION
As Representatives of the several U.S. Underwriters
By SMITH BARNEY INC.
By________________________________
Managing Director
-27-
<PAGE>
SCHEDULE I
CONVERSE INC.
Number of
Underwriter Firm Shares
----------- -----------
Smith Barney Inc. .
Dillon, Read & Co. Inc.
Donaldson, Lufkin & Jenrette Securities Corporation
_________
Total 3,600,000
=========
-28-
<PAGE>
EXHIBIT 1.B
900,000 Shares
CONVERSE INC.
Common Stock
INTERNATIONAL UNDERWRITING AGREEMENT
------------------------------------
May __, 1997
SMITH BARNEY INC.
DILLON, READ & CO. INC.
DONALDSON, LUFKIN & JENRETTE
SECURITIES CORPORATION
As Lead Managers for the Several Managers
c/o SMITH BARNEY INC.
388 Greenwich Street
New York, New York 10013
Dear Sirs:
Converse Inc., a Delaware corporation (the "Company"), proposes to
issue and sell an aggregate of 900,000 shares (the "Shares") of its common
stock, without par value, to the several Managers named in Schedule I hereto
(the "Managers"), for whom Smith Barney Inc., Dillon, Read & Co. Inc. and
Donaldson, Lufkin & Jenrette Securities Corporation are acting as
representatives (the "Lead Managers"). The Company's common stock, without par
value, including the Shares and the U.S. Shares (as defined herein), is
hereinafter referred to as the "Common Stock."
It is understood that the Company is concurrently entering into a U.S.
Underwriting Agreement, dated the date hereof (the "U.S. Underwriting
Agreement"), providing for the sale of 3,600,000 shares of the Common Stock (the
"Firm U.S. Shares") (plus an option granted by the Company to purchase up to an
additional 675,000 shares of Common Stock (the "Additional U.S. Shares") solely
for the purpose of covering overallotments) through arrangements with certain
underwriters in the United States and Canada (the "U.S. Underwriters") , for
whom Smith Barney Inc. Dillon, Read & Co. Inc. and Donaldson, Lufkin & Jenrette
Securities Corporation are
<PAGE>
acting as representatives (the "Representatives"). All shares of Common Stock
proposed to be offered to the U.S. Underwriters pursuant to the U.S.
Underwriting Agreement including the Firm U.S. Shares and the Additional U.S.
Shares, are herein called the "U.S. Shares"; the U.S. Shares and the Shares,
collectively, are herein called the "Underwritten Shares."
The Company also understands that the Lead Managers and the
Representatives have entered into an agreement (the "Agreement Between U.S.
Underwriters and Managers") contemplating the coordination of certain
transactions between the Managers and the U.S. Underwriters and that, pursuant
thereto and subject to the conditions set forth therein, the Managers may
purchase from the U.S. Underwriters a portion of the U.S. Shares or sell to the
U.S. Underwriters a portion of the Shares. The Company understands that any
such purchases and sales between the Managers and the U.S. Underwriters shall be
governed by the Agreement Between U.S. Underwriters and Managers and shall not
be governed by the terms of this Agreement or the U.S. Underwriting Agreement.
The Company wishes to confirm as follows its agreement with you and
the other several Managers on whose behalf you are acting, in connection with
the several purchases of the Shares by the Managers.
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
Underwritten Shares. 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 Shares may commence, the term
"Registration Statement" as used in this Agreement means the registration
statement as amended by said post-effective amendment. The term "Prospectuses"
as used in this Agreement means the prospectuses in the forms included in the
Registration Statement, or, if the prospectuses included in the Registration
Statement omit information in reliance on Rule 430A under the Act and such
information is included in prospectuses filed with the Commission pursuant to
Rule 424(b) under the Act, the term "Prospectuses" as used in this Agreement
means the prospectuses in the forms included in the Registration Statement as
supplemented by the addition of the Rule 430A information contained in the
prospectuses filed with the Commission pursuant to Rule 424(b). 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 "Prepricing
2
<PAGE>
Prospectuses" as used in this Agreement means the prospectuses 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
prospectuses shall have been amended from time to time prior to the date of the
Prospectuses. Any reference in this Agreement to the registration statement,
the Registration Statement, any Prepricing Prospectuses or the Prospectuses
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 Prospectuses
or the Prospectuses, as the case may be, and any reference to any amendment or
supplement to the registration statement, the Registration Statement, any
Prepricing Prospectuses or the Prospectuses shall be deemed to refer to and
include any documents filed after such date under the Securities Exchange Act of
1934, as amended (the "Exchange Act") which, upon filing, are incorporated by
reference therein, as required by paragraph (b) of Item 12 of Form S-3. As used
herein, the term "Incorporated Documents" means the documents which at the time
are incorporated by reference in the registration statement, the Registration
Statement, any Prepricing Prospectuses, the Prospectuses, or any amendment or
supplement thereto.
It is understood that two forms of Prepricing Prospectus and two forms
of Prospectus are to be used in connection with the offering and sale of the
Underwritten Shares: a Prepricing Prospectus and a Prospectus relating to the
U.S. Shares that are to be offered and sold in the United States (as defined
herein) or Canada (as defined herein) to U.S. or Canadian Persons (as defined
herein) (the "U.S. Prepricing Prospectus" and the "U.S. Prospectus,"
respectively), and a Prepricing Prospectus and a Prospectus relating to the
Shares that are to be offered and sold outside the United States or Canada to
persons other than U.S. or Canadian Persons (the "International Prepricing
Prospectus" and the "International Prospectus," respectively). The U.S.
Prospectus and the International Prospectus are herein collectively called the
"Prospectuses," and the U.S. Prepricing Prospectus and the International
Prepricing Prospectus are herein called the "Prepricing Prospectuses." For
purposes of this Agreement: "Rules and Regulations" means the rules and
regulations adopted by the Commission under either the Act or the Securities
Exchange Act of 1934, as amended (the "Exchange Act") as applicable; "U.S. or
Canadian Person" means any resident or national of the United States or Canada,
any corporation, partnership or other entity created or organized in or under
the laws of the United States or Canada or any estate or trust the income of
which is subject to United States or Canadian income taxation regardless of the
source of its income (other than the foreign branch of any U.S. or Canadian
Person), and includes any United States or Canadian branch of a person other
than a U.S. or Canadian Person; "United States" means the United States of
America (including the states thereof and the District of Columbia) and its
territories, its possessions and other areas subject to its jurisdiction; and
"Canada" means Canada and its territories, its possessions and other areas
subject to its jurisdiction.
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 Manager and, upon the
3
<PAGE>
basis of the representations, warranties and agreements of the Company herein
contained and subject to all the terms and conditions set forth herein, each
Manager agrees, severally and not jointly, to purchase from the Company, at a
purchase price of $______per share (the "purchase price per share"), the number
of Shares set forth opposite the name of such Manager in Schedule I hereto (or
such number of Shares increased as set forth in Section 10 hereof).
3. TERMS OF PUBLIC OFFERING. The Company has been advised by you
that the Managers propose to make a public offering of their respective portions
of the Shares as soon after the Registration Statement and this Agreement have
become effective as in your judgment is advisable and initially to offer the
Shares upon the terms set forth in the International Prospectus.
4. DELIVERY OF THE SHARES AND PAYMENT THEREFOR. Delivery to the
Managers of and payment for the Shares shall be made at the office of Smith
Barney Inc., 388 Greenwich Street, New York, N.Y. 10013, at 10:00 A.M., New York
City time, on May ____, 1997 (the "Closing Date"). The place of closing for
the Shares and the Closing Date may be varied by agreement between you and the
Company.
Certificates for the Shares shall be 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 preceding the Closing Date. Such certificates 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. The certificates evidencing the Shares to be purchased hereunder
shall be delivered to you on the Closing Date, against payment of the purchase
price therefor in immediately available funds.
5. AGREEMENTS OF THE COMPANY. The Company agrees with the several
Managers 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 Shares 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
Prospectuses or the Prospectuses 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 Shares for
offering or sale in any jurisdiction or the initiation of any proceeding for
such purpose; and (iii)
4
<PAGE>
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
Prospectuses (as then amended or supplemented) untrue or which requires the
making of any additions to or changes in the Registration Statement or the
Prospectuses (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 Prospectuses (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) four 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 request, (iii) such number of copies of the
Incorporated Documents, without exhibits, as you may request, and (iv) four
copies of the exhibits to the Incorporated Documents.
(d) The Company will not file any amendment to the Registration
Statement or make any amendment or supplement to the Prospectuses 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 International 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 Shares
are offered by the several Managers and by dealers, prior to the date of the
International Prospectus, of each International 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 Managers an International Prospectus is required by the Act to
be delivered in connection with sales by any Manager or dealer, the Company will
expeditiously deliver to each Manager and each dealer, without charge, as many
copies of the International Prospectus (and of any amendment or supplement
thereto) as you may request. The Company consents to the use of the
International
5
<PAGE>
Prospectus (and of any amendment or supplement thereto) in accordance with the
provisions of the Act and with the securities laws of the jurisdictions in which
the Shares are offered by the several Managers and by all dealers to whom Shares
may be sold, both in connection with the offering and sale of the Shares and for
such period of time thereafter as the International Prospectus is required by
the Act to be delivered in connection with sales by any Manager 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 Managers is required to be set
forth in the International 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 International 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 Managers and dealers a
reasonable number of copies thereof. In the event that the Company and you, as
Lead Managers for the several Managers, agree that the International 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 counsel for the
Managers in connection with the registration or qualification of the Shares for
offering and sale by the several Managers and by dealers under the securities
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 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
Shares, in any jurisdiction where it is not now so subject.
(h) The Company will make generally available to its security holders
a consolidated earnings statement, which need not be audited, covering a twelve-
month period commencing after the effective date of the Registration Statement
and ending not later than 15 months thereafter, as soon as practicable after the
end of such period, which consolidated earnings statement shall satisfy the
provisions of Section 11(a) of the Act.
(i) During the period of five years hereafter, the Company will
furnish to you (i) as soon as available, a copy of each report of the Company
mailed to stockholders or filed with the Commission, and (ii) from time to time
such other information concerning the Company as you may 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
6
<PAGE>
if this Agreement shall be terminated by the Managers 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 the Lead
Managers for all out-of-pocket expenses (including fees and expenses of counsel
for the Managers) incurred by you in connection herewith.
(k) The Company will apply the net proceeds from the sale of the
Shares substantially in accordance with the description set forth in the
Prospectuses.
(l) If Rule 430A of the Act is employed, the Company will timely file
the Prospectuses pursuant to Rule 424(b) under the Act and will advise you of
the time and manner of such filing.
(m) The Company will not sell, contract to sell or otherwise dispose
of any Common Stock, or any securities convertible into or exercisable or
exchangeable for Common Stock or grant any options or warrants to purchase
Common Stock, for a period of 120 days after the date hereof, without the prior
written consent of Smith Barney Inc., except for sales to the Managers pursuant
to this Agreement and the U.S. Underwriters pursuant to the U.S. Underwriting
Agreement.
(n) The Company has furnished or will furnish to you "lock-up"
letters, in form and substance satisfactory to you, signed by each of its
current officers and directors and each of its stockholders designated by you.
(o) Except as stated in this Agreement and in the U.S. Underwriting
Agreement and in the Prepricing Prospectuses and Prospectuses, the Company has
not taken, nor will it take, directly or indirectly, any action designed to or
that might reasonably be expected to cause or result in stabilization or
manipulation of the price of the Common Stock to facilitate the sale or resale
of the Shares.
(p) The Company will use its best efforts to satisfy on or before the
Closing Date all conditions to the Managers' obligations to purchase the Shares.
(q) The Company will use its best efforts to have the shares of Common
Stock which it agrees to sell under this Agreement 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 Manager that:
(a) Each International 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
7
<PAGE>
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 Prospectuses 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 statements in or omissions from the Registration Statement or the
Prospectuses made in reliance upon and in conformity with information relating
to any Manager furnished to the Company in writing by or on behalf of any
Manager through the Lead Managers expressly for use therein.
(c) The Incorporated Documents heretofore filed, when they were filed
(or, if any amendment with respect to any such document was filed, when such
amendment was filed), conformed in all material respects with the requirements
of the Exchange Act and the rules and regulations thereunder, any further
Incorporated Documents so filed will, when they are filed, conform in all
material respects with the requirements of the Exchange Act and the rules and
regulations thereunder; no such document when it was filed (or, if an amendment
with respect to any such document was filed, when such amendment was filed),
contained an untrue statement of a material fact or omitted to state a material
fact required to be stated therein or necessary in 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) 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 have been duly
authorized and, when issued and delivered to the Managers against payment
therefor in accordance with the terms hereof, will be validly issued, fully paid
and 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 Prospectuses.
(e) 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 Prospectuses, and is
duly registered and qualified to conduct its business and is in good standing in
each jurisdiction or place where the nature of its properties or the conduct of
its business requires such registration or qualification, except where the
failure so to register or qualify does not have a material adverse effect on the
condition (financial or other), business, properties,
8
<PAGE>
net worth or results of operations of the Company and the Subsidiaries (as
hereinafter defined) taken as a whole.
(f) All the Company's subsidiaries (collectively, the "Subsidiaries")
are listed in an exhibit to the Company's Annual Report on Form 10-K which is
incorporated by reference into the Registration Statement. Each Subsidiary is a
corporation duly organized, validly 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 Prospectuses, and is duly registered and
qualified to conduct its business and is in good standing in each jurisdiction
or place where the nature of its properties or the conduct of its business
requires such registration or qualification, except where the failure so to
register or qualify does not have a material adverse effect on the condition
(financial or other), business, properties, net worth or results of operations
of such Subsidiary; 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, free and clear of any lien, adverse claim, security
interest, equity or other encumbrance.
(g) 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 Prospectuses 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 Prospectuses 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.
(h) 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 or of any decree of any court or governmental agency or body having
jurisdiction over the Company or any of the Subsidiaries, or in default in any
material respect in the performance of any obligation, agreement or condition
contained in any bond, debenture, note or any other evidence of indebtedness or
in any material agreement, indenture, lease or other instrument to which the
Company or any of the Subsidiaries is a party or by which any of them or any of
their respective properties may be bound.
(i) Neither the issuance and sale of the Shares, the execution,
delivery or performance of this Agreement or the U.S. Underwriting Agreement 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
9
<PAGE>
as may be required for the registration of the Shares under the 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 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.
(j) 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 Prospectuses (or
any amendment or supplement thereto) are independent public accountants as
required by the Act.
(k) The historical and pro forma financial statements, together with
related schedules and notes, included or incorporated by reference in the
Registration Statement and the Prospectuses (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 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 Prospectuses (and any amendment or supplement thereto), have been
prepared on a basis consistent with such historical financial statements, except
for the pro forma adjustments specified therein, and give effect to assumptions
made on a reasonable basis and present fairly the historical and proposed
transactions contemplated by this Agreement and the Prospectuses (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 Prospectuses (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.
(l) The execution and delivery of, and the performance by the Company
of its obligations under this Agreement and the U.S. Underwriting Agreement have
been duly and validly authorized by the Company, and each of this Agreement and
the U.S. Underwriting Agreement has
10
<PAGE>
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 or thereunder may be limited by federal or state securities laws.
(m) Except as disclosed in the Registration Statement and the
Prospectuses (or any amendment or supplement thereto), subsequent to the
respective dates as of which such information is given in the Registration
Statement and the Prospectuses (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.
(n) Each of the Company and the Subsidiaries has good and marketable
title to all property (real and personal) described in the Prospectuses as being
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
Prospectuses or in a document filed as an exhibit to the Registration Statement
and all the property described in the Prospectuses as being held under lease by
each of the Company and the Subsidiaries is held by it under valid, subsisting
and enforceable leases.
(o) 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 Shares,
will not distribute any offering material in connection with the offering and
sale of the Shares other than the Registration Statement, the Prepricing
Prospectuses, the Prospectuses or other materials, if any, permitted by the Act.
(p) The Company and each of the Subsidiaries has such 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 Prospectuses, subject to
such qualifications as may be set forth in the Prospectuses; 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 Prospectuses; and, except as described in the Prospectuses, none of such
permits contains any restriction that is materially burdensome to the Company or
any of the Subsidiaries.
(q) The Company maintains a system of internal accounting controls
sufficient to provide reasonable assurances that (i) transactions are executed
in accordance with management's
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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.
(r) 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
Prospectuses.
(s) The Company and each of the Subsidiaries have filed all tax
returns required to be filed, which returns are complete and correct, 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.
(t) 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 or the U.S. Underwriting Agreement.
(u) 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 Prospectuses as being owned by them or any of them or necessary
for the conduct of their respective businesses, and the Company is not aware of
any claim to the contrary or any challenge by any other person to the rights of
the Company and the Subsidiaries with respect to the foregoing.
(v) The Company has complied with all provisions of Florida Statutes,
Section 517.075, relating to issuers doing business with Cuba.
(w) 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 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.
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(x) To the Company's knowledge, no labor problem exists with its
employees or with employees of any Subsidiary or is imminent that could
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 materially adversely affect the condition
(financial or other), business, properties, net worth or results of operations
of the Company and the Subsidiaries, taken as a whole.
(y) 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 on the condition (financial or other), business, properties, net
worth or results of operations of the Company and the Subsidiaries, taken as a
whole. 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").
(z) 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, singly or in the
aggregate, have a material adverse effect on the condition (financial or other),
business, properties, net worth or results of operations of the Company and the
Subsidiaries, taken as a whole.
7. INDEMNIFICATION AND CONTRIBUTION. (a) The Company agrees to
indemnify and hold harmless each of you and each other Manager and each person,
if any, who controls any Manager 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 International Prepricing Prospectus or in the
Registration Statement or the International 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
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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 Manager furnished in writing
to the Company by or on behalf of such Manager through you expressly for use in
connection therewith; provided, however, that the indemnification contained in
this paragraph (a) with respect to any International Prepricing Prospectus shall
not inure to the benefit of any Manager (or to the benefit of any person
controlling such Manager) on account of any such loss, claim, damage, liability
or expense arising from the sale of the Shares by such Manager to any person if
a copy of the International 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 International Prepricing
Prospectus was corrected in the International Prospectus, provided that the
Company has delivered the International Prospectus to the several Managers in
requisite quantity on a timely basis to permit such delivery or sending. The
foregoing indemnity agreement shall be in addition to any liability that the
Company may otherwise have.
(b) If any action, suit or proceeding shall be brought against any
Manager or any person controlling any Manager in respect of which indemnity may
be sought against the Company, such Manager or such controlling person shall
promptly notify the Company and the Company shall assume the defense thereof,
including the employment of counsel and payment of all fees and expenses. Such
Manager 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 Manager 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 Manager or
such controlling person and the Company and such Manager or such controlling
person shall have been advised by its counsel that representation of such
indemnified party and the Company by the same counsel would be inappropriate
under applicable standards of professional conduct (whether or not such
representation by the same counsel has been proposed) due to actual or potential
differing interests between them (in which case the Company shall not have the
right to assume the defense of such action, suit or proceeding on behalf of such
Manager 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 Managers 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,
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suit or proceeding, the Company agrees to indemnify and hold harmless any
Manager, 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 Manager 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 Manager, but only with respect to
information relating to such Manager furnished in writing by or on behalf of
such Manager through you expressly for use in the Registration Statement, the
International Prospectus or any International 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 International
Prospectus or any International Prepricing Prospectus, or any amendment or
supplement thereto, and in respect of which indemnity may be sought against any
Manager pursuant to this paragraph (c), such Manager 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 Manager 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 Manager's
expense), and the Company, its directors, any such officer, and any such
controlling person shall have the rights and duties given to the Managers by
paragraph (b) above. The foregoing indemnity agreement shall be in addition to
any liability that the Managers 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 Managers on the other hand from the Offerings,
or (ii) if the allocation provided by clause (i) above is not permitted by
applicable law, in such proportion as is appropriate to reflect not only the
relative benefits referred to in clause (i) above but also the relative fault of
the Company on the one hand and the Managers 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 Managers
on the other shall be deemed to be in the same proportion as the total net
proceeds from the Offerings (before deducting expenses) received by the Company
bear to the total underwriting discounts and commissions received by the
Managers, in each case as set forth in the table on the cover page of the
International Prospectus. The relative fault of the Company on the one hand and
the Managers 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 Managers on the
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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 Managers 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 Managers 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 Manager shall be required to contribute any
amount in excess of the amount by which the total price of the Shares
underwritten by it and distributed to the public exceeds the amount of any
damages which such Manager 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 Managers' obligations to contribute
pursuant to this Section 7 are several in proportion to the respective numbers
of Shares set forth opposite their names in Schedule I hereto (or such number of
Shares increased as set forth in Section 10 hereof) and not joint.
(f) No indemnifying party shall, without the prior written consent of
the indemnified party, effect any settlement of any pending or threatened
action, suit or proceeding in respect of which any indemnified party is or could
have been a party and indemnity could have been sought hereunder by such
indemnified party, unless such settlement includes an unconditional release of
such indemnified party from all liability on claims that are the subject matter
of such action, suit or proceeding.
(g) Any losses, claims, damages, liabilities or expenses for which an
indemnified party is entitled to indemnification or contribution under this
Section 7 shall be paid by the indemnifying party to the indemnified party as
such losses, claims, damages, liabilities or expenses are incurred. The
indemnity and contribution agreements contained in this Section 7 and the
representations and warranties of the Company set forth in this Agreement shall
remain operative and in full force and effect, regardless of (i) any
investigation made by or on behalf of any Manager or any person controlling any
Manager, the Company, its directors or officers or any person controlling the
Company, (ii) acceptance of any Shares and payment therefor hereunder, and (iii)
any termination of this Agreement. A successor to any Manager or any person
controlling any Manager, 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.
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8. CONDITIONS OF MANAGERS' OBLIGATIONS. The several obligations of
the Managers to purchase the Shares 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 Shares 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 Manager, threatened
by the Commission, and any request of the Commission for additional information
(to be included in the Registration Statement or the International Prospectus or
otherwise) shall have been complied with to your 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 Prospectuses, which in your opinion, as
Lead Managers of the several Managers, would materially, adversely affect the
market for the Shares, 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 Prospectuses untrue or which, in the opinion of the Company and its
counsel or the Managers and their counsel, requires the making of any addition
to or change in the Prospectuses 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 Prospectuses
to reflect such event or development would, in your opinion, as Lead Managers
for the several Managers, materially adversely affect the market for the Shares.
(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, as Lead Managers for the several Managers, to the effect that:
(i) 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 Prospectuses (and
any amendment or supplement thereto), 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
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condition (financial or other), business, properties, net worth or results of
operations of the Company and the Subsidiaries taken as a whole;
(ii) Each of the Subsidiaries is a corporation duly organized and
validly existing in good standing under the laws of the jurisdiction of its
organization, 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 Prospectuses (and any amendment or supplement thereto), and
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, free and clear of any perfected security interest, or, to the best
knowledge of such counsel after reasonable inquiry, 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 Prospectuses; and the
authorized capital stock of the Company conforms in all material respects as to
legal matters to the description thereof contained in the Prospectuses under the
caption "Description of Capital Stock";
(iv) All the shares of capital stock of the Company outstanding prior
to the issuance of the Shares have been duly authorized and validly issued, and
are fully paid and nonassessable;
(v) The Underwritten Shares have been duly authorized and, when issued
and delivered to the Managers and the U.S. Underwriters against payment therefor
in accordance with the terms of the International Underwriting Agreement and the
U.S. Underwriting Agreement, will be validly issued, fully paid and
nonassessable and free of any preemptive, or to the best knowledge of such
counsel after reasonable inquiry, similar rights that entitle or will entitle
any person to acquire any Shares upon the issuance thereof by the Company;
(vi) The form of certificates for the Shares conforms to the
requirements of the Delaware General Corporation Law;
(vii) The Registration Statement and all post-effective amendments,
if any, have become effective under the Act and, to the best knowledge of such
counsel after reasonable inquiry, 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 Prospectuses pursuant to Rule 424(b) has been made in accordance with Rule
424(b);
(viii) The Company has corporate power and authority to enter into
the International Underwriting Agreement and the U.S. Underwriting Agreement and
to issue, sell and deliver the Underwritten Shares to the Managers and the U.S.
Underwriters as provided therein, and each of the International Underwriting
Agreement and the U.S. Underwriting Agreement has been
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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;
(ix) Neither the Company nor any of the Subsidiaries is in violation
of its respective certificate or articles of incorporation or bylaws, or other
organizational documents, or to the best knowledge of such counsel after
reasonable inquiry, 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 Prospectuses;
(x) Neither the offer, sale or delivery of the Underwritten Shares,
the execution, delivery or performance of the International Underwriting
Agreement or the U.S. Underwriting Agreement, compliance by the Company with the
provisions of the International Underwriting Agreement or the U.S. Underwriting
Agreement, nor consummation by the Company of the transactions contemplated by
the International Underwriting Agreement or by the U.S. Underwriting Agreement
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 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 is bound that is an exhibit to the Registration Statement or to any
Incorporated Document, or is known to such counsel after reasonable inquiry, 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, 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 after reasonable
inquiry, applicable to the Company, the Subsidiaries or any of their respective
properties;
(xi) No consent, approval, authorization or other order of, or
registration or filing with, any court, regulatory body, administrative agency
or other governmental body, agency, or official is required on the part of the
Company (except as have been obtained under the Act or such as may be required
under state securities or Blue Sky laws governing the purchase and distribution
of the Shares) for the valid issuance and sale of the Shares to the Managers as
contemplated by the International Underwriting Agreement;
(xii) The Registration Statement and the Prospectuses 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
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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 best knowledge of such counsel after reasonable
inquiry, (A) other than as described or contemplated in the Prospectuses (or any
supplement thereto), 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 Prospectuses (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 Prospectuses (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) To the best knowledge of such counsel after reasonable inquiry,
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;
(xv) The statements in the Registration Statement and Prospectuses,
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
(xvi) 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 Prospectuses, 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 Prospectuses, as of their respective dates and as of the Closing Date,
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 Prospectuses, as of
its respective date, and as of the Closing Date, 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
opinion with respect to the financial statements and the notes thereto and the
schedules and
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other financial and statistical data included in the Registration Statement or
the Prospectuses or any Incorporated Document).
In rendering their opinion as aforesaid, counsel may rely upon an
opinion or opinions, each dated the Closing Date, of other counsel retained by
them or the Company as to laws of any jurisdiction other than the United States
or the State of New York, provided that (1) each such local counsel is
acceptable to the Lead Managers, (2) such reliance is expressly authorized by
each opinion so relied upon and a copy of each such opinion is delivered to the
Lead Managers and is, in form and substance satisfactory to them and their
counsel, and (3) counsel shall state in their opinion that they believe that
they and the Managers are justified in relying thereon.
(d) You shall have received on the Closing Date an opinion of Jack A.
Green, Esq., General Counsel to the Company, dated the Closing Date and
addressed to you, as Lead Managers of the several Managers, to the effect that:
(i) The Company and each of the Subsidiaries has full corporate power
and authority, and 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, singly or in the aggregate, have a material adverse effect on the
condition (financial or other), business, properties, net worth or results of
operations of the Company and the Subsidiaries taken as a whole), to own their
respective properties and to conduct their respective businesses as now being
conducted, as described in the Prospectuses;
(ii) Except as disclosed in the Prospectuses, the Company owns of
record, directly or indirectly, all the outstanding shares of capital stock of
each of the Subsidiaries free and clear of any lien, adverse claim, security
interest, equity, or other encumbrance;
(iii) Other than as described or contemplated in the Prospectuses (or
any supplement thereto), 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 Prospectuses (or
any amendment or supplement thereto);
(iv) There are no agreements, contracts, indentures, leases or other
instruments, that are required to be described in the Registration Statement or
the Prospectuses (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, service marks, service mark registrations, trade names,
copyrights, licenses, inventions, trade secrets and rights described in the
Prospectuses as being owned by them or any of them or necessary for the conduct
of their respective businesses, and such counsel is not aware
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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;
(vi) 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;
(vii) Except as described in the Prospectuses, 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; and
(viii) Except as described in the Prospectuses, 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 Shares 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.
(e) You shall have received on the Closing Date an opinion of Latham
& Watkins, counsel for the Managers, dated the Closing Date and addressed to
you, as Lead Managers for the several Managers, with respect to the matters
referred to in clauses (v), (vii), (viii), (xii) and (xvi) of the foregoing
paragraph (c) and such other related matters as you may request.
(f) You shall have received letters addressed to you, as Lead
Managers for the several Managers, 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 Prospectuses (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 Prospectuses
(or any amendment or supplement thereto), except as may otherwise be stated in
the Registration Statement and Prospectuses (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
22
<PAGE>
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 Prospectuses (or any amendment or supplement
thereto); and (v) all the representations and warranties of the Company
contained in this Agreement shall be true and correct on and as of the date
hereof and on and as of the Closing Date as if made on and as of the Closing
Date, and you shall have received a certificate, dated the Closing Date and
signed by the chief executive officer and the chief financial officer of the
Company (or such other officers as are acceptable to you), to the effect set
forth in this Section 8(g) and in Section 8(h) hereof.
(h) The Company shall not have failed at or prior to the Closing Date
to have performed or complied with any of its agreements herein contained and
required to be performed or complied with by it hereunder at or prior to the
Closing Date.
(i) Prior to the Closing Date, the Shares shall have been listed,
subject to notice of issuance, on the New York Stock Exchange.
(j) The closing under the U.S. Underwriting Agreement shall have
occurred concurrently with the closing hereunder on the Closing Date.
(k) The Company shall have furnished or caused to be furnished to you
such further certificates and documents as you shall have requested.
All such opinions, certificates, letters and other documents will be
in compliance with the provisions hereof only if they are 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, as Lead Managers for the several Managers, or to counsel for
the Managers, shall be deemed a representation and warranty by the Company to
each Manager as to the statements made therein.
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 Prospectuses,
and each amendment or supplement to any of them; (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
International Prepricing Prospectus, the International 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
Shares; (iii) the preparation, printing, authentication, issuance and delivery
of certificates for the Shares, including any stamp taxes in connection with the
original issuance and sale of the
23
<PAGE>
Shares; (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 Shares; (v) the listing of the Shares on the New York Stock Exchange;
(vi) the registration or qualification of the Shares for offer and sale under
the securities laws of the several states as provided in Section 5(g) hereof
(including the reasonable fees, expenses and disbursements of counsel for the
Managers and the U.S. Underwriters relating to the preparation, printing or
reproduction, and delivery of the preliminary and supplemental Blue Sky
Memoranda and such registration and qualification); (vii) the filing fees and
the fees and expenses of counsel for the Managers and the U.S. Underwriters in
connection with any filings required to be made with the National Association of
Securities Dealers, Inc.; (viii) the transportation and other expenses incurred
by or on behalf of Company representatives in connection with presentations to
prospective purchasers of the Shares; and (ix) 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 Shares 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, as Lead Managers for the several Managers, by
notifying the Company.
If any one or more of the Managers shall fail or refuse to purchase
Shares which it or they are obligated to purchase hereunder on the Closing Date,
and the aggregate number of Shares which such defaulting Manager or Managers are
obligated but fail or refuse to purchase is not more than one-tenth of the
aggregate number of Shares which the Managers are obligated to purchase on the
Closing Date, each non-defaulting Manager shall be obligated, severally, in the
proportion which the number of Shares set forth opposite its name in Schedule I
hereto bears to the aggregate number of Shares set forth opposite the names of
all non-defaulting Managers or in such other proportion as you may specify in
accordance with the Agreement Among Managers of Smith Barney Inc., to purchase
the Shares which such defaulting Manager or Managers are obligated, but fail or
refuse, to purchase. If any one or more of the Managers shall fail or refuse to
purchase Shares which it or they are obligated to purchase on the Closing Date
and the aggregate number of Shares with respect to which such default occurs is
more than one-tenth of the aggregate number of Shares which the Managers are
obligated to purchase on the Closing Date and arrangements satisfactory to you
and the Company for the purchase of such Shares by one or more non-defaulting
Managers 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 Manager 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
24
<PAGE>
longer than seven days, in order that the required changes, if any, in the
Registration Statement and the Prospectuses or any other documents or
arrangements may be effected. Any action taken under this paragraph shall not
relieve any defaulting Manager from liability in respect of any such default of
any such Manager under this Agreement. The term "Manager" 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 Shares which a defaulting Manager is obligated, but fails or refuses,
to purchase.
Any notice under this Section 10 may be given by telegram, telecopy or
telephone but shall be subsequently confirmed by letter.
11. TERMINATION OF AGREEMENT. This Agreement shall be subject to
termination in your absolute discretion, without liability on the part of any
Manager to the Company by notice to the Company, if prior to the Closing Date,
(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 or Massachusetts 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 Shares
at the offering price to the public set forth on the cover page of the
International Prospectus or to enforce contracts for the resale of the Shares by
the Managers. 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 MANAGERS. The statements set forth
in the last paragraph on the cover page, the stabilization legend on the inside
front cover page, and the statements in the first and fourth paragraphs under
the caption "Underwriting" in any International Prepricing Prospectus and in the
International Prospectus, constitute the only information furnished by or on
behalf of the Managers through you 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, as Lead Managers for the several Managers,
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
several Managers, 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
25
<PAGE>
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 Manager of any of the Shares
in his status as such purchaser.
14. APPLICABLE LAW; COUNTERPARTS. This Agreement shall be governed
by and construed in accordance with the laws of the State of New York applicable
to contracts made and to be performed within the State of New York.
This Agreement may be signed in various counterparts which together
constitute one and the same instrument. If signed in counterparts, this
Agreement shall not become effective unless at least one counterpart hereof
shall have been executed and delivered on behalf of each party hereto.
26
<PAGE>
Please confirm that the foregoing correctly sets forth the agreement
between the Company and the several Managers.
Very truly yours,
CONVERSE INC.
By _________________________________
Chairman of the Board
Confirmed as of the date first
above mentioned on behalf of
themselves and the other several
Managers named in Schedule I
hereto.
SMITH BARNEY INC.
DILLON, READ & CO. INC.
DONALDSON, LUFKIN & JENRETTE
SECURITIES CORPORATION
As Lead Managers for the several Managers
By SMITH BARNEY INC.
By________________________________
Managing Director
27
<PAGE>
SCHEDULE I
CONVERSE INC.
Number of
Manager International Shares
-------- --------------------
Smith Barney Inc. .
Dillon, Read & Co. Inc.
Donaldson, Lufkin & Jenrette Securities Corporation
_______
Total 900,000
=======
28
<PAGE>
EXHIBIT 23.1
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the use in the Prospectus constituting part of this
Registration Statement on Form S-3 of our report dated February 19, 1997,
except as to Note 16, which is as of March 14, 1997, relating to the financial
statements of Converse Inc. for the two year period ended December 28, 1996,
which appears in such Prospectus. We also consent to the application of such
report to the Financial Statement Schedule for the two years ended December
28, 1996, which is included in Converse Inc.'s Annual Report on Form 10-K,
when such schedule is read in conjunction with the financial statements
referred to in our report. The audits referred to in such report also included
this Financial Statement Schedule. We also consent to the reference to us
under the heading "Experts" in such Prospectus.
Price Waterhouse LLP
Boston, Massachusetts
March 21, 1997
<PAGE>
EXHIBIT 23.2
INDEPENDENT AUDITORS' CONSENT
The Board of Directors
Converse Inc.:
We consent to the use of our report included herein and to the reference to
our firm under the heading "Experts" in the prospectus.
KPMG Peat Marwick LLP
Boston, Massachusetts
March 19, 1997
<PAGE>
EXHIBIT 24
POWER OF ATTORNEY
KNOW ALL ME BY THESE PRESENTS that each of the undersigned does hereby
nominate, constitute and appoint Glenn N. Rupp, Jack A. Green or Donald J.
Camacho, or any of them, as his agent and attorney-in-fact, in his name to
execute on behalf of the undersigned a Registration Statement on From S-3 to
be filed with the Securities and Exchange Commission under the Securities Act
of 1933, as amended, in connection with the registration under said Act of
shares of Common Stock of Converse, Inc. (the "Company"), the authority herein
given to include execution of amendments of any part of such Registration
Statement and generally to do and perform all things necessary to be done in
the premises as fully and effectively in all respects as the undersigned could
do if personally present.
IN WITNESS WHEREOF this Power of Attorney has been executed in counterparts
by individuals listed below as of the 20th day of March, 1997.
/s/ Donald J. Barr
- ------------------------------------- -------------------------------------
Donald J. Barr John J. Hannan
/s/ Leon D. Black /s/ Joshua J. Harris
- ------------------------------------- -------------------------------------
Leon D. Black Joshua J. Harris
/s/ Julius W. Erving /s/ John H. Kissick
- ------------------------------------- -------------------------------------
Julius W. Erving John H. Kissick
- ------------------------------------- -------------------------------------
Robert H. Falk Richard B. Loynd
/s/ Gilbert Ford /s/ Glenn N. Rupp
- ------------------------------------- -------------------------------------
Gilbert Ford Glenn N. Rupp
/s/ Michael S. Gross /s/ Michael D. Weiner
- ------------------------------------- -------------------------------------
Michael S. Gross Michael D. Weiner
