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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
ACT OF 1934 FOR THE FISCAL YEAR ENDED DECEMBER 28, 1996.
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934 [NO FEE REQUIRED] FOR THE TRANSITION
PERIOD FROM _________ TO __________
COMMISSION FILE NUMBER 1-13430
CONVERSE INC.
(Exact name of registrant as specified in its charter)
DELAWARE 43-1419731
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
ONE FORDHAM ROAD
NORTH READING MASSACHUSETTS 01864
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (508) 664-1100
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Securities registered pursuant to Section 12(b) of the Act:
TITLE OF EACH CLASS NAME OF EACH EXCHANGE
ON WHICH REGISTERED
Common stock, without par value New York Stock Exchange
Securities registered pursuant to Section 12 (g) of the Act:
None.
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Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15 (D) of the Securities Exchange
Act of 1934 during the preceding 12 months (or such shorter period that
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days: YES [X] NO [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to
item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in part iii of this Form 10-K or any
amendment to this Form 10-K. [X]
As of March 14, 1997, the aggregate market value of the registrant's
voting stock held by non-affiliates of the registrant was approximately
$355,741,155, based on the closing sales price of the registrant's Common Stock
as reported on the New York Stock Exchange as of such date ($20 5/8).
Indicate with a check mark whether the registrant has filed all
documents and reports required to be filed by Section 12, 13 or 15(d) of the
Securities Exchange Act of 1934 subsequent to the distribution of securities
under a plan confirmed by a Court. YES [X] NO [ ]
As of March 14, 1997, 17,248,056 shares of the registrant's Common
Stock were outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrant's definitive Proxy Statement to be filed
with the Securities and Exchange Commission on or before April 28, 1997 for the
Annual Meeting of Stockholders to be held on June 18, 1997 are incorporated by
reference into Part III of this Report, as indicated herein.
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CONVERSE INC.
ANNUAL REPORT ON FORM 10-K
TABLE OF CONTENTS
Page
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PART I.
Item 1. Business...............................................
General.............................................
Products............................................
Marketing and Product Development...................
Sales and Distribution..............................
Licensing Agreements................................
Sourcing and Manufacturing..........................
Research and Development............................
Backlog.............................................
Competition.........................................
Trademarks and Patents..............................
Environmental Matters...............................
Employees...........................................
Item 2. Properties.............................................
Item 3. Legal Proceedings......................................
Item 4. Submission of Matters to a Vote of Security Holders....
PART II.
Item 5. Market for Registrant's Common Equity and
Related Stockholder Matters...........................
Item 6. Selected Financial Data................................
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations....................
Item 8. Financial Statements and Supplemental Data.............
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure....................
PART III.
Item 10. Directors and Executive Officers of the Registrant
Item 11. Executive Compensation.................................
Item 12. Security Ownership of Certain Beneficial Owners........
Item 13. Certain Relationships and Related Transactions.........
PART IV.
Item 14. Exhibits, Financial Statement Schedules, and
Reports on Form 8-K...................................
SIGNATURES
Signatures.............................................
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Information contained or incorporated by reference in this Report contains
"forward-looking statements" which can be identified by the use of forward-
looking terminology such as "believes," "expects," "may," "will," "should," or
"anticipates" or the negative thereof or other variations thereon or comparable
terminology, or by discussions of strategy. See, e.g., "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 contained in "Business--Risk Factors" of this Report
constitute cautionary statements identifying important factors with respect to
such forward-looking statements, including certain risks and uncertainties, that
could cause actual results to vary materially from the future results covered in
such forward-looking statements. Other factors could also cause actual results
to vary materially from the future results covered in such forward-looking
statements. The Company undertakes no obligation to publicly release any
revisions to these forward-looking statements to reflect any future events or
occurrences.
PART I
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ITEM 1. BUSINESS.
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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.
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.
. 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.
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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 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.
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.
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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.
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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.
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
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DECEMBER 31, DECEMBER 30, DECEMBER 28,
1994 1995 1996
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(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
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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
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Total.................................. $ 14,212 $ 17,257 $ 27,637
======== ======== ========
</TABLE>
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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.
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
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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 Inc. ("Nike"), with 1996 estimated U.S. footwear revenues
exceeding $2.5 billion, controls over 30% of the U.S. athletic footwear market.
Reebok International, Inc. ("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, 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 AG ("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.
8
<PAGE>
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.
RISK FACTORS
Investors should carefully consider the following factors, together with other
information contained and incorporated by reference in this Report, in
evaluating an investment in the Company.
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.
COMPETITION; CHANGES IN CONSUMER PREFERENCES
As described above under "Business--Competition," the branded athletic
footwear industry is highly competitive. Furthermore, 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 and Product Development." 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. 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".
SHARES ELIGIBLE FOR FUTURE SALE
The Apollo Stockholders have the right to cause Converse to register the
shares of Common Stock that they own pursuant to a registration rights
agreement. 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.
10
<PAGE>
ITEM 2. PROPERTIES.
- --------------------
Converse owns or leases the following principal plants, offices and
warehouses:
FLOOR SPACE
LOCATION TYPE OF FACILITY ------------- OWNED/LEASED
- -------- ---------------- (SQUARE FEET) ------------
-------------
North Reading, MA.......... Headquarters 106,800 Owned
Wilmington, MA............. Research and 23,192 Leased
Development Facility
Lumberton, NC.............. Plant 386,761 Owned
Charlotte, NC.............. Distribution center 431,665 Leased
Reynosa, Mexico............ Plant 50,188 Owned
Mission, TX................ Plant 55,552 Leased
In addition to the above properties, the Company leases space for 35 retail
stores in the U.S. and 2 retail stores in the United Kingdom. The Company also
leases several sales and customer service offices and distribution centers
throughout the world. The Wilmington, Massachusetts lease expires in 1998, with
renewal terms through 2000, the Charlotte, North Carolina lease expires in 2001,
and the Mission, Texas facility lease expires in 1998, with renewal terms
through 2014. For further information regarding the Lumberton and Mission
facilities see "Business--Sourcing and Manufacturing".
ITEM 3. LEGAL PROCEEDINGS.
- ---------------------------
A. Apex-related Litigation
-----------------------
On May 18, 1995, Converse consummated the acquisition of Apex One, Inc.
("Apex"). Under the terms of the Apex 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 million, 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.
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
11
<PAGE>
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 $2.0 million 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 $17.8 million. 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 approximately $8.9 million, $3.5 million
and $5.4 million 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 $750,000, 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
$774,000. 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.
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 $4.0 million payment to the Apex estate and a $500,000 payment
to certain creditors of Apex during the first quarter of 1997, resulting in a
pretax loss of approximately $4.5 million. In addition, Converse relinquished
its claims against Apex. The confirmed plan also included injunction and
release provisions which preclude Apex or its creditors from bringing or
continuing any Apex related claims against Converse.
As a result of the State Court Action, the settlement agreements with certain
former owners of Apex and the Apex bankruptcy payments, Converse will record a
net pretax gain of approximately $13.3 million during the first quarter of 1997.
See notes 3 and 16 to the Consolidated financial statements contained herein.
B. Other Litigation
----------------
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.
12
<PAGE>
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
- -------------------------------------------------------------
Not applicable.
PART II
-------
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
- -------------------------------------------------------------------------------
The Company's common stock ("Common Stock") is traded on the New York Stock
Exchange ("NYSE") 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 NYSE
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
</TABLE>
As of March 14, 1997 there were 17,248,056 shares of Common Stock issued and
outstanding, which shares were held by 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.
ITEM 6. SELECTED FINANCIAL DATA.
- ---------------------------------
The following selected consolidated financial data of Converse should be read
in conjunction with Converse's historical consolidated financial statements and
the notes thereto contained herein. The following selected historical
consolidated financial data has been derived from the historical consolidated
financial statements of Converse. Prior to the Distribution effected on November
17, 1994, Converse was a wholly-owned subsidiary of Furniture Brands
International, Inc. ("Furniture Brands"). Furniture Brands and its principal
domestic subsidiaries, including Converse, emerged from Chapter 11
reorganization on August 3, 1992. In accordance with AICPA Statement of Position
90-7, "Financial Reporting by Entities in Reorganization under the Bankruptcy
Code," Furniture Brands was required to adopt "fresh-start" reporting, and such
principles have been applied to the consolidated financial statements of
Converse and the tables presented below. Accordingly, Converse's consolidated
financial statements at dates and for periods after August 2, 1992 are not
comparable to the consolidated financial statements for prior periods. The
historical consolidated financial statements of Converse for 1994 and prior
periods may not reflect the results of operations or financial position that
would have been obtained had Converse been a separate, independent company
during such periods.
The unaudited pro forma consolidated statement of operations data for the year
ended December 31, 1994 has been derived from the historical consolidated
financial statements of Converse and gives effect to the Distribution, the new
Credit Facility of Converse entered into in connection therewith and the
application of the net proceeds therefrom as if they occurred at the beginning
of the year. The pro forma information is presented for illustrative purposes
only and is not necessarily indicative of operating results that would have
occurred had the Distribution been consummated at the beginning of the year.
13
<PAGE>
<TABLE>
<CAPTION>
FIVE MONTHS ENDED (1) FISCAL YEAR ENDED
------------------------------------ -----------------------------------------------------------
AUG. 2, 1992 JAN. 2, 1993 JAN. 1, 1994 DEC. 31, 1994 DEC. 30, 1995 DEC. 28, 1996
---------------------- ------------ ------------ ------------- -------------- --------------
<S> <C> <C> <C> <C> <C> <C>
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
STATEMENT OF OPERATIONS DATA:
Net sales....................... $ 133,976 $134,879 $380,427 $437,307 $407,483 $ 349,335
Cost of sales................... 93,372 88,204 254,338 286,555 293,948 263,098
--------- -------- -------- -------- -------- ---------
Gross profit.................... 40,604 46,675 126,089 150,752 113,535 86,237
Selling, general and
administrative expenses........ 41,760 43,366 108,059 128,876 146,332 114,888
Royalty income.................. 3,102 4,538 10,808 14,212 17,257 27,638
Restructuring expense (credit).. ---- ---- ---- ---- 14,182 (1,177)
Earnings (loss) from
operations..................... 1,946 7,847 28,838 36,088 (29,722) 164
Loss (credit) on investment
in unconsolidated
subsidiary..................... ---- ---- ---- ---- 52,160 (1,362)
Interest expense................ 2,753 3,152 7,501 7,423 14,043 17,776
Other expense, net.............. 564 165 1,904 504 3,966 6,319
--------- -------- -------- -------- -------- ---------
Earnings (loss) before
reorganization items, income
tax expense (benefit), and
cumulative effect of a change
in accounting principle........ (1,371) 4,530 19,433 28,161 (99,891) (22,569)
Reorganization items............ (99,531) ---- ---- ---- ---- ----
--------- -------- -------- -------- -------- ---------
Earnings (loss) before income
tax expense (benefit) and
cumulative effect of a change
in accounting principle........ (100,902) 4,530 19,433 28,161 (99,891) (22,569)
Income tax expense (benefit).... 313 3,570 7,329 10,565 (28,144) (4,134)
--------- -------- -------- -------- -------- ---------
Earnings (loss) before
cumulative effect of a change
in accounting principle........ (101,215) 960 12,104 17,596 (71,747) (18,435)
Cumulative effect on prior
years of a change in
accounting for retirement
benefits other than pensions.. (6,766) ---- ---- ---- ---- ----
--------- -------- -------- -------- -------- ---------
Net earnings (loss)............. $(107,981) $ 960 $ 12,104 $ 17,596 $(71,747) ($18,435)
========= ======== ======== ======== ======== =========
Net earnings (loss) (per share). $1.05 $(4.30) (1.10)
PRO FORMA STATEMENT OF
OPERATIONS DATA (UNAUDITED):
Interest expense(2)............ 10,148
Income tax expense (3)......... 9,479
Net Earnings(4)................ 16,004
Net Earnings per share (4)(5).. $0.96
BALANCE SHEET DATA
(AT PERIOD END):
Working capital................ $ 119,523 $108,975 $111,080 $131,122 $ 89,680 $ (32,648)
Total assets................... 167,956 167,010 179,954 223,726 224,507 222,603
Long-term debt, less current
maturities.................... 75,587 70,300 69,262 77,087 112,824 9,644
Total stockholders' equity
(deficiency).................. 4,926 3,191 10,270 44,987 (22,685) (38,868)
</TABLE>
14
<PAGE>
- ---------------
(1) Effective January 2, 1993, Converse changed its fiscal year end from the
last Saturday in February of each year to the Saturday closest to December
31 of each year. This change, coupled with "fresh-start" reporting,
results in reporting fiscal 1992 in two 22-week periods.
(2) Reflects the elimination of interest expense on Converse's allocated debt
prior to the Distribution ($80,000 at November 17, 1994) and records
interest expense under the Credit Facility entered into in connection with
the Distribution ("A Facility" borrowings of $35,000 plus average seasonal
borrowing of $10,000 at an average rate of 8.4% per annum, "B Facility"
borrowings of $40,000 at an average rate of 9.15% per annum, letters of
credit fees of $600 per year, unused line fees of $335 per year and
amortization of deferred facility fees [A Facility commitment fees of
$4,000 amortized over three years and B Facility commitment fees of $1,200
amortized over three years, $400 amortized over twenty-seven months
beginning nine months after transaction date and $800 amortized over two
years beginning one year after transaction date]).
(3) Reflects a reduction in income tax expense relating to pro forma
adjustments at an effective income tax of 37.2%.
(4) Includes the effect of $500 in fees that the Company paid to Furniture
Brands for consulting services under a Services Agreement that terminated
after one year, an annual consulting fee of $500 that the Company pays to
Apollo Advisors, L.P. and an annual collateral management fee of $100
payable to the principal lender under the Credit Facility.
(5) Pro forma net earnings per share calculated assuming 16,692,156 shares of
Common Stock were outstanding throughout the period. Outstanding stock
options are considered Common Stock equivalents but are not dilutive for
purposes of computing pro forma net earnings per share.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
- --------------------------------------------------------------------------------
OF OPERATIONS .
- ---------------
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, 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").
15
<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
16
<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.
Net Loss Per Share
The Company recorded a net loss per share of $1.10 in Fiscal 1996 versus a
net 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.
17
<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
18
<PAGE>
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.
19
<PAGE>
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).
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.
20
<PAGE>
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. 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.
21
<PAGE>
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.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTAL DATA.
- ----------------------------------------------------
The information required by this Item is submitted in a separate section of
this report. See Item 14 for index to financial statements required by this
item.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
- ------------------------------------------------------------------------
FINANCIAL DISCLOSURE.
- ---------------------
On April 14, 1995, the Company dismissed KPMG Peat Marwick LLP ("KPMG") as its
independent accountants and engaged Price Waterhouse LLP as its independent
accountants for the Company's 1995 Fiscal year. The Company's decision to
change its independent accounting firm was made in connection with a
reevaluation of this function in connection with the Company's spin-off from
Furniture Brands, its former parent, which occurred on November 17, 1994.
The Audit Committee of the Company's Board of Directors recommended the change
of independent auditors to Price Waterhouse LLP. The Executive Committee of the
Company's Board of Directors voted to approve this change.
The report of KPMG on the Company's financial statements for 1994 did not
contain any adverse opinion or disclaimer of opinion, nor was it qualified or
modified as to uncertainty, audit scope or accounting principles. In addition,
during Fiscal year 1994 and the subsequent interim period preceding April 14,
1995, there were no disagreements with KPMG on any matter of accounting
principles or practices, financial statement disclosure, auditing scope or
procedure, which disagreement, if not resolved to the satisfaction of KPMG,
would have caused KPMG to make a reference to the subject matter of the
disagreement in connection with its report. The Company reported this change in
accountants on Form 8-K on April 19, 1995. At that time, the Company requested
that KPMG furnish it with a letter addressed to the Securities and Exchange
Commission stating whether or not it agrees with the above statements. The
Company filed a copy of such letter as an exhibit to its report on Form 8-K by
amendment on April 26, 1995, promptly after such letter was received.
22
<PAGE>
During the two Fiscal years prior to this change and through April 14, 1995,
the Company had not consulted with Price Waterhouse LLP on any items which
concerned the subject matter of a disagreement or a reportable event with the
former accountants or any other matter described in Regulation S-K Item 304 (a)
(2).
PART III
- --------
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF REGISTRANT.
- ----------------------------------------------------------
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
23
<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.
24
<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.
25
<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.
<PAGE>
ITEM 11. EXECUTIVE COMPENSATION.
- ---------------------------------
The information required by this Item is incorporated by reference from the
Company's definitive proxy statement for the Annual Meeting of Stockholders to
be held June 18, 1997, which will be filed with the Securities and Exchange
Commission on or before April 28, 1997 (the "1997 Proxy Statement").
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
- -------------------------------------------------------------------------
The information required by this Item is incorporated by reference from the
1997 Proxy Statement.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
- ---------------------------------------------------------
The information required by this Item is incorporated by reference from the
1997 Proxy Statement.
PART IV
-------
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K.
- --------------------------------------------------------------------------
(a) List of documents filed as part of this report.
1. Financial statements:
The following consolidated financial statements are included in Item 8 and
presented as a separate section of this report:
Page
----
Report of Independent Accountants, 1996 and 1995 F-2
Independent Auditors' Report, 1994 F-3
Consolidated Balance Sheet at
December 30, 1995 and December 28, 1996 F-4
27
<PAGE>
For each of the fiscal years ended December 31, 1994,
December 30, 1995 and December 28, 1996:
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 - F-23
2. Financial Statement Schedule:
Schedule II - Valuation and Qualifying Accounts F-24
All other schedules are omitted because they are not applicable
or because the required information is presented in the consolidated
financial statements or notes thereto.
3. Exhibits
2.1 Distribution and Services Agreement dated as of November 17, 1994,
between INTERCO and Converse Inc. ("Services Agreement") (3)
2.2 Amendment to Services Agreement dated as of November 28, 1995. (10)
2.3 Securities Purchase Agreement, dated as of April 28, 1995, by and among
Converse Inc., Apex One, Inc., and the Sellers of Apex One, Inc. (7)
3.1 Restated Certificate of Incorporation (3)
3.2 By-laws (3)
4.1 Form of Promissory Notes (7)
4.2 Form of Warrants (7)
10.1 Credit Agreement dated as of November 17, 1994, among Converse
Inc., its subsidiaries, BT Commercial Corporation and certain other
lenders (the "Credit Agreement") (3)
10.2 First Amendment to Credit Agreement (9)
10.3 Waiver to Credit Agreement (8)
10.4 Second Amendment and Waiver to Credit Agreement (9)
10.5 Third Amendment and Waiver to Credit Agreement. (10)
10.6 Fourth Amendment to Credit Agreement (13)
10.7 Fifth Amendment to Credit Facility*
10.8 Sixth Amendment to Credit Facility*
10.9 Converse Inc. 1994 Stock Option Plan, as Amended and Restated (12)
10.10 Converse Inc. 1995 Non-Employee Director Stock Option Plan (10)
10.11 Amendment and Reaffirmation of Lease dated June 29, 1988, between
Godley Construction Company Inc. ("Godley") and Converse Inc. and
Lease Agreement dated as of March 26, 1974, between Godley and
Charlotte Footwear, Inc. (1)
28
<PAGE>
10.12 Sublease Agreement dated as of September 28, 1993, between Kmart
Corporation and Converse Inc. (1)
10.13 Registration Rights Agreement dated as of November 17, 1994,
between Apollo Interco Partners, L.P. and Converse Inc. (3)
10.14 INTERCO/Converse Tax Sharing Agreement dated as of November 17,
1994, between INTERCO and Converse Inc. (3)
10.15 Amendment to INTERCO/Converse Tax Sharing Agreement dated February
21, 1996 (10)
10.16 Consulting Agreement dated as of November 17, 1994, between Apollo
Advisors, L.P. and Converse Inc. (3)
10.17 Converse Inc. Executive Incentive Plan (1)
10.18 Converse Inc. Team Incentive Plan (1)
10.19 Converse Inc. Retirement Plan (1)
10.20 Converse Inc. Supplemental Executive Retirement Plan (10)
10.21 Agreement among Julius W. Erving, the Erving Group and Converse
Inc., dated October 1, 1984 as amended by an Amendment dated September
16, 1988, a Second Amendment dated July 18, 1989, a Third Amendment
dated October 17, 1991, and a Fourth Amendment dated February 7, 1994
(2)
10.22 Fifth Amendment to Agreement among Julius W. Erving, The Erving
Group, Inc. and Converse Inc. (5)
10.23 Sixth Amendment to Agreement among Julius W. Erving, the Erving
Group, Inc. and Converse Inc. (11)
10.24 Seventh Amendment to Agreement among Julius W. Erving, the Erving
Group, Inc. and Converse Inc. *
10.25 Agreement of Sale between INTERCO and Converse Inc. dated
September 30, 1994 relating to a distribution facility in Chester,
South Carolina (2)
10.26 Lease Agreement dated as of January 3, 1995 between Talbot Operations
Inc. and Converse Inc. (4)
10.27 Employment Agreement between Converse and Glenn N. Rupp (12)
10.28 Employment Agreement between Converse and James Solomon (13)
10.29 Employment Agreement between Converse and Donald J. Camacho (10)
10.30 Form of Employment Agreement dated as of October 25, 1995, between
Converse and each of the following: Jack A. Green, Herbert R.
Rothstein, Ronald J. Ryan, Alistair Thorburn, Thomas L. Nelson and
James E. Lawlor (10)
10.31 Amended and Restated Accommodation Letter*
16. Letter Regarding Change in Certifying Accountant (6)
21. List of subsidiaries*
29
<PAGE>
23.1 Consent of KPMG Peat Marwick LLP*
23.2 Consent of Price Waterhouse LLP*
27 Financial Data Schedule
* Filed herewith
(1) Filed as an Exhibit to Converse Inc. Form 10 dated October 14, 1994 filed
with the SEC on October 14, 1994, and incorporated by reference herein.
(2) Filed as an Exhibit to Converse Inc. Form 10/A Amendment
No. 1, filed with the SEC on November 8,
(3) Filed as an Exhibit to Converse Inc. Form 10/A Amendment No. 2, filed with
the SEC on November 23, 1994, and incorporated by reference herein.
(4) Filed as an Exhibit to Converse Inc. Form 10-K dated March 17, 1995, and
incorporated by reference herein.
(5) Filed as an Exhibit to Converse Inc. Quarterly Report on Form 10-Q for the
quarter ended April 1, 1995, and incorporated by reference herein.
(6) Filed as an Exhibit to Converse Inc. Current Report on Form 8-K/A dated
April 14, 1995, and incorporated by reference herein.
(7) Filed as an Exhibit to Converse Inc. Current Report on Form 8-K dated May
18, 1995, and incorporated by reference herein.
(8) Filed as an Exhibit to Converse Inc. Quarterly Report on Form 10-Q for the
quarter ended July 1, 1995, and incorporated by reference herein.
(9) Filed as an Exhibit to Converse Inc. Quarterly Report on Form 10-Q for the
quarter ended September 30, 1995, and incorporated by reference herein.
(10) Filed as an Exhibit to Converse Inc. Annual Report on Form 10-K for the
year ended December 30, 1995, and incorporated by reference herein.
(11) Filed as an Exhibit to Converse Inc. Annual Report on Form 10-Q for the
quarter ended March 30, 1996, and incorporated by reference herein.
(12) Filed as an Exhibit to Converse Inc. Annual Report on Form 10-Q for the
quarter ended June 29, 1996, and incorporated by reference herein.
(13) Filed as an Exhibit to Converse Inc. Annual Report on Form 10-Q for the
quarter ended September 28, 1996, and incorporated by reference herein.
(b) No reports on Form 8-K were filed by the Company during the last quarter
of Fiscal 1995.
UPON WRITTEN REQUEST TO THE COMPANY'S SECRETARY, THE COMPANY WILL FURNISH
SHAREHOLDERS WITH A COPY OF ANY OR ALL SUCH EXHIBITS REQUESTED AT A CHARGE OF
TEN CENTS PER PAGE, WHICH REPRESENTS THE COMPANY'S REASONABLE EXPENSES IN
FURNISHING SUCH EXHIBITS.
30
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized, in North Reading,
Massachusetts on March 21, 1997.
CONVERSE INC.
By: /s/ Glenn N. Rupp
----------------------------------------
Glenn N. Rupp, Chairman of the Board and
Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrants and in the capacities and on the dated indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- --------- ----- ----
<S> <C> <C>
/s/ Glenn N. Rupp
______________________________ Chairman of the Board, Chief March 21, 1997
Glenn N. Rupp Executive Officer and Director
(Principal Executive Officer)
/s/ Donald J. Camacho
______________________________ Senior Vice President and March 21, 1997
Donald J. Camacho Chief Financial Officer (Principal
Financial and Accounting Officer)
/s/ Donald J. Barr
______________________________ Director March 21, 1997
Donald J. Barr
/s/ Leon D. Black
______________________________ Director March 21, 1997
Leon D. Black
/s/ Julius W. Erving
______________________________ Director March 21, 1997
Julius W. Erving
______________________________ Director March 21, 1997
Robert H. Falk
/s/ Gilbert Ford
______________________________ Director March 21, 1997
Gilbert Ford
/s/ Michael S. Gross
______________________________ Director March 21, 1997
Michael S. Gross
______________________________ Director March 21, 1997
John J. Hannan
/s/ Joshua J. Harris
______________________________ Director March 21, 1997
Joshua J. Harris
/s/ John H. Kissick
______________________________ Director March 21, 1997
John H. Kissick
______________________________ Director March 21, 1997
Richard B. Loynd
/s/ Michael D. Weiner
______________________________ Director March 21, 1997
Michael D. Weiner
</TABLE>
31
<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 and Stockholders 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 Directors Converse 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>
SCHEDULE II
VALUATION AND QUALIFYING ACCOUNTS
(DOLLAR AMOUNTS IN THOUSANDS)
<TABLE>
<CAPTION>
ADDITIONS
CHARGED TO
BEGINNING COSTS AND ENDING
DESCRIPTION BALANCE EXPENSES DEDUCTION BALANCE
----------- --------- ---------- --------- -------
<S> <C> <C> <C> <C>
Year Ended December 31, 1994:
Allowance for doubtful accounts....... $1,519 $ 880 $ 846 $ 1,553
Inventory reserve..................... 1,761 127 415 1,473
Deferred tax asset valuation
allowance............................ -- -- -- --
Year Ended December 30, 1995:
Allowance for doubtful accounts....... $1,553 $1,366 $ 682 $ 2,237
Inventory reserve..................... 1,473 6,424 681 7,216
Deferred tax asset valuation
allowance............................ -- 6,650 -- 6,650
Year Ended December 28, 1996:
Allowance for doubtful accounts....... $2,237 $ 670 $ 913 $ 1,994
Inventory reserve..................... 7,216 306 1,951 5,571
Deferred tax asset valuation
allowance............................ 6,650 4,934 -- 11,584
</TABLE>
<PAGE>
EXHIBIT 10.7
FIFTH AMENDMENT TO CREDIT AGREEMENT
-----------------------------------
THIS FIFTH AMENDMENT to Credit Agreement (the "Amendment") is made as of
this 30th day of November, 1996, by and among Converse Inc. ("Borrower"), BT
Commercial Corporation, as Agent in such capacity, ("Agent"), BT Commercial
Corporation (in its capacity as lender, "BTCC"), The Bank of New York Commercial
Corporation ("Bank of New York"), Fleet Bank of Massachusetts, N.A. ("Fleet"),
Harris Trust and Savings Bank ("Harris"), Heller Financial, Inc. ("Heller"),
LaSalle National Bank ("LaSalle"), Nationsbank of Texas, N.A. ("Nationsbank"),
Sanwa Business Credit Corporation ("Sanwa"), Fleet Capital Corporation ("Fleet
Capital"), and First Source Financial LLP ("First Source"), (BTCC, Bank of New
York, Fleet, Harris, Heller, LaSalle, Nationsbank, Sanwa, Fleet Capital and
First Source, herein collectively referred to as "Lenders").
W I T N E S S E T H:
- - - - - - - - - -
WHEREAS, Borrower, Agent and Lenders are parties to that certain Credit
Agreement dated as of November 17, 1994, as amended by that certain First
Amendment to Credit Agreement dated as of May 18, 1995, that certain Second
Amendment to Credit Agreement dated as of November 13, 1995, that certain Third
Amendment to Credit Agreement dated as of February 29, 1996 and that certain
Fourth Amendment to Credit Agreement dated as of August 30, 1996 (collectively,
the "Credit Agreement"); and
WHEREAS, Borrower has requested that Agent and Lenders provide for certain
amendments to the Credit Agreement, as more fully set forth herein.
NOW, THEREFORE, in consideration of the mutual agreements herein contained
and other good and valuable consideration, the adequacy of which is hereby
acknowledged, and subject to the terms and conditions hereof, the parties hereto
agree as follows:
SECTION I. DEFINITIONS. Unless otherwise defined herein, all
-----------
capitalized terms shall have the meaning given to them in the Credit Agreement.
SECTION 2. AMENDMENTS TO CREDIT AGREEMENT.
------------------------------
2.1 The defined term "BORROWING BASE", which appears in Section 1.1 of
the Credit Agreement is hereby amended by deleting the period at the
end of subsection (D) thereof and inserting the following:
", plus
----
(E) so long as (i) no Event of Default has occurred and is
continuing, and (ii) the Support Letter of Credit remains
outstanding or a draw has been made
<PAGE>
thereunder, $10,000,000 during the period commencing November
15, 1996 and ending March 31, 1997."
2.2 The defined term "CONSOLIDATED NET WORTH", which appears in Section
1.1 of the Credit Agreement, is hereby deleted.
2.3 Section 7.7 of the Credit Agreement is hereby deleted in its
entirety and the following is inserted in lieu thereof:
"7.7 Interest Coverage Ratio. Borrower shall not permit the
-----------------------
ratio of EBITDA to Consolidated Interest Expense, to be less
than (A) 4.0 to 1 for the three month period ending March 31,
1997; (B) 2.1 to 1 for the six month period ending June 30,
1997; (C) 2.0 to 1 for the nine month period ending September
30, 1997; (D) 1.65 to 1 for the twelve month period ending
December 31, 1997; and (E) 1.65 to 1 for the twelve month
period ending with each fiscal quarter of Borrower thereafter
during the term hereof."
2.4 Section 7.19 of the Credit Agreement is hereby deleted in its
entirety.
2.5 Section 7.20 of the Credit Agreement is hereby deleted in its
entirety and the following is inserted in lieu thereof:
"7.20 Minimum EBITDA. Borrower shall not permit its EBITDA to
--------------
be an amount less than negative $3,500,000 for the three month
period ending December 31, 1996."
SECTION 3. AMENDMENT FEE. The effectiveness of the amendments herein
-------------
contained is expressly conditioned upon the payment by Borrower, on the date
hereof, to Agent for the benefit of the Lenders, of an Amendment Fee in an
amount equal to $375,000.
SECTION 4. REAFFIRMATION BY BORROWER. Borrower hereby represents and
-------------------------
warrants to Agent and Lenders that (i) the representations and warranties set
forth in Section 5 of the Credit Agreement are true and correct on and as of the
date hereof, except to the extent (a) that any such representations or
warranties relate to a specific date, or (b) of changes thereto as a result of
transactions for which Agent and Lenders have granted their consent; (ii)
Borrower is on the date hereof in compliance with all of the terms and
provisions set forth in the Credit Agreement as hereby amended; and (iii) upon
execution hereof no Default or Event of Default has occurred and is continuing
or has not previously been waived.
2
<PAGE>
SECTION 5. FULL FORCE AND EFFECT. Except as herein amended, the Credit
---------------------
Agreement and all other Credit Documents shall remain in full force and effect.
SECTION 6. COUNTERPARTS. This Amendment may be executed in two or more
------------
counterparts, each of which shall be deemed an original, but all of which
together shall constitute one and the same document.
IN WITNESS WHEREOF, the parties hereto have executed this Amendment on the
day and year specified above.
BORROWER:
CONVERSE INC.
By: /s/ Donald J. Camacho
-------------------------------
Name: Donald J. Camacho
--------------------------
Title: Senior Vice President
-------------------------
AGENT:
BT COMMERCIAL CORPORATION
By: /s/ William E. Howe
-------------------------------
Name: William E. Howe
--------------------------
Title: Associate
-------------------------
LENDERS:
BT COMMERCIAL CORPORATION
By: /s/ William E. Howe
-------------------------------
Name: William E. Howe
--------------------------
Title: Associate
-------------------------
3
<PAGE>
THE BANK OF NEW YORK
COMMERCIAL CORPORATION
By: /s/ Anthony Viola
-------------------------------
Name: Anthony Viola
--------------------------
Title: Vice President
-------------------------
FLEET BANK OF
MASSACHUSETTS, N.A.
By: /s/ Michael F. O'Neill
-------------------------------
Name: Michael F. O'Neill
--------------------------
Title:
-------------------------
HARRIS TRUST AND SAVINGS BANK
By: /s/ John McKelvie
-------------------------------
Name: John McKelvie
--------------------------
Title: Vice President
-------------------------
HELLER FINANCIAL, INC.
By: /s/ Linda A. Grant
-------------------------------
Name: Linda A. Grant
--------------------------
Title: Asst. Vice President
-------------------------
LASALLE NATIONAL BANK
By: /s/ Christopher Clifford
-------------------------------
Name: Christopher Clifford
--------------------------
Title: Sr. Vice President
-------------------------
4
<PAGE>
NATIONSBANK OF TEXAS, N.A.
By: J. Bart Reardon
-------------------------------
Name: J. Bart Reardon
--------------------------
Title: Vice President
-------------------------
SANWA BUSINESS CREDIT
CORPORATION
By: /s/ John P. Thacker
-------------------------------
Name: John P. Thacker
--------------------------
Title: Vice President
-------------------------
FLEET CAPITAL CORPORATION
By: /s/ John Edmonson
-------------------------------
Name: John Edmonson
--------------------------
Title: Sr. Vice President
-------------------------
FIRST SOURCE FINANCIAL LLP
By: First Source Financial, Inc.,
its Manager
By: /s/ Gary L. Francis
-------------------------------
Name: Gary L. Francis
--------------------------
Title: Sr. Vice President
-------------------------
5
<PAGE>
EXHIBIT 10.8
SIXTH AMENDMENT TO CREDIT AGREEMENT
-----------------------------------
THIS SIXTH AMENDMENT to Credit Agreement (the "Amendment") is made as of
this 14th day of March, 1997, by and among Converse Inc. ("Borrower"), BT
Commercial Corporation, as Agent in such capacity, ("Agent"), BT Commercial
Corporation (in its capacity as lender, "BTCC"), The Bank of New York Commercial
Corporation ("Bank of New York"), Fleet National Bank, formerly known as Fleet
National Bank of Connecticut, successor by merger to Fleet Bank of
Massachusetts, N.A. ("Fleet"), Harris Trust and Savings Bank ("Harris"), Heller
Financial, Inc. ("Heller"), LaSalle National Bank ("LaSalle"), Nationsbank of
Texas, N.A. ("Nationsbank"), Sanwa Business Credit Corporation ("Sanwa"), Fleet
Capital Corporation ("Fleet Capital"), and First Source Financial LLP ("First
Source"), (BTCC, Bank of New York, Fleet, Harris, Heller, LaSalle, Nationsbank,
Sanwa, Fleet Capital and First Source, herein collectively referred to as
"Lenders").
W I T N E S S E T H:
- - - - - - - - - -
WHEREAS, Borrower, Agent and Lenders are parties to that certain Credit
Agreement dated as of November 17, 1994, as amended by that certain First
Amendment to Credit Agreement dated as of May 18, 1995, that certain Second
Amendment to Credit Agreement dated as of November 13, 1995, that certain Third
Amendment to Credit Agreement dated as of February 29, 1996, that certain Fourth
Amendment to Credit Agreement dated as of August 30, 1996, and that certain
Fifth Amendment to Credit Agreement dated November 30, 1996 (collectively, the
"Credit Agreement"); and
WHEREAS, Borrower has requested that Agent and Lenders provide for certain
amendments to the Credit Agreement, as more fully set forth herein.
NOW, THEREFORE, in consideration of the mutual agreements herein contained
and other good and valuable consideration, the adequacy of which is hereby
acknowledged, and subject to the terms and conditions hereof, the parties hereto
agree as follows:
SECTION 1. DEFINITIONS. Unless otherwise defined herein, all
-----------
capitalized terms shall have the meaning given to them in the Credit Agreement.
SECTION 2. WAIVER REGARDING MINIMUM EBITDA. The Agent and the Lenders
-------------------------------
hereby waive Borrower's failure to comply with the provisions of Section 7.20 of
the Credit Agreement for the fiscal quarter ending December 31, 1996. Such
waiver is limited to the specific provisions of Section 7.20 for such period and
is not a waiver with respect to any future failure by the Borrower to comply
with Section 7.20 or with any other provision of the Credit Agreement generally.
<PAGE>
SECTION 3. AMENDMENTS TO CREDIT AGREEMENT.
------------------------------
3.1 The defined term "BORROWING BASE", which appears in Section 1.1 of
the Credit Agreement is hereby amended by deleting subsection (E)
thereof and inserting the following in lieu thereof:
"(E) so long as (i) no Event of Default has occurred and is
continuing, and (ii) the Support Letter of Credit remains
outstanding or a draw has been made thereunder, $15,000,000
during the period commencing March 31, 1997 and ending October
15, 1997."
3.2 Section 7.7 of the Credit Agreement is hereby deleted in its
entirety and the following is inserted in lieu thereof:
"7.7 Interest Coverage Ratio. Borrower shall not permit the
-----------------------
ratio of EBITDA to Consolidated Interest Expense, to be less
than (A) 1.5 to 1 for the three month period ending March 31,
1997; (B) 1.5 to 1 for the six month period ending June 30,
1997; (C) 1.5 to 1 for the nine month period ending September
30, 1997; (D) 1.5 to 1 for the twelve month period ending
December 31, 1997; and (E) 1.5 to 1 for the twelve month
period ending with each fiscal quarter of Borrower thereafter
during the term hereof."
3.3 That portion of Annex I to the Credit Agreement setting forth the
Revolving Credit Commitment of each Lender is hereby deleted, and
the portion of Annex I attached hereto as Exhibit A is inserted in
lieu thereof.
SECTION 4. CONDITIONS PRECEDENT. The effectiveness of the waiver and
--------------------
amendments herein contained is subject to the satisfaction of each of the
following conditions precedent:
(i) Agent shall have received the opinion of Jack Green, Esq.,
General Counsel of Borrower, addressed to Agent and Lenders,
in such form and substance satisfactory to Agent;
(ii) Agent shall have received a Certificate of the Secretary or
Assistant Secretary of Borrower certifying (A) that attached
thereto is a true and complete copy of resolutions duly
adopted by the Board of Directors of Borrower authorizing the
execution, delivery and performance of this Amendment, and
such other documents and instruments executed by such
2
<PAGE>
party pursuant hereto or in connection herewith, and that such
resolutions have not been modified, rescinded or amended and
are in full force and effect, and (B) as to the incumbency and
specimen signature of each officer executing this Amendment,
and any and all other documents delivered in connection
herewith on behalf of Borrower;
(iii) Borrower shall have paid to Agent, for the benefit of Lenders,
an Amendment fee in the amount of $75,000;
(iv) Agent shall have received counterparts of this Amendment and
such other documents or instruments contemplated required
hereby, which, when taken together, bear the signatures of all
of the parties hereto and thereto;
(v) Apollo Investment Fund, L.P., a Delaware limited partnership
("Apollo") shall have acknowledged and agreed to the terms and
conditions of this Amendment, and shall restate and reaffirm
the terms and conditions of that certain Amended and Restated
Participation Purchase Agreement dated as of March 14, 1997,
made by Apollo in favor of Agent for the benefit of the
Lenders; and
(vi) Agent shall have received such other documents as Agent may
reasonably request.
SECTION 5. REAFFIRMATION BY BORROWER. Borrower hereby represents and
-------------------------
warrants to Agent and Lenders that (i) the representations and warranties set
forth in Section 5 of the Credit Agreement are true and correct on and as of the
date hereof, except to the extent (a) that any such representations or
warranties relate to a specific date, or (b) of changes thereto as a result of
transactions for which Agent and Lenders have granted their consent; (ii)
Borrower is on the date hereof in compliance with all of the terms and
provisions set forth in the Credit Agreement as hereby amended; and (iii) upon
execution hereof no Default or Event of Default has occurred and is continuing
or has not previously been waived.
SECTION 6. FULL FORCE AND EFFECT. Except as herein amended, the Credit
---------------------
Agreement and all other Credit Documents shall remain in full force and effect.
SECTION 7. COUNTERPARTS. This Amendment may be executed in two or more
------------
counterparts, each of which shall be deemed an original, but all of which
together shall constitute one and the same document.
3
<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed this Amendment on the
day and year specified above.
BORROWER:
CONVERSE INC.
By: /s/ Donald J. Camacho
----------------------------------
Name: Donald J. Camacho
-----------------------------
Title: Senior Vice President
----------------------------
AGENT:
BT COMMERCIAL CORPORATION
By: /s/ Wayne D. Hillock
----------------------------------
Name: Wayne D. Hillock
-----------------------------
Title: Senior Vice President
----------------------------
LENDERS:
BT COMMERCIAL CORPORATION
By: /s/ Wayne D. Hillock
----------------------------------
Name: Wayne D. Hillock
-----------------------------
Title: Senior Vice President
----------------------------
THE BANK OF NEW YORK
COMMERCIAL CORPORATION
By: /s/ Anthony Viola
----------------------------------
Name: Anthony Viola
-----------------------------
Title: Vice President
----------------------------
4
<PAGE>
FLEET NATIONAL BANK
By: /s/ Michael F. O'Neill
----------------------------------
Name: Michael F. O'Neill
-----------------------------
Title: Vice President
----------------------------
HARRIS TRUST AND SAVINGS BANK
By: /s/ David R. Caster
----------------------------------
Name: David R. Caster
-----------------------------
Title: Senior Vice President
----------------------------
HELLER FINANCIAL, INC.
By: /s/ Linda Grant
----------------------------------
Name: Linda Grant
-----------------------------
Title: Asst. Vice President
----------------------------
LASALLE NATIONAL BANK
By: /s/ Christopher G. Clifford
----------------------------------
Name: Christopher G. Clifford
-----------------------------
Title: Senior Vice President
----------------------------
NATIONSBANK OF TEXAS, N.A.
By: /s/ J. Bart Reardon
----------------------------------
Name: J. Bart Reardon
-----------------------------
Title: Vice President
----------------------------
5
<PAGE>
SANWA BUSINESS CREDIT
CORPORATION
By: /s/ John Thacker
----------------------------------
Name: John Thacker
-----------------------------
Title: Vice President
----------------------------
FLEET CAPITAL CORPORATION
By: /s/ J. Edmondson
----------------------------------
Name: J. Edmondson
-----------------------------
Title: Senior Vice President
----------------------------
FIRST SOURCE FINANCIAL LLP
By: First Source Financial, Inc.,
its Manager
By: /s/ Gary L. Francis
----------------------------------
Name: Gary L. Francis
-----------------------------
Title: Senior Vice President
----------------------------
ACKNOWLEDGEMENT AND REAFFIRMATION
---------------------------------
The undersigned, Apollo Investment Fund, L.P., a Delaware limited
partnership, ("Apollo") hereby acknowledges and agrees to the terms and
conditions of the foregoing Amendment, and hereby restates and reaffirms the
terms and conditions of that certain Amended and Restated Participation Purchase
Agreement dated as of March 14, 1997, made by Apollo in favor of Agent for the
benefit of Lenders.
APOLLO INVESTMENT FUND, L.P.
By: Apollo Advisors, L.P., as
managing partner and on behalf
of Apollo Investment Fund, L.P.
By: Apollo Capital Management, Inc.,
Its: General Partner
By: /s/ Joshua Harris
----------------------------
Its: Vice President
---------------------------
6
<PAGE>
EXHIBIT A
ANNEX I
-------
EFFECTIVE AS OF MARCH 31, 1997
LENDERS AND COMMITMENT AMOUNT
REVOLVING
NAME OF LENDER CREDIT COMMITMENT
-------------- -----------------
BT Commercial Corporation $13,593,750
The Bank of New York Commercial Corporation $18,750,000
Fleet Bank of Massachusetts, N.A. $11,250,000
Harris Trust and Savings Bank $12,656,250
Heller Financial, Inc. $18,750,000
LaSalle National Bank $11,250,000
NationsBank of Texas, N.A. $18,750,000
Sanwa Business Credit Corporation $15,000,000
Fleet Capital Corporation $11,250,000
First Source Financial LLP $18,750,000
TOTAL: $150,000,000
<PAGE>
EXHIBIT 10.24
SEVENTH AMENDMENT
-----------------
SEVENTH AMENDMENT, made this 24th day of September, 1996 between JULIUS W.
ERVING ("Erving"), THE ERVING GROUP, INC. (the "Group") and CONVERSE INC. (the
"Company").
WHEREAS, the parties entered into an Agreement dated October 1, 1984, as
amended on September 16, 1988, July 18, 1989, October 17, 1991, February 7,
1994, February 1, 1995 and April 1, 1996, whereby Erving agreed to make his
services available to the Group and to the Company (the "Original Agreement");
and
WHEREAS, the parties desire to further amend the Original Agreement as is
set forth herein:
NOW THEREFORE, the parties agree as follows:
1. Paragraph 5(e) shall be added to the Fourth Amendment to the Original
Agreement, dated February 7, 1994, as follows:
"5(e) With respect to calendar year 1997, a guaranteed minimum
royalty of Thirty Thousand Dollars ($30,000.00) shall be paid to
Erving with respect to the Advertising Shoe. The Minimum Royalty
shall be paid Fifteen Thousand Dollars ($15,000.00) on March 1, 1997
and Fifteen Thousand Dollars on September 1, 1997. It is understood
that the Shoe Royalty shall be applied against the Minimum Royalty.
The Shoe Royalty payments made pursuant to paragraph 5(a) on August
15, 1997 and February 14, 1998 shall, in each case, be less the
Minimum Royalty payment as set forth herein. It is understood that
the Advertising Shoe shall mean the original Dr. J basketball shoe
model."
<PAGE>
Page 2
2. (a) In addition to the Shoe Royalty paid by the Company to Erving with
respect to the Advertising Shoe as set forth in paragraph 1 hereof, the Company
will pay Erving a royalty of one percent (1%) of the Net Sales of the Dr. J 2000
basketball shoe model (the "Dr. J 2000") for the first five hundred thousand
(500,000) pairs of the Dr. J 2000 sold in 1997 and one and one-half percent (1
1/2%) of the Net Sales of the Dr. J 2000 for all pairs sold in excess of five
hundred thousand (500,000) pairs in 1997 (the "Dr. J 2000 Royalty"). Payment of
the Dr. J 2000 Royalty shall be made to Erving on August 15, 1997 with respect
to royalties which have accrued for the preceding six (6) month period from
January 1, 1997 through June 30, 1997 and on February 14, 1998 for the preceding
six (6) month period from July 1, 1997 through December 31, 1997. It is
understood that the Dr. J 2000 Royalty shall be payable with respect to Dr. J
2000 orders taken and subsequently shipped.
(b) With respect to calendar year 1997, a guaranteed minimum royalty
of One Hundred Thousand Dollars ($100,000.00) shall be paid to Erving with
respect to the Dr. J 2000 (the "Dr. J 2000 Minimum Royalty"). The Dr. J 2000
Minimum Royalty shall be paid Fifty Thousand Dollars ($50,000.00) on March 1,
1997 and Fifty Thousand Dollars ($50,000.00) on September 1, 1997. It is
understood that the Dr. J 2000 Royalty shall be applied against the Dr. J 2000
Minimum Royalty. The Dr. J 2000 Royalty payments made pursuant to paragraph 2(a)
hereof on August 15, 1997 and February 14, 1998 shall, in each case, be less the
Dr. J 2000 Minimum Royalty payments set forth herein.
3. (a) In the event that the Company or its licensee implements a Dr. J
2000 apparel program, the Company shall pay Erving a royalty of one and one-half
percent (1 1/2%) of the Net Sales of apparel items contained in said program
(the "Apparel Royalty"). Payment of
<PAGE>
Page 3
the Apparel Royalty shall be made to Erving on August 15, 1997 with respect to
royalties which have accrued for the preceding six (6) month period from January
1, 1997 through June 30, 1997 and on February 14, 1998 for the preceding six (6)
month period from July 1, 1997 through December 31, 1997. It is understood that
the Apparel Royalty shall be payable with respect to Dr. J 2000 apparel orders
taken and subsequently shipped.
(b) With respect to calendar year 1997, a guaranteed minimum royalty
of Fifteen Thousand Dollars ($15,000.00) shall be paid to Erving with respect to
the Apparel Program (the "Apparel Minimum Royalty"). The Apparel Minimum Royalty
shall be paid Seven Thousand Five Hundred Dollars ($7,500.00) on March 1, 1997
and Seven Thousand Five Hundred ($7,500.00) Dollars on September 1, 1997. It is
understood that the Apparel Royalty shall be applied against the Apparel Minimum
Royalty. The Apparel Royalty payments made pursuant to paragraph 3(a) hereof on
August 15, 1997 and February 14, 1998 shall, in each case, be less the Apparel
Minimum Royalty payments set forth herein.
4. Erving agrees to make himself available, at times reasonably convenient
to Erving and to the Company, to make fifteen (15) promotional appearances on
behalf of the Company in calendar year 1997.
5. The Contract Period set forth in paragraph 1(c) of the Agreement shall
be extended for three (3) years, commencing October 1, 1997 and expiring
September 30, 2000.
6. The base compensation to be paid by the Company to Erving for the
October 1, 1996 to September 30, 1997 Contract Year and for the three (3) year
extension set forth in paragraph 5 hereof shall be Two Hundred Thousand Dollars
($200,000.00) for each Contract Year [instead of One Hundred Sixty-two Thousand
Five Hundred Dollars ($162,500.00)],
<PAGE>
Page 4
payable in two (2) equal installments on or before October 5 and April 5 of each
applicable Contract Year.
7. As amended hereby, the Original Agreement shall remain in full force
and effect.
IN WITNESS WHEREOF, the parties have executed this Seventh Amendment as of
the date first above written.
/s/ Julius W. Erving
- -------------------------- ---------------------------------
WITNESS JULIUS W. ERVING
THE ERVING GROUP, INC.
By /s/ Julius W. Erving
- ------------------------- ------------------------------
WITNESS Julius W. Erving, President
CONVERSE INC.
By /s/ Glenn N. Rupp
- ------------------------- ------------------------------
WITNESS
<PAGE>
Exhibit 10.31
Apollo Advisors, L.P.
Two Manhattanville Road
Purchase, New York 10577
March 14, 1997
Converse, Inc.
One Fordham Road
North Reading, MA 01864
Attention: Mr. Don Camacho
Senior Vice President and
Chief Financial Officer
Re: Amended and Restated Accommodation Letter
Gentlemen:
Reference is hereby made to that certain Credit Agreement dated as of
November 17, 1994 by and among Converse, Inc. (the "Company"), the financial
institutions parties thereto (collectively, the "Lenders") and BT Commercial
Corporation, as agent for the Lenders (in such capacity, the "Agent"), as
amended by the First Amendment to Credit Agreement dated as of May 10, 1995, by
the Second Amendment to Credit Agreement dated as of November 13, 1995, by the
Third Amendment to Credit Agreement dated as of February 29, 1996, by the Fourth
Amendment to Credit Agreement dated as of August 30, 1996, by the Fifth
Amendment to Credit Agreement dated as of November 30, 1996, and by the Sixth
Amendment to Credit Agreement dated as of March , 1997 (the First, Second,
-
Third, Fourth, Fifth and Sixth Amendments, collectively, the "Amendments", and
the Credit Agreement, as so amended by the Amendments, the "Credit Agreement").
All terms used but not defined in this Accommodation Letter have the meaning
given to them in the Credit Agreement.
Pursuant to the Amendments, inter alia, (i) the definition of "Borrowing
----- ----
Base" was (A) increased by $25,000,000 by adding paragraph (D) thereof and (B)
increased by $15,000,000
<PAGE>
by adding paragraph (E) thereof, and (ii) certain covenants were amended or
compliance therewith was waived, in each case, subject to certain terms and
conditions. To assist you in satisfying those terms and conditions, Apollo
Investment Fund, L.P. ("Apollo") entered into the Participation Purchase
Agreement dated as of November 13, 1995 with the Agent for the benefit of the
Lenders (the "Original Participation Agreement"), pursuant to which Apollo
committed to purchase, upon the occurrence of certain events and subject to
certain conditions, a pro rata participation from each Lender in the Letter of
Credit Loans. Apollo also arranged for the issuance of a letter of credit from a
financial institution in an amount sufficient to support its obligations to the
Lenders under the Original Participation Agreement (the "Original Letter of
Credit"). Apollo entered into the Original Participation Agreement and obtained
the Original Letter of Credit at your request and Apollo was willing to do so in
exchange for the fee and the agreements described in the Accommodation Letter
dated November 13, 1995 (the "Original Accommodation Letter"). Subsequently,
Apollo entered into an Amended and Restated Participation Purchase Agreement
dated as of February 29, 1996 with the Agent for the benefit of the Lenders (the
"Amended Participation Agreement") amending its obligations to purchase
participations in the Letter of Credit Loans, and at the same time, Apollo
arranged for the amendment of the Original Letter of Credit (as so amended, the
"Amended Letter of Credit"). Apollo entered into the Amended Participation
Agreement and obtained the Amended Letter of Credit at your request and Apollo
was willing to do so in exchange for the fees and agreements described in the
Accommodation Letter dated February 28, 1996 (the "Second Accommodation
Letter").
You have requested that Apollo extend its commitment to the Agent, for the
benefit of the Lenders, under the Amended Participation Agreement until November
17, 1997 and in connection therewith to provide an extension of the Amended
Letter of Credit currently issued to the Agent or the replacement thereof (the
Amended Letter of Credit, as so extended, or, if applicable, further amended the
"Letter of Credit") and enter into a second amended and restated Participation
Purchase Agreement substantially in the form of Exhibit A hereto (such amended
and Participation Agreement, together with the Original Participation Agreement
and the Amended Participation Agreement, the "Participation Agreement"). Apollo
is willing to do so subject to the Company's agreement to certain amendments and
modifications of the agreements set forth in the Second Accommodation Letter. To
evidence those amendments and modifications, the undersigned hereby amend and
restate the Second Accommodation Letter.
<PAGE>
As consideration for Apollo's commitment under the Original Participation
Agreement and its arranging for the issuance of the Letter of Credit, the
Company paid Apollo a fee equal to 3% of the face amount of the Letter of Credit
(the "Original Facility Fee"). As consideration for Apollo's extended commitment
under the Amended Participation Agreement and for its arranging of the Amended
Letter of Credit, the Company paid Apollo a fee of $100,000 (the "Extension Fee"
and together with the Original Facility Fee, the "Facility Fee"). Apollo will
not be paid a fee in connection with the second amendment and restatement of the
Participation Purchase Agreement. The Company has agreed, and further hereby
agrees to pay, promptly upon demand from time to time, the reasonable expenses
Apollo incurs from time to time in connection with the Original Participation
Agreement and each amendment and restatement thereof and all documents,
arrangements or accommodations in connection therewith, including the fees and
expenses of its counsel and the expenses incurred in obtaining and maintaining
the Letter of Credit and any letter of credit issued to replace the Letter of
Credit. All fees and other amounts payable hereunder shall be paid in
immediately available funds.
You also hereby agree as follows:
1. Once paid, the Facility Fee and reimbursement of expenses described
above shall not be refundable under any circumstances regardless of whether the
Letter of Credit Loans advanced under the Credit Agreement in connection with
which the Letter of Credit is issued are made and regardless of whether the
Letter of Credit is ever drawn.
2. So long as the Letter of Credit or any Letter of Credit Loan remains
outstanding, you will not, without Apollo's prior consent, agree to any waiver,
modification, amendment, consent or other change to the Credit Agreement which
would change the conditions under which the Letter of Credit Loans will be
advanced or repaid, including any change to the definition of "Borrowing Base"
or any of the defined terms used in such definition (or any such defined terms)
or cause the amount of the availability under paragraph (D) of the definition of
"Borrowing Base" utilized from time to time to be more than the amounts set
forth below in the periods below:
Period Amount
------ ------
Through November 17, 1997 $25 million
(or, if later, the expiration
of letter of credit)
<PAGE>
3. So long as the Letter of Credit or any Letter of Credit Loan remains
outstanding, you will provide Apollo with copies of all borrowing base reports
and other financial information you provide to the Lenders (or their Agent) at
the same time as you provide it to the Lenders (or their Agent), and you will
also provide Apollo, on a daily basis, with a report on the aggregate amount of
borrowings and financial accommodations outstanding under the Credit Agreement.
4. Regardless of whether the Letter of Credit Loans advanced under the
Credit Agreement in connection with which the Letter of Credit is issued are
made and regardless of whether the Letter of Credit is ever drawn, you will
indemnify and hold harmless Apollo, its partners, its affiliates and their
partners, and each of its and their respective officers, directors, employees,
agents, advisers and controlling persons from and against any and all losses,
claims, damages and liabilities to which any such person may become subject
arising out of, or in connection with, the Original Accommodation Letter, the
Second Accommodation Letter, this Amended and Restated Accommodation Letter, the
Participation Agreement, the Letter of Credit, the transactions contemplated
hereby or thereby or any claim, litigation, investigation or proceeding relating
to any of the foregoing, whether or not any of such indemnified persons is a
party thereto, and to reimburse each of such indemnified persons, from time to
time upon their demand, for any legal or other expenses incurred in connection
with investigating or defending any of the foregoing; provided that the
--------
foregoing indemnity will not, as to any indemnified person, apply to losses,
claims, damages, liabilities or related expenses to the extent that they are
determined by the final judgment of a court of competent jurisdiction to have
resulted from the willful misconduct or gross negligence of such indemnified
person. This indemnity will survive the termination of the Letter of Credit, any
letter of credit issued in exchange for the Letter of Credit and the repayment
of the Letter of Credit Loans.
This Amended and Restated Accommodation Letter shall be governed by, and
construed in accordance with, the laws of the State of New York.
This Amended and Restated Accommodation Letter may be executed in any
number of counterparts, each of which shall be an original and all of which,
when taken together, shall constitute one original.
<PAGE>
If the foregoing correctly sets forth our agreement, please indicate your
acceptance of the terms hereof by signing in the appropriate space below and
returning to us the executed duplicate of this Amended and Restated
Accommodation Letter.
Very truly yours,
APOLLO INVESTMENT FUND, L.P.
By: Apollo Advisors, L.P.,
as Managing Partner
and on Behalf of
Apollo Investment Fund, L.P.
By: Apollo Capital Management, Inc.,
its general partner
By: /s/ Michael D. Weiner
--------------------------------
Its: Vice President
-------------------------------
Agreed to and accepted as of
the date first above written:
CONVERSE, INC.
By: /s/ Donald J. Camacho
--------------------------------
Its: Senior Vice President
-------------------------------
<PAGE>
EXHIBIT 21
CONVERSE INC.
INCORPORATED IN DELAWARE ON JULY 22, 1986
SUBSIDIARIES
------------
CONVERSE STAR I, INC., a subsidiary of Converse Inc.
Incorporated in Massachusetts on March 26, 1985
CONVERSE EMEA LTD., a subsidiary of Converse Inc.
Incorporated in Delaware on January 29, 1990
CONVERSE FRANCE, INC., a subsidiary of Converse Benelux Holding Company, Inc.
Incorporated in Delaware on November 23, 1993 (branch in France)
CONVERSE EUROPE, INC., a subsidiary of Converse Inc.
Incorporated in Delaware on November 23, 1993 (branch in the Netherlands)
CONVERSE BENELUX, INC., a subsidiary of Converse Benelux Holding Company, Inc.
Incorporated in Delaware on November 23, 1993 (branches in the Netherlands and
Belgium)
CONVERSE BENELUX HOLDING COMPANY, INC., a subsidiary of Converse Europe, Inc.
Incorporated in Delaware on November 23, 1993
CONVERSE GERMANY, INC., a subsidiary of Converse Europe, Inc.
Incorporated in Delaware on March 21, 1994 (branch in Germany)
CONVERSE IBERIA, INC., a subsidiary of Converse Europe, Inc.
Incorporated in Delaware on July 8, 1994 (branches in Portugal and Spain)
CONVERSE ITALY, INC., a subsidiary of Converse Europe, Inc.
Incorporated in Delaware on September 21, 1994 (branch in Italy)
CONVERSE JAPAN, INC., a subsidiary of Converse Inc.
Incorporated in Delaware on November 21, 1994 (branch in Japan)
CONVERSE SCANDINAVIA, INC., a subsidiary of Converse Europe, Inc.
Incorporated in Delaware on June 7, 1995 (branch in Denmark)
CONVERSE PACIFIC, INC., a subsidiary of Converse Inc.
Incorporated in Delaware on May 2, 1996 (branch in Japan)
CONVERSE MEXICO, INC., a subsidiary of Converse Inc.
Incorporated in Delaware on October 23, 1996 (branch in Mexico)
CONVERSE ALL STAR DO BRASIL INDUSTRIA E COMERCIO LTDA., a subsidiary of Converse
Inc.
Incorporated in Brazil
CALZADO DEPORTIVO DE REYNOSA, S.A. DE C.V., a subsidiary of Converse Inc.
Incorporated in Mexico on January 25, 1984
CONVERSE EXPORT CO. LIMITED, a subsidiary of Converse Inc.
Incorporated in Barbados on December 28, 1984 (a foreign sales corporation)
APEX ONE, INC., a subsidiary of Converse Inc.
Incorporated in New Jersey on July 8, 1988
<PAGE>
Exhibit 23.1
INDEPENDENT AUDITORS' CONSENT
-----------------------------
The Board of Directors
Converse Inc.:
We consent to the incorporation by reference in the Registration Statements
(Nos: 33-87806 and 333-13269) on Form S-8 of Converse Inc. of our report dated
February 15, 1995, relating to the consolidated statements of operations, cash
flows and stockholders' equity (deficiency) of Converse Inc. and subsidiaries
for the year ended December 31, 1994, which report appears in the December 28,
1996 annual report on Form 10-K of Converse Inc.
/s/ KPMG PEAT MARWICK LLP
KPMG Peat Marwick LLP
Boston, Massachusetts
March 19, 1997
<PAGE>
Exhibit 23.2
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the incorporation by reference in the Registration
Statements on Form S-8 (Nos. 33-87806 and 333-13269) of Converse Inc. of our
report dated February 19, 1997, except as to Note 16, which is as of March 14,
1997, appearing in Converse Inc.'s December 28, 1996 Annual Report on Form 10-K.
We also consent to the application of such report to the Financial Statement
Schedule for the two years ended December 28, 1996 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.
/s/ Price Waterhouse LLP
PRICE WATERHOUSE LLP
Boston, Massachusetts
March 21, 1997
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED
FROM THE COMPANY'S FINANCIAL STATEMENTS CONTAINED IN ITS FORM
10-K FOR THE YEAR ENDED DECEMBER 28, 1996 AND IS QUALIFIED IN
ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-28-1996
<PERIOD-START> DEC-31-1995
<PERIOD-END> DEC-28-1996
<CASH> 5,908
<SECURITIES> 0
<RECEIVABLES> 63,540
<ALLOWANCES> 1,994
<INVENTORY> 86,799
<CURRENT-ASSETS> 176,572
<PP&E> 25,344
<DEPRECIATION> 7,495
<TOTAL-ASSETS> 222,603
<CURRENT-LIABILITIES> 209,220
<BONDS> 0
0
0
<COMMON> 17,213
<OTHER-SE> (56,081)
<TOTAL-LIABILITY-AND-EQUITY> 222,603
<SALES> 349,335
<TOTAL-REVENUES> 376,973
<CGS> 263,098
<TOTAL-COSTS> 263,098
<OTHER-EXPENSES> 141,349
<LOSS-PROVISION> 243
<INTEREST-EXPENSE> 17,776
<INCOME-PRETAX> (22,569)
<INCOME-TAX> (4,134)
<INCOME-CONTINUING> (18,435)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (18,435)
<EPS-PRIMARY> (1.10)
<EPS-DILUTED> 0
</TABLE>
