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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED APRIL 4, 1998
COMMISSION FILE NUMBER 1-13430
CONVERSE INC.
(Exact name of registrant as specified in its charter)
DELAWARE 43-1419731
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
ONE FORDHAM ROAD 01864
NORTH READING, MASSACHUSETTS (Zip Code)
(Address of principal executive offices)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (978) 664-1100
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities Act of
1934 during the preceding 12 months (or for such shorter period that registrant
was required to file such reports); and (2) has been subject to such filing
requirements for the past 90 days.
Yes [X] No [ ]
Indicate the number of shares outstanding of each of the issuer's
classes of common stock, as of the latest practical date.
AS OF APRIL 4, 1998, 17,319,556 SHARES OF COMMON STOCK WERE OUTSTANDING.
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TABLE OF CONTENTS
PAGE
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PART I: FINANCIAL INFORMATION
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Item 1. Consolidated Financial Statements
A. Consolidated Balance Sheet 1
B. Consolidated Statement of Operations 2
C. Consolidated Statement of Cash Flows 3
D. Notes to Consolidated Financial Statements 4
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 8
PART II: OTHER INFORMATION
Item 1. Legal Proceedings 13
Item 2. Changes in Securities 13
Item 3. Defaults Upon Senior Securities 13
Item 4 Submission of Matters to a Vote of
Security Holders 13
Item 5. Other Information 13
Item 6. Exhibits and Reports on Form 8-K 13
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SIGNATURE 14
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PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
CONVERSE INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEET
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
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<CAPTION>
JANUARY 3, 1998 APRIL 4, 1998
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Assets
Current assets:
Cash and cash equivalents .............................................. $ 5,738 $ 4,175
Receivables, less allowances of $2,066 and $1,967, respectively ........ 72,083 81,610
Inventories (Note 3) ................................................... 94,681 82,726
Prepaid expense and other current assets ............................... 9,713 9,792
-------- --------
Total current assets ................................................. 182,215 178,303
Net property, plant and equipment ........................................ 20,086 19,851
Other assets ............................................................. 32,393 31,673
-------- --------
$234,694 $229,827
======== ========
Liabilities and Stockholders' Equity (Deficiency)
Current liabilities:
Short-term debt ........................................................ $ 9,036 $ 17,182
Credit facility (Note 4) ............................................... 96,844 92,494
Accounts payable ....................................................... 41,318 36,453
Accrued expenses ....................................................... 14,279 13,039
Income taxes payable ................................................... 478 -
-------- --------
Total current liabilities ............................................ 161,955 159,168
Long-term debt (Note 4) .................................................. 80,000 80,000
Current assets in excess of reorganization value ......................... 30,299 29,779
Deferred postretirement benefits other than pensions ..................... 10,422 10,302
Stockholders' equity (deficiency):
Common stock, $1.00 stated value, 50,000,000 shares
authorized, 17,317,956 and 17,319,556 shares issued and outstanding
at January 3, 1998 and April 4, 1998, respectively ................... 17,318 17,320
Preferred stock, no par value, 10,000,000 shares authorized
none issued and outstanding .......................................... - -
Additional paid-in capital ............................................. 2,271 2,280
Retained earnings (deficit) ............................................ (65,314) (66,477)
Foreign currency translation adjustment ................................ (2,257) (2,545)
-------- --------
Total stockholders' equity (deficiency) .............................. (47,982) (49,422)
-------- --------
$234,694 $229,827
======== ========
</TABLE>
See accompanying notes to condensed consolidated financial statements.
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CONVERSE INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
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THREE MONTHS ENDED
------------------------------
MARCH 29, 1997 APRIL 4, 1998
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Net sales.............................................................. $135,969 $95,240
Cost of sales.......................................................... 93,809 67,425
--------------- --------------
Gross profit........................................................... 42,160 27,815
Selling, general and administrative expenses........................... 36,765 29,716
Royalty income......................................................... 6,377 5,028
Restructuring expense (credit) (Note 5)................................ (564) ----
--------------- --------------
Earnings from operations............................................... 12,336 3,127
Credit on investment in unconsolidated subsidiary...................... (13,051) ----
Interest expense, net.................................................. 2,679 4,193
Other (income) expense, net............................................ 2,090 (132)
--------------- --------------
Earnings (loss) before income tax...................................... 20,618 (934)
Income tax expense..................................................... 7,938 229
--------------- --------------
Net earnings (loss).................................................... $ 12,680 $(1,163)
=============== ==============
Basic net earnings (loss) per share.................................... $0.74 $(0.07)
=============== ==============
Diluted net earnings (loss) per share.................................. $0.71 $(0.07)
=============== ==============
Basic weighted average number of common shares (Note 2)................ 17,233 17,319
=============== ==============
Diluted weighted average number of common shares (Note 2).............. 17,862 17,319
=============== ==============
</TABLE>
See accompanying notes to condensed consolidated financial statements.
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CONVERSE INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
(DOLLARS IN THOUSANDS)
(UNAUDITED)
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THREE MONTHS ENDED
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MARCH 29, 1997 APRIL 4, 1998
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Cash flows from operating activities:
Net earnings (loss)..................................................... $ 12,680 $(1,163)
Adjustments to reconcile net earnings (loss) to net cash required for
operating activities:
(Credit) on investment in unconsolidated subsidiary ($13,051)
less cash payments of $7,207...................................... (20,258) -
Provision for restructuring actions................................... (564) -
Depreciation of property, plant and equipment......................... 860 916
Amortization of intangible assets..................................... 118 117
Amortization of current assets in excess of reorganization
value................................................................. (519) (520)
Deferred tax benefit.................................................. 6,948 305
Changes in assets and liabilities:
Receivables........................................................... (52,873) (9,527)
Inventories........................................................... 8,509 11,955
Prepaid expenses and other current assets............................. 1,397 (263)
Accounts payable and accrued expenses................................. 1,100 (6,105)
Income taxes payable.................................................. 429 (478)
Other long-term assets and liabilities................................ 756 74
-------- -------
Net cash required for operating activities.......................... (41,417) (4,689)
-------- -------
Cash flows from investing activities:
Additions to property, plant and equipment.............................. (757) (681)
-------- -------
Net cash used by investing activities................................. (757) (681)
-------- -------
Cash flows from financing activities:
Net proceeds from exercise of stock options............................. 222 11
Net proceeds from (payment of) short-term debt.......................... 2,945 8,146
Net proceeds from (payment of) old credit facility...................... 37,012 -
Net proceeds from (payment of) new credit facility...................... - (4,350)
-------- -------
Net cash provided by financing activities............................. 40,179 3,807
Net increase (decrease) in cash and cash equivalents...................... (1,995) (1,563)
Cash and cash equivalents at beginning of period.......................... 5,908 5,738
-------- -------
Cash and cash equivalents at end of period................................ $ 3,913 $ 4,175
======== =======
</TABLE>
See accompanying notes to condensed consolidated financial statements.
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CONVERSE INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of presentation:
In the opinion of management, the accompanying unaudited condensed
consolidated financial statements contain all adjustments, consisting of normal
recurring accruals, considered necessary for a fair presentation. This interim
financial information and notes thereto should be read in conjunction with the
Company's annual report on Form 10-K for the year ended January 3, 1998. The
Company's consolidated results of operations for the three months ended April 4,
1998 are not necessarily indicative of the results to be expected for any other
interim period or the entire fiscal year.
2. NET EARNINGS (LOSS) PER COMMON SHARE
Net earnings (loss) per common share is computed based on the weighted average
number of common shares and common equivalent shares, if dilutive, assumed
outstanding for the applicable period.
3. INVENTORIES
Inventories are summarized as follows:
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JANUARY 3, 1998 APRIL 4, 1998
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Retail merchandise..................................................... $ 5,245 $ 6,129
Finished products...................................................... 81,311 67,511
Work in process........................................................ 4,560 5,155
Raw materials.......................................................... 3,565 3,931
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$94,681 $82,726
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4. DEBT
As more fully described in Note 8 to the Consolidated Financial Statements for
the year ended January 3, 1998 included within the Company's annual report on
Form 10-K, in May 1997 the Company issued $80,000 of 7% Convertible Subordinated
Notes due June 1, 2004 (the "Convertible Notes"). The Convertible Notes are
convertible at any time prior to maturity, unless previously redeemed into
common stock of the Company, at the option of the holder, at a price of $21.83
per share, subject to adjustment in certain events. In addition, the
Convertible Notes may be redeemed, in whole or in part, at the option of the
Company, at any time on or after June 5, 2000 at redemption prices set forth
therein plus accrued interest to the date of redemption.
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Interest is payable semi-annually on June 1 and December 1. Proceeds from the
Convertible Notes were used to repay indebtedness under the Company's then
existing credit facility (the "Old Credit Facility").
Simultaneously with the issuance of the Convertible Notes in May 1997, the
Company entered into a new $150,000 secured credit agreement (the "Credit
Facility") with BT Commercial Corporation ("BTCC") for revolving loans, letters
of credit, foreign exchange contracts and banker acceptances and repaid the Old
Credit Facility. In July 1997 BTCC, as agent, syndicated the Credit Facility
to a group of participating lenders (the "Banks"). The amount of credit
available to the Company at any time is limited by a borrowing base formula, as
defined in the Credit Facility, consisting primarily of U.S. and Canadian
accounts receivable and inventory. The aggregate letters of credit, foreign
exchange contracts and banker acceptances may not exceed $80,000 at any time;
revolving loans are limited only by the Credit Facility's maximum availability
less any amounts outstanding for letters of credit, foreign exchange contracts
or banker acceptances.
The Credit Facility is for a five-year term and, accordingly, has an
expiration date of May 21, 2002. However, the total revolving loans and banker
acceptances outstanding under the Credit Facility of $92,494 are classified as
current due to the Company's lockbox arrangement (whereby payments made by the
Company's customers are deposited in a lockbox controlled by the Banks) and
certain clauses contained in the Credit Facility regarding mandatory repayment
that involve subjective judgments by the Banks. This classification is required
by Emerging Issues Task Force 95-22, "Balance Sheet Classification of Borrowings
Outstanding under a Revolving Credit Agreement that Includes both a Subjective
Acceleration Clause and a Lockbox Arrangement".
As of April 4, 1998 the Company's borrowing base was $98,991. Utilization
under the Credit Facility amounted to $93,573 consisting of revolving loans of
$81,473, banker acceptances of $11,021 and outstanding letters of credit of
$1,079. Accordingly, $5,418 of the maximum available borrowing base remained
unutilized as of April 4, 1998.
Revolving loans under the Credit Facility bear interest either at the Prime
Lending Rate (as defined therein) plus one percent (1.00%) per annum or at the
Adjusted LIBOR Rate (as defined therein) plus a margin of two and one-half
percent (2.50%) per annum. The foregoing LIBOR margin is subject to reduction
based upon the Company achieving certain interest coverage ratios specified in
the Credit Facility. At April 4, 1998, revolving loans outstanding under the
Credit Facility bore interest of 8.19% based upon the weighted average of the
Prime Lending Rate and Adjusted LIBOR Rate, as defined. Obligations outstanding
under the Credit Facility are secured by first priority liens on substantially
all of the Company's U.S. and Canadian assets. The Credit Facility requires
compliance with customary affirmative and negative covenants, including certain
financial covenants. At April 4, 1998, the Company was not in compliance with
one financial covenant contained in the Credit Facility. Subsequent to April 4,
1998, the Banks waived compliance with this financial covenant for the quarter
ended April 4, 1998.
Subsidiaries of the Company maintain asset-based financing arrangements in
certain European countries with various lenders. In general, these financing
arrangements allow for borrowings
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based upon eligible accounts receivable and inventory at varying advance rates
and varying interest rates. As of April 4, 1998, total short-term borrowings
outstanding under these financing arrangements totaled $17,182. These
obligations are secured by first priority liens on the respective foreign assets
being financed. In addition, Converse Inc. provided guarantees with respect to
the outstanding borrowings for certain of the financing arrangements.
5. RESTRUCTURING
As more fully described in Note 4 to the Consolidated Financial Statements for
the year ended January 3, 1998 included within the Company's annual report on
Form 10-K, during 1995 the Company recorded restructuring charges relating
primarily to initiatives aimed at reducing future operating costs. During 1997
the Company recorded additional restructuring charges in order to bring the
Company's expenses more in-line with projected revenues as a result of the
uncertainty caused by the recent industry downturn and the related oversupply of
inventory in the marketplace. The following table presents the restructuring
reserves remaining at April 4, 1998:
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JANUARY 3, 1998 CHARGES/ CHANGES IN APRIL 4, 1998
BALANCE WRITE-OFFS ESTIMATES BALANCE
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Contract termination costs......... $ 313 $ 58 ---- $255
Employee severance and
related costs..................... 1,661 1,438 ---- 223
Retail store closings.............. 464 34 ---- 430
--------------- ---------- ---------- -------------
$2,438 $1,530 ---- $908
=============== ========== ========== =============
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6. COMMITMENTS AND CONTINGENCIES
Converse is or may become a defendant in a number of pending or threatened
legal proceedings in the ordinary course of its business. Converse believes
that the ultimate outcome of any such proceedings will not have a material
adverse effect on its financial position or results of operations.
7. STOCK OPTION PLANS
On February 25, 1998, Converse repriced certain stock options granted under
the 1994 Plan. Options to purchase 278,000 shares of common stock were repriced
to an exercise price of $7.50 per share, which price exceeded the closing price
of Converse's common stock on February 25, 1998. No executive officers of the
Company had their options repriced. The original vesting schedules and
expiration dates associated with these stock options were not amended. None of
the foregoing stock option grants had vested prior to the repricing date.
8. RECENTLY ISSUED ACCOUNTING STANDARDS
In the first quarter of 1998, the Company adopted Statement of Financial
Accounting Standards No. 130, "Reporting Comprehensive Income." This statement
requires disclosure of
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comprehensive income and its components in interim and annual reports. Total
comprehensive income components included in stockholders' equity include any
changes in equity during a period that are not the result of transactions with
owners, including cumulative translation adjustments, unrealized gains and
losses on available-for-sale securities and minimum pension liabilities. For the
quarters ended March 29, 1997 and April 4, 1998, comprehensive income items
included in stockholders' equity consisted of translation adjustments of $208
and $(288), respectively.
In June 1997, the FASB issued Statement No. 131, "Disclosures about Segments
of an Enterprise and Related Information" (FAS 131). This statement established
standards for reporting information on operating segments in interim and annual
financial statements. FAS 131 is effective for the Company for the year ending
January 2, 1999 and management is currently reviewing the impact on its
Consolidated Financial Statements.
In February 1998, the FASB issued Statement No. 132, "Employers' Disclosures
about Pensions and Other Postretirement Benefits". The statement revises
employer's disclosures about pensions and other postretirement plans. The
statement does not change the measurement or recognition of those types of plans
and, accordingly, will not have a material impact on the Company's consolidated
financial position or results of operations.
9. SUBSEQUENT EVENTS
Due to continued softness in the athletic footwear market, primarily in the
adult's and children's basketball and cross training product categories, the
Company announced in April 1998 that it had reduced its workforce by 50
employees, which translates into reductions of approximately 5% in the Company's
non-manufacturing headcount and approximately 11% in its North Reading,
Massachusetts headquarters' workforce. This is the second such action the
Company has taken to reduce 1998 operating expenses based upon market slowdown
and its expected continued sluggishness.
In March of 1998, the Company entered into a Promise Agreement relating to the
sale of its Reynosa, Mexico manufacturing facility for $1,200. The Company will
continue to use its manufacturing facility in Reynosa through June 1998, at
which time the operation will be transferred to a larger leased facility in
Reynosa which will allow the Company to substantially increase its production
capacity. The Company entered into a lease agreement for a period of ten years
at an annual cost of approximately $550. The lease agreement is contingent upon
the sale of the Company's Reynosa, Mexico facility. This transaction is
scheduled to close with an anticipated gain of approximately $1,000 during the
second quarter of 1998.
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ITEM 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
The following table sets forth certain items relating to the Company's
operating results as a percentage of net sales for the three months ended March
29, 1997 ("First Quarter 1997") and for the three months ended April 4, 1998
("First Quarter 1998").
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THREE MONTHS ENDED
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MARCH 29, 1997 % APRIL 4, 1998 %
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Net sales.................................. $135,969 100.0 $95,240 100.0
Gross profit............................... 42,160 31.0 27,815 29.2
Selling, general and administrative
expenses................................. 36,765 27.0 29,716 31.2
Royalty income............................. 6,377 4.7 5,028 5.3
Earnings from operations................... 12,336 9.1 3,127 3.3
Loss (credit) on investment in
unconsolidated subsidiary................ (13,051) (9.6) ---- ---
Interest expense, net...................... 2,679 2.0 4,193 4.4
Other (income) expense 2,090 1.5 (132) (0.1)
Net earnings (loss)........................ 12,680 9.3 (1,163) (1.2)
Basic earnings (loss) per share............ $ 0.74 --- $ (0.07) ---
Diluted earnings (loss) per share.......... $ 0.71 --- $ (0.07) ---
</TABLE>
NET SALES
Net sales for the First Quarter 1998 decreased to $95.2 million from $136.0
million for the First Quarter 1997, a 30.0% decrease. The $40.8 million
reduction in net sales was attributable to decreases of 50.3%, 51.5%, and 34.3%
for the First Quarter 1998 in the categories of basketball, children's and cross
training, respectively, as compared to First Quarter 1997. The reduction in net
sales was partially offset by a 5.8% increase in the athletic originals
category.
Net sales in the United States decreased 40.0% to $53.6 million in the First
Quarter 1998 from $89.3 million for the First Quarter 1997. Net sales decreased
10.9% internationally to $41.6 million for the First Quarter 1998 from $46.7
million for the First Quarter 1997. First Quarter 1998 net sales decreased
36.4% and 55.1% in the Pacific and Latin/South America regions, respectively.
First Quarter 1998 Europe, Middle East and Africa ("E.M.E.A.") region net sales
increased from $24.8 million to $27.6 million, or 11.3%.
The athletic footwear industry is currently struggling through a slowdown in
branded athletic footwear sales, particularly in the adult's and children's
basketball and cross training product categories. The difficult industry
conditions have been exasperated by the excessive levels of athletic footwear
inventory held by several of the company's competitors. The slowdown is caused,
in part, by the shift in consumer preference away from athletic footwear for
streetwear
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use. This change in preference has adversely affected the Company's business, as
well as that of many of its competitors. The Company's basketball and cross
training categories have been significantly impacted along with the children's
category which, in large part, is comprised of "takedowns" from these
categories. The athletic originals category is more closely aligned with the
consumer preference shift and has been affected to a lesser extent. With
excessive footwear inventory at disproportionate levels in the marketplace, the
Company believes that it may take up to one year before the distribution
channels will return to more normalized levels. The excess inventory problem
began in the United States and, as competitors began to sell off excess
inventory in Europe and the Pacific region, has also become evident
internationally.
GROSS PROFIT
Gross profit decreased to $27.8 million for the First Quarter 1998 from $42.2
million for the First Quarter 1997, a 34.1% reduction. The industry slowdown
and related volume decreases accounted for the majority of the gross profit
reduction over the period. The Company's gross profit margin fell to 29.2% of
net sales for the First Quarter 1998 compared to 31.0% for First Quarter 1997.
The decline is a result of the high inventories within the industry and a
promotional retail environment which have reduced demand for the Company's
products. These factors have also negatively impacted the Company's gross
profit margin.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSE
Selling, general and administrative expenses decreased 19.3% to $29.7 million
for the First Quarter 1998 from $36.8 million for the First Quarter 1997. The
decrease in selling, general, and administrative expenses of $7.1 million was
primarily attributable to: (i) a 58.4% reduction in U.S. advertising; (ii) a
25.3% reduction in sports marketing spending; and (iii) an 18.0% reduction in
administrative infrastructure expenses. As a percentage of net sales, selling,
general and administrative expenses increased to 31.2% for the First Quarter
1998 from 27.0% for the prior year.
ROYALTY INCOME
Royalty income decreased by 21.9% to $5.0 million in the First Quarter 1998
from $6.4 million in the First Quarter 1997. The reduction was attributable to
decreases of 31.0%, 23.4% and 23.1% in royalty income for United States,
E.M.E.A. and Pacific regions, respectively. These declines were slightly offset
by a 5.0% improvement in the Latin/South America region. The decreases are
representative of the slowdown in the athletic footwear business, which serves
as a foundation for the branded apparel and accessories sales. Additionally,
the strength of the U.S. dollar has negatively impacted international royalty
income. As a percentage of net sales, royalty income was 5.3% in the First
Quarter 1998 compared to 4.7% in the First Quarter 1997.
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EARNINGS FROM OPERATIONS
Primarily as a result of the factors discussed above, the Company recorded
earnings from operations of $3.1 million for First Quarter 1998 compared to
$12.3 million for First Quarter 1997, a decrease of 74.8%. As a percentage of
net sales, earnings from operations were 3.3% and 9.1% for the First Quarter
1998 and the First Quarter 1997, respectively.
LOSS (CREDIT) ON INVESTMENT IN UNCONSOLIDATED SUBSIDIARY
In First Quarter 1997, the Company recorded a pretax gain totaling $13.1
million relating to the settlement of certain claims by the Company related to
the Company's 1995 acquisition of Apex One, Inc. ("Apex").
INTEREST EXPENSE
Interest expense for the First Quarter 1998 increased to $4.2 million from
$2.7 million for the First Quarter 1997, a 55.6% increase. The increase
reflects the higher borrowing levels in First Quarter 1998 compared to First
Quarter 1997 and the First Quarter 1997 reversal of $1.4 million of interest
payments previously paid into escrow on the subordinated notes issued to the
former owners of Apex and subsequently surrendered to the Company upon the
settlement of the Company's claims against them.
OTHER (INCOME) EXPENSE
The First Quarter 1997 expense of $2.1 million was primarily related to
foreign exchange losses attributable to the appreciation of the U.S. dollar.
Since the third quarter of 1997, the Company has entered into foreign exchange
contracts and currency options as part of a hedging strategy to reduce its
exposure to foreign currency fluctuations. U.S. currency fluctuations had a
negligible effect on First Quarter 1998 results.
NET EARNINGS (LOSS)
Primarily as a result of the factors discussed above, the Company recorded a
net loss for the First Quarter 1998 of $1.2 million compared to net earnings of
$12.7 million for the First Quarter 1997. The net loss for First Quarter 1998
includes a charge to the tax valuation reserve of $0.5 million. Net earnings in
First Quarter 1997 included a non-recurring gain of $8.0 million related to the
settlement of outstanding claims related to Apex and a restructuring credit of
$0.4 million related to the reversal of reserves associated with re-opening the
Mission, Texas facility. Excluding these non-recurring charges and credits, the
net loss in First Quarter 1998 was $0.7 million compared to net earnings of $4.3
million in First Quarter 1997.
EARNINGS (LOSS) PER SHARE
Basic and diluted loss for First Quarter 1998, as computed under FAS 128, was
$0.07 per share as compared to basic and diluted earnings per share of $0.74 and
$0.71, respectively, for the
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First Quarter 1997. Net loss for First Quarter 1998 includes a charge to the tax
valuation reserve of $0.03 per share. Net earnings in First Quarter 1997
included a non-recurring gain of $0.45 per share related to the settlement of
outstanding claims related to Apex and a restructuring credit of $0.02 per share
related to the reversal of reserves associated with re-opening the Mission,
Texas facility. Excluding these non-recurring charges and credits, the net loss
per share in First Quarter 1998 was $0.04 compared to net earnings per share of
$0.24 in First Quarter 1997.
LIQUIDITY AND CAPITAL RESOURCES
As of April 4, 1998 the Company's working capital (net of cash) position
increased to $15.0 million from $14.5 million at January 3, 1998. Accounts
receivable increased $9.5 million as a result of shipments in the First Quarter
1998 that exceeded those in the previous quarter. This increase, an increase in
prepaid expense and other current assets of $0.1 million, and a $6.6 million
reduction in accounts payable were financed by a decrease in inventories of
$11.9 million and an increase in seasonal borrowings of $3.8 million.
Total borrowings under the Company's Credit Facility and asset based financing
arrangements increased to $109.7 million at April 4, 1998 from $105.9 million at
January 3, 1998, reflecting the working capital changes discussed above (see
Note 4 of Notes to Condensed Consolidated Financial Statements contained
herein).
For First Quarter 1998 and First Quarter 1997, net cash required for operating
activities was $4.7 million and $41.4 million, respectively. During these
periods cash was primarily used to fund the Company's accounts receivable and
purchases of inventory. Net cash used by investing activities was $0.7 million
and $0.8 million for First Quarter 1998 and First Quarter 1997, respectively.
Cash invested was for additions in property, plant and equipment. Net cash
provided by financing activities was $3.8 million and $40.2 million for First
Quarter 1998 and First Quarter 1997, respectively. Cash provided by financing
activities consisted almost entirely of net proceeds from the Company's seasonal
borrowing, for the First Quarter 1998.
As a result of the current industry conditions and the Company's near-term
business outlook, the Company has taken steps to reduce expenses and manage its
business more efficiently in the immediate future. Key initiatives include
combining and redefining of business units and workforce reductions. The
Company intends to allocate resources to certain near-term projects that can
generate immediate results while postponing certain longer-term investments.
BACKLOG
At the end of First Quarter 1998, the Company's global backlog was $127.1
million, compared to $220.1 million at the end of the First Quarter 1997, a
decrease of 42.3%. The Company's four major categories of basketball,
children's, cross training and athletic originals recorded declines of 65.9%,
63.2%, 49.2% and 8.2%, respectively. The United States order backlog decreased
75.7% while international decreased 17.3%. The decline is primarily the result
of the industry-wide softening of demand for both adult's and children's
basketball and cross training products. The amount of backlog at a particular
time is affected by a number of factors, including the scheduling
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<PAGE>
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. In addition, the backlog
position is not necessarily indicative of future sales because the ratio of
future orders to "at once" shipments and sales by Company owned retail stores
may vary from year to year.
FORWARD-LOOKING STATEMENTS
Any statements set forth above which are not historical facts, including the
statements concerning the outlook for sales, earnings and anticipated cost
savings in 1998, and the product and industry developments for 1999 are forward
looking statements that involve certain risks and uncertainties that could cause
actual results to differ materially from those in the forward looking
statements. Potential risks and uncertainties include such factors as the
financial strength of the Company, the competitive pricing environment and
inventory levels within the footwear and apparel industries, consumer demand for
athletic footwear, market acceptance of the Company's products, the strength of
the U.S. dollar and the success of planned advertising, marketing and
promotional campaigns and other risks identified in documents filed by the
Company with the Securities and Exchange Commission.
-12-
<PAGE>
PART II. OTHER INFORMATION
Item 1. Legal Proceedings.
There have been no material changes from the information previously
reported under Item 3 of the Company's annual report on Form 10-K for
the fiscal year ended January 3, 1998.
Item 2. Changes in Securities.
Not Applicable
Item 3. Defaults Upon Senior Securities.
Not Applicable
Item 4. Submission of Matters to a Vote of Security-Holders.
Not Applicable.
Item 5. Other Information.
Not Applicable
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits. The following exhibits are contained in this report:
10.1 Waiver Number One dated May 6, 1998 to Credit Agreement
dated May 21, 1997
10.2 Amendment dated as of December 15, 1997 to Consulting
Agreement dated November 16, 1994 between Converse and
Apollo Advisors L.P.
11 Statement Regarding Computation of Per Share Earnings
27 Financial Data Statement
(b) Reports on Form 8-K.
There were no reports on Form 8-K filed during the quarter
ended April 4, 1998.
-13-
<PAGE>
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Dated: May 14, 1998 Converse Inc.
By: /s/ Donald J. Camacho
---------------------
Donald J. Camacho
Senior Vice President and
Chief Financial Officer
-14-
<PAGE>
EXHIBIT INDEX
Exhibit No. Description
- ----------- -----------
10.1 Waiver Number One dated May 6, 1998 to Credit Agreement dated
May 21, 1997
10.2 Amendment dated as of December 15, 1997 to Consulting Agreement
dated November 16, 1994 between Converse and Apollo Advisors
L.P.
11 Statement Regarding Computation of Per Share Earnings
27 Financial Data Statement
<PAGE>
EXHIBIT 10.1
WAIVER #1 TO CREDIT AGREEMENT
AMONG CONVERSE INC.,
BT COMMERCIAL CORPORATION, AS AGENT, AND
CERTAIN LENDERS NAMED THEREIN
Dated May 6, 1998
This Waiver #1 to that certain Credit Agreement, dated as of May 21, 1997, as
amended from time to time (collectively, "Credit Agreement"), by and among BT
Commercial Corporation ("Agent"), the Lenders party thereto, and Converse Inc.
("Borrower") is entered into as of the date stated above by the Borrower, the
Agent and the Lenders. Capitalized terms used herein without definition shall
have the respective meanings assigned thereto in the Credit Agreement.
W I T N E S S E T H:
WHEREAS, the Agent, the Lenders and the Borrower are parties to the Credit
Agreement; and
WHEREAS, the Credit Agreement imposes certain financial covenants and
restrictions on the Borrower; and
WHEREAS, the Borrower has advised Agent that Borrower has failed to comply
with one of the financial covenants of the Credit Agreement, and has requested,
and the Agent and the Lenders have agreed, subject to the terms and conditions
contained herein, to waive such non-compliance.
NOW, THEREFORE, in consideration of good and valuable consideration, the
receipt, adequacy and sufficiency of which are hereby acknowledged, the Agent,
the Lenders and the Borrower hereby agree as follows:
I. WAIVER REGARDING INTEREST COVERAGE RATIO. The Agent and the Lenders
----------------------------------------
hereby waive Borrower's failure to comply with the provisions of Section 7.7 of
the Credit Agreement for the fiscal quarter ended March, 1998. Such waiver is
limited to Borrower's non-compliance with Section 7.7 for the fiscal quarter
ended March, 1998 and is not a waiver with respect to any other fiscal quarter
or any other provision of the Credit Agreement generally.
2. CONDITION PRECEDENT TO WAIVER. The effectiveness of this Waiver is
-----------------------------
conditioned on the payment by Borrower to Agent for the benefit of Lenders of a
waiver fee in the amount of $100,000 contemporaneously with the execution and
delivery of this Waiver.
3. REAFFIRMATION. The Borrower hereby reaffirms to the Agent and each of the
-------------
Lenders that, except as modified hereby, the Credit Agreement and all of the
Credit Documents remain in full force and effect and have not been otherwise
waived, modified or amended.
<PAGE>
4. GOVERNING LAW AND INTERPRETATION. This Waiver has been delivered in
--------------------------------
Chicago, Illinois, and shall be governed by and construed in accordance with the
provisions of the Credit Agreement and the laws and decisions of the State of
Illinois without giving effect to the conflict of law principles thereunder.
5. COUNTERPARTS. This Waiver may be executed in one or more counterparts,
------------
each of which shall be deemed an original, but all of which together shall
constitute one and the same instrument. One or more counterparts of this Waiver
may be delivered by telecopier, with the intention that they shall have the same
effect as an original counterpart thereof.
IN WITNESS WHEREOF, each of the parties hereto has caused this Waiver to be
duly executed and delivered as of the day and year first above written.
BT COMMERCIAL
CORPORATION, as Agent
By: /s/ Frank Fazio
---------------
Name: Frank Fazio
Title: Vice President
BORROWER:
--------
CONVERSE INC.
By: /s/ Donald J. Camacho
---------------------
Name: Donald J. Camacho
Title: Senior Vice President
LENDERS:
--------
BT COMMERCIAL CORPORATION
By: /s/ Frank Fazio
---------------
Name: Frank Fazio
Title: Vice President
2
<PAGE>
LASALLE NATIONAL BANK
By: /s/ Christopher G. Clifford
---------------------------
Name: Christopher G. Clifford
Title: Sr. Vice President
HELLER FINANCIAL, INC.
By: /s/ Shyam Amladi
----------------
Name: Shyam Amladi
Title: Sr. Vice President
SANWA BUSINESS CREDIT
CORPORATION
By: /s/ Michael J. Cox
------------------
Name: Michael J. Cox
Title: 1st Vice President
NATIONSBANK GEORGIA, N.A.
By: /s/ Gaye Stathis
----------------
Name: Gaye Stathis
Title: Vice President
FLEET CAPITAL CORPORATION
By: /s/ Jennifer S. Mellitt
-----------------------
Name: Jennifer S. Mellitt
Title: Vice President
BNY FINANCIAL CORPORATION
By: /s/ Anthony Viola
-----------------
Name: Anthony Viola
Title: Vice President
3
<PAGE>
BANKBOSTON, N.A.
By: /s/ Frank Gianino
-----------------
Name: Frank Gianino
Title: Vice President
FINOVA FINANCIAL CORPORATION
By: /s/ Brian Rujawitz
------------------
Name: Brian Rujawitz
Title: Assistant Vice President
4
<PAGE>
EXHIBIT 10.2
AMENDMENT TO CONSULTING AGREEMENT
THIS AMENDMENT is made and entered into this 15th day of December 1997, by
and between CONVERSE INC., a Delaware Corporation ("Converse"), and APOLLO
ADVISORS, L.P. limited partnership (the "Advisor").
WHEREAS, Converse and the Advisor entered into a certain consulting
agreement dated as of November 16, 1994 whereby the Advisor provides certain
consulting services to Converse (the "Consulting Agreement"); and
WHEREAS, each of the parties desires to amend the Consulting Agreement as
set forth below.
NOW, THEREFORE, in consideration of the premises and mutual covenants
herein contained and for other good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, the parties agree as follows:
1. Fees. The fees payable by Converse to the Advisor shall be reduced
----
from the annual rate of $500,000 to the annual rate of $375,000 for
1997. Beginning on January 2, 1998, the annual rate shall revert to
$500,000.
2. Except as herein expressly modified, the terms and conditions of the
Consulting Agreement shall continue in full force and effect.
<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed this Amendment as of
the day and date first written above.
CONVERSE INC.
/s/ Donald J. Camacho
- ------------------------------------- -------------------------------------
Witness By: Donald J. Camacho
Title: Sr Vice President & CFO
APOLLO ADVISORS L.P.
/s/ Josh Harris
- ------------------------------------- -------------------------------------
Witness By: Josh Harris
Title: Vice President
<PAGE>
EXHIBIT 11
CONVERSE INC. AND SUBSIDIARIES
STATEMENT REGARDING COMPUTATION OF PER SHARE EARNINGS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
----------------------------------
MARCH 29, 1997 APRIL 4, 1998
---------------- ---------------
<S> <C> <C>
BASIC:
- ------
Weighted average number of shares outstanding .............. 17,233 17,319
Income (loss) available to stockholders .................... $12,680 $(1,163)
Basic earnings (loss) per share ............................ $ 0.74 $ (0.07)
DILUTED:
- --------
Weighted average number of common shares outstanding ...... 17,233 17,319
Weighted average incremental shares from assumed
conversion of common stock equivalents ................... 629 ----
---------------- ---------------
17,862 17,319
Income (loss) available to common stockholders.............. $12,680 $(1,163)
Diluted earnings (loss) per share .......................... $ 0.71 $ (0.07)
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> JAN-02-1999
<PERIOD-START> JAN-04-1998
<PERIOD-END> APR-04-1998
<CASH> 4,175
<SECURITIES> 0
<RECEIVABLES> 83,577
<ALLOWANCES> 1,967
<INVENTORY> 82,726
<CURRENT-ASSETS> 178,303
<PP&E> 31,743
<DEPRECIATION> 11,892
<TOTAL-ASSETS> 229,827
<CURRENT-LIABILITIES> 159,168
<BONDS> 80,000
0
0
<COMMON> 17,320
<OTHER-SE> (66,742)
<TOTAL-LIABILITY-AND-EQUITY> 229,827
<SALES> 95,240
<TOTAL-REVENUES> 100,268
<CGS> 67,425
<TOTAL-COSTS> 97,141
<OTHER-EXPENSES> (132)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 4,193
<INCOME-PRETAX> (934)
<INCOME-TAX> 229
<INCOME-CONTINUING> (1,163)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,163)
<EPS-PRIMARY> (0.07)
<EPS-DILUTED> (0.07)
</TABLE>
