<PAGE>
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
Form 10-Q
Quarterly Report Pursuant to Section 13 or 15(d) of
The Securities Exchange Act of 1934
For the quarterly period ended October 2, 1999
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 October 2, 1999, 17,479,025 shares of common stock were outstanding.
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TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
<S> <C>
PART I: FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements
A. Consolidated Balance Sheet 1
B. Consolidated Statement of Operations 2
C. Consolidated Statement of Cash Flows 3
D. Notes to Consolidated Financial Statements 4
Item 2. Management's Discussion and Analysis of 10
Financial Condition and Results of Operations
Item 3. Quantitative and Qualitative Disclosures 24
About Market Risk
PART II: OTHER INFORMATION
Item 1. Legal Proceedings 25
Item 2. Changes in Securities 25
Item 3. Defaults Upon Senior Securities 25
Item 4 Submission of Matters to a Vote of
Security Holders 25
Item 5. Other Information
Item 6. Exhibits and Reports on Form 8-K 25
SIGNATURE 26
</TABLE>
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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)
<TABLE>
<CAPTION>
January 2, 1999 October 2, 1999
--------------- ---------------
<S> <C> <C>
Assets
Current assets:
Cash and cash equivalents .......................................... $ 3,274 $ 1,708
Receivables, less allowances of $2,086 and $2,086, respectively..... 57,826 47,599
Inventories (Note 3) ............................................... 71,292 72,479
Prepaid expenses and other current assets........................... 8,962 7,555
------------- ---------------
Total current assets........................................... 141,354 129,341
Net property, plant and equipment........................................ 20,838 19,438
Other assets............................................................. 32,814 31,549
------------- ---------------
$ 195,006 $180,328
============= ===============
Liabilities and Stockholders' Equity (Deficiency)
Current liabilities:
Short-term debt (Note 4)............................................ $ 9,557 $ 7,180
Credit facility (Note 4)............................................ 73,833 81,829
Accounts payable.................................................... 37,184 33,667
Accrued expenses.................................................... 10,861 11,832
Income taxes payable................................................ 2,861 3,587
------------- ---------------
Total current liabilities...................................... 134,296 138,095
Long-term debt (Note 4) ................................................. 101,799 102,339
Current assets in excess of reorganization value......................... 28,221 26,663
Stockholders' equity (deficiency):
Common stock, $1.00 stated value, 50,000,000 shares
Authorized, 17,319,556 and 17,479,025 shares issued and
Outstanding at January 2, 1999 and October 2, 1999, respectively.. 17,320 17,479
Preferred stock..................................................... ---- ----
Additional paid-in capital.......................................... 3,695 4,817
Unearned compensation............................................... (758) (1,271)
Retained deficit ................................................... (88,129) (105,524)
Accumulated other comprehensive income.............................. (1,438) (2,270)
------------- --------------
Total stockholders' equity (deficiency) ....................... (69,310) (86,769)
------------- --------------
$ 195,006 $180,328
============= ==============
</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)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
---------------------------------- -----------------------------------
October 3, 1998 October 2, 1999 October 3, 1998 October 2, 1999
--------------- --------------- --------------- ---------------
<S> <C> <C> <C> <C>
Net sales....................................... $ 78,286 $ 60,983 $ 251,877 $ 188,202
Cost of sales................................... 62,242 46,147 188,281 139,573
--------------- --------------- --------------- ---------------
Gross profit.................................... 16,044 14,836 63,596 48,629
Selling, general and administrative expenses.... 19,921 20,598 71,601 60,963
Royalty income.................................. 4,527 5,251 14,014 15,033
Loss on sale of foreign subsidiaries ........... ---- ---- ---- 543
--------------- --------------- --------------- ---------------
Earnings (loss) from operations................. 650 (511) 6,009 2,156
Interest expense, net........................... 4,660 5,679 13,321 16,194
Other (income) expense, net..................... 509 1,325 (642) 430
--------------- --------------- --------------- ---------------
Loss from continuing operations before income
tax........................................... (4,519) (7,515) (6,670) (14,468)
Income tax expense ............................. 459 1,061 987 2,927
--------------- --------------- --------------- ---------------
Loss from continuing operations................. (4,978) (8,576) (7,657) (17,395)
Extraordinary gain net of tax of $437........... 704 ---- 704 ----
--------------- --------------- --------------- ---------------
Net loss........................................ $ (4,274) $ (8,576) $ (6,953) $ (17,395)
=============== =============== =============== ===============
Net basic and diluted loss per share:
Continuing operations......................... $ (0.29) $ (0.49) $ (0.44) $ (1.00)
Extraordinary gain............................ 0.04 0.00 0.04 0.00
--------------- --------------- --------------- ---------------
Net basic and diluted loss per share.......... $ (0.25) $ (0.49) $ (0.40) $ (1.00)
=============== =============== =============== ===============
Weighted average number of common shares
outstanding (Note 2)......................... 17,320 17,451 17,319 17,392
=============== =============== =============== ===============
</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)
<TABLE>
<CAPTION>
Nine Months Ended
----------------------------------------
October 3, 1998 October 2, 1999
--------------- ---------------
<S> <C> <C>
Cash flows from operating activities:
Net earnings (loss)..................................................... $ (6,953) $(17,395)
Adjustments to reconcile net loss to net cash (required for)
provided by operating activities:
Extraordinary loss from write-off of deferred financing fees 809 ---
Extraordinary gain on cancellation of convertible notes.............. (1,950) ---
Depreciation of property, plant and equipment........................ 2,743 3,410
Amortization of intangible assets.................................... 351 150
Amortization of current assets in excess of reorganization value..... (1,558) (1,558)
Amortization of note discount/warrants............................... 27 466
Amortization of deferred compensation................................ 136 423
Gain on sale of property, plant and equipment........................ (1,037) ---
Deferred income taxes................................................ 505 326
Changes in assets and liabilities:
Receivables.......................................................... 4,533 10,227
Inventories.......................................................... 17,951 (1,187)
Prepaid expenses and other current assets............................ 235 1,386
Accounts payable and accrued expenses................................ (6,874) (2,546)
Income taxes payable................................................. (359) 726
Other long-term assets and liabilities............................... (8,440) (22)
-------- --------
Net cash (required for) provided by operating activities........ 119 (5,594)
-------- --------
Cash flows from investing activities:
Additions to property, plant and equipment.............................. (3,156) (2,010)
Proceeds from sale of property, plant and equipment..................... 1,169 ---
-------- --------
Net cash used by investing activities........................... (1,987) (2,010)
-------- --------
Cash flows from financing activities:
Net proceeds from exercise of stock options............................. 11 ---
Net proceeds from exercise of warrants.................................. --- 268
Net proceeds from employee stock purchase plan.......................... --- 151
Net proceeds from (payment of) short-term debt.......................... 6,402 (2,377)
Net proceeds from (payment of) credit facility.......................... (31,877) 7,996
Net proceeds from issuance of senior secured notes...................... 24,000 ---
-------- --------
Net cash provided (used) by financing activities................ (1,464) 6,038
Net decrease in cash and cash equivalents................................. (3,332) (1,566)
Cash and cash equivalents at beginning of period.......................... 5,738 3,274
-------- --------
Cash and cash equivalents at end of period................................ $ 2,406 $ 1,708
======== ========
</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 2, 1999. The
Company's consolidated results of operations for the three and nine months ended
October 2, 1999 are not necessarily indicative of the results to be expected for
any other interim period or the entire fiscal year.
Reclassifications:
Certain amounts in the prior period financial statements and related notes
have been reclassified to conform with the current period's presentation.
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:
<TABLE>
<CAPTION>
January 2, 1999 October 2, 1999
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<S> <C> <C>
Retail merchandise............ $ 4,535 $ 4,009
Finished products............. 57,365 59,664
Work in process............... 5,009 5,061
Raw materials................. 4,383 3,745
------- -------
$71,292 $72,749
======= =======
</TABLE>
4. Debt
As more fully described in Note 8 to the Consolidated Financial Statements
for the year ended January 2, 1999 included within the Company's annual report
on Form 10-K, in May 1997
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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. 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. As discussed further below,
in September 1998 $5,735 face amount of the convertible Notes were repurchased
by the Company and cancelled. As of the end of the third quarter 1999, $74,265
face amount of Convertible Notes remain outstanding.
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 then
existing 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. 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. Pursuant to an amendment to the Credit Facility dated November 15,
1999, this amount was decreased to $40,000.
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 $81,829 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".
In September 1998, the Company's Credit Facility was amended to permit the
issuance of the Secured Notes as discussed below. The amendment decreased the
commitment under the Credit Facility from $150,000 to $120,000 and changed a
financial performance covenant. On November 15, 1999, a new amendment to the
Credit Facility further reduced the commitment from $120,000 to $90,000. The
Company will record a write-off of deferred financing fees of approximately $300
in the fourth quarter relating to this commitment reduction.
In May 1999, the Company's Credit Facility was amended to allow for $6,000
of additional borrowing base through July 1999. In July, the $6,000 was extended
through a new amendment until October 31, 1999, at which point the $6,000 was
extended through November 15, 1999. On
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November 15, 1999, the Credit Facility was amended to extend the $6,000
borrowing base through February 15, 2000.
Obligations under the Credit Facility are secured by first priority liens
on substantially all of the Company's U.S. assets. The Credit Facility requires
compliance with customary affirmative and negative covenants, including certain
financial covenants. At October 2, 1999 the Company was not in compliance with a
financial covenant contained in the Credit Facility. In connection with the
November 15, 1999 amendment, the Banks waived compliance with this financial
covenant for the nine month period ended October 2, 1999.
As of October 2, 1999 the Company's borrowing base was $83,738. Utilization
under the Credit Facility amounted to $82,504 consisting of revolving loans of
$76,800, banker acceptances of $5,029 and outstanding letters of credit of $675.
Accordingly, $1,234 of the maximum available borrowing base remained unutilized
as of October 2, 1999.
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. In November 1999, the interest rate under the Credit
Facility was increased to the Adjusted LIBOR Rate (as defined therein) plus a
margin of three percent (3.00%) per annum. At October 2, 1999, revolving loans
outstanding under the Credit Facility bore interest of 8.04% based upon the
weighted average of the Prime Lending Rate and Adjusted LIBOR Rate, as defined.
In September 1998, the Company issued $28,643 aggregate principal amount of
15% Senior Secured Notes (the "Secured Notes") due September 16, 2000 (the
"Initial Maturity Date"). Interest on the Secured Notes is payable quarterly in
arrears. The Initial Maturity Date may be extended an additional 12 months at
the Company's option upon written notification of its election to extend and
payment of a fee equal to 3% of the then outstanding principal amount of the
Secured Notes (the "First Extended Maturity Date"). The First Extended Maturity
Date may be extended to May 21, 2002 at the Company's option upon written
notification of its election to extend and payment of an additional fee equal to
3% of the then outstanding principal amount of the Secured Notes. The Secured
Notes were issued in two series: Series A in the aggregate principal amount of
$24,858 (the "Series A Secured Notes") and Series B in the aggregate principal
amount of $3,785 (the "Series B Secured Notes"). The Secured Notes are
redeemable at any time at face amount plus accrued interest.
The Secured Notes require compliance with customary affirmative and
negative covenants, including certain financial covenants, substantially the
same as the requirements contained in the Credit Facility. The Company was not
in compliance with the Third Quarter financial covenant and has exercised the
one automatic waiver of default contained in the Secured Note agreement. The
Company continues to classify the Secured Notes as long-term in the consolidated
balance sheet at October 2, 1999 as management believes that it is probable that
the Company will be in compliance with the covenants contained in the Secured
Note agreement for a twelve month period from October 2, 1999. Should the
Company fail to comply with any covenants in the
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future, an event of default will occur under the agreement and, in the absence
of a waiver, the amounts outstanding under the Secured Note agreement will be
payable upon demand.
Upon issuance of the Series A Secured Notes, the Company received gross
proceeds of $24,000 after discount from the face amount. In connection with the
issuance of the Series A Secured Notes, the Company issued warrants to purchase
360,000 shares of the Company's common stock to the purchasers and paid funding
fees to certain purchasers amounting to $350. The warrants were valued at $1.22
per share, vested immediately and expire on March 16, 2003. As discussed further
in Note 6 below, in May 1999 warrants to purchase 91,412 shares of the Company's
common stock were exercised leaving 268,588 outstanding. The Company paid a
placement fee of 4% of the gross proceeds, or $960, with respect to the Series A
Secured Notes. The Series A Secured Notes carry a second priority perfected lien
on all real and personal, tangible and intangible assets of the Company.
The Series B Secured Notes were issued in exchange for the surrender of
$5,735 face amount of Convertible Notes, which were subsequently cancelled by
the Company. In connection with the issuance of the Series B Secured Notes, the
Company paid a placement fee of 2% of the face amount, or $76. The Series B
Secured Notes carry a third priority perfected lien on all real and personal,
tangible and intangible assets of the Company.
Subsidiaries of the Company maintain asset-based financing arrangements in
certain European countries with various lenders. In general, these financing
arrangements allow for borrowings based upon eligible accounts receivable and
inventory at varying advance rates and varying interest rates. As of October 2,
1999, total short-term borrowings outstanding under these financing arrangements
totaled $7,180. 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. Comprehensive Income
For the three months ended October 3, 1998 and October 2, 1999,
comprehensive income items included in stockholders' equity consisted of
cumulative translation adjustments of $1,680 and $277, respectively. Total
comprehensive income (loss) for the third quarter of 1998 was $(2,594) compared
to comprehensive income (loss) of $(8,299) for the third quarter of 1999.
For the nine months ended October 3, 1998 and October 2, 1999,
comprehensive income items included in stockholders' equity consisted of
cumulative translation adjustments of $1,625 and $(832), respectively. Total
comprehensive income (loss) for the first nine months of 1998 was $(5,328)
compared to comprehensive income (loss) of $(18,227) for the first nine months
of 1999.
6. Stock Plans and Warrant Exercises
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In February and May 1999, 250,000 shares and 10,000 shares of restricted
stock, respectively, were granted to certain employees, resulting in $968 of
unearned compensation. During the first nine months of 1999, 10,000 shares of
restricted stock were cancelled due to resignations resulting in the reversal of
paid-in-capital and unearned compensation of $32. All restricted stock grants
are subject to restrictions as to continuous employment. The restricted stock
vests 100% on the third anniversary of the grant date. As there is no exercise
payment associated with the restricted stock awards, the cost of the awards,
determined as the fair market value of the shares on the date of grant, is
charged to expense ratably over the three year vesting period.
In February and August 1999, the Company issued 26,172 shares and 41,885
shares of common stock, respectively, under its Employee Stock Purchase Plan.
Proceeds of $151 were recorded in conjunction with these purchases.
In May 1999, 91,412 shares of common stock were issued pursuant to the
exercise of stock warrants. These warrants had an exercise price of $2.9375.
Proceeds of $268 were recorded in conjunction with this exercise.
7. Commitments and Contingencies
In September 1999, the Company decided to settle an employment related
lawsuit for $1,000. After discovery and depositions during the Third Quarter
1999, and after a review of jury verdicts in similar cases in the state and
county in which the suit was filed, the Company determined that the settlement
was in the best interest of the Company.
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 its operations.
8. Recently Issued Accounting Standards
On June 15, 1998, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards No. 133, "Accounting for Derivative
Instruments and Hedging Activities" (FAS 133). FAS 133 is effective for all
fiscal years beginning after June 15, 1999 (January 2, 2000 for the Company).
FAS 133 requires that all derivative instruments be recorded on the balance
sheet at their fair value. Changes in the fair value of derivatives are recorded
each period in current earnings or other comprehensive income, depending on
whether a derivative is designated as part of a hedge transaction and, if it is,
the type of hedge transaction. Management of the Company anticipates that, due
to its limited use of derivative instruments, the adoption of FAS 133 will not
have a significant effect on the Company's results of operations or its
financial position.
On July 8, 1999, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 137, "Accounting for Derivative
Instruments and Hedging Activities - Deferral of the Effective Date of FASB
Statement No. 133" (FAS 137). FAS 137 defers the
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effective date of FAS 133 from all fiscal years beginning after June 15, 1999 to
all fiscal years beginning after June 15, 2000 (December 31, 2000 for the
Company).
9. Subsequent Events
On November 8, 1999 the Company announced that it currently is not in
compliance with the newly effective New York Stock Exchange (NYSE) continued
listing standards, which require a listed Company to maintain both market
capitalization and shareholders' equity at no less than $50,000. The Company's
total market capitalization was approximately $35,000 at market close on
November 5, 1999 and its shareholders' deficiency was $86,769 at October 2,
1999.
The Company has submitted a business plan to the Listings and Compliance
Committee of the NYSE demonstrating how the Company intends to comply with the
new standards by the NYSE imposed deadline of March 2001. The NYSE has indicated
that its Committee will either accept the plan (at which time the Company will
be subject to quarterly monitoring for compliance with the plan), or not accept
the plan (at which time the Company will be subject to NYSE trading suspension
and delisting). Should the Company's common shares cease being traded on the
NYSE, the Company believes that an adequate alternative trading market would be
available.
10. Business Segment Information
As more fully described in Note 17 to the Consolidated Financial Statements
for the year ended January 2, 1999 included within the Company's annual report
on Form 10-K, the Company has adopted Statement of Financial Accounting
Standards No. 131, "Disclosures about Segments of an Enterprise and Related
Information". Summarized financial information concerning the Company's
reportable business segments is shown in the following table:
<TABLE>
<CAPTION>
Europe, Americas
Middle East, (excluding
United States Africa Asia Pacific United States) Eliminations Consolidated
------------- ------------ ------------ -------------- ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
Nine months ending October 2, 1999:
Net sales to customer..................... $104,480 $50,236 $27,503 $ 5,983 $ ---- $188,202
Intersegment net sales.................... 20,682 ---- ---- ---- (20,682) ----
Segment pretax profit (loss).............. (17,316) (2,050) 5,970 (1,072) ---- (14,468)
Segment total assets at October 2, 1999... 148,443 26,180 3,703 2,002 ---- 180,328
Nine months ending October 3, 1998:
Net sales to customer..................... $137,239 $63,437 $43,385 $ 7,816 $ ---- $251,877
Intersegment net sales.................... 34,213 ---- ---- ---- (34,213) ----
Segment pretax profit (loss).............. (13,577) (3,149) 11,054 (998) ---- (6,670)
Segment total assets at January 2, 1999... 153,107 33,066 4,834 3,999 ---- 195,006
Three months ending October 2, 1999:
Net sales to customer..................... $ 36,532 $15,552 $ 7,806 $ 1,093 $ ---- $ 60,983
Intersegment net sales.................... 5,794 ---- ---- ---- (5,794) ----
Segment pretax profit (loss).............. (7,733) (1,821) 2,163 (124) ---- (7,515)
Three months ending October 3, 1998:
Net sales to customer..................... $ 37,943 $22,042 $16,175 $ 2,126 $ ---- $ 78,286
Intersegment net sales.................... 11,917 ---- ---- ---- (11,917) ----
Segment pretax profit (loss).............. (2,004) (2,765) 1,491 (1,241) ---- (4,519)
</TABLE>
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Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Comparison of three months ended October 3, 1998 to three months ended
October 2, 1999
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
October 3, 1998 ("Third Quarter 1998") and for the three months ended October 2,
1999 ("Third Quarter 1999").
<TABLE>
<CAPTION>
(Dollars in thousands, except per share
amounts) Three Months Ended
---------------------------------------------------------
October 3, 1998 % October 2, 1999 %
--------------- - --------------- -
<S> <C> <C> <C> <C>
Net sales .............................. $ 78,286 100.0 $ 60,983 100.0
Gross profit............................ 16,044 20.5 14,836 24.3
Selling, general and administrative
expenses.............................. 19,921 25.4 20,598 33.8
Royalty income.......................... 4,527 5.8 5,251 8.6
Earnings (loss) from operations......... 650 0.8 (511) (0.8)
Interest expense, net................... 4,660 6.0 5,679 9.3
Other (income) expense, net............. 509 0.7 1,325 2.2
Loss from continuing operations before
income tax............................ (4,519) (5.8) (7,515) (12.3)
Income tax expense...................... 459 0.6 1,061 1.7
Loss from continuing operations......... $ (4,978) (6.4) $ (8,576) (14.1)
Net basic and diluted loss per share
from continuing operations............ $ (0.29) --- $ (0.49) ---
Extraordinary gain net of tax of $437... $ 704 0.9 --- ---
Net loss................................ $ (4,274) (5.5) $ (8,576) (14.1)
Net basic and diluted loss per share.... $ (0.25) --- $ (0.49) ---
</TABLE>
Net Sales
Net sales for the Third Quarter 1999 decreased to $61.0 million from $78.3
million for the Third Quarter 1998, a 22.1% decrease. The $17.3 million decrease
in net sales was primarily attributable to declines of 29.6%, 28.2% and 19.1% in
the cross training, children's and athletic originals categories, respectively,
compared to the prior year.
The Company's net sales continue to suffer from the effects of the athletic
footwear market slowdown which has occurred over the past two years.
Contributing to the sales decline internationally was the conversion of three
wholly-owned subsidiaries in Spain, Portugal and Canada to new licensing
agreements, revenues from which are now recorded as royalty income rather than
net sales.
Net sales in the United States decreased 3.9% to $36.5 million for the
Third Quarter 1999 from $38.0 million for the Third Quarter 1998. The decline
was due to reductions of 26.8%, 8.0% and 4.3% in the cross training, athletic
originals and children's categories, respectively,
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compared to the prior year. These reductions were partially offset by an
increase of $2.3 million, or 18.2%, in the basketball category in the Third
Quarter 1999.
Net sales decreased internationally 39.2% from $40.3 million for Third
Quarter 1998 to $24.5 million for Third Quarter 1999. The major reduction was in
the athletic originals category which declined $6.4 million, or 24.7%, while the
children's, basketball and cross training categories declined 69.6%, 69.1% and
42.8%, respectively, compared to the prior year. Net sales in the Pacific region
declined 51.7% in Third Quarter 1999 from the prior year primarily in the
athletic originals category. Net sales in the Europe, Middle East and Africa
("E.M.E.A.") region were down 29.4% mainly due to the conversion of Spain and
Portugal from wholly-owned subsidiaries to licensing agreements.
Gross Profit
Gross profit decreased to $14.8 million for the Third Quarter 1999 from
$16.0 million for the Third Quarter 1998, a reduction of 7.5%. The decrease in
gross profit was mainly due to the reduction in net sales volume. As a
percentage of net sales, gross profit increased to 24.3% for the Third Quarter
1999 from 20.5% in the prior year. The increase is primarily the result of the
athletic footwear market beginning to improve as well as lower inventory levels
of basketball and children's products resulting in less sell-off of overstocked
and returned products at reduced prices in the Third Quarter 1999.
Selling, General and Administrative Expenses
Selling, general and administrative expenses increased 3.5% to $20.6
million for the Third Quarter 1999 from $19.9 million for the Third Quarter
1998. As a percentage of net sales, selling, general and administrative expenses
increased to 33.8% for the Third Quarter 1999 from 25.4% in the prior year.
Third Quarter 1998 expenses include a one-time credit of $4.9 million related to
the reversal of accruals associated with the curtailment of the Company's
postretirement medical benefit plan. Excluding this one-time credit, selling,
general and administrative expense would have decreased $4.2 million, or 16.9%
for the Third Quarter 1999 compared to the prior year. This decrease was
primarily the result of reduced spending in the direct sales and international
sales/marketing areas.
In the United States, spending for direct sales expenses decreased by $1.4
million, or 25.5% for the Third Quarter 1999 from the prior year.
Advertising/marketing, research and development and administrative expenses
remained level from Third Quarter 1998 to Third Quarter 1999.
Selling, general and administrative expenses decreased internationally by
$2.1 million, or 24.1%, for the Third Quarter 1999 compared to the prior year.
Expenses in the E.M.E.A. region were reduced by $2.0 million, or 30.7%,
primarily the result of the conversion of subsidiaries in Spain and Portugal to
licensees.
-11-
<PAGE>
Royalty Income
Royalty income increased 17.8% to $5.3 million for the Third Quarter 1999
from $4.5 million for the Third Quarter 1998. The increase of $0.8 million was
mainly due to increased income from the Japan and Latin America regions. As a
percentage of net sales, royalty income increased to 8.6% for the Third Quarter
1999 from 5.8% for the Third Quarter 1998.
International royalty income, which represented 89.4% of the Company's
total royalty income, increased 31.2% in the Third Quarter 1999, the result of
increased income in all regions. Royalty income increased 24.6% in Japan and
17.0% in the Southeast Asia region, representative of the recovery of the
economies in Southeast Asia and the weakening of the U.S. dollar. Royalty income
from the E.M.E.A. region increased 47.3% mainly due to the conversion of the
Company's Spain/Portugal operating unit to a licensee agreement effective
January 1999. Royalty income from the Latin America region increased 114.8% for
Third Quarter 1999 from Third Quarter 1998 due mainly to increased income from
Chile and income from the new licensee agreement in Argentina.
Domestic royalty income declined 41.4% for the Third Quarter 1999 compared
to the Third Quarter 1998. The decline was primarily the result of weaker
royalty income from apparel and eyewear licenses.
Earnings (Loss) from Operations
The Company recorded a loss from operations of $0.5 million for the Third
Quarter 1999 compared to earnings from operations of $0.7 million for the Third
Quarter 1998 primarily the result of the factors discussed above. As a
percentage of net sales, the loss from operations was 0.8% for the Third Quarter
1999 compared to earnings from operations of 0.8% for the Third Quarter 1998.
Interest Expense
Interest expense for the Third Quarter 1999 increased to $5.7 million from
$4.7 million for the Third Quarter 1998, a 21.3% increase. The increase reflects
the higher borrowing levels for the Third Quarter 1999 compared to the Third
Quarter 1998 as well as higher interest costs associated with the secured notes
issued in September 1998.
Other (Income) Expense
Other expense for the Third Quarter 1999 of $1.3 million was mainly
comprised of a one-time legal settlement of $1.0 million. Third Quarter 1998
other expense of $0.5 million was primarily related to the write-off of the
currency translation adjustment resulting from the dissolution of the subsidiary
in Japan.
-12-
<PAGE>
Income Tax Expense
Income tax expense for the Third Quarter 1999 was $1.1 million compared to
$0.5 million for the Third Quarter 1998. The Company continued to increase its
deferred tax valuation reserve and established additional valuation allowances
of $3.2 million in the Third Quarter 1999 and $1.8 million in the Third Quarter
1998 representing approximately the tax benefit of the quarterly losses.
Loss from Continuing Operations
Primarily as a result of the factors discussed above, the Company recorded
a loss from continuing operations for the Third Quarter 1999 of $8.6 million
compared to a loss of $5.0 million for the Third Quarter 1998. The loss from
continuing operations for Third Quarter 1999 and Third Quarter 1998 included a
charge of $3.2 million and $1.8 million, respectively, to increase the deferred
tax valuation reserve. Excluding this charge, the loss from continuing
operations was $5.4 million for the Third Quarter 1999 and $3.2 million for the
Third Quarter 1998.
Loss Per Share from Continuing Operations
Basic and diluted loss from continuing operations for the Third Quarter
1999 was $0.49 per share compared to basic and diluted loss of $0.29 per share
for the Third Quarter 1998. The loss for the Third Quarter 1999 and Third
Quarter 1998 included a charge of $0.18 per share and $0.11 per share,
respectively, to increase the deferred tax valuation reserve. Excluding this
charge, the loss from continuing operations was $0.31 per share for the Third
Quarter 1999 and $0.18 per share for the Third Quarter 1998.
Extraordinary (Gain) Loss, net of tax
During Third Quarter 1998, the Company reported an outstanding
extraordinary gain of $0.7 million, net of tax. The extraordinary gain related
to cancellation of outstanding convertible subordinated notes exchanged for
newly issued secured notes, net of financing fees that were written off in
connection with the debt transactions. (See Note 4 of Notes to Condensed
Consolidated Financial Statements.)
Net Loss
The Company recorded a net loss of $8.6 million for the Third Quarter 1999
compared to a net loss of $4.3 million for the Third Quarter 1998. The net loss
for Third Quarter 1999 included a charge of $3.2 million to increase the
deferred tax valuation reserve. The net loss for Third Quarter 1998 included a
charge of $1.8 million to increase the deferred tax valuation reserve and the
extraordinary gain of $0.7 million. Excluding this non-operating charge and
extraordinary gain, the net loss was $5.4 million for the Third Quarter 1999 and
$3.2 million for the Third Quarter 1998.
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<PAGE>
Net Loss Per Share
Net loss per share for the Third Quarter 1999 was $0.49 compared to net
loss per share of $0.25 for the Third Quarter 1998. The net loss for the Third
Quarter 1999 included a charge of $0.18 per share to increase the deferred tax
valuation reserve. The net loss for the Third Quarter 1998 included a charge of
$0.11 per share to increase the deferred tax valuation reserve and the
extraordinary gain of $0.04 per share. Excluding this non-operating charge and
extraordinary gain, the net loss per share for the Third Quarter 1999 was $0.31
compared to net loss per share of $0.18 for the Third Quarter 1998.
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<PAGE>
Comparison of nine months ended October 3, 1998 to nine months ended October 2,
1999
The following table sets forth certain items relating to the Company's
operating results as a percentage of net sales for the nine months ended October
3, 1998 ("Nine Months 1998") and for the nine months ended October 2, 1999
("Nine Months 1999").
<TABLE>
<CAPTION>
(Dollars in thousands, except per share Nine Months Ended
amounts)
-------------------------------------------------------------------------
October 3, 1998 % October 2, 1999 %
--------------- ----- --------------- -----
<S> <C> <C> <C> <C>
Net sales .............................. $251,877 100.0 $188,202 100.0
Gross profit............................ 63,596 25.2 48,629 25.8
Selling, general and
administrative expenses .............. 71,601 28.4 60,963 32.4
Royalty income ......................... 14,014 5.6 15,033 8.0
Loss on sale of foreign subsidiaries.... --- --- 543 0.3
Earnings from operations ............... 6,009 2.4 2,156 1.1
Interest expense, net .................. 13,321 5.3 16,194 8.6
Other (income) expense, net............. (642) (0.3) 430 0.2
Loss from continuing operations
before income tax..................... (6,670) (2.6) (14,468) (7.7)
Income tax expense...................... 987 0.4 2,927 1.6
Loss from continuing operations......... $ (7,657) (3.0) $(17,395) (9.2)
Net basic and diluted loss per share
from continuing operations............ $ (0.44) --- $ (1.00) ---
Extraordinary gain, net of tax of $437.. $ 704 0.3 --- ---
Net loss................................ $ (6,953) (2.8) $(17,395) (9.2)
Net basic and diluted loss per share.... $ (0.40) --- $ (1.00) ---
</TABLE>
Net Sales
Net sales for Nine Months 1999 decreased to $188.2 million from $251.9
million for Nine Months 1998, a decline of 25.3%. The $63.7 million decrease in
net sales was attributable to declines of 42.9%, 34.4%, 25.7% and 21.4% in the
cross training, children's, basketball and athletic originals categories,
respectively, compared to the prior year. These decreases were partially offset
by a 22.0% increase in the action sports category.
Net sales in the United States decreased 23.9% to $104.5 million for Nine
Months 1999 from $137.3 million for Nine Months 1998. The decline was primarily
due to a reduction of $13.8 million, or 30.4%, in the athletic originals
category as well as reductions of 34.3%, 28.7% and 16.2% in the cross training,
children's and basketball categories, respectively, compared to the prior year.
Net sales decreased internationally 27.0% from $114.6 million for Nine
Months 1998 to $83.7 million for Nine Months 1999. The major reduction was in
the athletic originals category which declined $12.3 million, or 16.3%, while
the cross training, basketball and children's categories declined 68.0%, 62.9%
and 48.7%, respectively, compared to the prior year. Net sales in the Pacific
region declined 36.6% for Nine Months 1999 from the prior year primarily in the
-15-
<PAGE>
athletic originals category. Net sales in the E.M.E.A. region were down 20.8%
mainly due to the conversion of subsidiaries in Spain and Portugal.
Gross Profit
Gross profit decreased to $48.6 million for Nine Months 1999 from $63.6
million for Nine Months 1998, a reduction of 23.6% primarily due to reduced
sales volume. As a percentage of net sales, gross profit increased slightly to
25.8% for Nine Months 1999 from 25.2% in the prior year. The increase is due to
the slight improvement in the athletic footwear market and the lower sell-off of
unsold inventory in the Company's basketball and children's categories.
Selling, General and Administrative Expenses
Selling, general and administrative expenses decreased 14.8% to $61.0
million for Nine Months 1999 from $71.6 million for Nine Months 1998. The
decrease of $10.6 million was the result of reduced spending across all of the
Company's functions. As a percentage of net sales, selling, general and
administrative expenses increased to 32.4% for Nine Months 1999 from 28.4% in
the prior year. Nine Months 1998 expenses include a one-time credit of $9.0
million resulting from the reversal of accruals associated with the curtailment
of the Company's post retirement medical benefit plan. Excluding this one-time
credit, the decrease in selling, general and administrative expenses would have
been $19.6 million, or 24.3% for Nine Months 1999 compared to the prior year.
In the United States, spending for advertising and marketing was reduced by
$5.1 million, or 27.3%, and direct sales expenses decreased by $3.3 million, or
20.9%, for Nine Months 1999 from the prior year. Research and development costs
decreased to $4.6 million for Nine Months 1999 from $5.3 million for Nine Months
1998, a decrease of 13.2%. Administrative expenses in the United States
decreased by $1.6 million or 10.7%
Selling, general and administrative expenses decreased internationally by
$8.1 million, or 27.7%, for Nine Months 1999 compared to the prior year.
Expenses in the E.M.E.A. region were reduced by $6.8 million, or 33.7%, partly
the result of the conversion of subsidiaries in Spain and Portugal. The Pacific
and Latin America regions also recorded slight reductions.
Royalty Income
Royalty income increased 7.1% to $15.0 million for Nine Months 1999 from
$14.0 million for Nine Months 1998. The increase of $1.0 million was mainly due
to increased income from the Southeast Asia and Japan regions. As a percentage
of net sales, royalty income increased to 8.0% for Nine Months 1999 from 5.6%
for Nine Months 1998.
International royalty income, which represented 82.9% of the Company's
total royalty income, increased 10.0% for Nine Months 1999 primarily as a result
of increases of 26.8% in the Southeast Asia region and 10.2% in the Japan region
compared to the prior year. The increases
-16-
<PAGE>
are representative of the recovery of the economies in Southeast Asia and the
weakening of the U.S. dollar. Royalty income from the E.M.E.A. region increased
8.7% mainly due to the conversion of the Company's Spain/Portugal operating unit
to a licensee agreement effective in January 1999. Royalty income from the Latin
America region declined by 16.5% from Nine Months 1998 to Nine Months 1999
mainly due to lower income from licensees in Panama and Chile.
Domestic royalty income declined 6.0% for Nine Months 1999 compared to Nine
Months 1998. The decline was primarily the result of weaker royalty income from
apparel and eyewear licensees.
Loss on Sale of Foreign Subsidiaries
In the second quarter of 1999, the Company recorded a pretax loss totaling
$0.5 million related to the conversion of its Canada operation from a Company
owned subsidiary (direct operating unit) to a third party licensee/distributor
arrangement.
Earnings from Operations
The Company recorded earnings from operations of $2.2 million for Nine
Months 1999 compared to $6.0 million for Nine Months 1998 primarily the result
of the factors discussed above. As a percentage of net sales, earnings from
operations were 1.1% and 2.4% for Nine Months 1999 and Nine Months 1998,
respectively.
Interest Expense
Interest expense for Nine Months 1999 increased to $16.2 million from $13.3
million for Nine Months 1998, a 21.8% increase. The increase reflects the higher
borrowing levels for Nine Months 1999 compared to the prior year as well as
higher interest costs associated with the secured notes issued in September
1998.
Other (Income) Expense
Other expense for Nine Months 1999 of $0.4 million was primarily comprised
of one-time legal settlement of $1.0 million partially offset by gains realized
from foreign exchange contracts and put options. Nine Months 1998 other income
of $0.6 million was primarily related to the May 1998 sale of the Company's
Reynosa, Mexico manufacturing facility.
Income Tax Expense
Income tax expense for Nine Months 1999 was $2.9 million compared to $1.0
million for Nine Months 1998. The Company continued to increase its deferred tax
valuation reserve and established additional valuation allowances of $7.0
million in Nine Months 1999 and $2.9 million in Nine Months 1998, representing
approximately the tax benefit of the nine month losses.
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<PAGE>
Loss from Continuing Operations
Primarily as a result of the factors discussed above, the Company recorded
a loss from continuing operations for Nine Months 1999 of $17.4 million compared
to a loss of $7.7 million for Nine Months 1998. The loss from continuing
operations for Nine Months 1999 included a charge of $7.0 million to increase
the deferred tax valuation reserve and a loss of $0.3 million net of tax from
the sale of foreign subsidiaries. The loss from continuing operations for Nine
Months 1998 included a charge of $2.9 million to increase the deferred tax
valuation reserve. Excluding these charges, the loss from continuing operations
was $10.1 million and $4.8 million for Nine Months 1999 and Nine Months 1998,
respectively.
Loss Per Share from Continuing Operations
Basic and diluted loss from continuing operations for Nine Months 1999 was
$1.00 per share compared to basic and diluted loss of $0.44 per share for Nine
Months 1998. The loss for Nine Months 1999 included a charge of $0.40 per share
to increase the deferred tax valuation reserve and a loss on the sale of foreign
subsidiaries of $0.02 per share. The loss for Nine Months 1998 includes a charge
of $0.17 per share to increase the deferred tax valuation reserve. Excluding
these non-recurring charges, the loss per share from continuing operations for
Nine Months 1999 was $0.58 compared to net loss per share from continuing
operations of $0.27 for Nine Months 1998.
Extraordinary (Gain) Loss, net of tax
During Nine Months 1998, the Company reported an extraordinary gain of $0.7
million, net of tax. The extraordinary gain related to cancellation of
outstanding convertible subordinated notes of the Company exchanged for newly
issued secured notes, net of financing fees that were written off in connection
with the debt transactions. (See Note 4 of Notes to Condensed Consolidated
Financial Statements.)
Net Loss
The Company recorded a net loss for Nine Months 1999 of $17.4 million
compared to a net loss of $7.0 million for Nine Months 1998. The net loss for
Nine Months 1999 included a charge of $7.0 million to increase the deferred tax
valuation reserve and a loss of $0.3 million from the sales of foreign
subsidiaries. The net loss for Nine Months 1998 included a charge of $2.9
million to increase the deferred tax valuation reserve and the extraordinary
gain of $0.7 million. Excluding these charges and extraordinary gain, the net
loss was $10.1 million and $4.8 million for Nine Months 1999 and Nine Months
1998, respectively.
Net Loss Per Share
Net loss per share for Nine Months 1999 was $1.00 compared to net loss per
share of $0.40 for Nine Months 1998. The net loss for Nine Months 1999 included
a charge of $0.40 per share
-18-
<PAGE>
to increase the deferred tax valuation reserve and a loss on the sales of
foreign subsidiaries of $0.02 per share. The net loss for Nine Months 1998
included a charge of $0.17 per share to increase the deferred tax valuation
reserve and the extraordinary gain of $0.04 per share. Excluding these charges
and extraordinary gain, the net loss per share for Nine Months 1999 was $0.58
compared to net loss per share of $0.27 for Nine Months 1998.
Liquidity and Capital Resources
As of October 2, 1999 the Company's working capital (net of cash) position
decreased $14.3 million to a deficit of $10.5 million from $3.8 million at
January 2, 1999. Inventory levels increased $1.2 million. Accounts receivable
and prepaid expenses decreased $11.7 million due to decreased sales levels and
the Company's efforts to reduce operating costs. Accounts payable, accrued
liabilities and income taxes payable decreased $1.8 million while seasonal
borrowings increased $5.6 million.
Total borrowings under the Company's Credit Facility and asset based
financing arrangements increased to $81.8 million at October 2, 1999 from $73.8
million at January 2, 1999, reflecting the working capital needs discussed above
(see Note 4 of Notes to Condensed Consolidated Financial Statements contained
herein).
For Nine Months 1999 and Nine Months 1998, net cash provided by (required
for) operating activities was $(5.6) million and $0.1 million, respectively.
Cash required for operating activities in Nine Months 1999 was primarily used to
fund the Company's operating requirements. For Nine Months 1998 working capital
needs were reduced in line with reduced sales levels. Net cash used by investing
activities was $2.0 million for both Nine Months 1999 and Nine Months 1998. Cash
invested was for additions to property, plant and equipment of $2.0 million for
Nine Months 1999 and $3.2 million for Nine Months 1998 partially offset by
proceeds from the sale of the Reynosa facility in May 1998. Net cash provided by
financing activities of $6.0 million for Nine Months 1999 consisted primarily of
proceeds from the revolving credit facility. Net cash used by financing
activities of $1.5 million for Nine Months 1998 consisted primarily of a net
reduction in revolving loans offset by proceeds received from the issuance of
secured notes of $24.0 million.
As discussed in Note 4 of the Notes to the Condensed Consolidated Financial
Statements, in May 1999, the Company's Credit Facility was amended to allow for
$6.0 million of additional borrowing base through July 1999. In July, the $6.0
million was extended through a new amendment until October 31, 1999, at which
point the $6.0 million was extended through November 15, 1999. On November 15,
1999, the Credit Facility was amended to extend the $6.0 million additional
borrowing base through February 15, 2000. The November 15, 1999 amendment to the
Credit Facility also decreased the total commitment under the Credit Facility
from $120.0 million to $90.0 million and increased the interest rate under the
Credit Facility to the Adjusted LIBOR Rate (as defined therein) plus a margin of
three percent per annum.
-19-
<PAGE>
At October 2, 1999, the Company was not in compliance with the financial
covenant contained in the Credit Facility and in the Secured Note agreement. On
November 15, 1999 the Company obtained a waiver of the financial covenant from
the Banks for the Credit Facility and exercised the one-time automatic waiver of
default contained in the Secured Note agreement to cure the Secured Note
default. The Company anticipates that it will be in compliance with the
covenants contained in the Secured Note agreement for the next twelve months.
The ability of the Company to meet its debt service obligations will be
dependent upon the future performance of the Company, which will be impacted by
general economic conditions and other factors such as alternative and/or
supplemental financing arrangements. Should the Company not be in compliance
with covenants in the future, the amounts outstanding under the Credit Facility
and the Secured Notes will be payable upon demand in the absence of a waiver.
Backlog
At the end of the Third Quarter 1999, the Company's global backlog was
$89.8 million, compared to $109.3 million at the end of the Third Quarter 1998,
a decrease of 17.8%. The 1998 backlog figure has been adjusted to eliminate the
Company's backlog in Spain, Portugal and Canada where the Company's subsidiaries
subsequently were converted to licensee/distributor arrangements. The Company's
children's and athletic originals categories recorded declines of 41.2% and
25.3%, respectively, offset by improvements of 8.4% in the basketball category
and 17.1% in the cross training category. The United States order backlog
increased by 6.2% but was more than offset by international backlog which
decreased 39.5%. The decline was primarily the result of the continued industry-
wide soft demand for athletic footwear. The amount of backlog at any particular
time is affected by a number of factors, including the scheduling of the
introduction of new products and the timing of the manufacture and shipment 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.
The Year 2000
Background
The "Year 2000 Problem" is the result of many existing computer programs
and embedded chip technology containing programming code in which calendar year
data is abbreviated by using only two digits rather than four to refer to a
year. As a result of this, some of these programs may fail to operate or may not
properly recognize a year that begins with "20" instead of "19." This may cause
such software to recognize a date using "00" as the year 1900 rather than the
year 2000. Even systems and equipment that are not typically thought of as
computer-related often contain embedded hardware or software that may improperly
interpret dates beginning with the year 2000.
The Company's Year 2000 Project
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<PAGE>
Converse began working on Year 2000 compliance issues in 1996 when it
established a Company-wide Year 2000 project team (the "Year 2000 Project Team")
to identify all potential non-compliant software, hardware and embedded chip
technology and determine to what extent modification or replacement was
necessary to mitigate the Year 2000 Problem. The first task of the Year 2000
Project Team was to conduct an assessment of all internal hardware, software and
embedded chip technology to determine Year 2000 compliance and to assess the
risks associated with non-compliance by the Company's vendors, suppliers and
customers. The Year 2000 Project Team divided the action steps necessary to
minimize any Year 2000 non-compliance into two distinct categories: internal
compliance of software, hardware and embedded chip technology, and external non-
compliance by the Company's vendors, suppliers and customers.
Internal Year 2000 Compliance. The Company began the process of executing
-----------------------------
the necessary code changes and upgrading existing systems in 1996. As a result,
most of the Company's software, hardware and embedded chip technology are
already Year 2000 compliant. The Year 2000 Project Team developed an ongoing
program designed to bring the remaining software, hardware and embedded chip
technology at all of its domestic and international locations into Year 2000
compliance in time to minimize any significant detrimental affects on the
Company's business and operations. In many cases these upgrades were already
planned as part of ongoing business process improvements.
Currently, the Company has completed approximately 98% of the work believed
to be required to bring all internal systems into compliance. Converse's current
target is to complete all remaining work by the end of November 1999.
External Year 2000 Compliance. The Year 2000 Project Team reviewed all
-----------------------------
material relationships between Converse and each of its vendors and suppliers
and determined which ones were critical to Converse's business and operations.
The Company addressed each category as follows:
"Critical" Suppliers. Converse deemed 165 of its vendors and
-------------------
suppliers to be "critical" to the Company's business and operations.
Converse has sent each of its critical suppliers a detailed Year 2000
readiness questionnaire and checklist, followed in some cases by
formal communication and/or site visits. Response rate to date is 97%,
with 93% of the respondents indicating all systems have been or will
be verified Year 2000 compliant. For those critical suppliers that do
not respond or that do not have adequate compliance plans, Converse is
developing contingency plans that assume an estimated level of
noncompliance. These plans will likely consist of early purchase of
materials, components, work-in-process or finished goods. Even so,
these contingency plans are subject to much uncertainty and may not be
sufficient to mitigate any business interruption. Thus, some material
adverse impact to Converse may result from one or more third parties
regardless of Converse's defensive contingency plans.
"Non-Critical" Suppliers. The Company sent letters to 2,193
-----------------------
suppliers and vendors deemed to be "non-critical" advising them of the
Year 2000 Problem and requesting that they address compliance. Non-
compliance by such suppliers would not have a material adverse affect
on the Company.
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<PAGE>
Costs Associated with Year 2000 Compliance.
Through the Third Quarter 1999 the Company spent approximately $2.6 million
on incremental costs associated with the Year 2000 Problem. These costs
consisted of new hardware and software as well as the cost of contracted
programmers and the salaries and fringe benefits of employees dedicated to
addressing the Year 2000 Problem. These costs have been funded through operating
cash flows. Approximately $1.2 million of this amount relates to hardware and
software which the Company has capitalized and the remainder has been expensed
as incurred. The Company estimates that minimal additional expense will be
incurred during the remainder of 1999 to complete this process. These additional
expenditures will be comprised of some additional new hardware and software, as
well as the cost of contracted programmers and the salaries and benefits of
employees dedicated to addressing the Year 2000 Problem. These estimates are
based on currently available information and may change in the event of
unforeseen future developments.
Risks Associated with the Year 2000 Problem.
The failure to correct a material Year 2000 Problem could result in the
interruption in, or failure of, certain normal business activities or operations
of the Company. Such failures could materially and adversely affect the
Company's results of operations, liquidity and financial condition. Due to the
general uncertainty inherent in the Year 2000 Problem, resulting primarily from
uncertainty of the Year 2000 readiness of third-party vendors and suppliers, the
Company is unable at this time to determine whether the consequences of any Year
2000 failures will have a material impact on the Company. As discussed above,
Converse is dependent on a large number of vendors and suppliers in most of the
locations in which the Company operates to deliver a wide range of goods and
services. These vendors and suppliers, in turn, rely on many sub-tier vendors
and suppliers. Converse believes that this extended supply chain presents the
area of greatest risk of Year 2000 noncompliance, due to Converse's limited
ability to influence actions of some of these third parties and because of
Converse's inability to accurately estimate the level and impact of
noncompliance of third parties throughout the extended supply chain.
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, and the product and industry developments for 2000 and the Year 2000
Problem 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.
Risks associated with the Year 2000 Problem include the availability of
financial resources and manpower, the Company's ability to discover and correct
the Year 2000 Problems and the ability of third party vendors and suppliers to
bring their systems into Year 2000 compliance.
-22-
<PAGE>
Item 3.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Interest Rate Risk
The Company's exposure to market risk associated with changes in interest
rates relates primarily to its debt obligations. The Company's Credit Facility
bears interest at the Prime Lending Rate (as defined therein) plus 1% or the
adjusted LIBOR (as defined therein) plus 3.0%. The Company's foreign borrowings
also have variable interest rates. The Company's Convertible Notes and Secured
Notes bear fixed rates of interest. See Item 2 - Management's Discussion and
Analysis of Financial Condition and Results of Operations - Liquidity and
Capital Resources for further information. Converse does not use derivative
financial instruments to hedge its interest rate risks.
Foreign Currency Risk
Converse sells its products in a number of countries throughout the world
and, as a result, is exposed to movements on foreign currency exchange rates.
Although Converse has some of its products manufactured outside of the United
States on a per order basis, these purchases are made in U.S. dollars. The major
foreign currency exposures involve the markets in Western Europe, Japan and
Australia. In order to protect against the volatility associated with earnings
currency translations of foreign subsidiaries and royalty income from sources
outside the United States, the Company may, from time to time, utilize forward
foreign exchange contracts and/or foreign currency options with duration's of
generally from three to twelve months.
As of October 2, 1999, the Company had outstanding foreign exchange forward
contracts as follows:
<TABLE>
<CAPTION>
(currency per USD)
Notional Average Estimated
Amount Contract Rate Fair Value
-------------
(Dollars in thousands)
<S> <C> <C> <C>
Foreign exchange sell forward contracts:
Japanese Yen.................................... $4,524.8 112.74 $(299.6)
Australian Dollar............................... $ 876.2 1.59 $ (31.9)
Spanish Pesetas................................. $ 140.2 139.80 $ 21.9
Foreign exchange buy forward contracts:
Japanese Yen.................................... $1,115.4 112.77 $ (67.9)
</TABLE>
Commodity Price Risk
Raw materials used by the Company are subject to price volatility caused by
weather, supply conditions and other unpredictable factors. The Company does not
have a program of hedging activity to address these risks.
-23-
<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 2, 1999.
Item 2. Changes in Securities.
Not Applicable
Item 3. Defaults Upon Senior Securities.
As of October 2, 1999, the Company was in default of a
financial covenant. The default was subsequently waived. See
description under "Management's Discussion and Analysis of
Financial Conditions and Results of Operations--Liquidity and
Capital Resources."
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 Seventh Amendment dated October 31, 1999 to Credit
Agreement dated May 21, 1997.
10.2 Eighth Amendment dated November 15, 1999 to Credit
Agreement dated May 21, 1997.
27 Financial Data Statement
(b) Reports on Form 8-K.
There were no reports on Form 8-K filed during the
quarter ended October 2, 1999.
-24-
<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: November 16, 1999 Converse Inc.
By: /s/ Donald J. Camacho
--------------------------
Donald J. Camacho
Senior Vice President and
Chief Financial Officer
-25-
<PAGE>
EXHIBIT INDEX
Exhibit No. Description
- ---------- -----------
10.1 Seventh Amendment dated October 31, 1999 to Credit Agreement dated May
21, 1997.
10.2 Eighth Amendment dated November 15, 1999 to Credit Agreement dated May
21, 1997.
27 Financial Data Statement
<PAGE>
EXHIBIT 10.1
SEVENTH AMENDMENT TO CREDIT AGREEMENT
-------------------------------------
This Seventh Amendment to Credit Agreement (the "Amendment") is made on
this 31st day of October, 1999 by and among Converse Inc. (the "Borrower"), BT
Commercial Corporation, as Agent (in such capacity, the "Agent") and BT
Commercial Corporation (in its capacity as lender, "BTCC"), Fleet Business
Credit Corporation ("FBC"), LaSalle National Bank ("LaSalle"), BankBoston, N.A.
("BankBoston"), FINOVA Capital Corporation ("FINOVA"), BNY Financial Corporation
("BNY"), Fleet Capital Corporation ("Fleet"), NationsBank of Texas, N.A.
("NationsBank"), Heller Financial, Inc. (BT, FBC, LaSalle, BankBoston, FINOVA,
BNY, Fleet, NationsBank, and Heller referred to collectively as "Lenders").
W I T N E S S E T H:
WHEREAS, the Agent, the Lenders and the Borrower are parties to that
certain Credit Agreement dated as of May 21, 1997, as amended by that certain
First Amendment to Credit Agreement dated as of June 26, 1997, that certain
Second Amendment to Credit Agreement dated as of November 21, 1997, that certain
Third Amendment to Credit Agreement dated as of January 29, 1998, that certain
Fourth Amendment to Credit Agreement dated as of September 16, 1998, that
certain Fifth Amendment to Credit Agreement dated as of May 28, 1999, and that
certain Sixth Amendment to the Credit Agreement dated as of July 30, 1999
(collectively, the "Credit Agreement"); and
WHEREAS, the parties desire to amend 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 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 II. 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 reference to
"October 31, 1999" contained in subsection (F)(i) thereof and inserting
"November 15, 1999" in its stead .
SECTION III. CONDITIONS PRECEDENT. The effectiveness of this Amendment is
--------------------
expressly conditioned upon satisfaction of the following conditions precedent:
1
<PAGE>
3.1 Agent shall have received copies of this Amendment duly executed by
Borrower and Lenders constituting Required Lenders.
3.2 Borrower shall have paid to Agent for the benefit of the Lenders who
have committed to make advances pursuant to subsection (F) of the Borrowing
Base, an amendment fee in the amount of $0.
3.3 Agent shall have received such other documents, certificates and
assurances as it shall reasonably request.
SECTION IV. REAFFIRMATION OF BORROWER. Borrower hereby represents and
-------------------------
warrants to Agent and Lender 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 Lender have granted their consent; (ii) to the
best of Borrower's knowledge, on the date hereof it is in compliance with all of
the terms and provisions set forth in the Credit Agreement as hereby amended;
and (iii) to the best of Borrower's knowledge, upon execution hereof no Default
or Event of Default has occurred and is continuing or has not previously been
waived.
SECTION V. FULL FORCE AND EFFECT. Except as herein amended, the Credit
---------------------
Agreement and all other Credit Documents shall remain in full force and effect.
SECTION VI. 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:____________________
Title:___________________
2
<PAGE>
Agent:
BT COMMERCIAL CORPORATION
By: /s/ Frank Fazio
_________________________
Name:____________________
Title:___________________
Lender:
BT COMMERCIAL CORPORATION
By: /s/ Frank Fazio
_________________________
Name:____________________
Title:___________________
Lender:
FLEET BUSINESS CREDIT
CORPORATION
By: /s/ Jennifer S. Mellett
_________________________
Name:____________________
Title:___________________
Lender:
LASALLE NATIONAL BANK
By: /s/ Christopher G. Clifford
_________________________
Name:____________________
Title:___________________
3
<PAGE>
Lender:
BANKBOSTON, N.A.
By: /s/ Robert Brandon
_________________________
Name:____________________
Title:___________________
Lender:
FINOVA CAPITAL CORPORATION
By: /s/ Brian Rujawitz
_________________________
Name:____________________
Title:___________________
Lender:
GMAC COMMERCIAL CREDIT LLC
By: /s/ Anthony Viola
_________________________
Name:____________________
Title:___________________
Lender:
FLEET CAPITAL CORPORATION
By: /s/ Jennifer S. Mellett
_________________________
Name:____________________
Title:___________________
4
<PAGE>
Lender:
NATIONSBANK OF TEXAS, N.A.
By:_________________________
Name:____________________
Title:___________________
Lender:
HELLER FINANCIAL, INC.
By:_________________________
Name:____________________
Title:___________________
5
<PAGE>
EXHIBIT 10.2
EIGHTH AMENDMENT TO CREDIT AGREEMENT
------------------------------------
This Eighth Amendment to Credit Agreement (the "Amendment") is made on this
15th day of November, 1999 by and among Converse Inc. (the "Borrower"), BT
Commercial Corporation, as Agent (in such capacity, the "Agent") and BT
Commercial Corporation (in its capacity as lender, "BTCC"), Fleet Business
Credit Corporation ("FBC"), LaSalle National Bank ("LaSalle"), BankBoston, N.A.
("BankBoston"), FINOVA Capital Corporation ("FINOVA"), BNY Financial Corporation
("BNY"), Fleet Capital Corporation ("Fleet"), Bank of America, N.A. ("BofA"),
Heller Financial, Inc. (BT, FBC, LaSalle, BankBoston, FINOVA, BNY, Fleet, BofA,
and Heller referred to collectively as "Lenders").
W I T N E S S E T H:
WHEREAS, the Agent, the Lenders and the Borrower are parties to that
certain Credit Agreement dated as of May 21, 1997, as amended by that certain
First Amendment to Credit Agreement dated as of June 26, 1997, that certain
Second Amendment to Credit Agreement dated as of November 21, 1997, that certain
Third Amendment to Credit Agreement dated as of January 29, 1998, that certain
Fourth Amendment to Credit Agreement dated as of September 16, 1998, that
certain Fifth Amendment to Credit Agreement dated as of May 28, 1999, that
certain Sixth Amendment to Credit Agreement dated as of July 30, 1999, and that
certain Seventh Amendment to Credit Agreement dated as of October 31, 1999
(collectively, the "Credit Agreement"); and
WHEREAS, the parties desire to amend 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 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. AMENDMENTS TO CREDIT AGREEMENT.
------------------------------
2.1 Reduction of the Commitments. Pursuant to the direction of the
----------------------------
Borrower, the Total Commitments are hereby reduced from $120,000,000 to
$90,000,000, and Annex I to the Credit Agreement is hereby deleted in the form
of Annex I attached hereto is hereby substituted in its stead.
1
<PAGE>
2.2 Amendment to Definitions.
------------------------
(a) The defined term "Borrowing Base", which appears in
--------------
Section 1.1 of the Credit Agreement, is hereby amended by deleting the
reference to (i) "100,000" contained in Subsection B(i) thereof, and
inserting "60,000" in its stead and (ii) "November 15, 1999" contained in
subsection (F)(i) thereof and inserting "February 15, 2000" in its stead.
(b) The defined term "LIBOR Rate Margin" is hereby deleted
-----------------
in its entirety, and the following is inserted in lieu thereof:
"LIBOR Rate Margin shall mean three percent (3.00%) per annum."
-----------------
2.3 Amendment to Article 4.
----------------------
Sections 4.1(a), 4.2(a) and 4.2.1(a) of the Credit Agreement
are each hereby amended by deleting the references contained therein to
"$80,000,000," and inserting "$40,000,000" in its stead in each such
Section.
SECTION 3. WAIVER.
------
3.1 Waiver of Event of Default. Borrower has advised the Agent that
--------------------------
Borrower has failed to comply with the provisions of Section 7.7 of the Credit
Agreement for the 9 month period ending September 30, 1999, which failure
constitutes an Event of Default. Subject to the satisfaction by the Borrower of
the conditions precedent contained herein, the Agent and Required Lenders hereby
waive the Event of Default occasioned as a result of Borrower's failure to
comply with the provisions of Section 7.7 for the 9 month period ending
September 30, 1999. Such waiver is limited to the Event of Default described
herein and is not a waiver with respect to any other Default or Event of Default
which has or may occur pursuant to the terms of the Credit Agreement generally.
SECTION 4. CONDITIONS PRECEDENT. The effectiveness of this Amendment is
--------------------
expressly conditioned upon satisfaction of the following conditions precedent:
4.1 Amendment. Agent shall have received copies of this Amendment
---------
duly executed by Borrower and Lenders constituting Required Lenders.
4.2 Amendment Fee. Borrower shall have paid to Agent for the
-------------
benefit of the Lenders who have committed to make advances pursuant to
subsection (F) of the Borrowing Base, an amendment fee in the amount of
$100,000.
4.3 Waiver Fee. Borrower shall have paid to Agent for the benefit
----------
of the Lenders in accordance with their respective Revolving Credit Commitments
as set forth on Annex I as amended herein, a Waiver Fee in the amount of
$250,000.
4.4 Other. Agent shall have received such other documents,
-----
certificates and assurances as it shall reasonably request.
2
<PAGE>
SECTION 5. REAFFIRMATION OF BORROWER. Borrower hereby represents and
-------------------------
warrants to Agent and Lender 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 Lender 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.
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:__________________________
Title:_________________________
Agent:
BT COMMERCIAL CORPORATION
By: /s/ Frank Fazio
_______________________________
Name:__________________________
Title:_________________________
3
<PAGE>
Lender:
BT COMMERCIAL CORPORATION
By: /s/ Frank Fazio
_______________________________
Name:__________________________
Title:_________________________
Lender:
FLEET BUSINESS CREDIT
CORPORATION
By: /s/ Jennifer S. Mellett
_______________________________
Name:__________________________
Title:_________________________
Lender:
LASALLE NATIONAL BANK
By: /s/ Christopher G. Clifford
_______________________________
Name:__________________________
Title:_________________________
Lender:
BANKBOSTON, N.A.
By: /s/ Jennifer S. Mellett
_______________________________
Name:__________________________
Title:_________________________
4
<PAGE>
Lender:
FINOVA CAPITAL CORPORATION
By: /s/ Thomas L. Gibbons
_______________________________
Name:__________________________
Title:_________________________
Lender:
GMAC COMMERCIAL CREDIT LLC
By: /s/ Anthony Viola
_______________________________
Name:__________________________
Title:_________________________
Lender:
FLEET CAPITAL CORPORATION
By: /s/ Jennifer S. Mellett
_______________________________
Name:__________________________
Title:_________________________
Lender:
BANK OF AMERICA, N.A.
By:_______________________________
Name:__________________________
Title:_________________________
5
<PAGE>
Lender:
HELLER FINANCIAL, INC.
By: /s/ Tara Urobel
_______________________________
Name:__________________________
Title:_________________________
6
<PAGE>
ANNEX I
-------
LENDERS AND COMMITMENT AMOUNTS
------------------------------
Lender Revolving Credit Commitment
- ------ ---------------------------
BT Commercial Corporation $12,600,000
233 South Wacker Drive, Suite 8400
Chicago, Illinois 60606
Fleet Business Credit Corporation $12,000,000
200 Glastonbury Blvd.
Glastonbury, CT 06033
LaSalle National Bank $12,600,000
135 South LaSalle Street, Suite 425
Chicago, IL 60603
FINOVA Capital Corporation $ 9,600,000
311 South Wacker Drive, Suite 4400
Chicago, IL 60606-6618
GMAC Commercial Credit LLC $12,000,000
1290 Avenue of Americas, 3rd Floor
New York, NY 10104
Fleet Capital Corporation $ 9,600,000
200 Glastonbury Blvd.
Glastonbury, CT 06033
NationsBank of Texas, N.A. $ 9,600,000
c/o NationsBank Business Credit
600 Peachtree Street, 13/th/ Floor
Atlanta, Georgia 30308
Heller Financial, Inc. $12,000,000
500 West Monroe Street, 18/th/ Floor
Chicago, IL 60661
7
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> JAN-01-2000
<PERIOD-START> JAN-03-1999
<PERIOD-END> OCT-02-1999
<CASH> 1,708
<SECURITIES> 0
<RECEIVABLES> 49,685
<ALLOWANCES> 2,086
<INVENTORY> 72,479
<CURRENT-ASSETS> 129,341
<PP&E> 37,511
<DEPRECIATION> 18,073
<TOTAL-ASSETS> 180,328
<CURRENT-LIABILITIES> 138,095
<BONDS> 74,265
0
0
<COMMON> 17,479
<OTHER-SE> (104,248)
<TOTAL-LIABILITY-AND-EQUITY> 180,328
<SALES> 188,202
<TOTAL-REVENUES> 203,235
<CGS> 139,573
<TOTAL-COSTS> 201,079
<OTHER-EXPENSES> 430
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 16,194
<INCOME-PRETAX> (14,468)
<INCOME-TAX> 2,927
<INCOME-CONTINUING> (17,395)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (17,395)
<EPS-BASIC> (1.00)
<EPS-DILUTED> (1.00)
</TABLE>
