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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 July 3, 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 Exchange
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 July 3, 1999, 17,437,140 shares of common stock were outstanding.
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TABLE OF CONTENTS
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PAGE
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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 About
Market Risk 19
PART II: OTHER INFORMATION
Item 1. Legal Proceedings 20
Item 2. Changes in Securities 20
Item 3. Defaults Upon Senior Securities 20
Item 4 Submission of Matters to a Vote of
Security Holders 20
Item 5. Other Information 21
Item 6. Exhibits and Reports on Form 8-K 22
SIGNATURE 23
</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)
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<CAPTION>
(Unaudited)
January 2, 1999 July 3, 1999
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<S> <C> <C>
Assets
Current assets:
Cash and cash equivalents............................... $ 3,274 $ 2,317
Receivables, less allowances of $2,086 and $1,801,
respectively.......................................... 57,826 55,569
Inventories (Note 3).................................... 71,292 77,723
Prepaid expenses and other current assets............... 8,962 6,591
---------- ------------
Total current assets............................... 141,354 142,200
Net property, plant and equipment............................ 20,838 19,885
Other assets................................................. 32,814 31,940
---------- ------------
$ 195,006 $ 194,025
========== ============
Liabilities and Stockholders' Equity (Deficiency)
Current liabilities:
Short-term debt......................................... $ 9,557 $ 9,010
Credit facility (Note 4)................................ 73,833 85,096
Accounts payable........................................ 37,184 37,206
Accrued expenses........................................ 10,861 8,745
Income taxes payable.................................... 2,861 3,354
---------- ------------
Total current liabilities.......................... 134,296 143,411
Long-term debt (Note 4)...................................... 101,799 102,191
Current assets in excess of reorganization value............. 28,221 27,183
Stockholders' equity (deficiency):
Common stock, $1.00 stated value, 50,000,000 shares
authorized, 17,319,556 and 17,437,140 shares issued
and outstanding at outstanding at January 2, 1999
and July 3, 1999, respectively........................ 17,320 17,437
Preferred stock, no par value, 10,000,000 shares
authorized none issued and outstanding................ -- --
Additional paid-in capital.............................. 3,695 4,748
Unearned compensation................................... (758) (1,450)
Retained deficit........................................ (88,129) (96,948)
Accumulated other comprehensive income.................. (1,438) (2,547)
---------- ------------
Total stockholders' equity (deficiency)............ (69,310) (78,760)
---------- ------------
$ 195,006 $ 194,025
========== ============
</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 Six Months Ended
--------------------------- ---------------------------
July 4, 1998 July 3, 1999 July 4, 1998 July 3, 1999
------------ ------------ ------------ ------------
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Net sales.............................................. $ 78,351 $57,140 $173,591 $127,219
Cost of sales.......................................... 58,614 42,088 126,039 93,426
------------ ---------- ---------- ----------
Gross profit........................................... 19,737 15,052 47,552 33,793
Selling, general and administrative expenses........... 21,964 18,714 51,680 40,365
Royalty income......................................... 4,459 4,940 9,487 9,782
Loss on sale of foreign subsidiaries................... --- 543 --- 543
------------ ---------- ---------- ----------
Earnings from operations............................... 2,232 735 5,359 2,667
Interest expense, net.................................. 4,213 5,280 8,661 10,515
Other (income) expense, net............................ (764) 97 (1,151) (895)
------------ ---------- ---------- ----------
Loss before income tax................................. (1,217) (4,642) (2,151) (6,953)
Income tax expense..................................... 299 938 528 1,866
------------ ---------- ---------- ----------
Net loss............................................... $ (1,516) $(5,580) $ (2,679) $ (8,819)
============ ========== ========== ==========
Net basic and diluted loss per share (Note 2).......... $ (0.09) $ (0.32) $ (0.15) $ (0.51)
============ ========== ========== ==========
Weighted average number of common shares
outstanding (Note 2)................................... 17,320 17,396 17,319 17,363
============ ========== ========== ==========
</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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Six Months Ended
-------------------------------
July 4, 1998 July 3, 1999
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Cash flows from operating activities:
Net earnings (loss)..................................................... $ (2,679) $ (8,819)
Adjustments to reconcile net loss to net cash (required for) provided by
operating activities:
Depreciation of property, plant and equipment...................... 1,834 2,164
Amortization of intangible assets.................................. 234 100
Amortization of current assets in excess of reorganization
value............................................................ (1,039) (1,038)
Amortization of note discount/warrants............................. --- 318
Amortization of deferred compensation.............................. 54 211
Gain on sale of property, plant and equipment...................... (1,037) ---
Deferred income taxes.............................................. --- 224
Changes in assets and liabilities:
Receivables........................................................ 639 2,257
Inventories........................................................ 4,164 (6,431)
Prepaid expenses and other current assets.......................... 1,240 2,350
Accounts payable and accrued expenses.............................. 728 (2,094)
Income taxes payable............................................... (478) 493
Other long-term assets and liabilities............................. (1,789) (538)
------------ ------------
Net cash (required for) provided by operating activities........ 1,871 (10,803)
------------ ------------
Cash flows from investing activities:
Additions to property, plant and equipment.............................. (1,520) (1,211)
Proceeds from sale of property, plant and equipment..................... 1,169 ---
------------ ------------
Net cash used by investing activities........................... (351) (1,211)
------------ ------------
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.......................... --- 73
Net proceeds from (payment of) short-term debt.......................... (1,685) (547)
Net proceeds from (payment of) credit facility.......................... (2,915) 11,263
------------ ------------
Net cash provided (used) by financing activities................ (4,589) 11,057
Net decrease in cash and cash equivalents................................. (3,069) (957)
Cash and cash equivalents at beginning of period.......................... 5,738 3,274
------------ ------------
Cash and cash equivalents at end of period................................ $ 2,669 $ 2,317
============ ============
</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, except per share amounts)
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 six months ended
July 3, 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:
January 2, 1999 July 3, 1999
--------------- ------------
Retail merchandise............ $ 4,535 $ 4,578
Finished products............. 57,365 64,791
Work in process............... 5,009 5,112
Raw materials................. 4,383 3,242
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$ 71,292 $ 77,723
============ ==========
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 the Company issued $80,000 of 7% Convertible
Subordinated Notes due June 1, 2004 (the
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"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.
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.
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 $85,096 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. In May 1999, the Company's Credit Facility was
amended to allow for $6,000 of additional borrowing base through July 1999. In
July 1999, the Company's Credit Facility was further amended to extend the
$6,000 of additional borrowing base through October 31, 1999.
As of July 3, 1999 the Company's borrowing base was $92,843. Utilization
under the Credit Facility amounted to $88,037 consisting of revolving loans of
$80,048, banker acceptances of $5,048 and outstanding letters of credit of
$2,941. Accordingly, $4,806 of the maximum available borrowing base remained
unutilized as of July 3, 1999.
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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 July 3, 1999, revolving loans outstanding under the
Credit Facility bore interest of 7.67% 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. assets. The Credit Facility requires compliance with
customary affirmative and negative covenants, including certain financial
covenants. At July 3, 1999, the Company was in compliance with all covenants
contained in the Credit Facility, as amended.
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.
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, vest immediately and expire on March 16, 2003. 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
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varying interest rates. As of July 3, 1999, total short-term borrowings
outstanding under these financing arrangements totaled $9,010. 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.
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5. Comprehensive Income
For the three months ended July 4, 1998 and July 3, 1999, comprehensive
income items included in stockholders' equity consisted of cumulative
translation adjustments of $233 and $(564), respectively. Total comprehensive
income (loss) for the second quarter of 1998 was $(1,283) compared to
comprehensive income (loss) of $(6,144) for the second quarter of 1999.
For the six months ended July 4, 1998 and July 3, 1999, comprehensive
income items included in stockholders' equity consisted of cumulative
translation adjustments of $(55) and $(1,109), respectively. Total comprehensive
income (loss) for the first six months of 1998 was $(2,734) compared to
comprehensive income (loss) of $(9,928) for the first six months of 1999.
6. Stock Plans and Warrant Exercises
In February and May 1999, 250,000 shares and 10,000 shares of restricted
stock, respectively, were granted to certain employees, resulting in $922 of
unearned compensation. 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 1999, 26,172 shares of common stock were issued under the
Company's Employee Stock Purchase Plan. Proceeds of $73 were recorded in
conjunction with this purchase.
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
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
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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 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 July 1, 1999, Converse entered into a long-term agreement with a third
party company for the exclusive distribution and license rights in Italy for
Converse footwear and apparel. This agreement becomes effective in January 2000
and will have the impact of reducing the Company's future global backlog, net
sales and expenses while increasing the Company's royalty income.
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:
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Europe, Americas
Middle East, (excluding
United States Africa Asia Pacific United States) Eliminations Consolidated
-------------- ------------ ------------- ------------- ------------- ------------
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Six months ending July 3,
1999:
Net sales to customer.......... $ 67,948 $ 34,684 $ 19,697 $ 4,890 $ ---- $ 127,219
Intersegment net sales......... 14,888 ---- ---- ---- (14,888) ----
Segment pretax profit (loss).. (9,583) (229) 3,807 (948) ---- (6,953)
Segment total assets at July 3,
1999........................ 156,871 30,655 3,130 3,369 ---- 194,025
Six months ending July 4,
1998:
Net sales to customer.......... $ 99,296 $ 41,395 $ 27,210 $ 5,690 $ ---- $ 173,591
Intersegment net sales......... 22,296 ---- ---- ---- (22,296) ----
Segment pretax profit (loss)... (11,573) (384) 9,563 243 ---- (2,151)
Segment total assets at January
2, 1999..................... 153,107 33,066 4,834 3,999 ---- 195,006
Three months ending July 3,
1999:
Net sales to customer.......... $ 32,852 $ 12,668 $ 9,900 $ 1,720 $ ---- $ 57,140
Intersegment net sales......... 6,189 ---- ---- ---- (6,189) ----
Segment pretax profit (loss)... (5,346) (1,561) 2,471 (206) ---- (4,642)
Three months ending July 4,
1998:
Net sales to customer.......... $ 45,680 $ 13,813 $ 15,997 $ 2,861 $ ---- $ 78,351
Intersegment net sales......... 5,608 ---- ---- ---- (5,608) ----
Segment pretax profit (loss)... (5,082) (1,701) 4,833 733 ---- (1,217)
</TABLE>
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Item 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Comparison of three months ended July 4, 1998 to three months ended July 3, 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 July
4, 1998 ("Second Quarter 1998") and for the three months ended July 3, 1999
("Second Quarter 1999").
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Three Months Ended
---------------------------------------------------
July 4, 1998 % July 3, 1999 %
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<S> <C> <C> <C> <C>
Net sales............................ $ 78,351 100.0 $ 57,140 100.0
Gross profit......................... 19,737 25.2 15,052 26.3
Selling, general and administrative
Expenses........................... 21,964 28.0 18,714 32.8
Royalty income....................... 4,459 5.7 4,940 8.6
Loss on sale of foreign
subsidiaries....................... --- --- 543 1.0
Earnings from operations............. 2,232 2.8 735 1.3
Interest expense, net................ 4,213 5.4 5,280 9.2
Other (income) expense, net.......... (764) (1.0) 97 0.2
Net loss............................. $ (1,516) (1.9) $ (5,580) (9.8)
Net basic and diluted loss
per share......................... $ (0.09) --- $ (0.32) ---
</TABLE>
Net Sales
Net sales for the Second Quarter 1999 decreased to $57.1 million from $78.4
million for the Second Quarter 1998, a 27.2% decrease. The $21.3 million
reduction in net sales was attributable to decreases of 24.7%, 30.5%, 39.5% and
31.5% for the Second Quarter 1999 in the categories of basketball, children's,
cross training and athletic originals, respectively, as compared to Second
Quarter 1998. The reduction in net sales was partially offset by a 7.3% increase
in the action sports category.
Net sales in the United States decreased 28.2% to $32.9 million in the
Second Quarter 1999 from $45.7 million for the Second Quarter 1998. Net sales
decreased 25.7% internationally to $24.3 million for Second Quarter 1999 from
$32.7 million for Second Quarter 1998. Second Quarter 1999 net sales decreased
from Second Quarter 1998 by 8.3%, 38.1% and 39.9% in the Europe, Middle East and
Africa ("E.M.E.A."), Asia Pacific and the Americas regions, respectively.
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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. Also
contributing to the sales decline internationally was the conversion of three
wholly-owned subsidiaries operating in Spain, Portugal and Canada to new
licensing agreements, revenues from which are now recorded as royalty income
rather than as net sales.
Gross Profit
Gross profit decreased to $15.1 million for Second Quarter 1999 from $19.7
million for Second Quarter 1998, a 23.4% reduction. The net sales reduction
accounted for the majority of the gross profit decline. The Company's gross
profit margin increased to 26.3% of net sales for Second Quarter 1999 compared
to 25.2% of net sales for Second Quarter 1998. The increase is primarily the
result of 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 in Second Quarter 1999.
Selling, General and Administrative Expenses
Selling, general and administrative expenses decreased 15.0% to $18.7
million for Second Quarter 1999 from $22.0 million for Second Quarter 1998. The
decrease in selling, general and administrative expenses of $3.3 million
resulted from reduced spending across all of the Company's functions. As a
percentage of net sales, selling, general and administrative expenses increased
to 32.8% for Second Quarter 1999 from 28.0% for the prior year period. Second
Quarter 1998 expenses included one-time expense credits of $3.3 million
generated by a gain from the curtailment of the active employees from the post-
retirement medical benefit plan and a gain of $0.6 million resulting from
pension curtailment. Excluding these one-time 1998 expense credits of $3.9
million, the expense reduction would have been $7.2 million or 27.8% for Second
Quarter 1999 compared to Second Quarter 1998. As a result of sluggish conditions
in the athletic footwear market, the Company continues to tightly control costs
and inventory levels.
Royalty Income
Royalty income increased by 8.9% to $4.9 million in Second Quarter 1999
from $4.5 million in Second Quarter 1998. International royalty income, which
currently represents approximately 81% of the Company's total royalty income,
increased 6.7% for Second Quarter 1999 from Second Quarter 1998. The increase
was primarily attributable to an increase of 24.3% in the Asia Pacific region
due mainly to recovery in our Southeast Asia business, partially offset by
weakness in the E.M.E.A. and Americas regions. U.S. royalty income increased by
42.9% to $1.0 million for Second Quarter 1999 from $0.7 million for Second
Quarter 1998. As a percentage of net sales, royalty income was 8.6% in the
Second Quarter 1999 compared to 5.7% in the Second Quarter 1998.
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Loss on Sale of Foreign Subsidiaries
In the Second Quarter 1999, the Company recorded a pretax loss totaling
$0.5 million relating to the conversion of our Canada operation from a Company
owned subsidiary (direct operating unit) to a third party licensee/distributor
arrangement.
Earnings from Operations
Primarily as a result of the factors discussed above, the Company recorded
earnings from operations of $0.7 million for Second Quarter 1999 as compared to
$2.2 million for Second Quarter 1998. As a percentage of net sales, earnings
from operations were 1.3% and 2.8% for Second Quarter 1999 and Second Quarter
1998, respectively.
Interest Expense
Interest Expense for Second Quarter 1999 increased to $5.3 million from
$4.2 million for Second Quarter 1998, a 26.2% increase. The increase reflects
the higher borrowing levels in Second Quarter 1999 compared to Second Quarter
1998 as well as higher interest costs associated with the Secured Notes issued
in September 1998.
Other (Income) Expense
The Second Quarter 1998 income of $0.8 million was primarily attributable
to the May 1998 sale of the Company's Reynosa, Mexico manufacturing facility,
partially offset by foreign exchange losses attributable to the appreciation of
the U.S. dollar.
Net Loss
The Company recorded a net loss for Second Quarter 1999 of $5.6 million
compared to net loss of $1.5 million for Second Quarter 1998. The net loss for
Second Quarter 1999 includes a charge of $2.0 million to increase the deferred
tax valuation reserve and a loss on sale of foreign subsidiaries of $0.3
million. Excluding these charges, the net loss for Second Quarter 1999 was $3.3
million.
Net Loss Per Share
The Company recorded a loss per share of $0.32 for Second Quarter 1999
compared to $0.09 loss per share for Second Quarter 1998. The net loss for the
Second Quarter 1999 includes a charge of $0.11 per share to increase the
deferred tax valuation reserve and loss of $0.02 from sale of foreign
subsidiaries. Excluding these charges, the net loss for Second Quarter 1999 was
$0.19 per share.
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Comparison of six months ended July 4, 1998 to six months ended July 3, 1999
The following table sets forth certain items relating to the Company's
operating results as a percentage of net sales for the six months ended July 4,
1998 ("First Half 1998") and for the six months ended July 3, 1999 ("First Half
1999").
<TABLE>
<CAPTION>
Six Months Ended
-------------------------------------------------
July 4, 1998 % July 3, 1999 %
------------ ----- ------------ -----
<S> <C> <C> <C> <C>
Net sales............................... $173,591 100.0 $127,219 100.0
Gross profit............................ 47,552 27.4 33,793 26.6
Selling, general and administrative
expenses............................... 51,680 29.8 40,365 31.7
Royalty income.......................... 9,487 5.5 9,782 7.7
Loss on sale of foreign subsidiaries.... --- --- 543 0.4
Earnings from operations................ 5,359 3.1 2,667 2.1
Interest expense, net................... 8,661 5.0 10,515 8.3
Other (income) expense.................. (1,151) (0.7) (895) (0.7)
Net loss................................ $ (2,679) (1.5) $ (8,819) (6.9)
Net basic and diluted loss
per share.............................. $ (0.15) --- $ (0.51) ---
</TABLE>
Net Sales
Net sales for the First Half 1999 decreased 26.7% to $127.2 million from
$173.6 million for First Half 1998. Compared to the prior year period, the
$46.4 million reduction in net sales was attributable to decreases of 29.6%,
33.4%, 56.3% and 26.3% in the categories of basketball, children's, cross
training and athletic originals, respectively. The reduction in net sales was
partially offset by a $2.0 million increase in the Company's action sports
category, which was introduced in 1998.
Net sales in the United States for First Half 1999 decreased 31.6% to $67.9
from $99.3 million for First Half 1998. International net sales decreased 20.2%
to $59.3 million from $74.3 million in the prior year period. Net sales in the
E.M.E.A., Asia Pacific, and the Americas regions decreased 16.5%, 27.6% and
14.1%, respectively from the First Half 1998.
The Company's net sales continued 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 operating in Spain, Portugal and Canada to new
licensing agreements, revenues from which are now recorded as royalty income
rather than as net sales.
-13-
<PAGE>
Gross Profit
Gross profit decreased to $33.8 million for First Half of 1999 from $47.6
million for First Half 1998, a 29.0% reduction. The net sales reduction
accounted for the majority of the gross profit decline. The Company's gross
profit margin fell to 26.6% of net sales for First Half 1999 compared to 27.4%
of net sales for First Half 1998. The decline was caused by the industry
downturn and the resulting reduced demand for the Company's products.
Selling, General and Administrative Expenses
Selling, general and administrative expenses decreased 21.9% to $40.4
million for First Half 1999 from $51.7 million for First Half 1998. The decrease
in selling, general and administrative expenses of $11.3 million resulted in
reduced spending across all of the Company's functions. As a percentage of net
sales, selling, general and administrative expenses increased to 31.7% for First
Half 1999 from 29.8% for the prior year period. First Half 1998 expenses include
one-time expense credits of $3.3 million generated by a gain from the
curtailment of the active employees from the post-retirement medical benefit
plan and a gain of $0.6 million resulting from pension curtailment. Excluding
these one-time 1998 expense credits of $3.9 million, the expense reduction would
have been $15.2 million or 27.3% for First Half 1999 compared to First Half
1998.
Royalty Income
Royalty income increased 3.2% to $9.8 million in First Half 1999 from $9.5
million in First Half 1998. International royalty income, which currently
represents approximately 82% of the company's total royalty income, was similar
to the prior year period. The international royalty income was favorably
impacted by increase of 12.5% in the Asia Pacific region due mainly to recovery
in the Southeast Asia economies, partially offset by weakness in the E.M.E.A.
and Americas regions. U.S. royalty income increased 13.3% to $1.7 million for
First Half 1999 from $1.5 million for First Half 1998. As a percentage of net
sales, royalty income was 7.7% in the First Half 1999 compared to 5.5% in the
First Half 1998.
Loss on Sale of Foreign Subsidiaries
In the Second Quarter 1999, the Company recorded a pretax loss totaling
$0.5 million relating to the conversion of our Canada operation from a Company
owned subsidiary (direct operating unit) to a third party licensee/distributor
arrangement.
Earnings from Operations
Primarily as a result of the factors discussed above, the Company recorded
earnings from operations of $2.7 million for First Half 1999 as compared to $5.4
million for First Half 1998. As a percentage of net sales, earnings from
operations were 2.1% and 3.1% for First Half 1999 and First Half 1998,
respectively.
-14-
<PAGE>
Interest Expense
Interest Expense for First Half 1999 increased to $10.5 million from $8.7
million for First Half 1998, a 20.7% increase. The increase reflects the higher
borrowing levels in First Half 1999 compared to First Half 1998 as well as
higher interest costs associated with the Secured Notes issued in September
1998.
Other (Income) Expense
The First Half 1999 income of $0.9 million was primarily attributable to
gains realized from foreign exchange contracts and put options. The First Half
1998 income of $1.2 million was primarily related to the May 1998 sale of the
Company's Reynosa, Mexico manufacturing facility.
Net Loss
The Company recorded a net loss for First Half 1999 of $8.8 million
compared to net loss of $2.7 million for First Half 1998. The net loss for the
First Half 1999 includes a charge of $3.8 million to increase the deferred tax
valuation reserve and loss of $0.3 million from the sale of foreign
subsidiaries. The net loss for the First Half 1998 includes a charge of $1.1
million to increase the deferred tax valuation reserve. Excluding these non-
operating charges and credits, the net loss for the First Half 1999 was $4.7
million compared to net loss of $1.6 million in First Half 1998.
Net Loss Per Share
Net loss per share for the First Half 1999 was $0.51 as compared to net
loss per share of $0.15 for the First Half 1998. Net loss for First Half 1999
includes a charge of $0.22 per share to increase the deferred tax valuation
reserve and loss on sale of foreign subsidiaries of $0.02 per share. Net loss
for the First Half 1998 includes a charge of $0.06 per share to increase the
deferred tax valuation reserve. Excluding these nonrecurring charges, the net
loss per share for the First Half 1999 was $0.27 compared to net loss per share
of $0.09 in First Half 1998.
Liquidity and Capital Resources
As of July 3, 1999 the Company's working capital (net of cash) position
decreased $7.3 million to a deficit of $3.5 million from $3.8 million at January
2, 1999. Inventory increased $6.4 million due to a seasonal buildup for the
Company's back to school selling period. Accounts receivable and prepaid
expenses decreased $4.5 million due to decreased sales levels and the Company's
efforts to reduce operating costs. Accounts payable, accrued liabilities and
income taxes payable decreased $1.6 million while seasonal borrowings increased
$10.7 million.
Total borrowings under the Company's Credit Facility and asset based
financing arrangements increased to $85.1 million at July 3, 1999 from $73.8
million at January 2, 1999,
-15-
<PAGE>
reflecting the seasonal working capital needs discussed above (see Note 4 of
Notes to Condensed Consolidated Financial Statements contained herein).
For First Half 1999 and First Half 1998, net cash provided by (required
for) operating activities was $(10.8) million and $1.9 million, respectively.
Cash required for operating activities in First Half 1999 was primarily used to
fund the Company's seasonal requirements. In the First Half 1998, cash was
provided through inventory reduction and lower operating costs. Net cash used by
investing activities was $1.2 million and $0.4 million for First Half 1999 and
First Half 1998, respectively. Cash invested was for additions to property,
plant and equipment partially offset in First Half 1998 by cash received from
sale of Reynosa facility. Net cash provided by (used for) financing activities
was $11.0 million and ($4.6) million for First Half 1999 and First Half 1998,
respectively. Net cash provided by financing activities in First Half 1999
consisted primarily of proceeds from the Company's seasonal borrowings.
Backlog
At the end of First Half 1999, the Company's global backlog was $80.9
million, compared to $90.2 million at the end of the First Half 1998, a decrease
of 10.3%. 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 arrangements. The Company's categories
of athletic originals, children's and cross training recorded declines of 19.6%,
17.3% and 7.7%, respectively, offset by an improvement in the basketball
category of 22.8%. The United States order backlog increased by 12.2% but was
more than offset by international backlog which decreased 32.0%. 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.
-16-
<PAGE>
The Company's Year 2000 Project
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 95% 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 the third quarter of
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.
-17-
<PAGE>
"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.
Costs Associated with Year 2000 Compliance.
-
Through the second quarter of 1999 the Company spent approximately $2.2
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 $0.8 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 an additional $0.3 million 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, anticipated cost
savings, and the product and industry developments for 1999 and 2000 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
-18-
<PAGE>
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.
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 2.5%. 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 durations of
generally from three to twelve months.
As of July 3, 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......................... $6,414.9 113.34 $ 363.2
Australian Dollar.................... $1,123.4 1.59 $ (68.5)
Spanish Pesetas...................... $ 140.2 139.80 $ 18.7
Foreign exchange buy forward contracts:
Japanese Yen......................... $2,217.7 113.44 $(136.4)
</TABLE>
-19-
<PAGE>
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.
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.
Not Applicable
Item 4. Submission of Matters to a Vote of Security-Holders.
On May 12, 1999, the Company conducted its annual meeting of
stockholders pursuant to due notice. A Quorum being present either in
person or by proxy, the stockholders voted on the following matters:
1. To elect twelve directors to hold office until the next annual
meeting and until their successors are elected and qualified
2. To ratify the appointment of PricewaterhouseCoopers as the
Company's independent auditors for the next fiscal year.
3. To consider approval of the Converse Inc. Employee Stock Purchase
Plan.
Subsequent to the date the Company's proxy materials were delivered to
stockholders, Mr. John Ryan, one of the individuals nominated to be
elected a director of the Company, declined his nomination due to a
heavy work schedule. The Executive Committee of the Company's Board
of Directors subsequently voted to reduce the number of directors to
be elected to eleven and deleted Mr. Ryan's name from the list of
nominees.
No other matters were voted upon. The votes cast were as follows:
-20-
<PAGE>
1. Election of directors. The following directors were elected to the
Company's Board:
<TABLE>
<CAPTION>
NUMBER OF VOTES CAST
--------------------
FOR WITHHELD
--- --------
<S> <C> <C>
Donald J. Barr 16,871,184 145,986
Julius W. Erving 16,858,535 158,635
Robert H. Falk 16,857,016 160,154
Gilbert Ford 16,856,179 169,991
Michael S. Gross 16,863,027 154,143
John J. Hannan 16,855,242 161,928
Joshua J. Harris 16,163,703 163,703
John H. Kissick 16,853,688 160,482
Richard B. Loynd 16,864,968 152,202
Glenn N. Rupp 16,870,166 147,004
Michael D. Weiner 16,863,678 153,492
</TABLE>
2. Ratification of the selection of PricewaterhouseCoopers as the
Company's independent auditors.
For 16,693,868
Against 216,148
Abstain 107,154
3. Approval of Converse Inc. Employee Stock Purchase Plan.
For 16,693,868
Against 216,148
Abstain 107,154
Item 5. Other Information.
Not Applicable
-21-
<PAGE>
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits. The following exhibits are contained in this report:
10.1 Lease Agreement - Charlotte, North Carolina
10.2 Fifth Amendment, dated May 28, 1999, to Credit Agreement
dated May 21, 1997.
10.3 Sixth Amendment, dated July 30, 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
July 3, 1999.
-22-
<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: August 13, 1999 Converse Inc.
By: /s/ Donald J. Camacho
--------------------------
Donald J. Camacho
Senior Vice President and
Chief Financial Officer
-23-
<PAGE>
EXHIBIT INDEX
Exhibit No. Description
- ----------- -----------
10.1 Lease Agreement - Charlotte, North Carolina
10.2 Fifth Amendment, dated May 28, 1999, to Credit Agreement dated May 21,
1997.
10.3 Sixth Amendment, dated July 30, 1999, to Credit Agreement dated May 21,
1997.
27 Financial Data Statement
<PAGE>
EXHIBIT 10.1
LEASE AGREEMENT
THIS LEASE AGREEMENT (the "Lease"), made and entered into by and between Godley
Construction Company I, LLC, a North Carolina limited liability company,
hereinafter referred to as "Landlord", and Converse Inc., a corporation
organized under the laws of the State of Delaware, hereinafter referred to as
"Tenant".
WITNESSETH:
1. Premises and Term. In consideration of the obligation of Tenant to pay rent
as herein provided, and in consideration of the other terms, provisions and
covenants hereof, Landlord hereby demises and leases to Tenant, and Tenant
hereby takes from Landlord that certain premises consisting of approximately
Seventeen (17) acres, more or less, situated within the County of Mecklenburg,
State of North Carolina, and more particularly described on EXHIBIT "A" attached
hereto and incorporated herein by reference, together with all rights,
privileges, easements, and appurtenances belonging to or in any way pertaining
to the premises and together with the buildings and other improvements situated
upon said premises (said real property, building and improvements being
hereinafter referred to as the "premises").
TO HAVE AND TO HOLD for the term (the "term") commencing on the "commencement
date", as hereinafter defined, and ending one hundred twenty (120) months
thereafter
The commencement date of this lease (hereinafter the "commencement date") shall
be at 12:01 A.M. on February 1, 2001, the day immediately following the
expiration of the term of the existing lease of the premises, dated March 17,
1970, which Landlord and Tenant hereby agree shall expire on January 31, 2011.
2. Base Rent. Tenant agrees to pay to Landlord base rent for the premises, in
advance, without demand, deduction or set off, for the entire term hereof at the
rate of Eighty Thousand Two Hundred Forty-Five and No/100 Dollars ($80,245.00)
per month. One such monthly installment shall be due and payable on the
commencement date and a like monthly installment shall be due and payable on or
before the first day of each calendar month succeeding the commencement date
during the hereby demised term.
3. Use. The premises shall be used only for the purpose of sale, storage,
distribution, repair and servicing of its merchandise, and for all other
operations
1
<PAGE>
necessary or incident to the conduct of its business. Tenant shall at its own
cost and expense obtain any and all licenses and permits necessary for any such
use. Tenant shall comply with all governmental laws, ordinances, and regulations
applicable to the use of the premises, and shall promptly comply with all
governmental orders and directives for the correction, prevention and abatement
of nuisances, in, upon or connected with, the premises, all at Tenant's sole
expense. Tenant shall not permit any objectionable or unpleasant odors, smoke,
dust, gas, noise or vibrations to emanate from the premises, nor take any other
action which would constitute a nuisance or would disturb or endanger any other
tenants of the building in which the premises are situated or the occupants of
buildings in the vicinity of the premises or unreasonably interfere with their
use of their respective premises. Without Landlord's prior written consent,
Tenant shall not receive, store or otherwise handle any product, material or
merchandise which is explosive or highly inflammable. Tenant will not permit the
premises to be used for any purpose or in any manner (including without
limitation any method of storage) which would render the insurance thereon void
or the insurance risk more hazardous or cause the State Board of Insurance or
other insurance authority to disallow any sprinkler credits. It is understood
that the Tenant's current use of the premises is an appropriate and acceptable
use.
4. Base Rent Adjustment. The base rent payable under the terms of Paragraph 2
of this Lease shall be adjusted on the fourth, seventh and tenth annual
anniversaries of the commencement date of this Lease in accordance with the
following provisions:
Base rent shall be increased on each Comparison Date by the Percentage CPI
Increase. Provided, however, that: (i) the Base Rent for the second Comparison
Date shall be the Base Rent as previously increased during the second three (3)
year period of this Lease and (ii) the Base Rent for the third Comparison Date
shall be the Base Rent as previously increased during the third three (3) year
period of this Lease. Landlord shall notify Tenant on or about each Comparison
Date of each increase by delivering a written statement setting forth the Index
for the Base CPI Month, the Index for the applicable Comparison CPI Month, the
Percentage CPI Increase, and the new minimum base rent payable by Tenant.
Beginning on the first (1st) day of the month immediately following receipt by
Tenant of Landlord's notice herein, and continuing thereafter until the next
Comparison Date or the end of the Lease, whichever shall first occur, Tenant
shall pay Landlord the new Base Rent and in addition, Tenant shall pay Landlord
the difference between the new Base Rent and the Base Rent previously paid for
any month following the last Comparison Date to the end that the Landlord shall
have been paid the new Base Rent for each calendar month following the last
Comparison Date.
2
<PAGE>
For purposes of this Section, the following definitions shall apply:
(i) The "Index" shall mean the United States Department of Labor, Bureau
of Labor Statistics, Consumer Price Index for all Urban Consumers (on the basis
1982-1984 = 100). If the format or components of the Index have materially
changed before or after the execution of this Lease, Landlord shall substitute
an index which is published by the Bureau of Labor Statistics or similar agency
and which has been determined by independent third party sources to be
comparable to the Consumer Price Index for all Urban Consumers in effect on the
date of this Lease. Landlord shall notify Tenant of the substituted index, which
shall be used to calculate the increase in the minimum base rent.
(ii) The "Comparison Date" shall mean each of the third (3rd), sixth (6th)
and ninth (9th) calendar anniversary of the commencement date of this Lease.
(iii) The "Comparison CPI Month" for each Comparison Date shall mean the
month immediately preceding the month in which such Comparison Date occurs.
(iv) The "Base CPI Month" shall be defined as follows: (1) for the
Comparison Date which occurs on the third (3rd) calendar anniversary of the
Lease commencement date, the month in which the lease commencement date occurs
(Month 1); (2) for the Comparison Date which occurs on the sixth (6th) calendar
anniversary of the Lease commencement date, the month which is three (3) years
after the Lease commencement date (Month 37); and (3) for the Comparison Date
which occurs on the ninth (9th) calendar anniversary of the Lease commencement
date, the month which is six (6) years after the Lease commencement date (Month
73).
(v) The "Percentage CPI Increase" shall mean the increase in the Index
which has occurred between the Base CPI Month and the Comparison CPI Month for
each Comparison Date.
5. Five Year Renewal Option. Landlord hereby grants the Tenant the right to
extend the term hereof for an additional five (5) years beginning at 12:01 A.M.
on February 1, 2011. The Tenant shall renew the Lease by giving the Landlord
written notice thereof as provided in Paragraph 24 hereof not less than six (6)
months prior to the expiration of the initial ten year term of this Lease. In
the event the Tenant does renew this Lease for such additional five (5) year
term, all terms and conditions of this Lease for the initial ten (10) year term
shall apply to the five (5) year renewal term except that the rent payable shall
be determined as hereinafter provided.
3
<PAGE>
The base rent payable for the first two (2) years of the five (5) year
renewal term shall be the same amount of rent payable during the tenth (10th)
year of the initial ten (10) year term hereof.
Base rent shall be increased by the Percentage CPI Increase on the first
(and only) Comparison Date during the five (5) year renewal term, which shall be
on the second (2nd) calendar anniversary of the beginning of the five (5) year
renewal term. The Base CPI Month for the Comparison Date during the five (5)
year renewal term shall be the month which is nine (9) years after the Lease
commencement date).
The provisions of Paragraph 4, except as modified in this Paragraph 5,
shall apply in determining the rent payable by the Tenant to the Landlord during
the five (5) year renewal term.
6. Landlord's Repairs. Landlord shall at its expense maintain only the roof and
the structural soundness of the foundation and exterior walls of the building in
good repair, reasonable wear and tear excepted. Tenant shall repair and pay for
any damage to the roof, foundation and exterior walls of the building caused by
Tenant, or Tenant's employees, agents or invitees, or caused by Tenant's default
hereunder. In connection with maintaining the roof in good repair, the Tenant
agrees to not allow any of its employees, agents or invitees to gain access to
the roof without the written approval of the Landlord, except for the specific
purpose of repairing the exhaust fans on the roof which are a part of the HVAC
system. With regard to the Landlord's obligations hereunder, the term "walls" as
used herein shall not include interior and exterior windows, glass, painting or
plate glass, doors, special store fronts or office entries, all of which shall
be the responsibility of the Tenant to repair and maintain. Tenant shall
immediately give Landlord written notice of defect or need for repairs, after
which Landlord shall have reasonable opportunity to repair same or cure such
defect. Landlord's liability with respect to any defects, repairs or maintenance
for which Landlord is responsible under any of the provisions of this lease
shall be limited to the cost of such repairs or maintenance of the curing or
such defect.
7. Tenant's Repairs and Other Covenants of Care and Treatment or Premises.
A. Tenant shall at its own cost and expense keep and maintain all parts of the
premises (except those for which Landlord is expressly responsible under the
terms of the Lease) in good condition, promptly making all necessary repairs and
replacement, including, but not limited to, interior and exterior windows, glass
and plate glass, doors, any special office entries, interior walls, painting,
exterior walls (other than structural) and finish work, doors and floor
covering, down spouts, gutters, heating and air conditioning systems,
transportation accesses
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and pavement, dock boards, truck doors, dock bumpers, plumbing work and
fixtures, termite and pest extermination and regular removal of interior trash
and debris, keeping the whole of the premises in a clean and sanitary condition.
In making all such repairs and/or replacements, Tenant shall comply with all
governmental codes, requirements and regulations. Tenant shall be obligated to
repair any damage to Landlord's property caused by fire, windstorm, tornado,
earthquake or other casualty, unless the cost to repair is fully covered by the
insurance to be maintained by Tenant pursuant to subparagraph 13(A) below.
B. Tenant shall, at its own cost and expense, enter into a regularly scheduled
preventative maintenance/service contract with a maintenance contractor for
servicing all hot water, heating and air conditioning systems and equipment
within the premises. The maintenance contractor and the contract must be
approved by Landlord. The service contract must include all services suggested
by the equipment manufacturer within the operation/maintenance manual and must
become effective (and a copy thereof delivered to Landlord) within thirty (30)
days after the Commencement Date of this Lease.
C. Tenant agrees that washing over the road tractor and trailer equipment is
permitted and will take place on the premises, including the truck apron and
parking areas, but there shall be no washing of any kind on asphalt areas.
D. Tenant covenants and agrees not to permit any employees, agents,
representatives, or any subcontractors to go upon the roof of any building
within the premises without the Landlord's written consent. Notwithstanding the
foregoing, the Tenant may make emergency repairs to the roof; provided, that the
Tenant gives the Landlord notice thereof within thirty (30) days thereafter.
Tenant shall be permitted access to the office roof to service the HVAC units,
but any damage to the roof caused by such servicing shall be the Tenant's
responsibility to repair and pay the cost thereof. The failure on the part of
the Tenant to comply with this covenant and agreement shall cause the Tenant to
be fully liable for the entire cost of making any and all necessary repairs to
the roof which were cause by such entry upon the roof.
8. Alterations. Tenant shall not make any alterations, additions or
improvements to the premises (including but not limited to roof and wall
penetrations) without the prior written consent of Landlord, which consent shall
not be unreasonably withheld. Tenant may, without the consent of Landlord, but
at its own cost and expense and in a good workmanlike manner erect such shelves,
bins, machinery and trade fixtures as it may deem advisable, without altering
the basic character of the building or improvements and without overloading or
damaging such building or improvements, and in each case complying with all
applicable governmental laws, ordinances, regulations and other requirements.
All alterations, additions, improvements and partitions
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erected by Tenant shall be and remain the property of Tenant during the term of
this Lease and Tenant shall, unless Landlord otherwise elects as hereinafter
provided, remove all alterations, additions, improvements and partitions erected
by Tenant and restore the premises to their original condition by the date of
termination of this Lease or upon earlier vacating of the premises and shall be
delivered up to the Landlord with the premises. All shelves, bins, machinery and
trade fixtures installed by Tenant may be removed by Tenant prior to the
termination of this Lease if Tenant so elects, and shall be removed by the date
of termination of this Lease or upon earlier vacating of the premises if
required by Landlord; upon any such removal Tenant shall restore the premises to
their original condition. All such removals and restoration shall be
accomplished in a good workmanlike manner so as not to damage the primary
structure or structural qualities of the buildings and other improvements
situated on the premises.
9. Signage. Tenant shall have the right to install signs upon the premises only
when first approved in writing by Landlord and subject to any applicable
governmental laws, ordinances, regulations and other requirements. Tenant shall
remove all such signs by the termination of this Lease. Such installations and
removals shall be made in such manner as to avoid injury or defacement of the
building and other improvements, and Tenant shall repair any injury or
defacement, including without limitation discoloration, caused by such
installation and/or removal. The provisions of this paragraph shall not apply to
any existing signs upon the premises which were installed during the prior
lease.
10. Inspection. Landlord and Landlord's agents and representatives shall have
the right to enter and inspect the premises at any reasonable time during
business hours, for the purpose of ascertaining the condition of the premises or
in order to make such repairs is may be required or permitted to be made by
Landlord under the terms of this lease. During the period that is twelve (12)
months prior to the end of the term hereof, Landlord and Landlord's agents and
representatives shall have the right to enter the premises at any reasonable
time during business hours for the purpose of showing the premises and shall
have the right to erect on the premises a suitable sign indicating the premises
are available. Tenant shall give written notice to Landlord at least forty-five
(45) days prior to vacating the premises and shall arrange to meet with Landlord
for a joint inspection of the premises prior to vacating. In the event of
Tenant's failure to give such notice or arrange such joint inspection,
Landlord's inspection at or after Tenant's vacating the premises shall be
conclusively deemed correct for purposes of determining Tenant's responsibility
for repairs and restoration.
11. Utilities. Landlord has already made available during the prior lease water,
electricity and telephone service connections into the premises, and Tenant
shall pay for all water, gas, storm water fees, heat, light, power,
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telephone, sewer, sprinkler charges and other utilities and services used on or
from the premises, together with any taxes, penalties, surcharges or the like
pertaining thereto and any maintenance charges for utilities and shall furnish
all electric light bulbs and tubes. Landlord shall in no event be liable for any
interruption or failure of utility services on the premises.
12. Assignment and Subletting. Tenant shall not have the right to assign,
sublet, transfer or encumber this lease, or any interest therein, without the
prior written consent of Landlord, which consent shall not be unreasonably
withheld. Any attempted assignment, subletting, transfer or encumbrance by
Tenant in violation of the terms and covenants of this Paragraph shall at
Landlord's option be void. In addition to all rents payable hereunder by the
Tenant to the Landlord, the Landlord shall, in addition, be entitled to receive
from the Tenant one-half (1/2) of all cash or other proceeds received by the
Tenant which exceeds the rentals called for hereunder, resulting from any
sublease of the premises, assignment of this Lease or any other transfer. Such
additional rent shall be paid to Landlord, whether such assignment, subletting
or other transfer is consented to by Landlord or not, unless Landlord agrees to
the contrary in writing. These covenants shall run with the land and shall bind
Tenant and Tenant's heirs, executors, administrators, personal representatives,
successors and assigns in any bankruptcy proceeding. Any assignee, sublessee or
transferee of Tenant's interest in this lease (all such assignees, sublessees
and transferees being hereinafter referred to as "successors"), by assuming
Tenant's obligations hereunder shall assume liability to Landlord for all
amounts paid to persons other than Landlord by such successors in contravention
of this Paragraph. No assignment, subletting or other transfer, whether
consented to by Landlord or not, shall relieve Tenant of its liability
hereunder. Upon the occurrence of an "event of default" as hereinafter defined,
if the premises or any part thereof are then assigned or sublet, Landlord, in
addition to any other remedies herein provided, or provided by law, may at its
option collect directly from such assignee or subtenant all rents becoming due
to Tenant under such assignment or sublease and apply such rent against any sums
due to Landlord from Tenant hereunder, and no such collection shall be construed
to constitute a novation or a release of Tenant from the further performance of
Tenant's obligations hereunder. In determining the reasonableness of Landlord's
decision to grant or withhold its consent to a proposed assignment or sublease,
Landlord may take into consideration all relevant factors surrounding the
proposed assignment or sublease, including, without limitation, the following:
(a) the business reputation of the proposed assignee or subtenant and its
officers, directors and stockholders; (b) the nature of the business and the
proposed use of the premises by the proposed assignee or subtenant; (c) the
financial condition of the proposed assignee or subtenant; (c) the effect that
the proposed assignee's or subtenant's occupancy or use of a portion of the
premises would have upon the premises and Landlord's investment therein; (d) the
extent to
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which the proposed assignee or subtenant and Tenant provide Landlord with
assurances reasonably satisfactory to Landlord as to the satisfaction of
Tenant's obligation hereunder, including the payment of rent; and (e)
restrictions, if any, imposed by the holder of any deed to secure debt or
mortgage encumbering the premises or any portion thereof.
13. Fire and Casualty Damage.
A. Tenant shall keep the building(s) and all other improvements on the premises
insured for the benefit of Landlord only, against loss or damage by fire,
windstorm, hurricane, tornado, earthquake and similar hazards covered by
insurance of the type now known as "fire or extended coverage", and shall keep
and provide boiler and machinery insurance covering pressure vessels, air tanks,
boiler, machinery, pressure piping, and heating and air conditioning equipment,
in an amount reasonably satisfactory to Landlord. Such fire and extended
coverage policy or policies shall be for the full replacement value of the
building(s) and all other improvements located on the premises, including
sufficient proceeds to rebuild the improvements in compliance with all
applicable building codes. Tenant shall maintain and pay for such insurance on
Tenant's personal property as Tenant deems appropriate for Tenant's protection.
The Tenant shall not use or permit upon the premises anything that will
invalidate any policy of hazard or extended coverage or boiler and machinery
insurance now or hereafter carried with respect to the premises.
B. The policies representing such hazard insurance coverage shall contain a
provision that they may not be cancelled without first giving Landlord not less
than thirty (30) days prior written notice. A duplicate copy of the policies, or
a certificate of such insurance coverage, shall be delivered to Landlord prior
to commencement of the term of this Lease, and renewal policies, or copies
thereof, shall be delivered to Landlord at least thirty (30) days prior to the
expiration date of the preceding policy or policies, provided until such time as
the policy or the certificate is available, a binder, in usual form, will
suffice. All such insurance shall be for the sole benefit of Landlord, shall be
issued by insurance providers who have been approved in writing by the Landlord,
and shall be issued in the name of and insure only the Landlord and shall be
under its sole control.
C. If the buildings situated upon the premises should be damaged or destroyed by
fire, tornado or other casualty, Tenant shall give immediate written notice to
Landlord.
D. If the buildings situated upon the premises should be totally destroyed by
fire, windstorm, hurricane, tornado, earthquake or other casualty, or if they
should be partially damaged thereby so that rebuilding or repairs cannot in
Landlord's estimation be completed within two hundred fifty-five (255) days
after the date upon which Landlord is notified by the Tenant of such damage,
this
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lease shall terminate and the rent shall be abated during the unexpired portion
of this Lease, effective upon the date of the occurrence of such damage.
E. If the buildings situated upon the premises should be damaged by any peril
covered by the insurance to be provided by Tenant under subparagraph 13(A)
above, but only to such extent that rebuilding or repairs can in Landlord's
estimation be completed within two hundred fifty-five (255) days after the date
upon which Landlord is notified by the Tenant of such damage, this Lease shall
not terminate, and Landlord shall at its sole cost and expense, but only to
extent the Landlord has received the insurance proceeds, thereupon proceed with
reasonable diligence to rebuild and repair such buildings to substantially the
condition in which they existed prior to such damage, except that Landlord shall
not be required to rebuild, repair or replace any part of the partitions,
fixtures, additions and other improvements which may have been placed in, on or
about the premises by Tenant. If the premises are untenantable in whole or in
part following such damage, the rent payable hereunder during the period in
which they are untenantable shall, nevertheless, not abate and remain fully
payable by the Tenant to the Landlord. In the event that Landlord should fail to
complete such repairs and rebuilding within two hundred fifty-five (255) days
after the date upon which Landlord is notified by Tenant of such damage, Tenant
may at its option terminate this lease by delivering written notice of
termination to Landlord as Tenant's exclusive remedy, whereupon all rights and
obligations hereunder shall cease and terminate.
F. Notwithstanding anything herein to the contrary, in the event the holder of
any indebtedness secured by a mortgage or deed of trust covering the premises
requires that the insurance proceeds be applied to such indebtedness, then
Landlord shall have the right to terminate this lease by delivering written
notice of termination to Tenant within fifteen (15) days after such requirement
is made by any such holder, whereupon all rights and obligations hereunder shall
cease and terminate.
G. Anything in this lease to the contrary notwithstanding, Landlord and Tenant
hereby waive and release each other of and from any and all rights of recovery,
claim, action or cause of action, against each other, their agents, officers and
employees, for any loss or damage that may occur to the premises, improvements
to any building of which the premises are a part, or personal property (building
contents) within the building, by reason of fire or the elements regardless of
cause or origin, including negligence of Landlord or Tenant and their agents,
officers and employees, but only to the extent of the insurance proceeds payable
under the policies of insurance covering the property. Because this subparagraph
will preclude the assignment of any claim mentioned in it by way of subrogation
(or otherwise) to an insurance company (or any other person), the Tenant agrees
immediately to give to each insurance company
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which has issued to it policies of fire and extended coverage insurance, written
notice of the terms of the mutual waivers contained in this subparagraph, and to
have the insurance policies properly endorsed, if necessary, to prevent the
invalidation of the insurance coverage by reason of the mutual waivers contained
in this subparagraph.
14. Taxes. Tenant shall pay when due all real property ad valorem taxes
(including any increases in any subsequent years, with payments in the last year
of Tenant's occupancy to be appropriately apportioned or prorated) and
assessments of any kind or nature which may be imposed upon the premises.
15. Liability. Landlord shall not be liable to Tenant or Tenant's employees,
agents, patrons or visitors, or to any other person whomsoever, for any injury
to person or damage to property on or about the premises, resulting from and/or
caused in part or whole by the negligence or misconduct of Tenant, its agents,
servants or employees, or of any other person entering upon the premises, or
caused by the buildings and improvements located on the premises becoming out of
repair, or caused by leakage of gas, oil, water or steam or by electricity
emanating from the premises, or due to any cause whatsoever, and Tenant hereby
covenants and agrees that it will at all times indemnify and hold safe and
harmless the property, the Landlord (including without limitation the trustee
and beneficiaries if Landlord is a trust), Landlord's agents and employees from
any loss, liability, claims, suits, costs, expenses, including without
limitation attorney's fees and damages, both real and alleged, arising out of
any such damage or injury; except injury to persons or damage to property the
sole cause of which is the negligence of Landlord or the failure of Landlord to
repair any part of the premises which Landlord is obligated to repair and
maintain hereunder within a reasonable time after the receipt of written notice
from Tenant of needed repairs. Tenant shall procure and maintain throughout the
term of this lease a policy or policies of insurance, at its sole cost and
expense, insuring both Landlord and Tenant against all claims, demands or
actions arising out of or in connection with: (i) the premises; (ii) the
condition of the premises; (iii) Tenant's operations in and maintenance and use
of the premises; and (iv) Tenant's liability assumed under this lease, the
limits of such policy or policies to be in the amount of not less than
$2,000,000 per occurrence in respect of injury to persons (including death), and
in the amount of not less than $1,000,000 per occurrence in respect of property
damage or destruction, including loss of use thereof. All such policies shall be
procured by Tenant from responsible insurance companies satisfactory to
Landlord. Certified copies of such policies, together with receipt evidencing
payment of premiums therefor, shall be delivered to Landlord prior to the
commencement date of this lease. Not less than fifteen (15) days prior to the
expiration date of any such policies, certified copies of the renewals thereof,
bearing notations evidencing the payment of renewal premiums shall be delivered
to Landlord. Such policies shall further provide that not less than thirty
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(30) days written notice shall be given to Landlord before such policy may be
canceled or changed to reduce insurance provided thereby.
16. Condemnation.
A. If the whole or any substantial part of the premises which renders Tenant's
current use of the premises impractible should be taken for any public or
quasi-public use under governmental law, ordinance or regulation, or by right of
eminent domain, or by private purchase in lieu thereof and the taking would
prevent or materially interfere with the use of the premises for the purpose for
which they are being used, as determined by Landlord, this lease shall terminate
and the rent shall be abated during the unexpired portion of this Lease,
effective when the physical taking of said premises shall occur.
B. If part of the premises shall be taken for any public or quasi-public use
under any governmental law, ordinance or regulation, or by right of eminent
domain, or by private purchase in lieu thereof, and this Lease is not terminated
as provided in the subparagraph above, this Lease shall not terminate but the
rent payable hereunder during the unexpired portion of this Lease shall be
reduced by an amount proportionate to the percentage of the premises so taken.
C. All compensation awarded for any taking (or the proceeds of private sales in
lieu thereof) of the premises shall be the property of Landlord, and Tenant
hereby assigns its interest in any such award to Landlord-, provided, however,
Landlord shall have no interest in any award made to Tenant for loss of business
or for the taking of Tenant's fixtures and other property if a separate award
for such items is made to Tenant.
17. Holding Over. Tenant will, at the termination of this lease by lapse of
time or otherwise, yield up immediate possession to Landlord. If Landlord agrees
in writing that Tenant may hold over after the expiration or termination of this
Lease, unless the parties hereto otherwise agree in writing on the terms or such
holding over, the hold over tenancy shall be construed as a tenancy at will and
shall be subject to termination by Landlord at any time upon not less than five
(5) days advance written notice, or by Tenant at any time upon not less than
thirty (30) days advance written notice, and all of the other terms and
provisions of this lease shall be applicable during that period, except that
Tenant shall pay Landlord from time to time upon demand, as rental for the
period of any hold over, an amount equal to double the rent in effect on the
termination date, computed on a daily basis for each day of the hold over
period. No holding over by Tenant, whether with or without consent of Landlord,
shall operate to extend this lease except as otherwise expressly provided. The
preceding provisions of this Paragraph 15 shall not be construed consent for
Tenant to hold over.
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18. Quiet Enjoyment. Landlord covenants that it now has good title to the
premises, free and clear of all liens and encumbrances, excepting only the lien
for current taxes not yet due, such mortgage or mortgages as are permitted by
the terms of this Lease, zoning ordinances and other building and fire
ordinances and governmental regulations relating to the use of the premises, and
easements, restrictions and other conditions of record. Landlord represents and
warrants that it has full right and authority to enter into this Lease and that
Tenant, upon paying the rental herein set forth and performing its other
covenants and agreements herein set forth, shall peaceably and quietly have,
hold and enjoy the premises for the term hereof without hindrance or molestation
from Landlord, subject to the terms and provisions of this Lease.
19. Events of Default. The following events shall be deemed to be events of
default by Tenant under this lease:
A. In the event of (i) failure of Tenant to pay any installment of rent due
hereunder promptly for a period of ten (10) days after written notice from
Landlord to Tenant of such default; or (ii) failure of Tenant to comply with any
other term, covenant or condition of this Lease for a period of thirty (30) days
after written notice from Landlord to Tenant of such default (provided, however,
that if the default complained of is a default other than one which may be cured
by the payment of money, no default on the part of the Tenant in the performance
of any acts to be done or conditions to be met shall be deemed to exist if steps
shall have been commenced in good faith by the Tenant to rectify the same and
shall be prosecuted to completion with diligence and continuity).
B. Tenant shall make a transfer in fraud of creditors, or shall make an
assignment for the benefit of creditors.
C. Tenant shall file a petition, other than a Chapter XI proceeding, under any
section or chapter of the United States Bankruptcy Code, as amended, or under
any similar law or statute of the United States or any State thereof, or an
order for relief shall be entered against Tenant in any proceedings filed
against Tenant thereunder.
D. A receiver or trustee shall be appointed for all or substantially all of the
assets of Tenant.
E. Tenant shall vacate all or a substantial portion of the premises, whether or
not Tenant is in default of the rental payments due under this Lease.
F. Tenant shall fail to discharge any lien placed upon the premises in violation
of Paragraph 23 hereof within twenty (20) days after any such lien or
encumbrance is filed against the premises, or shall fail to take such actions as
is reasonably necessary to cause such lien to be discharged.
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G. Tenant shall fail to comply with any material term, provision or covenant of
this lease (other than the foregoing in this Paragraph 19), and shall not cure
such failure within twenty (20) days after written notice thereof to Tenant.
20. Remedies.
A. Upon the occurrence of any such events of default described in Paragraph 19
hereof, Landlord shall have the option to pursue any one or more of the
following remedies without any notice or demand whatsoever.
(a) Terminate this lease, in which event Tenant shall immediately surrender the
premises to Landlord, and if Tenant fails so to do, Landlord may, without
prejudice to any other remedy which it may have for possession or arrearage in
rent, enter upon and take possession of the premises and expel or remove Tenant
and any other person who may be occupying such premises or any part thereof, by
force if necessary, but only within the law.
(b) Enter upon and take possession of the premises and expel or remove Tenant
and any other person who may be occupying such premises or any part thereof, by
force if necessary, but only within the law and relet the premises and receive
the rent therefor.
(c) Enter upon the premises, by force if necessary, but only within the law, and
do whatever Tenant is obligated to do under the terms of this Lease; and Tenant
agrees to reimburse Landlord on demand for any reasonable expenses which
Landlord may incur in thus effecting compliance with Tenant's obligations under
this Lease, and Tenant further agrees that Landlord shall not be liable for any
damages resulting to the Tenant from such action.
(d) After obtaining possession as provided herein, alter all locks and other
security devices at the premises without terminating this Lease.
In the event Landlord may elect to regain possession of the premises by summary
ejectment proceeding, Tenant hereby specifically waives any statutory notice
which may be required prior to any such proceeding, and agrees that Landlord's
execution of this Lease is, in part, consideration for this waiver.
In the event Tenant fails to pay any installment of rent hereunder as and when
such installment is due, to help defray the additional cost to Landlord for
processing such late payments Tenant shall pay to Landlord on demand a late
charge in an amount equal to five percent (5%) of such installment; and the
failure to pay such amount within ten (10) days after demand therefor shall be
an
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event of default hereunder. The provision for such late charge shall be in
addition to all of Landlord's other rights and remedies hereunder or at law and
shall not be construed as liquidated damages or as limiting Landlord's remedies
in any manner.
B. Exercise by Landlord of any one or more remedies hereunder granted or
otherwise available shall not be deemed to be in acceptance of surrender of the
premises by Tenant, whether by agreement or by operation of law, it being
understood that such surrender can be effected only by the written agreement of
Landlord and Tenant. No such alteration of locks or other security devices and
no removal or other exercise of dominion by Landlord over the property of Tenant
or others at the premises shall be deemed unauthorized or constitute a
conversion, Tenant hereby consenting, after any event or default, to the
aforesaid exercise of dominion over Tenant's property within the premises. All
claims for damages by reason of such re-entry and/or repossession and/or
alteration of locks or other security devices are hereby waived, as are all
claims for damages by reason of any summary ejectment proceedings, or other
legal process. Tenant agrees that any re-entry by Landlord may be pursuant to
judgement obtained in summary ejectment proceedings or other legal proceedings
or without the necessity for any legal proceedings, as Landlord may elect, and
Landlord shall not be liable in trespass or otherwise.
C. In the event Landlord elects to terminate the lease by reason of an event of
default, then notwithstanding such termination, Tenant shall be liable for and
shall pay to Landlord, at the address specified for notice to Landlord herein,
the sum of all rental and other indebtedness accrued to date of such
termination, plus, as liquidated damages and not as a penalty, an amount equal
to the present value (using a discount rate equal to the Bank of America's then
prime rate) of the total rental hereunder for the remaining portion of the lease
term (had such term not been terminated by Landlord prior to the date of
expiration stated in Paragraph I ).
D. In the event that Landlord elects to repossess the premises without
terminating the lease, then Tenant shall be liable for and shall pay to
Landlord, at the address specified for notice to Landlord herein, all rental and
other indebtedness accrued to the date of such repossession, plus rental and all
other charges and expenses required to be paid by Tenant to Landlord during the
remainder of the lease term until the date of expiration of the term as stated
in Paragraph I diminished by any net sums thereafter received by Landlord
through reletting the premises during said period (after deducting expenses
incurred by Landlord as provided in subparagraph 17(E) below). In no event shall
Tenant be entitled to any excess of any rental obtained by reletting over and
above the rental herein reserved. Actions to collect amounts due by Tenant to
Landlord under this subparagraph may be brought from time to time, on one or
more occasions, without the necessity of Landlord's waiting until expiration of
the lease term.
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E. In case of any event of default or breach by Tenant, or threatened or
anticipatory breach or default, Tenant shall also be liable for and shall pay to
Landlord, at the address specified for notice to Landlord herein, in addition to
any sum provided to be paid above, reasonable brokers' fees incurred by Landlord
in connection with reletting the whole or any part of premises; the reasonable
costs of removing and storing Tenant's or other occupant's property; the
reasonable costs of repairing, altering, remodeling or otherwise putting the
premises into condition acceptable to a new tenant or tenants; and all
reasonable expenses incurred by Landlord in enforcing or defending Landlord's
rights and/or remedies including reasonable attorney's fees.
F. If Tenant should fail to make any payment or cure any default hereunder
within the time herein permitted, Landlord, without being under any obligation
to do so and without thereby waiving such default, may make such payment and/or
remedy such other default for the account of Tenant (and enter the premises for
such purpose), and thereupon Tenant shall be obligated to, and hereby agrees, to
pay Landlord, upon demand, all reasonable costs, expenses and disbursements
(including reasonable attorney's fees) incurred by Landlord in taking such
remedial action, plus interest thereon at the rate of eight percent (8%) (or the
highest rate allowed by law, whichever is less) from the date Landlord incurs
such costs, expenses, disbursements or fees.
G. In the event of any default by Landlord, Tenant's exclusive remedy shall be
an action for damages, but prior to any such action Tenant will give Landlord
written notice specifying such default with particularity, and Landlord shall
thereupon have thirty (30) days in which to cure any such default. Unless and
until Landlord fails to so cure any default after such notice, Tenant shall not
have any remedy or cause of action by reason thereof. All obligations of
Landlord hereunder will be construed as covenants, not conditions; and all such
obligations will be binding upon Landlord only during the period of its
possession of the premises and not thereafter. The term "Landlord" shall mean
only the owner, for the time being of the premises, and in the event of the
transfer by such owner of its interest in the premises, such obligations of the
Landlord shall be binding during the lease term upon each new owner for the
duration of such owner's ownership. Notwithstanding any other provision hereof,
Landlord shall not have any personal liability hereunder.
H. In the event that Landlord shall have taken possession of the premises
pursuant to the authority herein granted then Landlord shall have the right to
keep in place and use all of the furniture, fixtures and equipment at the
premises, including that which is owned by or leased to Tenant at all times
prior to any foreclosure thereon by Landlord or repossession thereof by any
lessor thereof or
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third party having a lien thereon. Landlord shall also have the right to remove
from the premises (without the necessity of obtaining an order for summary
ejectment or other legal process) all or any portion of such furniture,
fixtures, equipment and other property located thereon and to place same in
storage at any premises within the County in which the premises is located; and
in such event, Tenant shall be liable to Landlord for costs incurred by Landlord
in connection with such removal and storage. Landlord shall also have the right
to relinquish possession of all or any portion of such furniture, fixtures,
equipment and other property to any person ("Claimant") claiming to be entitled
to possession thereof who presents to Landlord a copy of any instrument
represented to Landlord by Claimant to have been executed by Tenant (or any
predecessor of Tenant) granting Claimant the right under various circumstances
to take possession of such furniture, fixtures, equipment or other property,
without the necessity on the part of the Landlord to inquire into the
authenticity of said instrument's copy of Tenant's or Tenant's predecessors
signature thereon and without the necessity of Landlord making any nature of
investigation or inquiry as to the validity of the actual or legal basis upon
which Claimant purports to act; and Tenant agrees to indemnify and hold Landlord
harmless from all cost, expense, loss, damage and liability incident to
Landlord's relinquishment of possession of all or any portion of such furniture,
fixtures, equipment or other property to Claimant. The rights of Landlord herein
stated shall be in addition to any and all other rights which Landlord has or
may hereafter have at law or in equity; and Tenant stipulates and agrees that
the rights herein granted Landlord are commercially reasonable.
21. Landlord's Lien. In addition to any statutory lien for rent in Landlord's
favor, Landlord shall have and Tenant hereby grants to Landlord a continuing
security interest for all rentals and other sums of money becoming due hereunder
from Tenant, upon all goods, wares, equipment, fixtures, furniture, inventory,
accounts, contract rights, chattel paper and other personal property of Tenant
situated on the premises, and such property shall not be removed therefrom
without the consent of Landlord until all arrearages in rent as well as any and
all other sums of money then due to Landlord hereunder shall first have been
paid and discharged. In the event of a default under this lease, Landlord shall
have, in addition to any other remedies provided herein or by law, all rights
and remedies under the Uniform Commercial Code, including without limitation the
right to sell the property described in this Paragraph 19 at public or private
sale upon five (5) days notice to Tenant. Tenant hereby agrees to execute such
financing statements and other instruments necessary or desirable in Landlord's
discretion to perfect the security interest hereby created, and hereby appoints
Landlord as attorney-in-fact for Tenant with full power and authority to execute
such financing statements and other instruments on Tenant's behalf. Any
statutory lien for rent is not hereby waived, the express contractual lien
herein granted being in addition and supplementary thereto.
16
<PAGE>
22. Mortgages. Tenant accepts this lease subject and subordinate to any
mortgage(s) and/or deed(s) of trust now or at any time hereafter constituting a
lien or charge upon the premises or Landlord's improvements situated thereon,
provided, however, that if the mortgagee, trustee, or holder of any such
mortgage or deed of trust elects to have Tenant's interest in this lease
superior to any such instrument in whole or in part, then by notice to Tenant,
from such mortgagee, trustee or holder, this lease shall be deemed superior to
such lien, whether this lease was executed before or after said mortgage or deed
of trust. Tenant shall at any time hereafter on demand execute any instruments,
releases or other documents which may be required by any mortgagee for the
purpose of subjecting and subordinating this lease or making this lease superior
to the lien of any such mortgage.
23. Mechanic's Liens and Tenant's Personal Property Taxes.
A. Tenant shall have no authority, express or implied, to create or place any
lien or encumbrance of any kind or nature whatsoever upon, or in any manner to
bind, the interest of Landlord or Tenant in the premises or to charge the
rentals payable hereunder for any claim in favor of any person dealing with
Tenant, including those who may furnish materials or perform labor for any
construction or repairs. Tenant covenants and agrees that it will pay or cause
to be paid all sums legally due and payable by it on account of any labor
performed or materials furnished in connection with any work performed on the
premises on which any lien is or can be validly and legally asserted against its
leasehold interest in the premises or the improvements thereon and that it will
save and hold Landlord harmless from any and all loss, cost or expense based on
or arising out of asserted claims or liens against the leasehold estate or
against the right, title and interest of the Landlord in the premises or under
the terms of this lease. Tenant agrees to give Landlord immediate written notice
of the placing of any lien or encumbrance against the premises.
B. Tenant shall be liable for all taxes levied or assessed against personal
property, furniture or fixtures placed by Tenant in the premises.
24. Notices. Each provision of this instrument or of any applicable
governmental laws, ordinances, regulations and other requirements with reference
to the sending, mailing or delivery of any notice or the making of any payment
by Landlord to Tenant or with reference to the sending, mailing or delivery of
any notice or the making of any payment by Tenant to Landlord shall be deemed to
be complied with when and if the following steps are taken:
A. All rent and other payments required to be made by Tenant to Landlord
hereunder shall be payable to Landlord at the address for Landlord hereinbelow
17
<PAGE>
set forth or at such other address as Landlord may specify from time to time by
written notice delivered in accordance herewith. Tenant's obligation to pay rent
and any other amounts to Landlord under the terms of this lease shall not be
deemed satisfied until such rent and other amounts have been actually received
by Landlord.
B. With the exception of the payment of rent as provided in Paragraph 24(a)
above, any notice or document required or permitted to be delivered hereunder
shall be deemed to be delivered whether actually received or not when deposited
in the United States Mail, postage prepaid, Certified or Registered Mail,
addressed to the parties hereto at the respective addresses set out below, or at
such other address as they have theretofore specified by written notice
delivered in accordance herewith:
LANDLORD: Godley Construction Company I, LLC
c/o Godley Builders, Inc.
415-D Minuet Lane
Charlotte, North Carolina 28217
TENANT: Attn: Jack A. Green
Converse Inc.
One Fordham Road
North Reading, Massachusetts 01864-2680
If and when included within the term "Landlord", as used in this instrument,
there are more than one person, firm or corporation, all shall jointly arrange
among themselves for their joint execution of such a notice specifying some
individual at some specific address for the receipt of notices and payments to
Landlord; if and when included within the term "Tenant", as used in this
instrument, there are more than one person, firm or corporation, all shall
jointly arrange among themselves for their joint execution of such a notice
specifying some individual at some specific address within the continental
United States for the receipt of notices and payments to Tenant. All parties
included within the terms "Landlord" and "Tenant" respectively, shall be bound
by notices given in accordance with the provisions of this paragraph to the same
effect as if each had received such notice.
25. Hazardous Materials.
A. For purposes of this lease: (i) "CERCLA" means The Comprehensive
Environmental Response, Compensation and Liability Act of 1980; (ii) "Hazardous
Material" or "Hazardous Materials" means and includes petroleum (including,
without limitation, gasoline, crude oil, fuel oil, diesel oil, lubricating oil,
sludge, oil refuse, oil mixed with wastes and any other petroleum-related
18
<PAGE>
product), flammable explosives, radioactive materials, any substance defined or
designated as a "hazardous substance", under Sections 101 (14) and 102 of
CERCLA; (iii) "Release" shall have the meaning given such term, or any similar
term, in Section 101 (22) of CERCLA; and (iv) "Environmental Law" or
"Environmental Laws" shall mean any "Superfund" or "Super Lien" law, or any
other federal, state or local statute, law, ordinance, code, rule, regulation,
order or decree, regulating, relating to or imposing liability or standards of
conduct concerning any Hazardous Materials as may now or at any time hereafter
be in effect and as amended from time to time, including, without limitation,
the following, as same may be amended or replaced from time to time, and all
regulations promulgated thereunder or in connection therewith: CERCLA; the
Superfund Amendments and Reauthorization Act of 1986 ("SARA"); The Clean Air Act
("CCA"); the Clean Water Act ("CWA"); The Toxic Substances Control Act ("TSCA");
The Solid Waste Disposal Act ("SWDA"), as amended by the Resource Conservation
and Recovery Act ("RCRA"); and the Occupational Safety and Health Act of 1970
("OSHA").
B. Tenant hereby covenants and agrees that: (i) no activity shall be undertaken
on the premises, nor shall any activity be undertaken within the building if the
premises are less than the whole building or on the land on which the premises
are situated by Tenant or its agents, employees or contractors, which would in
either event cause (A) the premises, building or land to become a hazardous
waste treatment, storage or disposal facility regulated or subject to regulation
under any Environment Law, (B) a Release of any Hazardous Material into the
environment at, on, in, under, above, through, or surrounding the premises,
building or land, or (C) the discharge of pollutants ' or effluents into any
water source or system, which would require a permit under any federal law,
state law, local ordinance or any other Environmental Law pertaining to such
matters; (ii) Tenant shall at its sole cost and expense comply with all
applicable Environmental Laws relating to or affecting the premises, and Tenant
shall keep the premises free and clear of any liens imposed pursuant to any
applicable Environmental Laws arising out of Tenant's use of the premises, all
at Tenant's sole cost and expense; (iii) Tenant will, at Tenant's sole cost and
expense, obtain and/or maintain all licenses, permits and/or other governmental
or regulatory actions necessary to comply with all applicable Environmental Laws
(the "Permits") and Tenant at all times remain in full compliance with the terms
and provisions of the Permits; (iv) Tenant shall immediately give Landlord oral
and written notice in the event that Tenant receives any communication from any
governmental agency, entity, or any other party with regard to Hazardous
Materials on, from or affecting the premises, building or land or otherwise with
respect to Tenant's use and occupancy of the premises or the operation of
Tenant's business therein; and (v) Tenant shall, at Tenant's sole cost and
expense, conduct and complete all investigations, studies, sampling, and
testing, and all remedial, removal, and other actions necessary to clean up and
remove
19
<PAGE>
all Hazardous Materials on, from or affecting the premises or, where resulting
from acts or omissions of Tenant or its agents, employees and contractors, the
building and/or land, in accordance with all applicable Environmental Laws.
C. Tenant hereby indemnifies Landlord and agrees to hold Landlord harmless from
and against any and all liens, demands, suits, actions, proceedings,
disbursements, liabilities, losses, litigation, damages, judgements,
obligations, penalties, injuries, costs, expenses (including, without
limitation, attorneys' and expert's fees) and claims of any and every kind
whatsoever paid, incurred, suffered by, or asserted against Landlord and/or the
premises, building and/or land for, with respect to, or as a direct or indirect
result of: (i) the Release or presence from, in, on, over or under the premises
of any Hazardous Materials regardless of quantity and regardless of whether or
not caused by or within the control of Tenant; (ii) the Release or presence
from, in, on, over or under the building or land of Hazardous Materials
regardless of quantity where caused by Tenant or its agents, employees or
contractors; (iii) the violation of any Environmental Laws relating to or
affecting the premises or Tenant, whether or not caused by or within the control
of Tenant; and (iv) the failure by Tenant to comply fully with the terms and
provisions of this Paragraph 25; provided, however that nothing contained in
this Paragraph 25 shall make Tenant liable or responsible for conditions
existing prior to the commencement of the term of this lease or first occurring
after the expiration of the term of this lease except where caused by Tenant or
its agents, employees or contractors.
D. In the event Landlord suspects, in its reasonable opinion, that Tenant has
violated any of the covenants contained in this Paragraph 25, or that the
premises, building or land are not in compliance with the Environmental Laws for
any reason as to which Tenant is responsible hereunder, or that the premises,
building or land are not free of Hazardous Materials for any reason as to which
Tenant is responsible hereunder, Tenant shall take such steps as Landlord
requires by written notice to Tenant in order to confirm or deny such
occurrences, including, without limitation, the preparation of environmental
studies, audits, surveys or reports. In the event that Tenant fails to take such
action, Landlord may take such action and shall have such access to the premises
as Landlord deems necessary, and the cost and expenses of all such actions taken
by Landlord, including, without limitation, Landlord's attorneys' fees, shall be
due and payable by Tenant upon demand therefore from Landlord as additional rent
hereunder. Further, Landlord reserves the right at any time and from time to
time to enter the premises following reasonable advance notice thereof to Tenant
(except in cases of emergency) in order to perform periodic environmental
studies, audits, surveys and reports and in order to determine whether Tenant is
in compliance with the terms of this Paragraph 25.
E. The obligations and liabilities of Tenant under this Paragraph 25 shall
survive the expiration or earlier termination of this lease.
20
<PAGE>
26. Miscellaneous.
A. Words of any gender used in this lease shall be held and construed to include
any other gender, and words in the singular number shall be held to include the
plural, unless the context otherwise requires.
B. The terms, provisions and covenants and conditions contained in this Lease
shall apply to, inure to the benefit of, and be binding upon, the parties hereto
and upon their respective heirs, legal representatives, successors and permitted
assigns, except as otherwise herein expressly provided. Landlord shall have the
right to transfer and assign, in whole or in part, its rights and obligations in
the premises that are the subject of this Lease. Each party agrees to furnish to
the other, promptly upon demand, a corporate resolution, proof of due
authorization by partners, or other appropriate documentation evidencing the due
authorization of such party to enter into this lease.
C. The captions inserted in this lease are for convenience only and in no way
define, limit or otherwise describe the scope or intent of this lease, or any
provision hereof, or in any way affect the interpretation of this lease.
D. Tenant agrees from time to time within ten (10) days after request of
Landlord, to deliver to Landlord, or Landlord's designee, an estoppel
certificate stating that this Lease is in full force and effect, the date to
which rent has been paid, the unexpired term of this lease and such other
matters pertaining to this Lease as may be requested by Landlord. It is
understood and agreed that Tenant's obligation to furnish such estoppel
certificates in a timely fashion is a material inducement for Landlord's
execution of this Lease.
E. This Lease may not be altered, changed or amended except by an instrument in
writing signed by both parties hereto.
F. All obligations of Tenant hereunder not fully performed as of the expiration
or earlier termination of the term of this Lease shall survive the expiration or
earlier termination of the term hereof, including without limitation all payment
obligations with respect to taxes and insurance and all obligations concerning
the condition of the premises. Upon the expiration or earlier termination of the
term hereof, and prior to Tenant vacating the premises, Tenant shall pay to
Landlord any amount reasonably estimated by Landlord as necessary to put the
premises, including without limitation all heating and air conditioning systems
and equipment herein, in good condition and repair, ordinary wear and tear
excepted. Tenant shall also, prior to vacating the premises, pay to Landlord the
amount, as estimated by Landlord, of Tenant's obligation hereunder for real
21
<PAGE>
estate taxes and insurance premiums for the year in which the Lease expires or
terminates. All such amounts shall be used and held by Landlord for payment of
such obligations of Tenant hereunder, with Tenant being liable for any
additional costs therefor upon demand by Landlord, or with any excess to be
returned to Tenant after all such obligations have been determined and
satisfied, as the case may be.
G. If any clause or provision of this lease is illegal, invalid or
unenforceable under present or future laws effective during the term of this
Lease, then and in that event, it is the intention of the parties hereto that
the remainder of this Lease shall not be affected thereby, and it is also the
intention of the parties to this Lease that in lieu of each clause or provision
of this Lease that is illegal, invalid or unenforceable, there be added as a
part of this Lease a clause or provision as similar in terms to such illegal,
invalid or unenforceable clause or provision as may be possible and be legal,
valid and enforceable.
H. All references in this lease to "the date hereof' or similar references
shall be deemed to refer to the last date, in point of time, on which all
parties hereto have executed this lease.
I. Landlord and Tenant represent and warrant that they have dealt with no
broker, agent or other person in connection with this transaction or that no
broker, agent or other person brought about this transaction, and each party
agrees to indemnify the other and hold it harmless from and against any claims
by any broker, agent or other person claiming a commission or other form of
compensation by virtue of having dealt with the other party with regard to this
leasing transaction.
J. This Lease must be executed by both the Landlord and the Tenant on or before
July 15, 1999 for this Lease to become effective.
K. The Tenant presently occupies the premises under a lease with the Landlord
which shall expire on January 31, 2001(the "current lease"). Attached as a part
of this Lease is Exhibit B, which describes additional obligations of both the
Landlord and the Tenant under both this Lease and under the current lease. The
failure of either party to perform an obligation set forth in Exhibit B shall
constitute an Event of Default under Paragraph 19G (as regards the Tenant) or a
default under Paragraph 20G (as regards the Landlord).
22
<PAGE>
(EXECUTION PAGE TO LEASE OF WESTINGHOUSE BOULEVARD
PROPERTY IN CHARLOTTE, NORTH CAROLINA)
EXECUTED BY TENANT THIS 7th DAY OF JULY, 1999.
Converse Inc.
(Corporate Seal)
By: /s/ Glenn N. Rupp
----------------------------------------
Name: Glenn N. Rupp
ATTEST: -------------------------------------
Title: Chairman and Chief Executive Officer
-------------------------------------
/s/ Jack A. Green
- ---------------------------
Secretary
EXECUTED BY LANDLORD, this 8th day of July, 1999.
Godley Construction Company I, LLC
By: /s/ William C. Godley
----------------------------------------
William C. Godley
Title: Manager
By: /s/ Robert T. Godley
----------------------------------------
Robert T. Godley
Title: Manager
23
<PAGE>
Exhibit B
1. The total warehouse building is approximately 437,700 square feet.
2. Landlord to install new roof on the 30,000 square footage office building
(return goods building) with a completion date of 9/1/99 or earlier. To
include two pump house roofs.
3. Tenant agrees to pay $100,000 to the Landlord in full consideration of its
obligation under the lease to return the office building (return goods
building) to its original condition. This shall be full payment for any
damages and modifications to this building's interior office partitions,
lighting, ceilings, carpet, fixtures, driveways, entrance, paving, et
cetera. Tenant agrees to pay this amount to Landlord by the expiration of
the current lease on January 31, 2001.
4. Landlord to correct the flooding of the dock wells during heavy rains in
the shipping and receiving areas by October 1, 1999.
5. Tenant will have all mechanical equipment in satisfactory operating
condition at expiration of the original lease on January 31, 2001.
6. The rainspouts shall be either repaired or replaced by Landlord by October
31, 1999.
7. Landlord and Tenant to share on a 50-50 basis the cost of increasing the
electrical load into the building from 800 amps to1200 amps by April 1,
2000. This cost is estimated to be in the range of $30,000.
8. Landlord to continue during the existing term and renewal of this lease to
be responsible for roof maintenance for the warehouse and the two pump
houses.
9. Property leased area describing the boundaries is per the attached
drawings.
10. Converse has elected not to continue leasing the 30,000 square footage
office building (return goods building). The costs for separating the
utilities of the two buildings shall be shared on a 50-50 basis between
Landlord and the Tenant. The sprinkler system for this 30,000 SF building
to remain "as is" tied into Converse's fire protection lines.
24
<PAGE>
11. All modification costs to the existing chain link fence are to be
completed by January 31, 2001, the cost of which is to be shared on a
50-50 basis by Tenant and Landlord.
25
<PAGE>
EXHIBIT 10.2
FIFTH AMENDMENT TO CREDIT AGREEMENT
This Fifth Amendment to Credit Agreement (the "Amendment") is made on this
28th day of May, 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, and that
certain Fourth Amendment to Credit Agreement dated as of September 16, 1998
(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 period at the end of
subsection (E), and inserting the following new subsection (F):
": plus
(F) the sum of $6,000,000 for the period from May 28th, 1999 until
the earlier to occur of (i) July 31, 1999, or (ii) the receipt by
Borrower of proceeds from any additional issuance of Debt, equity,
or any sale or disposition of assets in connection with any
<PAGE>
securitization of intellectual property and the related stream of
royalty payments associated therewith. Only those Lenders whose
names appear on Annex I-A hereto shall be obligated to fund
Revolving Loans against that portion of the Borrowing Base which
includes subsection (F), and then only in the amount of their
commitment reflected on such Annex I-A."
2.2 Section 3.6(d) of the Credit Agreement is hereby amended by the
addition of the following new final sentence:
"Notwithstanding the provisions hereof, in the event of the receipt
of any amounts by the Agent for distribution hereunder following the
declaration of an Event of Default and an acceleration of the
Obligations in accordance with the terms hereof, distributions with
respect to the ratable payment of principal due on the Revolving
Loans shall be made as if no amounts were outstanding under
subsection (F) of the Borrowing Base, to the effect that all other
advances outstanding on the Revolving Loans shall be paid prior to
the payment of any Revolving Loans outstanding as a result of
advances under subsection (F) of the Borrowing Base."
2.3 Annex I-A attached hereto is hereby added as Annex I-A to the
Credit Agreement.
SECTION III. CONDITIONS PRECEDENT. The effectiveness of this Amendment is
expressly conditioned upon satisfaction of the following conditions precedent:
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 prorata 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 $150,000.
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)
Borrower is on the date
2
<PAGE>
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 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: Donald J. Camacho
----------------------------
Title: Senior Vice President
---------------------------
AGENT:
BT COMMERCIAL CORPORATION
By: /s/ Frank Fazio
----------------------------------
Name: Frank Fazio
----------------------------
Title: Director
---------------------------
LENDER:
BT COMMERCIAL CORPORATION
By: /s/ Frank Fazio
----------------------------------
Name: Frank Fazio
----------------------------
Title: Director
---------------------------
3
<PAGE>
LENDER:
FLEET BUSINESS CREDIT
CORPORATION
By: /s/ Jennifer S. Mellitt
----------------------------------
Name: Jennifer S. Mellitt
----------------------------
Title: Vice President
---------------------------
LENDER:
LASALLE NATIONAL BANK
By: /s/ Christopher G. Clifford
----------------------------------
Name: Christopher G. Clifford
----------------------------
Title: Senior Vice President
---------------------------
LENDER:
BANKBOSTON, N.A.
By:
----------------------------------
Name:
----------------------------
Title:
---------------------------
LENDER:
FINOVA CAPITAL CORPORATION
By: /s/ Brian Rujewitz
----------------------------------
Name: Brian Rujewitz
----------------------------
Title:
---------------------------
4
<PAGE>
LENDER:
BNY FINANCIAL CORPORATION
By:
----------------------------------
Name:
----------------------------
Title:
---------------------------
LENDER:
FLEET CAPITAL CORPORATION
By: /s/ Jennifer S. Mellitt
----------------------------------
Name: Jennifer S. Mellitt
----------------------------
Title: Vice President
---------------------------
LENDER:
NATIONSBANK OF TEXAS, N.A.
By:
----------------------------------
Name:
----------------------------
Title:
---------------------------
LENDER:
HELLER FINANCIAL, INC.
By:
----------------------------------
Name:
----------------------------
Title:
---------------------------
5
<PAGE>
ANNEX I-A
LENDERS AND COMMITMENT AMOUNT
With Respect to Subsection (F) of the
Borrowing Base as of
May ___, 1999
Name and Address of Lender Revolving Credit Commitment
- -------------------------- ---------------------------
BT COMMERCIAL CORPORATION $6,000,000
233 South Wacker Drive
84th Floor
Chicago, Illinois 60606
Attention: Wayne D. Hillock
Telecopy No.: (312) 993-8096
6
<PAGE>
EXHIBIT 10.3
SIXTH AMENDMENT TO CREDIT AGREEMENT
This Sixth Amendment to Credit Agreement (the "Amendment") is made on this
30th day of July, 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, and that
certain Fifth Amendment to Credit Agreement dated as of May 28, 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 "July
31, 1999" contained in subsection (F)(i) thereof and inserting "October 31" 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 $150,000.
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: Donald J. Camacho
----------------------------
Title: Senior Vice President
---------------------------
2
<PAGE>
AGENT:
BT COMMERCIAL CORPORATION
By: /s/ Frank Fazio
----------------------------------
Name: Frank Fazio
----------------------------
Title: Director
---------------------------
LENDER:
BT COMMERCIAL CORPORATION
By: /s/ Frank Fazio
----------------------------------
Name: Frank Fazio
----------------------------
Title: Director
---------------------------
LENDER:
FLEET BUSINESS CREDIT
CORPORATION
By: /s/ Jennifer S. Mellitt
----------------------------------
Name: Jennifer S. Mellitt
----------------------------
Title: Vice President
---------------------------
LENDER:
LASALLE NATIONAL BANK
By: /s/ Christopher G. Clifford
----------------------------------
Name: Christopher G. Clifford
----------------------------
Title: Senior Vice President
---------------------------
3
<PAGE>
LENDER:
BANKBOSTON, N.A.
By: /s/ Kathy A.Sweeney
----------------------------------
Name: Kathy A. Sweeney
----------------------------
Title: Vice President
---------------------------
LENDER:
FINOVA CAPITAL CORPORATION
By: /s/ Brian Rujewitz
----------------------------------
Name: Brian Rujewitz
----------------------------
Title:
---------------------------
LENDER:
BNY FINANCIAL CORPORATION
By: /s/ Anthony Viola
----------------------------------
Name: Anthony Viola
----------------------------
Title: Vice President
---------------------------
LENDER:
FLEET CAPITAL CORPORATION
By: /s/ Jennifer S. Mellitt
----------------------------------
Name: Jennifer S. Mellitt
----------------------------
Title: Vice President
---------------------------
4
<PAGE>
LENDER:
NATIONSBANK OF TEXAS, N.A.
By:
----------------------------------
Name:
----------------------------
Title:
---------------------------
LENDER:
HELLER FINANCIAL, INC.
By: /s/ Sara Wrobel
----------------------------------
Name: Sara Wrobel
----------------------------
Title: Vice President
---------------------------
5
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM
THE COMPANY'S QUARTERLY REPORT ON FORM 10-Q AND IS QUALIFIED IN ITS ENTIRETY
BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> JAN-01-2000
<PERIOD-START> JAN-03-1999
<PERIOD-END> JUL-03-1999
<CASH> 2,317
<SECURITIES> 0
<RECEIVABLES> 57,370
<ALLOWANCES> 1,801
<INVENTORY> 77,723
<CURRENT-ASSETS> 142,200
<PP&E> 36,613
<DEPRECIATION> 16,728
<TOTAL-ASSETS> 194,025
<CURRENT-LIABILITIES> 143,411
<BONDS> 74,265
0
0
<COMMON> 17,437
<OTHER-SE> (96,197)
<TOTAL-LIABILITY-AND-EQUITY> 194,025
<SALES> 127,219
<TOTAL-REVENUES> 137,001
<CGS> 93,426
<TOTAL-COSTS> 134,334
<OTHER-EXPENSES> (895)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 10,515
<INCOME-PRETAX> (6,953)
<INCOME-TAX> 1,866
<INCOME-CONTINUING> (8,819)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (8,819)
<EPS-BASIC> (0.51)
<EPS-DILUTED> (0.51)
</TABLE>
