<PAGE>
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2000
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 SEPTEMBER 30, 2000, 17,535,555 SHARES OF COMMON STOCK WERE OUTSTANDING.
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TABLE OF CONTENTS
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 11
Financial Condition and Results of Operations
Item 3. Quantitative and Qualitative Disclosures 19
About Market Risk
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 21
Item 5. Other Information 21
Item 6. Exhibits and Reports on Form 8-K 21
SIGNATURE 21
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PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
CONVERSE INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEET
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
<TABLE>
<CAPTION>
JANUARY 1, SEPTEMBER 30,
2000 2000
---------- -------------
<S> <C> <C>
Assets
Current assets:
Cash and cash equivalents ........................................... $ 2,305 $ 2,047
Receivables, less allowances of $3,945 and $2,179, respectively ..... 40,511 35,934
Inventories (Note 3) ................................................ 76,414 60,310
Prepaid expense and other current assets ............................ 2,866 2,018
--------- ---------
Total current assets ........................................... 122,096 100,309
Net property, plant and equipment ........................................ 18,855 15,288
Other assets ............................................................. 11,412 11,122
--------- ---------
$ 152,363 $ 126,719
========= =========
Liabilities and Stockholders' Equity (Deficiency)
Current liabilities:
Short-term debt (Note 4) ............................................ $ 1,951 $ 1,519
Credit facility (Note 4) ............................................ 71,551 64,887
Current portion long-term debt(Note 4) .............................. 28,223 102,908
Accounts payable .................................................... 41,257 38,636
Accrued expenses .................................................... 15,063 16,704
Income taxes payable ................................................ 6,455 6,578
--------- ---------
Total current liabilities ...................................... 164,500 231,232
Long-term debt (Note 4) .................................................. 74,265 --
Current assets in excess of reorganization value ......................... 26,143 24,585
Stockholders' equity (deficiency):
Common stock, $1.00 stated value, 50,000,000 shares
authorized, 17,479,025 and 17,535,555 shares issued and
outstanding at January 1, 2000 and September 30, 2000,
respectively .................................................. 17,479 17,536
Preferred stock, no par value, 10,000,000 shares authorized
none issued and outstanding ................................... -- --
Additional paid-in capital .......................................... 4,764 4,463
Unearned compensation ............................................... (1,061) (386)
Retained earnings (deficit) ......................................... (131,737) (147,812)
--------- ---------
Accumulated other comprehensive income .............................. (1,990) (2,899)
Total stockholders' equity (deficiency) ........................ (112,545) (129,098)
--------- ---------
$ 152,363 $ 126,719
========= =========
</TABLE>
See accompanying notes to condensed consolidated financial statements.
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CONVERSE INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
------------------------------------- -------------------------------------
OCTOBER 2, 1999 SEPTEMBER 30, 2000 OCTOBER 2, 1999 SEPTEMBER 30, 2000
--------------- ------------------ --------------- ------------------
<S> <C> <C> <C> <C>
Net revenue....................................... $61,651 $53,552 $ 190,969 $ 162,471
Cost of sales..................................... 46,815 42,857 142,340 127,983
------ ------ ------- -------
Gross profit...................................... 14,836 10,695 48,629 34,488
Selling, general and administrative expenses...... 20,598 13,933 60,963 43,026
Royalty income.................................... 5,251 4,040 15,033 12,258
Restructuring and other unusual charges (credits) --- --- 543 (387)
------ ------ ------- -------
Earnings (loss) from operations.................. (511) 802 2,156 4,107
Interest expense, net............................. 5,683 5,060 16,205 16,041
Other expense, net................................ 1,321 1,370 419 2,105
------ ------ ------- -------
Loss before income tax ........................... (7,515) (5,628) (14,468) (14,039)
Income tax expense ............................... 1,061 670 2,927 2,036
------ ------ ------- -------
Net loss.......................................... $(8,576) $(6,298) $ (17,395) $ (16,075)
======= ======= ========= =========
Net basic and diluted loss per share (Note 2)..... $ (0.49) $ (0.36) $ (1.00) $ (0.92)
======= ======= ======== ========
Weighted average number of common shares
outstanding (Note 2).............................. 17,451 17,521 17,392 17,509
====== ====== ====== ======
</TABLE>
See accompanying notes to condensed consolidated financial statements.
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CONVERSE INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
(DOLLARS IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
--------------- ------------------
OCTOBER 2, 1999 SEPTEMBER 30, 2000
--------------- ------------------
<S> <C> <C>
Cash flows from operating activities:
Net loss .......................................................... $(17,395) $(16,075)
Adjustments to reconcile net loss to net cash required for
operating activities:
Depreciation of property, plant and equipment ............... 3,410 3,355
Amortization of intangible assets ........................... 150 --
Amortization of current assets in excess of reorganization
value ..................................................... (1,558) (1,558)
Amortization of note discount/warrants ...................... 466 420
Amortization of deferred compensation ....................... 423 381
Changes in assets and liabilities:
Receivables ................................................. 10,227 4,577
Inventories ................................................. (1,187) 16,104
Prepaid expenses and other current assets ................... 1,386 848
Accounts payable and accrued expenses ....................... (2,546) (721)
Income taxes payable ........................................ 726 123
Other long-term assets and liabilities ...................... 304 (619)
-------- --------
Net cash provided by (required for) operating
activities ............................................ (5,594) 6,835
-------- --------
Cash flows from investing activities:
Additions to property, plant and equipment ........................ (2,010) (47)
-------- --------
Net cash (used) by investing activities ................. (2,010) (47)
-------- --------
Cash flows from financing activities:
Net proceeds from exercise of warrants ............................ 268 --
Net proceeds from sale of common stock (Note 7) ................... 151 50
Net proceeds from (payment of) short-term debt .................... (2,377) (432)
Net proceeds from (payment of) credit facility .................... 7,996 (6,664)
-------- --------
Net cash provided (used) by financing activities ........ 6,038 (7,046)
Net (decrease) in cash and cash equivalents ......................... (1,566) (258)
Cash and cash equivalents at beginning of period .................... 3,274 2,305
-------- --------
Cash and cash equivalents at end of period .......................... $ 1,708 $ 2,047
======== ========
</TABLE>
See accompanying notes to condensed consolidated financial statements.
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CONVERSE INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of presentation:
In the opinion of management, the accompanying unaudited condensed
consolidated financial statements contain all adjustments, consisting of normal
recurring accruals, considered necessary for a fair presentation. This interim
financial information and notes thereto should be read in conjunction with the
Company's annual report on Form 10-K for the year ended January 1, 2000. The
Company's consolidated results of operations for the three and nine months ended
September 30, 2000 are not necessarily indicative of the results to be expected
for any other interim period or the entire fiscal year. In the prior year
financial statements and related notes certain amounts have been reclassified to
conform with the Fiscal 2000 presentation.
2. NET EARNINGS (LOSS) PER COMMON SHARE
Net earnings (loss) per common share is computed based on the weighted
average number of common shares and common equivalent shares, if dilutive,
assumed outstanding for the applicable period.
3. INVENTORIES
Inventories are summarized as follows:
<TABLE>
<CAPTION>
JANUARY 1, 2000 SEPTEMBER 30, 2000
--------------- ------------------
<S> <C> <C>
Retail merchandise..................... $ 6,452 $ 5,295
Finished products...................... 62,157 49,163
Work in process ....................... 4,120 3,358
Raw materials.......................... 3,685 2,494
------- -------
$76,414 $60,310
======= =======
</TABLE>
4. DEBT
As more fully described in Note 9 to the Consolidated Financial Statements
for the year ended January 1, 2000 included within the Company's annual report
on Form 10-K, in May 1997 the Company issued $80,000 of 7% Convertible
Subordinated Notes due June 1, 2004 (the "Convertible Notes"). The Convertible
Notes are convertible at any time prior to maturity, unless previously redeemed
into common stock of the Company, at the option of the holder, at a price of
$21.83 per share, subject to adjustment in certain events. In addition, the
Convertible Notes may be redeemed, in whole or in part, at the option of the
Company, at any time on or after June 5, 2000, at redemption prices set forth
therein, plus accrued interest to the date of redemption. Interest is payable
semi-annually on June 1 and December 1. Proceeds from the Convertible Notes were
used to repay indebtedness under the Company's then existing credit facility. As
discussed further below, in September 1998 the Company repurchased and cancelled
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$5,735 face amount of the Convertible Notes. As of September 30, 2000, $74,265
face amount of Convertible Notes remain outstanding. The Company did not make
the interest payment due on June 1, 2000 with respect to the Convertible Notes.
This interest payment remains outstanding and constitutes an Event of Default
under the related indenture. On August 4, 2000, the trustee under the indenture
for the Convertible Notes sent Converse a letter stating that holders of more
than twenty-five percent (25%) of the Convertible Notes had directed it to
declare the full amount of principal and interest under the Convertible Notes to
be due and payable. Accordingly, the entire principal amount of the Convertible
Notes is now due.
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 credit
commitment was subsequently reduced by the Company to $120,000 in September
1998, to $90,000 in November 1999 and to $80,000 in October 2000. 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 $40,000 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, as amended, has an expiration date of December 31,
2001. However, the total revolving loans and banker acceptances outstanding
under the Credit Facility of $64,887 are classified as current due to the Events
of Default as more fully described below and 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 Issue No.
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 May 1999, the Company's Credit Facility was amended to allow for $6,000
of additional borrowing base through July 31, 1999. Subsequent amendments to the
Credit Facility extended this additional borrowing base from July 31, 1999
through July 31, 2000. As of August 1, 2000, the $6,000 of additional borrowing
base has expired and is no longer in effect.
Obligations under the Credit Facility are secured by first priority liens
on substantially all of the Company's U.S. assets. The Credit Facility requires
compliance with customary affirmative and negative covenants, including certain
financial covenants. At September 30, 2000 the Company was not in compliance
with the minimum EBITDA (as defined therein) covenant contained in the Credit
Facility and such failure to comply constitutes an Event of Default under the
Credit Facility. Also, the default in payment of interest due with respect to
the Convertible Notes (see above) and the default in the payment of principal
and interest due with respect to the 15% Senior Secured Notes (see below)
constitute Events of Default under the Credit Facility. In
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October 2000 the Company entered into an agreement (the "Forbearance Agreement")
with the Banks whereby the Banks agreed to forbear the exercise of rights and
remedies under the Credit Facility in respect of these defaults until the
earlier of January 31, 2001, the date that the required lenders (as defined in
the Credit Facility) notify the agent that the Facility has been terminated or
such other date as certain defaults or other events specified in the Forbearance
Agreement occur. In November 2000, the Company paid a fee of $200 with respect
to the implementation of the Forbearance Agreement.
As of September 30, 2000 the Company's borrowing base was $73,704.
Utilization under the Credit Facility amounted to $68,112 consisting of
revolving loans of $51,191, banker acceptances of $13,696 and outstanding
letters of credit of $3,225. Accordingly, $5,592 of the maximum available
borrowing base remained unutilized as of September 30, 2000. Under the terms of
the Third Supplement to Note Purchase Agreements (the "Third Supplement")
executed in June 2000 (see Secured Notes below), the Company may not borrow
amounts as revolving loans under the Credit Facility if such amounts would
exceed the maximum permitted amount available to borrow less $5,750. With the
expiration of the $6,000 additional borrowing base as of August 1, 2000 (see
above), the Company has failed to maintain availability under the Credit
Facility in excess of the $5,750 required by the Third Supplement and such
failure is a continuing default under the Secured Notes.
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 three percent (3.00%)
per annum. At September 30, 2000, revolving loans outstanding under the Credit
Facility bore interest of 9.73% based upon the weighted average of the Prime
Lending Rate and Adjusted LIBOR Rate.
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 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.
Upon issuance of the Series A Secured Notes, the Company received gross
proceeds of $24,000 after discount from the face amount. In connection with the
issuance of the Series A Secured Notes, the Company issued warrants to purchase
360,000 shares of the Company's common stock to the purchasers and paid funding
fees to certain purchasers amounting to $350. The warrants were valued at $1.22
per share, vested immediately and expire on March 16, 2003. In May 1999 warrants
to purchase 91,412 shares of the Company's common stock were exercised, leaving
268,588 outstanding. The Company paid a placement fee of 4% of the gross
proceeds, or $960, with respect to the Series A Secured Notes. The Series A
Secured Notes carry a second priority perfected lien on substantially all real
and personal, tangible and intangible assets of the Company.
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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 substantially all real
and personal, tangible and intangible assets of the Company.
The Secured Notes require compliance with customary affirmative and
negative covenants, including certain financial covenants, substantially the
same as the requirements contained in the Credit Facility. The Company defaulted
on the payment of principal and interest due in September 2000 with respect to
the Secured Notes. The Company was not in compliance with the minimum EBITDA (as
defined therein) covenant contained in the Secured Notes agreement for the nine
month period ending September 30, 2000 and such failure to comply constitutes an
Event of Default under the Secured Notes. Also, the default in payment of
interest due with respect to the Convertible Notes (described above) constitutes
an Event of Default under the Secured Notes. In October 2000 the Company and the
holders of the Secured Notes executed the Fourth Supplement to Note Purchase
Agreements and Standstill Agreement (the "Fourth Supplement") whereby the
holders of the Secured Notes agreed to forbear from exercising remedies under
the Secured Notes until the earlier of January 31, 2001 or such other date as
certain defaults or other events specified in the Fourth Supplement occur. As a
condition to the effectiveness of the Fourth Supplement, the Company paid $1,468
of interest due under the Secured Notes through October 31, 2000 and a
supplement fee of $72.
Subsidiaries of the Company maintain asset-based financing arrangements in
certain European countries, principally with NMB-Heller, N.V. In general, these
financing arrangements allow for borrowings based upon eligible accounts
receivable and inventory at varying advance rates and varying interest rates. As
of September 30, 2000, total short-term borrowings outstanding under these
financing arrangements totaled $1,519. These obligations are secured by first
priority liens on the respective European assets being financed. In addition,
Converse Inc. provided guarantees with respect to the outstanding borrowings for
certain of the financing arrangements.
During the first nine months of 2000, the Company wrote-off deferred
financing costs and other recapitalization transactions of $2,151 related to
potential financing transactions which were not completed and a commitment to
provide financing had expired. These charges have been included within other
expense in the accompanying condensed consolidated statement of operations.
In September 2000 the Company announced that previously disclosed
negotiations with Euro American Investment Corporation, a private investment
concern, with respect to a potential financing transaction had terminated. The
Company is not in a position to pay its indebtedness and other obligations
without new financing and restructuring and in this connection is continuing to
explore a number of alternatives during the period afforded the Company under
the Forbearance Agreement with the Banks and the Fourth Supplement with the
holders of the Secured Notes.
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5. RESTRUCTURING AND OTHER UNUSUAL CHARGES
As more fully described in Note 4 to the Consolidated Financial Statements
for the year ended January 1, 2000 included within the Company's annual report
on Form 10-K, the Company recorded restructuring and other unusual charges of
$9.4 million in 1999 related primarily to initiatives aimed at reducing future
operating costs. Principal costs included in the charge were: (i) costs for
employee severance and related benefits for the termination of 49 corporate
employees; (ii) costs related to the closing of five unprofitable retail stores;
(iii) lease termination costs related to the R&D facility; (iv) termination
costs related to endorser contracts; and (v) costs of converting wholly-owned
subsidiaries with foreign operations into licensee/distributor arrangements. The
following table summarizes the related reserves remaining at September 30, 2000:
<TABLE>
<CAPTION>
JANUARY 1, 2000 CHANGE IN CHARGES/ SEPT. 30, 2000
BALANCE PROVISIONS WRITE-OFFS BALANCE
--------------- ---------- ---------- --------------
<S> <C> <C> <C> <C>
Corporate Employee Severance & Related Costs...... $ 1,135 $ (285) $ 850 $ ---
Retail Store Closings............................. 728 --- 551 177
R&D Building Lease Termination Costs.............. 136 (136) --- ---
Contract Termination Costs........................ 1,667 (242) 284 1,141
Conversion of Subsidiaries into Licensees......... 4,007 276 1,605 2,678
------- ------ ------ ------
$ 7,673 $ (387) $3,290 $3,996
======= ====== ====== ======
</TABLE>
During the first nine months of 2000, the Company charged $3,290 of costs
against the reserves for restructuring and other unusual charges. These charges
include $850 for employee severance related to the termination of corporate
employees, lease termination costs of $368 and writedown of fixed assets of $183
related to the closing of five unprofitable retail stores and costs of $1,605
related to the sale and conversion of wholly-owned foreign subsidiaries in
Canada, Mexico, Italy, Benelux and France. Due to attrition, the Company
incurred less than anticipated corporate severance costs and reversed
restructuring costs of $285. The Company also had lower than the anticipated
restructuring charges related to the R&D building lease termination costs and
contract termination costs resulting in the reversal of restructuring costs of
$136 and $242, respectively. The Company recorded an additional restructuring
charge of $276 related to the write-off of the cumulative translation adjustment
for its Benelux subsidiary. The remaining costs, as well as additional
cumulative translation adjustment charges and employee severance costs relating
to the sale and conversion of the wholly-owned foreign subsidiaries into
licensee/distributor arrangements, are expected to be incurred in the fourth
quarter of 2000. At September 30, 2000, $3,996 of the charges recorded remain in
current liabilities on the balance sheet.
On November 1, 2000, Converse entered into a long-term agreement with a
third party company to convert its wholly-owned subsidiary into a licensee for
the exclusive distribution and license rights for Converse footwear and apparel
in the United Kingdom and Ireland. This agreement becomes effective January 1,
2001 and will have the impact of reducing the Company's future global order
backlog, net revenue and expenses, while increasing royalty income. The employee
severance costs and cumulative translation adjustment charges related to this
transaction will be incurred in the fourth quarter of 2000.
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In October of 2000, the Company restructured its research and development,
marketing and distribution organizations, which resulted in the termination of
28 employees. As a result, the Company will record a charge in the fourth
quarter of 2000 of approximately $500 for employee severance and related
benefits.
6. COMPREHENSIVE INCOME
For the three months ended October 2, 1999 and September 30, 2000,
comprehensive income (loss) items included in stockholders' equity consisted of
cumulative translation adjustments of $277 and $(645), respectively. Total
comprehensive income (loss) for the third quarter of 1999 was $(8,299) compared
to $(6,943) for the third quarter of 2000.
For the nine months ended October 2, 1999 and September 30, 2000,
comprehensive income (loss) items included in stockholders' equity consisted of
cumulative translation adjustments of $(832) and $(909), respectively. Total
comprehensive income (loss) for the first nine months of 1999 was $(18,227)
compared to $(16,984) for the first nine months of 2000.
7. EMPLOYEE STOCK PLANS
During the first nine months of 2000, 135,000 shares of restricted stock
were cancelled due to employee terminations resulting in the reversal of paid in
capital and unearned compensation of $294. 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 2000 and August 2000, 34,836 and 21,694 shares of common stock
respectively, were issued under the Company's Employee Stock Purchase Plan.
Proceeds of $50 were recorded in conjunction with these purchases.
8. COMMITMENTS AND CONTINGENCIES
Converse is or may become a defendant in a number of pending or threatened
legal proceedings relating to its business and operations. Converse believes
that the ultimate outcome of any pending proceedings will not have a material
adverse effect on its financial position or results of operations.
9. 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
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on the balance sheet at their fair value. Changes in the fair value of
derivatives are recorded each period in current earnings or other comprehensive
income, depending on whether a derivative is designated as part of a hedge
transaction and, if it is, the type of hedge transaction. Management of the
Company anticipates that, due to its limited use of derivative instruments, the
adoption of FAS 133 will not have a significant effect on the Company's results
of operations or its financial position.
On July 8, 1999, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 137, "Accounting for Derivative
Instruments and Hedging Activities - Deferral of the Effective Date of FASB
Statement No. 133" ("FAS 137"). FAS 137 defers the 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).
10. BUSINESS SEGMENT INFORMATION
As more fully described in Note 19 to the Consolidated Financial Statements
for the year ended January 1, 2000 included within the Company's annual report
on Form 10-K, the Company has adopted Statement of Financial Accounting
Standards No. 131, "Disclosures about Segments of an Enterprise and Related
Information". Summarized financial information concerning the Company's
reportable business segments is shown in the following table:
<TABLE>
<CAPTION>
EUROPE, AMERICAS
MIDDLE EAST, (EXCLUDING
UNITED STATES AFRICA ASIA PACIFIC UNITED STATES) ELIMINATIONS CONSOLIDATED
------------- ------ ------------ -------------- ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
NINE MONTHS ENDING SEPTEMBER 30, 2000:
Net revenue to customer ................ $ 115,057 $ 29,545 $14,814 $ 3,055 $ -- $ 162,471
Intersegment net sales ................. 11,423 -- -- -- (11,423) --
Segment pretax profit (loss) ........... (9,355) (6,266) 1,450 132 -- (14,039)
Segment total assets at September 30,
2000 ................................... $ 112,251 $ 10,920 $ 2,657 $ 891 -- $ 126,719
NINE MONTHS ENDING OCTOBER 2, 1999:
Net sales to customer .................. $ 105,792 $ 51,655 $27,511 $ 6,011 $ -- $ 190,969
Intersegment net sales ................. 20,682 -- -- -- (20,682) --
Segment pretax profit (loss) ........... (18,411) (629) 5,978 (1,406) -- (14,468)
Segment total assets at January 1, 2000. $ 127,670 $ 19,466 $ 3,839 $ 1,388 -- $ 152.363
THREE MONTHS ENDING SEPTEMBER 30,2000:
Net sales to customer .................. $ 41,179 $ 7,060 $ 3,845 $ 1,468 $ -- $ 53,552
Intersegment net sales ................. 2,504 -- -- -- (2,504) --
Segment pretax profit (loss) ........... (2,531) (3,926) 856 (27) -- (5,628)
THREE MONTHS ENDING OCTOBER 2, 1999:
Net sales to customer .................. $ 36,750 $ 15,972 $ 7,813 $ 1,116 $ -- $ 61,651
Intersegment net sales ................. 5,794 -- -- -- (5,794) --
Segment pretax profit (loss) ........... (8,829) (400) 2,171 (457) -- (7,515)
</TABLE>
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ITEM 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
COMPARISON OF THREE MONTHS ENDED OCTOBER 2, 1999 TO
THREE MONTHS ENDED SEPTEMBER 30, 2000
The following table sets forth certain items relating to the Company's
operating results as a percentage of net revenue for the three months ended
October 2, 1999 ("Third Quarter 1999") and for the three months ended September
30, 2000 ("Third Quarter 2000").
<TABLE>
<CAPTION>
THREE MONTHS ENDED
-----------------------------------------------------------
OCTOBER 2, 1999 % SEPTEMBER 30, 2000 %
---------------- --- ------------------ ---
<S> <C> <C> <C> <C>
Net revenue ................................ $61,651 100.0 $ 53,552 100.0
Gross profit................................ 14,836 24.1 10,695 20.0
Selling, general and administrative
expenses ................................. 20,598 33.4 13,933 26.0
Royalty income ............................. 5,251 8.5 4,040 7.5
Earnings (loss) from operations ............ (511) (0.8) 802 1.5
Interest expense, net ...................... 5,683 9.2 5,060 9.4
Other expense, net.......................... 1,321 2.1 1,370 2.6
Loss before income tax ..................... (7,515) (12.2) (5,628) (10.5)
Income tax expense.......................... 1,061 1.7 670 1.3
Net loss ................................... (8,576) (13.9) (6,298) (11.8)
Net basic and diluted loss
per share................................. $ (0.49) --- $ (0.36) ---
</TABLE>
NET REVENUE
Net revenue for Third Quarter 2000 decreased to $53.6 million from $61.7
million for Third Quarter 1999, a 13.1% decline. The $8.1 million reduction in
net revenue was attributable to decreases of 28.4%, 29.5%, 54.7% and 36.4% in
the categories of performance, athletic originals, children's and action sports,
respectively, as compared to Third Quarter 1999. These reductions were partially
offset by additional net revenue of $11.2 million in the Company's lifestyle
category.
Net revenue in the United States increased 12.0% to $41.2 million for Third
Quarter 2000 from $36.8 million for Third Quarter 1999. Net revenue decreased
50.2% internationally to $12.4 million for Third Quarter 2000 from $24.9 million
for Third Quarter 1999. The conversion of wholly-owned subsidiaries with foreign
operations into licensing arrangements accounted for $4.6 million of the total
reduction of $12.5 million in international net revenue.
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<PAGE>
For the second consecutive quarter, net revenue from the United States
region reflected an increase in net revenue versus the prior year quarters. The
Company believes this positive trend is primarily attributable to the improving
athletic footwear market as well as the efforts the Company has made to broaden
its product offerings with the introduction during 1999 of the lifestyles
category.
The net revenue decline in the E.M.E.A. region was partly attributable to
the conversion of the Company's wholly-owned subsidiaries operating in Italy and
Benelux to third-party licensing entities, revenues from which are now recorded
as royalty income rather than net revenue. The revenue decline in the Pacific
region was primarily attributable to the softening of demand for the
traditionally strong athletic originals product offerings in that region.
GROSS PROFIT
Gross profit decreased to $10.7 million for Third Quarter 2000 from $14.8
million for Third Quarter 1999, a 27.7% reduction. The decline in gross profit
of $4.1 million was due to the lower volume of shipments as well as a charge to
increase the lower of cost or market inventory reserve as a result of strategic
pricing as well as a charge to increase distribution decisions made by
management during the Third Quarter 2000. As a percentage of net revenue, gross
profit decreased to 20.0% in Third Quarter 2000 compared to 24.1% for the prior
year period.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling, general and administrative expenses decreased $6.7 million to
$13.9 million for Third Quarter 2000 from $20.6 million for Third Quarter 1999,
a 32.5% decrease. This reduction was mainly attributable to decreased spending
in global selling, marketing, advertising and promotion activities, as well as
corporate staff reductions and expense reductions associated with converting
wholly-owned subsidiaries with foreign operations into licensee arrangements. As
a percentage of net revenue, selling, general and administrative expenses
decreased to 26.0% for Third Quarter 2000 from 33.4% for the prior year period.
ROYALTY INCOME
Royalty income decreased 24.5% to $4.0 million for Third Quarter 2000 from
$5.3 million for Third Quarter 1999. International royalty income, which
represented 76.6% of the Company's total royalty income in Third Quarter 2000,
decreased 34.5%. This reduction was primarily attributable to the elimination of
Japanese non-footwear trademark licensee agreements, which were sold in November
1999 (see below). As a percentage of net revenue, royalty income decreased to
7.5% for Third Quarter 2000 as compared to 8.5% in the prior year period.
On November 29, 1999, the Company completed the sale of all its
non-footwear trademarks in Japan and the assignment of its Japanese non-footwear
trademark license agreements to Itochu Corporation for $25.0 million cash. The
licensees of these trademarks generated royalty income of $1.1 million in Third
Quarter 1999. Royalty income adjusted to eliminate the Japanese non-footwear
trademarks was $4.2 million in Third Quarter 1999 versus $4.0 million in Third
Quarter 2000.
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<PAGE>
EARNINGS (LOSS) FROM OPERATIONS
The Company recorded earnings from operations in Third Quarter 2000 of $0.8
million compared to a loss from operations of $0.5 million in Third Quarter
1999. This change was primarily due to the factors discussed above.
INTEREST EXPENSE
Interest expense for Third Quarter 2000 decreased to $5.1 million from $5.7
million for Third Quarter 1999 due to a reduction in the level of debt partially
offset by increased interest rates.
OTHER EXPENSE
Other expense for Third Quarter 2000 was $1.4 million compared to $1.3
million for Third Quarter 1999. During Third Quarter 2000, the Company wrote off
deferred financing fees and other recapitalization transactions of $1.4 million
associated with financing transactions which were not completed and the
commitment to provide financing had expired. Other expense for Third Quarter
1999 was mainly comprised of a one time legal settlement of $1.0 million.
INCOME TAX EXPENSE
Income tax expense for Third Quarter 2000 was $0.7 million compared to $1.1
million for Third Quarter 1999. The Company continued to fully reserve the
income tax benefit of the quarterly loss by recording an additional valuation
allowance of $2.2 million in Third Quarter 2000 and $3.2 million in Third
Quarter 1999.
NET LOSS
The Company recorded a net loss of $6.3 million for Third Quarter 2000
compared to a net loss of $8.6 million for Third Quarter 1999. The net loss for
Third Quarter 2000 and Third Quarter 1999 included a charge of $2.2 million and
$3.2 million, respectively to increase the deferred tax valuation reserve.
Excluding this non-operating charge, the net loss was $4.1 million for Third
Quarter 2000 and $5.4 million for Third Quarter 1999.
NET LOSS PER SHARE
Net loss per share for Third Quarter 2000 was $0.36 compared to net loss
per share of $0.49 for Third Quarter 1999. The net loss per share for Third
Quarter 2000 and Third Quarter 1999 included a charge of $0.13 per share and
$0.18 per share, respectively, to increase the deferred tax valuation reserve.
Excluding this non-operating charge, the net loss per share for Third Quarter
2000 was $0.23 compared to net loss per share of $0.31 for Third Quarter 1999.
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<PAGE>
COMPARISON OF NINE MONTHS ENDED OCTOBER 2, 1999 TO NINE MONTHS ENDED
SEPTEMBER 30, 2000
The following table sets forth certain items relating to the Company's
operating results as a percentage of net revenue for the nine months ended
October 2, 1999 ("Nine Months 1999") and for the nine months ended September 30,
2000 ("Nine Months 2000").
<TABLE>
<CAPTION>
NINE MONTHS ENDED
------------------------------------------------------------
OCTOBER 2, 1999 % SEPTEMBER 30, 2000 %
--------------- --- ------------------ ---
<S> <C> <C> <C> <C>
Net revenue ................................ $190,969 100.0 $162,471 100.0
Gross profit................................ 48,629 25.5 34,488 21.2
Selling, general and administrative
expenses ................................. 60,963 31.9 43,026 26.5
Royalty income ............................. 15,033 7.9 12,258 7.5
Restructuring and other unusual
charges................................... 543 0.3 (387) (0.2)
Earnings from operations ................... 2,156 1.1 4,107 2.5
Interest expense, net ...................... 16,205 8.5 16,041 9.9
Other expense .............................. 419 0.2 2,105 1.3
Loss before income tax ..................... (14,468) (7.6) (14,039) (8.6)
Income tax expense.......................... 2,927 1.5 2,036 1.3
Net loss.................................... $ (17,395) (9.1) $(16,075) (9.9)
Net basic and diluted loss
per share................................. $ (1.00) --- $ (0.92) ---
</TABLE>
NET REVENUE
Net revenue for Nine Months 2000 decreased 14.9% to $162.5 million from
$191.0 million for Nine Months 1999. Compared to the prior year period, the
$28.5 million reduction in net revenue was attributable to decreases of 32.5%,
25.6%, 44.9% and 12.5% in the categories of performance, athletic originals,
children's, and action sports, respectively. These reductions were partially
offset by additional net revenue of $27.4 million in the Company's lifestyle
category which was introduced during 1999.
Net revenue in the United States increased 8.8% to $115.1 million for Nine
Months 2000 from $105.8 million for Nine Months 1999. Net revenue decreased
44.4% internationally to $47.4 million for Nine Months 2000 from $85.2 million
for Nine Months 1999. The conversion of wholly-owned subsidiaries with foreign
operations into licensing arrangements accounted for $14.6 million of the total
reduction of $37.8 million in international net revenue.
The downward trend in net revenue in the United States region that has
impacted the Company over the past two years turned positive for Nine Months
2000 primarily impacted by additional net revenue in the lifestyle category. The
decline in the E.M.E.A. and Latin America regions was partly attributable to the
conversion of the Company's wholly-owned subsidiaries
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<PAGE>
operating in Italy, Benelux and Mexico to third-party licensing entities,
revenues from which are now recorded as royalty income rather than net revenue.
The revenue decline in the Pacific region was primarily attributable to the
softening of demand for the traditionally strong athletic originals product
offerings in that region.
GROSS PROFIT
Gross profit decreased to $34.5 million for Nine Months 2000 from $48.6
million for Nine Months 1999, a 29.0% reduction. The decline of $14.1 million
was due to the lower volume of shipments as well as decreased manufacturing
utilization and the Company's efforts to keep inventory levels down through the
sale of excess inventory at reduced prices. As a percentage of net revenue,
gross profit decreased to 21.2% for Nine Months 2000 compared to 25.5% for the
prior year period.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling, general and administrative expenses decreased $18.0 million to
$43.0 million for Nine Months 2000 from $61.0 million for Nine Months 1999, a
29.5% decrease. This reduction was mainly attributable to decreased spending in
global selling, marketing, advertising, and promotion activities, as well as
corporate staff reductions and expense reductions associated with converting
wholly-owned subsidiaries with foreign operations into licensee arrangements. As
a percentage of net revenue, selling, general and administrative expenses
decreased to 26.5% for Nine Months 2000 from 31.9% for the prior year period.
ROYALTY INCOME
Royalty income decreased 18.0% to $12.3 million for Nine Months 2000 from
$15.0 million for Nine Months 1999. International royalty income, which
represented 78.1% of the Company's total royalty income for Nine Months 2000,
decreased 25.0%. This reduction was primarily attributable to the elimination of
Japanese non-footwear trademark licensee agreements which were sold in November
1999, (see below). This reduction was partially offset by an increase of 48.5%
in the E.M.E.A. region. As a percentage of net revenue, royalty income decreased
to 7.5% in the First Half 2000 compared to 7.9% in the prior year period.
On November 29, 1999, the Company completed the sale of all of its
non-footwear trademarks in Japan and the assignment of its Japanese non-footwear
trademark license agreements to Itochu Corporation for $25.0 million cash. The
licensees of these trademarks generated royalty income of $3.3 million for Nine
Months 1999. Royalty income adjusted to eliminate the Japanese non-footwear
trademarks was $11.7 million for Nine Months 1999 versus $12.3 million for Nine
Months 2000.
RESTRUCTURING AND OTHER UNUSUAL CHARGES
During Nine Months 2000, the Company recorded a net credit of $0.4 million
based upon lower than anticipated restructuring and other unusual costs which
consisted of credits of $0.3
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<PAGE>
million, $0.1 million and $0.3 million related to corporate employee severance
costs, R&D building lease termination costs and contract termination costs,
respectively, offset by a charge of $0.3 million of cumulative translation
adjustment charges related to the conversion of the Company's foreign subsidiary
in Benelux. During Nine Months 1999, the Company recorded a charge totaling $0.5
million related 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
The Company recorded earnings from operations for Nine Months 2000 of $4.1
million compared to $2.2 million for Nine Months 1999. This change was primarily
due to the factors discussed above.
INTEREST EXPENSE
Interest expense for Nine Months 2000 decreased to $16.0 million from $16.2
million for Nine Months 1999.
OTHER (INCOME) EXPENSE
Other expense for Nine Months 2000 was $2.1 million primarily from writing
off deferred financing fees and other recapitalization transactions associated
with financing transactions which were not completed and the commitment to
provide financing has expired. Other expense for Nine Months 1999 of $0.4
million was primarily comprised of a one time legal settlement of $1.0 million
partially offset by gains realized from foreign exchange contracts and put
options.
INCOME TAX EXPENSE
Income tax expense for Nine Months 2000 was $2.0 million compared to $2.9
million for Nine Months 1999. The Company fully reserved the income tax benefit
for the nine months losses by recording an additional valuation allowance of
$6.4 million for Nine Months 2000 and $7.0 million for Nine Months 1999.
NET LOSS
The Company recorded a net loss of $16.1 million for Nine Months 2000
compared to net loss of $17.4 million for Nine Months 1999. The net loss for
Nine Months 2000 and Nine Months 1999 included a charge of $6.4 million and $7.0
million, respectively, to increase the deferred tax valuation reserve. Excluding
this non-operating charge, the net loss was $9.7 million for Nine Months 2000
and $10.4 million for Nine Months 1999.
NET LOSS PER SHARE
Net loss per share for Nine Months 2000 was $0.92 compared to net loss per share
of $1.00 for Nine Months 1999. The net loss per share for Nine Months 2000 and
Nine Months 1999
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<PAGE>
included a charge of $0.37 per share and $0.40 per share, respectively, to
increase the deferred tax valuation reserve. Excluding this non-operating
charge, the net loss per share for Nine Months 2000 was $0.55 compared to net
loss per share of $0.60 for Nine Months 1999.
LIQUIDITY AND CAPITAL RESOURCES
As of September 30, 2000, the Company's working capital (net of cash)
position decreased $88.3 million to a deficit of $133.0 million from a deficit
of $44.7 million at January 1, 2000. The principal reason for the decrease was
the reclassification of the Convertible Notes in the principal amount of $74.3
million from long-term debt to current liabilities. The Company did not make the
interest payment due on June 1, 2000 with respect to the Convertible Notes and
such non-payment constitutes an Event of Default under the related indenture. In
August 2000, the trustee for the holders of the Convertible Notes notified the
Company in writing that at least twenty-five percent (25%) of the holders had
directed the trustee to declare the full amount of principal and interest on the
Convertible Notes to be immediately due and payable. Accordingly, the entire
principal amount of the Convertible Notes is now due.
Total borrowings under the Company's Credit Facility decreased $6.7 million
to $64.9 million on September 30, 2000 versus $71.6 million at January 1, 2000
and short term debt decreased $0.5 million to $1.5 million at September 30, 2000
versus $2.0 million at January 1, 2000.
Net cash provided by operating activities for Nine Months 2000 was $6.8
million compared to net cash required for operating activities of $5.6 million
for Nine Months 1999. Net cash provided by operating activities for Nine Months
2000 was primarily the result of a reduction in working capital requirements
partially offset by the net loss. Cash required for operating activities for
Nine Months 1999 was used primarily to fund a net loss offset by a reduction in
working capital requirements. Net cash used by investing activities was nil for
Nine Months 2000 versus $2.0 million for Nine Months 1999 for additions to
property, plant and equipment. Net cash used by financing activities of $7.0
million for Nine Months 2000 consisted of a net reduction in the Company's
asset-based borrowing facilities. Net cash provided by financing activities for
Nine Months 1999 of $6.0 million was derived primarily from net proceeds of the
Company's asset-based borrowing facilities.
As discussed in Note 4 of the Notes to the Condensed Consolidated Financial
Statements, in May 1999, the Company's Credit Facility was amended to allow for
$6.0 million of additional borrowing base through July 1999. Subsequent
amendments to the Credit Facility extended this additional borrowing base from
July 31, 1999 through July 31, 2000. As of August 1, 2000, the $6.0 million of
additional borrowing base has expired and is no longer in effect.
At September 30, 2000, the Company was not in compliance with the minimum
EBITDA (as defined therein) covenant contained in the Credit Facility and in the
Secured Notes agreement and such failure to comply constitutes an Event of
Default under the Credit Facility and the Secured Notes. The default in payment
of interest due with respect to the Convertible Notes also constitutes an Event
of Default under the Credit Facility and the Secured Notes, and the
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<PAGE>
default in the payment of principal and interest due with respect to the Secured
Notes constitutes an Event of Default under the Credit Facility. As discussed in
Note 4 to the Company's Condensed Consolidated Financial Statements, in October
2000 the Company entered into the Forbearance Agreement with the Banks
pertaining to the Credit Facility and a Fourth Supplement to Note Purchase
Agreements and Standstill Agreement with the holders of the Secured Notes. As a
result of these agreements, the Company is currently the beneficiary of a
forbearance period granted by its secured lenders that ends on January 31, 2001,
subject to earlier termination in certain events. The Company does not expect to
be in a position to pay its indebtedness and other obligations without new
financing and restructuring and in this connection is continuing to explore a
number of alternatives during the forbearance period.
BACKLOG
At the end of Third Quarter 2000, the Company's global order backlog was
$88.1 million, compared to $85.5 million at the end of Third Quarter 1999, an
increase of 3.0%. The U.S. order backlog increased from $55.0 million at October
2, 1999 to $56.9 million at September 30, 2000, or 3.5%. The international order
backlog increased from $30.5 million at October 2, 1999 to $31.2 million at
September 30, 2000, or 2.3%. The 1999 backlog figure has been adjusted to
eliminate the Company's backlog in Canada, Italy and Benelux, where the
Company's subsidiaries have been converted to licensee/distributor arrangements.
The backlog in the athletic originals and lifestyle categories increased 14.8%
and 200.0%, respectively, offset by declines of 47.4% in the performance
category and 36.2% in the children's category. The amount of backlog at a
particular time is affected by a number of factors, including the scheduling of
the introduction of new products and the timing of the manufacturing and
shipping of the Company's products. The Company continues to convert its
international wholly-owned operating units to new licensee arrangements which,
based on the results of conversions already completed, will reduce the Company's
global backlog and lower future new revenue, while increasing royalty income.
Accordingly, a comparison of the actual backlog as of two different dates is not
necessarily meaningful.
FORWARD-LOOKING STATEMENTS
Any statements set forth above which are not historical facts, including
the statements concerning the outlook for revenue, earnings and anticipated cost
savings, and the product and industry developments for 2000 and beyond are
forward looking statements that involve certain risks and uncertainties that
could cause actual results to differ materially from those in the forward
looking statements. Potential risks and uncertainties include such factors as
the financial strength of the Company, the competitive pricing environment and
inventory levels within the footwear and apparel industries, consumer demand for
athletic footwear, market acceptance of the Company's products, the strength of
the U.S. dollar and the success of planned advertising, marketing and
promotional campaigns and other risks identified in documents filed by the
Company with the Securities and Exchange Commission.
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<PAGE>
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Interest Rate Risk
At September 30, 2000, the carrying value of the Company's debt totaled
$169.3 million. This debt includes amounts at both fixed and variable interest
rates. For fixed rate debt, interest rate changes affect the fair market value
but do not impact earnings or cash flows. Conversely, for variable rate debt,
interest rate changes generally do not affect the fair market value but do
impact earnings and cash flows, assuming other factors are held constant.
At September 30, 2000, the Company had fixed rate debt of $102.9 million
and variable rate debt of $66.4 million. Holding other variables constant (such
as foreign exchange rates and debt levels), a one percentage point decrease in
interest rates would increase the unrealized fair market value of fixed rate
debt by approximately $2.5 million. Based on the amounts of variable rate debt
outstanding at September 30, 2000, the earnings and cash flow impact for the
next year resulting from a one percentage point increase in interest rates would
be approximately $0.7 million, holding other variables constant.
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
generally from three to twelve months. As of September 30, 2000, the Company had
no outstanding foreign exchange forward contracts.
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.
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<PAGE>
PART II. OTHER INFORMATION
Item 1. Legal Proceedings.
There have been no material changes from the information
previously reported under Item 3 of the Company's annual
report on Form 10-K for the fiscal year ended January 1, 2000.
Item 2. Changes in Securities.
Not Applicable
Item 3. Defaults Upon Senior Securities.
As described in Note 4 of the Notes to Condensed
Consolidated Financial Statements under Part I, Item 1, of
this report, there are a number of defaults under the Company's
senior secured Credit Facility and Secured Notes, and the
entire principal of and accrued interest on the Company's
subordinated unsecured Convertible Notes have been declared
due and payable by the trustee as a result of default in
payment of interest that was payable on June 1, 2000. The
outstanding principal amount of all such indebtedness at
September 30, 2000 was approximately $168 million. To address
the defaults under the Credit Facility, the Company entered
into a Forbearance Agreement, dated as of October 27, 2000,
with the lenders and the agent. To address defaults under the
Secured Notes, the Company has entered into a Fourth
Supplement to Note Purchase Agreements and Standstill
Agreement, dated as of October 27, 2000, with the holders of
the Secured Notes. The forbearance periods under these
agreements will continue until January 31, 2001 unless
terminated earlier upon the occurrence of certain events, as
described therein.
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<PAGE>
Item 4. Submission of Matters to a Vote of Security-Holders.
Not Applicable.
Item 5. Other Information.
See Item 3 above.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits. The following exhibits are contained in this report:
10.1 Forbearance Agreement between the Company, the lenders
under the Company's Credit Agreement and the agent
10.2 Thirteenth Amendment to Credit Agreement
10.3 Fourth Supplement to Note Purchase Agreements and
Standstill Agreement
27 Financial Data Schedule
(b) Reports on Form 8-K.
There were no reports on Form 8-K filed during the quarter
ended September 30, 2000.
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Dated: November 14, 2000 Converse Inc.
By: /s/ James E. Lawlor
-------------------------------
James E. Lawlor
Senior Vice President and
Chief Financial Officer
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EXHIBIT INDEX
Exhibit No. Description
----------- -----------
10.1 Forbearance Agreement between the Company, the lenders under the
Company's Credit Agreement and the agent
10.2 Thirteenth Amendment to Credit Agreement
10.3 Fourth Supplement to Note Purchase Agreements and Standstill
Agreement
27 Financial Data Schedule
