<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 APRIL 1, 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 Act of 1934 during
the preceding 12 months (or for such shorter period that registrant was required
to file such reports); and (2) has been subject to such filing requirements for
the past 90 days.
Yes [X] No [ ]
Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practical date.
AS OF APRIL 1, 2000, 17,513,861 SHARES OF COMMON STOCK WERE OUTSTANDING.
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TABLE OF CONTENTS
PAGE
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 15
About Market Risk
PART II: OTHER INFORMATION
Item 1. Legal Proceedings 16
Item 2. Changes in Securities 16
Item 3. Defaults Upon Senior Securities 16
Item 4. Submission of Matters to a Vote of
Security Holders 16
Item 5. Other Information 16
Item 6. Exhibits and Reports on Form 8-K 16
SIGNATURE 17
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PART I - FINANCIAL INFORMATION
<TABLE>
<CAPTION>
Item 1. FINANCIAL STATEMENTS
CONVERSE INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEET
(Dollars in thousands, except per share amounts)
(Unaudited)
January 1, 2000 April 1, 2000
--------------- -------------
<S> <C> <C>
Assets
Current assets:
Cash and cash equivalents........................................ $ 2,305 $ 2,368
Receivables, less allowances of $3,945 and $2,637, respectively.. 40,511 39,886
Inventories (Note 3)............................................. 76,414 71,423
Prepaid expense and other current assets......................... 2,866 3,408
---------- -----------
Total current assets............................................ 122,096 117,085
Net property, plant and equipment................................. 18,855 17,700
Other assets...................................................... 11,412 12,514
----------- -----------
$ 152,363 $ 147,299
========== ===========
Liabilities and Stockholders' Equity (Deficiency)
Current liabilities:
Short-term debt (Note 4)......................................... $ 1,951 $ 3,740
Credit facility (Note 4)......................................... 71,551 71,264
Senior secured notes (Note 4).................................... 28,223 28,371
Accounts payable................................................. 41,257 38,396
Accrued expenses................................................. 15,063 16,839
Income taxes payable............................................. 6,455 6,375
----------- -----------
Total current liabilities....................................... 164,500 164,985
Long-term debt (Note 4)........................................... 74,265 74,265
Current assets in excess of reorganization value.................. 26,143 25,624
Stockholders' equity (deficiency):
Common stock, $1.00 stated value, 50,000,000 shares
authorized, 17,479,025 and 17,513,861 shares issued and
outstanding at January 1, 2000 and April 1, 2000,
respectively................................................... 17,479 17,514
Preferred stock, no par value, 10,000,000 shares authorized
none issued and outstanding.................................... -- --
Additional paid-in capital....................................... 4,764 4,636
Unearned compensation............................................ (1,061) (800)
Retained earnings (deficit)...................................... (131,737) (136,804)
Accumulated other comprehensive income........................... (1,990) (2,121)
----------- -----------
Total stockholders' equity (deficiency)........................ (112,545) (117,575)
---------- -----------
$ 152,363 $ 147,299
========== ===========
</TABLE>
See accompanying notes to condensed consolidated financial statements.
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<TABLE>
<CAPTION>
CONVERSE INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
(Dollars in thousands, except per share amounts)
(Unaudited)
Three Months Ended
----------------------------------
April 3, 1999 April 1, 2000
------------- -------------
<S> <C> <C>
Net sales....................................................... $ 70,079 $ 51,613
Cost of sales................................................... 51,338 40,058
------------- -------------
Gross profit.................................................... 18,741 11,555
Selling, general and administrative expenses.................... 21,651 14,642
Royalty income.................................................. 4,842 4,167
------------- -------------
Earnings from operations........................................ 1,932 1,080
Interest expense, net........................................... 5,235 5,323
Other (income) expense, net..................................... (992) 96
------------- -------------
Loss before income tax.......................................... (2,311) (4,339)
Income tax expense.............................................. 928 728
Net loss........................................................ $ (3,239) $ (5,067)
============= =============
Net basic and diluted loss per share (Note 2)................... $ (0.19) $ (0.29)
============= =============
Weighted average number of common shares outstanding (Note 2)... 17,329 17,491
============= =============
</TABLE>
See accompanying notes to condensed consolidated financial statements.
2
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CONVERSE INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
(Dollars in thousands)
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended
-----------------------------------------
April 3, 1999 April 1, 2000
-------------- -------------
<S> <C> <C>
Cash flows from operating activities:
Net loss.......................................................... $ (3,239) $ (5,067)
Adjustments to reconcile net loss to net cash required for
operating activities:
Depreciation of property, plant and equipment............... 1,089 1,138
Amortization of intangible assets........................... 50 --
Amortization of current assets in excess of reorganization
value..................................................... (519) (519)
Amortization of note discount/warrants...................... 162 148
Amortization of deferred compensation....................... 82 136
Loss on disposal of property, plant and equipment........... -- 14
Changes in assets and liabilities:
Receivables................................................. (5,160) 625
Inventories................................................. 1,049 4,991
Prepaid expenses and other current assets................... 1,483 (542)
Accounts payable and accrued expenses....................... (739) (1,085)
Income taxes payable........................................ 79 (80)
Other long-term assets and liabilities...................... (47) (1,233)
------------ ------------
Net cash required for operating activities.............. (5,710) (1,474)
------------ ------------
Cash flows from investing activities:
Proceeds from disposal of assets.................................. -- 9
Additions to property, plant and equipment........................ (578) (6)
------------ ------------
Net cash used by investing activities................... (578) 3
------------ ------------
Cash flows from financing activities:
Net proceeds from sale of common stock (Note 7)................... 73 32
Net proceeds from (payment of) short-term debt.................... 5,029 1,789
Net proceeds from (payment of) credit facility.................... 477 (287)
------------ ------------
Net cash provided by financing activities............... 5,579 1,534
Net increase (decrease) in cash and cash equivalents................ (709) 63
Cash and cash equivalents at beginning of period.................... 3,274 2,305
------------ ------------
Cash and cash equivalents at end of period.......................... $ 2,565 $ 2,368
============ ============
</TABLE>
See accompanying notes to condensed consolidated financial statements.
3
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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 months ended April
1, 2000 are not necessarily indicative of the results to be expected for any
other interim period or the entire fiscal year.
2. Net Earnings (Loss) per Common Share
Net earnings (loss) per common share is computed based on the weighted average
number of common shares and common equivalent shares, if dilutive, assumed
outstanding for the applicable period.
3. Inventories
Inventories are summarized as follows:
<TABLE>
<CAPTION>
January 1, 2000 April 1, 2000
--------------- ---------------
<S> <C> <C>
Retail merchandise.................. $ 4,020 $ 4,130
Finished products................... 64,589 60,347
Work in process..................... 4,120 3,422
Raw materials....................... 3,685 3,524
--------------- --------------
$ 76,414 $ 71,423
=============== ==============
</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
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redemption. Interest is payable semi-annually on June 1 and December 1. Proceeds
from the Convertible Notes were used to repay indebtedness under the Company's
then existing credit facility. As discussed further below, in September 1998
$5,735 face amount of the Convertible Notes were repurchased by the Company and
cancelled. As of the end of the first quarter 2000, $74,265 face amount of
Convertible Notes remain outstanding.
Simultaneously with the issuance of the Convertible Notes in May 1997, the
Company entered into a new $150,000 secured credit agreement (the "Credit
Facility") with BT Commercial Corporation ("BTCC") for revolving loans, letters
of credit, foreign exchange contracts and banker acceptances and repaid the then
existing credit facility. In July 1997 BTCC, as agent, syndicated the Credit
Facility to a group of participating lenders (the "Banks"). The credit
commitment was subsequently reduced by the Company to $120,000 in September 1998
and to $90,000 in November 1999. 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 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 $71,264 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 May 1999, the Company's Credit Facility was amended to allow for $6,000
of additional borrowing base through July 1999. Subsequent amendments to the
Credit Facility extended this additional borrowing base from July 31, 1999
through March 31, 2000. In March 2000, the Credit Facility was amended to allow
for $6,000 of additional borrowing base through May 15, 2000. In May 2000, the
additional borrowing base was extended by amendment to the Credit Facility
through June 30, 2000.
Obligations under the Credit Facility are secured by first priority liens
on substantially all of the Company's U.S. assets. The Credit Facility requires
compliance with customary affirmative and negative covenants, including certain
financial covenants. At April 1, 2000 the Company was not in compliance with the
minimum EBITDA (as defined therein) covenant contained in the Credit Facility.
The Banks, in an amendment executed in May 2000, waived the Company's failure
to comply with this financial covenant for the twelve month period ending April
1, 2000. The Company does not anticipate being in compliance with future
covenants of the Credit Facility.
As of April 1, 2000 the Company's borrowing base was $81,371. Utilization
under the Credit Facility amounted to $73,309 consisting of revolving loans of
$67,791, banker acceptances of $3,473 and outstanding letters of credit of
$2,045. Accordingly, $8,062 of the
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maximum available borrowing base remained unutilized as of April 1, 2000. Under
the terms of the Supplement to Note Purchase Agreement executed in November 1999
(see Secured Notes below), the Company may not borrow amounts under the
revolving credit facility if such amounts would exceed the maximum permitted
amount available to borrow less $6,850. As a result, net availability under the
Credit Facility was $1,212 as of April 1, 2000.
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 April 1, 2000, revolving loans outstanding under the Credit
Facility bore interest of 9.12% based upon the weighted average of the Prime
Lending Rate and Adjusted LIBOR Rate, as defined.
In September 1998, the Company issued $28,643 aggregate principal amount of
15% Senior Secured Notes (the "Secured Notes") due September 16, 2000 (the
"Initial Maturity Date"). Interest on the Secured Notes is payable quarterly in
arrears. The Initial Maturity Date may be extended an additional 12 months at
the Company's option upon written notification of its election to extend and
payment of a fee equal to 3% of the then outstanding principal amount of the
Secured Notes (the "First Extended Maturity Date"). The First Extended Maturity
Date may be extended to May 21, 2002 at the Company's option upon written
notification of its election to extend and payment of an additional fee equal to
3% of the then outstanding principal amount of the Secured Notes. The Secured
Notes were issued in two series: Series A in the aggregate principal amount of
$24,858 (the "Series A Secured Notes") and Series B in the aggregate principal
amount of $3,785 (the "Series B Secured Notes"). The Secured Notes are
redeemable at any time at face amount plus accrued interest.
The Secured Notes require compliance with customary affirmative and
negative covenants, including certain financial covenants, substantially the
same as the requirements contained in the Credit Facility. The Company was not
in compliance with the minimum EBITDA (as defined therein) covenant contained in
the Secured Notes agreement for the three month period ending April 1, 2000. In
May 2000, the holders of the Secured Notes waived the Company's failure to
comply with this financial covenant as of April 1, 2000. As a condition to
obtaining this waiver, the Company has agreed not to make any further payments
of interest with respect to the Convertible Notes unless the Secured Notes are
paid in full or the required majority holders of the Secured Notes have
consented to any such payment. The Company does not anticipate being in
compliance with future covenants contained in the Secured Notes agreement.
Should the Company fail to comply with any covenants in the future, an event of
default will occur under the agreement and, in the absence of a waiver, the
amounts outstanding under the Secured Notes agreement will be payable upon
demand.
Upon issuance of the Series A Secured Notes, the Company received gross
proceeds of $24,000 after discount from the face amount. In connection with the
issuance of the Series A Secured Notes, the Company issued warrants to purchase
360,000 shares of the Company's common stock to the purchasers and paid funding
fees to certain purchasers amounting to $350. The warrants were valued at $1.22
per share, vested immediately and expire on May 21, 2002. In May 1999 warrants
to purchase 91,412 shares of the Company's common stock were exercised leaving
268,588 outstanding. The Company paid a placement fee of 4% of the gross
proceeds, or $960, with respect to the Series A Secured Notes. The Series A
Secured Notes carry a second priority perfected lien on all real and personal,
tangible and intangible assets of the Company.
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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 all real and personal,
tangible and intangible assets of the Company.
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 April 1, 2000, total short-term borrowings outstanding under these financing
arrangements totaled $3,740. 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.
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 relating 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 R&D facility; (iv) termination costs
related to endorser contracts; and (v) costs of converting wholly-owned
subsidiaries with foreign operations into licensee/distributor agreements. The
following table summarizes the related reserves remaining at April 1, 2000:
<TABLE>
<CAPTION>
January 1, 2000 Charges/ April 1, 2000
Balance Write-offs Balance
--------------- ------------ --------------
<S> <C> <C> <C>
Corporate Employee Severance &
Related Costs...................................... $ 1,135 $ 642 $ 493
Retail Store Closings................................ 728 133 595
R&D Building Lease Termination Costs................. 136 --- 136
Contract Termination Costs........................... 1,667 --- 1,667
Conversion of Subsidiaries into Licensees............ 4,007 364 3,643
----------- ----------- ------------
April 1, 2000 Balance................................ $ 7,673 $ 1,139 $ 6,534
=========== =========== ============
</TABLE>
During the first quarter of 2000, the Company charged $1,139 of costs
against the reserves for restructuring and other unusual charges. These charges
include $642 for employee severance related to the termination of 34 corporate
employees, $133 of lease termination costs related to the closing of two
unprofitable retail stores and costs of $364 related to the conversion of
wholly-owned foreign subsidiaries in Canada, Mexico, Italy and France. The
remaining costs, as well as additional cumulative translation adjustment charges
and employee severance costs relating to the conversion of the wholly-owned
foreign subsidiaries into licensee/distributor agreements, are expected to be
incurred during 2000. At April 1, 2000, $6,534 of the charges recorded remain in
current liabilities on the balance sheet.
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6. Comprehensive Income
For the three months ended April 3, 1999 and April 1, 2000, comprehensive
income items included in stockholders' equity consisted of cumulative
translation adjustments of $(545) and $(131), respectively. Total comprehensive
income (loss) for the first quarter of 1999 was $(3,784) compared to
comprehensive income (loss) of $(5,198) for the first quarter of 2000.
7. Stock Option Plans
During the first quarter of 2000, 40,000 shares of restricted stock were
cancelled due to termination resulting in the reversal of paid in capital and
unearned compensation of $125. 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, 34,836 shares of common stock were issued under the
Company's Employee Stock Purchase Plan. Proceeds of $32 were recorded in
conjunction with this purchase.
8. Commitments and Contingencies
Converse is or may become a defendant in a number of pending or threatened
legal proceedings in the ordinary course of its business. Converse believes that
the ultimate outcome of any such proceedings will not have a material adverse
effect on its financial position or results of operations.
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 on the balance
sheet at their fair value. Changes in the fair value of derivatives are recorded
each period in current earnings or other comprehensive income, depending on
whether a derivative is designated as part of a hedge transaction and, if it is,
the type of hedge transaction. Management of the Company anticipates that, due
to its limited use of derivative instruments, the adoption of FAS 133 will not
have a significant effect on the Company's results of operations or its
financial position.
On July 8, 1999, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 137, "Accounting for Derivative
Instruments and Hedging Activities -- Deferral of the Effective Date of FASB
Statement No. 133" ("FAS 137"). FAS 137 defers the
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effective date of FAS 133 from all fiscal years beginning after June 15, 1999 to
all fiscal years beginning after June 15, 2000 (December 31, 2000 for the
Company).
10. Subsequent Events
On April 10, 2000, Converse entered into a long-term agreement with a third
party company for the exclusive distribution and license rights in the
Netherlands, Belgium and Luxembourg for Converse footwear and apparel. This
agreement became effective May 1, 2000 and will have the impact of reducing the
Company's future global order backlog, net sales and expenses, while increasing
royalty income. Any expected losses are included in restructuring and other
unusual charges for the year ended January 1, 2000.
11. 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>
Three months ending April 1, 2000:
Net sales to customer...................... $ 33,432 $ 12,620 $ 4,792 $ 769 $ --- $ 51,613
Intersegment net sales..................... 6,227 --- --- --- (6,227) ---
Segment pretax profit (loss)............... (4,113) (726) 342 158 --- (4,339)
Segment total assets at April 1, 2000...... $ 119,259 $ 23,808 $ 3,059 $ 1,173 --- $ 147,299
Three months ending April 3, 1999:
Net sales to customer...................... $ 35,096 $ 22,016 $ 9,797 $ 3,170 $ --- $ 70,079
Intersegment net sales..................... 8,699 --- --- --- (8,699) ---
Segment pretax profit (loss)............... (4,237) 1,332 1,336 (742) --- (2,311)
Segment total assets at January 1, 2000 $ 127,670 $ 19,466 $ 3,839 $ 1,388 --- $ 152,363
</TABLE>
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Item 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
The following table sets forth certain items relating to the Company's
operating results as a percentage of net sales for the three months ended April
3, 1999 ("First Quarter 1999") and for the three months ended April 1, 2000
("First Quarter 2000").
<TABLE>
<CAPTION> Three Months Ended
-----------------------------------------------------------------
April 3, 1999 % April 1, 2000 %
------------- - ------------- -
<S> <C> <C> <C> <C>
Net sales................................................... $ 70,079 100.0 $ 51,613 100.0
Gross profit................................................ 18,741 26.7 11,555 22.4
Selling, general and administrative
expenses................................................... 21,651 30.9 14,642 28.4
Royalty income.............................................. 4,842 6.9 4,167 8.1
Earnings from operations.................................... 1,932 2.8 1,080 2.1
Interest expense, net....................................... 5,235 7.5 5,323 10.3
Other (income) expense...................................... (992) (1.4) 96 0.2
Loss before income tax...................................... (2,311) (3.3) (4,339) (8.4)
Income tax expense.......................................... 928 1.3 728 1.4
Net loss.................................................... (3,239) (4.6) (5,067) (9.8)
Net basic and diluted loss
per share.................................................. $ (0.19) --- $ (0.29) ---
</TABLE>
Net Sales
Net sales for First Quarter 2000 decreased to $51.6 million from $70.1
million for First Quarter 1999, a 26.4% decline. The $18.5 million reduction in
net sales was attributable to decreases of 26.1%, 23.3%, 34.2%, and 25.0% for
First Quarter 2000 in the categories of performance, athletic originals,
children's and action sports, respectively, as compared to First Quarter 1999.
Net sales in the United States decreased 4.8% to $33.4 million in First
Quarter 2000 from $35.1 million for First Quarter 1999. Net sales decreased
48.0% internationally to $18.2 million for First Quarter 2000 from $35.0 million
for First Quarter 1999. International net sales reduction was impacted by $5.1
million from converting wholly-owned subsidiaries with foreign operations into
licensee agreements. Net sales in the Europe, Middle East and Africa (E.M.E.A.),
Pacific and Latin America regions declined 42.7%, 51.0% and 38.5% respectively.
The downward United States net sales trend that has plagued the Company
over the past two years appears to be coming to an end. The Company believes
this change is primarily attributable to the improving athletic footwear and
apparel market as well as the efforts the Company has made to broaden its
product offerings. The Company expects continued
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improvement domestically, but believes this improvement will progress slowly due
to the conservative retail buying patterns that have surfaced as a result of the
slowdown in branded athletic footwear sales that affected the market during 1998
and 1999.
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
operating in Italy and Mexico to third-party licensing entities, revenues from
which are now recorded as royalty income rather than net sales. The Company
expects future net sales declines in the E.M.E.A. region as the process of
converting wholly-owned subsidiaries into third-party licensees continues. The
sales decline in the Pacific region was primarily the attributable to the
softening of demand for the traditionally strong athletic originals product
offerings in that region.
Gross Profit
Gross profit decreased to $11.6 million for First Quarter 2000 from $18.7
million for First Quarter 1999, a 38.0% reduction. The decline in net sales
accounted for the majority of the gross profit reduction over the period. As a
percentage of net sales, gross profit decreased to 22.4% in First Quarter 2000
compared to 26.7% for the prior year period. The decline was caused by the
Company's efforts to keep inventory levels down through the sales of excess
inventory at reduced margins.
Selling, General and Administrative Expense
The Company took aggressive actions in 1999 to reduce its on-going
operating expenses in order to address the current industry conditions. Selling,
general and administrative expenses decreased $7.1 million to $14.6 million for
First Quarter 2000 from $21.7 million for First Quarter 1999, a 32.7% decrease.
This reduction was mainly attributable to decreased spending in global selling,
marketing, advertising and promotion activities, as well as corporate staff
reduction and expense reduction associated with converting wholly-owned
subsidiaries with foreign operations into licensee arrangements. During the
first quarter 2000, the Company recorded a gain of $0.9 million resulting from
pension curtailment. As a percentage of net sales, selling, general and
administrative expenses decreased to 28.4% for First Quarter 2000 from 30.9% for
the prior year.
Royalty Income
Royalty income decreased 12.5% to $4.2 million for First Quarter 2000 from
$4.8 million for First Quarter 1999. International royalty income, which
represented 84.6% of the Company's total royalty income, decreased 13.2%. This
reduction was primarily attributable to the elimination of Japanese non-footwear
trademark licensee agreements which were sold in November 1999, which generated
$1.1 million of royalty income in First Quarter 1999. This reduction was
partially offset by improvement primarily attributable to increases of 43.5% and
36.1% in the Japanese footwear and EMEA regions, respectively. As a percentage
of net sales, royalty income increased to 8.1% for First Quarter 2000 compared
to 6.9% in the prior year.
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
11
<PAGE>
agreements to Itochu Corporation for $25.0 million cash. The licensees of these
trademarks generated royalty income of $1.1 million in First Quarter 1999 as
stated above. Royalty income adjusted to eliminate the Japanese non-footwear
trademarks was $4.2 million in First Quarter 2000 and $3.7 million in First
Quarter 1999.
Earnings from Operations
The Company recorded earnings from operations in First Quarter 2000 of $1.1
million compared to $1.9 million in First Quarter 1999. This change was
primarily due to the factors discussed above.
Interest Expense
Interest expense for First Quarter 2000 increased to $5.3 million from $5.2
million for First Quarter 1999.
Other (Income) Expense
First Quarter 1999 other income of $1.0 million was primarily related to
foreign exchange gains associated with the foreign currency exchange contracts
and put options the Company had entered into as part of its strategy to reduce
exposure to foreign currency fluctuations.
Income Tax Expense
Income tax expense for First Quarter 2000 was $0.7 million compared to $0.9
million for First Quarter 1999. The Company continued to fully reserve the
income tax benefit of the quarterly losses by recording an additional valuation
allowance of $2.2 million in First Quarter 2000 and $1.8 million in First
Quarter 1999.
Net Loss
The Company recorded a net loss of $5.1 million for First Quarter 2000
compared to a net loss of $3.2 million for First Quarter 1999. The net loss for
First Quarter 2000 and First Quarter 1999 included a charge of $2.2 million and
$1.8 million, respectively, to increase the deferred tax valuation reserve.
Excluding this non-operating charge, the net loss was $2.9 million for First
Quarter 2000 and $1.4 million for First Quarter 1999.
Net Loss Per Share
Net loss per share for First Quarter 2000 was $0.29 compared to net loss
per share of $0.19 for First Quarter 1999. The net loss for First Quarter 2000
and First Quarter 1999 included a charge of $0.13 per share and $0.11 per share,
respectively, to increase the deferred tax valuation reserve. Excluding this
non-operating charge, the net loss per share for First Quarter 2000 was $0.16
compared to net loss per share of $0.08 for First Quarter 1999.
12
<PAGE>
Liquidity and Capital Resources
As of April 1, 2000, the Company's working capital (net of cash) position
decreased $5.6 million to a deficit of $50.3 million from a deficit of $44.7
million at January 1, 2000. The principal reason for the decrease was a seasonal
reduction in inventory levels of $5.0 million.
Total borrowings under the Company's Credit Facility remained relatively
flat at $71.6 million on April 1, 2000 versus $71.3 million at January 1, 2000,
reflecting management's emphasis to control working capital needs in this
challenging market environment.
For the First Quarter 2000 and First Quarter 1999, net cash required for
operating activities was $1.5 million and $5.7 million, respectively. In the
First Quarter 2000, reduction in working capital needs helped to offset the loss
from operations, thus mitigating the cash required for operating activities.
During the First Quarter 1999, cash was primarily used to fund working capital
requirements. Net cash used by investing activities was nil in the First Quarter
2000 versus $0.6 million in the First Quarter 1999 for additions to property,
plant and equipment. Net cash provided by financing activities was $1.5 million
and $5.6 million for First Quarter 2000 and First Quarter 1999, respectively.
Cash provided by financing activities 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 March 31, 2000. In March 2000, the Credit Facility was
amended to allow for $6.0 million of additional borrowing base through May 15,
2000. In May 2000, the additional borrowing base of $6.0 million was extended,
by amendment to the Credit Facility, through June 30, 2000.
At April 1, 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. In May 2000, the Company obtained a waiver of this
financial covenant from the Banks for the Credit Facility and from the holders
of the Secured Notes with respect to the Company's failure to comply with this
financial covenant. As a condition to obtaining this waiver with the Secured
Notes, the Company has agreed not to make any further payments of interest with
respect to the Convertible Notes unless the Secured Notes are paid in full or
the required majority holders of the Secured Notes have consented to any such
payment. The ability of the Company to meet its debt service obligations will be
dependent upon the future performance of the Company, which will be impacted by
general economic conditions and other factors such as alternative and/or
supplemental financing arrangements. Management does not anticipate being in
compliance with future covenants of the Credit Facility or the Secured note
agreement. Should the Company not be in compliance with covenants in the future,
the amounts outstanding under the Credit Facility and the Secured Notes will be
payable upon demand in the absence of a waiver.
Backlog
At the end of First Quarter 2000, the Company's global order backlog was
$88.0 million, compared to $86.2 million at the end of First Quarter 1999, an
increase of 2.1%. The 1999 backlog figure has been adjusted to eliminate the
Company's backlog in Iberia, Canada and Italy, where the Company's
subsidiaries have been converted to licensee/distributor arrangements. The
backlog in the athletic originals category increased 28.1%, partially offset by
declines of 26.5% and 10.5% in the performance and children's categories,
respectively. The amount of
13
<PAGE>
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 sales, 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 sales, 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.
14
<PAGE>
Item 3.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Interest Rate Risk
At April 1, 2000, the carrying value of the Company's debt totalled $177.6
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 April 1, 2000, the Company had fixed rate debt of $102.6 million and
variable rate debt of $75.0 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 April 1, 2000, the earnings and cash flows impact for the next
year resultig from a one percentage point increase in interest rates would be
aproximately $0.8 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 April 1, 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.
15
<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.
Not Applicable
Item 4. Submission of Matters to a Vote of Security-Holders.
Not Applicable.
Item 5. Other Information.
Not Applicable
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits. The following exhibits are contained in this report:
10 Amendment Number Eleven to Credit Agreement.
10.1 Second Supplement to Note Purchase Agreements.
27 Financial Data Statement
(b) Reports on Form 8-K.
There were no reports on Form 8-K filed during the
quarter ended April 1, 2000.
16
<PAGE>
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Dated: May 16, 2000 Converse Inc.
By: /s/ Donald J. Camacho
---------------------
Donald J. Camacho
Senior Vice President and
Chief Financial Officer
17
<PAGE>
EXHIBIT INDEX
Exhibit No. Description
- ---------- -----------
10 Amendment Number Eleven to Credit Agreement.
10.1 Second Supplement to Note Purchase Agreements.
27 Financial Data Statement
<PAGE>
EXHIBIT 10
----------
ELEVENTH AMENDMENT TO CREDIT AGREEMENT
--------------------------------------
This Eleventh Amendment to Credit Agreement (the "Amendment") is made on
this 15th day of May, 2000 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"), GMAC Commercial Credit
LLC ("GMAC"), Fleet Capital Corporation ("Fleet"), Bank of America, N.A.
("BofA"), Heller Financial, Inc. (BT, FBC, LaSalle, BankBoston, FINOVA, GMAC,
Fleet, BofA, and Heller referred to collectively as "Lenders").
W I T N E S S E T H:
WHEREAS, the Agent, the Lenders and the Borrower are parties to that
certain Credit Agreement dated as of May 21, 1997, as amended by that certain
First Amendment to Credit Agreement dated as of June 26, 1997, that certain
Second Amendment to Credit Agreement dated as of November 21, 1997, that certain
Third Amendment to Credit Agreement dated as of January 29, 1998, that certain
Fourth Amendment to Credit Agreement dated as of September 16, 1998, that
certain Fifth Amendment to Credit Agreement dated as of May 28, 1999, that
certain Sixth Amendment to Credit Agreement dated as of July 30, 1999, that
certain Seventh Amendment to Credit Agreement dated as of October 31, 1999, that
certain Eighth Amendment to Credit Agreement dated November 15, 1999, that
certain Ninth Amendment to Credit Agreement dated February 15, 2000, and that
certain Tenth Amendment to Credit Agreement dated March 31, 2000 (collectively,
the "Credit Agreement"); and
WHEREAS, the parties desire to amend the Credit Agreement, as more fully
set forth herein.
NOW, THEREFORE, in consideration of the mutual agreements herein contained
and other good and valuable consideration, the adequacy is hereby acknowledged,
and subject to the terms and conditions hereof, the parties hereto agree as
follows:
SECTION 1. DEFINITIONS. Unless otherwise defined herein, all capitalized
-----------
terms shall have the meaning given to them in the Credit Agreement.
SECTION 2. AMENDMENTS TO CREDIT AGREEMENT.
------------------------------
2.1 The defined term "Borrowing Base", which appears in Section 1.1
of the Credit Agreement, is hereby amended by deleting the reference to " May
15, 2000" contained in subsection (F)(i) thereof and inserting "June 30, 2000"
in its stead.
<PAGE>
SECTION 3. WAIVER.
------
3.1 WAIVER OF EVENT OF DEFAULT. Borrower has advised the Agent that
Borrower has failed to comply with the provisions of Section 7.7 of the Credit
Agreement for the 12 month period ending March 31, 2000, which failure
constitutes an Event of Default. Subject to the satisfaction by the Borrower of
the conditions precedent contained herein, the Agent and Required Lenders hereby
waive the Event of Default occasioned as a result of Borrower's failure to
comply with the provisions of Section 7.7 for the 12 month period ending March
31, 2000. Such waiver is limited to the Event of Default described herein and is
not a waiver with respect to any other Default or Event of Default which has or
may occur pursuant to the terms of the Credit Agreement generally.
SECTION 4. CONDITIONS PRECEDENT. The effectiveness of this Amendment is
--------------------
expressly conditioned upon satisfaction of the following conditions precedent:
4.1 AMENDMENT. Agent shall have received copies of this Amendment
duly executed by Borrower and Lenders constituting Required Lenders.
4.2 AMENDMENT FEE. Borrower shall have paid to Agent for the benefit
of the Lenders who have committed to make advances pursuant to subsection (F) of
the Borrowing Base, an amendment fee in the amount of $50,000.
4.3 WAIVER FEE. Borrower shall have paid to Agent for the benefit of
the Lenders in accordance with their respective Revolving Credit Commitments as
set forth on Annex I as amended herein, a Waiver Fee in the amount of $100,000.
4.4 OTHER. Agent shall have received such other documents,
certificates and assurances as it shall reasonably request.
2
<PAGE>
SECTION 5. REAFFIRMATION OF BORROWER. Borrower hereby represents and
-------------------------
warrants to Agent and Lender that (i) the representations and warranties set
forth in Section 5 of the Credit Agreement are true and correct on and as of the
date hereof, except to the extent (a) that any such representations or
warranties relate to a specific date, or (b) of changes thereto as a result of
transactions for which Agent and Lender have granted their consent; (ii) 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 6. FULL FORCE AND EFFECT. Except as herein amended, the Credit
---------------------
Agreement and all other Credit Documents shall remain in full force and effect.
SECTION 7. COUNTERPARTS. This Amendment may be executed in two or more
------------
counterparts, each of which shall be deemed an original, but all of which
together shall constitute one and the same document.
IN WITNESS WHEREOF, the parties hereto have executed this Amendment on the
day and year specified above.
BORROWER:
CONVERSE INC.
By: /s/ Donald J. Camacho
---------------------
Name: Donald J. Camacho
-----------------
Title: Senior Vice President
---------------------
3
<PAGE>
AGENT:
BT COMMERCIAL CORPORATION
By: /s/ Frank Fazio
---------------
Name: Frank Fazio
-----------
Title: Director
--------
LENDERS:
BT COMMERCIAL CORPORATION
By: /s/ Frank Fazio
----------------
Name: Frank Fazio
-----------
Title: Director
--------
FLEET BUSINESS CREDIT
CORPORATION
By: /s/ Kim Bushey
--------------
Name: Kim Bushey
----------
Title: Vice President
--------------
LASALLE NATIONAL BANK
By: /s/ Christopher S. Clifford
---------------------------
Name: Christopher S. Clifford
-----------------------
Title: Senior Vice President
---------------------
BANKBOSTON, N.A.
By: /s/ Kim Bushey
--------------
Name: Kim Bushey
----------
Title: Vice President
--------------
4
<PAGE>
Lenders:
FINOVA CAPITAL CORPORATION
By: /s/ Brian Rujewitz
---------------------
Name: Brian Rujewitz
--------------
Title: Vice President
--------------
GMAC COMMERCIAL CREDIT LLC
By: /s/ Anthony Viola
------------------
Name: Anthony Viola
-------------
Title: Vice President
--------------
FLEET CAPITAL CORPORATION
By: /s/ Kim Bushey
--------------
Name: Kim Bushey
----------
Title: Vice President
--------------
BANK OF AMERICA, N.A.
By:
-----------------------
Name:
------------------
Title:
-----------------
HELLER FINANCIAL, INC.
By: /s/ Tara Urobel
----------------
Name: Tara Urobel
-----------
Title: Vice President
--------------
5
<PAGE>
ANNEX I
-------
LENDERS AND COMMITMENT AMOUNTS
------------------------------
Lender Revolving Credit Commitment
- ------ ---------------------------
BT Commercial Corporation $12,600,000
233 South Wacker Drive, Suite 8400
Chicago, Illinois 60606
Fleet Business Credit Corporation $12,000,000
200 Glastonbury Blvd.
Glastonbury, CT 06033
LaSalle National Bank $12,600,000
135 South LaSalle Street, Suite 425
Chicago, IL 60603
FINOVA Capital Corporation $ 9,600,000
311 South Wacker Drive, Suite 4400
Chicago, IL 60606-6618
GMAC Commercial Credit LLC $12,000,000
1290 Avenue of the Americas, 3rd Floor
New York, NY 10104
Fleet Capital Corporation $ 3,600,000
200 Glastonbury Blvd.
Glastonbury, CT 06033
Bank of America, N.A. $ 9,600,000
600 Peachtree Street, 13th Floor
Atlanta, Georgia 30308
Heller Financial, Inc. $12,000,000
500 West Monroe Street, 18th Floor
Chicago, IL 60661
BankBoston, N.A. $ 6,000,000
6
<PAGE>
ANNEX I-A
LENDERS AND COMMITMENT AMOUNT
WITH RESPECT TO SUBSECTION (F) OF THE
BORROWING BASE AS OF
MAY 15, 2000
Name and Address of Lender REVOLVING CREDIT COMMITMENT
- -------------------------- ---------------------------
BT Commercial Corporation $4,000,000
233 South Wacker Drive, 84th Floor
Chicago, Illinois 60606
LaSalle National Bank $2,000,000
135 South LaSalle Street, Suite 425
Chicago, IL 60603
7
<PAGE>
EXHIBIT 10.1
SECOND SUPPLEMENT TO NOTE PURCHASE AGREEMENTS
This SECOND SUPPLEMENT TO NOTE PURCHASE AGREEMENTS (the "Second
Supplemental Agreement") is made and dated as of May 16, 2000, by and among
Converse Inc. (the "Company"), and Libra Investments, Inc. ("Libra"), Foothill
Partners III, L.P. ("Foothill"), DDJ Canadian High Yield Fund ("DDJ Canadian"),
and B III Capital Partners, L.P. ("DDJ Capital") (Libra, Foothill, DDJ Canadian,
and DDJ Capital collectively the "Purchasers" or individually a "Purchaser").
WITNESSETH:
WHEREAS, the Company and the Purchasers are parties to several
substantially identical Note Purchase Agreements dated as of September 16, 1998
(collectively the "Note Purchase Agreements" or individually a "Note Purchase
Agreement"), pursuant to which the Company issued and sold its 15% senior
secured notes, in two series, in the aggregate principal amount of $28,642,687,
as more fully set forth therein (the "Secured Notes"); and
WHEREAS, the Note Purchase Agreements were supplemented in a Supplement to
Note Purchase Agreements dated as of November 15, 1999 (the "Supplemental
Agreement"), pursuant to which the parties (i) acknowledged the consent of the
Purchasers to the sale of certain Proprietary Rights by the Company, (ii) waived
certain provisions under the Note Purchase Agreements, and (iii) amended certain
provisions of the Note Purchase Agreements, as more fully set forth therein;
WHEREAS, the Company and the Purchasers desire to supplement further the
Note Purchase Agreements, as supplemented by the Supplemental Agreement
(collectively the "Supplemented Note Purchase Agreements" or individually a
"Supplemented Note Purchase Agreement"), in order to waive certain provisions
under the Supplemented Note Purchase Agreements and in order to amend and
confirm certain provisions of the Supplemented Note Purchase Agreements, as more
fully set forth herein.
NOW, THEREFORE, in consideration of the premises and the mutual agreements
herein contained and other good and valuable consideration, the adequacy of
which is hereby acknowledged, and on and subject to the terms and conditions
hereof, the parties agree as follows:
SECTION 1. DEFINITIONS. Unless otherwise defined herein, all capitalized
terms shall have the respective meanings given to them in the Supplemented Note
Purchase Agreements.
<PAGE>
SECTION 2. CERTIFICATIONS OF PURCHASERS. The Purchasers severally
represent and warrant as follows:
(a) Libra. Libra is (i) the purchaser and remains the holder of that
Series A Secured Note in the principal amount of $4,142,931 and (ii) the
party in interest as "Purchaser" under the related Supplemented Note
Purchase Agreement, and in such capacity Libra is authorized to extend
consents, waivers, and amendments with respect to its Supplemented Note
Purchase Agreement as set forth herein.
(b) Foothill. Foothill is (i) the purchaser and remains the holder of
that Series A Secured Note in the principal amount of $10,357,328 and (ii)
the party in interest as "Purchaser" under the related Supplemented Note
Purchase Agreement, and in such capacity Foothill is authorized to extend
consents, waivers, and amendments with respect to its Supplemented Note
Purchase Agreement as set forth herein.
(c) DDJ Canadian. DDJ Canadian is (i) the purchaser and remains the
holder of that Series A Secured Note in the principal amount of $4,045,408
and that Series B Secured Note in the aggregate principal amount of
$1,478,400 and (ii) the party in interest as "Purchaser" under the related
Supplemented Note Purchase Agreement, and in such capacity DDJ Canadian is
authorized to extend consents, waivers and amendments with respect to its
Supplemented Note Purchase Agreement as set forth herein.
(d) DDJ Capital. DDJ Capital is (i) the purchaser and remains the
holder of that Series A Secured Note in the principal amount of $6,311,920
and that Series B Secured Note in the aggregate principal amount of
$2,306,700 and (ii) the party in interest as "Purchaser" under the related
Supplemented Note Purchase Agreement, and in such capacity DDJ Capital is
authorized to extend consents, waivers and amendments with respect to its
Supplemented Note Purchase Agreement as set forth herein.
SECTION 3. WAIVER. The Purchasers hereby grant to the Company a waiver of
the requirements for minimum EBITDA under the provisions of Section 9.7 of the
Note Purchase Agreements, as supplemented by the Supplemental Agreement, for the
3 month period ending March 31, 2000, and hereby agree that the failure to
comply with such minimum EBITDA requirements for such 3 month period shall not
constitute a Default or an Event of Default under the Supplemented Note Purchase
Agreements.
SECTION 4. COVENANT. The Company covenants that the Company will not
redeem, repurchase, retire for value, or make any further payment of the
principal of or interest on the Subordinated Notes, unless and until the Secured
Notes shall have been paid in full or unless and until the Required Holders
shall have otherwise consented in writing to such payment.
SECTION 5. CONFIRMATION AND AMENDMENT.
(a) The Company confirms that in the event the Company shall transfer
any assets consisting of the Proprietary Rights (which the Company
acknowledges requires the written consent of the Required Holders pursuant
to Section 9.5(a) of the Note Purchase Agreements), then the Net Cash
Proceeds of such transfer shall be applied to the indebtedness and
obligations under the Revolving Credit Agreement and to the principal and
interest under the Secured Notes, within 5 Business Days of receipt, as
provided in Section 7.2 of the Note Purchase Agreements, as amended in this
Second Supplemental Agreement.
2
<PAGE>
(b) The provisions of subsection (a) of Section 7.2 of the Note
Purchase Agreements are deleted in their entirety, and the same shall be
replaced with the following:
Upon receipt by the Company of the Net Cash Proceeds from any
Asset Disposition which exceeds $250,000 individually or which,
together with the Net Cash Proceeds from other Asset Dispositions
during the same fiscal year, exceeds $1,000,000 in the aggregate, the
Company shall, within 5 days of the receipt of such Net Cash Proceeds,
prepay the Secured Notes in an amount equal to the lesser of (i) the
then outstanding aggregate principal amount of the Secured Notes and
(ii) the amount of such excess Net Cash Proceeds less, in either case,
the portion, if any, of such excess proceeds required to be applied to
the repayment of indebtedness and other obligations outstanding under
the Revolving Credit Agreement in accordance with the terms and
conditions thereof, in either case, together with accrued interest to
the date of such prepayment on the principal amount of the Secured
Notes so prepaid and all fees, expenses and other payments due to the
holders of the Secured Notes under the Note Documents. To the extent
necessary, any prepayment provided for herein shall be made with the
proceeds of advances under the Revolving Credit Agreement.
SECTION 6. CONDITION PRECEDENT. The effectiveness of this Second
Supplemental Agreement is expressly conditioned upon satisfaction of the
condition that the Required Lenders (as defined in the Revolving Credit
Agreement) under the Revolving Credit Agreement shall have waived non-compliance
with the requirements of Section 7.7 of the Revolving Credit Agreement with
respect to minimum EBITDA of the Company for the 12 month period ending March
31, 2000.
SECTION 7. CERTIFICATION OF THE COMPANY. The Company represents and
warrants that the Company is, upon the effectiveness of this Second Supplemental
Agreement, in compliance with the terms and provisions set forth in the
Supplemented Note Purchase Agreements, as hereby amended, and in compliance with
the payment obligations under the Secured Notes.
SECTION 8. PAYMENT. The Company shall pay the Purchasers which are
signatories to this Second Supplemental Agreement a supplement fee, which
supplement fee shall be paid by means of the remittance to those Purchasers of
up to $100,000 in the aggregate, and which supplement fee shall be paid at the
time of the full repayment of the principal balance of the Secured Notes,
accompanied by interest accruing on the unpaid balance of such supplement fee at
the rate of 15% per annum from the date hereof until the date paid or prepaid.
The amount to be so remitted to each such Purchaser as its share of the
supplement fee and related interest shall be determined by multiplying $100,000
by the percentage calculated by dividing the principal amount of the Secured
Notes held by such Purchaser as of the date hereof by the aggregate principal
amount of the Secured Notes held by all the Purchasers as of the date hereof.
3
<PAGE>
SECTION 9. OBLIGATIONS IN FULL FORCE AND EFFECT. Except as herein amended
or otherwise provided (by consent or waiver), the Note Purchase Agreements, as
supplemented by the Supplemental Agreement, and the Ancillary Documents shall
remain in full force and effect.
SECTION 10. COUNTERPARTS. This Second Supplemental Agreement may be
executed in counterparts, each of which shall be deemed an original, but all of
which together shall constitute one and the same documents.
IN WITNESS WHEREOF, the parties hereto have executed this Second
Supplemental Agreement as of the day and year specified above.
COMPANY:
CONVERSE INC.
By: /s/ Donald Camacho
--------------------------------------
Name: Donald J. Camacho
-------------------------------
Title: Sr. VP and CFO
-------------------------------
PURCHASERS:
LIBRA INVESTMENTS, INC.
By:
--------------------------------------
Name:
-------------------------------
Title:
-------------------------------
FOOTHILL PARTNERS III, L.P.
By: /s/ Jeff Nikora
--------------------------------------
Name: Jeff Nikora
-------------------------------
Title: GP
-------------------------------
4
<PAGE>
DDJ CANADIAN HIGH YIELD FUND
By: DDJ Capital Management, LLC, its
attorney-in-fact
By: /s/ Judy K. Mencher
--------------------------------------
Name: Judy K. Mencher
-------------------------------
Title: Member
-------------------------------
B III CAPITAL PARTNERS, L.P.
By: DDJ Capital III, LLC, its General Partner
By: DDJ Capital Management, LLC, Manager
By: /s/ Judy K. Mencher
--------------------------------------
Name: Judy K. Mencher
-------------------------------
Title: Member
-------------------------------
5
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM CONVERSE
INC., APRIL 1, 2000 10Q AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-30-2000
<PERIOD-START> JAN-02-2000
<PERIOD-END> APR-01-2000
<CASH> 2,368
<SECURITIES> 0
<RECEIVABLES> 42,523
<ALLOWANCES> 2,637
<INVENTORY> 71,423
<CURRENT-ASSETS> 117,085
<PP&E> 37,944
<DEPRECIATION> 17,700
<TOTAL-ASSETS> 147,299
<CURRENT-LIABILITIES> 164,985
<BONDS> 74,265
0
0
<COMMON> 17,514
<OTHER-SE> (135,089)
<TOTAL-LIABILITY-AND-EQUITY> 147,299
<SALES> 51,613
<TOTAL-REVENUES> 55,780
<CGS> 40,058
<TOTAL-COSTS> 54,700
<OTHER-EXPENSES> 96
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 5,323
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</TABLE>
