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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
ACT OF 1934 FOR THE FISCAL YEAR ENDED January 1, 2000.
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934 [NO FEE REQUIRED] FOR THE TRANSITION PERIOD FROM
_________ TO __________
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
NORTH READING MASSACHUSETTS 01864
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (978) 664-1100
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Securities registered pursuant to Section 12(b) of the Act:
TITLE OF EACH CLASS NAME OF EACH EXCHANGE
ON WHICH REGISTERED
None
Securities registered pursuant to Section 12 (g) of the Act:
Common stock, without par value
7% Convertible Subordinated Notes due 2004
----------------------------------------------------------
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 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 by check mark if disclosure of delinquent filers pursuant to item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]
As of March 23, 2000, the aggregate market value of the registrant's voting
stock held by non-affiliates of the registrant was approximately $5,750,346
based on the closing sales price of the registrant's common stock as reported on
the Over-The-Counter as of such date ($1.062).
Indicate with a check mark whether the registrant has filed all documents
and reports required to be filed by Section 12, 13 or 15(D) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a plan
confirmed by a Court. YES [X] NO [_]
As of March 23, 2000, 17,513,861 shares of the registrant's Common Stock
were outstanding.
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CONVERSE INC.
ANNUAL REPORT ON FORM 10-K
TABLE OF CONTENTS
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PART I.
Item 1. Business........................................................ 1
Products...................................................... 1
Marketing and Product Development............................. 3
Sales and Distribution........................................ 3
Licensing Agreements.......................................... 4
Sourcing and Manufacturing.................................... 4
Research and Development...................................... 5
Backlog....................................................... 6
Competition................................................... 6
Trademarks and Patents........................................ 6
Environmental Matters......................................... 6
Employees..................................................... 7
Risk Factors.................................................. 7
Item 2. Properties...................................................... 9
Item 3. Legal Proceedings............................................... 9
Item 4. Submission of Matters to a Vote of Security Holders............. 9
PART II.
Item 5. Market for Registrant's Common Equity and Related Stockholder
Matters......................................................... 10
Item 6. Selected Financial Data......................................... 11
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations....................................... 12
Item 7A. Quantitative and Qualitative Disclosure About Market Risk 22
Item 8. Financial Statements and Supplemental Data...................... 23
Item 9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure........................................ 23
PART III.
Item 10. Directors and Executive Officers of the Registrant.............. 24
Item 11. Executive Compensation.......................................... 27
Item 12. Security Ownership of Certain Beneficial Owners and Management.. 30
Item 13. Certain Relationships and Related Transactions.................. 30
PART IV.
Item 14. Exhibits, Financial Statement Schedules, and Reports on
Form 8-K........................................................ 31
SIGNATURES
Signatures...................................................... 34
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Information contained or incorporated by reference in this Report contains
"forward-looking statements" which can be identified by the use of forward-
looking terminology such as "believes," "expects," "may," "will," "should," or
"anticipates" or the negative thereof or other variations thereon or comparable
terminology, or by discussions of strategy. See, e.g., "Management's Discussion
and Analysis of Financial Condition and Results of Operations." No assurance can
be given that the future results covered by the forward-looking statements will
be achieved. The Risk Factors contained in "Business--Risk Factors" of this
Report constitute cautionary statements identifying important factors with
respect to such forward-looking statements, including certain risks and
uncertainties, that could cause actual results to vary materially from the
future results covered in such forward-looking statements. Other factors could
also cause actual results to vary materially from the future results covered in
such forward-looking statements. Converse Inc. (hereinafter the "Company" or
"Converse") undertakes no obligation to publicly release any revisions to these
forward-looking statements to reflect any future events or occurrences.
PART I
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ITEM 1. BUSINESS.
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Converse is a leading global designer, manufacturer and marketer of high
quality athletic footwear for men, women and children and a global licensor of
sports apparel, accessories and selected footwear. The Company, founded in 1908,
began establishing its authentic footwear heritage with the introduction of its
original canvas Chuck Taylor basketball shoe in 1923. Throughout its 92-year
history, Converse has achieved a high level of brand name recognition due to its
reputation for high performance products, quality, value and style. Through its
well-known Converse All Star brand, the Company has consistently maintained its
position as the American performance brand with authentic sports heritage by
being among the top ten suppliers of athletic footwear in the U.S.
In 1999, the Company's footwear products were offered in four product
categories: performance, athletic originals, children's, and action sports.
The performance category is comprised of basketball and training footwear for
athletes and typically features innovative design and construction and various
proprietary performance technologies. Converse's athletic originals category is
centered on the Converse(R) Chuck Taylor(R) All Star(R) canvas athletic shoe,
which management believes is the world's all time best-selling athletic shoe
with over 570 million pairs sold since its introduction. Converse's children's
category consists of colorful and imaginative footwear especially for kids, as
well as children's sized versions of the Company's performance and athletic
originals footwear. The Company entered the action sports category in 1998,
focusing on alternative sports such as skateboarding, in order to capitalize on
the dramatic growth in the popularity of these individualistic sports.
The Company's products are distributed in over 110 countries to
approximately 6,000 customers, which include specialty athletic, sporting goods,
department and shoe stores, as well as to 28 Company-operated retail outlet
stores. In 1999 the Company reported net sales of $231.8 million. However, this
figure understates the total worldwide presence of Converse-branded products
since a large amount is sold through licensees, and Converse recognizes only a
percentage of these licensees' sales, which it records as royalty income. Global
wholesale sales of Converse-branded products, which include direct sales by the
Company to retailers, sales by Converse distributors and sales of licensed
products by Converse licensees, were approximately $571 million in 1999, of
which over $396 million, or approximately 69%, were outside of the United
States.
PRODUCTS
In 1999, the Company concentrated its marketing, product development and
sales efforts on its four categories: performance, athletic originals,
children's, and action sports.
Performance
Converse performance footwear offerings include models for basketball,
training, and cheering activities that feature one or more proprietary
performance technologies developed by the Company. The largest segment of the
Company's performance footwear is basketball, which represents 85% of the
performance category sales. Performance shoes are
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targeted toward serious athletes. To strengthen its performance business, in
November 1999 the Company introduced a $100 basketball shoe that contains helium
technology. The Company plans to broaden its line of helium-oriented products
during 2000 into the other performance segments of training, running and action
sports and to offer other basketball models. The Company sells its basketball
footwear at suggested retail prices ranging from $45 to $100, and its training
shoes from $50 to $75 through an extensive network of athletic specialty,
sporting goods, department and shoe stores.
Athletic Originals
Converse's athletic originals footwear line is divided into three segments:
classics, men's and women's. The cornerstone of this product line continues to
be the Chuck Taylor(R) All Star(R) canvas athletic shoe. Since its introduction
in 1923 as the world's first basketball shoe, the Company has sold over 570
million pairs, and management believes it to be the all-time best selling
athletic shoe. Although the styling of athletic original shoes has remained
unchanged over time, the Company regularly introduces new colors and fabrics to
expand their appeal and meet changing fashion trends. The men's and women's
athletic originals products have been inspired by Converse's rich athletic
heritage and market demand for contemporary evolutions. Footwear in this
category sells at suggested retail prices ranging from $25 to $65 in athletic
specialty, sporting goods, department and shoe stores, as well as specialty
apparel retailers.
Children's
The Company has recently implemented a new strategy in the children's
product category that revolves around offering colorful and imaginative footwear
designed specifically for children. The Company continues to offer its
traditional children's sized versions of the Company's performance, athletic
originals and action sports product lines. Children's products are sold at
suggested retail prices from $18 to $40 through athletic specialty, children's
bootery, sporting goods and department stores.
Action Sports
In 1998, Converse made the strategic decision to enter the action sports
category, a rapidly growing product category that focuses on alternative sports
such as skateboarding. This line continued to expand its offerings throughout
1999. Action sports products offer a mix of urban, flashier, color-intensive
stylings for the younger, more fashion-conscious consumer as well as technical
innovations for the serious athlete. The Company has deliberately sought to
keep the distribution of its action sports products more limited to maintain
their appeal. Products are offered through independent skate shops and select
retail customers. Most of the action sports line is priced between $60 and $90.
Sports Apparel, Accessories and Selected Footwear Licensing (Royalty Income)
Converse utilizes licensees who manufacture or purchase and distribute
sports apparel, accessories and selected footwear to provide consumers globally
with Converse-branded products from head-to-toe. Converse has entered into a
number of separate licensing agreements permitting the licensees to design and
market selected products under the Converse brand name within specific markets.
Japanese licensees accounted for approximately 39.4% of Converse's total
worldwide royalty income in 1999. Royalty income in the Pacific Region,
including Japan, contributed 63.1% of total worldwide royalty income. Royalty
income generated in the U.S. represented approximately 13.8% of total worldwide
royalty income in 1999. Royalty income for 1997, 1998, and 1999 was $22.6, $20.2
and $20.5 million, respectively.
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On November 29, 1999, Converse announced 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. Those
trademarks and licenses generated $4.2 million of licensing revenue in 1999.
Royalty income for 1997, 1998 and 1999, adjusted to eliminate the income
generated by the rights sold, was $16.1, $14.3, and $16.3 million, respectively.
MARKETING AND PRODUCT DEVELOPMENT
The Company's rich heritage is the cornerstone of the Converse brand.
Classic products like the Chuck Taylor(R) All Star(R) and Jack Purcell(R) have
endured the test of time and continue to be in demand throughout the world.
Consumer base for these products offer great commercial potential and additional
opportunities in the marketplace. The Company continues to develop new products
which are directly inspired by its classic heritage and supported by the
Company's consumer research.
The Company plans to capitalize on its significant investment in research
and development by expanding its helium-oriented product line. Converse is the
first footwear manufacturer to harness the lighter-than-air helium atom by
developing a revolutionary polymer that is impermeable by the helium atom and
encapsulates them in a material known as Nanofilament(TM). This new helium
technology is designed to improve the performance needs of serious athletes. The
technology debuted with the All Star(R) He:01 basketball shoe during the 1999
Holiday season.
To complement its marketing strategies, Converse cultivates the endorsement
and promotion of its footwear among athletes. The Company's endorsers include
prominent current NBA athletes, such as Karl Malone and Jalen Rose, as well as
NBA athletes from an earlier era, such as Julius "Dr. J" Erving. Management
believes that there are substantial opportunities for these endorsers to
influence its target customers and to further build the Converse All Star(R)
brand through focused and integrated marketing strategies.
SALES AND DISTRIBUTION
The Company's products are distributed in over 110 countries to
approximately 6,000 customers, including athletic specialty, sporting goods,
department and shoe stores, as well as to 28 Company-operated retail outlet
stores. Beginning in 1996, the Company has significantly increased its
distribution through athletic specialty retailers that showcase the coordinated
head-to-toe products offered by the Company and its licensees.
United States Market
The Company's 34-member U.S. sales force markets Converse footwear through
approximately 3,600 active retail accounts. In 1999, domestic sales represented
57% of Company net sales. Since 1998, the Company has refined its distribution
strategy to increase its focus on key growth accounts such as athletic specialty
retailers. Various select national accounts are serviced by five account
executives who focus on the product and merchandising needs of these retailers.
A majority of the Company's larger domestic customers are served by an
electronic data interface ("EDI") ordering system. In addition, a quick
response system has been implemented with a number of the Company's high volume
accounts. The quick response system provides for rapid replenishment of
retailer stock through an inventory management process that produces constant
"on hand" inventory quantities.
International Market
The Company currently markets its products in approximately 110 countries
outside of the United States through subsidiaries, branch offices, independent
distributors and licensees. Non-U.S. sales accounted for 43% of total net sales
in 1999.
In the key Western European markets of France, Benelux, United Kingdom,
Germany and Scandinavia, Converse has wholly-owned operating units of the
Company. These Converse operating units are responsible for the marketing and
distribution of Converse-branded footwear, apparel and accessories to sporting
goods, department and specialty stores within these territories. In 1998, the
Company began a program of converting several of its wholly-owned foreign
operations into licensee/distributor arrangements. This process has been
completed in Spain, Portugal, Canada, Mexico and Italy. The completed
conversions have already reduced operating expenses by $5.0 million and added
royalty income
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of $1.2 million on an annualized basis. Upon the successful conversion of it's
wholly-owned subsidiaries with foreign operations into licensee/distributor
agreements, it is estimated that there would be a further reduction of $11.4
million in expenses and an additional $3.2 million of royalty income. Sales in
Eastern Europe, the Middle East, Africa and Latin America continue to be made
through independent licensees/distributors. See Note 18 of Notes to Consolidated
Financial Statements.
Sales of footwear in the Pacific region are also made through independent
licensees/distributors, the largest of which is MoonStar Chemical Corporation,
the Company's exclusive distributor of footwear in Japan since 1980. MoonStar
contributes approximately 17% to the Company's total net sales worldwide. Prior
to the November 1999 sale of Japanese non-footwear trademarks, the Pacific
region also contributes the largest percentage of international licensing
income.
The Latin American market is supplied by five footwear
licensees/distributors and four apparel licensees.
LICENSING AGREEMENTS
Converse contracts with licensees who manufacture or purchase and
distribute sports apparel, accessories and selected footwear to provide
customers globally with head-to-toe Converse-branded products. Converse has
entered into a number of separate licensing agreements permitting the licensees
to design and market selected products under the Converse brand name within
specific markets.
Under the terms of Converse's licensing arrangements, all products designed
by licensees, as well as the related advertising, must be approved in advance by
Converse. In addition, the license agreements give Converse the right to monitor
the quality of the licensed products on an ongoing basis.
The following table details sales by Converse's licensees and the related
royalty income to Converse:
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Fiscal Year Ended
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January 3, 1998 January 2, 1999 January 1, 2000
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(Dollars in thousands)
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Total sales by licensees:
Footwear....................... $141,344 $121,666 $147,588
Apparel and accessories........ 208,866 179,330 143,823
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Total.............................. $350,210 $300,996 $291,411
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Total royalty income:
Footwear....................... $ 10,013 $ 9,776 $ 11,809
Apparel and accessories........ 12,556 10,399 8,657
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Total.............................. $ 22,569 $ 20,175 $ 20,466
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Royalty income going forward will be affected by the sale of the Company's
non-footwear trademarks and licenses in Japan to Itochu Corporation, as
described above. The Company anticipates that this reduction in royalty income
will be offset by increased licensing income from the conversion of foreign
operations thereby maintaining a consistent stream of royalty income. In
addition, the Company is seeking to complete a transaction that would securitize
its future royalty income derived from its trademarks and licenses. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Liquidity and Capital Resources -- Future Financing Needs."
SOURCING AND MANUFACTURING
The majority of the Company's footwear models are sourced from various Far
East manufacturers. However, most of the Company's athletic originals products
are manufactured domestically by Converse.
Sourcing
In 1999, approximately 55% of all Converse footwear was sourced from a
variety of Far East manufacturers on a per order basis. These manufacturers
produce the Company's footwear according to the Company's own design
specifications and quality standards. Sourcing is managed by the Company's
corporate headquarters in the United States. In selecting contractors, Converse
attempts to use manufacturers that specialize in the type of footwear being
produced and to avoid
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over reliance on any particular supplier by having a sufficient diversity of
manufacturing resources. The Company utilizes one sourcing agent in Taiwan who
assists the Company in selecting and overseeing third party contractors,
ensuring quality, sourcing fabrics and monitoring quotas and other trade
regulations. The Company's production staff and independent sourcing agent
together oversee all aspects of manufacturing and production.
In 1999, the Company used 11 manufacturers located in China, Taiwan, Macau,
Vietnam and the Philippines. While one manufacturer produced approximately 20%
of the Company's products, the Company believes any manufacturer can be
replaced, if necessary, subject to short-term supply disruptions. Many of the
manufacturers utilized by Converse are also used by the Company's competitors.
Manufacturing
Converse is the largest manufacturer of athletic footwear in the United
States, producing approximately 5.6 million pairs domestically in 1999.
Converse owns and operates a 385,000 square foot manufacturing facility in
Lumberton, North Carolina, and leases manufacturing facilities in Mission, Texas
(55,000 square feet) and Reynosa, Mexico (100,000 square feet). The majority of
sales generated from the Company's athletic originals category are from models
manufactured at the Lumberton facility, with supplemental production in Mission.
Leather cutting and stitching are performed in Reynosa in order to capitalize on
lower labor costs. This provides the Company with the ability to supply classic
models with the "Made in the U.S.A." label which is an important consumer
criterion for certain overseas markets.
The domestic manufacturing of Converse's athletic originals products has
enabled the Company to utilize an EDI/quick response system with some of its
major customers. Management believes that its ability to produce its best-
selling athletic originals models with significantly shorter lead-times than
foreign-sourced products is a competitive advantage.
The principal materials used in Converse's athletic originals footwear
products are canvas, linen and rubber. The Company purchases its raw materials
from diverse suppliers. Converse purchases dyed canvas raw material primarily
from four dyehouses, with its largest dyehouse accounting for approximately 8%
of raw material purchased during 1999. The Company believes that any supplier
can be replaced, if necessary, subject to short-term supply disruptions.
RESEARCH AND DEVELOPMENT
Converse is a leading innovator of new footwear technologies. The Company
spent $8.8 million, $7.7 million and $6.2 million on research and development in
1997, 1998 and 1999, respectively. Converse's state of the art biomechanics
laboratory, located in a leased facility near the Company's headquarters,
continually conducts research on new performance-enhancing technologies. The
Company's engineers are involved in the design stages of athletic footwear to
help develop new technologies and attributes to improve the function of shoes
for specific sports. The Company maintains a full set of production equipment at
its biomechanics laboratory to develop prototypes, and to ensure that new
products can be manufactured efficiently to Converse's specifications. In
addition, Converse maintains a chemistry laboratory that develops and tests
midsole and outsole compounds, adhesives and fabrics for use in its products.
Many of Converse's basketball shoes use the patented REACT(R) shock
absorption technology. REACT gel is a polymer encapsulated in the heel and
forefoot regions of the midsoles of Converse basketball shoes that attenuates
shock as athletes run and jump and force pressure on their feet.
In 1999, Converse developed a breakthrough method to encapsulate helium
molecules with a technology that results in an extremely lightweight shoe that
delivers cushioning, stability and comfort. Designed to be among the lightest
cushioning technologies available, the helium technology will improve the
performance needs of serious athletes. Converse is the first footwear
manufacturer to harness the lighter-than-air helium molecule by developing a
revolutionary polymer that is impermeable by the helium molecule. A cylindrical
metallic gray helium capsule is visible through a clear window on the outsole
and midsole of the shoes and is attached to the heel of the inner bootie. A
Converse polymer known as Nanofilament(TM) (patent pending) allows the helium
capsule to trap the helium molecules and prevents them from escaping.
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BACKLOG
At the end of 1999, the Company's global backlog after adjustments for the
conversion of Iberia, Canada, and Italian subsidiaries, was $75.6 million,
compared to $82.0 million at the end of 1998. 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 net sales, while increasing royalty income.
Accordingly, a comparison of the actual backlog as of two different dates is not
necessarily meaningful.
COMPETITION
The athletic footwear market is highly competitive. Industry participants
compete with respect to fashion, price, quality, performance and durability.
During the second half of 1997, there was an overall weakening of the athletic
footwear and apparel market which resulted in an oversupply of inventory in the
marketplace. This weakness and oversupply of inventory continued through 1999.
Competitors in the athletic footwear industry in the United States can be broken
down into several groups. Nike Inc. ("Nike"), with 1999 estimated U.S. footwear
revenues exceeding $3 billion, controls over 43% of the U.S. athletic footwear
market. Reebok International, Inc. ("Reebok") and adidas-Solomon AG ("adidas"),
each with 1999 estimated U.S. footwear revenues of approximately $900 million,
each control over 12% of the U.S. athletic footwear market. New Balance
Athletic Shoe, Inc. ("New Balance"), with 1999 estimated U.S. footwear revenues
of approximately $550 million, controls over 7% of the U.S. athletic footwear
market. Each of these companies has full lines of product offerings, competes
with Converse in the Far East for manufacturing sources, distributes to more
than 10,000 outlets worldwide and spends substantially more on advertising and
promotion than Converse. Stride Rite Corporation and K-Swiss, Inc. each have
1999 U.S. branded athletic footwear revenues of between $200 million and $300
million. Both of these companies also compete with Converse for access to
foreign manufacturing facilities. In addition to these competitors, there are
companies with U.S. revenues of under $200 million, including Vans, Airwalk,
ASICS, Foot-Joy, Fila U.S.A., Inc. and Saucony, among others. Some of these
companies emphasize footwear in categories such as running, tennis, golf or team
sports which are currently not being produced by the Company. Worldwide footwear
industry data is unavailable, but the largest companies worldwide are believed
to be Nike, Reebok and adidas.
TRADEMARKS AND PATENTS
Converse utilizes trademarks on virtually all of its footwear, licensed
apparel and accessories. Converse's main trademarks are "Converse(R) All
Star(R)", "Chuck Taylor(R)" and "REACT(R)" name and design and the "Converse All
Star Chuck Taylor Patch" and "All Star and Design" logos. In addition to those
main trademarks, from time to time Converse registers and/or uses other special
trademarks for new product lines, products or features. Converse believes that
these trademarks are important in identifying products with the Converse brand
image, and the trademarks are often incorporated prominently in product designs.
The Company believes the Converse brand to be its most important and
valuable marketing asset and generally seeks protection for its trademarks in
significant foreign markets. The Company maintains and preserves its trademarks
and the related registrations and aggressively protects such rights by taking
appropriate legal action against infringement, counterfeiting and misuse when
warranted. It is impossible to estimate the amount of counterfeiting involving
Converse products or the effect such counterfeiting may have on Converse's
revenue and brand image.
The Company has a variety of patents, including a number of U.S. and
foreign patents and patent applications on its helium and REACT(R) technologies.
The Company is not aware of any material claim of infringement or other
challenges to the Company's right to use any of its trademarks, tradenames, or
patents.
ENVIRONMENTAL MATTERS
The Company's operations are subject to federal, state and local laws,
regulations and ordinances relating to the operation and removal of underground
storage tanks and the storage, handling, generation, treatment, emission,
release, discharge and disposal of certain materials, substances and wastes. The
nature of the Company's operations exposes it to
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the risk of claims with respect to environmental matters and there can be no
assurance that material costs or liabilities will not be incurred in connection
with such claims.
Based on the Company's experience to date, the Company believes that its
future cost of compliance with environmental laws, regulations and ordinances,
or exposure to liability for environmental claims, will not have a material
adverse effect on the Company's business, operations or financial position.
However, future events such as changes in existing laws and regulations, or
unknown contamination of sites owned or operated by the Company (including
contamination caused by prior owners and operators of such sites) may give rise
to additional compliance costs which could have a material adverse effect on the
Company's financial condition.
EMPLOYEES
As of January 1, 2000, Converse employed 2,024 individuals, of which 1,311
were in manufacturing, and 713 were in sales, administration, development and
distribution. Management believes its relationship with its employees to be
good. Converse has not experienced any material work stoppages or strikes in
recent years. The Reynosa, Mexico manufacturing workforce, representing
approximately 28% of Converse's work force, is represented by a union.
RISK FACTORS
Investors should carefully consider the following factors, together with
other information contained in this Report, in evaluating an investment in the
Company.
Adverse Industry Conditions Continue
Since 1997, there has been a significant slowdown in the branded athletic
footwear industry. In 1998, U.S. athletic footwear sales declined 6%, both in
retail dollars spent and pairs sold, the most severe decline since 1992. In
1999, weak industry conditions continued, led by the diminishing importance of
basketball shoes worn casually all over the world. Running shoes remained the
hot category during 1999 with retail sales outside the U.S. growing 11% to
$2.614 billion. Non-U.S. sales of basketball footwear, the former leading
category, declined 14% to $2.002 billion. Our sales decline in 1999 is
indicative of the continued industry-wide reduced demand for athletic footwear
of the type sold by the Company. Consumer spending for athletic footwear in the
U.S. market remained essentially unchanged in 1999 at $13.7 billion in retail
sales compared to $13.8 billion in 1998. Although the number of pairs sold
decreased by 3.8% in 1999, the average selling price per pair increased by 3.5%.
The declines in athletic footwear sales in 1998 and 1999 are attributable
to three major negative trends:
. Shift in consumer preference away from athletic footwear towards
casual product offerings such as "brown" shoes, in response to
casualization trends in apparel and a relaxation of workplace dress
codes.
. Increasing competition from designer and urban brands as they enter
the footwear market. These brands target the style-conscious 12-24
year-old customers, who favor fashion over performance and no longer
buy multiple pairs of athletic shoes.
. U.S. sales of basketball shoes have declined over 33% from $3.0
billion in 1997 to $2.0 billion in 1999. While basketball shoe sales
have been falling for a few years, 1998 and the first half of 1999
were particularly hurt by the NBA lockout, the retirement of Michael
Jordan and the emergence of younger marquee NBA players whose brand
identities are not yet defined.
These trends may continue and impair the Company's ability to increase
sales of our footwear products.
We May Not Be Able to Obtain Necessary Financing
On March 31, 2000, we announced that for several months we have been
working with our financial advisor, Universal Credit Corp., a specialty
investment bank minority owned by Deutsche Bank and Prudential Securities, on a
financing transaction which would securitize our trademarks, licensing
agreements and all related future royalty income.
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We need the proceeds of this financing or an alternate arrangement in order to
respond to challenges within our industry and improve operating results, but
there is no assurance that we will complete this or another transaction.
Rapidly Changing Consumer Tastes Can Adversely Affect Our Business
There are many competitors in our markets with substantially greater
financial resources, production, marketing and product development capabilities.
Our performance may be hurt by our competitors' product development, sourcing,
pricing, innovation and marketing strategies. The impact that electronic
commerce will have in the future on the retail industry is uncertain, but there
is no assurance that any such impact will not adversely affect our business.
The footwear industry specifically, and the fashion industry in general,
are subject to rapid and substantial shifts in consumer tastes and preferences.
The fashion industry and retail industry are exposed to sudden shifts in
consumer trends and consumer spending, on which our results are, in part,
dependent. Consumer acceptance of our new products may fall below expectations
and the launch of new product lines may be delayed. Our results are affected by
the buying plans of our customers in the wholesale business, which include large
athletic specialty stores, as well as smaller retailers. Our wholesale customers
may not inform us of changes in their buying plans until it is too late for us
to make the necessary adjustments to our product lines and marketing strategies.
While we believe that purchasing decisions in many cases are made independently
by individual stores or store chains, we are exposed to a decision by the
controlling owner of a store chain, to decrease the amount of footwear products
purchased from us. Moreover, the retail industry periodically experiences
consolidation. We face a risk that our wholesale customers may consolidate,
restructure, reorganize or realign in ways which could decrease the number of
stores, or the amount of shelf space, that carry our products.
Oversea Production Risks Affect Our Business
The Company purchases a substantial amount of athletic footwear overseas
and expects to do so for the foreseeable future. International sourcing subjects
the Company to the risks of doing business abroad. Such risks include
expropriation, acts of war, political disturbances, political instability and
similar events, including trade sanctions, loss of normalized trade relations
status, export duties, import controls, quotas and other trading restrictions.
Moreover, we rely heavily on independent third-party manufacturing facilities,
primarily located in China, to produce our products. If trade relations between
the U.S. and China, or other countries in which our products are manufactured,
deteriorate or are threatened by instability, our business may be adversely
impacted. We cannot predict the effect that changes in the economic and
political conditions in China could have on the economics of doing business with
Chinese manufacturers. Although we believe that we could find alternative
manufacturing sources for our products with independent third-party
manufacturing facilities in other countries, the loss of a substantial portion
of our Chinese manufacturing capacity could have a material adverse effect on
our business. Also, if we were required to relocate a substantial portion of our
manufacturing outside of China, there can be no assurance that we could obtain
as favorable economic terms, which could adversely affect our performance.
Risks Associated with International Sales and Fluctuations in Currency Exchange
Rates May Affect Our Results
International sales represent a significant portion of total net sales.
International sales are made through Company-owned subsidiaries denominated in
local currencies and through independent distributors denominated in U.S.
dollars. Future operating results will depend, in part, on our ability to
maintain or replace independent distributor relationships in key markets as
existing agreements expire. Additionally, changes in demand resulting from
fluctuations in currency exchange rates may affect our international sales. All
distributor sales are denominated in U.S. dollars and an increase in the value
of the U.S. dollar relative to foreign currencies could make Converse products
less competitive in those markets. During 1999, the Company used foreign
currency options to protect us from the effect of changes in foreign exchange
rates on statement of operations with respect to European subsidiaries.
International sales and operations may also be subject to risks such as the
imposition of governmental controls, export license requirements, political
instability, trade restrictions, changes in tariffs and difficulties in staffing
and managing international operations and managing accounts receivable. In
addition, the laws of certain countries do not protect Converse's products and
intellectual property rights to the same extent as the laws of the United
States. Any of these factors could have a material adverse effect on Converse.
Impact of Year 2000
The Company began the process of executing the necessary code changes and
upgrading existing systems in 1996 and completed its Year 2000 software program
conversions for its critical systems during 1999. From 1996 through January,
2000, the Company spent approximately $2.6 million on incremental costs
associated with the Year 2000 program. As of March 31, 2000, the Company has not
experienced any Year 2000 problems either internally or from outside sources.
However, since it may take several additional months before it is known whether
the Company or third party suppliers, vendors or customers may have undergone
Year 2000 problems, no assurances can be given that the Company will not
experience losses or disruptions due to Year 2000 computer related issues.
8
<PAGE>
Certain Stockholders Have the Ability to Control Converse
Apollo Investment Fund, L.P. ("Apollo") and its affiliate Lion Advisors,
L.P., on behalf of an investment account under management ("Lion"; Apollo and
Lion together being referred to herein as the "Apollo Stockholders"), together
beneficially owned approximately 64% of our outstanding Common Stock. By reason
of their ownership of shares of Common Stock, the Apollo Stockholders have the
power effectively to control or influence control of Converse, including in
elections of the Board of Directors and other matters submitted to a vote of our
stockholders, including extraordinary corporate transactions such as mergers.
The Apollo Stockholders may exercise such control from time to time. A majority
of the Board of Directors consists of individuals affiliated with Apollo and
Lion.
ITEM 2. PROPERTIES.
- --------------------
Converse owns or leases the following principal manufacturing plants,
offices and warehouses:
<TABLE>
<CAPTION>
Floor Space
Location Type of Facility (Square Feet) Owned/Leased
- -------- ---------------- ------------- ------------
<S> <C> <C> <C>
North Reading, MA............. Headquarters 106,800 Owned
Wilmington, MA................ Research and Development Facility 23,192 Leased
Lumberton, NC................. Manufacturing Plant 386,781 Owned
Charlotte, NC................. Distribution Center 437,700 Leased
Reynosa, Mexico............... Manufacturing Plant 100,948 Leased
Mission, TX................... Manufacturing Plant 55,552 Leased
</TABLE>
In addition to the above properties, the Company leases space for 27 retail
stores in the U.S. and 1 retail store in the United Kingdom. The Company also
leases several sales and customer service offices and distribution centers
throughout the world. The Wilmington, Massachusetts lease expires in 2003; the
Charlotte, North Carolina lease expires in 2011; the Reynosa, Mexico lease
expires in 2008; and the Mission, Texas facility lease expires in 2003. For
further information regarding the Lumberton, Mission and Reynosa facilities see
"Business--Sourcing and Manufacturing". The Company anticipates transferring its
research and development functions into its headquarter facility. See Note 4 of
Notes to Consolidated Financial Statements.
ITEM 3. LEGAL PROCEEDINGS.
- ---------------------------
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 the
ultimate outcome of any such proceedings will not have a material adverse effect
on its financial position or results of operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
- -------------------------------------------------------------
Not applicable.
9
<PAGE>
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
- -------------------------------------------------------------------------------
The Company's common stock ("Common Stock") was traded on the New York
Stock Exchange ("NYSE") under the symbol "CVE" until March 2, 2000. The
Company's Common Stock is now traded over-the-counter under the symbol "CVEO".
The following table sets forth the range of high and low closing sales prices
for the Common Stock as reported by the NYSE for the periods indicated:
<TABLE>
<CAPTION>
High Low
---- ---
<S> <C> <C>
1998
----
First Quarter............................. 8/1/4/ 5/13/16/
Second Quarter............................ 6/9/16/ 4/1/16/
Third Quarter............................. 5/3/16/ 2/9/16/
Fourth Quarter............................ 3/1/4/ 1/15/16/
1999
----
First Quarter............................. 4/3/16/ 2/1/4/
Second Quarter............................ 5/1/2/ 2/11/16/
Third Quarter............................. 3/11/16/ 2/3/16/
Fourth Quarter............................ 2/1/2/ 1/3/8/
</TABLE>
As of March 23, 2000 there were 17,513,861 shares of Common Stock issued
and outstanding, which shares were held by approximately 2,017 holders of
record.
The Company has not paid any dividends on its Common Stock during the
periods indicated and does not anticipate paying any dividends on its Common
Stock in the foreseeable future. Any future payment of dividends will depend
upon the financial condition, capital requirements, earnings and loan covenant
restrictions of Converse, as well as upon other factors that the Board of
Directors may deem relevant.
10
<PAGE>
ITEM 6. SELECTED FINANCIAL DATA.
- ---------------------------------
The following selected consolidated financial data of Converse should be
read in conjunction with Converse's historical consolidated financial statements
and the notes thereto contained elsewhere herein.
<TABLE>
<CAPTION>
Fiscal Year Ended
----------------------------------------------------------------------------
Dec. 30, 1995 Dec. 28, 1996 Jan. 3, 1998 Jan. 2, 1999 Jan. 1, 2000
-------------- -------------- ------------- ------------- -------------
(Dollars in thousands, except per share amounts)
<S> <C> <C> <C> <C> <C>
Statement of Operations Data:
Net sales ......................................... $407,483 $ 349,335 $ 450,199 $ 308,353 $ 231,767
Cost of sales...................................... 293,948 263,098 329,258 237,671 176,510
-------- --------- --------- --------- ----------
Gross profit....................................... 113,535 86,237 120,941 70,682 55,257
Selling, general and administrative expenses....... 146,332 114,888 127,261 92,683 83,764
Royalty income..................................... 17,257 27,638 22,569 20,175 20,466
Gain on sale of trademarks......................... ----- ----- ----- ----- 24,811
Restructuring and other unusual charges........... 14,182 (1,177) 1,537 ----- 9,368
-------- --------- --------- --------- ----------
Earnings (loss) from operations.................... (29,722) 164 14,712 (1,826) 7,402
Loss (credit) on investment in unconsolidated
subsidiary........................................ 52,160 (1,362) (12,537) ----- -----
Interest expense, net.............................. 14,043 17,776 16,133 18,487 22,289
Other (income) expense, net........................ 3,966 6,319 2,267 (366) 1,047
-------- --------- --------- --------- ----------
Earnings (loss) from continuing operations
before income taxes............................... (99,891) (22,569) 8,849 (19,947) (15,934)
Income tax expense (benefit)....................... (28,144) (4,134) 13,154 3,572 27,674
-------- --------- --------- --------- ----------
Earnings (loss) from continuing operations......... (71,747) (18,435) (4,305) (23,519) (43,608)
Extraordinary (gain) loss, net of tax expense
(benefit) of $(576) and $437, respectively........ ----- ----- 744 (704) -----
-------- --------- --------- --------- ----------
Net loss........................................... $(71,747) $ (18,435) $ (5,049) $ (22,815) $ (43,608)
======== ========= ========= ========= ==========
Net basic and diluted earnings (loss) per share:
Continuing operations............................. $ (4.30) $ (1.10) $ (0.25) $ (1.36) $ (2.50)
Extraordinary gain (loss)......................... ----- ----- (0.04) 0.04 -----
-------- --------- --------- --------- ----------
Net earnings (loss)............................... $ (4.30) $ (1.10) $ (0.29) $ (1.32) $ (2.50)
======== ========= ========= ========= ==========
Balance Sheet Data (at period end):
Working capital................................... $ 89,680 $ (32,648) $ 20,260 $ 2,706 $ (42,404)
Total assets...................................... 224,507 222,603 234,694 198,217 152,363
Long-term debt, less current maturities........... 112,824 9,644 80,000 101,799 74,265
Total stockholders' equity (deficiency)........... (22,685) (38,868) (47,982) (69,310) (112,545)
</TABLE>
11
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
- --------------------------------------------------------------------------------
OF OPERATIONS.
- --------------
The following discussion is based upon and should be read in conjunction
with the consolidated financial statements and the notes thereto of the Company
included elsewhere herein.
General
Converse was founded in 1908, and operated as an independent family-owned
company until 1971, when it was acquired by Eltra Corporation, a diversified
holding company. In 1983, Converse became a publicly-traded company through an
initial public offering. In 1986, Furniture Brands, then named INTERCO
INCORPORATED, acquired Converse. On November 17, 1994, Furniture Brands
distributed to its stockholders all of the outstanding Common Stock of Converse
(the "Distribution"), and Converse became an independent publicly-traded
company.
Converse is a leading global designer, manufacturer and marketer of high
quality athletic footwear for men, women and children and a global licensor of
sports apparel, accessories and selected footwear. The Company's products are
distributed in over 110 countries to approximately 6,000 customers, which
include athletic specialty, sporting goods, department and shoe stores, as well
as to 28 Company-operated retail outlet stores. The primary costs and expenses
of the Company result from the following: athletic products sourced from various
Far East manufacturers, employee salaries and fringe benefits, advertising and
promotion expenses and the purchase of raw materials used in the Company's
manufacturing process.
The Company's financial results in Fiscal 1999 (as defined below) were
affected by several significant factors including: (i) the continued weakness in
the athletic footwear and apparel market which led to a 24.8% decline in net
sales; (ii) the strength of the U.S. dollar in the European and Asian markets
resulting in weaker net sales, gross profit and royalty income; (iii) the
conversion of Company-owned foreign operations in Spain, Portugal, Mexico and
Canada into third party licensing entities; (iv) the Company's aggressive
efforts to reduce operating expenses; (v) the sale of the Company's non-footwear
trademarks in Japan and the assignment of its Japanese non-footwear license
agreements to Itochu Corporation for $25.0 million cash; (vi) the recording of
restructuring and other unusual charges of approximately $9.4 million relating
primarily to initiatives aimed at reducing future operating expenses and; (vii)
the recording of a $24.8 million charge in order to establish a full valuation
allowance against the Company's deferred tax assets.
Results of Operations
The Company's fiscal year end is the Saturday closest to December 31 in
each year. The results of operations will periodically include a 53-week fiscal
year. For purposes of the Company's financial statements, Fiscal 1999 refers to
the 52-week period ended on January 1, 2000 ("Fiscal 1999"), Fiscal 1998 refers
to the 52-week period ended January 2, 1999 ("Fiscal 1998"), and Fiscal 1997
refers to the 53-week period ended January 3, 1998 ("Fiscal 1997").
12
<PAGE>
Comparison of Fiscal 1999 and Fiscal 1998
The following table sets forth certain items related to operations and such
items as a percentage of net sales for Fiscal 1999 and Fiscal 1998:
<TABLE>
<CAPTION>
Fiscal Year Ended
--------------------------------------------------------
January 2, 1999 % January 1, 2000 %
---------------- ------- --------------- ------
(Dollars in thousands, except per share amounts)
<S> <C> <C> <C> <C>
Net sales............................................................. $308,353 100.0 $231,767 100.0
Gross profit.......................................................... 70,682 22.9 55,257 23.8
Selling, general and administrative expenses.......................... 92,683 30.1 83,764 36.1
Royalty income........................................................ 20,175 6.5 20,466 8.8
Gain on sale of trademarks............................................ --- --- 24,811 10.7
Restructuring and other unusual charges............................... --- --- 9,368 4.0
Earnings (loss) from operations....................................... (1,826) (0.6) 7,402 3.2
Interest expense, net................................................. 18,487 6.0 22,289 9.6
Other (income) expense, net........................................... (366) (0.1) 1,047 0.5
Loss from continuing operations before income tax..................... (19,947) (6.5) (15,934) (6.9)
Income tax expense.................................................... 3,572 1.2 27,674 11.9
Loss from continuing operations....................................... (23,519) (7.6) (43,608) (18.8)
Basic and diluted loss per share from continuing operations........... $ (1.36) --- $ (2.50) ---
Extraordinary (gain) loss, net of tax................................. (704) (0.2) --- ---
Net loss.............................................................. $(22,815) (7.4) $(43,608) (18.8)
Basic and diluted net loss per share.................................. $(1.32) --- $(2.50) ---
</TABLE>
Net Sales
Net sales for Fiscal 1999 decreased to $231.8 million from $308.4 million in
Fiscal 1998, a 24.8% reduction. The $76.6 million net sales reduction in Fiscal
1999 was attributable to decreases of 23.5%, 22.2%, and 36.5% in the
performance, athletic originals, and children's categories, respectively,
compared to Fiscal 1998. These decreases were partially offset by a $1.0
million increase in the action sports category.
Net sales in the United States decreased 20.2% to $133.0 million for Fiscal
1999 from $166.6 million for Fiscal 1998. Net sales decreased 30.3%
internationally to $98.8 million for Fiscal 1999 from $141.8 million for Fiscal
1998. Net sales in the Europe, Middle East and Africa ("E.M.E.A."), Pacific and
Americas regions were down 26.9%, 35.0% and 13.6%, respectively. The decline in
the E.M.E.A. region was primarily due to the conversion of two wholly-owned
subsidiaries operating in Spain and Portugal to third-party licensing entities,
revenues from which are now recorded as royalty income rather than net sales.
In 1998 and 1999, the athletic footwear and apparel industry struggled through
a slowdown in branded athletic sales, particularly in the adult's and children's
basketball and cross training product categories. The difficult industry
conditions have been exacerbated by the excessive levels of athletic footwear
inventory in the marketplace. The domestic market also suffered from the over
capacity due to significant retail expansion during a period of softening
consumer demand. This change in preference has adversely affected the Company's
business, as well as that of many of its competitors. The Company's basketball
and cross training categories have been significantly impacted along with the
children's category which, in large part, has been comprised of "takedowns" from
these categories. The athletic originals category is more closely aligned with
the global consumer preference and was affected to a lesser extent. Also
adversely affecting the industry environment was the financial turmoil in the
Asia Pacific and Latin America regions which negatively impacted consumer
spending. This industry-wide softening demand resulted in an oversupply of
branded athletic footwear in the global marketplace.
This industry slowdown, which has plagued the Company and its competitors
since 1997, is showing signs of improvement. This improvement appears to be
progressing slowly, in part due to the conservative retail buying patterns that
have surfaced as a result of the industry downturn. The Company is also affected
by the financial difficulties experienced by retailers that constitute some of
its key accounts.
13
<PAGE>
Gross Profit
Gross profit decreased to $55.3 million in Fiscal 1999 from $70.7 million in
Fiscal 1998, a 21.8% decline. 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 increased to 23.8% in Fiscal 1999 compared to 22.9% for the
prior year period. The gross profit percentage increase is primarily due to the
slight improvement in the athletic footwear market and a reduction of sales of
excess inventory at reduced margins as compared to Fiscal 1998.
Selling, General and Administrative Expenses
In order to address the current industry conditions, the Company took
aggressive actions in 1999 to reduce its operating expenses. Selling, general
and administrative expenses, which are primarily comprised of direct selling,
advertising, and promotion expenses in addition to employee salaries and
benefits and other overhead costs, decreased $8.9 million to $83.8 million for
Fiscal 1999 from $92.7 million for Fiscal 1998, a 9.6% decrease. This reduction
was mainly attributable to decreased spending in global selling, marketing,
advertising and promotion activities, as well as staff reductions to partially
offset the effects of the industry downturn. Excluding one-time credits and
charges of $9.1 million in 1998 related to termination of the post-retirement
medical benefit plan, pension curtailment and severance charge, adjusted expense
reduction would be $18.0 million from Fiscal 1998 to Fiscal 1999. As a
percentage of net sales, selling, general and administrative expenses increased
to 36.1% for Fiscal 1999 from 30.1% for the prior year.
Royalty Income
Royalty income increased 1.5% to $20.5 million in Fiscal 1999 from $20.2
million in Fiscal 1998. International royalty income, which represented 86.2%
of the Company's total royalty income, increased 3.2%. The improvement was
primarily attributable to increases of 16.5% and 46.5% in the Southeast Asia and
E.M.E.A. regions, respectively. These increases are representative of the
recovery in the economies in Southeast Asia and E.M.E.A. as well as the
favorable impact of the conversion of Spain and Portugal from direct operating
units to licensees. These increases were partially offset by reductions in
royalty income from the following regions - Japan 7.2%, Latin Americas 13.7% and
Canada 24.5%. Domestic royalty income decreased by 8.3% to $2.8 million in
Fiscal 1999. As a percentage of net sales, royalty income increased to 8.8% in
Fiscal 1999 compared to 6.5% in the prior year.
Gain on Sale of Trademarks
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 Company
used the proceeds from the sale to pay down bank debt and provide additional
working capital. The licensees of these trademarks generated royalty
income of $4.2 million in Fiscal 1999 and $5.9 million in Fiscal 1998. Royalty
income adjusted to eliminate the Japanese non-footwear trademarks was $16.3
million in Fiscal 1999 and $14.3 million in Fiscal 1998.
Restructuring and Other Unusual Charges
During 1999, Converse recorded restructuring and other unusual charges of
$9.4 million relating primarily to initiatives aimed at reducing future
operating costs, including global distribution, marketing, selling and
administrative 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.
Included in the restructuring charge is $1.5 million for the cost of employee
severance and related benefits for the termination of 49 corporate employees.
Future annual savings due to reduced salary and benefits expense is estimated to
be $2.7 million as a result of these actions, all of which are estimated to be
completed by April 2000. Costs of $0.7 million associated with the closing of
five retail stores is included in the restructuring charge. Net sales and net
operating losses with respect to these five retail stores were $2.6 million and
$(0.1) million in Fiscal 1997; $2.6 million and $(0.3) million in Fiscal 1998;
and $1.9 million and $(0.3) million in Fiscal 1999. It is estimated that these
store closings will be completed by June 2000. Lease termination costs of $0.1
million are included in the restructuring charge relating to the Company's R&D
facility. It is estimated that the move from, and sublet of, this facility will
be completed by December 2000. Future annual savings due to reduced lease,
utilities and maintenance expense associated with the R&D facility are estimated
to be $0.5 million. Termination costs associated with marketing endorser
contracts of $1.7 million are included in the restructuring charge. It is
estimated that these contracts will be terminated effective no later than August
2000. Future annual savings in marketing expenses of $1.1 million are
anticipated as a result of these terminations.
Costs of $5.4 million relating to the conversion of the Company's wholly-owned
foreign operations into licensee/distributor arrangements are included in the
restructuring charge. The sales/conversion costs for both the anticipated and
completed transactions are comprised primarily of severance charges related to
32 employees, fixed assets writedowns and lease termination costs. Additional
severance charges are anticipated in the future. Also included in these
conversion costs is a charge of $0.6 million relating to the write-off of the
cumulative translation adjustment associated with the conversion of Converse's
wholly-owned foreign operations which have been completed by January 1, 2000.
Additional cumulative translation adjustment restructuring charges will be
recognized in future periods relating to the conversion of the wholly-owned
foreign operations into licensee/distributor arrangements upon substantial
completion of the conversions. The net sales and the net operating losses
associated with the Company's wholly-owned foreign operations were $56.9 million
and $(11.5) million, respectively, in Fiscal 1997; $57.8 million and $(7.1)
million in Fiscal 1998; and $47.0 million and $(4.6) million in Fiscal 1999.
Upon completion of the conversion of the Company's wholly-owned foreign
operations to licensee/distributor arrangements, it is anticipated that the
working capital needs to support these operations and the associated net sales
and net operating losses from these operations will be substantially eliminated.
Incremental royalty income from these conversions is estimated to be $3.2
million. This conversion has already been completed for Spain and Portugal in
1998, Canada in the second quarter of 1999 and Italy on January 1, 2000. It is
estimated that all remaining wholly-owned foreign operations will be converted
to licensee/distributor formats by December 2000. See Note 18 of Notes to
Consolidated Financial Staements.
14
<PAGE>
Earnings (Loss) from Operations
The Company recorded earnings from operations in Fiscal 1999 of $7.4 million,
compared to loss from operations of $1.8 million in Fiscal 1998. This change
was primarily due to the factors discussed above.
Interest Expense
Interest expense for Fiscal 1999 increased 20.5% to $22.3 million from $18.5
million in Fiscal 1998. The increase reflects higher credit facility fees
during Fiscal 1999 compared to Fiscal 1998, as well as higher interest costs
associated with the secured notes issued in September 1998.
Other (Income) Expense
Other expenses for Fiscal 1999 of $1.0 million was mainly comprised of a legal
settlement. Other income for Fiscal 1998 of $0.4 million was mainly comprised of
a gain of $1.0 million on the sale of the Company's Reynosa, Mexico
manufacturing facility, partially offset by foreign exchange losses.
Income Tax Expense
Income tax expense for Fiscal 1999 was $27.7 million compared to $3.6 million
for Fiscal 1998. As of January 1, 2000, the Company's gross deferred tax assets
were $63.0 million, which was the result of net operating loss carryforwards and
other future tax deductible items totaling $162.8 million. Although the period
to use these deferred tax assets is 10 to 20 years for tax purposes, the
accounting guidance requires that a shorter time frame be used to assess the
probability of their realization. Due to the limited degree of certainty in
estimating which business and tax planning strategies under consideration will
be executed, the Company incurred a net charge to income tax expense of $24.8
million to establish a full valuation allowance of $63.0 million against its
deferred tax assets.
Extraordinary (Gain) Loss
During Fiscal 1998, the Company reported an extraordinary gain of $0.7
million, net of tax. The extraordinary gain related to the cancellation of
outstanding subordinated notes the Company exchanged for newly issued secured
notes, net of financing fees that were written off in connection with the debt
transactions.
Net Loss
Due to the factors described above, the Company recorded a net loss of $ 43.6
million in Fiscal 1999 compared to a $22.8 million net loss in Fiscal 1998.
15
<PAGE>
Net Loss Per Share
The Company recorded a net loss per share of $2.50 in Fiscal 1999 compared to
a net loss per share of $1.32 in Fiscal 1998. The weighted average number of
outstanding shares in Fiscal 1999 was 17,413,859 versus 17,319,377 in Fiscal
1998.
Comparison of Fiscal 1998 and Fiscal 1997
The following table sets forth certain items related to operations and such
items as a percentage of net sales for Fiscal 1998 and Fiscal 1997:
<TABLE>
<CAPTION>
Fiscal Year Ended
---------------------------------------------------------
January 3, 1998 % January 2, 1999 %
----------------- ------- ---------------- ------
(Dollars in thousands, except per share amounts)
<S> <C> <C> <C> <C>
Net sales............................................................. $450,199 100.0 $308,353 100.0
Gross profit.......................................................... 120,941 26.9 70,682 22.9
Selling, general and administrative expenses.......................... 127,261 28.3 92,683 30.1
Royalty income........................................................ 22,569 5.0 20,175 6.5
Restructuring expenses................................................ 1,537 0.3 --- ---
Earnings (loss) from operations....................................... 14,712 3.3 (1,826) (0.6)
(Credit) on investment in unconsolidated subsidiary................... (12,537) (2.8) --- ---
Interest expense, net................................................. 16,133 3.6 18,487 6.0
Other(income) expense, net............................................ 2,267 0.5 (366) (0.1)
Earnings (loss) from continuing operations before income tax.......... 8,849 2.0 (19,947) (6.5)
Income tax expense.................................................... 13,154 2.9 3,572 1.2
Loss from continuing operations....................................... (4,305) (1.0) (23,519) (7.6)
Basic and diluted loss per share from continuing operations........... $ (0.25) --- $ (1.36) ---
Extraordinary (gain) loss, net of tax................................. 744 0.2 (704) (0.2)
Net loss.............................................................. $ (5,049) (1.1) $(22,815) (7.4)
Basic and diluted net loss per share.................................. $ (0.29) $ (1.32)
</TABLE>
Net Sales
Net sales for Fiscal 1998 decreased to $308.4 million from $450.2 million in
Fiscal 1997, a 31.5% reduction. The $141.8 million net sales reduction in
Fiscal 1998 is attributable to decreases of 53.7%, 51.1%, 37.7% and 2.8% in the
basketball, children's, cross training and athletic originals categories,
respectively, compared to Fiscal 1997. These decreases were partially offset by
a $7.0 million increase in the Company's new action sports category.
Net sales in the United States decreased 41.5% to $166.6 million for Fiscal
1998 from $284.9 million for Fiscal 1997. Net sales decreased 14.2%
internationally to $141.8 million for Fiscal 1998 from $165.3 million for Fiscal
1997. Net sales in the Europe, Middle East and Africa ("E.M.E.A."), Pacific and
Latin America regions were down 3.8%, 15.8% and 57.1%, respectively.
Gross Profit
Gross profit decreased to $70.7 million in Fiscal 1998 from $120.9 million in
Fiscal 1997, a 41.5% decline. The industry downturn and related volume
decreases accounted for the majority of the gross profit reduction over the
period. As a percentage of net sales, gross profit fell to 22.9% in Fiscal 1998
compared to 26.9% for the prior year period. The decline was caused primarily
by the highly promotional and over-inventoried environment that has led to
reduced demand in the Company's performance categories and has resulted in price
reductions for basketball, children's and cross training products. The
Company's efforts to reduce inventory levels through the clearance of product
from past seasons have also contributed to the decline.
16
<PAGE>
Selling, General and Administrative Expenses
In order to address the current industry conditions, the Company took
aggressive actions in 1998 to reduce its operating expenses. Selling, general
and administrative expenses, which are primarily comprised of direct selling,
advertising, and promotion expenses in addition to employee salaries and
benefits and other overhead costs, decreased $34.6 million to $92.7 million for
Fiscal 1998 from $127.3 million for Fiscal 1997, a 27.2% decrease. This
reduction was mainly attributable to decreased spending in global selling,
marketing, advertising and promotion activities, as well as staff reductions to
partially offset the effects of the industry downturn. Also contributing to the
reduction in selling, general and administrative charges in 1998 was a gain of
$9.3 million resulting from the termination of the post-retirement medical
benefit plan and a gain of $1.6 million resulting from pension curtailment
related to workforce reductions. These gains were partially offset by a $1.8
million severance charge related to workforce reduction in 1998. As a
percentage of net sales, selling, general and administrative expenses increased
to 30.1% for Fiscal 1998 from 28.3% for the prior year.
Royalty Income
Royalty income decreased 10.6% to $20.2 million in Fiscal 1998 from $22.6
million in Fiscal 1997. International royalty income, which represented 84.8%
of the Company's total royalty income, declined 8.8%. The reduction was
primarily attributable to decreases of 25.3% and 40.6% in the Southeast Asia and
E.M.E.A. regions, respectively. Domestic royalty income decreased by 19.4% to
$3.1 million for Fiscal 1998. The decreases are representative of the slowdown
in the athletic footwear business and were exacerbated by the deterioration of
the economies in Southeast Asia and the strength of the U.S. dollar worldwide.
These declines were partially offset by an 11.9% improvement in royalty income
derived from Japan. As a percentage of net sales, royalty income increased to
6.5% in Fiscal 1998 compared to 5.0% in the prior year.
Restructuring Expenses
In the fourth quarter of Fiscal 1997, the Company established pretax
restructuring reserves of $2.1 million related to a workforce reduction and the
elimination of certain unprofitable retail stores. This restructuring charge
was partially offset by the reversal of previously written-off expenses relating
to the closing of the Mission, Texas manufacturing facility in the first quarter
of Fiscal 1997.
Earnings (Loss) from Operations
The Company recorded a loss from operations in Fiscal 1998 of $1.8 million,
compared to earnings from operations of $14.7 million in Fiscal 1997. This
change was primarily due to the factors discussed above.
Credit on Investment in Unconsolidated Subsidiary
In Fiscal 1997, the Company recorded a pretax credit totaling $13.2 million
related to the settlement of certain claims by the Company related to the
Company's 1995 acquisition of Apex One, Inc. ("Apex"). This amount was
partially offset by additional Apex-related legal and settlement costs incurred
in the fourth quarter of Fiscal 1997, finalizing all remaining outstanding
litigation relating to the Company's investment in Apex. The net activity for
Fiscal 1997 was a net credit on investment in unconsolidated subsidiary of $12.5
million. At January 2, 1999, there were no remaining claims against the Company
related to its 1995 acquisition of Apex. See Note 3 to the Consolidated
Financial Statements of the Company included herein.
Interest Expense
Interest expense for Fiscal 1998 increased 14.9% to $18.5 million from $16.1
million in Fiscal 1997. The increase reflects higher borrowing levels in Fiscal
1998 compared to Fiscal 1997 and the reversal of $1.4 million of interest
payments previously paid into escrow on the subordinated notes issued to former
owners of Apex and subsequently surrendered to the Company upon settlement of
the Company's claims against them in 1997.
17
<PAGE>
Other (Income) Expense
Other income for Fiscal 1998 of $0.4 million was comprised primarily of the
$1.0 million gain on the sale of the Company's Reynosa, Mexico manufacturing
facility offset by foreign exchange losses. The Fiscal 1997 expense of $2.3
million was primarily related to foreign exchange losses attributable to the
appreciation of the U.S. dollar. Since the third quarter 1997, the Company has
entered into foreign exchange contracts and currency options as part of a
strategy to reduce its exposure to foreign currency fluctuations.
Income Tax Expense
Income tax expense, excluding the effect of extraordinary items, for Fiscal
1998 was $3.6 million, compared to $13.2 million for Fiscal 1997. As of January
2, 1999, the Company's gross deferred tax assets were $54.1 million, which was
the result of net operating loss carryforwards and other future tax deductible
items totaling $133.2 million. Although the period to use these deferred tax
assets is 11 to 20 years for tax purposes, the accounting guidance requires that
a shorter time frame be used to assess the probability of their realization. As
a result of the uncertainty caused by the industry downturn which began in the
last half of Fiscal 1997 and the related oversupply of inventory in the
marketplace in Fiscal 1998, the Company incurred a charge to income tax expense
of $9.4 million to increase its deferred tax valuation allowance to a total of
$30.8 million.
Extraordinary (Gain) Loss
During Fiscal 1998, the Company reported an extraordinary gain of $0.7
million, net of tax. The extraordinary gain related to the cancellation of
outstanding subordinated notes the Company exchanged for newly issued secured
notes, net of financing fees that were written off in connection with the debt
transactions. During Fiscal 1997, the Company entered into a new $150.0 million
secured credit agreement replacing its former credit agreement. In connection
with the repayment of the former credit agreement, the Company wrote-off
deferred financing fees of $1.3 million which resulted in an extraordinary loss
net of tax of $0.7 million.
Net Loss
Due to the factors described above, the Company recorded a net loss of $22.8
million in Fiscal 1998 compared to a $5.0 million net loss in Fiscal 1997.
Net Loss Per Share
The Company recorded a net loss per share of $1.32 in Fiscal 1998 compared to
a net loss per share of $0.29 in Fiscal 1997. The weighted average number of
outstanding shares in Fiscal 1998 was 17,319,377 versus 17,271,911 in Fiscal
1997.
Liquidity and Capital Resources
Cash Flow
Net cash provided by operating activities was $10.7 million in Fiscal 1999
versus $0.6 million in Fiscal 1998. In Fiscal 1999, the net loss of $7.2
million (after giving effect to adjustments for non-cash items of depreciation
and amortization of $4.0 million, deferred tax charge of $24.8 million and
provision for restructuring actions of $7.7 million) was offset by cash provided
from reductions in working capital needs of $16.7 million due principally to
reduced accounts receivable from lower sales and from reductions in other long-
term assets and liabilities of $1.2 million. In Fiscal 1998, the net loss of
$26.9 million (after giving effect to adjustments for non-cash items) and
requirements for changes in other long term assets and liabilities of $10.3
million, principally the reduction in the long term liability due to the
elimination of deferred postretirement medical benefits, were offset by cash
provided of $37.8 million from the reduction in working capital needs fueled by
significant reductions in receivables and inventories.
Net cash used by investing activities was $2.7 million in Fiscal 1999 and
consisted of additions to, and normal replacement of, fixed assets. Net cash
used by investing activities was $3.6 million in Fiscal 1998. Additions to
property,
18
<PAGE>
plant and equipment of $4.8 million were partially offset by proceeds received
of $1.2 million from the disposal of assets, principally the sale of a
manufacturing facility in Reynosa, Mexico to accommodate the Company's move to a
larger leased facility.
In Fiscal 1999, net cash used by financing activities was $9.1 million. Cash
was used to reduce short-term debt relating to financing arrangements in the
Company's European operation's by $7.2 million and to reduce borrowings
outstanding in the Credit Facility (see Financing Arrangements below) by $2.3
million. Partially offsetting the use of cash for debt reduction was $0.3
million of net cash provided from the exercise of warrants issued in conjunction
with the Secured Notes (see Financing Arrangements below) and $0.2 million of
net cash provided from the sale of Common Stock relating to the Company's
employee stock purchase plan. Net cash provided by financing activities was
$1.2 million for Fiscal 1998. Net proceeds received from the issuance of
Secured Notes (as defined below) of $24.0 million and short term debt of $0.2
million generated by the asset based financing arrangements of the Company's
European operations were used to reduce revolving debt by $23.0 million
outstanding under the Credit Facility (see Financing Arrangements below).
Working Capital
The Company's working capital position, net of cash, was a deficit of $44.7
million on January 1, 2000 versus a deficit of $0.6 million on January 2, 1999.
Total current assets, net of cash, were $119.8 million at January 1, 2000,
down $17.1 from $136.9 million at January 2, 1999. The decrease was principally
related to accounts receivable, decrease in $17.3 million, due to reduced sales
in Fiscal 1999. Total current liabilities increased $27.0 million, from $137.5
million at January 2, 1999 to $164.5 million at January 1, 2000. The major
portion of this increase was related to the reclassification of $28.2 million of
Senior Notes (see Financing Arrangements below) from long-term debt to current
liabilities in the fourth quarter of Fiscal 1999. Accounts payable, income
taxes payable and accrued expenses increased $8.7 million in the aggregate from
the prior year due in large part to reserves for restructuring expense
recognized in the fourth quarter of Fiscal 1999. (See Note 4 of the Company's
Notes to Consolidated Financial Statements). This was offset at January 1, 2000
by a reduction in revolving debt of $2.3 million from the Company's Credit
Facility and a reduction of $7.6 million in short-term debt from asset-based
financings in the Company's European operations (see Financing Arrangements
below).
Financing Arrangements
In September 1998, the Company issued $28.6 million 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
$24.8 million (the "Series A Secured Notes") and Series B in the aggregate
principal amount of $3.8 million (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 a financial covenant relating to minimum EBITDA (as defined
therein) contained in the Secured Notes agreement for the nine month period
ending October 2, 1999. As permitted pursuant to the Secured Notes agreement,
the Company exercised a one-time automatic waiver of non-compliance with this
covenant. On November 23, 1999, the Secured Notes agreement was amended: to
(1) give consent to the Company to sell its title and interest to the non-
footwear trademarks and assign non-footwear license agreements in Japan,
(2) eliminate a minimum EBITDA (as defined therein) requirement for the twelve
month period ending January 1, 2000 and (3) to decrease the maximum amount
available under the Credit Facility by $6.85 million. The Secured Notes are
classified under current liabilities on the Company's consolidated balance sheet
as of January 1, 2000 as the Company does not believe that it is probable that
every covenant in the Secured Notes agreement will remain in compliance over the
next twelve month period.
Upon issuance of the Series A Secured Notes the Company received gross
proceeds of $24.0 million after discount from the face amount of $0.9 million.
In connection with the issuance of the Series A Secured Notes, the Company
issued warrants to purchase 360,000 shares of the Common Stock to the purchasers
and paid funding fees to certain purchasers amounting to $0.4 million. The
warrants were valued at $1.22 per share, vest immediately and expire on May 21,
2002.
19
<PAGE>
In May 1999 warrants to purchase 91,412 shares of the Common Stock were
exercised at $2.9375 per share. Warrants outstanding on January 1, 2000 were
268,588. The Company paid a placement fee of 4% of the gross proceeds, or $1.0
million, with respect to the Series A Secured Notes. The Series A Secured Notes
carry a second priority perfected lien on all real and personal, tangible and
intangible assets of the Company.
The Series B Secured Notes were issued in exchange for the surrender of $5.7
million face amount of Convertible Notes (see below), 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
$0.1 million. The Series B Secured Notes carry a third priority perfected lien
on all real and personal, tangible and intangible assets of the Company.
On May 21, 1997, the Company issued $80.0 million of 7% Convertible
Subordinated Notes (the "Convertible Notes") due June 1, 2004. As discussed
above, in September 1998 the Company received, and subsequently cancelled, $5.7
million of Convertible Notes in exchange for the issuance of the Series B
Secured Notes leaving $74.3 million face amount of Convertible Notes outstanding
as of January 1, 2000. The Convertible Notes are subordinated to all existing
and future Senior Indebtedness (as defined therein). The Convertible Notes are
convertible into Common Stock at any time prior to maturity, unless previously
redeemed, at the option of the holder, at a conversion 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, commencing on December 1, 1997. Proceeds from the
Convertible Notes were used to repay indebtedness under the Company's then
existing credit agreement (the "Old Credit Facility").
Simultaneously with the issuance of the Convertible Notes in May 1997 (see
above), the Company entered into a new $150.0 million secured credit agreement
(the "Credit Facility") with BT Commercial Corporation ("BTCC") for revolving
loans, letters of credit, foreign exchange contracts and banker acceptances and
repaid the Old Credit Facility. In July 1997, BTCC, as agent, syndicated the
Credit Facility to a group of participating lenders (the "Banks"). In September
1998, the Credit Facility was amended to decrease the commitment from $150.0
million to $120.0 million in conjunction with the issuance of the Secured Notes.
In November 1999, the Company reduced the commitment from $120.0 million to
$90.0 million. 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 "Borrowing
Base"). The aggregate of letters of credit, foreign exchange contracts and
banker acceptances may not exceed $40.0 million 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 $71.6 million are
classified as current due to the Company's lockbox arrangement (whereby payments
by the Company's customers are deposited in a lockbox controlled by the Banks)
and certain clauses contained in the Credit Facility regarding mandatory
repayment that involve subjective judgments by the Banks. This classification
is required by Emerging Issues Task Force 95-22, "Balance Sheet Classification
of Borrowings Outstanding under a Revolving Credit Agreement that Includes both
a Subjective Acceleration Clause and a Lockbox Arrangement."
As of January 1, 2000, the Borrowing Base was $84.8 million. Utilization
under the Credit Facility at year end amounted to $75.0 million, consisting of
revolving loans of $66.7 million, banker acceptances of $4.9 million and
outstanding letters of credit of $3.4 million. Accordingly, $9.8 million of the
maximum available Borrowing Base remained unutilized as of January 1, 2000.
Under the terms of the Supplement To Note Purchase Agreements signed November
23, 1999 (see the Secured Notes above), the Company may not borrow amounts under
the revolving credit facility if such amounts would exceed the maximum permitted
amount available to borrow less $6.8 million, thus the net availability as of
January 1, 2000 were $3.0 million. In May 1999, the Credit Facility was amended
to allow for $6.0 million of additional borrowing base through July 31, 1999.
Subsequent amendments to the Credit Facility have extended this additional
borrowing 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.
Revolving loans under the Credit Facility bear interest either at the Prime
Lending Rate (as defined therein) plus one percent (1.00%) per annum or at the
Adjusted LIBOR Rate (as defined therein) plus a margin of two and one-half
percent (2.50%) per annum. In November 1999, the Credit Facility was amended to
increase the LIBOR margin rate to three percent (3.00%) per annum. At January
1, 2000, revolving loans outstanding under the Credit Facility bore interest of
9.23% based upon the weighted average of the Prime Lending Rate and Adjusted
LIBOR Rate. Obligations outstanding
20
<PAGE>
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. In September 1998, the Company's Credit Facility was amended to
permit the issuance of the Secured Notes as discussed above. The amendment
decreased the commitment under the Credit Facility from $150.0 million to $120.0
million, increased the annual collateral management fee from $0.1 million to
$0.125 million and changed a financial performance covenant contained therein.
The Company was not in compliance with its financial covenant for maintenance of
minimum EBITDA (as defined therein) for the nine month period ending October 2,
1999. In November 1999, the Banks waived the Company's failure to comply with
this financial covenant as of October 2, 1999. In connection with this waiver,
the Credit Facility was amended to reduce the credit commitment from $120.0
million to $90.0 million. As of January 1, 2000, the Company was not in
compliance with the minimum EBITDA covenant of the Credit Facility. In March
2000, the Banks waived the Company's non-compliance with this minimum EBITDA
covenant for the twelve month period ending January 1, 2000. The Company does
not believe that it is probable that it will remain in compliance with every
covenant contained in the Credit Facility over the next twelve month period.
Subsidiaries of the Company maintain asset based financing arrangements in
certain European countries with NMB-Heller, N.V. or an affiliate. In general,
these financing arrangements allow the Company to borrow against varying
percentages of eligible account receivable balances, along with varying
percentages of inventory, as defined. Total short-term borrowings outstanding
under these financing arrangements were $2.0 million at January 1, 2000.
Interest is payable at the respective lender's base rate plus 1.5% (varying by
country from 5.5% to 8.25% at January 1, 2000). The obligations are secured by
a first priority lien on the respective European assets being financed. In
addition, Converse has provided guarantees of these borrowings.
Future Financing Needs
In the current industry environment, the Company continues to have additional
financing needs to provide funds for operations and to respond to the challenges
in the industry. On March 31, 2000, the Company announced that for several
months it has been working with its financial advisor, Universal Credit Corp., a
specialty investment bank minority owned by Deutsche Bank and Prudential
Securities, on a financing transaction which would securitize the Company's
trademarks, licensing agreements and all related future royalties income. Based
upon the Company's 1999 adjusted royalty income, and subject to the
transaction's final rating, the transaction is expected to result in
approximately $85 million of gross proceeds. There can be no assurance that
this financing transaction will be completed, and a failure to complete the
transaction could materially and adversely affect the Company's liquidity and
ability to carry on its business.
Capital Expenditures
Capital expenditures were $2.7 million, $4.8 million and $5.9 million in
Fiscal 1999, Fiscal 1998 and Fiscal 1997, respectively. Fiscal 1999 investments
included $0.8 million to maintain and upgrade the Company's manufacturing
facilities in North Carolina, Texas and Mexico, $1.6 million in information
technology to support improvements in networking and international operations
and $0.3 million on various smaller projects and improvements.
In Fiscal 1998, investments were made in information technology and software,
principally to upgrade systems in the Company's European operations for $1.9
million, in ongoing improvements in the Company's manufacturing processes at its
facilities in North Carolina, Texas and Mexico for $1.8 million and other
various smaller projects and expenditures for $1.1 million.
Fiscal 1997 investments included $0.5 million on building improvements
primarily to upgrade the heating system at the corporate office, $0.5 million on
leasehold improvements primarily to open or remodel the Company's retail stores,
$1.6 million to maintain and upgrade the Company's manufacturing facilities in
North Carolina, Texas and Mexico, $0.7 million to maintain and upgrade the
Company's distribution facility in Charlotte, North Carolina, $1.2 million in
information technology to support improvements in networking and international
operations and $1.4 million on various smaller projects and improvements.
21
<PAGE>
Impact of Recently Issued Accounting Pronouncements
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 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).
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK.
- --------------------------------------------------------------------
Interest Rate Risk
At January 1, 2000, the carrying value of the Company's debt totaled $176
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 January 1, 2000, the Company had fixed rate debt of $102.5 million and
variable rate debt of $73.5 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 January 1, 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 subsidiaries with foreign operations and
royalty income from other sources outside the United States, the Company has
used forward foreign exchange contracts and foreign currency options with
durations of generally from three to twelve months.
As of January 1, 2000, the Company had outstanding the following foreign
exchange forward contracts and currency options:
<TABLE>
<CAPTION>
(currency per USD)
Notional Average Estimated
Amount Contract Rate Fair Value
------ ------------- ----------
(Dollars in thousands)
<S> <C> <C> <C>
Foreign exchange sell forward contracts:
Japanese Yen....................................... $2,480.5 112.23 $(249.6)
Australian Dollar.................................. $ 476.3 1.59 $( 17.7)
</TABLE>
22
<PAGE>
Commodity Price Risk
Raw materials used by the Company are subject to price volatility caused by
weather, supply conditions and other unpredictable factors. The Company does
not have a program of hedging activity to address these risks.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTAL DATA.
- ----------------------------------------------------
The information required by this Item is submitted in a separate section of
this report. See Item 14 for index to financial statements required by this
Item.
ITEM 9. CHANGE IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
- -----------------------------------------------------------------------
FINANCIAL DISCLOSURE.
- ---------------------
Not applicable.
23
<PAGE>
PART III
--------
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
- -------------------------------------------------------------
Information required by this Item with respect to the Company's directors and
executive officers is set forth below.
Directors and Executive Officers of the Company
<TABLE>
<CAPTION>
Name Age Position
- ---- --- --------
<S> <C> <C>
Glenn N. Rupp................................................... 55 Chairman of the Board and
Chief Executive Officer
Donald J Barr................................................... 65 Director
Julius W. Erving................................................ 50 Director
Robert H. Falk.................................................. 61 Director
Gilbert Ford.................................................... 68 Director
Michael S. Gross................................................ 38 Director
John J. Hannan.................................................. 47 Director
Joshua J. Harris................................................ 35 Director
John H. Kissick................................................. 58 Director
Richard B. Loynd................................................ 72 Director
Michael D. Weiner............................................... 47 Director
Donald J. Camacho............................................... 49 Senior Vice President and
Chief Financial Officer
Jack A. Green................................................... 54 Senior Vice President Administration,
General Counsel and Secretary
Herbert R. Rothstein............................................ 58 Senior Vice President, Products
James E. Solomon................................................ 44 Senior Vice President, Sales and
Marketing
Alistair M. Thorburn............................................ 42 Senior Vice President, International
and U.S. Operations
James E. Lawlor................................................. 46 Vice President, Finance and Treasurer
</TABLE>
Mr. Rupp was elected Chairman of the Board and Chief Executive Officer by
Converse's Board of Directors on April 11, 1996. From August 1994 to April 1996,
Mr. Rupp was the Acting Chairman of McKenzie Sports Products, Inc. and a
Strategic Planning Advisor for CRC Industries, Inc. Mr. Rupp was President and
Chief Executive Officer of Simmons Upholstered Furniture Inc. from August 1991
until May 1994. Prior to 1991, Mr. Rupp held various positions with Wilson
Sporting Goods Co., including President and Chief Executive Officer from 1987 to
1991. Mr. Rupp is also a director of Consolidated Papers, Inc. and Johnson
Worldwide Associates, Inc.
Mr. Barr was an Executive Vice President of Time Inc. from October 1990 until
his retirement in 1996. Prior to 1990, Mr. Barr was the publisher of Sports
Illustrated (1985 - 1990) and Vice President of Time Inc. (1987 - 1990). Mr.
Barr was an employee of Time Inc. for 39 years.
Mr. Erving has been the President of The Erving Group since 1979 and Vice
President of RDV Sports and Executive Vice President of the Orlando Magic since
1997. Mr. Erving is also a part owner of Philadelphia Coca-Cola bottling
Company. He was a member of the Philadelphia 76'ers basketball team until April
1987 and has been an endorser of Converse products since 1975. Mr. Erving is
also a director of Philadelphia Coca-Cola Bottling Company, The Sports
Authority, Inc., Saks Holding Co., Inc., Darden Restaurants, Inc. and L.C.I.
International.
24
<PAGE>
Mr. Falk has been an officer of Apollo Capital Management, Inc. ("Apollo
Capital") and Lion Capital Management, Inc. ("Lion Capital") since 1992. Mr.
Falk is also a director of Florsheim Group Inc. and Samsonite Corporation.
Mr. Ford served as Vice Chairman of the Board of Converse from April 11, 1996
to December 1, 1996, as which time Mr. Ford retired from Converse. Mr. Ford
served as Chairman of the Board of Converse from September 1994 to April 1996
and as Chief Executive Officer of Converse from October 1986 to April 1996.
Previously, Mr. Ford held various positions within Converse, including President
(October 1986 to September 1994), and was an employee of Converse for over 34
years.
Mr. Gross is one of the founding principals of Apollo Advisors L.P. and Lion
Advisors L.P. and has served as an officer of Apollo Capital and Lion Capital
since 1990. Mr. Gross is also a director of Allied Waste Industries, Inc.,
Florsheim Group Inc., Rare Medium, Inc., Saks Holding Co., Inc. and United
Rentals, Inc.
Mr. Hannan is one of the founding principals of Apollo Advisors L.P., Lion
Advisors L.P. and Apollo Real Estate Advisors, L.P. and has served as an officer
and director of Apollo Capital and Lion Capital since 1990 and of Apollo Real
Estate Management, Inc. ("Apollo Real Estate") since 1993. Mr. Hannan is also a
director of Florsheim Group Inc. and United Auto Group, Inc.
Mr. Harris is an officer of Apollo Capital and Lion Capital, having been
associated with them since 1990. Mr. Harris is also a director of Florsheim
Group Inc., Quality Distribution, Inc. and NRT, Incorporated.
Mr. Kissick is one of the founding principals of Apollo Advisors L.P. and Lion
Advisors L.P. and has served as an officer of Lion Capital and consultant to
Apollo Capital since 1991. Mr. Kissick is also a director of Continental
Graphics Holdings, Inc., Florsheim Group Inc. and MTL, Inc.
Mr. Loynd served as Chairman of the Board of Directors of Furniture Brands
International, Inc. from 1990 through 1998. Mr. Loynd was also Chief Executive
Officer of Furniture Brands International, Inc. from 1989 through October 1996.
Mr. Loynd was Chairman of the Board of Converse from 1982 to August 1994. Mr.
Loynd is also a director of Emerson Electric Co.
Mr. Weiner has been an officer of Apollo Capital and of Lion Capital since
1992 and of Apollo Real Estate since 1993. Prior to 1992, Mr. Weiner was a
partner in the law firm of Morgan, Lewis & Bockius LLP. Mr. Weiner is also a
director of Continental Graphics Holdings, Inc., Florsheim Group Inc., Quality
Distribution, Inc., NRT, Incorporated and WMC Finance Co., Inc.
Mr. Camacho has served as Senior Vice President and Chief Financial Officer
since September 1994. Previously, Mr. Camacho held positions of increasing
responsibility with Converse since 1974.
Mr. Green has served as Senior Vice President Administration, General Counsel
and Secretary since May 1998. Prior to that, Mr. Green served as Senior Vice
President, General Counsel and Secretary since August 1985, having joined the
Company as Vice President, Legal in 1983. Since 1996, Mr. Green has also served
as an Adjunct Professor at Emmanuel College in Boston, Massachusetts and Tufts
University in Medford, Massachusetts. Mr. Green is a director of Arrow Mutual
Liability Insurance Company.
Mr. Rothstein has served as Senior Vice President, Products since December
1999. Previously, Mr. Rothstein was Senior Vice President, Production from 1996
to 1999, Senior Vice President, Sourcing from 1992 to 1996, Senior Vice
President of Materials Management and Manufacturing from 1991 to 1992 and Vice
President of Materials Management from 1988 to 1991. Before joining Converse,
Mr. Rothstein held several senior management positions with Reebok International
Ltd. from 1985 to 1988; Morse Shoe Inc. from 1973 to 1985, BGS Shoe Corporation
from 1969 to 1972 and Signet from 1964 to 1969.
25
<PAGE>
Mr. Solomon has served as Senior Vice President, Sales and Marketing since May
1998. Prior to that, Mr. Solomon served as Senior Vice President, Marketing
since October 1996. Previously, Mr. Solomon worked for Lenox Inc. from August
1990 to September 1996 in a number of senior positions, including President and
Chief Operating Officer of the Dansk International Design division from May 1994
to September 1996 and Gorham, Kirk-Stieff, Dansk division from July 1991 to May
1994. He also has experience in the athletic footwear industry, having served as
Executive Vice President of Kangaroos USA from 1989 to 1990, Vice President,
Marketing of Avia Athletic Footwear from 1985 to 1988, and Group Product
Manager, New Balance Athletic Shoes from 1981 to 1983.
Mr. Thorburn has served as Senior Vice President, International and U.S.
Operations since January 2000. Previously, Mr. Thorburn was Senior Vice
President, International from 1996 to 1999. Prior to joining the Company, Mr.
Thorburn was Vice President Europe/Asia Pacific for the Wilson Sporting Goods
Co., Ltd. from 1987 to 1993.
Mr. Lawlor has served as Vice President, Finance and Treasurer since June
1995. Previously, Mr. Lawlor held the positions of Vice President and Treasurer
from September 1994 to June 1995, and other positions of increasing
responsibility since 1975.
Compliance with Section 16(a) of the Securities Exchange Act
Section 16(a) of the Securities Exchange Act of 1934 (the "1934 Act") requires
the Company's directors and executive officers, and certain other officers and
persons who own more than ten percent of a registered class of the Company's
equity securities, to file with the Securities and Exchange Commission ("SEC")
initial reports of ownership and reports of changes in ownership of Common Stock
and other equity securities of the Company. Officers, directors and greater
than ten percent stockholders are required by SEC regulation to furnish the
Company with copies of forms they file. To the Company's knowledge, based
solely on review of the copies of such reports furnished to the Company and
written representations that no reports were required, all Section 16(a) filing
requirements applicable to its officers, directors and greater than ten-percent
beneficial owners were complied with during 1999.
26
<PAGE>
ITEM 11. EXECUTIVE COMPENSATION.
- ---------------------------------
Summary Compensation Table
<TABLE>
<CAPTION>
Annual Compensation Long-Term Compensation
------------------- ----------------------
Awards
------
Securities
Other Annual Restricted Stock Underlying All Other
Name and Principal Position Year Salary ($) Bonus ($)/(1)/ Compensation ($) Award(s) ($)/(2)/ Options (#) Compensation ($)
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Glen N. Rupp 1999 500,000 0 0 184,375 0 2,500/(4)/
Chairman and Chief 1998 500,000 0 0 222,500 0 2,500
Executive Officer 1997 476,538 0 129,965 0 30,000 2,375
James E. Solomon 1999 300,000 0 0 147,500 0 2,500/(4)/
Senior Vice President 1998 295,192 0 0 0 0 95,500
Sales & Marketing 1997 285,577 0 54,181 0 20,000 93,000
Alistair Thorburn 1999 247,262 0 66,204/(3)/ 147,500 0 24,250/(5)/
Senior Vice President 1998 235,000 0 69,287 166,875 0 24,598
International & U.S. 1997 230,792 0 83,181 0 10,000 23,731
Operations
Jack A. Green 1999 211,769 0 0 73,750 0 2,500/(4)/
Senior Vice President 1998 197,227 0 0 55,625 0 2,500
Administration, General 1997 186,727 0 0 0 15,000 2,375
Counsel and Secretary
Donald J. Camacho 1999 203,235 0 0 73,750 0 2,500/(4)/
Senior Vice President 1998 192,500 0 0 55,625 0 2,500
Chief Financial Officer 1997 192,837 0 0 0 0 2,375
</TABLE>
(1) The Company generally pays bonuses to its executives in the first quarter
of each fiscal year based on the Company's results in the prior year. The
Company paid no bonuses to any Named Executive Officers in 1997, 1998 or
1999.
(2) Amounts shown represent the dollar value of restricted stock awards
calculated by multiplying the closing price of the Company's Common Stock
on the date of grant by the number of shares awarded. The values of all
restricted stock awards at January 1, 2000 based on the closing price of
the Company's Common Stock on the last trading day of the fiscal year
($1.375) were $123,750, $55,000, $96,250, $41,250, and $41,250 for Messrs.
Rupp, Solomon, Thorburn, Green and Camacho, respectively.
(3) Amount shown represents $39,772 worth of relocation and temporary housing
expenses incurred by Mr. Thorburn in connection with his move from the
United Kingdom to Massachusetts, an $18,000 car allowance, and $8,431
relating to amounts reimbursed for the payment of taxes.
(4) Except as otherwise noted, all amounts shown represent payments by the
Company relating to the Company's matching contribution under the Converse
Inc. Thrift Savings Plan.
(5) Amounts represent payment to the Converse U.K. Retirement Benefit Plan in
lieu of Mr. Thorburn's participation in the Converse Inc. Retirement Plan
(see "Retirement Plans" below). Mr. Thorburn does not participate in the
Converse Inc. Thrift Savings Plan.
Retirement Plans
Messrs. Rupp, Solomon, Green and Camacho are participants in the Converse
Inc. Retirement Plan (the "Retirement Plan"), a noncontributory, defined benefit
pension plan designed to provide retirement benefits upon normal retirement at
age 65. Covered remuneration is base salary and, based on a straight life
annuity, annual benefits at normal retirement are equal to the greater of (a)
2.25% of average final compensation (the highest 60 consecutive calendar months
of the last 120 months) multiplied by years of credited service up to a maximum
of 15 years, plus 1.75% of average final compensation multiplied by service in
excess of 15 years up to a maximum of 15 years, less 1.67% of the Social
Security benefit multiplied by credited service up to a maximum of 30 years, or
(b) $10 multiplied by years of credited service. Benefits payable under the
Retirement Plan are limited by certain provisions of the Internal Revenue Code
of 1986, as amended (the "Code"). A supplemental executive retirement plan
("SERP") has been adopted by Converse to provide for payments from general funds
to Messrs. Rupp and Solomon of any retirement income that would otherwise be
payable pursuant to the Retirement Plan in absence of any such limitations. Set
forth below is the credited service under the Retirement Plan as of January 1,
2000 and estimated annual benefits payable upon the normal retirement of each of
the Named Executive Officers, assuming continuation of current covered
remuneration. In the cases of Messrs. Rupp and Solomon such amount includes
amounts payable under the SERP.
27
<PAGE>
<TABLE>
<CAPTION>
Years of
Credited Service Annual
Name at January 1, 2000 Benefits Payable
---- ------------------ ----------------
<S> <C> <C>
Glenn N. Rupp............................................ 3.75 142,395
James E. Solomon......................................... 3.25 136,952
Jack A. Green............................................ 16.17 84,038
Donald J. Camacho........................................ 25.34 92,202
</TABLE>
Mr. Thorburn is not eligible to participate in the Retirement Plan because
he is not a citizen of the United States. In lieu of Mr. Thorburn's
participation in the Retirement Plan, Converse contributes an amount equal to
approximately 10% of Mr. Thorburn's annual salary directly to the Converse U.K.
Retirement Benefit Plan. See "Summary Compensation Table"
Stock Options
The Company granted no stock options or stock appreciation rights to any
Named Executive Officers in 1999.
AGGREGATED OPTION EXERCISES AND FISCAL YEAR-END OPTION VALUES
<TABLE>
<CAPTION>
Number of Securities Underlying Value of Unexercised In-the-Money
Unexercised Options at FY-End Options at FY-End/(1)/
----------------------------- ----------------------
Shares Acquired on Value
Exercise (#) Realized ($) Exercisable (#) Unexercisable (#) Exercisable ($) Unexercisable ($)
------------ ------------ --------------- ----------------- --------------- -----------------
<S> <C> <C> <C> <C> <C>
Glenn N. Rupp 0 0 412,000 118,000 0 0
James E. Solomon 0 0 128,000 92,000 0 0
Alistair Thorburn 0 0 81,000 29,000 0 0
Jack A. Green 0 0 27,000 8,000 0 0
Donald J. Camacho 0 0 79,000 16,000 0 0
</TABLE>
(1) Based on the $1.375 per share closing price of the Common Stock on the New
York Stock Exchange ("NYSE") December 31, 1999.
Employment Contracts
Mr. Rupp entered into a three year employment agreement with the Company in
April 1996. In March 1999, this agreement was extended for a rolling two year
period, so that at any point in time the term remaining under this agreement
shall be two years. Under the agreement, Mr. Rupp was initially entitled to a
base salary of no less than $450,000 plus a bonus of up to 70% of Mr. Rupp's
salary as determined pursuant to the Company's Executive Incentive Plan. In
October 1997, Mr. Rupp's annual base salary was increased to $500,000. At all
times during the term of his agreement, Mr. Rupp shall be entitled to
participate in Converse's medical, dental, 401(k), insurance, retirement and
other employee benefit plans. If Mr. Rupp's employment is terminated by
Converse during the term of the agreement other than for cause (as defined), or
if Mr. Rupp chooses to terminate his employment after being required to relocate
his principal office without his consent, Mr. Rupp shall continue to receive his
annual salary for the longer of (i) the remaining balance of the term of the
agreement or (ii) two years from the date of termination. In addition, in the
event Mr. Rupp's employment is terminated by Converse during the term of the
agreement other than for cause (as defined), all unvested restricted stock
awards held by Mr. Rupp at such time shall automatically vest.
Mr. Solomon entered into an employment agreement with the Company in
September 1996. Under the agreement, Mr. Solomon is entitled to a base salary of
$275,000 annually plus a bonus at a target amount of 55% of Mr. Solomon's
salary. In addition, Mr. Solomon was entitled to allowance payments in the
amount of $93,000 on October 1, 1996, October 1, 1997 and October 1, 1998, which
were intended to compensate Mr. Solomon for certain guaranteed payments that he
would have received from his former employer had he not accepted employment with
Converse. The agreement provides that Mr. Solomon be granted options to purchase
200,000 shares of Common Stock at a price equal to the closing price of such
stock on the date of grant. Such options were granted to Mr. Solomon on
September 16, 1996 at an exercise price of $6.50 per share. These options vest
in 20% increments on each of the first five anniversaries of the grant, except
that in the event Mr. Solomon's employment is terminated, other than by
resignation or for cause, 50% of the then
28
<PAGE>
unvested options shall vest. Mr. Solomon is entitled to participate in
Converse's medical, dental, 401(k), insurance, retirement and other employee
benefit plans. The agreement provides that if Mr. Solomon's employment is
involuntarily terminated by the Company, he would be entitled to 12 months' base
salary.
Mr. Thorburn, Mr. Green and Mr. Camacho each entered into employment
agreements with the Company in October 1995. Under the terms of these
agreements, the Company will pay to the employee an amount equal to his annual
salary in the event that his employment with Converse is involuntarily
terminated.
Compensation Committee Interlocks and Insider Participation
Messrs. Gross and Harris, directors and members of the Executive
Compensation and Stock Option Committee of the Board, are associated with the
Apollo Stockholders which together beneficially own 64.1% of the outstanding
shares of Common Stock of the Company. In November 1994, Converse entered into a
Consulting Agreement with Apollo Advisors L.P. pursuant to which it provides
corporate advisory, financial and other consulting services to the Company. Fees
under the agreement are payable at an annual rate of $500,000 plus out-of-pocket
expenses for a one-year term and the Consulting Agreement is automatically
renewable for successive one-year terms unless terminated by the Board. Converse
has granted registration rights to the Apollo Stockholders, with respect to
their shares of Common Stock. The Apollo Stockholders can require Converse to
file registration statements and to include their shares in registration
statements otherwise filed by Converse. Costs and expenses of preparing such
registration statements are required to be paid by Converse.
Compensation of Directors
Each Converse director who is not an employee of Converse or any Converse
subsidiary is paid a monthly fee of $1,000 and a fee of $1,500 plus expenses for
each meeting of the Board attended. In addition, for attending a meeting of a
committee of the Board, each director who is not an employee of Converse or any
Converse subsidiary is paid a fee of $800 plus expenses if such director is a
member of the committee or $900 plus expenses if such director is the Chairman
of the committee.
In March 1995, the Executive Committee of the Company's Board of Directors
adopted a Non-Employee Director Stock Option Plan (the "1995 Plan"), which
provides for a one-time grant of options to each director who is not employed by
Converse or employed by, or affiliated with, Lion Advisors or AIF (a "Non-
Employee Director"), to purchase 7,500 shares of Common Stock at its fair market
value on the date the options are granted. The Company's stockholders approved
the 1995 Plan at the 1995 Annual Meeting of Stockholders. These options become
exercisable in one-third increments on each of the first three anniversaries of
the grant date. Currently, Messrs. Loynd, Erving and Barr have been granted
options under the 1995 Plan.
On July 28, 1999, the Executive Compensation and Stock Option Committee of
the Board voted, subject to stockholder approval (i) to amend the Converse Inc.
1994 Stock Option Plan to permit the issuance of options under such plan to Non-
Employee Directors and (ii) to issue to each of the Non-Employee Directors as of
July 28, 1999 (Messrs. Barr, Erving, Falk, Ford and Loynd) options to purchase
5,000 shares of Common Stock at an exercise price per share of $ 3.4375 (the
closing price on that day), with such options vesting at the rate of 20% per
year on the anniversary date of the grant. The Company intends to seek
stockholder approval for the proposed amendment at the 2000 Annual Meeting of
Stockholders.
29
<PAGE>
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
- -------------------------------------------------------------------------
The following table sets forth certain information (as of March 31, 2000,
except as otherwise noted) regarding the beneficial ownership of shares of
Common Stock by (i) each person known by Converse to beneficially own more than
5% of the outstanding shares of Common Stock, (ii) each executive officer named
in the Summary Compensation Table below, (iii) each director of Converse and
(iv) the directors and executive officers of Converse as a group.
<TABLE>
<CAPTION>
Number of Shares Percent of Common
Beneficially Stock Beneficially
Greater than 5% Stockholders Owned Owned
---------------------------- ------------- -------------
<S> <C> <C>
Apollo Investment Fund, L.P., c/o Apollo Advisors, L.P.
and
Lion Advisors, L.P.
Two Manhattanville Road
Purchase, New York 10577 (1).................................... 11,230,365 64.1%
Directors and Executive Officers
--------------------------------
Glenn N. Rupp/(2)/.............................................. 427,000 2.4
James E. Solomon/(2)/........................................... 130,000 *
Alistair M. Thorburn/(2)/....................................... 81,000 *
Jack A. Green/(2)/.............................................. 27,195 *
Donald J. Camacho/(2)/.......................................... 84,000 *
Donald J. Barr/(2)/............................................. 7,500 *
Julius W. Erving/(2)/........................................... 7,500 *
Robert H. Falk/(1)//(3)/........................................ 11,230,365 64.1
Gilbert Ford/(2)/............................................... 10,000 *
Michael S. Gross/(1)//(3)/...................................... 11,230,365 64.1
John J. Hannan/(1)//(3)/........................................ 11,230,365 64.1
Joshua J. Harris/(1)//(3)/...................................... 11,230,365 64.1
John H. Kissick/(1)//(3)/....................................... 11,230,365 64.1
Richard B. Loynd/(2)/........................................... 44,666 *
Michael D. Weiner/(1)//(3)/..................................... 11,230,365 64.1
Directors and executive officers of the
Company as a group (17 persons)............................... 12,099,223 69.1%
- ----------------------------------------------------------------
</TABLE>
* less than 1%.
(1) Includes (i) 5,616,306 shares beneficially owned by Apollo Investment
Fund, L.P. ("AIF") and (ii) 5,614,059 shares beneficially owned by Lion
Advisors, L.P. ("Lion Advisors") for the benefit of an investment account
under management over which Lion Advisors has sole investment, voting and
dispositive power. The managing general partner of AIF is Apollo
Advisors, L.P., whose general partner is Apollo Capital. The general
partner of Lion Advisors is Lion Capital.
(2) Shares beneficially owned represent options to purchase Converse Common
Stock that are exercisable within 60 days, except for shares held of
record by the following: Mr. Rupp 15,000 shares, Mr. Solomon 2,000
shares, Mr. Green 195 shares, Mr. Camacho 5,000 shares, Mr. Ford 10,000
shares, and Mr. Loynd 37,166 shares.
(3) Mr. Hannan is a director and officer of Apollo Capital and Lion Capital.
Messrs. Falk, Gross, Harris and Weiner are officers of Apollo Capital and
Lion Capital. Mr. Kissick is an officer of Lion Capital and a consultant
to Apollo Capital. Each such director disclaims beneficial ownership of,
and a personal pecuniary interest in, the shares beneficially owned by
AIF and Lion Advisors.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
- ---------------------------------------------------------
Mr. Erving has a contract with Converse whereby he has agreed to perform
certain services. The agreement provides for Mr. Erving's endorsement of the
Company's footwear and activewear, the right to use his name and likeness to
advertise the Company's products, promotional appearances, and advertising
production and product development consultation. The agreement provides for an
annual fee of $200,000 and expires on September 30, 2000.
30
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K.
- --------------------------------------------------------------------------
(a) List of documents filed as part of this report.
1. Financial statements:
The following consolidated financial statements are included in Item 8
and presented as a separate section of this report:
<TABLE>
<CAPTION>
Page
----
<S> <C>
Report of Independent Accountants F-2
Consolidated Balance Sheet at
January 2, 1999 and January 1, 2000 F-3
For each of the fiscal years ended January 3, 1998,
January 2, 1999 and January 1, 2000:
Consolidated Statement of Operations F-4
Consolidated Statement of Cash Flows F-5
Consolidated Statement of Stockholders' Equity F-6
and Comprehensive Income
Notes to Consolidated Financial Statements F-7
2. Financial Statement Schedule:
For each of the fiscal years ended January 3, 1998,
January 2, 1999 and January 1, 2000:
Schedule II - Valuation and Qualifying Accounts F-26
All other schedules are omitted because they are not applicable
or because the required information is presented in the consolidated
financial statements or notes thereto.
</TABLE>
3. Exhibits
3.1 Restated Certificate of Incorporation (3)
3.2 By-laws (3)
4. Indenture dated as of May 21, 1997 between Converse and First
Union National Bank, as Trustee, relating to Converse Inc. 7%
Convertible Subordinated Notes due 2004 in the principal amount
of $80.0 million, including the form of Note (12)
10.1 Credit Agreement dated as of May 21, 1997, among Converse Inc.,
its subsidiaries, BT Commercial Corporation, as agent, and the
financial institutions party thereto (the "Credit Agreement")
(12)
10.2 Amendment Number One to Credit Agreement (12)
10.3 Amendment Number Two to Credit Agreement(14)
10.4 Amendment Number Three Credit Agreement (14)
31
<PAGE>
10.5 Amendment Number Four to Credit Agreement (17)
10.6 Amendment Number Five to Credit Agreement (20)
10.7 Amendment Number Six to Credit Agreement (20)
10.8 Amendment Number Seven to Credit Agreement (21)
10.9 Amendment Number Eight to Credit Agreement (21)
10.10 Amendment Number Nine to Credit Agreement *
10.11 Amendment Number Ten to Credit Agreement *
10.12 Waiver Number One to Credit Agreement (15)
10.13 Waiver Number Two to Credit Agreement (16)
10.14 Amendment and Reaffirmation of Lease dated June 29, 1988,
between Godley Construction Company Inc. ("Godley") and Converse
Inc. and Lease Agreement dated as of March 26, 1974, between
Godley and Charlotte Footwear, Inc. (1)
10.15 Lease Agreement dated as of February 1, 2001 between Godley
Construction Company and Converse Inc. (20)
10.16 Sublease Agreement dated as of September 28, 1993, between Kmart
Corporation and Converse Inc. (1)
10.17 Lease Agreement - Reynosa, Mexico (16)
10.18 Registration Rights Agreement dated as of November 17, 1994,
between Apollo Interco Partners, L.P. and Converse Inc. (3)
10.19 Consulting Agreement dated as of November 17, 1994, between
Apollo Advisors, L.P. and Converse Inc. (3)
10.20 Amendment to Consulting Agreement Dated as of November 17, 1998
between Apollo Advisors L.P. and Converse Inc. (15)
10.21 Converse Inc. Executive Incentive Plan (1)
10.22 Converse Inc. Team Incentive Plan (1)
10.23 Converse Inc. Supplemental Executive Retirement Plan (6)
10.24 Converse Inc. 1994 Stock Option Plan, as Amended and Restated as
of February 25, 1998 (16)
10.25 Converse Inc. 1995 Non-Employee Director Stock Option Plan, as
amended and restated as of July 30, 1997 (13)
10.26 Converse Inc. Employee Stock Purchase Plan (16)
10.27 Agreement among Julius W. Erving, the Erving Group and Converse
Inc., dated October 1, 1984 as amended by an Amendment dated
September 16, 1988, a Second Amendment dated July 18, 1989, a
Third Amendment dated October 17, 1991, and a Fourth Amendment
dated February 7, 1994 (2)
10.28 Fifth Amendment to Agreement among Julius W. Erving, The Erving
Group, Inc. and Converse Inc.(5)
10.29 Sixth Amendment to Agreement among Julius W. Erving, the Erving
Group, Inc. and Converse Inc.(7)
10.30 Seventh Amendment to Agreement among Julius W. Erving, the
Erving Group, Inc. and Converse Inc.(10)
10.31 Lease Agreement dated as of January 3, 1995 between Talbot
Operations Inc. and Converse Inc. (4)
32
<PAGE>
10.32 Employment Agreement between Converse Inc. and Glenn N. Rupp (8)
10.33 Amendment Number One to Employment Agreement between Converse
Inc. and Glenn N. Rupp (19)
10.34 Employment Agreement between Converse Inc. and James E. Solomon
(9)
10.35 Employment Agreement between Converse Inc. and Donald J. Camacho
(6)
10.36 Form of Employment Agreement dated as of October 25, 1995,
between Converse Inc. and each of the following: Jack A. Green,
Herbert R. Rothstein, Alistair M. Thorburn, and James E. Lawlor
(6)
10.37 Employment Agreement between Converse Inc. and Edward C.
Frederick (11)
10.38 Purchase Agreement dated June 1, 1997 between Converse Inc. and
Exeter Research, Inc. (12)
10.39 Senior Secured Note Purchase Agreement dated September 16, 1998
(17)
10.40 Supplement dated November 23, 1999 to Senior Secured Note
Purchase Agreement dated September 16, 1998*
10.41 Senior Secured Note dated September 16, 1998 (17)
10.42 Warrant Agreement dated September 16, 1998 (17)
10.43 Agreement for Assignment and Sale of Trademarks dated November
25, 1999*
21. List of subsidiaries*
23.1 Consent of PricewaterhouseCoopers LLP*
27. Financial Data Schedule*
* Filed herewith
(1) Filed as an Exhibit to Converse Inc. Form 10 dated October 14, 1994
filed with the SEC on October 14, 1994, and incorporated by reference
herein.
(2) Filed as an Exhibit to Converse Inc. Form 10/A Amendment No. 1, filed
with the SEC on November 8, 1994, and incorporated by reference herein.
(3) Filed as an Exhibit to Converse Inc. Form 10/A Amendment No. 2, filed
with the SEC on November 23, 1994, and incorporated by reference
herein.
(4) Filed as an Exhibit to Converse Inc. Annual Report on Form 10-K for the
year ended December 31, 1994, and incorporated by reference herein.
(5) Filed as an Exhibit to Converse Inc. Quarterly Report on Form 10-Q for
the quarter ended April 1, 1995, and incorporated by reference herein.
(6) Filed as an Exhibit to Converse Inc. Annual Report on Form 10-K for the
year ended December 30, 1995, and incorporated by reference herein.
(7) Filed as an Exhibit to Converse Inc. Quarterly Report on Form 10-Q for
the quarter ended March 30, 1996, and incorporated by reference herein.
(8) Filed as an Exhibit to Converse Inc. Quarterly Report on Form 10-Q for
the quarter ended June 29, 1996, and incorporated by reference herein.
(9) Filed as an Exhibit to Converse Inc. Quarterly Report on Form 10-Q for
the quarter ended September 28, 1996, and incorporated by reference
herein.
(10) Filed as an Exhibit to Converse Inc. Annual Report on Form 10-K for the
year ended December 28, 1996, and incorporated by reference herein.
33
<PAGE>
(11) Filed as an Exhibit to Converse Inc. Quarterly Report on Form 10-Q for
the quarter ended March 29, 1997, and incorporated by reference herein.
(12) Filed as an Exhibit to Converse Inc. Quarterly Report on Form 10-Q for
the quarter ended June 28, 1997, and incorporated by reference herein.
(13) Filed as an Exhibit to Converse Inc. Quarterly Report on Form 10-Q for
the quarter ended September 29, 1997, and incorporated by reference
herein.
(14) Filed as an Exhibit to Converse Inc. Annual Report on Form 10-K for the
year ended January 3, 1998, and incorporated herein by reference.
(15) Filed as an Exhibit to Converse Inc. Quarterly Report on Form 10-Q for
the quarter ended April 4, 1998. and incorporated herein by reference.
(16) Filed as an Exhibit to Converse Inc. Quarterly Report on Form 10-Q for
the quarter ended July 4, 1998, and incorporated herein by reference.
(17) Filed as an Exhibit to Converse Inc. Quarterly Report on Form 10-Q for
the quarter ended October 3, 1998, and incorporated herein by
reference.
(18) Filed as an Exhibit to Converse Inc. Annual Report on Form 10-K for the
year ended January 2, 1999,and incorporated herein by reference.
(19) Filed as an Exhibit to Converse Inc. Quarterly Report on Form 10-Q for
the quarter ended April 3, 1999 and incorporated herein by reference.
(20) Filed as an Exhibit to Converse Inc. Quarterly Report on Form 10-Q for
the quarter ended July 3, 1999 and incorporated herein by reference.
(21) Filed as an Exhibit to Converse Inc. Quarterly Report on Form 10-Q for
the quarter ended October 2, 1999 and incorporated herein by reference.
(b) No reports on Form 8-K were filed by the Company during the last
quarter of Fiscal 1999.
UPON WRITTEN REQUEST TO THE COMPANY'S SECRETARY, THE COMPANY
WILL FURNISH SHAREHOLDERS WITH A COPY OF ANY OR ALL SUCH
EXHIBITS REQUESTED AT A CHARGE OF TEN CENTS PER PAGE, WHICH
REPRESENTS THE COMPANY'S REASONABLE EXPENSES IN FURNISHING
SUCH EXHIBITS.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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, in North Reading,
Massachusetts on April 17, 2000.
CONVERSE INC.
By: /s/ Glenn N. Rupp
-----------------------
Glenn N. Rupp
Chairman of the Board and
Chief Executive Officer
34
<PAGE>
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the date indicated.
<TABLE>
<CAPTION>
Signature Title Date
- --------- ----- ----
<S> <C> <C>
/s/ Glenn N. Rupp Chairman of the Board, Chief Executive Officer April 17, 2000
- --------------------------------
Glenn N. Rupp and Director (Principal Executive Officer)
/s/ Donald J. Camacho Senior Vice President and Chief Financial Officer April 17, 2000
- --------------------------------
Donald J. Camacho (Principal Financial and Accounting Officer)
/s/ Donald J. Barr Director April 17, 2000
- --------------------------------
Donald J. Barr
/s/ Julius W. Erving Director April 17, 2000
- --------------------------------
Julius W. Erving
/s/ Robert H. Falk Director April 17, 2000
- --------------------------------
Robert H. Falk
/s/ Gilbert Ford Director April 17, 2000
- --------------------------------
Gilbert Ford
/s/ Michael S. Gross Director April 17, 2000
- --------------------------------
Michael S. Gross
Director
- --------------------------------
John J. Hannan
/s/ Joshua J. Harris Director April 17, 2000
- --------------------------------
Joshua J. Harris
/s/ John H. Kissick Director April 17, 2000
- --------------------------------
John H. Kissick
/s/ Richard B. Loynd Director April 17, 2000
- --------------------------------
Richard B. Loynd
/s/ Michael D. Weiner Director April 17, 2000
- --------------------------------
Michael D. Weiner
</TABLE>
35
<PAGE>
CONVERSE INC. AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Page
-------
<S> <C>
Report of Independent Accountants...................................................................... F-2
Consolidated Balance Sheet............................................................................. F-3
Consolidated Statement of Operations................................................................... F-4
Consolidated Statement of Cash Flows................................................................... F-5
Consolidated Statement of Stockholders' Equity and Comprehensive Income................................ F-6
Notes to Consolidated Financial Statements............................................................. F-7
</TABLE>
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and
Stockholders of Converse Inc.
In our opinion, the consolidated financial statements listed in the
accompanying index appearing under Item 14(a) of this Form 10-K present fairly,
in all material respects, the financial position of Converse Inc. (the
"Company") and its subsidiaries at January 1, 2000 and January 2, 1999, and the
results of their operations and their cash flows for each of the three years in
the period ended January 1, 2000 in conformity with accounting principles
generally accepted in the United States. In addition, in our opinion, the
financial statement schedule listed in the accompanying index appearing under
Item 14(a) of this Form 10-K presents fairly, in all material respects, the
information set forth therein when read in conjunction with the related
consolidated financial statements. These financial statements and financial
statement schedule are the responsibility of the Company's management; our
responsibility is to express an opinion on these financial statements and
financial statement schedule based on our audits. We conducted our audits of
these statements in accordance with auditing standards generally accepted in the
United States, which require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for the opinion expressed above.
The accompanying financial statements and financial statement schedule have
been prepared assuming that the Company will continue as a going concern. As
discussed in Note 4 to the financial statements, the Company has suffered
recurring losses from operations and has a net capital deficiency that raise
substantial doubt about its ability to continue as a going concern.
Management's plans in regard to these matters are also described in Note 4. The
financial statements and financial statement schedule do not include any
adjustments that might result from the outcome of this uncertainty.
/s/ PricewaterhouseCoopers LLP
- ------------------------------
PRICEWATERHOUSECOOPERS LLP
Boston, Massachusetts
April 11, 2000
F-2
<PAGE>
CONVERSE INC. AND SUBSIDIARIES
------------------------------
CONSOLIDATED BALANCE SHEET
(Dollars in thousands, except per share amounts)
<TABLE>
<CAPTION>
January 2, 1999 January 1, 2000
---------------- ----------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents...................................................................... $ 3,274 $ 2,305
Receivables, less allowances of $2,086 and $3,945, respectively................................ 57,826 40,511
Inventories (Note 6)........................................................................... 71,292 76,414
Prepaid expenses and other current assets (Note 11)............................................ 7,821 2,866
-------- ---------
Total current assets....................................................................... 140,213 122,096
Net property, plant and equipment (Note 7)...................................................... 20,838 18,855
Other assets (Note 11).......................................................................... 37,166 11,412
-------- ---------
$198,217 $ 152,363
======== =========
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIENCY)
Current liabilities:
Short-term debt (Note 9)....................................................................... $ 9,557 $ 1,951
Credit facility (Note 9)....................................................................... 73,833 71,551
Senior secured notes (Note 9).................................................................. -- 28,223
Accounts payable............................................................................... 37,184 41,257
Accrued expenses (Note 8)...................................................................... 9,597 15,063
Income taxes payable (Note 11)................................................................. 7,336 6,455
-------- ---------
Total current liabilities.................................................................. 137,507 164,500
Long-term debt (Note 9)......................................................................... 101,799 74,265
Current assets in excess of reorganization value (Note 2)....................................... 28,221 26,143
Stockholders' equity (deficiency):
Common stock, $1.00 stated value, 50,000,000 shares authorized, 17,319,556 and
17,479,025 shares issued and outstanding at January 2, 1999 and
January 1, 2000, respectively.............................................................. 17,320 17,479
Preferred stock, no par value, 10,000,000 shares authorized, none issued and
outstanding................................................................................ -- --
Additional paid-in capital..................................................................... 3,695 4,764
Unearned compensation.......................................................................... (758) (1,061)
Retained deficit............................................................................... (88,129) (131,737)
Accumulated other comprehensive income......................................................... (1,438) (1,990)
-------- ---------
Total stockholders' equity (deficiency).................................................... (69,310) (112,545)
-------- ---------
$198,217 $ 152,363
======== =========
</TABLE>
See accompanying notes to consolidated financial statements.
F-3
<PAGE>
CONVERSE INC. AND SUBSIDIARIES
------------------------------
CONSOLIDATED STATEMENT OF OPERATIONS
(Dollars in thousands, except per share amounts)
<TABLE>
<CAPTION>
Fiscal Year Ended
----------------------------------------------------
January 3, 1998 January 2, 1999 January 1, 2000
---------------- ---------------- ----------------
<S> <C> <C> <C>
Net sales......................................................... $450,199 $308,353 $231,767
Cost of sales..................................................... 329,258 237,671 176,510
--------- -------- --------
Gross profit...................................................... 120,941 70,682 55,257
Selling, general and administrative expenses...................... 127,261 92,683 83,764
Royalty income.................................................... 22,569 20,175 20,466
Gain on sale of trademarks (Note 5)............................... -- -- 24,811
Restructuring and other unusual charges (Note 4).................. 1,537 -- 9,368
--------- -------- --------
Earnings (loss) from operations................................... 14,712 (1,826) 7,402
(Credit) on investment in unconsolidated subsidiary (Note 3)...... (12,537) -- --
Interest expense.................................................. 16,133 18,487 22,289
Other expense (income), net....................................... 2,267 (366) 1,047
--------- -------- --------
Earnings (loss) from continuing operations before income taxes.... 8,849 (19,947) (15,934)
Income tax expense (Note 11)...................................... 13,154 3,572 27,674
--------- -------- --------
Loss from continuing operations................................... (4,305) (23,519) (43,608)
Extraordinary (gain) loss, net of tax expense (benefit) of $(576)
and $437, respectively (Note 10).............................. 744 (704) --
-------- ------- --------
Net loss........................................................... $ (5,049) $(22,815) $(43,608)
======== ======== ========
Net basic and diluted loss per share (Note 2):
Continuing operations......................................... $ (0.25) $ (1.36) $ (2.50)
Extraordinary gain (loss)..................................... (0.04) 0.04 --
--------- -------- --------
Net loss...................................................... $ (0.29) $ (1.32) $ (2.50)
========= ======== ========
Weighted average common shares outstanding (Note 2)................ 17,272 17,319 17,414
========= ======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
F-4
<PAGE>
CONVERSE INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
(Dollars in thousands, except per share amounts) Fiscal Year Ended
--------------------------------------------------
January 3, 1998 January 2, 1999 January 1, 2000
---------------- ---------------- ---------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net loss......................................................................... $ (5,049) $(22,815) $(43,608)
Adjustments to reconcile net loss to net cash provided by (required for)
operating activities:
Credit on investment in unconsolidated subsidiary, less cash payments of $8,064 (20,601) -- --
in 1997.........................................................................
Provision for restructuring actions, less cash payments of $3,763, $2,438 and (2,226) -- 7,673
$1,033, respectively and non-cash charges of $662 in 1999.......................
Extraordinary loss on write-off of deferred financing fees....................... 1,320 809 --
Extraordinary gain on cancellation of convertible notes.......................... -- (1,950) --
Depreciation of property, plant and equipment.................................... 3,589 3,939 4,640
Amortization of intangible assets................................................ 548 468 200
Amortization of current assets in excess of reorganization value................. (2,077) (2,078) (2,078)
Amortization of note discount/warrants........................................... -- 189 614
Gain on sale of property, plant and equipment.................................... -- (1,042) --
Amortization of deferred compensation............................................ -- 217 580
Deferred tax provision........................................................... 11,709 (4,637) 24,757
Changes in assets and liabilities:
Receivables...................................................................... (12,359) 14,937 16,355
Inventories...................................................................... (8,775) 23,423 (5,328)
Prepaid expenses and other current assets........................................ 114 1,294 4,424
Accounts payable and accrued expenses............................................ (8,751) (8,707) 2,089
Income taxes payable............................................................. (2,929) 6,858 (881)
Other long-term assets and liabilities........................................... (2,620) (10,347) 1,230
-------- -------- --------
Net cash provided by (required for) operating activities........................ (48,107) 558 10,667
-------- -------- --------
Cash flows from investing activities:
Proceeds from disposal of assets................................................. -- 1,169 --
Additions to property, plant and equipment....................................... (5,909) (4,787) (2,718)
-------- -------- --------
Net cash used by investing activities........................................... (5,909) (3,618) (2,718)
-------- -------- --------
Cash flows from financing activities:
Net proceeds from exercise of stock options...................................... 512 11 --
Net proceeds from exercise of warrants........................................... -- -- 268
Net proceeds from sale of common stock........................................... -- -- 151
Net proceeds from (payment of) short-term debt................................... (3,236) 169 (7,192)
Net proceeds from (payment of) old credit facility............................... (117,765) ---- ----
Net proceeds from (payment of) new credit facility............................... 96,844 (23,011) (2,282)
Net proceeds from issuance of senior secured notes............................... -- 24,000 --
Net proceeds from bond issue..................................................... 76,400 -- --
-------- -------- --------
Net cash provided by financing activities....................................... 52,755 1,169 (9,055)
-------- -------- --------
Effect of foreign currency rate fluctuations on cash and cash equivalents......... 1,091 (573) 137
-------- -------- --------
Net increase (decrease) in cash and cash equivalents.............................. (170) (2,464) (969)
Cash and cash equivalents at beginning of period.................................. 5,908 5,738 3,274
-------- -------- --------
Cash and cash equivalents at end of period........................................ $ 5,738 $ 3,274 $ 2,305
======== ======== ========
Supplemental Disclosures:
Cash payments for income taxes, net.............................................. $ 3,719 $ 1,803 $ 2,441
======== ======== ========
Cash payments for interest....................................................... $ 16,663 $ 17,083 $ 19,327
======== ======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
F-5
<PAGE>
CONVERSE INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
AND COMPREHENSIVE INCOME
(Dollars in thousands, except per share amounts)
<TABLE>
<CAPTION>
Total Accumulated
Stockholders' Retained Other Additional
Equity Comprehensive Earnings Comprehensive Common Paid-in Unearned
(Deficiency) Income (Loss) (Deficit) Income Stock Capital Compensation
-------------- -------------- --------- ------------- ------- -------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance, December 28, 1996.............. $ (38,868) $ (60,265) $ (1,208) $ 17,213 $ 5,392 ---
Comprehensive income (loss)
Net loss.............................. (5,049) (5,049) (5,049)
Other comprehensive income (loss),
net of tax............................
Foreign currency translation
adjustments......................... (1,049) (1,049) (1,049)
---------
Comprehensive income (loss)............. $ (6,098)
=========
Exercise of common stock options........ 512 105 407
Cancellation of common stock warrants
(Note 3)............................ (3,528) (3,528)
--------- -------- -------- ------ ------ -------
Balance, January 3, 1998................ (47,982) (65,314) (2,257) 17,318 2,271 ---
Comprehensive income (loss).............
Net loss.............................. (22,815) (22,815) (22,815)
Other comprehensive income (loss),
net of tax............................
Foreign currency translation
adjustments......................... 819 819 819
---------
Comprehensive income (loss)............. $(21,996)
=========
Exercise of common stock options........ 11 2 9
Issuance of common stock warrants
(Note 9)............................ 440 440
Issuance of restricted stock (Note 13).. --- 975 (975)
Amortization of unearned compensation... 217 217
--------- -------- -------- ------ ------ -------
Balance, January 2, 1999................ (69,310) (88,129) (1,438) 17,320 3,695 (758)
Comprehensive income (loss).............
Net loss.............................. (43,608) (43,608) (43,608)
Other comprehensive income (loss),
net of tax............................
Foreign currency translation
adjustments......................... (552) (552) (552)
--------
Comprehensive income (loss)............. $(44,160)
========
Employee stock purchase plan share
issuance............................ 151 68 83
Exercise of warrants.................... 194 91 103
Issuance of restricted stock
(Note 13)........................... --- 968 (968)
Cancellation of restricted stock........ --- (85) 85
Amortization of unearned compensation... 580 580
--------- --------- ------- ------- ------- -------
Balance, January 1, 2000................ $(112,545) $(131,737) $ (1,990) $17,479 $ 4,764 $(1,061)
========= ========= ======= ======= ======= =======
</TABLE>
See accompanying notes to consolidated financial statements.
F-6
<PAGE>
CONVERSE INC. AND SUBSIDIARIES
------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per share amounts)
1. Summary of Business Operations
Converse Inc. ("Converse" or the "Company") is a leading global designer,
manufacturer and marketer of high-quality athletic footwear for men, women and
children and a global licensor of sports apparel, accessories and selected
footwear. Converse's principal markets are the United States, Europe and the
Pacific Rim.
2. Significant Accounting Policies
The major accounting policies of Converse are set forth below.
Fiscal year
Converse's fiscal year end is the Saturday closest to December 31 in each
year. For 1999, Converse's fiscal year ended on January 1, 2000 ("Fiscal
1999"), for 1998, Converse's fiscal year ended on January 2, 1999 ("Fiscal
1998") and for 1997, Converse's fiscal year ended on January 3, 1998 ("Fiscal
1997"). Fiscal Years 1999 and 1998 include 52 weeks whereas Fiscal Year 1997
includes 53 weeks.
Basis of consolidation
The consolidated financial statements include the accounts of Converse and
its subsidiaries. All material intercompany transactions are eliminated in
consolidation.
Management estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Cash and cash equivalents
Converse considers all short-term investments with an original maturity of
three months or less to be cash equivalents.
Fair value of financial instruments
The carrying amount of cash, cash equivalents, trade receivables and trade
payables approximates their fair value because of the short maturity of these
financial instruments. Except for the Convertible Notes (See Note 9), at
January 1, 2000, the carrying amount of the Company's long-term instruments
approximates fair value, which is estimated based on market values for similar
instruments. At January 1, 2000, the fair value of the $74.3 million
Convertible Notes was $18.6 million, as estimated using quoted market prices.
Inventories
Inventories are stated at the lower of cost (first-in, first-out) or
market.
Property, plant and equipment
Property, plant and equipment are recorded at cost when acquired.
Expenditures for improvements are capitalized while normal repairs and
maintenance are expensed as incurred. When properties are disposed of, the
related cost and accumulated depreciation or amortization are removed from the
accounts, and gains or losses on the dispositions are reflected in results of
operations. For financial reporting purposes, Converse utilizes the straight-
line method of
F-7
<PAGE>
computing depreciation and amortization while accelerated methods are used for
tax purposes. Such expense is computed based on the estimated useful lives of
the respective assets.
Impairment of long-lived assets
The Company reviews long-lived assets, including goodwill, for impairment
whenever events or changes in business circumstances indicate that the carrying
amount of the assets may not be fully recoverable or that the useful lives of
these assets are no longer appropriate. Each impairment test is based on a
comparison of the undiscounted cash flows to the recorded value of the asset.
If an impairment is indicated, the asset is written down to its estimated fair
value on a discounted cash flow basis.
Current assets in excess of reorganization value and distribution
In 1992, in connection with a reorganization under the bankruptcy code,
Furniture Brands and its domestic subsidiaries, including Converse, were
required to adopt "fresh-start" reporting. As a result of adopting "fresh-
start" reporting, Converse recorded current assets in excess of reorganization
value of approximately $41,553. This deferred credit is being amortized on a
straight-line basis over a 20 year period.
Prior to November 17, 1994, Converse was a wholly-owned subsidiary of
Furniture Brands International, Inc. ("Furniture Brands"), which until March 1,
1996 was named INTERCO INCORPORATED. On November 17, 1994, Furniture Brands
distributed to the holders of Furniture Brands common stock all outstanding
shares of common stock of Converse (the "Distribution").
Foreign currency transactions
Assets and liabilities of international operations are translated into U.S.
dollars at current exchange rates. Income and expense accounts are translated
into U.S. dollars at average rates of exchange prevailing during the period.
Adjustments resulting from the translation of foreign functional currency
financial statements into U.S. dollars are recorded in a separate component of
stockholders' equity. Other foreign currency transaction gains and losses are
included in the determination of net income.
During Fiscal 1999, the Company used foreign exchange forward contracts and
foreign currency options to protect the Company from the effects of changes in
foreign exchange rates. These instruments do not qualify for hedge accounting.
Option premiums are amortized over the respective life of the instrument.
During the year ended January 1, 2000, the Company recorded amortization expense
of $225 with respect to the currency options. At January 1, 2000, the Company
had open foreign exchange forward contracts totaling $2,825 with a maximum
remaining term to maturity of less than one year. The Company recorded
unrealized losses totaling $154 on these open forward contracts for the year
ended January 1, 2000. The Company recorded realized gains of $1,271 and $108
on exercised currency options and closed forward contracts, respectively, during
the year ended January 1, 2000.
At January 2, 1999, the Company had open "out of the money" currency
options totaling $26,100 and open foreign exchange forward contracts totaling
$21,300 with a maximum remaining term to maturity of less than one year. The
Company recorded unrealized losses totaling $111 on these open forward contracts
for the year ended January 2, 1999. The Company recorded realized gains of $128
and $124 on exercised currency options and closed forward contracts,
respectively, during the year ended January 2, 1999.
At January 3, 1998, the Company had open "out of the money" put options
totaling $15.1 million with a maximum remaining term to maturity of less than
one year and no open foreign exchange forward contracts. Net realized losses of
$214 related to these transactions have been reflected in the statement of
operations for the year ended January 3, 1998.
Revenue recognition
Revenue from the sale of product is recognized at the time of shipment.
Royalty income is recognized by Converse when all events have occurred to
establish the royalty amount payable to the Company (typically, when sales are
made by the licensees to retail distribution in their respective territories or,
in the case of certain footwear license agreements whereby royalties are payable
based upon factory cost, when shipment is made from the manufacturer to the
licensee).
F-8
<PAGE>
Advertising
Advertising production costs are expensed the first time an advertisement
is run. Media placement costs are expensed the first time the advertising
appears.
Endorsement contracts
Accounting for endorsement contracts is based upon specific contract
provisions. Generally, endorsement payments are expensed uniformly over the term
of the contract after giving recognition to periodic performance compliance
provisions of the contracts.
Earnings per share
In February 1997, Statement of Financial Accounting Standards No. 128,
"Earnings per Share" ("SFAS No. 128") was issued which supersedes the old
methodology for calculation of earnings per share, as promulgated under
Accounting Principles Board Opinion No. 15. SFAS No. 128 requires presentation
of "basic" earnings per share (which excludes dilution as a result of
unexercised stock options and convertible subordinated debentures) and "diluted"
earnings per share. For the fiscal years ended, January 3, 1998, January 2,
1999 and January 1, 2000 basic and diluted earnings per share are the same.
Concentration of risk
Converse purchases dyed canvas raw material primarily from four dye houses.
Additionally, Converse sources certain footwear production from the Far East.
One manufacturer produces approximately 20% of the Company's sourced products.
A change in the Company's largest dye house or in its largest Far East
manufacturer could cause a delay in manufacturing; however, management does not
expect such a change to impact long-term supply due to the existence of
alternative suppliers.
Financial instruments which potentially expose the Company to concentration
of credit risk include trade accounts receivable and foreign currency options
and forward contracts. Concentration of credit risk with respect to trade
accounts receivable is limited due to the large number of customers and their
international dispersion. In addition, the Company maintains reserves for
potential credit losses, and such losses, in the aggregate, have not exceeded
management expectations. Concentration of credit risk with respect to foreign
currency options and forward contracts is limited because the Company maintains
these financial instruments with various major financial institutions. The
Company performs periodic evaluations of the relative credit standing of these
financial institutions and limits the amount of credit exposure with any
institution.
Reclassifications
Certain amounts in the prior year financial statements and related notes
have been reclassified to conform with the Fiscal 1999 presentation.
3. Investment in Unconsolidated Subsidiary
On May 18, 1995, Converse consummated the acquisition of Apex One, Inc.
("Apex") for $14,528 of subordinated promissory notes and warrants. Subsequent
to the acquisition of Apex, Converse, through its integration of Apex's
information systems and in-depth review of Apex operating procedures and
financial condition, determined that the operating losses of Apex and its weak
financial position could not be corrected without additional significant
investment or financing. On August 11, 1995, Converse's Board of Directors voted
to cease funding Apex's operations as of that date. As a result of this
decision, Apex ceased operations and was unable to meet its obligations and on
September 14, 1995 filed for Chapter 11 bankruptcy protection.
In 1997, the Company prevailed in a breach of warranty lawsuit brought
against several former owners of Apex. Subsequently, the Company entered into
settlement agreements with substantially all of the former owners of Apex. As a
result of these settlements, the Company recorded a credit on investment in
unconsolidated subsidiary of $12,537. One former owner of Apex continues to hold
subordinated notes bearing interest at 8% per annum in 1997, 10% in 1998 and
F-9
<PAGE>
12% in 1999 through maturity at May 18, 2003 issued by Converse in the amount of
$774. This amount is included within accrued expenses in the accompanying
consolidated balance sheet.
4. Changes in Business
1999 Operating losses and 2000 Outlook
Over the past two and a half years, Converse has been adversely affected by
the downturn and continued weakness in the athletic footwear and apparel market.
Industry sales of basketball shoes throughout the world have declined
significantly due to the 12-24 year old consumer moving to other types of
athletic shoes (running) and non-athletic shoes ("brown shoes"). Converse's net
sales have decreased 31.5% and 24.8% in Fiscal 1998 and Fiscal 1999,
respectively. At January 1, 2000, the Company was in default of certain
financial covenants contained in its Credit Facility. In March, the banks waived
defualt of these financial covenants. However, it is not probable that the
Company will be in compliance with covenants on any of its principle borrowing
facilities in the next twelve months. Converse expects that demands on its
liquidity and credit resources will continue to be significant throughout fiscal
2000.
To address these issues, Converse has undertaken a series of strategic
initiatives to reposition the Company. One of these initiatives includes
diversification of the Company's product offerings to decrease dependence on
basketball products. This diversification entails adding new "retro-inspired"
products to its athletic originals line, introduction of a new patent-pending
helium technology performance shoe, creating an action sports category, and
expanding its athletic originals to include models designed specifically for
women.
In addition, the Company has focused on reducing its corporate
infrastructure to significantly reduce operating expenses. During 1999, the
Company reduced its selling, general and administrative expenses by
approximately $18.0 million, excluding a one-time settlement gain related to a
postretirement medical benefit plan. In 2000, the Company will continue to
reduce its spending structure across all functions. In order to attain this
goal, the Company has recorded $9,368 of restructuring and other unusual
charges, as discussed below, relating primarily to corporate headcount
reductions, closing of five unprofitable retail outlets and converting foreign
operations into licensee arrangements.
In order to address working capital needs, the Company is pursuing
additional long-term financing. On March 31, 2000, the Company announced that
for several months it has been working with its financial advisor, Universal
Credit Corp., a speciality investment bank, minority owned by Deutsche Bank and
Prudential Securities, on a financing transaction which would securitize the
Company's trademarks, licensing agreements and all related future royalty
income. Based upon the Company's 1999 adjusted royalty income, and subject to
the transaction's final rating, the transaction is expected to result in
approximately $85 million of gross proceeds. The Company intends to utilize the
proceeds from the transaction to pay down existing secured indebtedness and
provide incremental working capital. Assuming the completion of this financing
transaction, the Company intends to amend the financial covenants of its
existing principle borrowing facilities. This financing should increase the
Company's capacity to respond to challenges within its industry and improve
operating results.
Restructuring and Other Unusual Charges
During 1995, Converse recorded restructuring charges related to the closing
of the Mission Texas manufacturing facility. During the first quarter of 1997,
the Company re-opened the manufacturing facility located in Mission, Texas for
cutting and limited production due to an unexpected increase in demand for
athletic originals products. Accordingly, the remaining lease termination
restructuring reserve of $563 was reversed into income. During the fourth
quarter of 1997, the Company recorded a restructuring charge of $2,100. The
costs included in the charge were primarily: (i) employee severance and related
benefits of $1,192 for the termination of 35 employees; (ii) costs of $464
related to the closing of three unprofitable retail stores; and (iii)
termination costs of $444 related to marketing endorser contracts. During 1998
all remaining restructuring liabilities were paid out. As of January 2, 1999,
there were no remaining restructuring liabilities related to these actions.
During 1999, Converse recorded restructuring and other unusual charges of
$9,368 relating primarily to initiatives aimed at reducing future operating
costs, including global distribution, marketing, selling and administrative
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 Company's 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 corporate employees severance and related costs relate primarily to the
domestic layoffs begun in January 2000 and expected to be completed by April
2000. The charge for the retail store closures, as well as the closure of the
R&D facility, is primarily comprised of lease termination costs and writedowns
of leasehold improvements and other fixed assets to their estimated fair market
value. Converse has also decided to terminate endorsement contracts with certain
basketball endorsers. In future periods a pension curtailment will also be
recognized related to the corporate actions.
International actions include the anticipated sale and conversion of all of
the Company's European operations. This conversion has already been completed
for Spain and Portugal in 1998, Canada in the second quarter of 1999 and Italy
on January 1, 2000. The sale/conversion costs for both the anticipated and the
completed transactions are comprised primarily of severance charges, fixed asset
writedowns and lease termination costs, where applicable.
Costs included in the 1999 restructuring and other unusual charges include
employee severance and related benefits for the termination of 105 corporate,
retail and international employees. The restructuring charge also includes
costs of $576 relating to the write-off of the cumulative translation adjustment
associated with the conversion of Converse's wholly-owned foreign subsidiaries
completed by January 1, 2000. Additional cumulative translation adjustment
charges and employee severance costs will be recognized as restructuring and
other unusual charges in future periods relating to the conversion of the
wholly-owned foreign subsidiaries into licensee/distributor agreements. At
January 1, 2000, $7,673 of the charges recorded remain in current liabilities
on the balance sheet.
The following table summarizes the Fiscal 1999 activity relating to these
initiatives:
<TABLE>
<CAPTION>
Corporate
Employee R&D Conversion of
Severance & Retail Store Building Lease Contract Subsidiaries into
Related Costs Closing Termination Costs Termination Costs Licensees Total
------------- ------------ ----------------- ----------------- ------------------ ------
<S> <C> <C> <C> <C> <C> <C>
1999 Restructuring Accrual $1,485 $728 $136 $1,667 $5,352 $9,368
Charges/Write-offs 350 --- --- --- 1,345 1,695
------ ----- ----- ------ ------ ------
January 1, 2000 Balance $1,135 $728 $136 $1,667 $4,007 $7,673
====== ===== ===== ====== ====== ======
</TABLE>
F-10
<PAGE>
5. Gain on Sale of Trademarks
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
Company used the proceeds from the sale to pay down bank debt and provide
additional working capital. The licensees represented by these trademarks
generated royalty income of $4.2 million in Fiscal 1999 and $5.9 million in
Fiscal 1998. Royalty income adjusted to eliminate the Japanese non-footwear
trademarks was $16.3 million in Fiscal 1999 and $14.3 million in Fiscal 1998.
6. Inventories
Inventories are summarized as follows:
<TABLE>
<CAPTION>
January 2, 1999 January 1, 2000
--------------- ---------------
<S> <C> <C>
Retail merchandise............... $ 4,535 $ 4,020
Finished products................ 57,365 64,589
Work-in-process.................. 5,009 4,120
Raw materials.................... 4,383 3,685
-------- -------
$71,292 $76,414
======== =======
</TABLE>
7. Property, Plant and Equipment
Property, plant and equipment consisted of the following:
<TABLE>
<CAPTION>
Estimated
Useful
Life (Years) January 2, 1999 January 1, 2000
------------------- ---------------------- ----------------------
<S> <C> <C> <C>
Building and leasehold improvements 5 - 10 $ 8,129 $ 8,198
Machinery and equipment...................... 3 - 11 14,139 15,103
Furniture and fixtures....................... 5 - 8 3,049 2,984
Office and computer equipment................ 7 10,171 11,749
---------- ----------
35,488 38,034
Less accumulated depreciation................ 14,650 19,179
---------- ----------
$20,838 $18,855
========== ==========
</TABLE>
F-11
<PAGE>
8. Accrued Expenses
Accrued expenses consisted of the following:
<TABLE>
<CAPTION>
January 2, 1999 January 1, 2000
---------------------- ----------------------
<S> <C> <C>
Employee compensation................................. $2,944 $ 3,348
Advertising and promotion............................. 466 514
Accrued interest...................................... 1,410 829
Restructuring and other unusual charges............... --- 7,673
Other................................................. 4,777 2,699
--------- -------
$9,597 $15,063
========= =======
</TABLE>
9. Debt
Debt consisted of the following:
<TABLE>
<CAPTION>
January 2, 1999 January 1, 2000
---------------------- ----------------------
<S> <C> <C>
Current:
Short-term debt............................................. $ 9,557 $ 1,951
Credit facility............................................. $73,833 $71,551
Senior secured notes (net of unamortized bond discount)..... --- $28,223
Long-Term:
Senior secured notes (net of unamortized bond discount)..... $27,534 ---
Convertible subordinated notes.............................. $74,265 $74,265
</TABLE>
Short-term debt
Subsidiaries of the Company maintain asset based financing arrangements in
certain European countries with NMB-Heller, N.V. or an affiliate. In general,
these financing arrangements allow the Company to borrow against varying
percentages of eligible customer receivable balances based on pre-established
credit lines, along with varying percentages of inventory, as defined. Interest
is payable at the respective lender's base rate plus 1.5% (varying by country
from 5.5% to 8.25% at January 1, 2000). The obligations are secured by a first
priority lien on the respective European assets being financed. In addition,
Converse has provided guarantees of these borrowings.
Credit facility
Simultaneously with the issuance of the $80,000 principal amount of 7%
Convertible Subordinated Notes (the "Convertible Notes") in May 1997 (see
below), 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 indebtedness under the Company's then existing credit agreement (the "Old
Credit Facility"). In July 1997, BTCC, as agent, syndicated the Credit Facility
to a group of participating lenders (the "Banks"). In September 1998, the
Credit Facility was amended to decrease the commitment from $150,000 to $120,000
in conjunction with the issuance of the Secured Notes (see below). In November
1999, the Company reduced the commitment from $120,000 to $90,000. 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 "Borrowing Base"). The aggregate of
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 $71,551 are classified as
current due to the Company's lockbox arrangement (whereby payments 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
F-12
<PAGE>
Classification of Borrowings Outstanding under a Revolving Credit Agreement that
Includes both a Subjective Acceleration Clause and a Lockbox Arrangement."
In May 1999, the 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 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. As of January 1, 2000,
the Borrowing Base was $84,807. Utilization under the Credit Facility at year
end amounted to $74,955 consisting of revolving loans of $66,664, banker
acceptances of $4,887 and outstanding letters of credit of $3,404. Accordingly,
$9,852 of the maximum available Borrowing Base remained unutilized as of January
1, 2000. Under the terms of the Supplement To Note Purchase Agreements signed
November 23, 1999 (see the 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, thus the net
availability as of January 1, 2000 was $3,002.
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, which was formerly, two
and one-half percent (2.50%) per annum and in November 1999, was increased to
three percent (3.00%) per annum. At January 1, 2000, revolving loans outstanding
under the Credit Facility bore interest of 9.23% based upon the weighted average
of the Prime Lending Rate and the Adjusted LIBOR Rate. Obligations outstanding
under the Credit Facility are secured by first priority liens on substantially
all of the Company's U.S. assets. The Credit Facility requires compliance with
customary affirmative and negative covenants, including certain financial
covenants. In September 1998, the Company's Credit Facility was amended to
permit the issuance of the Secured Notes as discussed below. The amendment
decreased the commitment under the Credit Facility from $150,000 to $120,000,
increased the annual collateral management fee from $100 to $125 and changed a
financial performance covenant contained therein. The Company was not in
compliance with its financial covenant for maintenance of minimum EBITDA (as
defined therein) for the nine month period ending October 2, 1999. In November
1999, the Banks waived the Company's failure to comply with this financial
covenant as of October 2, 1999. In connection with this waiver, the Credit
Facility was amended to reduce the credit commitment from $120,000 to $90,000.
As of January 1, 2000, the Company was not in compliance with the minimum EBITDA
covenant of the Credit Facility. In March 2000, the Banks waived the Company's
non-compliance with this minimum EBITDA covenant for the twelve month period
ending January 1, 2000.
The Credit Facility provides for customary ongoing fees including an unused
line fee of .50% per annum on the unutilized portion of the credit commitment
and fees with respect to documentary or stand-by letters of credit varying from
1.25% to 2.25% per annum on the outstanding face amount of the respective
credit. The Company is obligated to pay BTCC, as agent for the Credit Facility,
an annual collateral management fee of $125.
In May 1997, the Company paid a funding fee with respect to the Credit
Facility of 2% of the total commitment, or $3,000, to BTCC. The Company has
capitalized these fees (adjusted for a write-off to extraordinary loss of $442
in the funding fee when the commitment was reduced from $150,000 to $120,000 in
September 1998 and a write-off of $302 to interest expense when the commitment
was reduced from $120,000 to $90,000 in November 1999) and is amortizing these
costs over the term of the Credit Facility. Amendment fees totaling $650 were
incurred and expensed during 1999. Unamortized costs of $102 relating to the
September 1998 amendment to the Credit Facility was written-off to interest
expense in November 1999. Accordingly, unamortized financing fees relating to
the Credit Facility, recorded in other assets on the consolidated balance sheet
of the Company, were $860 at January 1, 2000.
Senior secured notes
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
F-13
<PAGE>
financial covenants, substantially the same as the requirements contained in the
Credit Facility. The Company was not in compliance with a financial covenant
relating to minimum EBITDA (as defined therein) contained in the Secured Notes
agreement for the nine month period ending October 2, 1999. Compliance to this
covenant was automatically waived by the purchasers of the Secured Notes for
this quarter only per terms of the agreement. On November 23, 1999, the Secured
Notes agreement was amended to (1) give consent to the Company to sell its non-
footwear trademarks, logos and license agreements in Japan, (2) eliminate a
minimum EBITDA requirement for the twelve month period ending January 1, 2000
and (3) not allow the Company to make any borrowings of revolving loans
(including letter of credit obligations, foreign exchange obligations or
acceptance obligations) if such borrowing would exceed the maximum amount
available under the Credit Facility less $6,850. In connection with this
amendment, the Company paid a fee of $250 to the holders of the Secured Notes.
The Secured Notes are classified under current liabilities on the Company's
consolidated balance sheet as of January 1, 2000 as the Company does not believe
that it is probable that every covenant in the Secured Notes agreement will
remain in compliance over the next twelve month period.
Upon issuance of the Series A Secured Notes the Company received gross
proceeds of $24,000 after discount from the face amount of $858. The Company is
amortizing this discount over 24 months to the Initial Maturity Date.
Accordingly, the unamortized note discount was $304 on January 1, 2000. In
connection with the issuance of the Series A Secured Notes, the Company issued
warrants to purchase 360,000 shares of the Company's common stock to the
purchasers and paid funding fees to certain purchasers amounting to $350. The
warrants were valued at $1.22 per share, vest immediately and expire on May 21,
2002. In May 1999 warrants to purchase 91,412 shares of the Company's common
stock were exercised at $2.9375 per share. Warrants outstanding on January 1,
2000 were 268,588. The total warrant valuation of $440 (adjusted for $75 of the
unamortized bond discount relating to warrants exercised in May 1999) is
considered additional bond discount and is being amortized over a 24 month
period to the Initial Maturity Date. As of January 1, 2000, the unamortized
warrant cost was $116. 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 the
U.S. assets of the Company.
The Series B Secured Notes were issued in exchange for the surrender of
$5,735 face amount of Convertible Notes (see below), 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 the U.S. assets of the Company.
The Company has capitalized all fees and expenses associated with the
issuance of the Secured Notes and is amortizing these costs from the date of
inception to the Initial Maturity Date. Accordingly, total unamortized financing
fees and expenses relating to the Secured Notes, recorded in other assets on the
consolidated balance sheet of the Company, were $830 at January 1, 2000.
Convertible subordinated notes
On May 21, 1997, the Company completed the sale of $80,000 of Convertible
Notes due June 1, 2004. As discussed above, in September 1998 the Company
received, and subsequently cancelled, $5,735 of Convertible Notes in exchange
for the issuance of the Series B Secured Notes leaving $74,265 face amount of
Convertible Notes outstanding as of January 1, 2000. The Convertible Notes are
subordinated to all existing and future Senior Indebtedness (as defined
therein). 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 conversion 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
the redemption prices set forth therein plus accrued interest to the date of
redemption. Interest is payable semi-annually on June 1 and December 1,
commencing on December 1, 1997. The Company capitalized deferred note issuance
costs of $3,673 in conjunction with the issuance of the Convertible Notes.
These deferred costs are being amortized over the seven year life of the
Convertible Notes. Unamortized bond issue fees of $151 with respect to the
Convertible Notes exchanged in September 1998 were written off as an
extraordinary loss in 1998. Accordingly, unamortized convertible note issuance
costs, recorded as other assets on the consolidated balance sheet of the
Company, were $2,187 at January 1, 2000.
F-14
<PAGE>
Total interest expense consisted of the following:
<TABLE>
<CAPTION>
Fiscal Year Ended
-------------------------------------------------------------
January 3, 1998 January 2, 1999 January 1, 2000
---------------- --------------- ----------------
<S> <C> <C> <C>
Interest on short-term debt, Credit
Facility and Old Credit Facility..... $ 9,777 $ 7,829 $ 6,846
Interest on Convertible Notes.......... 3,508 5,346 5,199
Interest on Apex notes................. (1,354) ---- ----
Amortization of Convertible Notes
issuance costs....................... 320 668 498
Credit line fees and other fees........ 1,819 1,380 1,506
Amortization of Credit Facility
financing fees....................... 1,304 604 1,727
Amortization of Secured Notes
issuance costs....................... ---- 421 1,445
Interest on Secured Notes.............. ---- 1,277 4,296
European Factoring Fees................ 759 962 772
--------- ------- -------
$16,133 $18,487 $22,289
========= ======= =======
</TABLE>
10. Extraordinary (Gain) Loss
In May 1997, the Company entered into the Credit Facility and repaid the
Old Credit Facility. In connection with the repayment of the Old Credit
Facility, the Company wrote-off deferred financing fees of $1,320 in the second
quarter of Fiscal 1997. This write-off is presented as an extraordinary loss of
$744, net of income tax benefit of $576, on the statement of operations.
During the third quarter of Fiscal 1998, the Company reported an
extraordinary gain of $704, net of tax of $437. The extraordinary gain related
to the issuance of Series B Secured Notes of $3,785 in exchange for the
surrender of $5,735 face amount of Convertible Notes which were subsequently
cancelled, net of financing fees of $809 which were written off.
11. Income Taxes
The domestic and foreign components of income (loss) from continuing
operations before income taxes were as follows:
<TABLE>
<CAPTION>
Fiscal Year Ended
----------------------------------------------------------
January 3, 1998 January 2, 1999 January 1, 2000
--------------- ----------------- -------------------
<S> <C> <C> <C>
Domestic...................... $ 29,730 $ (4,040) $ (9,391)
Foreign....................... (20,881) (15,907) (6,543)
--------- --------- --------
$ 8,849 $(19,947) $(15,934)
========= ========= ========
</TABLE>
Income tax expense (benefit) related to continuing operations was comprised of
the following:
<TABLE>
<CAPTION>
Fiscal Year Ended
-------------------------------------------------------------------------------
January 3, 1998 January 2, 1999 January 1, 2000
------------------------- -------------------------- -------------------------
<S> <C> <C> <C>
Current:
State.......................... $ 362 $ 501 $ 422
Foreign........................ 2,336 2,848 2,495
-------- ------ --------
2,698 3,349 2,917
-------- ------ --------
Deferred:
Federal........................ 8,574 281 21,084
State.......................... 1,882 (58) 3,673
-------- ------ --------
10,456 223 24,757
-------- ------ -------
$13,154 $3,572 $27,674
======== ====== ========
</TABLE>
F-15
<PAGE>
The following table reconciles the differences between the Federal
corporate statutory rate and Converse's effective income tax rate:
<TABLE>
<CAPTION>
Fiscal Year Ended
--------------------------------------------------------------------------
January 3, 1998 January 2, 1999 January 1, 2000
------------------------ ----------------------- -----------------------
<S> <C> <C> <C>
Federal corporate statutory tax rate
(benefit)................................. 35.0% (35.0)% (35.0)%
State taxes (benefit), net of Federal tax
effect.................................... 13.9 (0.9) (1.3)
Foreign income taxes....................... ---- 8.5 9.7
Valuation allowance........................ 105.0 47.2 202.4
Other...................................... (5.3) (1.9) (2.1)
------------- ---------------- -------------
Effective income tax (benefit) rate........ 148.6% 17.9% 173.7%
============= =============== =============
</TABLE>
Deferred income taxes reflect the effect of temporary differences between
the tax basis of assets and liabilities and the reported amounts of assets and
liabilities for financial reporting purposes net of any valuation allowance.
Converse's deferred tax assets and liabilities at January 2, 1999 and January 1,
2000, consisted of the following:
<TABLE>
<CAPTION>
January 2, 1999 January 1, 2000
------------------------- -------------------------
<S> <C> <C>
Deferred tax assets:
Tax benefit of loss carryforwards......................... $ 53,260 $ 55,538
Expense accruals.......................................... 2,132 4,448
Receivable, inventory and other reserves.................. 2,262 5,066
Depreciation.............................................. 715 ----
--------- ----------
Gross deferred tax assets............................... 58,369 65,052
Deferred tax liabilities:
Employee pension plans.................................... (1,272) (852)
Depreciation.............................................. ---- (215)
Other..................................................... (1,077) (986)
--------- ----------
Net deferred tax assets before valuation allowance...... 56,020 62,999
Valuation allowance....................................... (30,756) (62,999)
--------- ----------
Net deferred tax assets................................. $ 25,264 $ ----
========= ==========
</TABLE>
The net deferred tax assets are included in the consolidated balance sheet as
follows:
<TABLE>
<CAPTION>
January 2, 1999 January 1, 2000
---------------------- --------------------------
<S> <C> <C>
Prepaid expenses and other current assets..................... $ 1,265 $ ----
Other assets.................................................. 23,999 ----
-------- ----------
$25,264 $ ----
======== ==========
</TABLE>
Statement of Financial Accounting Standards No. 109, "Accounting for Income
Taxes," requires that a valuation allowance be recorded against deferred tax
assets for which there is a greater than fifty percent chance that the tax
assets will not be realized. The period to use these deferred tax assets is 10
to 20 years for tax purposes and Converse believes these assets will be realized
during this period. However, the accounting guidance requires that a shorter
time frame be used to assess the probability of their realization.
During the second half of Fiscal 1997, a downturn in the athletic footwear
industry began, resulting in an oversupply of inventory in the marketplace.
Converse reassessed the realizability of its deferred tax assets as a result of
these developments and recorded a $9,292 increase to its valuation allowance in
the fourth quarter of Fiscal 1997. During Fiscal 1998, industry conditions
deteriorated. Converse reassessed the realizability of its deferred tax assets
each quarter based on re-forecasts of estimated future earnings and the adoption
of various business and tax planning strategies. These planning strategies
included the sale and conversion of certain unprofitable foreign operations and
anticipated enhancements of the Company's financial structure. Converse
concluded that $25,264 of its deferred tax assets were realizable in accordance
with the accounting guidance, and established additional valuation allowance of
$9,879 during the year, fully reserving the tax benefits of Fiscal 1998
quarterly losses.
During Fiscal 1999, the industry downturn continued. Converse reassessed
the realizability of its deferred tax assets each quarter based on re-forecasts
of estimated future earnings and progress being made in executing the business
and tax
F-16
<PAGE>
planning strategies described above. Specifically, Converse sold and converted
to distributors/licensees its operations in Canada and Italy in Fiscal 1999 and
entered into discussions to sell and convert certain other unprofitable foreign
operations. On November 29, 1999, the Company sold its non-footwear trademarks
and licensee agreements in Japan resulting in a taxable gain of $24.8 million.
Converse also has been in active discussions throughout the year with respect to
various refinancing alternatives, one of which is described in Note 4.
Because a variety of actions are actively being considered, it is not
practicable to estimate with any degree of certainty which specific transactions
and plans ultimately will be accomplished. Given this uncertainty, Converse's
history of operating losses, and the accounting guidance referred to above,
Converse recorded a charge of $25,278 in the fourth quarter of Fiscal 1999
bringing the total fiscal 1999 charge to $32,243 in order to establish a full
valuation allowance against its deferred tax assets. These charges are offset by
fourth quarter and year to date deferred assets created of $531 and $7,486,
respectively, resulting in a deferred tax provision of $24,757 for both the
fourth quarter and Fiscal 1999. As execution of specific transactions are
determined to be more likely than not, Converse will reduce its deferred tax
valuation allowance and credit earnings accordingly.
January 1, 2000, Converse had operating loss carryforwards of $162,800.
The loss carryforwards expire between the years 2009 and 2019.
12. Employee Benefits
Converse sponsors or contributes to retirement plans covering substantially
all domestic employees. Converse has a defined benefit pension plan in addition
to other retirement plans and benefits. The annual cost for the defined benefit
plan is determined using the projected unit credit actuarial cost method which
includes significant actuarial assumptions and estimates which are subject to
change in the near term. Prior service cost is amortized on a straight-line
basis over the average remaining service period of employees expected to receive
benefits. In certain foreign countries, contributions are made to defined
contribution plans as well as to government sponsored plans, as required in the
respective jurisdictions. Liabilities and expenses related to these foreign
employees are not material.
Defined benefit pension plan
Converse has a non-contributory defined benefit pension plan (the
"Converse Pension Plan") covering substantially all salaried employees at its
domestic operations. Retirement benefits generally are based on years of service
and final average compensation with employees becoming vested upon completion of
five years of service. The plan is funded by Company contributions to trust
funds which are held for the sole benefit of the employees. It is Converse's
practice to fund pension costs to the extent that such costs are tax deductible
and in accordance with ERISA. The assets of the plan are primarily comprised of
equity securities and fixed income investments. In Fiscal 1998, the net periodic
pension costs were subject to a $1,625 curtailment gain resulting from workforce
reductions.
Supplemental pension plans
The Converse Supplemental Executive Retirement Plan (the "SERP") is a non-
qualified supplemental pension plan offered to certain executives. Eligibility
is determined by the Board of Directors. The purposed of the plan is to restore
benefits which the Converse Inc. Retirement Plan would otherwise generate except
for the limits imposed by the Internal Revenue Code sections 415 and 401(1).
These provisions limit the maximum benefits payable from a qualified plan and
the amount of compensation used to calculate the benefit. Participants are not
vested in the SERP until normal retirement (age 65 and at least 5 years of
service).
The Executive Benefit Plan (the "EBP") is a non-qualified supplemental
pension plan offered to certain executives. Eligibility is determined by the
Board of Directors. The EBP consists of split-dollar life insurance (paid for
and owned by the Company) and a retirement income supplement. The split dollar
benefit provides active service death benefits which, at retirement may be
converted to a ten-year retirement income supplement or to a paid-up retirement
life insurance policy owned by the employee. Participants are not eligible to
receive benefits unless they actively retire from Converse (age 55 with at least
5 years of service).
F-17
<PAGE>
Aggregated financial information including the Converse Pension Plan, the SERP
and the EBP is shown in the following table:
<TABLE>
<CAPTION>
January 3, 1998 January 2, 1999 January 1, 2000
------------------------ ----------------------- -----------------------
Change in benefit obligation
<S> <C> <C> <C>
Benefit obligation at beginning of year......... $ 46,781 $ 58,553 $ 60,297
Service cost.................................... 1,751 1,718 3,329
Interest cost................................... 3,769 3,851 4,152
Curtailment (gains)............................. ---- (1,625) ----
Actuarial loss (gain)........................... 8,731 440 (9,942)
Benefits paid................................... (2,479) (2,640) (3,042)
--------- --------- ---------
Benefit obligation at end of year............... $ 58,553 $ 60,297 $ 54,794
========= ======== =========
Change in plan assets
Fair value of plan assets at beginning of year.. $ 51,122 $ 59,507 $ 65,730
Actual return on plan assets.................... 10,458 8,863 8,037
Employer contribution........................... 406 ---- 182
Benefits paid................................... (2,479) (2,640) (3,042)
--------- --------- ---------
Fair value of plan assets at end of year........ $ 59,507 $ 65,730 $ 70,907
========= ======== =========
Reconciliation of Funded Status
Benefit obligation at end of year............... $(58,553) $(60,297) $(54,794)
Fair value of plan assets at end of year........ 59,507 65,730 70,907
--------- --------- ---------
Funded status at end of year.................... 954 5,433 16,113
Unrecognized prior service cost................. (75) (62) (56)
Unrecognized net actuarial loss (gain).......... 895 (1,889) (13,740)
--------- --------- ---------
Prepaid benefit cost............................ $ 1,774 $ 3,482 $ 2,317
========= ======== =========
Weighted Average Assumptions
Discount rate................................... 7.00% 6.75% 8.00%
Expected return on plan assets.................. 9.50% 9.50% 9.50%
Rate of compensation increase................... 4.50% 4.75% 4.75%
Components of Net Periodic Benefit Cost
Service cost.................................... $ 1,751 $ 1,718 $ 3,329
Interest cost................................... 3,769 3,851 4,152
Expected return on plan assets.................. (4,788) (5,646) (6,128)
Amortization of prior service costs............. (7) (6) (6)
Curtailment gains............................... ---- (1,625) ----
--------- --------- ---------
Net periodic benefit cost....................... $ 725 $ (1,708) $ 1,347
========= ======== =========
</TABLE>
The aggregate fair value of plan assets for the Converse Pension Plan of
$70,907 exceeded the aggregate benefit obligation of $53,448 at January 1, 2000.
The SERP and EBP with an aggregate benefit obligation of $1,346 are unfunded.
Net prepaid pension benefits of $3,663 have been included in other assets and
net pension liabilities of $1,346 have been included in current liabilities in
the consolidated balance sheet.
Defined benefit postretirement plan
In addition to pension benefits, certain retired employees had previously
been provided with specified health care and life insurance benefits. Employees
who retired after a certain age with specified years of service were eligible
for these benefits if they agreed to contribute a portion of the cost. At
January 3, 1998, the Company had an accrued postretirement benefit obligation of
$10,422. Net periodic postretirement benefit cost totaled $215 for Fiscal 1997.
In Fiscal 1997, the accumulated postretirement benefit obligation was measured
based upon a weighted average discount rate of 7.0%, a 9.0% annual rate of
increase in the cost of health care benefits and an assumed long-term rate of
compensation increase of 4.0%.
F-18
<PAGE>
In the second quarter of Fiscal 1998, the Company announced its intentions
to cease the accrual of benefits to active employees under the plan. Unless the
employees were eligible for and elected to retire by December 31, 1998, all
vested benefits under the postretirement plan ceased to exist. As a result of
this action, the defined benefits for future services of a significant number of
plan participants were eliminated and the Company recognized a $3,284
curtailment gain.
In the third quarter of Fiscal 1998, the Company notified retired employees
that their medical and life benefits would terminate on January 1, 1999 and the
employees would receive transition payments in three equal installments over a
three-year period beginning January 5, 1999 based on age and dependents. As a
result, the Company settled its obligations under the postretirement plan and
recorded a settlement gain of $5,990. Transition payments of $333 were made in
Fiscal 1999. The accrual for these future payments is included in accrued
expenses on the consolidated balance sheet.
Other retirement plans and benefits
Converse has a non-contributory defined contribution plan covering all
hourly employees with at least one year of service at its domestic manufacturing
and warehouse facilities. Contributions under this plan are fixed at $0.41 per
hour of service with a maximum contribution based on 2,000 hours per employee.
The defined contribution expense was $625, $975 and $490 for Fiscal 1997, 1998
and 1999, respectively.
Converse also sponsors a savings plan. The total cost of this plan for
Fiscal 1997, 1998 and 1999 was $333, $325, and $366, respectively.
13. Stock Option Plans
Converse 1994 stock option plan
The Board of Directors of Converse adopted the Converse Inc. 1994 Stock
Option Plan (the "1994 Plan") as a means to encourage ownership of Converse
common stock by key employees and enable Converse to attract and retain the
services of outstanding employees in competition with other employers.
The 1994 Plan authorizes grants to key employees, including executive
officers of Converse and its subsidiaries, and to its consultants, of incentive
and non-qualified options to purchase shares of common stock. In 1998, the 1994
Plan was amended by the Company's Board of Directors and Stockholders to permit
the granting of restricted stock in addition to stock options. The plan
administrator has discretion to grant non-qualified options at less than 100% of
the fair market value per share of the common stock of Converse on the date of
grant. Converse incentive stock options must be granted with an exercise price
of not less than 100% of the fair market value per share of common stock of
Converse on the date of grant. Option prices are payable in full and in cash,
upon the exercise of a stock option, and the proceeds are added to the general
funds of Converse.
In July 1999, the Company's Board of Directors approved an amendment to the
1994 Plan granting incentive stock options to each of the Company's current non-
employee directors who are not affiliated with Converse's controlling
stockholder in the amount of 5,000 shares of common stock. This amendment is
subject to the approval of the Company's stockholders at the next Annual
Meeting. As of January 1, 2000, the number of shares of common stock which may
be issued under the 1994 Plan is 3,300,000 subject to adjustment upon the
occurrence of certain contingencies. The maximum number of shares with respect
to which options or restricted stock may be granted to any individual during any
calendar year and during the term of the 1994 Plan is 500,000 and 750,000,
respectively. Options under the 1994 Plan generally expire nine years from the
grant date.
The 1994 Plan will terminate in October 2004, subject to the right of the
Board of Directors to suspend or discontinue the 1994 Plan at any prior date and
the rights of holders of options to exercise options after such date in
accordance with the terms of such options.
F-19
<PAGE>
The following table summarizes stock option activity under the 1994 Plan:
<TABLE>
<CAPTION>
Weighted Average
Number of Exercise Exercise Price
Options Price per Share Per Share
----------------- ----------------------- ---------------------
<S> <C> <C> <C>
Outstanding at December 28, 1996................. 1,578,800 $ 4.00 - $ 23.00 $ 6.31
Granted.......................................... 442,000 $10.94 - $ 26.88 17.30
Canceled......................................... (127,250) $ 5.27 - $ 26.88 9.34
Exercised........................................ (104,800) $ 4.00 - $ 9.40 5.96
------------
Outstanding at January 3, 1998................... 1,788,750 $ 4.00 - $ 26.88 8.85
Granted.......................................... 438,000 $ 4.75 - $ 7.50 7.43
Canceled......................................... (468,400) $5.265 - $26.875 14.51
Exercised........................................ (1,600) $ 7.00 7.00
------------
Outstanding at January 2, 1999................... 1,756,750 $ 4.00 - $26.875 6.99
Granted.......................................... 422,000 $3.688 - $ 4.625 3.75
Canceled......................................... (217,200) $3.688 - $20.625 6.62
Exercised........................................ ----- ----- -----
------------
Outstanding at January 1, 2000................... 1,961,550 $3.688 - $26.875 $ 6.33
============
Exercisable at January 1, 2000................... 967,550
============
Restricted stock outstanding at January 1, 2000.. 425,000
============
Available for future grants...................... 561,050
============
</TABLE>
The following table summarizes information about the 1994 Plan stock options
outstanding at January 1, 2000:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
----------------------------------------------------------- ----------------------------------------
Weighted Average
Remaining
Range of Number Outstanding Contractual Weighted Average Number Exercisable Weighted Average
Exercise Prices at January 1, 2000 Life (Years) Exercise Price at January 1, 2000 Exercise Price
--------------- ------------------ ------------ ---------------- ------------------ ------------------
<S> <C> <C> <C> <C> <C>
$3.69 334,000 8 $ 3.69 ---- N/A
$4.00-$6.00 698,750 5 5.11 448,550 $ 5.19
$6.125-$8.645 753,800 6 7.01 400,000 6.90
$9.00-$13.00 134,000 6 10.92 89,000 10.91
$15.00-$21.00 26,000 6 18.61 22,000 18.72
$23.00-$26.875 15,000 6 25.58 8,000 24.94
=========== ==========
1,961,550 967,550
=========== ==========
</TABLE>
The above option activity table reflects all options at their amended
price. On February 25, 1998, Converse repriced certain stock options granted
under the 1994 Plan. Options to purchase 278,000 shares of common stock were
repriced to an exercise price of $7.50 per share, which exceeded the closing
price of Converse's common stock on February 25, 1998. The original vesting
schedules and expiration dates associated with these stock options remained the
same as the original grants. None of the foregoing stock option grants had
vested prior to the repricing date.
Converse 1995 non-employee director plan
On March 22, 1995, the Board of Directors of Converse adopted the 1995 Non-
Employee Director Plan (the "1995 Plan") as a means of fostering and promoting
the long-term financial success of Converse by attracting and retaining Non-
Employee Directors of outstanding ability.
F-20
<PAGE>
Converse has reserved an aggregate of 45,000 shares for issuance under the
1995 Plan. Options to purchase 22,500 of these shares were granted during 1995
at the fair market value on the date of grant of $9.88. No grants have been
made since this time. These stock options become exercisable in equal one-third
increments on the anniversaries of the grant date beginning on March 22, 1996
and expire ten years from the date of grant. No such options were exercised
since their grant and all options remain outstanding at January 1, 2000.
Restricted stock awards
In 1998, the Company amended the 1994 Plan to permit the granting of
restricted stock. 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 1999, 260,000 shares of restricted stock were
granted, resulting in $968 of unearned compensation, and 35,000 shares of
restricted stock were cancelled due to resignations, resulting in the reversal
of paid-in capital and unearned compensation of $85. Amortization of restricted
stock for Fiscal 1998 and 1999 was $217 and $580, respectively.
Employee stock purchase plan
The Company adopted an Employee Stock Purchase Plan (the "ESPP") in 1998.
The Company reserved 500,000 shares of common stock for issuance under the ESPP.
Eligible employees may invest up to $10 per year through payroll deductions. The
purchase price of the shares is equal to 85% of the lower of the fair market
value of the stock as of the first or last trading day of each purchase period.
The first purchase period began on October 1, 1998 and ran through February 28,
1999. Thereafter, each purchase period will run for six months. There were no
shares issued under the ESPP during 1998. During 1999, 68,057 shares of common
stock were issued under the ESPP. Proceeds of $151 were recorded in conjunction
with this purchase.
Stock-based compensation
The Company accounts for stock-based compensation using the method
prescribed in Accounting Principles Board Opinion No. 25, "Accounting for Stock
Issued to Employees." Accordingly, no compensation cost has been recognized for
the Company's stock option plans. The Company has adopted the disclosure-only
provisions Statement of Financial Accounting Standards No. 123 "Accounting for
Stock-Based Compensation" ("SFAS 123"). Had compensation cost been determined
based on the fair value at the grant dates for awards in 1997, 1998, and 1999
consistent with the provisions of SFAS 123, the Company's net loss and loss per
share would have been increased to the pro forma amounts indicated below:
<TABLE>
<CAPTION>
Fiscal Year Ended
-------------------------------------------------------------------------------
January 3, 1998 January 2, 1999 January 1, 2000
------------------------- ------------------------- -------------------------
<S> <C> <C> <C>
Net loss - as reported............... $(5,049) $(22,815) $(43,608)
Net loss - pro forma................. (7,041) (24,493) (45,073)
Basic and diluted loss per share
as reported........................ $ (0.29) $ (1.32) $ (2.50)
Basic and diluted loss per share
pro forma.......................... (0.41) (1.41) (2.59)
</TABLE>
The fair value of options granted at date of grant was estimated using the
Black-Scholes model with the following weighted average assumptions:
<TABLE>
<CAPTION>
Fiscal Year Ended
-------------------------------------------------------------------------------
January 3, 1998 January 2, 1999 January 1, 2000
------------------------- ------------------------- -------------------------
<S> <C> <C> <C>
Expected life (years)............... 6.0 6.0 6.0
Interest rate....................... 6.18% 5.12% 5.61%
Volatility.......................... 67.00% 69.44% 76.53%
Dividend yield...................... ---- ---- ----
</TABLE>
F-21
<PAGE>
The weighted average grant date fair value of options granted during Fiscal
1997, Fiscal 1998 and Fiscal 1999 was $12.20, $3.07 and $2.65, respectively.
The pro forma net income and earnings per share amounts reflected above do
not include a tax benefit for Fiscal 1997, 1998 or 1999 as a full valuation
allowance would have been provided against any such benefit. The pro forma
effect on net income for Fiscal 1997, Fiscal 1998 and Fiscal 1999 is not
necessarily indicative of future amounts as it does not take into consideration
pro forma compensation expense related to grants made prior to 1995 as SFAS 123
does not apply to awards prior to 1995.
14. Lease Commitments
Substantially all of Converse's retail outlets and certain other real
properties and equipment are operated under lease agreements expiring at various
dates through the year 2012. Leases covering retail outlets and equipment
generally require, in addition to stated minimums, contingent rentals based on
retail sales and equipment usage. Generally, the leases provide for renewal for
various periods at stipulated rates.
Rental expense under operating leases was as follows:
<TABLE>
<CAPTION>
Fiscal Year Ended
January 3, 1998 January 2, 1999 January 1, 2000
--------------- --------------- ---------------
<S> <C> <C> <C>
Minimum rentals............. $4,713 $4,510 $ 4,756
Contingent rentals.......... 1,588 1,763 1,197
-------- -------- ---------
$6,301 $6,273 $5,953
======== ======== =========
</TABLE>
Future minimum lease payments under operating leases are $4,522, $3,565,
$2,510, $1,757 and $3,329 for 2000 through 2004 and thereafter, respectively.
15. 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 the
ultimate outcome of any such proceedings will not have a material adverse effect
on its financial position or results of operations.
16. Related Party Transactions
On November 17, 1994, Converse entered into a consulting agreement with
Apollo Advisors, L.P., an affiliate of the owners of a majority of the
outstanding common stock of the Company, pursuant to which Apollo Advisors, L.P.
provides corporate advisory, financial and other consulting services to
Converse. Fees under the agreement were initially payable at an annual rate of
$500 plus out-of-pocket expenses. During Fiscal 1997, this agreement was amended
to decrease the rate for the year ended January 3, 1998 from $500 to $375. The
consulting agreement continues on a year-to-year basis unless terminated by the
Converse Board of Directors.
17. Other Financial Data
Items charged to earnings during Fiscal 1997, 1998 and 1999 included the
following:
<TABLE>
<CAPTION>
Fiscal Year Ended
--------------------------------------------------
January 3, 1998 January 2, 1999 January 1, 2000
--------------- --------------- ---------------
<S> <C> <C> <C>
Advertising and promotion........... $34,887 $23,713 $15,498
Research and development............ $ 8,817 $ 7,659 $ 6,200
</TABLE>
18. 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 becomes effective in May 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.
F-22
<PAGE>
19. Business Segment Information
Converse adopted Statement of Financial Accounting Standards No. 131
"Disclosures about Segments of an Enterprise and Related Information" ("SFAS No.
131"), during the fourth quarter of 1998. SFAS No 131 established standards for
reporting information about business segments in annual financial statements and
requires selected information about operating segments in interim financial
reports issued to stockholders. Converse operates in one industry segment;
designing, manufacturing and marketing of athletic and leisure footwear, apparel
and accessories. Business segments are defined as components of an enterprise
about which separate financial information is available that is evaluated
regularly by the chief operating decision maker, or decision making group, in
deciding how to allocate resources and in assessing performance. Converse's
chief operating decision making group is the Company's operating committee,
which is comprised of the Chairman and the lead executives of each of the
Company's business segments.
The Company's business units have been aggregated into four reportable
segments [United States; Europe, Middle East, Africa; Asia Pacific; and Americas
(excluding Unites States)]. Each of these segments have separate management
teams and infrastructures and offer different products and services. The lead
executive for each business segment manages the profitability and cash flow of
each respective segment's various product lines and businesses.
Converse has a diversified customer base with one customer accounting for
14% of the Company's net sales in Fiscal 1997, 19% in Fiscal 1998 and 17% in
Fiscal 1999. Sales to this significant customer are included in the Asia Pacific
segment.
The accounting policies of the reportable segments are the same as those
described in Note 2 of Notes to Consolidated Financial Statements except the
disaggregated financial results for Converse's business segments have been
prepared using a management approach, which is consistent with the basis and
manner in which Converse management internally disaggregates financial
information for the purposes of assisting in making internal operating
decisions. The Company evaluates the performance of its business segments based
on net sales, gross margin, royalty income, depreciation and amortization,
interest expense, other operating costs, other (income) expense, pretax profit
and total assets. The intersegment sales are accounted for based on
established sales prices between the related companies and pertain primarily to
sales from the United States to various foreign operations. For SFAS 131
disclosures, the Company has allocated interest expense to each segment based on
its respective accounts receivable and inventory balances. Certain other
operating costs have been allocated based on gross footwear sales. The $9,300
gain in Fiscal 1998 related to the termination of the post retirement medical
benefit plan has been allocated fully to the United States.
F-23
<PAGE>
PAGE>
Summarized financial information concerning the Company's reportable
business segments is shown in the following table. The information for 1998 and
1997 has been restated from the prior year's presentation in order to conform to
the 1999 presentation.
<TABLE>
<CAPTION>
Europe, Americas
Middle East, (excluding
United States Africa Asia Pacific United States) Eliminations Consolidated
-------------- ------------- ------------- ------------- ------------ -------------
<S>...................................... <C> <C> <C> <C> <C> <C>
Fiscal 1999
Net sales to customer.................... $132,999 $ 53,102 $38,821 $ 6,845 $ ---- $231,767
Intersegment net sales................... 24,959 ---- ---- ---- (24,959) ----
Gross margin............................. 32,426 12,730 9,265 836 ---- 55,257
Royalty income........................... 2,815 2,663 12,909 2,079 ---- 20,466
Depreciation and amortization............ 1,347 109 205 83 ---- 1,744
Net interest expense..................... 12,555 5,859 2,844 1,031 ---- 22,289
Gain on sale of trademarks............... ---- ---- 24,811 ---- ---- 24,811
Restructuring and other unusual charges.. 4,016 4,362 297 693 ---- 9,368
Other operating costs.................... 41,978 21,652 15,115 3,275 ---- 82,020
Other (income) expense................... 10,222 (6,192) (3,066) 83 ---- 1,047
-------- --------- -------- ------- -------- ---------
Segment pretax profit (loss)............. $(34,877) $(10,397) $31,590 $(2,250) $ ---- $(15,934)
======== ========= ======== ======= ======== =========
Segment total assets..................... $127,670 $ 19,466 $ 3,839 $ 1,388 $ ---- $152,363
Segment long-lived assets................ 16,930 1,736 177 12 ---- 18,855
Segment capital expenditures............. 1,640 1,035 34 9 ---- 2,718
Fiscal 1998
Net sales to customer.................... $166,555 $ 72,603 $59,719 $ 9,476 $ ---- $308,353
Intersegment net sales................... 47,344 ---- ---- ---- (47,344) ----
Gross margin............................. 35,376 15,973 17,697 1,636 ---- 70,682
Royalty income........................... 3,069 1,820 12,846 2,440 ---- 20,175
Depreciation and amortization............ 1,337 117 192 71 ---- 1,717
Net interest expense..................... 10,613 4,771 2,275 828 ---- 18,487
Other operating costs.................... 40,784 29,627 15,899 4,656 ---- 90,966
Other (income) expense................... 11,212 (9,179) (2,510) 111 ---- (366)
-------- --------- -------- ------- -------- ---------
Segment pretax profit (loss)............. $(25,501) $ (7,543) $14,687 $(1,590) $ ---- $(19,947)
======== ========= ======== ======= ======== =========
Segment total assets..................... 156,318 33,066 4,834 3,999 ---- 198,217
Segment long-lived assets................ 18,839 1,767 182 50 ---- 20,838
Segment capital expenditures............. 4,179 540 54 14 ---- 4,787
Fiscal 1997
Net sales to customer.................... $284,895 $ 75,452 $70,953 $18,899 $ ---- $450,199
Intersegment net sales................... 44,890 ---- ---- ---- (44,890) ----
Gross margin............................. 82,932 14,371 20,373 3,265 ---- 120,941
Royalty income........................... 3,809 3,060 13,331 2,369 ---- 22,569
Depreciation and amortization............ 1,271 112 160 86 ---- 1,629
Net interest expense..................... 10,524 3,306 1,531 772 ---- 16,133
Other operating costs.................... 70,952 34,085 15,551 6,581 ---- 127,169
Other (income) expense................... (11,591) 1,886 (478) (87) ---- (10,270)
-------- --------- -------- ------- -------- ---------
Segment pretax profit (loss)............. $ 15,585 $(21,958) $16,940 $(1,718) $ ---- $ 8,849
======== ========= ======== ======= ======== =========
Segment total assets..................... 192,923 32,973 4,390 4,408 ---- 234,694
Segment long-lived assets................ 18,838 1,125 65 58 ---- 20,086
Segment capital expenditures............. 5,298 558 11 42 ---- 5,909
</TABLE>
F-24
<PAGE>
20. Quarterly Financial Information (Unaudited)
Following is a summary of unaudited quarterly information:
<TABLE>
<CAPTION>
First Second Third Fourth
Quarter Quarter Quarter Quarter
------------ ------------ ----------- -----------
<S> <C> <C> <C> <C>
Year ended January 2, 1999:
Net sales............................. $95,240 $78,351 $78,286 $ 56,476
Gross profit.......................... $27,815 $19,737 $16,044 $ 7,086
Net earnings (loss)................... $(1,163) $(1,516) $(4,274) $(15,862)
--------- ------- ------- --------
Net earnings (loss) per share......... $ (0.07) $ (0.09) $ (0.25) $ (0.92)
========= ======= ======= ========
First Second Third Fourth
Quarter Quarter Quarter Quarter
------------ ------------ ----------- -----------
Year ended January 1, 2000:
Net sales............................. $70,079 $57,140 $60,983 $ 43,565
Gross profit.......................... $18,741 $15,052 $14,836 $ 6,628
Net earnings (loss)................... $(3,239) $(5,580) $(8,576) $(26,213)
--------- ------- ------- --------
Net earnings (loss) per share......... $ (0.19) $ (0.32) $ (0.49) $ (1.50)
========= ======= ======= ========
</TABLE>
F-25
<PAGE>
SCHEDULE II
-----------
VALUATION AND QUALIFYING ACCOUNTS
(Dollar amounts in thousands)
<TABLE>
<CAPTION>
Additions
(Reversals)
Charged to
Beginning Costs and Deductions Ending
Description Balance Expenses (Additions) Balance
----------- ---------- ----------- ------------ ----------
<S> <C> <C> <C> <C>
Year Ended January 3, 1998:
Allowance for Doubtful Accounts................ $ 1,994 $ 1,074 $1,002 $ 2,066
Inventory Reserve.............................. 5,571 (769) 1,840 2,962
Deferred Tax Asset Valuation Allowance......... 11,584 9,293 ---- 20,877
Year Ended January 2, 1999:
Allowance for Doubtful Accounts................ $ 2,066 $ 1,073 $1,053 $ 2,086
Inventory Reserve.............................. 2,962 410 327 3,045
Deferred Tax Asset Valuation Allowance......... 20,877 9,406 (473) 30,756
Year Ended January 1, 2000:
Allowance for Doubtful Accounts................ $ 2,086 $ 2,989 $1,130 $ 3,945
Inventory Reserve.............................. 3,045 146 776 2,415
Deferred Tax Asset Valuation Allowance......... 30,756 32,243 ---- 62,999
</TABLE>
F-26
<PAGE>
Exhibit 10.10
-------------
NINTH AMENDMENT TO CREDIT AGREEMENT
-----------------------------------
This Ninth Amendment to Credit Agreement (the "Amendment") is made on this
15th day of February, 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, and
that certain Eighth Amendment to Credit Agreement dated November 15, 1999
(collectively, the "Credit Agreement"); and
WHEREAS, the parties desire to amend the Credit Agreement, as more fully
set forth herein.
NOW, THEREFORE, in consideration of the mutual agreements herein contained
and other good and valuable consideration, the adequacy is hereby acknowledged,
and subject to the terms and conditions hereof, the parties hereto agree as
follows:
SECTION I. DEFINITIONS. Unless otherwise defined herein, all capitalized
-----------
terms shall have the meaning given to them in the Credit Agreement.
SECTION II. AMENDMENTS TO CREDIT AGREEMENT.
------------------------------
2.1 The defined term "Borrowing Base", which appears in Section 1.1
of the Credit Agreement, is hereby amended by deleting the reference to
"February 15, 2000" contained in subsection (F)(i) thereof and inserting "March
31, 2000" in its stead.
1
<PAGE>
SECTION III. CONDITIONS PRECEDENT. The effectiveness of this Amendment is
--------------------
expressly conditioned upon satisfaction of the following conditions precedent:
3.1 Agent shall have received copies of this Amendment duly executed
by Borrower and Lenders constituting Required Lenders.
3.2 Borrower shall have paid to Agent for the 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.
3.3 Agent shall have received such other documents, certificates and
assurances as it shall reasonably request.
SECTION IV. REAFFIRMATION OF BORROWER. Borrower hereby represents and
-------------------------
warrants to Agent and Lender that (i) the representations and warranties set
forth in Section 5 of the Credit Agreement are true and correct on and as of the
date hereof, except to the extent (a) that any such representations or
warranties relate to a specific date, or (b) of changes thereto as a result of
transactions for which Agent and Lender have granted their consent; (ii) to the
best of Borrower's knowledge, on the date hereof it is in compliance with all of
the terms and provisions set forth in the Credit Agreement as hereby amended;
and (iii) to the best of Borrower's knowledge, upon execution hereof no Default
or Event of Default has occurred and is continuing or has not previously been
waived.
SECTION V. FULL FORCE AND EFFECT. Except as herein amended, the Credit
---------------------
Agreement and all other Credit Documents shall remain in full force and effect.
SECTION VI. COUNTERPARTS. This Amendment may be executed in two or more
------------
counterparts, each of which shall be deemed an original, but all of which
together shall constitute one and the same document.
IN WITNESS WHEREOF, the parties hereto have executed this Amendment on the
day and year specified above.
Borrower:
CONVERSE INC.
By:______________________________
Name:_________________________
Title:________________________
2
<PAGE>
Agent:
BT COMMERCIAL CORPORATION
By:______________________________
Name:_________________________
Title:________________________
Lenders:
BT COMMERCIAL CORPORATION
By:______________________________
Name:_________________________
Title:________________________
FLEET BUSINESS CREDIT
CORPORATION
By:______________________________
Name:_________________________
Title:________________________
LASALLE NATIONAL BANK
By:______________________________
Name:_________________________
Title:________________________
BANKBOSTON, N.A.
By:______________________________
Name:_________________________
Title:________________________
3
<PAGE>
Lenders:
FINOVA CAPITAL CORPORATION
By:______________________________
Name:_________________________
Title:________________________
GMAC COMMERCIAL CREDIT LLC
By:______________________________
Name:_________________________
Title:________________________
FLEET CAPITAL CORPORATION
By:______________________________
Name:_________________________
Title:________________________
BANK OF AMERICA, N.A.
By:______________________________
Name:_________________________
Title:________________________
HELLER FINANCIAL, INC.
By:______________________________
Name:_________________________
Title:________________________
4
<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, 3/rd/ 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, 13/th/ Floor
Atlanta, Georgia 30308
Heller Financial, Inc. $12,000,000
500 West Monroe Street, 18/th/ Floor
Chicago, IL 60661
BankBoston, N.A. $ 6,000,000
5
<PAGE>
ANNEX I-A
LENDERS AND COMMITMENT AMOUNT
With Respect to Subsection (F) of the
Borrowing Base as of
February 15, 2000
Name and Address of Lender Revolving Credit Commitment
- -------------------------- ---------------------------
BT Commercial Corporation $4,000,000
233 South Wacker Drive, 84/th/ Floor
Chicago, Illinois 60606
LaSalle National Bank $2,000,000
135 South LaSalle Street, Suite 425
Chicago, IL 60603
6
<PAGE>
Exhibit 10.11
-------------
TENTH AMENDMENT TO CREDIT AGREEMENT
-----------------------------------
This Tenth Amendment to Credit Agreement (the "Amendment") is made on this
31/st/ day of March, 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, and that
certain Ninth amendment to credit agreement dated February 15, 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 "March
31, 2000" contained in subsection (F)(i) thereof and inserting "May 15, 2000" in
its stead.
1
<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 December 31, 1999, which failure
constitutes an Event of Default. Subject to the satisfaction by the Borrower of
the conditions precedent contained herein, the Agent and Required Lenders hereby
waive the Event of Default occasioned as a result of Borrower's failure to
comply with the provisions of Section 7.7 for the 12 month period ending
December 31, 1999. Such waiver is limited to the Event of Default described
herein and is not a waiver with respect to any other Default or Event of Default
which has or may occur pursuant to the terms of the Credit Agreement generally.
SECTION 4. CONDITIONS PRECEDENT. The effectiveness of this Amendment is
--------------------
expressly conditioned upon satisfaction of the following conditions precedent:
4.1 Amendment. Agent shall have received copies of this Amendment
---------
duly executed by Borrower and Lenders constituting Required Lenders.
4.2 Amendment Fee. Borrower shall have paid to Agent for the benefit
-------------
of the Lenders who have committed to make advances pursuant to subsection (F) of
the Borrowing Base, an amendment fee in the amount of $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:_______________________________
Name:__________________________
Title:_________________________
3
<PAGE>
Agent:
BT COMMERCIAL CORPORATION
By:_______________________________
Name:__________________________
Title:_________________________
Lenders:
BT COMMERCIAL CORPORATION
By:_______________________________
Name:__________________________
Title:_________________________
FLEET BUSINESS CREDIT
CORPORATION
By:_______________________________
Name:__________________________
Title:_________________________
LASALLE NATIONAL BANK
By:_______________________________
Name:__________________________
Title:_________________________
BANKBOSTON, N.A.
By:_______________________________
Name:__________________________
Title:_________________________
4
<PAGE>
Lenders:
FINOVA CAPITAL CORPORATION
By:_______________________________
Name:__________________________
Title:_________________________
GMAC COMMERCIAL CREDIT LLC
By:_______________________________
Name:__________________________
Title:_________________________
FLEET CAPITAL CORPORATION
By:_______________________________
Name:__________________________
Title:_________________________
BANK OF AMERICA, N.A.
By:_______________________________
Name:__________________________
Title:_________________________
HELLER FINANCIAL, INC.
By:_______________________________
Name:__________________________
Title:_________________________
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, 3/rd/ 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, 13/th/ Floor
Atlanta, Georgia 30308
Heller Financial, Inc. $12,000,000
500 West Monroe Street, 18/th/ 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
February 15, 2000
Name and Address of Lender Revolving Credit Commitment
- -------------------------- ---------------------------
BT Commercial Corporation $4,000,000
233 South Wacker Drive, 84/th/ Floor
Chicago, Illinois 60606
LaSalle National Bank $2,000,000
135 South LaSalle Street, Suite 425
Chicago, IL 60603
7
<PAGE>
Exhibit 10.40
-------------
SUPPLEMENT TO NOTE PURCHASE AGREEMENTS
--------------------------------------
This SUPPLEMENT TO NOTE PURCHASE AGREEMENTS ("Supplemental Agreement")
is made and dated as of November 23, 1999, by and among Converse Inc. (the
"Company"), and U. S. Bancorp Investments, Inc., successor to Libra Investments,
Inc. ("Libra"), Foothill Partners III, L.P. ("Foothill"), DDJ Canadian High
Yield Fund ("DDJ Canadian"), and B III Capital Partners, L.P. ("B III Capital")
(Libra, Foothill, DDJ Canadian, and B III 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
(the "Secured Notes"); and
WHEREAS, the Company and the Purchasers desire (i) to acknowledge the
consent to the sale of certain Proprietary Rights by the Company, and (ii) to
amend certain provisions of the Note Purchase Agreements, as more fully set
forth herein.
NOW, THEREFORE, in consideration of the premises, the mutual
certifications and agreements herein contained and the payment provided for
herein, 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 certify and agree as follows:
SECTION 1. DEFINITIONS. Unless otherwise defined herein, all
-----------
capitalized terms shall have the respective meanings given to them in the Note
Purchase Agreements.
SECTION 2. ACKNOWLEDGMENTS OF PURCHASERS. The Purchasers acknowledge
-----------------------------
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 Note Purchase Agreement,
and in such capacity Libra is authorized to extend consents and amendments
with respect to the Note Purchase Agreements 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 Note Purchase
Agreement, and in such
<PAGE>
(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
Note Purchase Agreement, and in such capacity DDJ Canadian is authorized to
extend consents and amendments with respect to the Note Purchase Agreements
as set forth herein.
(d) B III Capital. B III 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
Note Purchase Agreement, and in such capacity B III Capital is authorized
to extend consents and amendments with respect to the Note Purchase
Agreements as set forth herein.
SECTION 3. CONSENT. Pursuant to Section 9.5(a) of the Note Purchase
-------
Agreements, the written consent of the Required Holders is required with respect
to the sale of any Proprietary Rights. The Company has the opportunity to sell
certain Proprietary Rights consisting of (i) the Company's entire right, title
and interest in trademarks and logos, whether registered or not, or applied for
registration or not, concerned with products and commodities except footwear and
special sports/gymnastic footwear covered by International Class 25 and the
corresponding former Japanese Classes 22 and 24 according to the Japanese
trademark law, in the geographical area of Japan, together with the goodwill of
the associated business in the geographical area of Japan, and (ii) any and all
agreements or contracts entered into by the Company, by which those trademarks
and logos have been licensed or otherwise allowed to be used with those products
and commodities in the geographical area of Japan (the assets in clauses (i) and
(ii) collectively the "Japanese Apparel Rights") for a gross sales price of US
$25,000,000. The net proceeds of the sale of the Japanese Apparel Rights will
be applied in their entirety to the repayment of indebtedness and obligations
under the Revolving Credit Agreement, as provided in Section 7.2 of the Note
Purchase Agreements. The Company hereby acknowledges that, as a result of and
upon the sale of the Japanese Apparel Rights, the annual "royalty income" shall
be determined on a pro forma basis for purposes of the "rolling twelve month
period" calculation under paragraph (E) of the definition of "borrowing base" in
the Revolving Credit Agreement, resulting in a reduction of approximately
$2,900,000 in the "borrowing base" as of the date of such sale. The Purchasers
hereby consent to the sale of the Japanese Apparel Rights, on the terms and
conditions described herein, and hereby acknowledge that, in connection with and
upon such sale, the liens and security interests relating to the Japanese
Apparel Rights as part of the Collateral under the Ancillary Documents shall be
and are released.
SECTION 4. AMENDMENT. Pursuant to Section 15.1 of the Note Purchase
---------
Agreements, the written consent of the Required Holders is required with
2
<PAGE>
respect to the amendment of the Note Purchase Agreements. The Purchasers hereby
consent (and agree with the Company) to amendments of the Note Purchase
Agreements as follows:
(a) The provisions of Section 9.7 of the Note Purchase Agreements are
deleted in their entirety, and the same shall be replaced with the
following provisions:
9.7 Minimum EBITDA.
The Company shall not permit EBITDA for each of the periods
ending on the dates set forth below to be less than the amount set
forth for such period:
The 3 month period ending $ 4,330,000
March 31, 2000
The 6 month period ending $ 8,660,000
June 30, 2000
The 9 month period ending $13,000,000
September 30, 2000
The 12 month period ending $17,330,000
December 31, 2000
The 12 month period ending $21,000,000
March 31, 2001
The 12 month period ending $23,500,000
June 30, 2001
The 12 month period ending $26,500,000
September 30, 2001
The 12 month period ending $28,000,000
December 31, 2001
(b) The following provisions shall be added to Section 9 of the Note
Purchase Agreements as new Section 9.15 thereof:
9.15 Availability Reserve; Limitation on Future Overadvances.
At any time while there are outstanding Series A Secured Notes,
the Company shall not, without the written consent of the holders of
at least two-thirds in interest of the aggregate principal amount of
the Series A Secured Notes, (i) make any borrowings of "revolving
loans" under the Revolving Credit Agreement, become liable for any
reimbursement or indemnity obligations with respect to "letter of
credit obligations", "foreign exchange obligations" or "acceptance
obligations" under the Revolving Credit Agreement, or incur any
obligations for other advances or extensions of credit under the
Revolving Credit Agreement if and to the
3
<PAGE>
extent the same would cause the principal amount of such loans and
other obligations outstanding under the Revolving Credit Agreement to
exceed the maximum principal amount then permitted to be outstanding
under the Revolving Credit Agreement less $6,850,000, or (ii) amend
the definition of "borrowing base" in the Revolving Credit Agreement
to include any future overadvances other than the aggregate principal
amount of $6,000,000 in overadvances set forth in paragraph (F) of
such definition, provided, however, that in any event the Company may,
without the consent of any of the Purchasers, effect, from time to
time, extensions of the date specified in clause (i) of paragraph (F)
of such definition (the Company hereby acknowledging and agreeing that
the aggregate principal amount of overadvances outstanding at any time
under the Revolving Credit Agreement shall never exceed $6,000,000).
SECTION 5. CERTIFICATION OF THE COMPANY. The Company represents and
----------------------------
warrants that the Company is, on the date hereof, in compliance with the terms
and provisions set forth in the Note Purchase Agreements, as hereby amended, and
in compliance with the payment obligations under the Secured Notes.
SECTION 6. PAYMENT. The Company shall pay the Purchasers which are
-------
signatories to this Supplemental Agreement a supplement fee, which supplement
fee shall be paid by means of the remittance to those Purchasers of up to
$250,000 in the aggregate. The amount to be so remitted to each such Purchaser
as its share of the supplement fee shall be determined by multiplying $250,000
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.
SECTION 7. OBLIGATIONS IN FULL FORCE AND EFFECT. Except as herein
------------------------------------
amended or otherwise provided (by consent), the Purchase Agreements and the
Ancillary Documents shall remain in full force and effect.
SECTION 8. COUNTERPARTS. This 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.
4
<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed this Supplemental
Agreement as of the day and year specified above.
COMPANY:
CONVERSE INC.
By:_______________________________
Name:__________________________
Title:_________________________
PURCHASERS:
U. S. BANCORP INVESTMENTS, INC.
By:_______________________________
Name:__________________________
Title:_________________________
FOOTHILL PARTNERS III, L.P.
By:_______________________________
Name:__________________________
Title:_________________________
DDJ CANADIAN HIGH YIELD FUND
By: DDJ Capital Management, LLC, its
attorney-in-fact
By:__________________________
Name:_____________________
Title:____________________
B III CAPITAL PARTNERS, L.P.
By: DDJ Capital III, LLC, its
general partner
By: DDJ Capital Management, LLC,
its manager
By:__________________________
Name:_____________________
Title:____________________
5
<PAGE>
Exhibit 10.43
-------------
AGREEMENT FOR ASSIGNMENT AND SALE OF TRADEMARKS
-----------------------------------------------
THIS AGREEMENT FOR ASSIGNMENT AND SALE OF TRADEMARKS (hereafter
"Agreement") is made and entered into this 25th day of November, 1999, by and
between CONVERSE INC., a corporation duly organized and existing under the laws
of the State of Delaware, U.S.A. and having its principal office at One Fordham
Road, North Reading, Massachusetts 01864, U.S.A. (hereafter "Converse"), and
ITOCHU Corporation, a corporation duly organized and existing under the laws of
Japan, having its registered office at 1-3, Kyutaro-machi-4-chome, Chuo-ku,
Osaka 541-8577, Japan (hereafter "Itochu").
WITNESSETH:
A. WHEREAS, Converse has created, developed, adopted and used, by itself
or through its licensees or distributors, certain trademarks for identifying,
advertising, manufacturing, marketing, distributing and selling certain products
and commodities in the Territory (hereinafter defined at Section 1.2) and other
countries in the world;
B. WHEREAS, Converse wishes to assign and sell to Itochu, and Itochu
wishes to acquire from Converse, Converse's entire rights, title, and interest
in the Trademarks (hereinafter defined at Section 1.1) concerned with all the
Products (hereinafter defined at Section 1.3), and Converse's entire Trademarks
Interest (hereinafter defined at Section 1.7) concerned with the Products in the
Territory together with the goodwill of the business of the Trademarks solely in
connection with the Products; and,
C. WHEREAS, Converse wishes to assign and sell to Itochu and Itochu
wishes to acquire from Converse certain License Agreements (hereinafter defined
at Section 1.8) whereby Converse grants to its licensees in the Territory the
right to use certain Trademarks.
NOW THEREFORE, in consideration of the promises and the mutual covenants
herein set forth, and of other good and valuable consideration, the receipt of
which is hereby acknowledged, it is mutually agreed as follows:
Section 1. Definitions. For the purposes of this Agreement, the following
-----------
terms shall have the meanings set forth below:
1.1. "Trademarks" means those trademarks and logos described and
represented in Exhibit A (trademarks registered to Converse, and trademarks
<PAGE>
developed by Converse and for which an application of registration has been
filed), and Exhibit B (marks and designs developed by Converse that are neither
registered nor has an application been filed for registration as a trademark,
but that are eligible for registration at the Japanese Trademark Office in the
Territory), attached hereto, currently owned by Converse.
1.2 "Territory" means the geographical area of Japan.
1.3 "Products" means all products and commodities, except footwear and
special sports/gymnastic footwear covered by International Class 25 and the
corresponding former Japanese Classes 22 and 24 according to the Japanese
Trademark Law.
1.4 "Closing Date" means November 26, 1999, or such other date as may be
determined by written agreement between the parties hereto.
1.5 "Closing" means the execution and exchange of all documents and the
performance and consummation of all obligations required to be executed,
exchanged, performed or consummated on the Closing Date in accordance with the
terms and conditions of this Agreement.
1.6 "Footwear Trademarks" means Trademarks in the Territory related to
footwear and special sports/gymnastic footwear covered by International Class 25
and in the corresponding former Japanese Classes 22 and 24 according to the
Japanese Trademark Law.
1.7 "Trademarks Interest" means Converse's entire right, title and
interest, as of the date of this Agreement, in and to the Trademarks concerned
with the Products in the Territory, whether registered or not, or applied for
registration or not, and shall include, but shall not be limited to, (i)
Converse's right to acquire a trademark right with respect to the marks and
logos described and represented in Exhibit B hereto which are concerned with any
of the Products and are eligible for registration at the Japanese Trademark
Office in the Territory; (ii) the rights and benefits accruing from or otherwise
arising out of the use of any of the Trademarks in conjunction with the
marketing of the Products in the Territory; (iii) the benefits of registration
of and applications for registration of the Trademarks now or hereafter made in
the Territory (including the benefits of applications for and registration of
the marks and logos described and represented in Exhibit B); (iv) the goodwill
of the business concerned with the Products for which the Trademarks are used in
the Territory; and, (v) in so far as it is lawful to assign and sell the same,
the right of Converse with respect to the Products to sue for all past acts of
infringement or passing-off in the Territory and to retain all damages and costs
awarded.
1.8 "License Agreements" means any and all agreements or contracts entered
<PAGE>
into by Converse, listed in Exhibit C hereto, by which the Trademarks have been
licensed or otherwise allowed to be used with the Products in the Territory, and
"License Agreement" means each of such License Agreements.
Section 2. Assignment and Sale of Trademarks Interest and License Agreement
----------------------------------------------------------------
2.1. Assignment and Sale of Trademarks Interest. Subject to and upon the
--------------------------------------------
terms and conditions herein set forth, Converse hereby agrees to assign and sell
to Itochu, and Itochu hereby acquires from Converse, Converse's Trademarks
Interest effective as of the Closing.
2.2 Assignment and Sale of License Agreements. Subject to and upon the
-------------------------------------------
terms and conditions herein set forth, Converse hereby agrees to assign and sell
to Itochu, and Itochu hereby agrees to acquire from Converse, Converse's entire
interest in all License Agreements regarding the Trademarks concerning the
Products in the Territory, including, but not limited to, the right to all
license fees and other amounts payable under the License Agreements on and after
the Closing Date except as set forth in Section 4.4.2.
2.3 Transfer of Trademarks Interest and License Agreements to Itochu.
----------------------------------------------------------------
Transfer of the ownership of the Trademarks Interest and the assignment and sale
of the License Agreements (in accordance with Sections 2.1 and 2.2, above, and
with such modifications as set out in Section 3.5 below) from Converse to Itochu
hereunder shall become effective as of the Closing. Converse shall not retain
after the Closing any power, right or interest with respect to the Trademarks
Interest or License Agreements assigned and sold pursuant to Sections 2.1 and
2.2, above. Converse shall retain, however, its interests and rights in the
Footwear Trademarks and license agreements concerning the Footwear Trademarks
other than the License Agreements concerning Footwear Trademarks.
2.4 Purchase Price. Itochu will pay to Converse for the assignment and sale
---------------
of the Trademarks Interest and the License Agreements the sum of Twenty-Five
Million United States Dollars (US$25,000,000.00) (hereafter "Purchase Price").
Section 3. Conditions of Assignment and Sale. All obligations of Itochu and
---------------------------------
of Converse to consummate the transactions contemplated herein are subject to
the fulfillment, to the satisfaction of Itochu, of each of the following
conditions:
3.1 Approval of the Board of Directors. Converse shall have obtained
----------------------------------
approval of the Converse's Board of Directors of this Agreement in the form
attached hereto as Exhibit D;
3.2 Release of Collateral. Converse shall have obtained complete and
---------------------
<PAGE>
unconditional letters of release for each of the Trademarks and License
Agreements from any security agreement or similar document, including, but not
limited to, any agreement with BT Commercial Corporation, in the form attached
hereto as Exhibit E, that prevents or may prevent Itochu's full ownership of the
Trademarks or assignment of the License Agreements;
3.3 Approval from Zett Create Corporation. Converse shall have obtained the
--------------------------------------
written consent of Zett Create Corporation and its parent company Zett
Corporation for the assignment of the License Agreements under this Agreement in
the form attached hereto as Exhibits F and G, respectively.
3.4 Application Documents for Trademark Assignments. Converse shall have
------------------------------------------------
executed trademark assignments and consents in a form as attached hereto as
Exhibits L, M, N, O, P and Q, as applicable, and shall deliver the same to
Itochu in order to register the assignment of the Trademarks in Japan.
Section 4. Closing and Post-Closing Activities.
-----------------------------------
4.1 Time and Place of Closing. The Closing will be held at 7:30 am., Tokyo
-------------------------
time at the Law Offices of Yanagida & Nomura in Tokyo, Japan on the Closing
Date.
4.2 Actions by Converse. At the Closing, Converse shall deliver each of the
--------------------
following documents to Itochu:
4.2.1 A certified copy of the resolution by Converse's Board of
Directors approving each and every term of this Agreement in the form attached
hereto as Exhibit D;
4.2.2 Complete and unconditional letters of release for each of the
Trademarks and License Agreements from any security agreement or similar
document, including, but not limited to, any agreement with BT Commercial
Corporation, in the form attached hereto as Exhibit E, that prevents or may
prevent Itochu's full ownership of the Trademarks;
4.2.3 Written consent from Zett Create Corporation and its parent
company Zett Corporation for the assignment and sale of the Trademarks and
License Agreement under this Agreement in the form attached hereto as Exhibits F
and G, respectively;
4.2.4 An executed letter to each of the licensees under the License
Agreements stating that Itochu has been assigned all rights, title and interest
of Converse in and to the License Agreements, that payment of all license fees,
marketing supplement fees and any other amounts due and payable under the
License Agreements from December 1, 1999, shall be paid to Itochu, and
<PAGE>
providing instructions for payment to Itochu, in the form attached hereto as
Exhibit K;
4.2.5 Executed assignments and consents for each of the Trademarks in
a form as attached hereto as Exhibits L, M, N, O, P and Q, as applicable, in
order to register the assignment of the Trademarks in Japan; and,
4.2.6 An executed "Closing Certificate" in the form attached hereto as
Exhibit S.
4.3 Actions by Itochu. Subject to the full satisfaction of the conditions
-----------------
to the Closing set forth in Section 3 and the preceding paragraphs of this
Section, Itochu shall pay to Converse at the Closing Twenty Four Million Six
Hundred Fifteen Thousand Five Hundred and Forty Nine United States Dollars and
Fifty-eight cents (US$24,615,549.58) which is the amount of the Purchase Price
less Three-Hundred Eighty Four Thousand Four Hundred Fifty United States Dollars
and Forty-two cents (US$384,450.42) calculated under Section 4.4.1 herein. Said
payment shall be made by wire transfer to Account Number 00196074 at Banker's
Trust, New York, New York, U.S.A. for the account of Converse Inc. ABA Routing
Number 021001033, unless the parties hereto mutually agree in writing to other
terms of payment.
4.4 Settlement of License Fees under Licensing Agreements.
------------- ---------------------------------------
4.4.1 Guaranteed Minimum Annual License Fee and Marketing Supplemental
----------------------------------------------------------------
Fee. Converse acknowledges that it has received certain Guaranteed Minimum
- ---
Annual License Fees and Marketing Supplement Fees as advanced payments for
license fees from the licensees as provided for in the License Agreements
(hereafter collectively "Advance Payments"). Converse further acknowledges that
a portion of the Advance Payments after November 30, 1999, calculated to be Four
hundred and Four Thousand Six Hundred Eighty Four United States Dollars and
Sixty-five cents (US$404,684.65), are owing to Itochu, less the amount of Twenty
Thousand Two Hundred Thirty Four United States Dollars and Twenty-three cents
(US$20,234.23) representing fifty-percent (50%) of the Japanese withholding tax
already paid by Converse. Therefore, the parties hereto agree that Itochu shall
offset, on the Closing Date, Three-Hundred Eighty Four Thousand Four Hundred
Fifty United States Dollars and Forty-two cents (US$384,450.42) owing to Itochu
against the amount owing under Section 2.4 of this Agreement.
4.4.2 License Fees. If after the Closing Date Itochu actually
-------------
receives any license fees or Marketing Supplement Fees under a particular
License Agreement in respect to a period prior to November 30, 1999, Itochu
shall pay to Converse, net of applicable withholding tax, the sum equal to such
license fees based on net sales reported by the licensees from the period of the
commencement date of such License Agreement to November 30, 1999, and such
<PAGE>
Marketing Supplement Fees prorated on a daily basis from the period of the
commencement date of such License Agreement to November 30, 1999. Such payments
are due to Converse no later than fourteen (14) days from their actual receipt
by Itochu. In addition, Itochu shall forward a tax withholding certificate for
any license fees and Marketing Supplement Fees paid to Converse pursuant to the
preceding sentence.
4.5 Post-Closing Actions by Converse. Within thirty (30) days of the
---------------------------------
Closing Date, Converse shall deliver each of the following documents to Itochu:
4.5.1 Written consent of Moonstar Corporation (hereafter "Moonstar"),
for the assignment and sale by Converse to Itochu of the Japanese trademarks co-
owned by Converse in the form attached hereto as Exhibit H;
4.5.2 Written consent of Moonstar for Itochu to grant license to any
third party the use of trademarks co-owned by Itochu and Moonstar after the
assignment and sale of such co-owned trademarks from Converse to Itochu, in the
form attached hereto as Exhibit I; and,
4.5.3 Written commitment from Gunze Limited (hereafter "Gunze") in
which Gunze waives its right to use the "GRANDMAMA" trademark under the
Trademark License Agreement dated December 1, 1994 between Gunze and Converse,
and acknowledges Itochu's right to collect any and all license fees from the
Closing Date, in the form attached hereto as Exhibit J.
Section 5. Power of Attorney. Converse hereby makes, constitutes and
------------------
appoints Itochu, its successors and assigns as Converse's true and lawful
attorney-in-fact, with full power of substitution and revocation, in Converse's
name and stead but on behalf and for the benefit of Itochu: (i) to assert or
enforce any claim, claim title or right hereby assigned and sold against
infringers or otherwise;(ii) from time to time to institute, prosecute, appear
in, defend and appeal any and all actions, suits and proceedings at law, in
equity or otherwise, which Itochu may reasonably deem proper in order to
enforce the Trademarks Interest; and (iii) to do all acts and things in
relation to the Trademarks Interest which Itochu may reasonably deem desirable
to protect and enforce the Trademark Interest against third parties. Converse
hereby declares that the foregoing powers are coupled with an interest and
shall not be revocable by Converse in any manner or for any reason, known or
unknown on the Closing Date.
Section 6. Representations and Warranties. Converse hereby represents and
------------------------------
warrants to Itochu, and its successors and assigns as follows:
6.1 Due Incorporation and Good Standing. Converse is a company duly
-----------------------------------
incorporated, organized, validly existing and in good standing under the laws
of the
<PAGE>
State of Delaware and has not, and does not intend to, (i) made a general
assignment to creditors, (ii) filed any voluntary petition of bankruptcy or
suffered the filing of any involuntary petition by creditors, (iii) suffered the
appointment of a receiver to take possession of all or substantially all of its
assets, (iv) suffered the attachment or other judicial seizure of all, or
substantially all, of its assets, (v) admitted in writing its inability to pay
its debts as they become due, or (vi) made an offer of settlement, extension or
composition to its creditors generally.
6.2 Authority. All acts and conditions required by law on the part of
---------
Converse to authorize the execution and delivery of this Agreement by Converse
and the transaction contemplated herein and the performance of all obligations
of Converse hereunder have been duly performed and obtained. No registration
with, or consent or approval of, or notice to, or other action by, any trustee
or holder of any indebtedness or obligation of Converse or any governmental
authority on the part of Converse to the execution, delivery and performance of
this Agreement or the assignment hereunder is required, or if required, such
registration has been made, such consent or approval given, such notice given or
such other appropriate action taken and certified copies of such have been
delivered to Itochu.
6.3 Enforceability. This Agreement constitutes, and each document referred
---------------
to in Section 4 above, when executed and delivered by Converse shall constitute,
a valid and legally binding obligation of Converse, enforceable in accordance
with its terms, subject to bankruptcy, insolvency, reorganization and other
similar laws affecting the rights and remedies of the creditors generally.
6.4 Capacity. Converse has the legal power, right and authority to execute
---------
and deliver this Agreement and the instruments referenced herein. The persons
executing this Agreement and the instruments referenced herein on behalf of
Converse have the legal power, right and actual authority to bind Converse to
the terms and conditions of this Agreement.
6.5 Legal Conflict. The execution, delivery and performance of this
---------------
Agreement and the consummation of the transactions contemplated hereby will not
result in any violation or default of any provision of any instrument, judgment,
order, writ, decree or contract to which Converse is a party or by which
Converse is bound, or require any consent under or be in conflict with or
constitute, with or without the passage of time and giving notice, either a
violation or default under any such provision.
6.6 Conduct of Business. On and after the date of this Agreement and until
-------------------
the Closing Date, Converse shall conduct its business in the ordinary course of
business consistent with past practice and shall not sell, transfer or otherwise
dispose of any of the Trademarks or the License Agreements.
6.7 No Pending Disputes. Except for an opposition filed by Mizuno
-------------------
<PAGE>
Corporation for Registration No. 4274297, Converse All Star, there is no action,
suit, proceeding, or investigation pending or to the best knowledge of Converse,
threatened against or affecting Converse which questions the validity of this
Agreement, the validity of any of the Trademarks or License Agreements, or the
right of Converse to enter into this Agreement or to consummate the transactions
contemplated hereby.
6.8 Trademarks. Collectively, Exhibits A and B attached hereto create a
-----------
comprehensive list of all registered and non-registered trademarks owned by
Converse, as well as those marks and designs developed by Converse, that are
neither registered nor has an application been filed for registration as a
trademark but that are eligible for registration at the Japanese Trademark
Office in the Territory, for the Products in the Territory.
6.9 License Agreements
------------------
6.9.1 Exhibit C attached hereto is a comprehensive list of all License
Agreements and no other license agreement exists which grants the use of the
Trademarks, except those for the use of the Footwear Trademarks, owned by
Converse.
6.9.2 Each License Agreement is valid, effective and enforceable in
accordance with its terms.
6.9.3 There is no breach of contract, action, suit, proceeding, or
investigation pending or threatened against or affecting Converse under the
License Agreements.
6.9.4 Each License Agreement, except for that between Converse and
Zett Create Corporation and its parent company Zett Corporation, is assignable
without any consent of the licensee to such License Agreement.
6.10 Ownership of Trademarks; Encumbrances. Converse has valid, sole and
-------------------------------------
undivided title to and in all and each item of the Trademarks concerned with the
Products in the Territory to be assigned and sold by Converse to Itochu under
this Agreement, free and clear of any lien, pledge, security interest,
encumbrance or other restriction of any kind or character and, upon the
assignment and sale of the Trademarks Interest as provided in this Agreement,
except those trademarks co-owned with Moonstar listed in Exhibit H. Itochu will
acquire valid, sole and undivided title thereto and therein, free and clear of
any lien, pledge security interest, encumbrance or restriction of any kind or
character. On and after the assignment and sale of the Trademarks Interest
pursuant to Section 2 above, Itochu is the sole owner of the Trademarks Interest
with its sole, exclusive, free and complete right to use, affix, assign,
license, advertise and apply for the registration of, the Trademarks concerned
with the Products in whatever form, color or design or arrangement thereof which
Itochu deems appropriate or necessary with respect to the Products.
<PAGE>
6.10.1 Trademark License Agreement with Gunze. With regard to the
--------------------------------------
Trademark License Agreement dated December 1, 1994, between Converse and Gunze
Limited, involving the "GRANDMAMA" trademark, Converse hereby represents and
warrants that Itochu will not be liable for any payments to Larry Johnson's
Agent under section 5.1(a) of the Trademark License Agreement or any of its
amendments. Any payments now owing or owing in the future to Larry Johnson's
Agent are and will remain the sole responsibility of Converse.
6.11 Registration and Renewal Fees Each of the registrations and
-----------------------------
applications for registration of the Trademarks, when applicable, is in full
force and effect and is not subject to any pending current or notified
cancellation or opposition proceedings (except for Registration No. 4274297,
Converse All Star), and Converse has paid in full all fees necessary to maintain
validity of such registrations or applications for registration that come due
prior to the Closing Date.
6.12 No Infringement. The use of the Trademarks concerned with the
-----------------
Products in the Territory for identifying, advertising, manufacturing, selling
or distributing the Products in the Territory, whether registered or not, does
not and will not directly or indirectly violate or infringe upon any trademark
rights or other proprietary or intellectual property right of any third party.
6.13 Information. Converse has fully provided Itochu with all the
------------
information in Converse's possession that Itochu has requested, in determining
whether to acquire the Trademarks, Trademarks Interest, and License Agreements
and has not failed to disclose to Itochu any condition concerning the Products
in the Territory which has become known to Converse and which does or could
materially affect such Trademarks or their use thereof in the Territory.
6.14 Accuracy of Representations and Warranties. All of Converses
------------------------------------------
representations and warranties in this Agreement shall have been accurate in all
material respects as of the date of this Agreement, and shall be accurate in all
material aspects as of the Closing Date as if made on the Closing Date.
Section 7. Covenants of Converse. Converse hereby covenants with Itochu, its
---------------------
assigns and successors as follows:
7.1 Information. In addition to the documents delivered to Itochu pursuant
-----------
to Section 4 above, Converse shall promptly upon reasonable notice of Itochu
from time to time provide Itochu with all information, documents and cooperation
necessary to enable Itochu, its nominees or patent attorneys to prepare and file
(within the respective time periods required by the applicable authorities in
the Territory for registration of trademark assignment) applications for (i)
registration of assignment of the Trademarks Interest with competent
<PAGE>
offices in the Territory and for (ii) registration of Trademarks which are not
yet registered at the Closing. Itochu shall bear the costs of preparation of
such documents as it requires and of such registration of assignment (which
shall not include attorney's fees for the attorney which Converse may retain in
connection with the above subjects). Such documents shall include, but are not
limited to, consent letters, powers of attorney and certificates of nationality
in such forms and contents as required by the applicable authorities in the
Territory. The consideration for Converse's cooperation pursuant to the
foregoing shall be deemed included in the Purchase Price, and Itochu shall not
be obligated to pay any additional consideration for Converse's cooperation
except for the aforementioned costs which Itochu shall bear under this Section.
7.2 Further Acts. Converse shall assist Itochu in any reasonable manner to
------------
obtain for its own benefit the Trademarks concerned with the Products in the
Territory, and Converse shall promptly upon request of Itochu execute, deliver,
notarize, file and register applications and assignments (including, without
limitation and where applicable, trademark assignments) thereof to Itochu,
consents to registration and any other lawful documents deemed necessary by
Itochu to preserve or protect the Trademarks Interest assigned and sold to it
hereunder or otherwise carry out the purposes of this Agreement, and Converse
shall further assist Itochu in every way to enforce the Trademarks Interest
assigned to and sold Itochu hereunder, including, without limitation, testifying
in any suit or proceeding involving any Trademarks Interest or executing any
documents deemed necessary by Itochu, all without consideration, but at the
expense of Itochu (which shall not include attorney's fees for the attorney
which Converse may retain in connection with the above subjects).
7.2.1 Future Registration of Trademarks. Converse acknowledges that
---------------------------------
its duties under Section 7.2 include that, in case the Japanese Patent Office
rejects the application by Itochu of trademarks listed in Exhibit B, Converse
will apply for registration of such trademarks under Converse's name, but for
the exclusive benefit of Itochu. After the application for registration of such
trademarks Converse will immediately assign such registered trademarks to Itochu
in a form attached hereto as Exhibit R. Consideration for any action by Converse
under this Section is deemed to be included in the Purchase Price, however,
Itochu shall reimburse Converse for any expenses incurred by Converse (which
shall not include attorney's fees for the attorney which Converse may retain in
connection with the above subjects).
7.3 Approval from Moonstar
----------------------
7.3.1 Converse shall have obtained and delivered to Itochu within
thirty (30) days of the Closing Date written consent of Moonstar, in the form
attached hereto as Exhibit H, for the assignment and sale by Converse to Itochu
of the Japanese trademarks co-owned by Converse.
<PAGE>
7.3.2 Converse shall have obtained and delivered to Itochu within
thirty (30) days of the Closing Date written consent of Moonstar for Itochu to
grant license to any third party the use of trademarks co-owned by Itochu and
Moonstar after the assignment and sale of such co-owned trademarks from Converse
to Itochu, in the form attached hereto as Exhibit I.
7.4 Letter from Gunze. Converse shall have obtained and delivered to Itochu
-----------------
within thirty (30) days of the Closing Date the written commitment from Gunze in
which Gunze waives its right to use the "GRANDMAMA" trademark under the
Trademark License Agreement dated December 1, 1994 between Gunze and Converse,
and acknowledges Itochu's right to collect any and all license fees from the
Closing Date, in the form attached hereto as Exhibit J.
7.5 Indemnity. Converse shall indemnify and hold harmless Itochu, and any
----------
of its successors and assigns from and against any and all claims, demands,
causes of action, losses, liabilities, judgments, damages, obligations, costs or
expenses, including attorneys fees, arising out of or in connection with (i) any
breach of any covenant or agreement of Converse contained in this Agreement;
and, (ii) any misrepresentation of Converse or any breach of warranties or
representations of Converse contained in this Agreement, including, without
limitation, the obligations and liabilities for any claims asserted by third
parties against Itochu, its successors and assigns, and their licensees and
distributors based on the allegation that the use of the Trademarks for
identifying, advertising, manufacturing, selling or distributing the Products in
any part of the Territory constitutes an infringement of any trademark or other
proprietary or intellectual property rights of any third party.
Section 8. Taxes.
------
8.1 Payment of Taxes Any and all taxes (including withholding tax), duties
----------------
or levies to be imposed by the Japanese tax authority on the payment of the
Purchase Price hereunder, if any, shall be borne and paid by Converse. The
evidence of any payment of the above amount withheld by Itochu, if any, shall be
furnished to Converse.
8.2 Tax Treaty. Itochu and Converse acknowledge that this Agreement is a
-----------
sale for the purposes of Articles 14 and 16 of the United States/Japan Tax
treaty.
Section 9. Notice. All notices, demands and other communications permitted
-------
or required to be given under this Agreement shall be in writing and shall be
delivered personally or transmitted by confirmed facsimile (in each case
followed by confirmation delivered by registered airmail or express courier) or
send by registered airmail or express courier to the other party, postage and
cost of transmission and delivery prepaid, to the parties at the following
addresses:
<PAGE>
If to Converse: CONVERSE INC.
One Fordham Road
North Reading, Massachusetts 01864-2619
U.S.A.
Facsimile No. : 1-978-664-7579
Attention: Jack A. Green, Senior Vice President
Administration, General Counsel and
Secretary
If to Itochu:
ITOCHU Corporation
1-3, Kyutaro-machi 4-chome,
Chuo-ku, Osaka 541-8577
JAPAN
Facsimile No. : 81-6-6244-0845
Attention: Kiyoshi Yamaguchi, Manager Textile
& Fashion Goods Division
Section No.4
With a copy to:
PROMINENT USA INC.
1411 Broadway, 35th Floor
New York, NY 10018
U.S.A.
Facsimile No. : 1-212-827-5711
Attention: Richard Tretler
Senior Vice President Finance
Treasurer
If either Converse or Itochu changes its address, as aforesaid, written
notice of such change shall be given to the other party and any such change
shall, by this reference, be adopted into this section and become part of this
Agreement.
Section 10. Miscellaneous
-------------
10.1. Binding Effect; Assignment. This Agreement shall be binding upon and
---------------------------
inure to the benefit of the parties and their respective successors,
representatives, and assigns. Neither party hereto shall assign any of its
rights or obligations under this Agreement without the prior written consent of
the other party.
10.2. Best Efforts. Each of the parties hereto will use its best efforts
------------
to take, or cause to be taken, all appropriate action to do, or cause to be
done, all things necessary, proper or advisable under applicable laws and
regulations to consummate and make effective the transactions contemplated in
this Agreement. The parties shall provide to
<PAGE>
each other the necessary information to effect the transactions contemplated in
this Agreement as soon as reasonably practicable. In case at any time after the
Closing any further action is necessary to carry out the purposes of this
Agreement, each party to this Agreement shall take such necessary action.
10.3 Waivers. No waiver of any breach of any agreement or provision herein
--------
contained shall be deemed a waiver of any preceding or succeeding breach thereof
or of any other agreement or provision herein contained.
10.4 Severability. If any term or provision of this Agreement or the
-------------
application thereof to any person or circumstance shall to any extent be invalid
or unenforceable, the remainder of this Agreement and the application of such
term or provision to persons or circumstances other than those as to which it is
held invalid or unenforceable shall not be affected thereby, and each term or
provision of this Agreement shall be valid and enforceable to the fullest extent
permitted by law.
10.5 Survival. The representations and warranties of Converse made herein,
---------
and all obligations of Converse and Itochu under this Agreement the full
performance of which is not required prior to the Closing Date, shall each
survive the date of this Agreement and the Closing Date, and shall be fully
enforceable thereafter in accordance with their respective terms.
10.6 Governing Law. This Agreement shall be governed by, and construed with
--------------
the laws of Japan.
10.7 Arbitration and Venue. All disputes, controversies or claims arising
---------------------
out, in relations to or in connection with this Agreement, or for any breach
thereof, shall be finally settled by arbitration in Osaka, Japan in accordance
with the Arbitration Rules of the International Chamber of Commerce. Arbitration
shall be conducted in English language. Any award or decision rendered shall be
final and binding upon both of the parties, their successors and assigns.
10.7.1 Equitable Relief. Notwithstanding the preceding terms of this
-----------------
paragraph, both parties shall maintain the right to seek equitable relief at its
discretion, e.g. temporary restraining orders, preliminary injunctions, etc.,
for all disputes, controversies or claims arising out, in relations to or in
connection with this Agreement, or for any breach thereof, in a competent court
having jurisdiction.
10.8 Attorney's Fees. Should any party institute any action or proceeding
----------------
to enforce this Agreement or any provision hereof, or for any declaration of
rights hereunder, the prevailing party in such action or proceeding shall be
entitled to receive from the other party all costs and expenses, including,
without limitation, attorneys' fees and expenses and all other litigation costs
and expenses, interest, penalties and all
<PAGE>
expenses and costs, incurred by the prevailing party in connection with such
action or proceeding.
10.9 Headings. Headings contained in this Agreement are solely for
--------
convenience and shall not be used to define or construe any of the provisions
hereof.
10.10 Exhibits. Each of the exhibits referred to in and attached to this
--------
Agreement is fully incorporated herein by reference.
10.11 Modifications and Amendments. This Agreement may not be modified,
----------------------------
changed or supplemented, nor may any obligations hereunder be waived or
extensions of time for performance granted, except by written instrument signed
by the party to be charged.
10.12 Entire Agreement. This Agreement constitutes the entire agreement
----------------
between Converse and Itochu with respect to the subject matter hereof and
supercedes any and all prior discussions, promises, covenants, agreements, and
commitments, oral or written, made and entered into between Converse and Itochu.
10.13 Counterparts. This Agreement may be executed in counterparts, each of
-------------
which shall be deemed an original, but all of which taken together shall
constitute but one and the same instrument.
10.14 Execution Required. This Agreement shall not be binding upon the
-------------------
party against whom enforcement is sought until such party duly executes this
Agreement.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
executed by their duly authorized officers as of the day and year first written
above.
CONVERSE INC.
By:____________________________
Laura W Kelley
Deputy General Counsel and
Assistant Secretary
ITOCHU CORPORATION
By:____________________________
Kiyoshi Yamaguchi
Manager
Import Textile & Fashion Goods Division
Section No. 4
<PAGE>
Exhibit 21
CONVERSE INC.
LIST of SUBSIDIARIES
--------------------
Converse Star I, Inc., a subsidiary of Converse Inc.
Incorporated in Massachusetts on March 26, 1985
Converse EMEA Ltd., a subsidiary of Converse Inc.
Incorporated in Delaware on January 29, 1990
Converse Europe, Inc., a subsidiary of Converse Inc.
Incorporated in Delaware on November 23, 1993
Converse Germany, Inc., a subsidiary of Converse Europe, Inc.
Incorporated in Delaware on March 21, 1994
Converse Iberia, Inc., a subsidiary of Converse Europe, Inc.
Incorporated in Delaware on July 8, 1994
Converse Italy, Inc., a subsidiary of Converse Europe, Inc.
Incorporated in Delaware on September 21, 1994
Converse Scandinavia, Inc., a subsidiary of Converse Europe, Inc.
Incorporated in Delaware on June 7, 1995
Converse Benelux Holding Company, Inc., a subsidiary of Converse Europe, Inc.
Incorporated in Delaware on November 23, 1993
Converse Benelux, Inc., a subsidiary of Converse Benelux Holding Company,
Inc.
Incorporated in Delaware on November 23, 1993
Converse France, Inc., a subsidiary of Converse Benelux Holding Company,
Inc.
Incorporated in Delaware on November 23, 1993
Converse Shelf, Inc., a subsidiary of Converse Inc.
Incorporated in Delaware on November 21, 1994
Converse Japan Corporation, a subsidiary of Converse Inc.
Incorporated in Delaware on May 2, 1996
Converse Mexico, Inc., a subsidiary of Converse Inc.
Incorporated in Delaware on October 23, 1996
Converse All Star do Brasil Industria e Comercio Ltda., a subsidiary of Converse
Inc.
Incorporated in Brazil
Calzado Deportivo de Reynosa, S.A. de C.V., a subsidiary of Converse Inc.
Incorporated in Mexico on January 25, 1984
Converse Export Co. Limited, a subsidiary of Converse Inc.
Incorporated in Barbados on December 28, 1984
Apex One, Inc., a subsidiary of Converse Inc.
Incorporated in New Jersey on July 8, 1988
<PAGE>
EXHIBIT 23.1
------------
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the incorporation by reference in this Registration
Statement on Form S-8 of Converse Inc. of our report dated April 11, 2000
relating to the consolidated financial statements and financial statement
schedule, which appears in this Annual Report on Form 10-K.
PricewaterhouseCoopers LLP
Boston, Massachusetts
April 14, 2000
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM CONVERSE
INC. 1999 FORM 10-K AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> JAN-01-2000
<PERIOD-START> JAN-03-1999
<PERIOD-END> JAN-01-2000
<CASH> 2,305
<SECURITIES> 0
<RECEIVABLES> 44,456
<ALLOWANCES> 3,945
<INVENTORY> 76,414
<CURRENT-ASSETS> 122,096
<PP&E> 38,034
<DEPRECIATION> 19,179
<TOTAL-ASSETS> 152,363
<CURRENT-LIABILITIES> 164,500
<BONDS> 74,265
0
0
<COMMON> 17,479
<OTHER-SE> (130,024)
<TOTAL-LIABILITY-AND-EQUITY> 152,363
<SALES> 231,767
<TOTAL-REVENUES> 252,233
<CGS> 176,510
<TOTAL-COSTS> 269,642
<OTHER-EXPENSES> 1,047
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 22,289
<INCOME-PRETAX> (15,934)
<INCOME-TAX> 27,674
<INCOME-CONTINUING> (43,608)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (43,608)
<EPS-BASIC> (2.50)
<EPS-DILUTED> (2.50)
</TABLE>
