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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
ACT OF 1934 FOR THE FISCAL YEAR ENDED DECEMBER 30, 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
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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 April 9, 2001, the aggregate market value of the registrant's voting
stock held by non-affiliates of the registrant was approximately $1,882,786
based on the closing sales price of the registrant's common stock as reported on
the Over-The-Counter Bulletin Board ("OTCBB") as of such date ($0.17).
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 April 9, 2001, 17,553,047 shares of the registrant's Common Stock
were outstanding.
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CONVERSE INC.
ANNUAL REPORT ON FORM 10-K
TABLE OF CONTENTS
Page
----
PART I.
Item 1. Business.................................................... 1
Products................................................. 1
Sales and Distribution.................................. 3
Licensing Agreements..................................... 3
Sourcing and Manufacturing............................... 4
Research and Development................................. 4
Backlog.................................................. 4
Competition.............................................. 5
Trademarks and Patents................................... 5
Environmental Matters.................................... 5
Employees................................................ 5
Item 2. Properties.................................................. 6
Item 3. Legal Proceedings........................................... 6
Item 4. Submission of Matters to a Vote of Security Holders......... 6
PART II.
Item 5. Market for Registrant's Common Equity and Related
Stockholder Matters......................................... 6
Item 6. Selected Financial Data..................................... 7
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations......................... 8
Item 7A. Quantitative and Qualitative Disclosure About Market Risk... 18
Item 8. Financial Statements and Supplemental Data.................. 18
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure......................... 18
PART III.
Item 10. Directors and Executive Officers of the Registrant.......... 19
Item 11. Executive Compensation...................................... 20
Item 12. Security Ownership of Certain Beneficial Owners and
Management.................................................. 24
Item 13. Certain Relationships and Related Transactions.............. 24
PART IV.
Item 14. Exhibits, Financial Statement Schedules, and Reports
on Form 8-K................................................. 25
SIGNATURES
Signatures.................................................. 30
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. 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 has been 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 93-
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.
On January 22, 2001, the Company voluntarily filed a petition to reorganize
as a debtor in possession under Chapter 11 of Title 11 of the United States Code
(the "Bankruptcy Proceedings") in the U.S. District Court for the District of
Delaware (the "Bankruptcy Court"). Some of the actions that have been
implemented by Management during the Bankruptcy Proceedings include the
following:
. The Company's domestic manufacturing facilities in Lumberton, NC,
Mission, TX and Reynosa, Mexico were closed down effective March 31,
2001.
. The Company reduced its general overhead expenses by terminating 28
corporate employees located at its headquarters office in North Reading,
Massachusetts.
Following a bidding process approved by the Bankruptcy Court, Converse
entered in an Asset Purchase Agreement (the "APA") with Footwear Acquisition,
Inc. ("Footwear Acquisition") providing for a sale of substantially all of the
Company's assets, including trademarks and other intellectual property, certain
contracts, accounts receivable and inventory, for a purchase price of $117.5
million. The APA was approved by the Bankruptcy Court following a hearing on
April 12, 2001. The closing under the APA is scheduled to be held on April 30,
2001. The purchase price under the APA is subject to adjustment based on the
level of accounts receivables and inventory of Converse as of the closing date,
and a portion of the purchase price is to be deposited into escrow pursuant to
the terms of the APA.
The APA does not provide for the sale of the Company's manufacturing
facilities and the equipment located therein or for the sale of certain other
non-material assets of the Company. The Bankruptcy Court has approved a
procedure for the sale of those assets and the Company intends to proceed with
the sale of such assets. Proceeds from the sale under the APA and other sales
will be applied to the payment of expenses and creditor claims under the
supervision of the Bankruptcy Court.
The Company is advised that Footwear Acquisition intends to continue the
business of the Company following closing of the sale under the APA. The
Company expects that some of its employees will join Footwear Acquisition after
the sale.
The APA contains a number of conditions to the obligations of the parties to
complete the sale, and there can be no assurance that the sale provided for in
the APA will be completed.
PRODUCTS
In 2000, the Company concentrated its marketing, product development and
sales efforts on its five categories: performance, athletic originals,
children's, action sports and lifestyles.
1
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 targeted toward serious
athletes. To strengthen its performance business, the Company introduced a
$100 basketball shoe that contains helium technology in 1999. The Company
broadened its line of helium-oriented products in 2000 by introducing models in
the other performance segments of training, running and action sports as well as
other basketball models. The Company sells its basketball footwear at suggested
retail prices ranging from $45 to $100, and its other performance 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 is 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 574 million pairs,
and management believes it to be the all-time best selling athletic shoe.
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 implemented a new strategy in the children's product category
that includes 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 steadily growing product category that focuses on alternative sports
such as skateboarding. 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.
LIFESTYLES
The offerings in the lifestyles product category are based on clean,
athletic inspired, low-cut product styles and sell at suggested retail prices
ranging from $50 to $60 per pair. The lifestyles category is specifically
designed toward young, trend-setting inner city male and female consumers, 12-22
years of age, who historically have influenced the direction of the athletic
footwear market. The U.S. distribution of this product has been strictly
monitored within targeted urban athletic shops, as well as industry leaders in
athletic specialty and sporting goods stores.
SPORTS APPAREL, ACCESSORIES AND SELECTED FOOTWEAR LICENSING (ROYALTY INCOME)
Converse utilizes third party licensee companies who manufacture or purchase
and distribute sports apparel, accessories and selected footwear to provide
consumers worldwide with Converse-branded products from head-to-toe. Converse
has entered into a number of separate licensing agreements permitting licensees
to design and market certain products under the Converse brand name within
specific markets.
2
SALES AND DISTRIBUTION
In 2000, the Company's products were distributed in over 110 countries to
approximately 5,500 customers, including athletic specialty, sporting goods,
department and shoe stores, as well as to 23 Company-operated retail outlet
stores.
UNITED STATES MARKET
In 2000, the Company's 26-member U.S. sales force marketed Converse footwear
through approximately 2,900 active retail accounts. In 2000, domestic sales
represented 69% of the Company's 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 were serviced by
three account executives who focus on the product and merchandising needs of
these retailers.
INTERNATIONAL MARKET
In 2000, the Company marketed 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 31% of total net sales
in 2000.
As of year-end, in the key Western European markets of France, United
Kingdom, Germany and Scandinavia, Converse had wholly-owned subsidiary units
operating in these territories. These Converse operating units were responsible
for the marketing and distribution of Converse-branded footwear, apparel and
accessories to sporting goods, department and specialty stores within these
countries. In 1998, the Company began a program of converting all of its wholly-
owned foreign operations into licensee/distributor arrangements. In 2001, the
Company completed the conversion of its remaining operating units in Western
Europe.
Sales of footwear in the Pacific region were also made through independent
licensees/distributors, the largest of which is Moon-Star Chemical Corporation,
the Company's exclusive distributor of footwear in Japan since 1980. Moon-Star
contributes approximately 13% to the Company's total net sales worldwide.
Five footwear licensees/distributors and four apparel licensees supply the
Latin American market.
LICENSING AGREEMENTS
Converse contracts with licensees who manufacture or purchase and distribute
sports apparel, accessories and selected footwear to provide global customers
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:
FISCAL YEAR ENDED
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JANUARY 2, 1999 JANUARY 1, 2000 DECEMBER 30, 2000
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(DOLLARS IN THOUSANDS)
Total sales by licensees:
Footwear...................... $121,666 $147,588 $147,541
Apparel and accessories....... 179,330 143,823 94,444
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Total.............................. $300,996 $291,411 $241,985
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Total royalty income:
Footwear....................... $ 9,776 $ 11,809 $ 11,032
Apparel and accessories........ 10,399 8,657 5,275
-------- -------- --------
Total.............................. $ 20,175 $ 20,466 $ 16,307
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3
SOURCING AND MANUFACTURING
The majority of the Company's footwear models are sourced from various Far
East manufacturers. However, nearly all of the Company's athletic originals
products sold in 2000 were manufactured domestically at two facilities in the
U.S. and one facility in Mexico. On March 31, 2001, the Company closed all of
its domestic manufacturing facilities and transferred that production to a
factory in Indonesia owned by a long-standing supplier.
SOURCING
In 2000, approximately 67% of all converse footwear was sourced from several
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.
In 2000, the Company used 21 manufacturers located in China, Taiwan, Macau
and Vietnam. While one manufacturer produced approximately 43% of the Company's
products sourced overseas, 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 was the largest manufacturer of athletic footwear in the United
States, producing approximately 3.9 million pairs domestically in 2000 at a
385,000 square foot manufacturing facility in Lumberton, North Carolina, and
leased 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 were from models manufactured at the
Lumberton facility, with supplemental production in Mission. Leather cutting
and stitching was performed in Reynosa in order to capitalize on lower labor
costs. This provided the Company with the ability to supply classic models with
the "Made in the U.S.A." label which was an important consumer criterion for
certain overseas markets. As stated above, manufacturing ceased at these
factories on March 31, 2001.
RESEARCH AND DEVELOPMENT
Converse has been a leading innovator of new footwear technologies. The
Company spent $7.7 million, $6.2 million and $3.5 million on research and
development in 1998, 1999 and 2000, respectively.
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. 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.
BACKLOG
At the end of 2000, the Company's global backlog, after adjustments for the
conversion of all of the Company's foreign subsidiaries into third party
licensing entities, was $77.7 million, compared to $57.1 million at the end of
1999. 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.
4
COMPETITION
The athletic footwear market is highly competitive. Industry participants
compete with respect to fashion, price, quality, performance and durability.
Competitors in the athletic footwear industry in the United States can be broken
down into several groups. Nike Inc. ("Nike"), with estimated 2000 U.S. footwear
revenues exceeding just under $3.3 billion, controls over 42% of the U.S.
athletic footwear market. Reebok International, Inc. ("Reebok"), with estimated
2000 U.S. footwear revenues of approximately $900 million controls just under
12% of the U.S. athletic footwear market. The adidas-Solomon AG Corporation
("adidas"), with estimated 2000 U.S. footwear revenues of approximately $840
million controls just over 10.7% of the U.S. athletic footwear market. New
Balance Athletic Shoe, Inc. ("New Balance"), with estimated 2000 U.S. footwear
revenues of approximately $750 million, controls over 9.6% 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 Vans each have 2000
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 2000 U.S. revenues of under $200 million, including K-Swiss,
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 were not produced by the Company in 2000. Worldwide footwear
industry data is unavailable, but the largest companies globally are believed to
be Nike, Reebok and adidas.
TRADEMARKS AND PATENTS
Converse has utilized 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.
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 manufacturing operations while discontinued, still
exposes it to the risk of claims with respect to environmental matters and there
can be no assurance that material costs and/or liabilities will not be incurred
in connection with such claims.
EMPLOYEES
As of December 30, 2000, Converse employed 1,510 individuals, of which 1,081
were in manufacturing, and 429 were in sales, administration, development and
distribution.
5
ITEM 2. PROPERTIES.
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As of December 30, 2000, Converse owned or leased the following principal
manufacturing plants, offices and warehouses:
TYPE OF FACILITY
LOCATION (SQUARE FEET) FLOOR SPACE OWNED/LEASED
-------- ------------------ ----------- -------------
North Reading, MA................. Headquarters 106,800 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
In addition to the above properties, the Company leased space for 22 retail
stores in the U.S. and 1 retail store in the United Kingdom. The Company also
leased several sales, customer service offices and distribution centers
throughout the world. The Charlotte, North Carolina lease expires in 2011; the
Reynosa, Mexico lease expires in 2008; and the Mission, Texas lease expires in
2003. On December 20, 2000, the Company sold its headquarters building located
in North Reading, Massachusetts for the purchase price of $15.1 million. The
sale involved a "leaseback" provision allowing the Company to continue renting
allocated space within the building until June 30, 2001.
ITEM 3. LEGAL PROCEEDINGS.
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Other than the Bankruptcy Proceedings described under Item 1. Business,
above, Converse is not a defendant in any material legal proceedings.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
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Not applicable.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
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The Company's common stock ("Common Stock") was traded on the New York Stock
Exchange ("NYSE") under the symbol "CVE" until March 2, 2000. Commencing on
March 7, 2000, the Company's Common Stock traded on the OTCBB under the symbol
"CVEO". The following table for 1999 sets forth the range of high and low
closing prices for the Common Stock as reported by the NYSE for the periods
indicated. The following table for 2000 sets forth the range of high and low
closing prices for the Common Stock as reported by the NYSE until March 2 and
thereafter as reported on the OTCBB. OTCBB quotations reflect interdealer
prices, without retail markup, markdown, commissions or other adjustments and
may not necessarily represent actual transactions. Since the commencement of
the Bankruptcy Proceedings, the market for Common Stock has been limited and the
quotations reported may not be indicative of prices that could be obtained in
actual transactions.
6
High Low
---- ---
1999
----
First Quarter................................. $4.187 $2.25
Second Quarter................................ 5.50 2.6875
Third Quarter................................. 3.6875 2.1875
Fourth Quarter................................ 2.50 1.3750
2000
----
First Quarter................................. 1.8125 0.625
Second Quarter................................ 1.0313 0.50
Third Quarter................................. 1.125 0.5313
Fourth Quarter................................ 0.75 0.25
As of April 9, 2001 there were 17,553,047 shares of Common Stock issued and
outstanding, which shares were held by approximately 1,950 holders of record.
The Company has not paid any dividends on its Common Stock during the
periods indicated and will not pay any dividends on its Common Stock in the
future.
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.
FISCAL YEAR ENDED
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DEC. 28, 1996 JAN. 3, 1998 JAN. 2, 1999 JAN. 1, 2000 DEC. 30, 2000
------------- ------------ ------------ ------------ -------------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
STATEMENT OF OPERATIONS DATA:
Net sales ......................................... $354,829 $455,817 $313,124 $ 235,154 $ 209,050
Cost of sales...................................... 268,592 334,876 242,442 179,897 175,907
-------- -------- -------- --------- ---------
Gross profit....................................... 86,237 120,941 70,682 55,257 33,143
Selling, general and administrative expenses....... 114,888 127,261 92,683 83,764 56,322
Royalty income..................................... 27,638 22,569 20,175 20,466 16,307
Gain on sale of trademarks......................... -- -- -- 24,811 --
Restructuring, asset impairment and
other unusual charges........................... (1,177) 1,537 -- 9,368 7,071
-------- -------- -------- --------- ---------
Earnings (loss) from operations.................... 164 14,712 (1,826) 7,402 (13,943)
Credit on investment in unconsolidated
Subsidiary...................................... (1,362) (12,537) -- -- --
Interest expense, net.............................. 17,776 16,133 18,487 22,301 21,395
Gain on sale of headquarters building.............. -- -- -- -- 14,870
Other (income) expense, net........................ 6,319 2,267 (366) 1,035 3,754
-------- -------- -------- --------- ---------
Earnings (loss) from continuing operations
before income taxes............................. (22,569) 8,849 (19,947) (15,934) (24,222)
Income tax expense (benefit)....................... (4,134) 13,154 3,572 27,674 3,223
-------- -------- -------- --------- ---------
Loss from continuing operations................... (18,435) (4,305) (23,519) (43,608) (27,445)
Extraordinary (gain) loss, net of tax expense
(benefit) of $(576) and $437, respectively..... -- 744 (704) -- --
-------- -------- -------- --------- ---------
Net loss........................................... $(18,435) $ (5,049) $(22,815) $ (43,608) $ (27,445)
======== ======== ======== ========= =========
Net basic and diluted earnings (loss) per share:
Continuing operations........................... $ (1.10) $ (0.25) $ (1.36) $ (2.50) $ (1.57)
Extraordinary gain (loss)....................... -- (0.04) 0.04 -- --
-------- -------- -------- --------- ---------
Net earnings (loss)............................. $(1.10) $ (0.29) $ (1.32) $ (2.50) $ (1.57)
======== ======== ======== ========= =========
BALANCE SHEET DATA (AT PERIOD END):
Working capital................................. $(32,648) $ 20,260 $ 2,706 $ (42,404) $(133,141)
Total assets.................................... 222,603 234,694 198,217 152,363 97,183
Long-term debt, less current maturities......... 9,644 80,000 101,799 74,265 --
Total stockholders' equity (deficiency)......... (38,868) (47,982) (69,310) (112,545) (140,195)
7
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. On January 22, 2001, the Company voluntarily commenced the Bankruptcy
Proceedings. The Company has been engaged in the Bankruptcy Proceedings
throughout the first quarter of Fiscal 2001 (See Note 3 of the Notes to
Consolidated Financial Statements).
Converse has been 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 5,500 customers, which
include athletic specialty, sporting goods, department and shoe stores, as well
as to 23 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 2000 (as defined below) were
affected by several significant factors including: (i) the ongoing conversion of
operating subsidiaries into third party licensing entities, with conversions
completed for Benelux and Italy subsidiaries; (ii) continued aggressive efforts
to reduce operating expenses; (iii) an asset impairment charge of $6.7 million
to reduce long-lived assets to fair market values and; (iv) the sale of the
Company's North Reading, Massachusetts headquarters building for the purchase
price of $15.1 million, the proceeds of which were used to reduce the Company's
secured debt, resulting in a gain on sale of fixed assets of approximately $14.9
million included as other income in the Company's statement of operations.
RESULTS OF OPERATIONS
The Company's fiscal year end is the Saturday closest to December 31 in each
year. The results of operations periodically include a 53-week fiscal year. For
purposes of the Company's financial statements Fiscal 2000 refers to the 52-week
period ended December 30, 2000 ("Fiscal 2000"), Fiscal 1999 refers to the 52-
week period ended January 1, 2000 ("Fiscal 1999") and Fiscal 1998 refers to the
52-week period ended January 2, 1999 ("Fiscal 1998").
COMPARISON OF FISCAL 2000 AND FISCAL 1999
FISCAL YEAR ENDED
----------------------------------------------------
JANUARY 1, 2000 % DECEMBER 30, 2000 %
--------------- ----- ----------------- -----
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
Net revenue........................................................... $235,154 100.0 $209,050 100.0
Gross profit.......................................................... 55,257 23.5 33,143 15.9
Selling, general and administrative expenses.......................... 83,764 35.6 56,322 27.0
Royalty income........................................................ 20,466 8.7 16,307 7.8
Gain on sale of trademarks............................................ 24,811 10.6 -- --
Restructuring, asset impairment and other unusual charges............. 9,368 4.0 7,071 3.4
Earnings (loss) from operations....................................... 7,402 3.2 (13,943) (6.7)
Interest expense, net................................................. 23,301 9.5 21,395 10.2
Other (income) expense, net........................................... 1,035 0.5 (11,116) (5.3)
Loss from continuing operations before income tax..................... (15,934) (6.8) (24,222) (11.6)
Income tax expense.................................................... 27,674 11.8 3,223 1.5
Net loss.............................................................. $(43,608) (18.6) $(27,445) (13.1)
Basic and diluted net loss per share.................................. $ (2.50) -- $ (1.57) --
8
Net Revenue
Net revenue for Fiscal 2000 decreased to $209.1 million from $235.2 million
in Fiscal 1999, an 11.1% reduction. The $26.1 million reduction in net revenue
in Fiscal 2000 was attributable to decreases of 34.4%, 17.1%, 43.2% and 12.3% in
the performance, athletic originals, children's and action sports categories,
respectively, compared to Fiscal 1999. These decreases were partially offset by
a $32.0 million increase in the Company's lifestyle category, which was
introduced during Fiscal 1999.
Net revenue in the United States increased 7.0% to $144.2 million for Fiscal
2000 from $134.8 million for Fiscal 1999. The $9.4 million increase in net
revenue was primarily attributable to the increased demand of products in the
Company's lifestyles category. Net revenue decreased 35.4% internationally to
$64.9 million for Fiscal 2000 from $100.4 million for Fiscal 1999. Net revenue
in Europe, Middle East and Africa ("E.M.E.A."), Pacific and Americas regions
declined 39.4%, 29.6% and 35.6% respectively. This decrease in international
net revenue is primarily due to the conversion of several Western European
subsidiaries into third party licensee arrangements.
GROSS PROFIT
Gross profit decreased to $33.1 million in Fiscal 2000 from $55.3 million in
Fiscal 1999, a 40.1% decline. The decline of $22.2 million was due to lower
volume of shipments, decreased manufacturing utilization, increased reserves to
adjust certain inventory to lower of cost or market values, and the Company's
efforts to reduce inventory levels through the sale of excess inventory at
reduced prices. As a percentage of net revenue, gross profit decreased to 15.9%
in Fiscal 2000 compared to 23.5% for the prior year period.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
The Company took aggressive actions in 2000 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 $27.5 million
to $56.3 million for Fiscal 2000 from $83.8 million for Fiscal 1999, a 32.8%
reduction. This reduction was mainly attributable to decreased spending in
marketing, advertising, promotion and research and development activities, as
well as corporate staff reductions and expense reductions associated with
converting wholly-owned subsidiaries with foreign operations into licensee
arrangements. As a percentage of net revenue, selling, general and
administrative expenses decreased to 27.0% for Fiscal 2000 from 35.6% for Fiscal
1999.
ROYALTY INCOME
Royalty income decreased 20.5% to $16.3 million for Fiscal 2000 from $20.5
million for Fiscal 1999. International royalty income, which represented 77.9%
of the Company's total royalty income for Fiscal 2000, decreased 28.0%. This
reduction was primarily attributable to the elimination of Japanese non-footwear
trademark licensee agreements which were sold in November 1999 (see below).
Reductions of royalty income from Latin America of 21.6% and from Southeast Asia
of 10.8% were partially offset by an increase of 3.8% from Japan and 4.5% from
E.M.E.A. Domestic royalty income increased 28.1% to $3.6 million in Fiscal
2000. As a percentage of net revenue, royalty income decreased to 7.8% in
Fiscal 2000 compared to 8.7% 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 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. Royalty income adjusted to eliminate the Japanese non-
footwear trademarks was $16.3 million in Fiscal 1999 and $16.3 million in Fiscal
2000.
9
RESTRUCTURING, ASSET IMPAIRMENT AND OTHER UNUSUAL CHARGES
During Fiscal 2000, Converse recorded restructuring and asset impairment
charges of $7.1 million, net of reversals. Converse recorded a restructuring
charge of $0.4 million in the fourth quarter of 2000 for severance and related
benefits related to a workforce reduction of 28 employees in its research and
development, marketing and distribution functions. The Company incurred less
than anticipated severance costs related to its 1999 corporate restructuring
initiative and reversed reserves of $0.3 million. The Company also had lower
than anticipated restructuring costs related to the R&D building lease
termination reserve and the contract termination reserve resulting in the
reversal of restructuring costs of $0.1 million and $0.2 million, respectively.
An additional restructuring charge of $0.3 million was recorded related to the
write-off of the cumulative translation adjustment for the Benelux subsidiary.
Charges of $0.4 million were recorded for severance and lease termination costs
related to the completion of the conversion of its European subsidiaries. Also
during the fourth quarter of fiscal 2000, the Company recorded an impairment
loss of $6.7 million associated with long-lived assets at corporate, retail
stores, and the Company's leased manufacturing plants in Mission, Texas and
Reynosa, Mexico. At December 30, 2000, $3.2 million of the restructuring charges
recorded remain in current liabilities on the balance sheet.
In the first quarter of 2001, the Company will record additional
restructuring and inventory charges relating to: (i) the write-off of cumulative
translation adjustments for Germany, Scandinavia, France and U.K. subsidiary
conversions effective January 1, 2001 approximating $0.9 million; (ii) severance
charges for manufacturing employees terminated on March 31, 2001; and (iii)
inventory charges for excess raw materials at the time of the factory closings.
EARNINGS (LOSS) FROM OPERATIONS
The Company recorded a loss from operations in Fiscal 2000 of $13.9 million
compared to earnings from operations of $7.4 million in Fiscal 1999. This
change was primarily due to the factors discussed above.
INTEREST EXPENSE
Interest expense for Fiscal 2000 decreased 4.0% to $21.4 million from $22.3
million in Fiscal 1999. The reduction was primarily due to decreased
amortization of financing costs related to the Senior Secured Notes which were
fully amortized in September 2000.
OTHER (INCOME) EXPENSE
Other income for Fiscal 2000 of $11.1 million was mainly comprised of the
net gain on the sale of the Company's North Reading, Massachusetts headquarters
building of $14.9 million. This gain was partially offset by the write-off of
financing costs associated with the Company's effort to obtain a royalty
securitization as well as legal and professional costs related to the corporate
restructuring. Other expense for Fiscal 1999 of $1.0 million was mainly
comprised of a legal settlement.
INCOME TAX EXPENSE
Income tax expense for Fiscal 2000 was $3.2 million compared to $27.7
million for Fiscal 1999. As of December 30, 2000, the Company's gross deferred
tax assets were $72.1 million, which was the result of net operating loss
carryforwards and other future tax deductible items totaling $188.8 million.
Although the period to use these deferred tax assets is 9 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 such, the Company did not
recognize tax benefits of $9.1 million in Fiscal 2000 in order to establish a
full valuation allowance of $72.1 million against its deferred tax assets. Since
the Company has reserved all deferred tax assets, income tax expense of $3.2
million for Fiscal 2000 is comprised of certain fixed foreign, federal and state
taxes.
NET LOSS
Due to the factors described above, the Company recorded a net loss of $27.4
million in Fiscal 2000 compared to a net loss of $43.6 million in Fiscal 1999.
10
NET LOSS PER SHARE
The Company recorded a net loss per share of $1.57 in Fiscal 2000 compared
to a net loss per share of $2.50 in Fiscal 1999. The weighted average number of
outstanding shares in Fiscal 2000 was 17,515,366 versus 17,413,859 in Fiscal
1999.
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 revenue for Fiscal 1999 and Fiscal 1998:
FISCAL YEAR ENDED
---------------------------------------------------
JANUARY 2, 1999 % JANUARY 1, 2000 %
--------------- ----- --------------- ----
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
Net revenue......................................................... $313,124 100.0 $235,154 100.0
Gross profit........................................................ 70,682 22.6 55,257 23.5
Selling, general and administrative expenses........................ 92,683 29.6 83,764 35.6
Royalty income...................................................... 20,175 6.4 20,466 8.7
Gain on sale of trademarks.......................................... -- -- 24,811 10.6
Restructuring, asset impairment 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 5.9 22,301 9.5
Other (income) expense, net......................................... (366) (0.1) 1,035 0.5
Loss from continuing operations before income tax................... (19,947) (6.4) (15,934) (6.8)
Income tax expense.................................................. 3,572 1.1 27,674 11.8
Loss from continuing operations..................................... (23,519) (7.5) (43,608) (18.6)
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) (7.3) $(43,608) (18.6)
Basic and diluted net loss per share................................ $ (1.32) -- $ (2.50) --
Net Revenue
Net revenue for Fiscal 1999 decreased to $235.2 million from $313.1 million
in Fiscal 1998, a 24.9% reduction. The $77.9 million net revenue reduction in
Fiscal 1999 was attributable to decreases of 23.7%, 25.5%, and 40.9% in the
performance, athletic originals, and children's categories, respectively,
compared to Fiscal 1998. These decreases were partially offset by increases of
$6.1 million and $1.0 million in the lifestyles and action sports category,
respectively.
Net revenue in the United States decreased 20.4% to $134.8 million for
Fiscal 1999 from $169.3 million for Fiscal 1998. Net revenue decreased 30.3%
internationally to $100.4 million for Fiscal 1999 from $143.9 million for Fiscal
1998. Net revenue in the E.M.E.A., Pacific and Americas regions were down 26.7%,
35.0% and 27.7%, 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.
11
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 23.5% in Fiscal 1999 compared to 22.6% 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 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 35.6% for Fiscal 1999 from 29.6% 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 46.3% 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 8.7% in
Fiscal 1999 compared to 6.4% 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, Asset Impairment 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
12
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 that 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 agreements upon substantial
completion of the conversions. The revenues and the respective 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.
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.
13
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.
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.
LIQUIDITY AND CAPITAL RESOURCES
Cash Flow
Net cash provided by operating activities was $11.6 million and $10.7
million for Fiscal 2000 and Fiscal 1999, respectively. In Fiscal 2000, a net
loss of $29.1 million was incurred after giving effect to adjustments for gains
on disposals of property, plant and equipment of $13.0 million, provision for
restructuring and impairment actions of $6.8 million, non-cash items of
depreciation and amortization of $3.0 million and amortization of a previously
established deferred tax asset. The adjusted net loss of $29.1 million was
increased by $0.9 million from changes in other long-term assets and liabilities
but offset by reductions in working capital needs of $41.5 million, resulting in
net cash provided by operating activities of $11.6 million. Reductions in
working capital needs were driven principally from reductions in receivables and
inventories of $6.3 million and $36.2 million, respectively, due to reduced
sales levels in Fiscal 2000, conversion of all remaining operating subsidiaries
in Europe to third-party licensing arrangements effective in January 2001 and
timing of purchases of finished goods inventory for Spring 2001 resulting in
reductions of in-transit inventory in December 2000 versus prior year. In Fiscal
1999, a net loss of $6.6 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 $8.3 million) was
offset by cash provided from reductions in working capital needs of $16.0
million due principally to reduced receivables from lower sales and from
reductions in other long-term assets and liabilities of $1.2 million.
In Fiscal 2000, cash provided by investing activities amounted to $14.6
million. Proceeds from disposal of assets of $14.9 million were due principally
to the sale of the Company's headquarters office building in North Reading,
Massachusetts. This was partially offset by proceeds used for additions to
property, plant and equipment of $0.3 million consisting primarily of leasehold
improvements to open two new retail stores during the year. 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 financing activities was $25.1 million in Fiscal 2000. Use
of cash was due predominantly to a reduction of $1.5 million in short-term debt
with respect to the Company's European subsidiaries and a reduction of $23.7
with respect to the Company's revolving credit facility (see Financing
Arrangements below). A major component of the reduction in the revolving credit
facility was net cash proceeds of $14.2 million received in December 2000 for
the sale of the Company's headquarters office building in North Reading,
Massachusetts. 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 $0.3
million of net cash provided from the sale of Common Stock relating to the
Company's employee stock purchase plan.
Working Capital
The Company's working capital position, net of cash, was a deficit of $136.0
million on December 30, 2000 versus a deficit of $44.7 million on January 1,
2000.
14
Total current assets, net of cash, were $77.3 million at December 30, 2000,
down $42.5 from $119.8 million at January 1, 2000. The decrease in current
assets is predominantly decreases of $6.4 million and $36.3 million in accounts
receivable and inventories, respectively. The decreases in receivables and
inventories are due principally to a decrease in sales in 2000 and the continued
conversion of operating subsidiaries in Europe to third-party licensing
arrangements. Total current liabilities increased $48.8 million, from $164.5
million at January 1, 2000 to $213.3 million at December 30, 2000. The current
portion of long-term debt increased $74.7 million due to the reclassification of
convertible subordinated notes from long-term debt in the third quarter of
Fiscal 2000 (see Financing Arrangements below). This was partially offset by a
decrease of $23.7 million and $1.5 million in the credit facility and short-term
debt respectively (see Financing Arrangements below). Accounts payable, accrued
expenses and income taxes payable decreased $0.6 million, in aggregate, from
prior year.
Financing Arrangements
Simultaneously with the issuance of the $80.0 million principal amount of 7%
Convertible Subordinated Notes (the "Convertible Notes") in May 1997 (see
below), 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 indebtedness under the Company's then existing credit agreement. 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 (see below). In November
1999, the Company reduced the commitment from $120.0 million to $90.0 million.
In October 2000, the Credit Facility was amended to reduce the commitment to
$80.0 million. In December 2000, in connection with the receipt of net cash
proceeds net of closing costs and lease deposit of $14.2 million from the sale
of the Company's headquarters office building in North Reading, Massachusetts,
the commitment was reduced to $68.8 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. In order to receive the required
consents for the sale of the office building in December 2000 from the Company's
secured lenders, the Company entered into a Consent Agreement with the Banks
whereby Excess Proceeds (as defined therein) of $3.0 million were reserved for
against the Borrowing Base, thereby not allowing any incremental availability to
the Company under the Credit Facility as a result of this transaction.
At December 30, 2000, the total revolving loans and banker acceptances
outstanding under the Credit Facility of $47.8 million are classified as current
due to the Events of Default as more fully described below and due to the
Company's lockbox arrangement (whereby payments 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.
As of December 30, 2000, the borrowing base was $52.2 million. Utilization
under the Credit Facility at year end amounted to $51.8 million consisting of
revolving loans of $38.1 million, banker acceptances of $9.7 million and
outstanding letters of credit of $4.0 million. Accordingly, $0.4 million of the
maximum available borrowing base remained unutilized as of December 30,
2000.Revolving loans under the Credit Facility bear interest either at the Prime
Lending Rate (as defined therein) plus one and one-half percent (1.50%) per
annum as amended effective October 27, 2000 (previously 1.00%) or at the
Adjusted LIBOR Rate (as defined therein) plus a margin of three and one-half
percent (3.50%) per annum as amended effective October 27, 2000 (previously
3.00%). At December 30, 2000, revolving loans outstanding under the Credit
Facility bore interest of 10.51% based upon the weighted average of the Prime
Lending Rate and the Adjusted LIBOR Rate. Obligations under the Credit Facility
are secured by first priority liens on substantially all of the Company's U.S.
assets. The Credit Facility requires compliance with customary affirmative and
negative covenants, including certain financial covenants. At September 30,
2000 the Company was not in compliance with the minimum EBITDA (as defined
therein) covenant contained in the Credit Facility and such failure to comply
constitutes an Event of Default under the Credit Facility. Also, the default in
payment of interest due with respect to the Convertible Notes (see below) and
the default in the payment of principal and interest due with respect to the 15%
Senior Secured Notes (see below) constitute Events of Default under the Credit
Facility. In October 2000, the Company entered into an agreement (the
"Forbearance Agreement') with the Banks whereby the Banks agreed to forbear the
exercise of rights and remedies under the Credit Facility in respect of these
defaults until the earlier of January 31, 2001, the date that the
15
required lenders (as defined in the Credit Facility) notify the agent that the
Facility has been terminated or such other date as certain defaults or other
events specified in the Forbearance Agreement occur.
On January 12, 2001 the Company and the Banks entered into the Fourteenth
Amendment to the Credit Agreement whereby, among other things, the Fixed Asset
Reserve (as defined therein) was changed to allow the Company to utilize up to
$6.0 million of incremental availability. On January 22, 2001, the Company
commenced the Bankruptcy Proceedings, and in connection therewith, entered into
a post-petition credit facility (the "Postpetition Credit Facility") with the
Banks. Pursuant to entering into the Fourteenth Amendment to the Credit
Agreement and the Postpetition Credit Facility, the Company paid fees of $0.7
million in January 2001 and $0.4 million in February 2001 to the Banks. An
additional fee of $0.25 million is payable on April 15, 2001 if the Fixed Asset
Reserve (as defined therein) is not equal to, or greater than, $8.9 million.
In September 1998, the Company issued $28.6 million aggregate principal
amount of 15% Senior Secured Notes (the "Secured Notes") due September 16, 2000.
Interest on the Secured Notes is payable quarterly in arrears. The Secured Notes
were issued in two series: Series A in the aggregate principal amount of $24.8
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 Company has defaulted on various covenants included in the Secured
Notes. In October 2000, the Company and the Holders of the Secured Notes
executed the Fourth Supplement to Note Purchase Agreement and Standstill
Agreement (the "Fourth Supplement") whereby the Holders of the Secured Notes
agreed to forbear from exercising remedies under the Secured Notes until the
earlier of January 31, 2001 or such other date as certain defaults or other
events specified in the Fourth Supplement occur.
On January 11, 2001, the Holders of the Secured Notes consented to the
aforementioned Fourteenth Amendment to the Credit Agreement. In connection with
this consent, the Company paid a transaction fee of 1% of the outstanding amount
of the Secured Notes, or $0.3 million. On January 22, 2001, the Company entered
into the Fifth Supplement to Note Purchase Agreements (the "Fifth Supplement")
whereby consent and approval of the holders of the Secured Notes was obtained to
enter into the Postpetition Credit Facility. In connection with this Fifth
Supplement, the following transaction fees were agreed to as of January 22,
2001: (1) a payment in kind, in lieu of cash, of 3% of the outstanding principal
amount of the Secured Notes by increasing the outstanding principal amount from
$28.6 million to $29.5 million, (2) 0.5% of the outstanding principal amount, or
$0.15 million, if the Fixed Asset Reserve (as defined therein) is not equal to,
or greater than, $8.9 million on February 28, 2001, and (3) 0.5% of the
outstanding principal amount, or $0.15 million, if the Fixed Asset Reserve is
not equal to, or greater than, $8.9 million on April 15, 2001. Also effective
January 22, 2001, under the Fifth Supplement, interest accrues at the rate of
18% per annum on the unpaid principal amount of the Secured Notes; 15% per annum
payable monthly in arrears and 3% per annum payable at the time of final payment
of the principal balance outstanding under the Secured Notes.
The Secured Notes are classified under current liabilities on the Company's
consolidated balance sheet as of December 30, 2000 as the principal amount was
in default and due. 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 carry a third priority perfected lien on substantially all the U.S. assets
of the Company.
On May 21, 1997, the Company completed the sale of $80.0 million of
Convertible Notes. 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 December 30, 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. Interest is payable semi-annually on June 1 and December 1,
commencing on December 1, 1997. The Company did not make semi-annual interest
payments due on June 1, 2000 and December 1, 2000 with respect to the
Convertible Notes. The interest payments remain outstanding and constitute an
Event of Default under the related indenture. On August 4, 2000, the trustee
under the indenture for the Convertible Notes sent Converse a letter stating
that Holders of more than twenty-five percent (25%) of the Convertible Notes had
directed it to declare the full amount of principal and interest under the
Convertible Notes to be due and payable. Accordingly, the entire principal
amount and related interest of the Convertible Notes is now due and is
classified as current in the Company's consolidated balance sheet at December
30, 2000.
16
In the past, subsidiaries of the Company have maintained asset based
financing arrangements in certain European countries with NMB-Heller, N.V. or an
affiliate. In general, these financing arrangements allowed 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. At December 30, 2000 $0.4 million was outstanding in
connection with these arrangements. As of January 1, 2001 all remaining
operating subsidiaries in Europe (i.e. France, United Kingdom, Scandinavia and
Germany) were converted to third-party licensing entities. Accordingly, all
outstanding debt in connection with these financing arrangements was repaid
during the first quarter of Fiscal 2001.
Capital Expenditures
Capital Expenditures were $0.3 million, $2.7 million and $4.8 million in
Fiscal 2000, Fiscal 1999 and Fiscal 1998, respectively. Fiscal 2000 investments
included $0.2 million on leasehold improvements primarily to open two new
Company retail stores and the remainder $0.1 million on various smaller projects
and improvements.
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.
17
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK.
--------------------------------------------------------------------
Interest Rate Risk
At December 30, 2000 the carrying value of the Company's debt totaled $151.0
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 December 30, 2000 the Company had fixed rate debt of $103.0 million and
variable rate debt of $48.0 million. The Company is in default on payments on
both the fixed rate and variable rate debt and the face amount is currently due.
As such, the debt is no longer subject to interest rate risk.
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.
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.
18
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. All directors serve until the next
Annual Meeting of the Company and until their successors are elected and
qualified.
DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY
Name DIRECTOR SINCE AGE POSITION
---------------------- -------------- --- -----------------------------------------------------
Glenn N. Rupp 1996 56 Chairman of the Board and Chief Executive Officer
Donald J. Barr 1994 66 Director
Julius W. Erving 1994 51 Director
Robert H. Falk 1994 62 Director
Gilbert Ford 1987 69 Director
Michael S. Gross 1992 39 Director
Joshua J. Harris 1992 36 Director
John H. Kissick 1994 59 Director
Michael D. Weiner 1996 48 Director
Jack A. Green 55 Senior Vice President Administration, General Counsel
And Secretary
Herbert R. Rothstein 59 Executive Vice President - Operations
Alistair M. Thorburn 43 Executive Vice President
James E. Lawlor 47 Senior Vice President and Chief Financial Officer
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 was 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 Johnson Outdoors, 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 Incorporated, and Darden Restaurants, Inc.
MR. FALK has been an officer of Apollo Capital Management, L.P.. ("Apollo
Management") or its predecessor, 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.
19
MR. GROSS has been an officer of Apollo Management or its predecessor since
1990. Mr. Gross is also a director of Allied Waste Industries, Inc., Florsheim
Group Inc., Rare Medium, Inc., Saks Incorporated, Sylvan Learning Systems, Inc.,
Encompass Services Corporation, and United Rentals, Inc.
MR. HARRIS is an officer of Apollo Management, having been associated with
it or a predecessor since 1990. Mr. Harris is also a director of Florsheim
Group Inc. and Quality Distribution, Inc.
MR. KISSICK has been a principal of Apollo Management or its predecessor
since 1991. Mr. Kissick is also a director of Florsheim Group Inc. and Quality
Distribution, Inc.
MR. WEINER has been an officer of Apollo Management or its predecessor
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 Florsheim Group Inc., and
Quality Distribution, Inc.
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 Executive Vice President - Operations since
October 2000. Previously, Mr. Rothstein was Senior Vice President, Products and
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.
MR. THORBURN has served as Executive Vice President since October 2000.
Prior to that, Mr. Thorburn served as Senior Vice President, International and
U.S. Operations. 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 Senior Vice President and Chief Financial Officer
since September 2000. Mr. Lawlor held the position of Vice President, Finance
since June 1995 and Vice President and Treasurer from September 1994. Mr.
Lawlor has held positions with the Company 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 2000.
ITEM 11. EXECUTIVE COMPENSATION.
---------------------------------
The following table sets forth certain information for each period presented
with respect to compensation awarded to, earned by or paid to Converse's Chief
Executive Officer during 2000 and to the four most highly compensated executive
officers of Converse other than Converse's Chief Executive Officer (the "Named
Executive Officers"):
20
SUMMARY COMPENSATION TABLE
Annual Compensation LONG-TERM COMPENSATION AWARDS
----------------------------------- ----------------------------------
SECURITIES
OTHER ANNUAL RESTRICTED UNDERLYING ALL OTHER
NAME SALARY BONUS COMPENSATION STOCK AWARD(S) OPTIONS COMPENSATION
AND PRINCIPAL POSITION YEAR ($) ($) (1) ($) ($) (2) (#) ($)
--------------------------------------------------------------------------------------------------------------------------------
Glenn N. Rupp 2000 500,000 0 0 0 500 2,625 (4)
Chairman and Chief 1999 500,000 0 0 184,375 0 2,500
Executive Officer 1998 500,000 0 0 222,500 0 2,500
Alistair Thorburn 2000 246,750 0 74,067 (3) 0 500 24,917 (5)
Executive Vice President 1999 247,262 0 66,204 147,500 0 24,250
1998 235,000 0 69,287 166,875 0 24,598
Jack A. Green 2000 216,000 0 0 0 500 0 (4)
Senior Vice President 1999 211,769 0 0 73,750 0 2,500
Administration, General 1998 197,227 0 0 55,625 0 2,500
Counsel and Secretary
Herbert R. Rothstein 2000 210,000 0 0 0 500 2,625 (4)
Executive Vice President 1999 199,382 0 0 73,500 0 2,500
Operations 1998 180,546 0 0 50,000 0 2,500
James E. Lawlor 2000 176,756 0 0 0 500 2,625 (4)
Senior Vice President 1999 164,040 0 0 0 0 2,370
and Chief Financial Officer 1998 151,539 0 0 0 0 2,273
James E. Solomon(6) 2000 210,000 0 0 0 0 0
Senior Vice President, 1999 300,000 0 0 147,500 0 2,500
Sales and Marketing 1998 295,192 0 0 0 0 95,500
(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 1998, 1999 or
2000. Retention bonuses earned during the year were $62,500, $30,844,
$27,000, $26,250 and $25,000 for Messrs. Rupp, Thorburn, Green, Rothstein,
and Lawlor, respectively. Payment of these retention bonuses is contingent
on the Bankruptcy Proceedings and is, therefore, not assured.
(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 December 30, 2000 based on the closing price of
the Company's Common Stock on the last trading day of the fiscal year
($0.3650) were $32,850, $25,550, $10,950, $10,950 for Messrs. Rupp,
Thorburn, Green and Rothstein respectively.
(3) Amount shown represents $37,249 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 $18,818
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.
(6) Mr. Solomon was Senior Vice President, Sales and Marketing, until he
resigned on August 25, 2000.
RETIREMENT PLANS
Messrs. Rupp, Green, Rothstein and Lawlor 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 Mr. Rupp 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 December 30, 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 case of Mr. Rupp such amount includes amounts payable under the SERP.
21
YEARS OF
CREDITED SERVICE ANNUAL
NAME AT DECEMBER 30, 2000 BENEFITS PAYABLE
--------------------------------------------------------- -------------------- ----------------
Glenn N. Rupp............................................ 4.75 133,015
Jack A. Green............................................ 17.17 83,522
Herbert R. Rothstein..................................... 12.34 56,310
James E. Lawlor.......................................... 22.00 90,372
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." Mr. Solomon resigned
from the Company on August 25, 2000, therefore he will not be entitled to any
annual benefits under the Retirement Plan.
STOCK OPTIONS
The Company granted 500 shares of stock options to each full-time salaried
employee working for the Company as of May 10, 2000, including the Named
Executive Officers (with the exception of Mr. Solomon).
AGGREGATED OPTION EXERCISES AND FISCAL YEAR-END OPTION VALUES
NUMBER OF SECURITIES UNDERLYING VALUE OF UNEXERCISED IN-THE-MONEY
UNEXERCISED OPTIONS AT FY-END OPTIONS AT FY-END (1)
SHARES ACQUIRED VALUE
ON EXERCISE REALIZED EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
(#) ($) (#) (#) ($) ($)
--------------- -------- ----------- ------------- ----------- -------------
Glenn N. Rupp............ 0 0 418,000 202,500 0 0
Alistair Thorburn........ 0 0 96,000 84,500 0 0
Jack A. Green............ 0 0 29,000 36,500 0 0
Herbert R. Rothstein..... 0 0 19,000 33,500 0 0
James E. Lawlor.......... 0 0 28,800 9,700 0 0
(1) Based on the $0.365 per share price of the Common Stock on the over-the-
counter Bulletin Board on December 29, 2000.
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.
Messrs. Thorburn, Green, Rothstein and Lawlor 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.
22
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 Apollo
Investment Fund, L.P. which beneficially owns 32% 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. No
payments were made under the Consulting Agreement in 2000. Converse has granted
registration rights to Apollo with respect to their shares of Common Stock.
Apollo 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 Apollo (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 obtained stockholder
approval for the proposed amendment at the 2000 Annual Meeting of Stockholders.
23
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
-------------------------------------------------------------------------
The following table sets forth certain information (as of April 9, 2001,
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.
NUMBER OF SHARES PERCENT OF COMMON
Beneficially STOCK BENEFICIALLY
GREATER THAN 5% STOCKHOLDERS Owned Owned
---------------------------- ----------------- ------------------
Apollo Investment Fund, L.P., c/o Apollo Advisors, L.P.
Two Manhattanville Road
Purchase, New York 10577........................................ 5,616,301 32.0%
Artemis America Partnership, c/o RL & F Service Group One
Rodney Square, P.O. Box 551
/Wilmington, DE 19899 /........................................ 5,614,054 32.0
Glenn N. Rupp (2)............................................... 573,250 3.3
Alistair M. Thorburn (2)........................................ 136,250 *
Jack A. Green (2)............................................... 41,445 *
Herbert R. Rothstein (2)........................................ 29,250 *
James E. Lawlor (2)............................................. 38,847 *
Donald J. Barr (2).............................................. 7,500 *
Julius W. Erving (2)............................................ 7,500 *
Robert H. Falk (1)(3)........................................... 5,616,301 32.0
Gilbert Ford (2)................................................ 10,000 *
Michael S. Gross (1)(3)......................................... 5,616,301 32.0
Joshua J. Harris (1)(3)......................................... 5,616,301 32.0
John H. Kissick (1)(3).......................................... 5,616,301 32.0
Michael D. Weiner (1)(3)........................................ 5,616,301 32.0
Directors and executive officers of the
Company as a group (13 persons)............................... 6,460,343 36.8
----------------------------------------------------------------
* less than 1%.
(1) Shares beneficially owned by Apollo Investment Fund, L.P. ("AIF").
(2) Shares beneficially owned represent options to purchase Converse Common
Stock that are currently exercisable or will become exercisable within 60
days and shares of restricted stock that will be received within 60 days,
except for shares held of record by the following: Mr. Rupp 15,000 shares,
Mr. Green 195 shares, Mr. Lawlor 7,797 shares and Mr. Ford 10,000 shares.
(3) Messrs. Falk, Gross, Harris, Kissick and Weiner are associated with AIF.
Each such director disclaims beneficial ownership of, and a personal
pecuniary interest in, the shares beneficially owned by AIF.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
---------------------------------------------------------
Mr. Erving had a contract with Converse to endorse the Company's footwear
and activewear, allow the Company to use his name and likeness to advertise the
Company's products, appear at promotional events, and provide advertising
production and product development consultation. The agreement provided for an
annual fee of $200,000 and expired on September 30, 2000.
24
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:
Page
----
Report of Independent Accountants F-2
Consolidated Balance Sheet at
January 1, 2000 and December 30, 2000 F-3
For each of the fiscal years ended January 2, 1999,
January 1, 2000 and December 30, 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 2, 1999,
January 1, 2000 and December 30, 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.
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)
25
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 (22)
10.11 Amendment Number Ten to Credit Agreement (22)
10.12 Amendment Number Eleven to Credit Agreement (23)
10.13 Amendment Number Twelve to Credit Agreement (24)
10.14 Amendment Number Thirteen to Credit Agreement (25)
10.15 Amendment Number Fourteen to Credit Agreement (*)
10.16 Waiver Number One to Credit Agreement (15)
10.17 Waiver Number Two to Credit Agreement (16)
10.18 Forbearance to Credit Agreement (25)
10.19 Postpetition Credit Agreement dated as of January 22, 2001 among
Converse Inc., certain lenders and Bankers Trust Company, an
affiliate of Deutsche Banc Alex. Brown as agent for the lenders (26)
10.20 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)
10.21 Lease Agreement dated as of February 1, 2001 between Godley
Construction Company and Converse Inc. (20)
10.22 Sublease Agreement dated as of September 28, 1993, between Kmart
Corporation and Converse Inc. (1)
10.23 Lease Agreement - Reynosa, Mexico (16)
10.24 Registration Rights Agreement dated as of November 17, 1994, between
Apollo Interco Partners, L.P. and Converse Inc. (3)
10.25 Consulting Agreement dated as of November 17, 1994, between Apollo
Advisors, L.P. and Converse Inc. (3)
10.26 Amendment to Consulting Agreement Dated as of November 17, 1998
between Apollo Advisors L.P. and Converse Inc. (15)
10.27 Converse Inc. Executive Incentive Plan (1)
10.28 Converse Inc. Team Incentive Plan (1)
10.29 Converse Inc. Supplemental Executive Retirement Plan (6)
10.30 Converse Inc. 1994 Stock Option Plan, as Amended and Restated as of
February 25, 1998 (16)
10.31 Converse Inc. 1995 Non-Employee Director Stock Option Plan, as
amended and restated as of July 30, 1997 (13)
10.32 Converse Inc. Employee Stock Purchase Plan (16)
26
10.33 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)
10.34 Fifth Amendment to Agreement among Julius W. Erving, The Erving
Group, Inc. and Converse Inc.(5)
10.35 Sixth Amendment to Agreement among Julius W. Erving, the Erving
Group, Inc. and Converse Inc.(7)
10.36 Seventh Amendment to Agreement among Julius W. Erving, the Erving
Group, Inc. and Converse Inc.(10)
10.37 Lease Agreement dated as of January 3, 1995 between Talbot Operations
Inc. and Converse Inc. (4)
10.38 Employment Agreement between Converse Inc. and Glenn N. Rupp (8)
10.39 Amendment Number One to Employment Agreement between Converse Inc.
and Glenn N. Rupp (19)10.39
10.40 Employment Agreement between Converse Inc. and James E. Solomon (9)
10.41 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)
10.42 Purchase Agreement dated June 1, 1997 between Converse Inc. and
Exeter Research, Inc. (12)
10.43 Senior Secured Note Purchase Agreements dated September 16, 1998 (17)
10.44 Supplement dated November 23, 1999 to Senior Secured Note Purchase
Agreements dated September 16, 1998 (22)
10.45 Second Supplement to Senior Secured Note Purchase Agreements dated
September 16, 1998 (23)
10.46 Third Supplement to Senior Secured Note Purchase Agreements dated
September 16, 1998 (24)
10.47 Fourth Supplement to Senior Secured Note Purchase Agreements dated
September 16, 1998 (25)
10.48 Fifth Supplement to Senior Secured Note Purchase Agreements dated
September 16, 1998 (*)
10.49 Senior Secured Note dated September 16, 1998 (17)
10.50 Warrant Agreement dated September 16, 1998 (17)
10.51 Asset Purchase Agreement dated April 6, 2001 between the Company and
Footwear Acquisition, Inc.(*)
21. List of subsidiaries (22)
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.
27
(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.
(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.
(22) Filed as an Exhibit to Converse Inc. Annual Report on Form 10-K for the
year ended January 1, 2000, and incorporated herein by reference.
(23) Filed as an Exhibit to Converse Inc. Quarterly Report on Form 10-Q for the
quarter ended April 1, 2000, and incorporated herein by reference.
(24) Filed as an Exhibit to Converse Inc. Quarterly Report on Form 10-Q for the
quarter ended July 1, 2000, and incorporated herein by reference.
(25) Filed as an Exhibit to Converse Inc. Quarterly Report on Form 10-Q for the
quarter ended September 30, 2000, and incorporated herein by reference.
28
(26) Filed as an Exhibit to Converse Inc. Report on Form 8-K dated January 22,
2001, and incorporated herein by reference.
(b) The Company filed no reports on Form 8-K during the last quarter of
Fiscal Year 2000. An 8-K was filed on January 30, 2001 to report that
on January 22, 2001, the Company filed a voluntary petition to
reorganize as a debtor in possession under Chapter 11 of Title 11 of
the United States Bankruptcy Code.
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 16, 2001.
CONVERSE INC.
By: /s/ Glenn N. Rupp
-----------------
Glenn N. Rupp
Chairman of the Board and
Chief Executive Officer
29
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.
SIGNATURE TITLE DATE
--------- ----- ----
/s/ Glenn N. Rupp Chairman of the Board, Chief Executive Officer April 16, 2001
-------------------------------- and Director (Principal Executive Officer)
Glenn N. Rupp
/s/ James E. Lawlor Senior Vice President and Chief Financial Officer April 16, 2001
-------------------------------- (Principal Financial and Accounting Officer)
James E. Lawlor
/s/ Donald J. Barr Director April 16, 2001
--------------------------------
Donald J. Barr
/s/ Julius W. Erving Director April 16, 2001
--------------------------------
Julius W. Erving
/s/ Robert H. Falk Director April 16, 2001
--------------------------------
Robert H. Falk
/s/ Gilbert Ford Director April 16, 2001
--------------------------------
Gilbert Ford
/s/ Michael S. Gross Director April 16, 2001
--------------------------------
Michael S. Gross
/s/ Joshua J. Harris Director April 16, 2001
--------------------------------
Joshua J. Harris
/s/ John H. Kissick Director April 16, 2001
--------------------------------
John H. Kissick
/s/ Michael D. Weiner Director April 16, 2001
--------------------------------
Michael D. Weiner
30
CONVERSE INC. AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
PAGE
----
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
1
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 December 30, 2000 and January 1, 2000, and the results of
their operations and their cash flows for each of the three years in the period
ended December 30, 2000 in conformity with accounting principles generally
accepted in the United States of America. 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 the financial
statement schedule are the responsibility of the Company's management; our
responsibility is to express an opinion on these financial statements and the
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 of America, 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 the financial statement schedule have
been prepared assuming that the Company will continue as a going concern. As
discussed in Note 1 to the financial statements, on January 22, 2001, the
Company voluntarily filed a petition to reorganize as a debtor in possession
under Chapter 11 of the United States Bankruptcy Code which raises substantial
doubt about the Company's ability to continue as a going concern. Management's
plans in regard to this matter are described in Note 3. The financial statements
do not include any adjustments that might result from the outcome of this
uncertainty.
/s/ PricewaterhouseCoopers LLP
------------------------------
PRICEWATERHOUSECOOPERS LLP
Boston, Massachusetts
April 12, 2001
F-2
CONVERSE INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
(Dollars in thousands, except per share amounts)
JANUARY 1, 2000 DECEMBER 30, 2000
--------------- -----------------
ASSETS
Current assets:
Cash and cash equivalents.................................................. $ 2,305 $ 2,906
Receivables, less allowances of $4,595 and $3,917, respectively............ 40,511 34,069
Inventories (Note 6)....................................................... 76,414 40,134
Prepaid expenses and other current assets ................................. 2,866 3,062
----------- -------------
Total current assets................................................... 122,096 80,171
Net property, plant and equipment (Note 7).................................... 18,855 6,255
Other assets.................................................................. 11,412 10,757
----------- -------------
$152,363 $97,183
=========== =============
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIENCY)
Current liabilities:
Short-term debt (Note 9)................................................... $ 1,951 $ 427
Credit facility............................................................ 71,551 47,824
Senior secured notes and convertible notes (Note 9)........................ 28,223 102,908
Accounts payable........................................................... 41,257 39,565
Accrued expenses (Note 8).................................................. 15,063 16,388
Income taxes payable (Note 11)............................................. 6,455 6,200
---------- -----------
Total current liabilities.............................................. 164,500 213,312
Long-term debt (Note 9)....................................................... 74,265 ------
Current assets in excess of reorganization value (Note 2)..................... 26,143 24,066
Stockholders' equity (deficiency):
Common stock, $1.00 stated value, 50,000,000 shares authorized,
17,479,025 and 17,535,555 shares issued and outstanding at
January 1, 2000 and December 30, 2000, respectively.................... 17,479 17,536
Preferred stock, no par value, 10,000,000 shares authorized,
none issued and outstanding............................................ ----- -----
Additional paid-in capital................................................. 4,764 4,449
Unearned compensation...................................................... (1,061) (278)
Retained deficit........................................................... (131,737) (159,182)
Accumulated other comprehensive income..................................... (1,990) (2,720)
----------- -----------
Total stockholders' equity (deficiency)................................ (112,545) (140,195)
----------- -----------
$152,363 $97,183
=========== ===========
See accompanying notes to consolidated financial statements.
F-3
CONVERSE INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF OPERATIONS
(Dollars in thousands, except per share amounts)
FISCAL YEAR ENDED
---------------------------------------------------------------------
JANUARY 2, 1999 JANUARY 1, 2000 DECEMBER 30, 2000
--------------- --------------- -----------------
Net revenue........................................... $ 313,124 $ 235,154 $ 209,050
Cost of sales......................................... 242,442 179,897 175,907
-------------- --------------- -----------------
Gross profit.......................................... 70,682 55,257 33,143
Selling, general and administrative expenses.......... 92,683 83,764 56,322
Royalty income........................................ 20,175 20,466 16,307
Gain on sale of trademarks (Note 5)................... ----- 24,811 ----
Restructuring, asset impairment and other
unusual charges (Note 4)............................. ----- 9,368 7,071
-------------- --------------- ----------------
Earnings (loss) from operations....................... (1,826) 7,402 (13,943)
Interest expense...................................... 18,487 22,301 21,395
Gain on sale of headquarters building................. ----- ----- 14,870
Other expense (income), net .......................... (366) 1,035 3,754
-------------- --------------- ----------------
Loss from continuing operations before income taxes... (19,947) (15,934) (24,222)
Income tax expense (Note 11).......................... 3,572 27,674 3,223
-------------- --------------- ----------------
Loss from continuing operations....................... (23,519) (43,608) (27,445)
Extraordinary (gain) loss, net of tax expense of $437
(Note 10)............................................ (704) ----- -----
------------- --------------- ----------------
Net loss.............................................. $(22,815) $(43,608) $(27,445)
============= =============== ================
Net basic and diluted loss per share (Note 2):
Continuing operations............................ $ (1.36) $ (2.50) $ (1.57)
Extraordinary gain (loss)........................ 0.04 ---- ----
------------- --------------- ----------------
Net loss......................................... $ (1.32) $ (2.50) $ (1.57)
============= =============== ================
Weighted average common shares outstanding (Note 2)... 17,319 17,414 17,515
============= =============== ================
See accompanying notes to consolidated financial statements.
F-4
CONVERSE INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
FISCAL YEAR ENDED
-------------------------------------------------------------
JANUARY 2, 1999 JANUARY 1, 2000 DECEMBER 30, 2000
--------------- --------------- -----------------
Cash flows from operating activities:
Net loss.................................................. $(22,815) $(43,608) $(27,445)
Adjustments to reconcile net loss to net cash
provided by (required for) operating activities:
Provision for restructuring and impairment actions,
less cash payments of $2,438 and $270,
respectively............................................ ----- 8,335 6,801
Extraordinary loss on write-off of deferred
financing fees.......................................... 809 ----- -----
Extraordinary gain on cancellation of convertible
notes................................................... (1,950) ----- -----
Depreciation of property, plant and equipment............. 3,939 4,640 4,199
Amortization of intangible assets......................... 468 200 -----
Amortization of current assets in excess of
reorganization value................................... (2,078) (2,078) (2,077)
Amortization of note discount/warrants.................... 189 614 420
Gain on sale of property, plant and equipment............. (1,042) ---- (12,956)
Amortization of deferred compensation..................... 217 580 475
Deferred tax provision.................................... (4,637) 24,757 1,525
Changes in assets and liabilities:
Receivables............................................... 14,937 16,355 6,330
Inventories............................................... 23,423 (5,328) 36,197
Prepaid expenses and other current assets................. 1,294 4,424 (269)
Accounts payable and accrued expenses..................... (8,707) 1,427 (995)
Income taxes payable...................................... 6,858 (881) 255
Other long-term assets and liabilities.................... (10,347) 1,230 (870)
----------- ------------- --------------
Net cash provided by operating activities............. 558 10,667 11,590
----------- ------------- --------------
Cash flows from investing activities:
Proceeds from disposal of assets.......................... 1,169 ----- 14,859
Additions to property, plant and equipment................ (4,787) (2,718) (276)
----------- ------------ --------------
Net cash (used) provided by investing
activities........................................ (3,618) (2,718) 14,583
---------- ------------ --------------
Cash flows from financing activities:
Net proceeds from exercise of stock options............... 11 ---- ----
Net proceeds from exercise of warrants.................... ---- 268 ----
Net proceeds from sale of common stock.................... ---- 151 50
Net proceeds from (payment of) short-term debt............ 169 (7,192) (1,462)
Net proceeds from (payment of) new credit facility........ (23,011) (2,282) (23,727)
Net proceeds from issuance of senior secured notes........ 24,000 ---- ----
---------- ------------ -------------
Net cash provided by (required for) financing
activities.......................................... 1,169 (9,055) (25,139)
---------- ------------ -------------
Effect of foreign currency rate fluctuations on cash and
cash equivalents............................................. (573) 137 (433)
---------- ------------ -------------
Net increase (decrease) in cash and cash equivalents........... (2,464) (969) 601
Cash and cash equivalents at beginning of period............... 5,738 3,274 2,305
---------- ------------ -------------
Cash and cash equivalents at end of period..................... $ 3,274 $ 2,305 $ 2,906
========== ============ =============
Supplemental Disclosures:
Cash payments for income taxes, net....................... $ 1,803 $ 2,441 $ 1,955
========== ============ =============
Cash payments for interest................................ $17,083 $19,327 $13,557
========== ============ =============
See accompanying notes to consolidated financial statements.
F-5
CONVERSE INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
AND COMPREHENSIVE INCOME
(Dollars in thousands, except per share amounts)
Total Accumulated
Stockholders' Retained Other Additional
Equity Comprehensive Earnings Comprehensive Common Paid-in Unearned
(Deficiency) Income (Loss) (Deficit) Income Stock Capital Compensation
------------ ------------ --------- ------------- ------ ---------- ------------
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)................... (43,608) (43,608) (43,608)
Net loss.................
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 restriced
stock (Note 13).......... -- 968 (968)
Cancellation of restricted
stock.................... -- (85) 85
Amortization of unearned
compensation............. 580 580
-------- -------- ------- ------- ------- -------
Balance, January 2, 1999... $(112,545) $(131,737) $(1,990) $17,479 $ 4,764 $(1,061)
Comprehensive income
(loss)................... (27,445) (27,445) (27,445)
Other comprehensive
income (loss), net of
tax
Foreign currency
translation adjustments. (730) (730) (730)
--------
Comprehensive income (loss) $(28,175)
Employee stock purchase ========
plan share issuance..... 50 57 (7)
Cancellation of restricted
stock................... -- (308) (308)
Amortization of unearned
compensation............ 475 475
-------- -------- ------- ------- ------- -------
Balance, December 30,
2000.................... $(140,195) $(159,182) $(2,720) $17,536 $ 4,449 $ (278)
========= ========= ======= ======= ======= =======
See accompanying notes to consolidated financial statements.
F-6
CONVERSE INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
1. SUMMARY OF BUSINESS OPERATIONS AND BASIS OF ACCOUNTING
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.
Subsequent to December 30, 2000, the Company voluntarily filed a
petition for protection under Chapter 11 of the United States Bankruptcy Code
(the "Bankruptcy Proceedings") on January 22, 2001. Although the Company's
bankruptcy raises doubt about the Company's ability to continue as a going
concern, the accompanying financial statements have been prepared on a going
concern basis. This basis contemplates the continuity of operations, the
realization of assets, and the discharge of liabilities in the ordinary course
of business. The financial statements present the assets of the Company at
historical cost and not at their realizable value on a liquidation basis.
Liabilities of the Company are presented at face value on December 30, 2000 in
the financial statements. In the Bankruptcy Proceedings, substantially all of
the liabilities as of the filing date are subject to settlement under a plan of
reorganization. The ultimate amount and settlement terms for such liabilities
are subject to a plan of reorganization requiring court approval, and
accordingly, are not presently determinable. As such, the Company's financial
statements do not present the amounts which may ultimately be paid to settle
liabilities or contingencies that may be allowed in the Bankruptcy Proceedings.
The interests of common shareholders could, among other things, be substantially
diluted or eliminated as a result of the Bankruptcy Proceedings. The financial
statements do not include the effect of any changes that may be made to the
capitalization of the Company. The final proposal and plan of reorganization as
approved could materially change the amounts currently included in the December
30, 2000 financial statements.
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 2000, Converse's fiscal year ended on December 30, 2000 ("Fiscal
2000"), for 1999, Converse's fiscal year ended on January 1, 2000 ("Fiscal
1999"), and for 1998, Converse's fiscal year ended on January 2, 1999 ("Fiscal
1998").
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.
F-7
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
December 30, 2000, the carrying amount of the Company's long-term instruments
approximates fair value, which is estimated based on market values for similar
instruments (See Note 1). At December 30, 2000, the fair value of the $74,300
Convertible Notes was $8,173, 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 amortizations 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 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 or current appraisal
value (See Note 4).
Current assets in excess of reorganization value and distribution
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.
In 1992, in connection with 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.
Foreign currency transactions
Assets and liabilities of international operations are translated into
U.S. dollars at current exchange rates. Income and expense accounts and cash
flows 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.
The Company has 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 December 30, 2000, the Company realized a net gain of $55 on forward
contracts. At December 30, 2000, the Company had no outstanding foreign exchange
forward contracts or foreign currency options. 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
F-8
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.
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).
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 2, 1999, January 1, 2000
and December 30, 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 43% 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 (See also Note 18). 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.
F-9
Reclassifications
Certain amounts in the prior year financial statements and related
notes have been reclassified to conform with the Fiscal 2000 presentation.
3. CHANGES IN BUSINESS AND SUBSEQUENT EVENTS
2000 Operating Losses and 2001 Plan
Over the past two years, Converse has been adversely affected by the
downturn and continued weakness in the athletic footwear and apparel market.
Converse's net sales have decreased 24.9% and 11.1% in Fiscal 1999 and Fiscal
2000, respectively. At December 30, 2000, the Company had a working capital
deficit of $133,141.
At December 30, 2000, the Company was in default of certain financial
covenants contained in its Credit Facility, Secured Notes and Convertible Notes
resulting in all debt being currently due and classified as short term on the
Company's consolidated balance sheet. On January 22, 2001, the Company
voluntarily filed a petition to reorganize as a debtor in possession under
Chapter 11 of Title 11 of the United States Code (the "Bankruptcy Proceedings")
in the U.S. District Court for the District of Delaware (the "Bankruptcy
Court"). Some of the actions that have been implemented by management during the
Bankruptcy Proceedings include the following:
o The Company's manufacturing facilities in Lumberton, NC,
Mission, TX and Reynosa, Mexico were closed down effective
March 31, 2001.
o The Company reduced its general overhead expenses by
terminating 28 corporate employees located at its
headquarters office in North Reading, Massachusetts.
o The Company completed its conversion of the remaining Western
European subsidiaries (in the territories of France, Germany,
Scandinavia and the United Kingdom) into third party licensee
arrangements.
o In January 2001, the Company closed 6 of its retail store
outlets in the United States and 1 in the United Kingdom.
Following a bidding process approved by the Bankruptcy Court, Converse
entered in an Asset Purchase Agreement (the "APA") with Footwear Acquisition,
Inc. ("Footwear Acquisition") providing for a sale of substantially all of the
Company's assets, including trademarks and other intellectual property, certain
contracts, accounts receivable and inventory, for a purchase price of $117.5
million. The APA was approved by the Bankruptcy Court following a hearing on
April 12, 2001. The closing under the APA is scheduled to be held on April 30,
2001. The purchase price under the APA is subject to adjustment based on the
level of accounts receivable and inventory of Converse as of the closing date,
and a portion of the purchase price is to be deposited into escrow pursuant to
the terms of the APA.
The APA does not provide for the sale of the Company's manufacturing
facilities and the equipment located therein or for the sale of certain other
non-material assets of the Company. The Bankruptcy Court has approved a
procedure for the sale of those assets and the Company intends to proceed with
the sale of such assets. Proceeds from the sale under the APA and other sales
will be applied to the payment of expenses and creditor claims under the
supervision of the Bankruptcy Court.
The Company is advised that Footwear Acquisition intends to continue
the business of the Company following closing of the sale under the APA. The
Company expects that some of its employees will join Footwear Acquisition after
the sale.
The APA contains a number of conditions to the obligations of the
parties to complete the sale, and there can be no assurance that the sale
provided for in the APA will be completed.
4. RESTRUCTURING, ASSET IMPAIRMENT AND OTHER UNUSUAL CHARGES
During Fiscal 2000, Converse recorded restructuring and asset
impairment charges of $7,071, net of reversals. Converse recorded a
restructuring charge of $415 in the fourth quarter of 2000 for severance and
related benefits related to a workforce reduction of 28 employees in its
research and development, marketing and distribution functions. The Company
incurred less than anticipated severance costs related to its 1999 corporate
restructuring initiative and reversed reserves of $285. The Company also had
lower than anticipated restructuring costs related to the R&D building lease
termination reserve and the contract termination reserve resulting in the
reversal of restructuring costs of $136 and $242, respectively. An additional
restructuring charge of $276 was recorded related to the write-off
F-10
of the cumulative translation adjustment for the Benelux subsidiary. Charges of
$364 were recorded for severance and lease termination costs related to the
completion of the conversion of its European subsidiaries. Also during the
fourth quarter of fiscal 2000, the Company recorded an impairment loss of $6,680
associated with long-lived assets at corporate, retail stores, and the Company's
leased manufacturing plants in Mission, Texas and Reynosa, Mexico. The
impairment was recognized when the future undiscounted cash flows of each
facility were estimated to be insufficient to recover their related carrying
values. As such, the carrying values of these assets were written down to the
Company's estimates of fair value. Fair value was based on current appraisal
values and other estimates and, accordingly, actual results could vary
significantly from such estimates. At December 30, 2000, these assets and the
assets at the Company's manufacturing facility in Lumberton, NC have a remaining
carrying amount of $6,255 million. At December 30, 2000, $3,206 of the
restructuring charges recorded remain in current liabilities on the balance
sheet.
In the first quarter of 2001, the Company will record additional
restructuring and inventory charges relating to: (i) the write-off of cumulative
translation adjustments for Germany, France, Scandinavia and U.K. subsidiary
conversions effective January 1, 2001 approximating $931; (ii) severance charges
for manufacturing employees terminated on March 31, 2001 and (iii) inventory
charges for excess raw materials at the time of the factory closings.
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) lease termination and fixed asset write-down 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) severance, fixed asset write-down and lease termination costs of
converting wholly-owned subsidiaries with foreign operations into
licensee/distributor agreements.
The following table summarizes the Fiscal 1999 and Fiscal 2000 activity
relating to these initiatives:
R&D Building
Corporate and Impairment of Contract Conversions of
Employee Severance Retail Store Long-Lived Termination Subsidiaries
& Related Costs Closings Assests Costs into Licensees Total
--------------- -------- ------- ----- ------------- -----
1999 Restructuring Accrual $1,485 $864 ---- $1,667 $5,352 $ 9,368
Charges/Write-offs (350) --- --- --- (1,345) (1,695)
------------- ------------- ------------ ------------- ------------- -------------
January 1, 2000 Balance $1,135 $864 ---- $1,667 $4,007 $ 7,673
2000 Restructuring Accrual 415 ---- 6,680 ---- ---- 7,095
Changes in Estimates (285) (136) ---- (242) 639 (24)
Charges/Write-offs (1,120) (717) (6,680) (284) (2,737) (11,538)
------------- ------------- ------------ ------------- ------------- -------------
December 30, 2000 Balance $145 $11 ---- $1,141 $1,909 $ 3,206
============= ============= ============ ============= ============= =============
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 $25,000 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 $4,200 in Fiscal 1999 and $5,900 in Fiscal 1998. Royalty income
adjusted to eliminate the Japanese non-footwear trademarks was $16,300 in Fiscal
1999 and $14,300 in Fiscal 1998.
6. INVENTORIES
Inventories are summarized as follows:
JANUARY 1, 2000 DECEMBER 30, 2000
--------------- -----------------
Retail merchandise.......... $ 4,020 $ 3,554
Finished products........... 64,589 32,011
Work-in-process............. 4,120 2,978
Raw materials............... 3,685 1,591
----------- -------------
$ 76,414 $ 40,134
=========== =============
The inventory reserves were increased from $2,415 at January 1, 2000 to $7,542
at December 30, 2000 of which $1,797 was recorded in the fourth quarter of
Fiscal 2000 in order to properly state inventory at lower of cost or market.
F-11
7. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consisted of the following:
ESTIMATED
USEFUL
LIFE (YEARS) JANUARY 1, 2000 DECEMBER 30, 2000
----------- --------------- -----------------
Building and leasehold
improvements................. 5 - 10 $8,198 $4,058
Machinery and equipment....... 3 - 11 15,103 12,584
Furniture and fixtures........ 5 - 8 2,984 2,416
Office and computer equipment. 7 11,749 9,285
----------- -----------
38,034 28,343
Less accumulated depreciation.... 19,179 22,088
----------- -----------
$ 18,855 $ 6,255
=========== ===========
8. ACCRUED EXPENSES
Accrued expenses consisted of the following:
JANUARY 1, 2000 DECEMBER 30, 2000
--------------- -----------------
Employee compensation....... $3,348 $4,966
Advertising and promotion...... 514 157
Accrued interest............ 829 6,023
Restructuring, asset
impairment and other
unusual charges............ 7,673 3,206
Other................... 2,699 2,036
------------- -------------
$15,063 $ 16,388
============= =============
9. DEBT
Debt consisted of the following:
JANUARY 1, 2000 DECEMBER 30, 2000
--------------- -----------------
Current:
Short-term debt............ $ 1,951 $ 427
Credit facility............ 71,551 47,824
Senior secured notes
(net of unamortized
discount and warrants).... 28,223 28,643
Convertible subordinated
notes ----- 74,265
Long-Term:
Convertible subordinated
notes.................... 74,265 -----
Short-term debt
During Fiscal 2000, operating subsidiaries of the Company maintained
asset based financing arrangements in certain European countries with
NMB-Heller, N.V. or its affiliate. In general, these financing arrangements
allowed 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 was payable at the respective
F-12
lender's base rate plus 1.5% (varying by country from 4.25% to 9.25% at December
30, 2000). As of January 1, 2001 all remaining operating subsidiaries in Europe
(France, United Kingdom, Scandinavia and Germany) have been converted to
third-party licensing arrangements. Accordingly, all outstanding debt in
connection with these European asset-based financing arrangements was repaid
during the first quarter of 2001.
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. 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. In October 2000, the Credit Facility
was amended to reduce the commitment to $80,000. In December 2000 in connection
with the receipt of net cash proceeds of $14,215 from the sale of the Company's
headquarters office building in North Reading, Massachusetts, the commitment was
reduced to $68,785. The amount of credit available to the Company at any time
was limited by a borrowing base formula, as defined in the Credit Facility,
consisting primarily of U.S. accounts receivable and inventory (the "Borrowing
Base"). In order to receive the required consents for the sale of the office
building in December 2000 from the Company's secured lenders, the Company
entered into a Consent Agreement with the Banks whereby Excess Proceeds (as
defined therein) of $3,000 were reserved for against the Borrowing Base thereby
not allowing any incremental availability to the Company under the Credit
Facility as a result of this transaction. 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 was amended in October 2000 to expire as of
December 31, 2001. The total revolving loans and banker acceptances outstanding
under the Credit Facility of $47,824 are classified as current due to the Events
of Default as more fully described below and due to the Company's lockbox
arrangement (whereby payments 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.
In May 1999 the Company's Credit Facility was amended to allow for
$6,000 of additional borrowing base through July 31, 1999. Subsequent amendments
to the Credit Facility extended this additional borrowing base from July 31,
1999 through July 31, 2000. As of August 1, 2000, the $6,000 of additional
borrowing base expired and is no longer in effect. As of December 30, 2000, the
borrowing base was $52,180. Utilization under the Credit Facility at year-end
amounted to $51,818 consisting of revolving loans of $38,120, banker acceptances
of $9,704 and outstanding letters of credit of $3,994. Accordingly, $362 of the
maximum available borrowing base remained unutilized as of December 30, 2000.
Revolving loans under the Credit Facility bear interest either at the
Prime Lending Rate (as defined therein) plus one and one-half percent (1.50%)
per annum as amended effective October 27, 2000 (previously 1.00%) or at the
Adjusted LIBOR Rate (as defined therein) plus a margin of three and one-half
percent (3.50%) per annum as amended effective October 27, 2000 (previously
3.00%). At December 30, 2000, revolving loans outstanding under the Credit
Facility bore interest of 10.51% based upon the weighted average of the Prime
Lending Rate and the Adjusted LIBOR Rate. Obligations under the Credit Facility
are secured by first priority liens on substantially all of the Company's U.S.
assets. The Credit Facility requires compliance with customary affirmative and
negative covenants, including certain financial covenants. At December 30, 2000
the Company was not in compliance with the minimum EBITDA (as defined therein)
covenant contained in the Credit Facility and such failure to comply constitutes
an Event of Default under the Credit Facility. Also, the default in payment of
interest due with respect to the Convertible Notes (see below) and the default
in the payment of principal and interest due with respect to the 15% Senior
Secured Notes (see below) constitute Events of Default under the Credit
Facility. In October 2000, the Company entered into an agreement (the
"Forbearance Agreement') with the Banks whereby the Banks agreed to forbear the
exercise of rights and remedies under the Credit Facility in respect of these
defaults until the earlier of January 31, 2001, the date that the required
lenders (as defined in the Credit Facility) notify the agent that the Facility
has been terminated or such other date as certain defaults or other events
specified in the Forbearance Agreement occur. In November 2000, the Company paid
a fee of $200 with respect to the implementation of the Forbearance Agreement.
F-13
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, a write-off of $302 to interest expense when the commitment was
reduced from $120,000 to $90,000 in November 1999 and a write-off of $62 to
interest expense when the commitment was reduced from $90,000 to $80,000 in
October 2000) and is amortizing these costs over the term of the Credit
Facility. Amendment fees totaling $639 were expensed during 2000. Accordingly,
unamortized financing fees relating to the Credit Facility recorded in other
assets on the consolidated balance sheet of the Company, were $726 at December
30, 2000. These fees will be written off at the time the debt is extinguished.
On January 12, 2001 the Company and the Banks entered into the
Fourteenth Amendment to the Credit Agreement whereby, among other things, the
Fixed Asset Reserve (as defined therein) was changed to allow the Company to
utilize up to $6,000 of incremental availability. On January 22, 2001, the
Company became a debtor-in-possession under Chapter 11 of the U.S. Bankruptcy
Code and in connection therewith entered into a post-petition credit facility
(the "Postpetition Credit Facility") with the Banks. Pursuant to entering into
the Fourteenth Amendment to Credit Agreement and the Postpetition Credit
Facility, the Company paid fees of $688 in January 2001 and $394 in February
2001 to the Banks. An additional fee of $250 is payable on April 15, 2001 if the
Fixed Asset Reserve (as defined therein) is not equal to, or greater than,
$8,895 on February 28, 2001.
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 Secured Notes were issued in two series: Series A in
the aggregate principal amount of $24,858 (the "Series A Secured Notes") and
Series B in the aggregate principal amount of $3,785 (the "Series B Secured
Notes"). The Secured Notes are redeemable at any time at face amount plus
accrued interest.
The Secured Notes require compliance with customary affirmative and
negative covenants, including certain financial covenants, substantially the
same as the requirements contained in the Credit Facility. The Company defaulted
on the payment of principal and interest due in September 2000 with respect to
the Secured Notes. The Company was not in compliance with the minimum EBITDA (as
defined therein) covenant contained in the Secured Notes agreement for the nine
month period ending September 30, 2000 and such failure to comply constitutes an
Event of Default under the Secured Notes. Additionally, under the terms of the
Third Supplement to Note Purchase Agreements (the "Third Supplement") executed
in June 2000, the Company may not borrow amounts as revolving loans under the
Credit Facility if such amounts would exceed the maximum permitted amount
available to borrow less $5,750. With the expiration of the $6,000 additional
borrowing base as of August 1, 2000 (see above), the Company has failed to
maintain availability under the Credit Facility in excess of the $5,750 required
by the Third Supplement and such failure is a continuing default under the
Secured Notes. Also, the default in payment of interest due with respect to the
Convertible Notes (described below) constitutes an Event of Default under the
Secured Notes. In October 2000 the Company and the Holders of the Secured Notes
executed the Fourth Supplement to Note Purchase Agreement and Standstill
Agreement (the "Fourth Supplement") whereby the Holders of the Secured Notes
agreed to forbear from exercising remedies under the Secured Notes until the
earlier of January 31, 2001 or such other date as certain defaults or other
events specified in the Fourth Supplement occur. As a condition to the
effectiveness of the Fourth Supplement, the Company paid $1,468 of interest due
under the Secured Notes through October 31, 2000 and a supplement fee of $72.
On January 11, 2001, the Holders of the Secured Notes consented to the
aforementioned Fourteenth Amendment to Credit Agreement to increase availability
to the Company by $6,000. In connection with this consent, the Company paid a
transaction fee of 1% of the outstanding amount of the Secured Notes, or $286.
On January 22, 2001 the Company became a debtor-in-possession under Chapter 11
of the United States Bankruptcy Code and in connection therewith entered into
the Postpetition Credit Facility. On January 22, 2001, the Company entered into
the Fifth Supplement to Note Purchase Agreements (the "Fifth Supplement")
whereby consent and approval of the Holders of the Secured Notes was obtained to
enter into the Postpetition Credit Facility. In connection with this Fifth
Supplement, the following transaction fees were agreed to as of January 22,
2001: (1) a payment in kind, in lieu of cash, of 3% of the outstanding principal
F-14
amount of the Secured Notes by increasing the outstanding principal amount from
$28,643 to $29,502, (2) 0.5% of the outstanding principal amount, or $148, if
the Fixed Asset Reserve (as defined therein) is not equal to, or greater than,
$8,895 on February 28, 2001, and (3) 0.5% of the outstanding principal amount,
or $148, if the Fixed Asset Reserve (as defined therein) is not equal to, or
greater than, $8,895 on April 15, 2001. Also effective January 22, 2001, under
the Fifth Supplement, interest accrues at the rate of 18% per annum on the
unpaid principal amount of the Secured Notes; 15% per annum payable monthly in
arrears and 3% per annum payable at the time of final payment of the principal
balance outstanding under the Secured Notes.
The Secured Notes are classified under current liabilities on the
Company's consolidated balance sheet as of December 30, 2000 as the principal
amount is in default and is due.
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
amortized this discount over 24 months to September 16, 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, vested immediately and expire on May 21, 2002. In May 1999
warrants to purchase 91,412 shares of the Company's common stock were exercised
at $2.9375 per share. Warrants outstanding on December 30, 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) was considered additional
bond discount and was amortized over a 24 month period to September 16, 2000.
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.
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 December 30, 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 did not make
semi-annual interest payments due on June 1, 2000 and December 1, 2000 with
respect to the Convertible Notes. The interest payments remain outstanding and
constitute an Event of Default under the related indenture. On August 4, 2000,
the trustee under the indenture for the Convertible Notes sent Converse a letter
stating that Holders of more than twenty-five percent (25%) of the Convertible
Notes had directed it to declare the full amount of principal and interest under
the Convertible Notes to be due and payable. Accordingly, the entire principal
amount and related interest of the Convertible Notes is now due and classified
as current liabilities on the Company's consolidated balance sheet.
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 $1,689 at December 30, 2000.
These fees will be written off at the time the Convertible Notes are
extinguished.
F-15
Total interest expense consisted of the following:
FISCAL YEAR ENDED
-----------------------------------------------------------------------------
JANUARY 2, 1999 JANUARY 1, 2000 DECEMBER 30, 2000
--------------- --------------- -----------------
Interest on short-term debt
and Credit Facility.............. $7,829 $6,858 $7,119
Interest on Convertible Notes.......................... 5,346 5,199 5,199
Amortization of Convertible Notes
issuance costs...................................... 668 498 498
Credit line fees and other fees........................ 1,380 1,506 1,431
Amortization of Credit Facility
financing fees....................................... 604 1,727 1,231
Amortization of Secured Notes
issuance costs....................................... 421 1,445 1,107
Interest on Secured Notes.............................. 1,277 4,296 4,392
European Factoring Fees................................ 962 772 418
-------- ------- --------
$ 18,487 $ 22,301 $ 21,395
======== ======== =========
Interest on Convertible Notes was accrued but not paid since December 1, 1999.
As of December 30, 2000 accrued interest with respect to the Convertible Notes
is $5,698 and is classified in current liabilities on the Company's consolidated
balance sheet.
10. EXTRAORDINARY (GAIN) LOSS
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.
F-16
11. INCOME TAXES
The domestic and foreign components of income (loss) from continuing
operations before income taxes were as follows:
FISCAL YEAR ENDED
-----------------------------------------------------------------------------
JANUARY 2, 1999 JANUARY 1, 2000 DECEMBER 30, 2000
--------------- --------------- -----------------
Domestic.................. $(4,040) $ (9,391) $ (16,742)
Foreign................... (15,907) (6,543) (7,480)
--------- ---------- ----------
$(19,947) $ (15,934) $ (24,222)
========= ========== ==========
Income tax expense (benefit) related to continuing operations was
comprised of the following:
FISCAL YEAR ENDED
-----------------------------------------------------------------------------
JANUARY 2, 1999 JANUARY 1, 2000 DECEMBER 30, 2000
--------------- --------------- -----------------
Current:
Federal.................. ---- ---- ----
State.................... $ 501 $ 422 $ 383
Foreign.................. 2,848 2,495 1,593
-------- ---------- ---------
3,349 2,917 1,976
-------- ---------- ---------
Deferred:
Federal.................. 281 21,084 1,312
State.................... (58) 3,673 (65)
-------- ---------- ---------
223 24,757 1,247
-------- ---------- ---------
$ 3,572 $ 27,674 $ 3,223
======== ========== =========
The following table reconciles the differences between the Federal
corporate statutory rate and Converse's effective income tax rate:
FISCAL YEAR ENDED
--------------------------------------------------------------------------------
JANUARY 2, 1999 JANUARY 1, 2000 DECEMBER 30, 2000
--------------- --------------- -----------------
Federal corporate statutory tax rate (benefit)... (35.0)% (35.0)% (35.0)%
State taxes (benefit), net of Federal tax effect. (0.9) (1.3) (1.2)
Foreign income taxes............................. 8.5 9.7 4.0
Valuation allowance.............................. 47.2 202.4 37.5
Other............................................ (1.9) (2.1) 8.0
--------- ---------- ----------
Effective income tax (benefit) rate.............. 17.9% 173.7% 13.3%
========= ========== ==========
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 1, 2000 and
December 30, 2000 consisted of the following:
JANUARY 1, 2000 DECEMBER 30, 2000
--------------- -----------------
Deferred tax assets:
Tax benefit of loss carryforwards............................. $ 55,538 $ 65,037
Expense accruals.............................................. 4,448 3,622
Receivable, inventory and other reserves...................... 5,066 5,827
Depreciation.................................................. ---- ----
-------- --------
Gross deferred tax assets.............................. 65,052 74,486
Deferred tax liabilities:
Employee pension plans........................................ (852) (2,034)
Depreciation.................................................. (215) 995
Other......................................................... (986) (1,371)
-------- --------
Net deferred tax assets before valuation allowance..... 62,999 72,076
Valuation allowance........................................... (62,999) (72,076)
-------- --------
Net deferred tax assets................................ $ ---- $ ----
======== ========
F-17
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 9 to
20 years for tax purposes, however, the accounting guidance requires that a
shorter time frame be used to assess the probability of their realization.
During Fiscal 1998, the athletic footwear 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 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 had been in active discussions throughout
1999 with respect to various refinancing alternatives. Because the Company could
not estimate with any degree of certainty which specific transactions and plans
would ultimately be accomplished, Converse recorded a charge of $32,243 in
Fiscal 1999 in order to establish a full valuation allowance against its
deferred tax assets. This charge was offset by deferred assets created of $7,486
resulting in a deferred tax provision of $24,757.
During Fiscal 2000, Converse continued to sell its unprofitable foreign
operations to distributors/licensees and it continued in its effort to examine
various refinancing alternatives. Due to the ongoing uncertainty of its ability
to implement a refinancing alternative Converse concluded that it needed to
continue to maintain a full valuation allowance against its deferred tax assets
and, accordingly, did not record deferred benefits of $9,076 for Fiscal 2000.
The Company's Fiscal 2000 tax expense recorded of $3,223 relates primarily to
certain fixed foreign, federal and state taxes.
At December 30, 2000, Converse had operating loss carryforwards of
$159,326. The loss carryforwards expire between the years 2009 and 2019. In the
event of a change of control of the Company, utilization of these operating loss
carryforwards will be subject to limitation by Section 382 of the Internal
Revenue Code.
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 that 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 and Fiscal 2000,
the net periodic pension costs were subject to a curtailment gain resulting from
workforce reductions of $1,625 and $1,145, respectively.
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 purpose of the plan is
to restore benefits that the Converse Inc. Retirement Plan would otherwise
generate except for the limits imposed by the Internal
F-18
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).
Aggregated financial information, including the Converse Pension Plan,
the SERP and the EBP, is shown in the following table:
JANUARY 2, 1999 JANUARY 1, 2000 DECEMBER 30, 2000
--------------- --------------- -----------------
CHANGE IN BENEFIT OBLIGATION
Benefit obligation at beginning of year.......... $ 58,553 $ 60,297 $ 54,794
Service cost..................................... 1,718 3,329 1,330
Interest cost.................................... 3,851 4,152 4,212
Curtailment (gain)............................... (1,625) ---- (1,145)
Actuarial loss (gain)............................ 440 (9,942) (508)
Benefits paid.................................... (2,640) (3,042) (2,902)
--------- --------- ---------
Benefit obligation at end of year................ $ 60,297 $ 54,794 $ 55,787
========= ========= =========
CHANGE IN PLAN ASSETS
Fair value of plan assets at beginning of year... $ 59,507 $ 65,730 $ 70,907
Actual return on plan assets..................... 8,863 8,037 5,173
Employer contribution............................ ---- 182 169
Benefits paid.................................... (2,640) (3,042) (2,902)
--------- --------- ---------
Fair value of plan assets at end of year......... $ 65,730 $ 70,907 $ 73,347
========= ========= =========
RECONCILIATION OF FUNDED STATUS
Benefit obligation at end of year................ $(60,297) $(54,794) $(55,787)
Fair value of plan assets at end of year......... 65,730 70,907 73,347
--------- --------- ---------
Funded status at end of year..................... 5,433 16,113 17,560
Unrecognized prior service cost.................. (62) (56) (29)
Unrecognized net actuarial loss (gain)........... (1,889) (13,740) (12,015)
--------- --------- ---------
Prepaid benefit cost............................. $3,482 $2,317 $5,516
========= ========= =========
WEIGHTED AVERAGE ASSUMPTIONS
Discount rate.................................... 6.75% 8.00% 7.50%
Expected return on plan assets................... 9.50% 9.50% 9.50%
Rate of compensation increase.................... 4.75% 4.75% 4.75%
COMPONENTS OF NET PERIODIC BENEFIT COST
Service cost..................................... $ 1,718 $3,329 $1,330
Interest cost.................................... 3,851 4,152 4,212
Expected return on plan assets................... (5,646) (6,128) (6,855)
Amortization of prior service costs.............. (6) (6) (3)
Amortization of actuarial (gain)/loss............ ---- ---- (629)
Curtailment gains................................ (1,625) ---- (119)
--------- --------- ---------
Net periodic benefit cost........................ $(1,708) $1,347 $(3,064)
========= ========= =========
F-19
The aggregate fair value of plan assets for the Converse Pension Plan
of $73,347 exceeded the aggregate benefit obligation of $54,370 at December 30,
2000. The SERP and EBP with an aggregate benefit obligation of $1,417 are
unfunded. Net prepaid pension benefits of $6,977 have been included in other
assets and net pension liabilities of $1,461 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.
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 and $198 were made in Fiscal 1999 and Fiscal 2000,
respectively. 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 $975, $490 and $406 for Fiscal 1998, 1999
and 2000, respectively.
Converse also sponsors a savings plan. The total cost of this plan for
Fiscal 1998, 1999 and 2000 was $325, $366, and $326, 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, 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 May 2000, the Company's Board of Directors authorized the Company to
grant incentive stock options under the 1994 Plan to each of its full-time
salaried employees as of May 10, 2000. The option allowed the eligible employees
to purchase 500 shares of the Company's common stock at the closing price on May
10, 2000 and these rights were vested in cumulative installments of 50% on each
of the first two anniversaries of the date of the grant.
F-20
As of December 30, 2000, the number of shares of common stock, which
may be issued under the 1994 Plan, was 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.
The following table summarizes stock option activity under the 1994
Plan:
WEIGHTED AVERAGE
NUMBER OF EXERCISE EXERCISE PRICE
OPTIONS PRICE PER SHARE PER SHARE
---------- ------------------ ----------------
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
-----------
Granted..................................... 297,500 $0.656 - $1.625 0.69
Canceled.................................... (801,000) $0.656 - $23.00 6.46
Exercised................................... ----- ----- -----
-----------
Outstanding at December 30, 2000............ 1,458,050 $0.656- $26.875 5.11
===========
Exercisable at December 30, 2000............ 821,550
===========
Restricted stock outstanding at
December 30, 2000........................ 280,000
===========
Available for future grants................. 1,209,550
===========
The following table summarizes information about the 1994 Plan stock
options outstanding at December 30, 2000:
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
--------------------------------------------------------------- ----------------------------------------
WEIGHTED
AVERAGE
NUMBER REMAINING WEIGHTED NUMBER WEIGHTED
RANGE OF OUTSTANDING AT CONTRACTUAL AVERAGE EXERCISABLE AT AVERAGE
EXERCISE PRICES DECEMBER 30, 2000 LIFE (YEARS) EXERCISE PRICE DECEMBER 30, 2000 EXERCISE PRICE
--------------- ----------------- ------------ -------------- ----------------- --------------
$0.656 - $1.625 250,500 8 $ 0.69 ---- N/A
$3.6875 191,000 7 3.69 38,200 $ 3.69
$4.00-$5.625 584,550 4 5.01 465,950 5.02
$6.125-$8.645 323,000 6 7.11 232,400 7.03
$9.401-$11.456 99,000 5 10.90 79,000 10.89
$26.875 10,000 5 26.88 6,000 26.88
=========== ==========
1,458,050 821,550
=========== ==========
F-21
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.
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 December 30, 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 2000, 145,000 shares of restricted stock were
cancelled due to resignations, resulting in the reversal of paid-in capital and
unearned compensation of $308. Amortization of restricted stock for Fiscal 1998,
1999 and 2000 was $217, $580 and $475, 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 for proceeds of $151.
During 2000, 56,530 shares of common stock were issued under the ESPP. Proceeds
of $50 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 1998, 1999, and 2000
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:
F-22
FISCAL YEAR ENDED
----------------------------------------------------------------
JANUARY 2, 1999 JANUARY 1, 2000 DECEMBER 30, 2000
---------------- --------------- -----------------
Net loss - as reported................. $(22,815) $(43,608) $(27,445)
Net loss - pro forma................... (24,493) (45,073) (28,078)
Basic and diluted loss per share
As reported.......................... $ (1.32) $ (2.50) $ (1.57)
Basic and diluted loss per share
Pro forma............................ (1.41) (2.59) (1.60)
The fair value of options granted at date of grant was estimated using
the Black-Scholes model with the following weighted average assumptions:
FISCAL YEAR ENDED
-------------------------------------------------------------
JANUARY 2, 1999 JANUARY 1, 2000 DECEMBER 30, 2000
--------------- --------------- -----------------
Expected life (years)............ 6.0 6.0 5.6
Interest rate.................... 5.12% 5.61% 6.15%
Volatility....................... 69.44% 76.53% 106.59%
Dividend yield................... ---- ---- ----
The weighted average grant date fair value of options granted during
Fiscal 1998, Fiscal 1999 and Fiscal 2000 was $3.07, $2.65 and $0.56,
respectively.
The pro forma net income and earnings per share amounts reflected above
do not include a tax benefit for Fiscal 1998, 1999 or 2000 as a full valuation
allowance would have been provided against any such benefit. The pro forma
effect on net income for Fiscal 1998, Fiscal 1999 and Fiscal 2000 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:
FISCAL YEAR ENDED
--------------------------------------------------------------------
JANUARY 2, 1999 JANUARY 1, 2000 DECEMBER 30, 2000
--------------- --------------- -----------------
Minimum rentals................. $4,510 $4,756 $4,421
Contingent rentals............... 1,763 1,197 867
------ ------ ------
$6,273 $5,953 $5,288
====== ====== ======
Future minimum lease payments under operating leases are $5,031,
$3,674, $2,774, $2,328 and $10,131 for 2001 through 2005 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.
F-23
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 32% 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. This 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 1998, 1999 and 2000 included
the following:
FISCAL YEAR ENDED
------------------------------------------------------------------
JANUARY 2, 1999 JANUARY 1, 2000 DECEMBER 30, 2000
--------------- --------------- -----------------
Advertising and promotion........... $23,713 $15,498 $7,763
Research and development............ $7,659 $6,200 $3,541
F-24
18. 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 United States)]. Each of these segments has 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 19% of the Company's net revenue in Fiscal 1998, 17% in Fiscal 1999 and 13%
in Fiscal 2000. 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 No. 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 fully allocated to the United States segment.
F-25
Summarized financial information concerning the Company's reportable
business segments is shown in the following table. The information for Fiscal
1999 and Fiscal 1998 has been restated from the prior year's presentation in
order to conform to the Fiscal 2000 presentation.
EUROPE, AMERICAS
MIDDLE EAST, (EXCLUDING
UNITED STATES AFRICA ASIA PACIFIC UNITED STATES) ELIMINATIONS CONSOLIDATED
------------- ------ ------------ -------------- ------------ ------------
FISCAL 2000
Net revenue to customer................ $144,199 $ 33,104 $ 27,323 $ 4,424 $ ---- $209,050
Intersegment net sales................. 11,909 ---- ---- ---- (11,909) ----
Gross margin........................... 27,442 2,266 3,593 (158) ---- 33,143
Royalty income......................... 3,607 2,782 8,287 1,631 ---- 16,307
Depreciation and amortization.......... 1,221 93 187 25 ---- 1,526
Net interest expense................... 14,787 3,685 2,473 450 ---- 21,395
Restructuring, impairment and other
unusual charges...................... 6,423 362 287 (1) ---- 7,071
Other operating costs.................. 29,616 13,920 9,899 1,361 ---- 54,796
Other (income) expense................. (4,220) (4,773) (2,116) (7) ---- (11,116)
-------- -------- -------- ------- -------- --------
Segment pretax profit (loss)........... $(16,778) $ (8,239) $ 1,150 $ (355) $ ---- $(24,222)
======== ======== ======== ======= ======== ========
Segment total assets................... $ 87,096 $ 6,863 $ 2,723 $ 501 $ ---- $ 97,183
Segment long-lived assets.............. 5,850 227 178 ---- ---- 6,255
Segment capital expenditures........... 158 18 100 ---- ---- 276
FISCAL 1999
Net revenue to customer................ $134,802 $ 54,649 $38,829 $ 6,874 $ ---- $235,154
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, impairment 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 revenue to customer................ $169,263 $ 74,602 $59,753 $ 9,506 $ ---- $313,124
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
F-26
20. QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
Following is a summary of unaudited quarterly information:
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER
Year ended January 1, 2000
Net revenue $70,998 $ 58,320 $61,651 $ 44,185
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)
======= ======== ======= ========
Year ended December 30, 2000
Net revenue $52,395 $ 56,524 $53,552 $ 46,579
Gross profit............................. $11,555 $ 12,238 $10,695 $ (1,345)
Net earnings (loss)...................... $(5,067) $ (4,710) $(6,298) $(11,370)
------- -------- ------- --------
Net earnings (loss) per share............ $ (0.29) $ ( 0.27) $( 0.36) $ (0.65)
======= ======== ======= ========
F-27
SCHEDULE II
VALUATION AND QUALIFYING ACCOUNTS
(DOLLAR AMOUNTS IN THOUSANDS)
BEGINNING ADDITIONS (REVERSALS) DEDUCTIONS ENDING
DESCRIPTION BALANCE AND EXPENSES (ADDITIONS) BALANCE
----------- ------- -------- ----------- -------
Year Ended January 2, 1999:
Allowance for Doubtful Accounts............. $ 2,066 $ 1,904 $ 1,053 $ 2,917
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............. $ 2,917 $ 2,808 $ 1,130 $ 4,595
Inventory Reserve 3,045 146 776 2,415
Deferred Tax Asset Valuation Allowance......
30,756 32,243 ---- 62,999
Year Ended December 30, 2000:
Allowance for Doubtful Accounts............. $ 4,595 $ 2,301 $ 2,979 $ 3,917
Inventory Reserve 2,415 5,602 475 7,542
Deferred Tax Asset Valuation Allowance......
62,999 8,653 ---- 71,652
F-28