-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, LSa/89pPUZM/4FvR+yo/3RTtjTIDlCECFHS7YgE/iHn0QBtspeSTJUtkSGPzkk2Z P82VormQRZiLhSpob+aazg== 0000927016-01-500194.txt : 20010418 0000927016-01-500194.hdr.sgml : 20010418 ACCESSION NUMBER: 0000927016-01-500194 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 20001230 FILED AS OF DATE: 20010416 FILER: COMPANY DATA: COMPANY CONFORMED NAME: CONVERSE INC CENTRAL INDEX KEY: 0000716934 STANDARD INDUSTRIAL CLASSIFICATION: RUBBER & PLASTICS FOOTWEAR [3021] IRS NUMBER: 041419731 STATE OF INCORPORATION: MA FISCAL YEAR END: 0102 FILING VALUES: FORM TYPE: 10-K405 SEC ACT: SEC FILE NUMBER: 001-13430 FILM NUMBER: 1603685 BUSINESS ADDRESS: STREET 1: ONE FORDHAM RD CITY: NORTH READING STATE: MA ZIP: 01864 BUSINESS PHONE: 5086641100 MAIL ADDRESS: STREET 1: ONE FORDHAM ROAD CITY: NORTH READING STATE: MA ZIP: 01864 10-K405 1 d10k405.txt FORM 10-K405 ================================================================================ 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 ----------------------------------------------------------- Securities registered pursuant to Section 12(b) of the Act: TITLE OF EACH CLASS NAME OF EACH EXCHANGE ON WHICH REGISTERED None Securities registered pursuant to Section 12 (g) of the Act: Common stock, without par value 7% Convertible Subordinated Notes due 2004 ---------------------------------------------------------- Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15 (D) of the Securities Exchange Act of 1934 during the preceding 12 months (or such shorter period that registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days: YES [X] NO [ ] Indicate by check mark if disclosure of delinquent filers pursuant to item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [X] As of 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. ================================================================================ 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 ------ ITEM 1. BUSINESS. - ------------------ 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 ------------------------------------------------------------- JANUARY 2, 1999 JANUARY 1, 2000 DECEMBER 30, 2000 --------------- --------------- ----------------- (DOLLARS IN THOUSANDS) Total sales by licensees: Footwear...................... $121,666 $147,588 $147,541 Apparel and accessories....... 179,330 143,823 94,444 -------- -------- -------- Total.............................. $300,996 $291,411 $241,985 ======== ======== ======== 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 ======== ======== ========
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. - -------------------- 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. - --------------------------- 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. - ------------------------------------------------------------- Not applicable. PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS. - ------------------------------------------------------------------------------- The Company's common stock ("Common Stock") was traded on the New York Stock Exchange ("NYSE") under the symbol "CVE" until March 2, 2000. 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 ----------------------------------------------------------------------------- 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 EX-10.15 2 dex1015.txt FOURTEENTH AMENDMENT TO CREDIT AGREEMENT EXHIBIT 10.15 FOURTEENTH AMENDMENT -------------------- TO CREDIT AGREEMENT ------------------- This FOURTEENTH AMENDMENT TO CREDIT AGREEMENT (this "Amendment") is entered into as of January 12, 2001, by and among CONVERSE INC. (the "Borrower"), BT COMMERCIAL CORPORATION, AS AGENT (in such capacity, the "Agent"), and the several banks and other financial institutions listed on the signature pages of this agreement (together with each of their respective successors and assigns, individually, a "Lender" and, collectively, the "Lenders"). WITNESSETH: WHEREAS, the Agent, the Lenders and the Borrower are parties to that certain Credit Agreement dated as of May 21, 1997, as amended by that certain First Amendment to Credit Agreement dated as of June 26, 1997, that certain Second Amendment to Credit Agree ment dated as of November 21, 1997, that certain Third Amendment to Credit Agreement dated as of January 29, 1998, that certain Fourth Amendment to Credit Agreement dated as of September 16, 1998, that certain Fifth Amendment to Credit Agreement dated as of May 28, 1999, that certain Sixth Amendment to Credit Agreement dated as of July 30, 1999, that certain Seventh Amendment to Credit Agreement dated as of October 31, 1999, that certain Eighth Amendment to Credit Agreement dated as of November 15, 1999, that certain Ninth Amendment to Credit Agreement dated as of February 15, 2000, that certain Tenth Amendment to Credit Agreement dated as of March 31, 2000, that certain Eleventh Amendment to Credit Agreement dated as of May 15, 2000, that certain Twelfth Amendment to Credit Agreement dated as of June 30, 2000, and that certain Thirteenth Amendment to Credit Agreement dated as of October 27, 2000 (such Credit Agreement as amended, supplemented or otherwise modified prior to the date hereof, the "Credit Agreement"); and WHEREAS, Borrower has requested that certain provisions of the Credit Agreement be modified in the manner provided for in this Amendment; and WHEREAS, the Lenders party hereto and the Agent have agreed with the Borrower to make such modifications to the terms and conditions of the Credit Agreement as are set forth herein. NOW, THEREFORE, in consideration of the mutual agreements herein contained and other good and valuable consideration, the adequacy of which is hereby acknowledged, and subject to the terms and conditions hereof, the parties hereto agree as follows: Section 1. DEFINITIONS. Unless otherwise defined herein, all capitalized terms shall have the meaning given to them in the Credit Agreement. Section 2. AMENDMENTS TO CREDIT AGREEMENT. 2.1 ADDITIONAL DEFINITIONS. Section 1.1 of the Credit Agreement is hereby amended by inserting the following new defined terms in proper alphabetical sequence: "BUDGET shall mean the budget attached as Exhibit R, which budget shall specify the projected cash receipts and cash disburse ments of the Borrower on a weekly basis, and shall cover each of the thirteen consecutive weekly periods commencing with the week of Janu ary 1, 2001." "FIXED ASSET RESERVE shall mean (i) during the period commencing January 1, 2001 to (but not including) January 31, 2001, $2,895,000 plus the Net Cash Proceeds of any Asset Disposition received after January 1, 2001, and (ii) thereafter, $8,895,000 plus the Net Cash Proceeds of any Asset Disposition received after January 1, 2001." 2.2 DEFINITIONS. (i) BORROWING BASE. Section 1.1 of the Credit Agreement is hereby amended by deleting the word "plus" appearing at the end of clause (C) of the definition "Borrowing Base" and inserting the word "minus" in lieu thereof. (ii) FIXED ASSET RESERVE. Section 1.1 of the Credit Agreement is hereby further amended by deleting clause (D) appearing in the definition "Borrowing Base" and inserting the following text in lieu thereof: "(D) the Fixed Asset Reserve, plus" ---- (iii) ROYALTIES. Section 1.1 of the Credit Agree ment is hereby further amended by deleting the amount "$15,000,000" appearing in clause (E) of the definition "Borrowing Base" and inserting the amount "$12,000,000" in lieu thereof. 2.3 USE OF PROCEEDS. Section 6.14 of the Credit Agreement is hereby amended by inserting the following sentence at the end thereof: "The Borrower hereby agrees that to the extent the Borrower utilizes the incremental $6,000,000 of availability created hereunder as a result of the Fourteenth Amendment to this Credit Agreement dated as of January 12, 2001 it will use such incremental availability to purchase (or provide Letters of Credit to support the purchase of) Inventory." 2.4 BUDGET. Section 7.19 of the Credit Agreement is hereby amended by deleting said section in its entirety and inserting the following in lieu thereof: "7.19 BUDGET. During January 2001, the Borrower shall not use the proceeds of any Loans or the proceeds of any Collateral for items or purposes not provided for in the month of January 2001 in the Budget." 2.5 AMENDMENTS. Section 13.11 of the Credit Agreement is hereby amended by deleting clause (v) of the first proviso thereto and inserting the following in lieu thereof: "(v) amend or waive Section 3.5(b) or this Section 13.11, or change the definition of Budget, Fixed Asset Reserve, or Required Lend ers," 2.6 LIST OF LENDERS AND COMMITMENT AMOUNTS. Annex I to the Credit Agreement is hereby deleted in its entirety and replaced with Annex I attached hereto. 2.7 BUDGET. The Credit Agreement is hereby amended by attaching Exhibit R attached hereto in sequence after Exhibit Q. Section 3. FEES. The Borrower agrees to pay to the Agent fees in such amounts and at such times as follows, which fees shall be fully earned upon the effectiveness hereof (except as otherwise specifically provided in this Section 3) and nonrefundable when paid, and are in addition to any and all other fees required to be paid from time to time by the Borrower under the Credit Agreement. 3.1 AMENDMENT FEE. Borrower shall pay to Agent for the benefit of the Lenders in accordance with their respective Revolving Credit Commitments as set forth on Annex I to the Credit Agreement (as amended hereby) an amendment fee of 150 basis points, to be payable in two installments as follows: (i) 100 basis points on the Total Commitment as set forth in such Annex I, payable on the date hereof; provided however, that if the Borrower becomes a debtor and a debtor-in-possession in a case filed under Chapter 11 of the United States Bankruptcy Code (hereinafter, a "Case"), and in connection therewith the Borrower (as debtor and debtor-in-possession) enters into a post-petition credit facility with the Agent (or its affiliates) and the Lenders party to the Credit Agreement, the amount paid under this Section 3.1(i) hereof allocable to each of the Lenders who is also a lender in such post-petition credit facility shall be credited against the corresponding closing fee payable to each such lender under such post-petition credit facility; and (ii) 50 basis points on the Total Commitment as set forth in such Annex I, payable on January 31, 2001; provided however, that the Borrower shall be entitled to a credit of $200,000 against the fee payable under this Section 3.1(ii) on account of the fees paid under the Forbearance Agreement, dated as of October 27, 2000, among the Borrower, the Lenders party thereto, and the Agent. 3.2 FIXED ASSET RESERVE FEE. Borrower shall pay to Agent for the benefit of the Lenders in accordance with their respective Revolving Credit Commitments as set forth on Annex I to the Credit Agreement (as amended hereby) a fixed asset reserve fee in an amount equal to $500,000, payable on January 31, 2001. Section 4. CONDITIONS PRECEDENT. This Amendment shall be effective on the first date upon which all of the following conditions have been satisfied: 4.1 AMENDMENT. Agent shall have received copies of this Amendment duly executed by Borrower and such Lenders as are required for this Amendment to be effective in accordance with the terms of the Credit Agreement. 4.2 AMENDMENT FEE. Borrower shall have paid to Agent the amendment fee described in Section 3.1(i). 4.3 NOTEHOLDER CONSENT. The Noteholders shall have consented to the amendments contained herein. 4.4 NOTEHOLDER FEE. The Noteholders shall have received the fee referred to in the consent letter of even date herewith addressed to BTCC. 4.5 OTHER. Agent shall have received such other documents, certificates and assurances as it shall reasonably request. Section 5. REAFFIRMATION OF BORROWER. To induce the Agent and the Lenders to enter into this Amendment, the Borrower hereby represents and warrants to Agent and Lender that, both before and after giving effect to this Amendment, except for the "Existing Defaults" and the "Fourth Quarter Defaults" (each as defined in that certain Forbear ance Agreement, dated as of October 27, 2000, by and among the Borrower, the Agent and the Lenders), (i) the representations and warranties set forth in Section 5 of the Credit Agreement are true and correct on and as of the date hereof, except to the extent (a) that any such representations or warranties relate to a specific date (in which case such representations or warranties were true and correct as of such date), or (b) of changes thereto as a result of transactions for which Agent and Lender have granted their consent; (ii) on the date hereof it is in compliance with all of the terms and provisions set forth in the Credit Agreement as hereby amended; and (iii) no Default or Event of Default has occurred that is continuing or has not previously been waived. Section 6. NO OTHER CHANGES. Except as herein amended, provisions and conditions of the Credit Agreement and all other Credit Documents shall remain unchanged and shall continue in full force and effect. Section 7. CONSENT AGREEMENT. To the extent that any term of this Amendment shall be inconsistent with any term of that certain Consent Agreement, dated as of December 22, 2000, by and between the Agent and the Borrower (as amended, restated, supplemented or otherwise modified, the "Consent Agreement"), the parties hereto agree that the terms of this Amendment shall control over the terms of the Consent Agreement. Section 8. COUNTERPARTS. This Amendment may be executed by the parties hereto in several counterparts, each of which shall be deemed an original and all of which shall constitute together one and the same document. Delivery of an executed counterpart of this Amendment by telecopy shall be effective as an original and shall constitute a representation that the original shall be delivered to the Agent. Section 9. GOVERNING LAW. THE VALIDITY, INTERPRETATION AND ENFORCEMENT OF THIS AMENDMENT SHALL BE GOVERNED BY THE LAWS OF THE STATE OF ILLINOIS WITHOUT GIVING EFFECT TO THE CONFLICT OF LAW PRINCIPLES THEREOF. Section 10. HEADINGS DESCRIPTIVE. The headings of the several sections and subsections of this Amendment are inserted for convenience only and shall not in any way affect the meaning or construction of any provision of this Amendment. IN WITNESS WHEREOF, the parties hereto have executed this Amendment on the day and year specified above. CONVERSE INC. By: ------------------------------- Name: Title: BT COMMERCIAL CORPORATION, as Agent By: ------------------------------- Name: Title: LENDERS: BT COMMERCIAL CORPORATION By: ------------------------------- Name: Title: GMAC COMMERCIAL CREDIT LLC By: ------------------------------- Name: Title: LA SALLE BANK N.A. By: ------------------------------- Name: Title: BANK OF AMERICA, N.A. By: ------------------------------- Name: Title: MADELEINE LLC By: ------------------------------- Name: Title: HELLER FINANCIAL, INC. By: ------------------------------- Name: Title: FINOVA CAPITAL CORPORATION By: ------------------------------- Name: Title: EX-10.48 3 dex1048.txt FIFTH SUPPLEMENT TO NOTE PURCHASE AGREEMENTS EXHIBIT 10.48 FIFTH SUPPLEMENT TO NOTE PURCHASE AGREEMENTS This FIFTH SUPPLEMENT TO NOTE PURCHASE AGREEMENTS (the "FIFTH SUPPLEMENTAL AGREEMENT") is made and dated as of January 22, 2001, by and among Converse, Inc. (the "COMPANY"), and US Bancorp Libra, a division of Bancorp Investments, Inc. ("LIBRA"), Foothill Partners III, L.P. ("FOOTHILL"), DDJ Canadian High Yield Fund ("DDJ CANADIAN"), and B III Capital Partners, L.P. ("DDJ CAPITAL") (Libra, Foothill, DDJ Canadian, and DDJ Capital collectively the "PURCHASERS" or individually a "PURCHASER"). WITNESSETH: WHEREAS, the Company and the Purchasers are parties to several substantially identical Note Purchase Agreement, dated as of September 16, 1998 (collectively the "NOTE PURCHASE AGREEMENTS" or individually a "NOTE PURCHASE AGREEMENT"), pursuant to which the Company issued and sold its 15% senior secured notes, in two series, in the aggregate principal amount of $28,642,687, as more fully set forth herein (the "SECURED NOTES"); and WHEREAS, the Note Purchase Agreements were supplemented in a Supplement to Note Purchase Agreements dated as of November 15, 1999 (the "SUPPLEMENTAL AGREEMENT"), pursuant to which the parties (i) acknowledged the consent of the Purchasers to the sale of certain Proprietary Rights by the Company, (ii) waived certain provisions under the Note Purchase Agreements, and (iii) amended certain provisions of the Note Purchase Agreements, as more fully set forth therein; WHEREAS, the Note Purchase Agreements were further supplemented in a Second Supplement to Note Purchase Agreements dated as of May 16, 2000 (the "SECOND SUPPLEMENTAL AGREEMENT"), pursuant to which the Purchasers waived certain provisions under the Supplemented Note Purchase Agreements and the parties amended and confirmed certain provisions of the Supplemented Note Purchase Agreements, as more fully set forth therein; WHEREAS, the Note Purchase Agreements were further supplemented in a Third Supplement to Note Purchase Agreements dated as of June 30, 2000 (the "THIRD SUPPLEMENTAL AGREEMENT") pursuant to which the Purchasers agreed to forbear from exercising their rights and remedies after an Event of Default through the Forbearance Termination Date and the parties amended and confirmed certain provisions of the Supplemented Note Purchase Agreements, as more fully set forth therein; and WHEREAS, the Note Purchase Agreements were further supplemented in a Fourth Supplement to Note Purchase Agreements dated as of October 26, 2000 (the "FOURTH SUPPLEMENTAL AGREEMENT") pursuant to which the Purchasers agreed to forbear from exercising their rights and remedies through the Forbearance Termination Date and the parties amended and confirmed certain provisions of the Supplemented Note Purchase Agreements, as more fully set forth therein; and WHEREAS, on January 22, 2001, the Company filed a voluntary petition for relief under chapter 11 of Title 11 of the United States Code in the United States Bankruptcy Court for the District of Delaware, Case No. 01-00223; and WHEREAS, on January 22, 2001, the Company entered into a Post Petition Credit Agreement, by and among the Company, the lenders from time to time party thereto and Bankers Trust Company, as agent (the "DIP Agreement"); and WHEREAS, the Purchasers have consented to the entry of an interim order on January 22, 2001, authorizing and approving, inter alia, the Post Petition Credit Agreement (the "DIP Order"), in connection with which the Company has agreed to supplement further the Note Purchase Agreements, as supplemented by the Supplemental Agreement, the Second Supplemental Agreement, the Third Supplemental Agreement and the Fourth Supplemental Agreement (collectively the "SUPPLEMENTED NOTE PURCHASE AGREEMENTS" or individually a "SUPPLEMENTED NOTE PURCHASE AGREEMENT") in order to confirm the Company's obligations under the Supplemented Note Purchase Agreements and in order to amend and confirm certain provisions of the Supplemented Note Purchase Agreements, as more fully set forth herein. NOW, THEREFORE, in consideration of the premises and the mutual agreements herein contained and other good and valuable consideration, the adequacy of which is hereby acknowledged, and on and subject to the terms and conditions hereof, the parties agree as follows: SECTION 1. DEFINITIONS. Unless otherwise defined herein, all capitalized terms shall have the respective meanings given to them in the Supplemented Note Purchase Agreements. SECTION 2. CERTIFICATIONS OF PURCHASERS. The Purchasers severally represent and warrant as follows: (a) Libra. Libra is (i) the purchaser and remains the holder of that Series A Secured Note in the principal amount of $4,142,931 and (ii) the party in interest as "Purchaser" under the related Supplemented Note Purchase Agreement, and in such capacity Libra is authorized to extend consents, waivers, and amendments with respect to its Supplemented Note Purchaser Agreement as set forth herein. (b) Foothill. Foothill is (i) the purchasers and remainder the holder of that Series A Secured Note in the principal amount of $10,357,328 and (ii) the party in interest as "Purchaser" under the related Supplemented Note Purchase Agreement, and in such capacity Foothill is authorized to extend consents, waivers, and amendments with respect to its Supplemented Note Purchase Agreement as set forth herein. (c) DDJ Canadian. DDJ Canadian is (i) the purchaser and remains the holder of that Series A Secured Note in the principal amount 2 of $4,045,408 and that Series B Secured Note in the aggregate principal amount of $1,478,400 and (ii) the party in interest as "Purchaser" under the related Supplemented Note Purchase Agreement, and in such capacity DDJ Canadian is authorized to extend consents, waivers and amendments with respect to its Supplemented Note Purchase Agreement as set forth herein. (d) DDJ Capital. DDJ Capital is (i) the purchaser and remains the holder of that Series A Secured Note in the principal amount of $6,311,920 and that Series B Secured Note in the aggregate principal amount of $2,306,700 and (ii) the party in interest as "Purchaser" under the related Supplemented Note Purchaser Agreement, and in such capacity DDJ Capital is authorized to extend consents, waivers and amendments with respect to its Supplemented Note Purchase Agreements as set forth herein. SECTION 3. ACKNOWLEDGMENT OF COMPANY. The Company acknowledges that (a) on the date of this Fifth Supplemental Agreement, the principal amount outstanding under the Secured Notes, together with accrued but unpaid interest, is due and payable, and (b) from and after the date of this Fifth Supplemental Agreement, interest shall accrue on the unpaid principal amount of the Secured Notes at the rate of 18% per annum, and such interest shall be payable as follows: (i) interest accruing at the rate of 15% per annum shall be paid by the Company in arrears, monthly, on the last day of each calendar month and at the time of the final payment of the principal balance outstanding under the Secured Notes, in accordance with the terms and conditions of the DIP Order, and (ii) interest accruing at the rate of 3% per annum shall be paid by the Company at the time of final payment of the principal balance outstanding under the Secured Notes. SECTION 4. ACKNOWLEDGMENT OF THE PURCHASERS. The Purchasers hereby acknowledge that each of them (i) has consented to, and reaffirms approval of, the Company entering into the DIP Agreement and (ii) has consented to, and reaffirms approval of, the entry of the DIP Order by the Bankruptcy Court. SECTION 5. TRANSACTION PAYMENTS; IN CASH AND IN KIND. The Company agrees to pay the Purchasers, as transaction fees, the following in cash or in kind payments: (a) The Purchasers shall receive from the Company, as a payment in kind, in lieu of cash, to accrue to the Purchasers as the holders of the Secured Notes on a pro rata basis, on the date of this Fifth Supplemental Agreement, a sum equal to 3% of the principal amount outstanding under the Secured Notes, which payment in kind shall be made by increasing the principal amount outstanding under the Secured Notes by such sum on a pro rata basis on such date; and (b) The Purchasers shall receive from the Company, as a payment or payments in cash, to be distributed to the Purchasers as the holders of the Secured Notes on a pro rata basis, (i) on February 28, 2001, a sum equal to .5% of the aggregate principal 3 amount outstanding under the Secured Notes on February 28, 2001 if the Fixed Asset Reserve (as defined in the Post-Petition Credit Agreement) on such date shall not equal or exceed $8,895,000 and (ii) on April 15, 2001, a sum equal to .5% of the aggregate principal amount outstanding under the Secured Notes on April 15, 2001 if the Fixed Asset Reserve on such date shall not equal or exceed $8,895,000. SECTION 6. CONDITIONS. The effectiveness of this Fifth Supplemental Agreement is expressly conditioned upon the effectiveness of the DIP Order, and the acknowledgments and agreements of the Company in this Fifth Supplemental Agreement are expressly subject to the terms and conditions of the DIP Order, including without limitation those terms and conditions relating to the termination of cash payments and cost and expense reimbursements as set forth in the last sentence of Section 9 of the DIP Order. SECTION 7. EXPENSES. The Company agrees to pay Purchasers (i) any and all reasonable out-of-pocket costs or expenses (including reasonable legal fees and disbursements of counsel and financial advisors to the Purchasers) incurred as a result of the negotiation and documentation of this Fifth Supplemental Agreement and (ii) from time to time any and all reasonable out-of-pocket costs or expenses (including reasonable fees and disbursements of counsel and financial advisors to the Purchasers) incurred in connection with the enforcement and protection of the rights of the Purchasers in the Company's chapter 11 case. SECTION 8. OBLIGATIONS IN FULL FORCE AND EFFECT. Except as herein amended and modified, the Note Purchase Agreements, as supplemented, and the Ancillary Documents shall remain in full force and effect. SECTION 9. COUNTERPARTS. This Fifth Supplemental Agreement may be executed in counterparts, each of which shall be deemed an original, but all of which together shall constitute one and the same document. IN WITNESS WHEREOF, the parties have executed this Fifth Supplemental Agreement as of the date and year first written above. CONVERSE, INC. By: /s/ James E. Lawlor ----------------------------------- Name: James E. Lawlor Title: Senior Vice President and CFO 4 FOOTHILL PARTNERS III, L.P. By: ----------------------------- Name: ------------------------ Title: ----------------------- US BANCORP LIBRA, a division of BANCORP INVESTMENTS, INC. By: ----------------------------- Name: ------------------------ Title: ----------------------- DDJ CANADIAN HIGH YIELD FUND By: DDJ Capital Management, LLC, its attorney-in-fact By: ----------------------------- Name: ------------------------ Title: ----------------------- B III CAPITAL PARTNERS, L.P. By: DDJ Capital III, LLC, its General Partner By: DDJ Capital Management, LLC, Manager By: ----------------------------- Name: ------------------------ Title: ----------------------- 5 EX-10.51 4 dex1051.txt ASSET PURCHASE AGREEMENT DATED APRIL 6, 2001 EXHIBIT 10.51 EXECUTION COPY ================================================================================ ASSET PURCHASE AGREEMENT BY AND BETWEEN CONVERSE INC., SELLER and FOOTWEAR ACQUISITION, INC., BUYER DATED AS OF APRIL 6, 2001 ================================================================================ TABLE OF CONTENTS Page ---- ARTICLE I. TERMS OF PURCHASE AND SALE............................... 1 1.01 Purchase and Sale............................................. 1 1.02 Excluded Assets............................................... 4 1.03 The Closing................................................... 4 1.04 Payment of Purchase Price..................................... 4 1.05 Post-Closing Adjustment....................................... 6 1.06 Assumption of Certain Obligations............................. 8 1.07 Retained Liabilities.......................................... 8 1.08 Payment of Transfer Taxes and Other Charges................... 10 ARTICLE II. REPRESENTATIONS AND WARRANTIES OF SELLER................. 10 2.01 Organization and Standing..................................... 10 2.02 Authorization by Seller....................................... 10 2.03 Assumed Contracts; Information................................ 11 2.04 Intellectual Property......................................... 12 2.05 Title to Purchased Assets; Absence of Liens and Encumbrances.. 14 2.06 Litigation.................................................... 15 2.07 Inventory..................................................... 15 2.08 Insurance..................................................... 15 2.09 Compliance with Laws.......................................... 15 2.10 Tax and Other Returns and Reports............................. 15 2.11 Environmental Matters......................................... 16 2.12 Accounts Receivable; Collection............................... 16 2.13 Software...................................................... 16 2.14 Customers and Suppliers....................................... 18 2.15 Changes in Accounting Method.................................. 18 2.16 Absence of Undisclosed Liabilities............................ 18 2.17 Subsidiary Assets............................................. 19 2.18 Schedules..................................................... 19 ARTICLE III. REPRESENTATIONS AND WARRANTIES OF BUYER.................. 19 3.01 Organization and Standing..................................... 19 3.02 Authorization by Buyer........................................ 19 3.03 Available Funds............................................... 20 3.04 HSR Matters................................................... 20 3.05 Litigation.................................................... 20 ARTICLE IV. COVENANTS OF SELLER...................................... 20 4.01 Cooperation................................................... 20 4.02 Court Approval................................................ 21 4.03 Conduct of Business........................................... 22 4.04 Disclosure Supplements........................................ 23 4.05 Closing....................................................... 24 4.06 Confidentiality............................................... 24 4.07 Transitional Arrangements Agreement........................... 24 4.08 Further Assurances............................................ 24 4.09 Inspection.................................................... 24 4.10 Maintain Insurance............................................ 25 4.11 Maintenance of, and Access to, Records........................ 25 4.12 Accounts Receivable........................................... 25 4.13 Consents...................................................... 25 4.14 Specific Enforcement of Covenants............................. 26 4.15 Acquisition Proposals......................................... 26 ARTICLE V. COVENANTS OF BUYER....................................... 26 5.01 Cooperation................................................... 26 5.02 Confidentiality............................................... 27 5.03 Employees..................................................... 27 5.04 Shipped Inventory Matters..................................... 27 ARTICLE VI. CONDITIONS TO BUYER'S OBLIGATIONS........................ 27 6.01 Covenants..................................................... 27 6.02 Representations and Warranties True........................... 27 6.03 Delivery of Certificates...................................... 27 6.04 Instruments of Transfer....................................... 28 6.05 Consents...................................................... 28 6.06 Approval Order................................................ 28 6.07 HSR Waiting Period............................................ 28 6.08 Injunction.................................................... 28 6.09 Material Adverse Change....................................... 28 6.10 Ancillary Agreements.......................................... 28 ARTICLE VII. CONDITIONS TO SELLER'S OBLIGATIONS....................... 28 7.01 Covenants of Buyer............................................ 28 7.02 Representations and Warranties True........................... 29 7.03 Delivery of Certificates...................................... 29 7.04 Instruments of Assumption..................................... 29 7.05 Tender of Purchase Price...................................... 29 7.06 Approval Order................................................ 29 7.07 HSR Waiting Period............................................ 29 7.08 Injunction.................................................... 29 7.09 Further Action................................................ 29 7.10 Ancillary Agreements.......................................... 29 ARTICLE VIII. TERMINATION PRIOR TO CLOSING............................. 29 8.01 Termination................................................... 29 8.02 Effect on Obligations......................................... 30 8.03 Return of Deposit to Buyer.................................... 30 ARTICLE IX. INDEMNIFICATION.......................................... 30 9.01 Survival...................................................... 30 9.02 Indemnification by Seller..................................... 31 9.03 Indemnification by Buyer...................................... 31 9.04 Limitations................................................... 31 9.05 Indemnification Procedure..................................... 33 ARTICLE X. MISCELLANEOUS............................................ 34 10.01 Entire Agreement.............................................. 34 10.02 Use of Names.................................................. 34 10.03 Successors and Assigns........................................ 34 10.04 Counterparts.................................................. 35 10.05 Headings, Interpretation...................................... 35 10.06 Modification and Waiver....................................... 35 10.07 Expenses, etc................................................. 35 10.08 Notices....................................................... 35 10.09 Governing Law................................................. 36 10.10 Announcements................................................. 36 10.11 Compliance with Bulk Sales Laws............................... 37 10.12 Binding Nature of Agreement................................... 37 10.13 Seller's Knowledge............................................ 37 Schedules Schedule 1.02 Certain Excluded Assets Schedule 1.05(a) Deposits and Prepayments Schedule 2.02(b) Conflicts, Etc. Schedule 2.03(a) Assumed Contracts Schedule 2.03(c) Purchase Orders, Etc. Schedule 2.03(d) Material Customers Schedule 2.03(e) Sales Personnel Compensation Schedule 2.03(f)(i) Requalification Contracts Schedule 2.03(f)(ii) Certain License Agreement Schedule 2.04 Intellectual Property Matters Schedule 2.04(i) Trade Names, Etc. Schedule 2.06 Litigation Schedule 2.09 Compliance with Law Schedule 2.10 Tax Matters Schedule 2.11(a) Environmental Matters Schedule 2.13(a) Software Consents Schedule 2.13(d) Licensed Software Schedule 2.13(e) Software Records, Etc. Schedule 2.13(f) Software Licensing Agreements Schedule 2.13(h) Software Maintenance Agreements Schedule 2.14(i) Customer Complaints Schedule 2.14(ii) Requalification Customers Schedule 2.17 Subsidiary Inventory and Accounts Receivable Schedule 5.04 Shipped Inventory Matters Schedule A Intellectual Property Schedule A-1 Copyrights Schedule A-2 Know-How Schedule A-3 Licensed Intellectual Property Schedule A-4 Patents Schedule A-5 Trademarks Schedule B Licenses Schedule C Vendor Agreements Schedule D Customer Agreements Schedule E Marketing Agreements Schedule F Inventory Schedule G Applications Schedule H Accounts Receivable Exhibit A Form of Deposit Escrow Agreement Exhibit B Form of Post Closing Escrow Agreement Exhibit C Auditor Report Standards and Procedures Exhibit D Form of Bankruptcy Court Order Exhibit E Form of Transitional Arrangements Agreement ASSET PURCHASE AGREEMENT This Asset Purchase Agreement (this "Agreement") dated as of April 6, 2001 by and between Converse Inc., a Delaware corporation ("Seller"), and Footwear Acquisition, Inc., a Delaware corporation ("Buyer"). W I T N E S S E T H : WHEREAS, Seller is willing to sell, and Buyer desires to purchase, certain intellectual property, contracts, accounts receivable, inventory and other assets of Seller; WHEREAS, Seller has filed a voluntary petition for relief under Chapter 11 of the United States Bankruptcy Code (the "Bankruptcy Code"), case no. 01-0223 (the "Bankruptcy Case"), which is currently pending in the United States Bankruptcy Court for the District of Delaware (the "Bankruptcy Court"); WHEREAS, Seller has determined that it is in its best interests to sell to Buyer, and for Buyer to purchase from Seller, pursuant to Sections 363 and 365 of the Bankruptcy Code, the Purchased Assets (as defined herein) for consideration, and upon the terms and conditions, hereinafter set forth; and WHEREAS, Seller and Buyer intend that the Closing under this Agreement will not occur until after a Notification and Report Form pursuant to the Hart-Scott- Rodino Antitrust Improvement Act of 1976 ("HSR Act") with respect to the transaction is filed, if required, with the U.S. Department of Justice and Federal Trade Commission, and any applicable waiting period under the HSR Act has expired or been earlier terminated ("HSR Clearance"). NOW, THEREFORE, in consideration of the premises and mutual promises and covenants contained herein, Buyer and Seller agree as follows: ARTICLE I. TERMS OF PURCHASE AND SALE 1.01 Purchase and Sale. Subject to the terms and conditions set forth herein, Buyer agrees to purchase and pay for, and Seller agrees to sell, assign, transfer and convey to Buyer, on the Closing Date (as defined in Section 1.03), free and clear of all Liens (as defined in Section 4.02(b)(ii) below) subject in the case of the Intellectual Property (as defined in Section 2.04 hereof) to licenses pursuant to the agreements set forth on Schedule 2.04 to this Agreement, all of the assets set forth in this Section 1.01 existing on the Closing Date, wherever located (the "Purchased Assets"). The Purchased Assets consist of and shall include only the items set forth in this Section 1.01, subject to Buyer's rights to exclude certain specified assets prior to the Closing in accordance with Section 1.02. (a) The following items of intellectual property, contracts, inventory and accounts receivable: (i) all general intangibles and intangible property, including the Intellectual Property owned by Seller; (ii) all of Seller's rights under license and sublicense agreements, pursuant to which Seller's Intellectual Property is licensed to third parties, whether domestic or international, including those listed or described on Schedule B hereto (the "Licenses"); (iii) all of Seller's rights under supplier, services or vendor agreements, purchase orders issued by Seller and other contracts entered into by Seller in connection with the design, testing, manufacture, warehousing, or transport of its products, and all contractor and outsourcing agreements otherwise entered into in connection with the products, including (x) those listed or described on Schedule C and (y) existing agreements, arrangements or understandings with E.M.I. of Taiwan, Buyer's Far East production agent ("E.M.I.") for services and information provided by E.M.I. (together, the "Vendor Agreements"); provided, however, that with respect to all current and future production orders for inventory that has not been received into Seller's distribution center as of the Closing, and for which Seller has not yet placed or opened letters of credit to the manufacturers of such inventory, Buyer agrees to open letters of credit or secure credit terms on a timely basis, as necessary to purchase such inventory, so long as such inventory conforms to the purchase orders placed by Seller with respect to such inventory and so long as Seller has provided Buyer with the terms of the letters of credit or credit terms which are summarized on Schedule C, and provided further that with respect to all production orders for inventory for which Seller has opened letters of credit for which sufficient time exists for Buyer to open substitute letter of credit or secure credit terms to replace the letters of credit opened by Seller, Buyer hereby agrees to open substitute letters of credit or obtain substituted credit terms on a timely basis so long as Seller has provided Buyer with the terms of such letters of credit or credit terms; (iv) all of Seller's rights under existing purchase orders, including customer order backlog and customer agreements and other agreements entered into by Seller for the purchase, distribution, sale, consignment or other disposition of Seller's products, including those listed or described on Schedule D hereto (the "Customer Agreements"); (v) all of Seller's rights under any marketing agreements and commitments to trade shows, media advertising, event sponsorships, celebrity endorsements, endorsements with high school, college and other organizations, including any prepayments or deposits with respect thereto, as listed or described on Schedule E hereto (the "Marketing Agreements"); (vi) all finished goods inventory wherever located, owned by Seller, including (w) all finished products or goods that are to become finished product prior to Closing that are in transit to or from Seller's distribution and -2- manufacturing facilities, (x) finished goods at Seller's manufacturing facility not yet shipped that are or become finished product prior to Closing, (y) all inventory located at Seller's retail locations (including any of Seller's inventory located at retail stores owned by Seller's subsidiaries) and (z) inventory listed on Schedule F hereto (the "Inventory"); (vii) all information technology software and hardware ("Information Technology") necessary to conduct Seller's business, other than its manufacturing and retail store businesses, as carried out during the twelve (12) month period immediately prior to the date of this Agreement, including the applications described on Schedule G (the "Applications"); (viii) all of Seller's rights under any lease agreements to computer hardware that is necessary to run the Applications (the "Hardware Lease Agreements"); and (ix) all trade receivables, royalty receivables and license fee receivables owned by Seller (the "Accounts Receivable"), unpaid interest accrued on any such accounts receivable and any security or collateral relating thereto. For purposes of this Agreement, "Assumed Contracts" shall mean all Licenses, IP License Agreements (as defined in Section 2.04(d), below), Vendor Agreements, Customer Agreements, Applications (but only to the extent they constitute executory contracts), Hardware Lease Agreements and Marketing Agreements, but shall not include any licenses, contracts or agreements listed on Schedule 1.02 or deleted from the schedules prior to the Closing Date. (b) The following items of personal property (together, the "Supplementary Items") as follows: (i) Marketing materials, including brochures, newsletters, selling tools, point-of-sale materials, corporate and consumer videos and photos, trade show booths, displays and materials, in-store concept shops, fixtures and other point of sale materials, including those located at customer locations, co-op agreements with vendors and customers, written materials and paraphernalia relating to Converse's heritage and history, including artifacts, original products, models and product designs, historical photos, descriptions and documentation and such other items identified by Buyer to Seller in writing prior to Closing. (ii) Existing and future designs of Seller's products, including prototypes, drawings, logos, specifications and artwork associated with each, and all Seller owned or controlled footwear lasts and molds. (iii) Such furniture, fixtures and equipment including computer hardware owned by Seller, located at Seller's headquarters and identified by Buyer to Seller in writing prior to Closing. -3- (iv) Copies of books, records, supplier lists, customer lists and order history, vendor lists with production and pricing data past and pending, detailed inventory data, business records, other data owned by Seller and used or held for use in connection with any of the foregoing Intellectual Property, Assumed Contracts, Inventory, Applications and Supplementary Items. 1.02 Excluded Assets. Notwithstanding the foregoing, Seller is not selling and Buyer is not purchasing pursuant to this Agreement, and the term "Purchased Assets" shall not include, any assets not specifically listed in Section 1.01 (the "Excluded Assets"); provided, however, that within the fourteen-day period following the date the Approval Order (as defined below) is signed by the Bankruptcy Court Buyer may, by written notification to Seller, provide to Seller a Schedule 1.02 that specifically lists certain assets, licenses, agreements or contracts to be excluded from purchase or assignment hereunder, which Schedule 1.02 shall be deemed to the extent necessary to amend such other Schedules hereto that may have listed such assets, licenses, agreements or contracts as Purchased Assets, and such assets, licenses, agreements or contracts shall become Excluded Assets; provided, further, that in no event shall the Purchase Price (as defined below) be reduced with respect to such deletions or exclusions. 1.03 The Closing. Upon the terms and subject to the conditions contained herein, the closing of the transactions contemplated hereby (the "Closing") shall take place at 10:00 a.m. on later of (i) April 30, 2001 and (ii) the first business day after the last condition in Articles VI and VII is satisfied (other than those conditions requiring deliveries at the Closing itself) at Willkie Farr & Gallagher, 787 Seventh Avenue, New York, New York, or at another location or time mutually agreed upon by the parties (such date being hereinafter referred to as the "Closing Date"). 1.04 Payment of Purchase Price. (a) The price to be paid by Buyer for the Purchased Assets at the Closing shall be $117,500,000 (the "Purchase Price") minus (i) the Deposit (together with any interest earned thereon) and (ii) $10,000,000 (the "Retention Amount"), which Retention Amount shall be held by Buyer and reduced and/or paid in accordance with Section 1.05(c). On the date of entry of the Approval Order (as defined below) by the Bankruptcy Court, as evidence of its good faith, Buyer shall deposit $4,700,000 (together with the $300,000 previously delivered to Seller, the "Deposit") in escrow with an escrow agent selected by the parties (the "Escrow Agent") pursuant to an agreement substantially in the form set forth as Exhibit A hereto (the "Deposit Escrow Agreement"). The Deposit Escrow Agreement shall provide, among other things, for the Deposit to be held in escrow until the earlier of the Closing or the termination of this Agreement and released as follows: (A) upon Closing, the Deposit and all interest earned thereon shall be released by the Escrow Agent to Seller in order to partially fund the acquisition of the Purchased Assets, (B) in the event of a termination of this Agreement by Seller pursuant to Section 8.01(c), the Deposit and all interest earned thereon shall be released by the escrow agent to Seller as liquidated damages, which liquidated damages shall be the sole and exclusive remedy of Seller as a result of such termination or (C) in the event of any other termination of this Agreement, the Deposit and all interest earned thereon shall be released by the Escrow Agent to Buyer. -4- (b) Of the Purchase Price, $10,000,000 (the "Accounts Receivable/Inventory Holdback Amount") shall be deposited into escrow pursuant to an agreement substantially in the form set forth as Exhibit B hereto (the "Post Closing Escrow Agreement") which Buyer, Seller and the Escrow Agent shall enter into at the Closing. The Post Closing Escrow Agreement shall provide, among other things, for the Accounts Receivable/Inventory Holdback Amount to be deposited in escrow with the Escrow Agent for the period commencing on the Closing Date and ending on the later of (i) ninety (90) days following the Closing and (ii) fifteen (15) days following the resolution of any dispute relating to the Audit (as defined below). The Accounts Receivable/Inventory Holdback Amount shall be used to satisfy (x) any Estimated Adjustment Amount pursuant to subsection 1.04(e); (y) any Downward Adjustment Amount owed to Buyer pursuant to Section 1.05 and (z) any indemnification claims arising from the breach of representations and warranties of Seller with respect to Sections 2.07 (Inventory) and 2.12 (Accounts Receivable) pursuant to and in accordance with Article IX hereof. After the later of (i) ninety (90) days following the Closing and (ii) fifteen (15) days following the resolution of any dispute relating to the Audit, if the aggregate amount of claims made by Buyer against the Accounts Receivable/Inventory Holdback Amount is less than $10,000,000 ("Holdback Claims"), then Buyer and Seller shall countersign a certificate instructing the Escrow Agent to release to Seller an amount equal to the difference between (x) $10,000,000 and (y) the Holdback Claims plus any unpaid administrative expenses of the Escrow Agent (the "Holdback Release Amount"); provided that if any amounts payable from the Accounts Receivable/Inventory Holdback Amount are the subject of an unresolved dispute, Buyer and Seller shall countersign a certificate instructing the Escrow Agent to release to Seller the Holdback Release Amount less any amounts subject to dispute (which amounts subject to dispute shall be released as disputes are resolved in accordance with the terms of the Post Closing Escrow Agreement). (c) Of the Purchase Price, $5,000,000 (the "Escrow Amount") shall be deposited into escrow pursuant the Post Closing Escrow Agreement. The Post Closing Escrow Agreement shall provide, among other things, for the Escrow Amount to be deposited in escrow with the Escrow Agent for a period of six (6) months following the Closing. The Escrow Amount shall be used to satisfy any indemnification claims arising from the representations and warranties of Seller with respect to Sections 2.03 (Assumed Contracts), 2.04 (Intellectual Property), 2.05 (Title) and 2.13 (Software) pursuant to and in accordance with Article IX hereof. After the 180th day from the Closing Date, if the aggregate amount of indemnification claims made by Buyer against the Escrow Amount pursuant to this Section 1.04(c) ("Indemnification Claim Amount") is less than $5,000,000, then Buyer and Seller shall countersign a certificate instructing the Escrow Agent to release to Seller an amount equal to the difference between (i) $5,000,000 and (ii) the Indemnification Claim Amount plus any unpaid administrative expenses of the Escrow Agent (the "Escrow Release Amount"); provided that if any amounts payable from the Escrow Amount are the subject of an unresolved dispute, Buyer and Seller shall countersign a certificate instructing the Escrow Agent to release to Seller the Escrow Release Amount less any amounts subject to dispute (which amounts subject to dispute shall be released as disputes are resolved in accordance with the terms of the Post Closing Escrow Agreement). (d) Buyer shall pay the Purchase Price to Seller at the Closing in immediately available funds wire transferred into an account maintained by Seller and which shall be -5- designated by Seller at least five (5) business days prior to the Closing Date, less (i) the Deposit plus any interest accumulated thereon, (ii) the Retention Amount, (iii) the Accounts Receivable/Inventory Holdback Amount and (iv) the Escrow Amount. The Accounts Receivable/Inventory Holdback Amount and the Escrow Amount shall be wired transferred to the Escrow Agent pursuant to the terms of the Post Closing Escrow Agreement. (e) The appropriate financial officers of Seller shall close the books of Seller as of April 28, 2001 in accordance with its normal course of business consistent with past practice, and shall deliver to Buyer no later than May 20, 2001, a report setting forth the estimated value of (i) the Account Receivables as of April 28, 2001 (the "Estimated Accounts Receivable Value") and (ii) the Inventory as of April 28, 2001 (the "Estimated Inventory Value"). The sum of the Estimated Accounts Receivable Value and the Estimated Inventory Values shall be the "Estimated Value." If the Estimated Value exceeds $80,300,000, there will be no adjustment of the purchase price until the Auditor Report is available in accordance with Section 1.05. If the difference between $80,300,000 and the Estimated Value exceeds the Retention Amount (which excess shall be referred to as the "Estimated Adjustment Amount") then an amount equal to the excess of (i) the Estimated Adjustment Amount over (ii) $1,000,000 (One Million Dollars) shall be immediately paid to Buyer (the "Estimated Payment") from the Accounts Receivable/Inventory Holdback Amount upon delivery to the Escrow Agent by Buyer of a certificate setting forth such amount. Seller shall have no right to interfere with the payment by the Escrow Agent of the Estimated Payment. 1.05 Post-Closing Adjustment. (a) Following the Closing, Buyer shall cause Arthur Andersen L.L.P. or such other "big five" accounting firm selected by Buyer and approved by Seller (which approval shall not be unreasonably withheld) (the "Auditor") to prepare a valuation of Accounts Receivable and Inventory (the "Auditor Report"). The Auditor Report shall be prepared in accordance with the principles set forth on Exhibit C, and shall set forth the value of Accounts Receivable as of the Closing Date (the "Accounts Receivable Value") and the value of the Inventory as of the Closing Date (the "Inventory Value"), in each case in accordance with GAAP applied in accordance with Exhibit C. In addition, the Audit Report shall set forth the value of all deposits and prepayments made by Seller in respect of Assumed Contracts, which deposits and prepayments will inure to the benefit of Buyer and are identified on Schedule 1.05(a) (the "Deposit/Prepayment Value"). For purposes of this Agreement and the Auditor Report, the aggregate Deposit/Prepayment Value shall not exceed $500,000. The Audit Report shall state the sum of the Accounts Receivable Value plus the Inventory Value plus the Deposit/Prepayment Value (the "Audited Value"). The Auditor shall deliver the Auditor Report to Buyer and Seller within thirty (30) business days of the Closing Date (the "Audit Report Date"). Buyer and Seller shall share equally the cost of the Auditor Report. (b) If Seller disputes the Auditor Report, Seller shall so notify Buyer in writing (a "Notice of Dispute") within ten (10) days after the date of Seller's receipt of the Auditor Report, specifying its calculation of the Accounts Receivable Value and the Inventory Value and any other points of disagreement. Upon receipt of a Notice of Dispute, Buyer shall promptly consult with Seller with respect to such alternate calculation and points of disagreement in an effort to resolve such dispute (in connection with such effort to resolve disputes, and in connection with the Auditor's preparation of the Auditor Report, Buyer shall -6- grant to Seller, its agents and the Auditors reasonable access to the books and records of Buyer pertaining to the Inventory and Accounts Receivable). If any such dispute cannot be resolved by Seller and Buyer within five (5) days after Buyer receives a Notice of Dispute from Seller, Seller and Buyer shall immediately appoint the Boston, Massachusetts office of Ernst & Young LLP to act as an arbitrator (the "Accounting Arbitrator") to determine the appropriate calculation of each of the Accounts Receivable Value, the Inventory Value, the Deposit/Prepayment Value, the Audited Value and all other remaining points of disagreement with respect to the Auditor Report (the "Review"). Seller and Buyer understand and agree that, in resolving any dispute with respect to the Auditor Report, the Accounting Arbitrator shall apply GAAP and the standards set forth on Exhibit C. All determinations made by the Accounting Arbitrator shall be final, conclusive and binding. The Accounting Arbitrator shall be directed to hold a hearing within ten (10) days of appointment (which hearing shall be held in Boston, Massachusetts) and to make a determination within five (5) days after such hearing, unless otherwise mutually agreed by the parties. The fees and expenses of the Accounting Arbitrator shall be borne equally by Seller and by Buyer. Each of the parties shall bear its own attorneys' and accounting fees and expenses incurred in connection with the Review. (c) Within five (5) business days of the later of (x) the Audit Report Date and (y) in the case of any dispute of pursuant to Section 1.05(b), the resolution of such dispute: (i) If the Audited Value exceeds $80,300,000 (the amount of such excess being the "Additional Purchase Price"), then (A) Buyer shall pay Seller by wire transfer of immediately available funds an amount equal to the Additional Purchase Price and (B) Buyer shall pay to Seller the Retention Amount by wire transfer of immediately available funds. Under no circumstances shall the Additional Purchase Price exceed $25,000,000. (ii) If the Audited Value is less than $80,300,000, then Buyer shall be entitled to the difference between $80,300,000 and the Audited Value (the "Downward Adjustment Amount"); provided, however, that under no circumstances shall the Downward Adjustment Amount exceed $25,000,000. If the Downward Adjustment Amount exceeds the sum of the Retained Amount plus the Estimated Payment (such excess being herein referred to as the "Required Additional Payment"), then (A) first, the Retention Amount shall be credited to and retained by Buyer and (B) the Escrow Agent shall pay to Buyer from the existing Accounts Receivable/Inventory Holdback Amount by wire transfer of immediately available funds the Required Additional Payment; provided further that if the Downward Adjustment Amount exceeds $20,000,000, Seller shall pay to Buyer by wire transfer of immediately available funds such excess amount up to an amount not to exceed $5,000,000. (iii) If a Downward Adjustment Amount has been determined and no Estimated Payment was made pursuant to Section 1.04(e), then (A) first, the Retention Amount shall be reduced and credited to Buyer by an amount equal to the Downward Adjustment Amount, and (B) to the extent the Downward Adjustment Amount exceeds the Retention Amount (the "Excess Amount"), the -7- Escrow Agent shall pay to Buyer from the Accounts Receivable/Inventory Holdback Amount by wire transfer of immediately available funds the Excess Amount; provided further that if the Downward Adjustment Amount exceeds $20,000,000, Seller shall pay to Buyer by wire transfer of immediately available funds such excess amount up to an amount not to exceed $5,000,000. Any Retention Amount remaining after the reduction thereto pursuant to subclause (A) above shall be paid by Buyer to Seller by wire transfer of immediately available funds. (iv) If the Downward Adjustment Amount is less than the sum of Retention Amount and Estimated Payment (such shortfall being herein referred to as the "Required Refund"), then (A) if the Required Refund is less than or equal to the Estimated Payment then Buyer shall pay to the Escrow Agent for deposit into the Accounts Receivable/Inventory Holdback Amount by wire transfer of immediately available funds an amount equal to the Required Refund or (B) if the Required Refund is greater than the Estimated Payment then Buyer shall (x) pay to the Escrow Agent for deposit into the Accounts Receivable/Inventory Holdback Amount by wire transfer of immediately available funds an amount equal to the Estimated Payment and (y) pay to Seller from the Retention Amount an amount equal to the excess of the Required Refund over the Estimated Payment by wire transfer of immediately available funds. Notwithstanding anything to the contrary contained herein, Buyer agrees that under no circumstance shall Escrow Agent release any of the Escrow Amount to Buyer to satisfy any amounts owed to Buyer in respect of the Downward Adjustment Amount except as otherwise permitted pursuant to Section 9.04(b). Any payment by Seller, the Escrow Agent or Buyer required by this subsection (c) shall bear interest at the rate equal to the interest being earned on the Accounts Receivable/Inventory Holdback Amount pursuant to the Post Closing Escrow Agreement from the Closing Date until the date of payment. The Additional Purchase Price or the Downward Adjustment Amount, as the case may be (excluding payments attributable to interest), will be treated by the parties as an increase or decrease, as the case may be, in the Purchase Price. (d) The allocation for tax purposes of the Purchase Price will be agreed upon by the parties prior to the Closing. 1.06 Assumption of Certain Obligations. Upon the sale, transfer, assignment, conveyance, and delivery of the Purchased Assets to Buyer at the Closing, Buyer shall assume and thereafter pay, perform, and discharge all obligations to be performed or arising after the Closing under all of the Assumed Contracts (the "Assumed Obligations"). Other than the Assumed Obligations, Buyer shall not assume or be liable for any other obligations or liabilities of Buyer (including any cure amounts payable to other parties to the Assumed Contracts). 1.07 Retained Liabilities. (a) Seller shall retain and pay, discharge and perform any and all obligations and liabilities not expressly assumed by Purchaser in Section 1.06 above, -8- including the following obligations and liabilities (all such obligations and liabilities, the "Retained Liabilities"): (i) liabilities for unpaid Taxes (as defined in Section 2.10); (ii) all obligations or liabilities of Seller that relate to any of the Excluded Assets; (iii) all obligations or liabilities for any borrowed money incurred by Seller whether pre-petition or post-petition; (iv) all obligations and liabilities resulting from, caused by or arising out of, directly or indirectly, the conduct of Seller's business or ownership or lease of any of its properties or assets or any properties or assets previously used by Seller at any time prior to the Closing Date, including such of the foregoing as constitute, may constitute or are alleged to constitute a tort, breach of contract, or violation or requirement of any law or governmental regulation; (v) any and all liabilities of Seller under any employee benefit plans, whether formal or informal, whether or not set forth in writing, and whether covering one person or more than one person, sponsored or maintained by Seller. For the purposes hereof, the term "employee benefit plan" includes all plans, funds, pension funds, programs, policies, arrangements, practices, customs and understandings providing benefits of economic value to any employee, former employee, or present or former beneficiary, dependent or assignee of any such employee or former employee other than regular salary, wages or commissions paid substantially concurrently with the performance of the services for which paid. The term "employee benefit plan" includes all employee welfare benefit plans within the meaning of Article 3(1) of the Employee Retirement Income Security Act of 1974, as amended ("ERISA"), and all employee pension benefit plans within the meaning of Article 3(2) of ERISA. Seller shall retain liability for all employee pension benefits; (vi) any alleged or actual liability for the investigation, cleanup or removal of any Hazardous Material (as defined in Section 2.11), or for death or injury to person or property, as a result of the generation, transportation, disposal, storage, release, emission or discharge of any Hazardous Material onsite or offsite and in, on, under, from or onto any real property subject to any lease or otherwise, past or present, that occurred or existed on or before the Closing Date; (vii) any alleged or actual liability and penalties for violations of or noncompliance with environmental laws and that occurred or existed on or before the Closing Date; and (viii) liability for all compensation, salary, wages, bonuses, commissions, incentive payments or any other benefit, perquisite, cost, expense, liability or obligation attributable to services provided prior to the Closing but -9- payable on or after the Closing to the employees, contractors, athletes or celebrities solicited and hired by Buyer pursuant to Section 5.03, if any. Buyer shall have no liability for compensation, salary, wages, bonuses, commissions, incentive payments or any other benefit, perquisite, cost, expense, liability or obligation relating to the employment or termination of employment by Seller before or after the Closing of any of Seller's employee's, contractors, athletes or celebrities. (b) At the Closing, Seller shall deliver to Buyer (i) duly executed instruments of assignment and assumption including an assignment and assumption agreement (the "Assignment and Assumption Agreement"), in form and substance reasonably satisfactory to Buyer and its counsel, and sufficient for the assignment of the Purchased Assets and the assumption by Buyer of the Assumed Obligations and (ii) take all acts reasonably necessary to give Buyer possession of, or control over, the Purchased Assets; provided, however, that in the case of Inventory located at retail stores, Seller agrees to take all action necessary to have such Inventory delivered to Seller's Charlotte, North Carolina distribution center within 45 days following the Closing, provided further that Buyer agrees to pay the freight charges incurred in connection with such delivery. 1.08 Payment of Transfer Taxes and Other Charges. At or after the Closing, Seller shall pay all transfer taxes, sales taxes (including retail sales taxes), stamp taxes, withholding taxes, and other similar taxes which are due in connection with the transactions contemplated hereby. ARTICLE II. REPRESENTATIONS AND WARRANTIES OF SELLER Seller represents and warrants to Buyer as follows: 2.01 Organization and Standing. Seller is a corporation, duly organized, validly existing and in good standing under the laws of the State of Delaware and has all corporate power and authority to carry on its business as it is currently conducted, subject to Bankruptcy Court approval. Seller is duly qualified to do business as a foreign corporation and is in good standing in all jurisdictions where the conduct of its business renders such qualification necessary, except where failure to be so qualified would not have Material Adverse Effect. For purposes of this Agreement, a Material Adverse Effect means a material adverse effect on the value or condition of the Purchased Assets, taken as a whole. 2.02 Authorization by Seller. (a) The execution, delivery and performance by Seller of this Agreement and the consummation by Seller of the transactions contemplated hereby have been or will by the Closing Date be, as the case may be, duly authorized by all requisite corporate action of Seller. This Agreement has been duly and validly executed and delivered by Seller and, upon entry of the Approval Order, will be the legal, valid, and binding obligation of Seller, enforceable against -10- Seller in accordance with its terms, except as enforceability may be limited by equitable principles (regardless of whether enforcement is brought in a proceeding in equity or at law). (b) Except as set forth on Schedule 2.02(b), neither the execution and delivery of this Agreement or any other agreements and documents to be executed or delivered pursuant hereto, nor the consummation of the transactions contemplated hereby, will (i) violate, or conflict with, any provision of Seller's Certificate of Incorporation or By-Laws, (ii) violate, or conflict with, or result in a breach of any provisions of, or constitute a default under, or result in the termination of, or accelerate the performance required by, or result in the creation of any lien, security interest, charge or encumbrance upon any of the properties or assets being sold hereunder by Seller under any of the terms, conditions or provisions of any note, bond, mortgage, indenture, deed of trust, license, agreement, lease or other instrument to which Seller is a party or by which it or any of its properties is bound, or (iii) violate, or conflict with, any order, writ, injunction, arbitral award, judgment or decree of any court, governmental body or arbitrator applicable to Seller, except, in the case of clause (ii), for any such violations, conflicts, breaches, defaults, terminations, accelerations or other matters which, individually or in the aggregate, have not had and would not reasonably be expected to have a Material Adverse Effect. 2.03 Assumed Contracts; Information. (a) Except as set forth on Schedule 2.03(a): (i) Each of the Assumed Contracts was duly executed and delivered by Seller and each constitutes the valid and legally binding obligations of the parties thereto and is enforceable by Seller in accordance with its terms. (ii) Except with regard to compliance under Assumed Contracts that is excused pursuant to Section 365(b)(2) of the Bankruptcy Code, Seller is in compliance in all material respects with the terms and conditions of the Assumed Contracts and all laws, rules and regulations applicable thereto. (iii) Except with regard to defaults under Assumed Contracts that (A) can be cured pursuant to Section 365(b)(1) of the Bankruptcy Code or (B) can be excused pursuant to Section 365(b)(2) of the Bankruptcy Code, to Seller's knowledge, no event of default (or term of like intent) has occurred under any Assumed Contract (iv) To Seller's knowledge, Seller has not received or sent notice that an event has occurred which, with the lapse of time or the giving of notice, or both, would constitute an event of default (or term of like intent) under the terms of any Assumed Contract. (v) To Seller's knowledge, Seller has not received notice from any person that any Assumed Contract has been, or is to be, terminated, or that any Assumed Contract has been, or is to be, terminated prior to its stated term, nor to -11- Seller's knowledge, does there exist any basis for a termination of any Assumed Contract. (vi) No consent of any party is required to sell, assign and transfer to Buyer any Assumed Contract that provides for the provision of goods or services or the payment of money having a value in excess of $100,000 per annum. (vii) Seller has provided Buyer with full and complete copies of all Assumed Contracts and any written amendments, modifications or waivers with respect thereto. To Seller's knowledge, there exists no oral amendments, modifications or waivers with respect to any of the Assumed Contracts, except for such oral amendments, modifications or waivers which, individually or in the aggregate, would not result in a change in the provision of goods or services or the payment of money having a value in excess of $100,000 per annum. (b) Schedule B sets forth (i) a complete list of Licenses to which Seller is a party and all other licenses to which Seller was a party since March 30, 2000, (ii) amendments to any License, (iii) the names, addresses, phone and fax numbers (and e-mail addresses, if known to Seller) of each licensee under a License, (iv) key contact persons at each licensee of a License and (v) names of Seller personnel who have been dealing with each licensee of a License. (c) Schedule 2.03(c) sets forth (i) all outstanding purchase orders with each of Seller's vendors of finished goods, (ii) all other material agreements with vendors and (iii) copies of all outstanding letters of credit issued by Seller to such vendors. (d) Schedule 2.03(d) sets forth, with respect to all of Seller's 100 highest revenue generating customers ("Material Customers"), (i) credit terms, (ii) margin allowances and discounts and (iii) return information. (e) Schedule 2.03(e) sets forth the terms and conditions of Seller's employment of or contractual arrangements with, Seller's internal and external U.S. and overseas sales personnel, including commissions and bonuses. (f) With respect to any Assumed Contracts listed or described on Schedule 2.03(a) as exceptions to the representations set forth in 2.03(a)(vi), Seller shall obtain appropriate consents to the sale, assignment and transfer contemplated herein together with an estoppel agreed to by the consenting parties to each such Assumed Contract acknowledging the transfer to Buyer of such Assumed Contract. Notwithstanding the foregoing, Seller shall only be required to use commercially reasonable efforts to obtain any consent required under (i) the agreements listed on Schedule 2.03(f)(i), which would require Buyer to establish itself as a "qualified" vendor, and (ii) the license agreement listed in Schedule 2.03(f)(ii). 2.04 Intellectual Property. Except as set forth on Schedule 2.04: (a) Seller owns all right, title and interest in and to the Owned Intellectual Property. Seller has all rights necessary to use the Licensed Intellectual Property in the manner presently used in its business. None of the Intellectual Property infringes or violates the -12- intellectual property rights of any third parties or, to Seller's knowledge, is being infringed upon by third parties. Consummation of the transactions contemplated hereby shall not impair any rights or impose any obligations with respect to Intellectual Property, except for any notices, recordings or filings that are required to be given or made by applicable law as a result of the transfer of the Intellectual Property to Buyer. On the Closing Date, Seller will transfer the Intellectual Property to Buyer, free and clear of Liens. None of the Intellectual Property is subject to any outstanding order, decree, judgment, stipulation, injunction, written restriction or agreement restricting the scope of use thereof by Seller anywhere in the world. (b) There is no pending or, to Seller's knowledge, threatened (or unasserted but considered probable of assertion) claim against Seller, nor has Seller received any written notice of any claim (i) asserting that any of the Intellectual Property as used in Seller's business infringes or violates the intellectual property rights of any third parties, (ii) asserting that any of the Intellectual Property is being infringed upon or diluted by others, (iii) asserting that any third parties have any rights to use any of the Intellectual Property except for Licensed Intellectual Property licensed to Seller on a nonexclusive basis, except for such claims which, individually or in the aggregate, would not reasonably be expected to have a Material Adverse Effect. (c) During the prior twelve months, Seller has not given notice to any third parties asserting material infringement by such third parties of any of the Intellectual Property, and to Seller's knowledge, there is no basis for any such claim against a third party. (d) All of the Licensed Intellectual Property is licensed pursuant to valid written agreements (the "IP License Agreements"). (e) Seller has not adversely used any confidential information, trade secrets or known patentable inventions of any person relating to the conduct of its business, and Seller, to its knowledge, does not have any product which, if commercially developed and sold, would adversely use any such confidential information, trade secrets or other inventions except as would not have a Material Adverse Effect. (f) There is no pending or, to Seller's knowledge, threatened claim that Seller is in breach of any IP License Agreement and, to Seller's knowledge, no basis for any such claim exists, except as would not have a Material Adverse Effect. (g) There is no pending or, to Seller's knowledge, threatened claim against Seller of any Licensed Intellectual Property asserting that any of the Licensed Intellectual Property infringes or conflicts with the rights of third parties, and to Seller's knowledge, no basis for any such claim exists. (h) Seller has performed all of the obligations required to be performed by it, and is not in default under any agreement relating to any Intellectual Property, except where such failure to perform would not have a Material Adverse Effect. (i) Schedule 2.04(i) hereto identifies each trade name, fictitious business name, or other similar name under which Seller has conducted any part of its business during the -13- five (5) years preceding the date hereof, and the trademark status reports set forth in Schedule A-5 contain true and correct information regarding the Trademarks set forth therein. (j) For purposes of this Agreement: (i) "Copyrights" shall mean all registered and unregistered copyrights and applications for copyright registration in every country of the world, including those identified in Schedule A-1; (ii) "Intellectual Property" shall mean the Owned Intellectual Property and the Licensed Intellectual Property; (iii) "Know-How" shall mean technical information, trade secrets, inventions, processes, specifications, manuals, reports, documents, drawings, procedures, processes, devices, software and source code, software documentation, research and development data, marketing information, customer lists, database rights, industrial design rights, other tangible embodiments of information and all other intellectual property or proprietary rights other than Patents, Trademarks and Copyrights, in every country of the world, owned by Seller and its subsidiaries, including those identified in Schedule A-2; (iv) "Licensed Intellectual Property" shall mean all intellectual property owned by third parties and licensed to Seller and its subsidiaries, including those identified in Schedule A-3; (v) "Owned Intellectual Property" shall mean all Patents, Trademarks, Copyrights and Know-How owned by Seller and its subsidiaries, including those listed on Schedules A-1, A-2, A-3, A-4 and A-5; (vi) "Patents" shall mean all utility and design patents and patent applications (including any divisions, continuations, continuations-in-part, reexaminations, extensions, renewals or reissues thereof), design, design registrations, utility models and any similar rights and applications therefor, in every country of the world, owned by Seller and its subsidiaries, including those identified in Schedule A-4; and (vii) "Trademarks" shall mean all registered and unregistered trademarks, service marks, trade dress, trade names, Internet domain names, fictitious business names or other similar names, and any other identification of source or origin, and applications for registration of any of the foregoing, together with associated goodwill, in every country of the world, owned by Seller and its subsidiaries, including those trademarks identified in the trademark status report attached hereto as Schedule A-5. 2.05 Title to Purchased Assets; Absence of Liens and Encumbrances. Seller owns all right, title and interest in and to, and has good and marketable title to, all Purchased Assets transferred pursuant to this Agreement. Seller will transfer all right, title and interest in the -14- Purchased Assets, including any Purchased Assets located outside of the United States, to Buyer at the Closing Date free and clear of Liens. Without limiting the foregoing, on the Closing Date the Purchased Assets will not be in any manner encumbered by any Liens arising out of unpaid state, federal, local and foreign income, sales, or ad valorem taxes which are due and payable. 2.06 Litigation. Except as set forth on Schedule 2.06, there is no litigation pending or, to Seller's knowledge, threatened (a) against Seller, its business, subsidiaries or any of its Intellectual Property or other assets which, if adversely determined, would affect the Purchased Assets, or (b) which seeks to enjoin or obtain damages in respect of the consummation of the transaction contemplated hereby. 2.07 Inventory. Seller has or will have on the Closing Date good and marketable title to the Inventory free and clear of any Lien or other right of any third party and Seller will transfer the Inventory to Buyer at the Closing, free and clear of Liens. The Inventory is recorded on the books and records of Seller at the lower of actual FIFO cost or market, net of any reserves (taking into account obsolete, defective or unmerchantable goods, odd sizes, excess quantities, unsaleable returns, other unsaleable merchandise), as determined in accordance with GAAP. 2.08 Insurance. Seller has maintained and currently maintains sufficient insurance coverage to protect its business and the full replacement value of the Purchased Assets, as well as business interruption insurance with respect to Seller's manufacturing facilities located in the United States and Mexico, in each case with reputable insurance companies in amounts consistent with other companies in its industry. 2.09 Compliance with Laws. Except as set forth on Schedule 2.09, Seller is not aware of any violation of any applicable statute, ordinance, code, restriction, regulation, or other governmental requirements, which violation, individually or in the, aggregate, would have a Material Adverse Effect. 2.10 Tax and Other Returns and Reports. Except as listed in Schedule 2.10, all material federal, state, local and foreign tax returns, reports, statements and other similar filings required to be filed by Seller in connection with its operation of the business as it pertains to the Purchased Assets (the "Tax Returns") with respect to any federal, state, local or foreign taxes, assessments, interests, penalties, deficiencies, fees and other governmental charges or impositions, as well as all transfer taxes, sales taxes (including retail sales taxes), duties and customs fees, stamp taxes, withholding taxes, and other similar taxes (all such tax liabilities relating to the manufacture, importation, delivery, shipment and use of the Purchased Assets, including Inventory in transit, for all periods ended prior to the Closing Date referred to herein as the "Taxes") have been filed with the appropriate governmental agencies in all jurisdictions in which such Tax Returns are required to be filed. Except as listed in Schedule 2.10, all Taxes, including those which are called for by the Tax Returns, or heretofore or hereafter claimed to be due by any taxing authority from Seller, have been properly accrued or paid. Seller shall be solely responsible for Taxes accrued during periods ended on or prior to the Closing Date and Seller shall have the sole right to contest any such claim or deficiency in any administrative or judicial forum of its choosing, or pursue or forego any appeal of any administrative judicial decision, or to terminate or settle an administrative proceeding. -15- 2.11 Environmental Matters. Except as set forth on Schedule 2.11(a), neither Seller nor, to Seller's knowledge, any other person has (x) discharged or disposed of any Hazardous Materials at Seller's Charlotte, North Carolina distribution facility or North Reading, Massachusetts headquarters in a manner which at the time of such act was is in violation of any law, rule or regulation affecting the use, discharge, or disposal of any Hazardous Material. Additionally, none of such real property is being used, or to Seller's knowledge, after due inquiry has ever previously been used, for the discharge or disposal of any Hazardous Materials in a manner which at the time of such act was in violation of any law, rule or regulation affecting the use, discharge, or disposal of any Hazardous Material or, (y) received any notice from any governmental authority indicating that the real property has been or may be placed on any federal or state "Superfund" or "Superlien" list. The term "Hazardous Material" means any substance that is defined as a "hazardous waste" or "hazardous substance" under any applicable federal, state, or local statute, regulation, or ordinance and shall include any (A) "hazardous waste" as defined by the Resource Conservation and Recovery Act of 1976 (42 U.S.C. Article 6901 et seq.), as amended from time to time, and regulations promulgated thereunder; and (B) any "hazardous substance" as defined by the Comprehensive Environmental Response, Compensation and Liability Act of 1980 (42 U.S.C. Article 9601 et seq.) ("CERCLA"), as amended from time to time and regulations promulgated thereunder. 2.12 Accounts Receivable; Collection. Schedule H sets forth a listing showing aging by customer of the Accounts Receivable that are outstanding as of the date hereof. The Accounts Receivable are not subject to any written or, to Seller's knowledge, oral agreement or understanding providing for any credit, chargeback, counterclaim, setoff, discount, returns or co-operative marketing payments in respect thereof, except for any such credits, chargebacks, counterclaims, setoffs, discounts, returns or co-operative marketing payments that have been estimated and reserved for based on historical experience (either generally or specifically) on the books and records of Seller. Seller has not accelerated or delayed collection of Accounts Receivable in advance of or beyond their regular due dates or the dates when the same would otherwise have been collected other than in the ordinary course of business. Accounts Receivable with extended payment terms providing for payments over more than 90 days are carried at no greater than present value. 2.13 Software. (a) Seller's rights in and to (i) the Applications that are required to process Inventory and Accounts Receivable (the "Accounts Receivable/Inventory Software") and (ii) all other Applications not requiring the consent of third parties for the assignment thereof will be granted to Buyer, either by transfer of title, assignment of rights or grant of license at the Closing. Schedule 2.13(a) sets forth a list of the Applications ("Licensed Software") requiring the consent of the owners and/or licensors ("Licensors") thereof ("Licensors' Consent"). Subject to receipt of Licensors' Consent, Seller's rights in and to Licensed Software will be granted to Buyer, either by transfer of title, assignment of rights or grant of license at the Closing. Seller shall use commercially reasonable efforts to obtain Licensors' Consent prior to Closing. Upon receipt of Licensors' Consent, if applicable, Seller shall, at the request of Buyer, provide programming code, source code and documentation in Seller's possession and execute and -16- deliver such other instruments of sale, transfer, conveyance, assignment or license as Buyer may reasonably request in order to effectively vest in Buyer the rights contemplated hereby. (b) The activities and operations of Seller with regard to the Applications prior to the Closing, are not, and have not been, in violation of any agreement, or in violation of any rights held by any Person except for pre- petition amounts owed under license agreements between Seller and Licensors relating to the Applications. (c) Seller holds either: (i) sole and exclusive ownership of all rights in and to the Applications; or (ii) valid rights and licenses to utilize the Applications in its operations and activities as carried out during the twelve-month period prior to the date of this Agreement. The Accounts Receivable/Inventory Software constitutes substantially all the computer software necessary for Buyer to conduct the operations and activities necessary to manage and dispose of Inventory and Accounts Receivable. All Licensed Software is transferable to Buyer with Licensors' Consent. The Applications and computer hardware leased pursuant to the Hardware Lease Agreements constitute all of the computer software and hardware necessary to conduct the operations and activities of Seller (other than its manufacturing and retail store operations) during the prior twelve months. The Information Technology, whether transferred to Buyer hereunder, or in the form of services provided by Seller pursuant to Section 4.01, constitutes or will constitute on the Closing Date, all of the computer software and hardware necessary to conduct the operations and activities of Seller (other than its manufacturing and retail store operations) during the prior twelve months. (d) In the case of each Application indicated in Schedule 2.13(d) as being owned by Seller (hereafter "Owned Software"), Seller has good and marketable right, title and interest in and to all forms, versions and releases of the Owned Software, including all copyright rights and all applicable patent and trade secret rights, free and clear of any Liens other than rights of authors which may not be legally waived except for the language and database licensed by third parties which is used to operate the Owned Software. No item of Owned Software is a derivative work (as defined in U.S. Copyright Law) of any other work that is not owned in its entirety by, or properly licensed such that no one may claim any rights in such derivative work other than, Seller. Except as indicated in Schedule 2.13(d), Seller is in actual possession of the complete source code and object code, and is in possession of all documentation necessary for the effective use, distribution and support of each such item of Owned Software. (e) Except as indicated in Schedule 2.13(e), Seller: (i) maintains master machine readable reproducible copies, source code listings, technical documentation and user documentation for the most current releases and versions thereof; and -17- (ii) maintains the machine readable copies such that they substantially conform to the corresponding source code listings, programming and user manuals, and published specifications (if any). (f) All Applications which are not Owned Software (herein referred to as "Third Party Software") are subject to restrictions on assignment, transfer, relocation, use, copying, distribution, preparation of derivative works, display, performance, sale, offer for sale, manufacture or disclosure (such activities collectively and individually referred to herein as "Use") as are contained in the corresponding license agreements identified in Schedule 2.13(f). (g) Subject to Licensors' Consent, if applicable, the continued or further Use of any Application by Buyer after the Closing, which Use is consistent with the Use of such item by Seller prior to the Closing, will not give rise to any obligation to pay any royalty, fee, penalty, damages or compensation to any Person. (h) All contracts, agreements, commitments or obligations of Seller for the maintenance, support, upgrade, correction of defects or deficiencies, or for continuing or for renewing rights to, any Third Party Software, and any payment obligations or options therefor, are identified in Schedule 2.13(h). 2.14 Customers and Suppliers. Since January 1, 2001 and except as disclosed in Schedule 2.14(i), there has been no written complaint or, to Seller's knowledge, oral complaint from any Material Customer and no notice of breach or of termination under any contract with a Material Customer. Seller has not been advised in writing or, to Seller's knowledge, orally by any Material Customer or supplier of finished goods ("Finished Goods Supplier") that such Material Customer or Finished Goods Supplier was or is intending to terminate its relationship or would not continue to purchase or sell supplies or services for future periods on account of any dissatisfaction with Seller's performance. All order backlog is described on Schedule D hereto, and such backlog has been accurately accounted for in the records of Seller in accordance with Seller's historical practices; and, to Seller's knowledge, the order backlog represents good orders consistent with Seller's and industry practice. Seller has not been advised in writing or, to Seller's knowledge, orally that any customer intends to cancel or change the material terms of any orders included in such order backlog. Notwithstanding any of the foregoing, with respect to the Material Customers identified on Schedule 2.14(ii) as potentially requiring Buyer to establish itself as a "qualified" vendor ("Requalification Customers"), Seller makes no representation to Buyer in respect of any Requalification Customer that following the date hereof gives notice of termination or its intention to terminate its relationship with Seller or its intention not to continue to purchase supplies or services for future periods because of the failure of Buyer to so "qualify". 2.15 Changes in Accounting Method. Since December 1, 2000, Seller has not made any material change in any method of accounting or accounting practice related to the Inventory or the Accounts Receivable. 2.16 Absence of Undisclosed Liabilities. Except for the Assumed Obligations, to Seller's knowledge there are no material liabilities with respect to the Purchased Assets other -18- than those disclosed or provided in this Agreement and in the Schedules hereto; Seller is not aware of any facts or circumstances that could be expected to result in such liabilities. 2.17 Subsidiary Assets. To Seller's knowledge, there are no assets owned by any of its subsidiaries that are necessary for Buyer, following the Closing, to carry on the business conducted by Seller prior to the Closing (other than Seller's manufacturing and retail store operations). Schedule 2.17 sets forth all material accounts receivable and inventories (other than those related to Seller's manufacturing and retail stores) that are owned by Seller's subsidiaries, if any (the "Subsidiary A/R and Inventory"). Buyer and Seller acknowledge and agree that the Subsidiary A/R and Inventory is not a part of the Purchased Assets. 2.18 Schedules. All of the information contained on the Schedules to this Agreement with respect to the Purchased Assets and Assumed Contracts is complete, accurate and correct in all material respects. ARTICLE III. REPRESENTATIONS AND WARRANTIES OF BUYER Buyer hereby represents and warrants to Seller as follows: 3.01 Organization and Standing. Buyer is a corporation validly existing and in good standing under the laws of Delaware, and has all requisite corporate power to enter into this Agreement, to perform its obligations hereunder, and to carry out the transactions contemplated hereby. Buyer has the requisite corporate power to carry on its business as it is now being conducted. 3.02 Authorization by Buyer. (a) the execution, delivery, and performance by Buyer of this Agreement and the consummation by Buyer of the transactions contemplated hereby have been duly authorized by all requisite corporate action of Buyer. This Agreement has been duly and validly executed and delivered by Buyer and constitutes the legal, valid, and binding obligation of Buyer enforceable against Buyer in accordance with its terms, except as enforceability may be limited by bankruptcy, insolvency, reorganization, moratorium, receivership or similar laws affecting or referring to the enforcement of creditors' rights generally or by equitable principles (regardless of whether enforcement is brought in a proceeding in equity or at law). (b) Neither the execution and delivery of this Agreement and all other agreements and documents to be executed or delivered hereunder, nor the performance and fulfillment by Buyer of all its representations, warranties, covenants and obligations hereunder, will (i) violate, or conflict with, any provision of Buyer's Articles of Incorporation or By- Laws, (ii) violate, or conflict with, or result in a breach of any provisions of, or constitute a default under, or result in a breach of any provisions of, or constitute a default under, or result in the termination of, or accelerate the performance required by, or result in the creation of any lien, security interest, charge or encumbrance upon any of the properties or assets of Buyer under any of the terms, conditions or provisions of any note, bond, mortgage, indenture, deed of trust, license, agreement, lease or other instrument to which Buyers is a party or by which its is bound, -19- or (iii) violate, or conflict with, any order, writ, injunction, arbitral award, judgment or decree of any court, governmental body or arbitrator applicable to Buyer. 3.03 Available Funds. Upon satisfaction of all conditions to Buyer's obligation to purchase the Purchased Assets, Buyer will have the funds necessary to pay the Purchase Price. 3.04 HSR Matters. Buyer shall notify Seller within three days hereof as to whether the transactions contemplated by this Agreement require the parties hereto to file a Notification and Report Form pursuant to the HSR Act. In the event that Buyer notifies Seller that no such filing is necessary, Buyer hereby represents and warrants that as of the Closing Buyer (i) is its own "ultimate parent entity," as such term is defined under the Premerger Notification Rules (the "Rules") to the HSR Act and (ii) (x) had annual net sales of less than $10,000,000 and (y) has less than $10,000,000 in total assets, each as determined in accordance with Section 801.11 of the Rules to the HSR Act. 3.05 Litigation. There is no litigation pending (a) against Buyer in connection with the conduct of its business which, if adversely determined, would materially and adversely affect the business or financial condition of Buyer or (b) which seeks to enjoin or obtain damages in respect of the consummation of the transactions contemplated by this Agreement. ARTICLE IV. COVENANTS OF SELLER Seller hereby covenants and agrees with Buyer as follows: 4.01 Cooperation. Subject to the terms and conditions herein provided, Seller agrees to use its reasonable best efforts to take, or cause to be taken, all action and to do, or cause to be done, all things necessary, proper or advisable to consummate and make effective as promptly as practicable the transactions contemplated by this Agreement, and to cooperate with Buyer in connection with the foregoing, including using its reasonable best efforts (i) to obtain all necessary waivers, consents and approvals from other parties to any Assumed Contract and any other material agreements, leases and contracts included in the Purchased Assets; (ii) to obtain all necessary consents, approvals and authorizations as are required to be obtained under any federal, state or foreign law or regulations, including the Approval Order; (iii) to lift or rescind any injunction or restraining order or other order adversely affecting the ability of the parties to consummate the transactions contemplated hereby (including, at Buyer's request, to defend any lawsuit brought against Buyer that threatens to enjoin, restrain or adversely affect the ability of the parties to consummate the transactions contemplated hereby); (iv) to effect all necessary registrations, filings and submissions of information requested by governmental authorities; (v) to fulfill all conditions to this Agreement; and (vi) to provide Buyer promptly with all information and assistance with respect to the foregoing and the Purchased Assets as Buyer may reasonably request, in writing or otherwise. Without limiting the foregoing, on the Closing Date or as promptly as reasonably practicable thereafter, Seller will execute and deliver to Buyer all applications for transfer of trademark registrations and other documents reasonably requested by Buyer to effectuate the unconditional transfer of the Intellectual Property upon the Closing Date, -20- free and clear of all Liens subject, in the case of the Intellectual Property, to licenses granted pursuant to the agreements set forth on Schedule 2.04 to this Agreement that may exist on the Closing Date, and will waive any other right, title and interest of Seller in and to the Intellectual Property. Effective upon the Closing Date, Seller will and does hereby grant to Buyer an exclusive, irrevocable, worldwide, fully- paid, royalty-free right and license to exercise all rights in and to the Intellectual Property to permit Buyer's full enjoyment of its ownership rights during the period before Buyer becomes the record owner, and while Seller is the record owner, of the applicable Intellectual Property, which license shall be for the benefit of Buyer, its licensees, successors and assigns. Upon the Closing Date, Seller shall execute and deliver to Buyer such documents as Buyer may reasonably request to effect the foregoing. Effective as of the Closing Date, Seller grants to Buyer an irrevocable power of attorney, with full power of substitution, with respect to the Intellectual Property. Upon the Closing Date, Seller agrees to execute in favor of Buyer or its designee a specific irrevocable power of attorney with full power of substitution, in form and substance satisfactory to Buyer, to record the assignment of the Intellectual Property from Seller to Buyer. In furtherance of the foregoing, to the extent that Seller is unable to transfer right, title and interest in and to any Assumed Contract to Buyer on the Closing Date, Seller agrees, to the extent permitted by law, to provide Buyer with the benefits of any such Assumed Contract, provided, however, that Buyer agrees to perform the Assumed Obligations, if any, in respect thereof and provided further that the provision to Buyer of such benefits shall not relieve Seller of (i) its obligations to obtain any required consents hereunder nor (ii) such consequences as may be provided for hereunder for failure to obtain such consents. 4.02 Court Approval. (a) Prior to Closing, the sale of the Purchased Assets to Buyer pursuant to this Agreement and the other transactions contemplated by this Agreement shall have been approved by the Bankruptcy Court pursuant to sections 105, 363, 365 and 1146(c) of the Bankruptcy Code, pursuant to an order in substantially the form attached hereto as Exhibit D (with no modifications or changes except those approved by Buyer and Seller, the "Approval Order"), and the Approval Order shall have become a Final Order. Buyer and Seller agree to use reasonable efforts to cause the Bankruptcy Court to enter the Approval Order. Promptly following entry of the Approval Order, Seller shall serve such entered Approval Order to all parties to the Assumed Contracts. (b) For purposes of this Agreement, (i) a Final Order means an order or a judgment entered by the Bankruptcy Court (x) that has not been reversed, stayed, modified or amended, (y) as to which no appeal or petition for review or motion for rehearing or reargument has been taken or has been made, and (z) as to which the time for filing a notice of appeal, a petition for review or a motion for reargument or rehearing has expired, (ii) "Liens" means all title defects or objections, mortgages, deeds of trust, liens, claims, charges, pledges, security interests, obligations, interests or other encumbrances of any nature whatsoever, whether domestic or foreign; provided, however, that any claims, credits, obligations, charges or similar rights of customers of Seller that offset or reduce any Accounts Receivable relating to such customers shall not constitute "Liens" on such Accounts Receivable. (c) Seller shall cooperate reasonably with Buyer and its representatives in connection with the Approval Order and the bankruptcy proceedings in connection therewith. -21- Seller further covenants and agrees that if the Approval Order is entered the terms of any plan submitted by Seller to the Bankruptcy Court for confirmation shall not conflict with, supersede, abrogate, nullify, modify or restrict the terms of this Agreement and the rights of Buyer hereunder, or in any way prevent or interfere with the consummation or performance of the transactions contemplated by this Agreement including any transaction that is contemplated by or approved pursuant to the Approval Order. (d) If the Approval Order or any other orders of the Bankruptcy Court relating to this Agreement shall be appealed by any Person (or a petition for certiorari or motion for rehearing or reargument shall be filed with respect thereto), Seller agrees to take all steps as may be reasonable and appropriate to defend against such appeal, petition or motion, and Buyer agrees to cooperate in such efforts, and each party hereto agrees to use its reasonable efforts to obtain an expedited resolution of such appeal; provided, however, that nothing herein shall preclude the parties hereto from consummating the transactions contemplated herein if the Approval Order shall have been entered and has not been stayed and Buyer, in its sole discretion, waives in writing the requirement that the Approval Order be a Final Order. 4.03 Conduct of Business. (a) Between the date hereof and the Closing Date, Seller will use its commercially reasonable efforts to preserve, protect, and maintain the Purchased Assets, and to operate its business in the same manner it currently operates. Seller will not harm the Purchased Assets and will not take any action that will materially adversely affect the Assumed Contracts. Seller shall (i) maintain the Inventory in all material respects in the manner in which it has been maintained during the fifteen- month period immediately prior to the date hereof and (ii) comply in all material respects with all provisions of any Assumed Contract. Without limiting the foregoing, Seller shall conduct its business diligently and in the ordinary and normal course and consistent with past practice (including using its commercially reasonable efforts to preserve beneficial relationships with distributors, agents, lessors, suppliers and customers). (b) Seller shall not engage in any transaction relating to the purchase or sale of goods, inventories, capital expenditures, marketing programs or other operating or production items or accounts receivable, from the date hereof until the Closing other than: (i) transactions in the ordinary course of business or (ii) transactions not objected to by Buyer. For the purposes of this Section 4.03, (A) any transaction involving the sale of excess, close-out or obsolete goods in excess of $25,000, (B) any transaction involving the sale of goods at or below cost (other than transactions involving the sale of excess, close-out or obsolete goods of less than $25,000 in the aggregate) or (C) any commitment or expenditure exceeding $25,000 (excluding payroll expenditures) shall be deemed to be outside the ordinary course of business. Buyer shall communicate to Seller the names of one or more representatives of Buyer who shall be "Designated Representatives" and as such shall be authorized to object to transactions outside the ordinary course of business. Seller shall notify the Designated Representatives of each transaction outside the ordinary course of business, and Buyer shall notify Seller of any objection to such transaction as soon as reasonably practicable, but in no event more than two (2) business days following receipt of notice of such proposed transaction. If Seller has not received notice of -22- an objection to any such transaction within such two (2) business day period, Seller may assume Buyer does not object to such transaction. (c) Without limiting the generality of the foregoing and except as approved by Buyer or otherwise expressly provided in this Agreement, during the period from the date hereof through the Closing Date, Seller shall not: (i) sell, transfer, license or otherwise dispose of, or agree to sell, transfer, license or otherwise dispose of, any Purchased Assets, except in the ordinary and normal course of business consistent with industry practice, including, without limitation, fulfilling customer orders prior to normal shipment periods inconsistent with industry practices (which industry practices shall include seasonality requirements); (ii) modify, waive or accelerate or delay collection of accounts receivable in advance of or beyond their regular due dates or the dates when the same would otherwise have been collected other than with respect to accounts receivable not exceeding $5,000 and otherwise in the ordinary course of business; (iii) enter into any new agreements that would be included in Assumed Contracts, or amend or alter in any material way any existing Assumed Contracts; (iv) take any action the taking of which, or omit to take any action the omission of which, would cause any of the representations and warranties contained in Article II to fail to be true and correct in all material respects as of the Closing as though made at and as of the Closing; or (v) agree to do any of the foregoing. 4.04 Disclosure Supplements. (a) From time to time prior to the Closing, Seller shall promptly supplement or amend the disclosures contained in the Schedules or Exhibits with respect to any matter: (i) which may arise hereafter and which, if existing or occurring at or prior to the date hereof, would have been required to be set forth or described therein; or (ii) which makes it necessary to correct any information in the Schedules or Exhibits or in any representation and warranty of Sellers which has been rendered inaccurate thereby. No supplement or amendment to the Schedules or Exhibits or any delivery of Schedules after the date hereof, unless expressly consented in writing by Buyer, shall be deemed to cure any breach of any representation or warranty made in this Agreement, or modify, affect or diminish Buyer's right to terminate this Agreement pursuant to Section 8.01(c). (b) During the period from the date hereof to the Closing, Seller shall promptly: (i) furnish or make available to Buyer copies of all financial or other reports relating to the Purchased Assets as soon as they become available, all certified by a duly authorized officer of Seller that such financial statements were generated in the ordinary course of business -23- consistent with past accounting or past applicable operational reporting practices; and (ii) notify Buyer of the occurrence of any event having a Material Adverse Effect. 4.05 Closing. Seller shall use its reasonable best efforts to cause the conditions set forth in Article VI to be satisfied by the Closing Date, including undertaking such measures as may be appropriate, including written notice letters, required to obtain the necessary consents. 4.06 Confidentiality. If the Closing does not occur, Seller will maintain in confidence all information relating to Buyer furnished to it by Buyer, or any agents of Buyer, including information concerning the businesses, financial condition or stockholders of Buyer, and will not disclose such information to others, or use such information for any purpose unless and until such information is or becomes in the public domain by reason other than disclosure by Seller, except as such information may be required to be disclosed by Seller under applicable law or which has previously been made public. If this Agreement is terminated, Seller shall return all confidential information received from Buyer and all copies and summaries thereof. 4.07 Transitional Arrangements Agreement. At the Closing, Seller and Buyer shall execute and deliver a Transitional Arrangements Agreement, in substantially the form of Exhibit E hereto. 4.08 Further Assurances. At any time or from time to time after the Closing Date, Seller shall execute and deliver any further instruments or documents, and take all such further action as Buyer may request, including procuring assurance and cooperation from Seller's officers and employees, in order to transfer to and vest in Buyer all of Seller's right, title and interest in and to the Purchased Assets, including using its best efforts, at Buyer's expense, to assist and cooperate with Buyer in Buyer's preparation and filing of documents relating to the transfer of the Intellectual Property. In the event that Seller fails to promptly execute and deliver any such instruments or documents reasonably requested by Buyer, Seller hereby irrevocably appoints Buyer as its power-of-attorney, effective only upon the Closing, with full right of substitution for the purpose of executing such documents. This power of attorney shall be for the benefit of Buyer, its licensees, successors and assigns. 4.09 Inspection. For all periods prior to the Closing, Seller agrees to grant Buyer full and complete access to all of its properties at any time and to its customers, vendors and suppliers during normal business hours and upon reasonable notice from Buyer and to cooperate with any request of Buyer to permit Buyer to inspect or review any location owned or leased by Seller, including the making available of such personnel of Seller as Buyer may reasonably request. At Buyer's discretion, Buyer may arrange for its employees, officers, accountants and attorneys to visit and inspect any such location and to review any all documentation pertaining to the Purchased Assets. Without limiting the foregoing, Seller agrees to make available to Buyer or its auditors or attorneys, and to provide full and complete access to, for inspection and copying, documentation relating to any of the following: (a) All financial records for the last five years including accounts receivable, accounts payable, capital spending, income statements, balance sheets, accounting work papers, -24- tax files, all agreements for the past three years with any financial institution with whom Seller has had dealings; (b) Employee records for the past three years of full and part-time employees and contract employee, including salary information and employment contracts and all agreements with outside organizations providing labor or employment services to Seller; provided, however, that employee records shall in no event include employee medical records or any other information reasonably determined by Seller to be of a confidential nature; (c) All records, including order and payment histories, of the customers and vendors of Seller's subsidiaries and the names and contact numbers of all managers and other employees of such subsidiaries; (d) All Assumed Contracts, including purchase orders; (e) Records of all transfers of Inventory and goods in connection with the closing of Seller's manufacturing facilities and retail locations; (f) all documentation pertaining to any investigation, institution, settlement or agreement to settle any litigation, action or proceeding before any governmental entity in connection with the businesses of Seller, including under the Foreign Corrupt Practices Act, for five years prior to the Closing; and (g) reasonable access to employees for the purposes of conducting interviews; provided, however, that Buyer shall give Seller reasonable advance notice thereof to Buyer. 4.10 Maintain Insurance. Seller shall maintain insurance coverage sufficient to protect its business and the Purchased Assets. 4.11 Maintenance of, and Access to, Records. After the Closing Date, Seller shall provide Buyer with access (with an opportunity to make copies), during normal business hours, and upon reasonable notice, to any records relating to the Purchased Assets and Assumed Obligations. Seller shall preserve and maintain any books and records relating to the Purchased Assets that are not otherwise provided to Buyer for at least two years after the Closing Date. 4.12 Accounts Receivable. In the event that Seller receives any payment relating to any Account Receivable outstanding on or after the Closing Date, such payment shall be the property of Buyer. Seller will promptly endorse and deliver to Buyer any cash, checks or other documents received by it on account of any such Accounts Receivable. Seller shall advise Buyer (promptly following its becoming aware thereof) of any counterclaims or set-offs that may arise subsequent to the Closing Date with respect to any Account Receivable. 4.13 Consents. Following the Closing, Seller shall use its best efforts to obtain all necessary consents of third parties to those contracts that but for obtaining such consent would have been Assumed Contracts transferred to Buyer on the Closing Date. Immediately after obtaining any required consents, Seller agrees to take all necessary action to assign such -25- contracts to Buyer, including the execution and delivery to Buyer of instruments of assignment in form and substance reasonably satisfactory to Buyer and its counsel. 4.14 Specific Enforcement of Covenants. Seller acknowledges that irreparable damage would occur in the event that any of the covenants and agreements of Seller set forth in Article IV of this Agreement were not timely performed in accordance with their specific terms or were otherwise breached. It is accordingly agreed that Buyer shall be entitled to an injunction or injunctions to prevent or cure any breach of such covenants and agreements of Seller and to enforce specifically the terms and provisions thereof, this being in addition to any other remedy to which it may be entitled at law or in equity or under the terms of this Agreement. 4.15 Acquisition Proposals. Between the date hereof and the Closing, Seller shall not, directly or indirectly, (a) take any action to solicit, initiate submission of or knowingly encourage any Acquisition Proposal or (b) participate in any substantive discussions or negotiations regarding an Acquisition Proposal with anyone, except in the case of each of the foregoing for Acquisition Proposals by or on behalf of Buyer or its affiliates. During such period, Seller shall promptly notify Buyer upon receipt of any indication of interest or any offer with respect to an Acquisition Proposal. For purposes hereof, an "Acquisition Proposal" shall include any proposal for any acquisition or purchase by anyone of all or a portion of the Purchased Assets or any equity interest in Seller or any of its subsidiaries, of any merger or business combination with, or any acquisition of, Seller or any of its subsidiaries. If, after the entry of the Approval Order, Seller enters into a written agreement to accept any Acquisition Proposal, Seller shall, in addition to returning Buyer's Deposit (together with any interest), promptly reimburse Buyer for all of Buyer's expenses incurred in connection with preparing its Bid, its investigation of Seller and its negotiation and preparation of this Agreement, including the fees and expenses of Buyer's attorneys, accountants and advisors, such reimbursement being in addition to any other remedy to which Buyer may be entitled at law or in equity or under the terms of this Agreement. Notwithstanding anything herein to the contrary, until the Bankruptcy Court enters the Approval Order Seller may (and may authorize and/or permit any of its officers, directors, employees, attorneys, agents or representatives to) furnish information with respect to Seller to any person or persons making an unsolicited proposal or inquiry and shall notify Buyer in writing of any such proposal or inquiry. ARTICLE V. COVENANTS OF BUYER Buyer hereby covenants and agrees with Seller as follows: 5.01 Cooperation. Subject to the terms and conditions herein provided, Buyer agrees to use its reasonable best efforts to take, or cause to be taken, all action and to do, or cause to be done, all things necessary, proper or advisable to consummate and make effective as promptly as practicable the transactions contemplated by this Agreement, and to cooperate with Seller in connection with the foregoing, including using its reasonable best efforts (i) to obtain all necessary consents, approvals and authorizations as are required to be obtained under any federal, state or foreign law or regulations required to be obtained by Buyer; (ii) to lift or rescind -26- any injunction or restraining order or other order adversely affecting the ability of Buyer to consummate the transactions contemplated hereby; (iii) to effect all necessary registrations, filings and submissions of information requested of Buyer by governmental authorities; (iv) to fulfill all conditions to this Agreement capable of being fulfilled by Buyer; and (v) to provide Seller promptly with all information and assistance with respect to the foregoing, including obtaining the Approval Order, as Seller may reasonably request, in writing or otherwise. 5.02 Confidentiality. Buyer agrees that if the Closing does not occur, it will maintain in confidence all information relating to Seller furnished to it by Seller, or any agents of Seller, including information concerning Seller's business, the Purchased Assets, the liabilities of Seller related to the business and the financial condition of Seller, and will not disclose such information to others, or use such information for any purpose unless and until such information is in or enters the public domain by reason other than disclosure by Buyer, except as such information may be required to be disclosed by Buyer under applicable law. If this Agreement is terminated, Buyer shall return all confidential information received from Seller and all copies and summaries thereof. 5.03 Employees. Buyer may consider making an offer of employment to certain current or former employees of Seller, upon such terms, and with compensation and benefits as Buyer may determine in its sole discretion. 5.04 Shipped Inventory Matters. Set forth on Schedule 5.04 is a form of letter sent to the Finished Goods Suppliers listed thereon requesting that such Finished Goods Suppliers ship inventory to Seller without letters of credit to secure the purchase of such inventory. Buyer hereby acknowledges such letters and agrees to purchase such inventory from such Finished Goods Suppliers following the Closing so long as such inventory conforms to the purchase orders placed by Seller in respect thereof. ARTICLE VI. CONDITIONS TO BUYER'S OBLIGATIONS The obligations of Buyer to purchase the Purchased Assets shall be subject to the satisfaction on or prior to Closing of all of the following conditions: 6.01 Covenants. Seller shall have complied in all material respects with all of its agreements and covenants contained herein to be performed at or prior to Closing. 6.02 Representations and Warranties True. All representations and warranties of Seller in this Agreement or in any Exhibit or Schedule delivered pursuant to this Agreement shall be true, complete and correct on the Closing Date, except for such failures to be true, complete and correct as would not, individually or in the aggregate, have a Material Adverse Effect. 6.03 Delivery of Certificates. Buyer shall have received a certificate or certificates, dated as of the Closing Date, executed by a duly authorized executive of Seller certifying, without personal liability on the part of the officer executing the same, in such detail as Buyer -27- may reasonably request that the conditions specified in Sections 6.01 and 6.02 hereof have been fulfilled. 6.04 Instruments of Transfer. Buyer shall have received a bill of sale and such other duly executed instruments of transfer, conveyance, and assignment, duly executed by an authorized officer of Seller, in form and substance reasonably satisfactory to Buyer and its counsel, as is necessary or desirable to effect the transfers, conveyances, and assignments to Buyer of the Purchased Assets as contemplated by this Agreement. 6.05 Consents. Except for consents identified on Schedules 2.03(f)(i) and 2.03(f)(ii), all requisite third party consents and estoppels shall have been obtained and shall be in full force and effect except where the failure to have obtained such consents or estoppels would not have a Material Adverse Effect. For the purposes of this Section 6.05, the failure to obtain any consent or estoppel related to Assumed Contracts which, individually or in the aggregate, account for payments to Seller in excess of $500,000 per year, shall be deemed to have a Material Adverse Effect. 6.06 Approval Order. The Approval Order shall have been entered by the Bankruptcy Court. 6.07 HSR Waiting Period. The waiting period under the HSR Act shall have expired or terminated, if applicable. 6.08 Injunction. No court or governmental body of competent jurisdiction shall have enacted, issued, promulgated, enforced or entered any law, statute, ordinance, rule, regulation, judgment, decree, injunction or other order (whether temporary, preliminary or permanent) that is in effect and (i) restrains, enjoins or otherwise prohibits the consummation of the transaction contemplated hereby or (ii) would materially adversely affect the value of the Purchased Assets, and no governmental body shall have instituted any proceeding therefor. 6.09 Material Adverse Change. Since February 1, 2001 there shall have occurred no change, or discovery of a condition or occurrence of any event which would reasonably be expected to result in a Material Adverse Effect. 6.10 Ancillary Agreements. Seller shall have executed and delivered the Post Closing Escrow Agreement and the Transitional Arrangements Agreement. ARTICLE VII. CONDITIONS TO SELLER'S OBLIGATIONS The obligations of Seller to sell the Purchased Assets shall be subject to the satisfaction on or prior to Closing of all of the following conditions: 7.01 Covenants of Buyer. Buyer shall have complied in all material respects with all of its agreements and covenants contained herein to be performed at or prior to Closing. -28- 7.02 Representations and Warranties True. All representations and warranties of Buyer in this Agreement shall be true and correct on the Closing Date. 7.03 Delivery of Certificates. Seller shall have received a certificate or certificates, dated as of the Closing Date, executed by a duly authorized executive of Buyer certifying, without personal liability on the part of the officer executing the same, in such detail as Seller may reasonably request that the conditions specified in Sections 7.01 and 7.02 hereof have been fulfilled. 7.04 Instruments of Assumption. Seller shall have received duly executed instruments of assumption of the Assumed Obligations, duly executed by an authorized officer of Buyer, in form and substance reasonably satisfactory to Seller and its counsel, as is necessary or desirable to effect the assumption by Buyer of the Assumed Contracts as contemplated by this Agreement. 7.05 Tender of Purchase Price. Buyer shall have tendered the Purchase Price. 7.06 Approval Order. The Approval Order shall have been entered by the Bankruptcy Court and shall have become a Final Order. 7.07 HSR Waiting Period. The waiting period under the HSR Act shall have expired or terminated, if applicable. 7.08 Injunction. No court or governmental body of competent jurisdiction shall have enacted, issued, promulgated, enforced or entered any law, statute, ordinance, rule, regulation, judgment, decree, injunction or other order (whether temporary, preliminary or permanent) that is in effect and restrains, enjoins or otherwise prohibits the consummation of the transaction contemplated hereby, and no governmental body shall have instituted any proceeding therefor. 7.09 Further Action. All actions, consents, approvals (temporary or permanent), authorizations, exemptions and waivers from third parties that shall be required in order to enable Seller to consummate the transactions contemplated hereby shall have been duly obtained, (except for such actions, consents, approvals, authorizations, exemptions and waivers of non-governmental third parties, the absence of which would not prohibit consummation of such transactions or render such consummation illegal). 7.10 Ancillary Agreements. Buyer shall have executed and delivered the Post Closing Escrow Agreement and the Transitional Arrangements Agreement. ARTICLE VIII. TERMINATION PRIOR TO CLOSING 8.01 Termination. This Agreement may be terminated: (a) By the mutual written consent of Buyer and Seller; -29- (b) By either Buyer or Seller in writing, if the Closing does not occur by April 30, 2001 provided that neither Buyer nor Seller may terminate this Agreement pursuant to this clause (b) if the Closing shall not have been consummated within such time period by reason of the failure of such party to perform in all material respects any of its covenants or agreements contained in this Agreement; (c) By either Seller or Buyer in writing, without liability to the terminating party (provided the terminating party is not otherwise in material default or in breach of this Agreement) if there has been a material misrepresentation or material breach of this Agreement by the other party which is not cured within fifteen (15) days after such party has been notified in writing of such breach and the intent to terminate this Agreement pursuant to this clause 8.01(c); or (d) By Buyer by not later than April 20, 2001 if the Bankruptcy Court does not enter the Approval Order by April 13, 2001. 8.02 Effect on Obligations. Termination of this Agreement pursuant to this Article shall terminate all obligations of the parties hereunder, except for Seller's obligations under Section 4.06 and Buyer's obligations under Section 5.02 hereof, except that (a) in the event of a termination under Section 8.01(c) by Seller, the Deposit shall be paid to Seller as liquidated damages, which liquidated damages shall be the sole and exclusive remedy of Seller as a result of such termination, or (b) in the event of a termination under Section 8.01(c) by Buyer, Buyer shall retain all its rights in law and in equity; provided, however, that Buyer hereby agrees that Seller shall have no liability to Buyer in excess of $5,000,000 as a result of any termination of this Agreement. Buyer acknowledges that the agreements contained in this Section 8.02 are an integral part of the transactions contemplated by this Agreement and that, without these agreements, Seller would not enter into this Agreement. 8.03 Return of Deposit to Buyer. Upon the termination by either party of this Agreement pursuant to Section 8.01(a) or (b) or upon the termination by Buyer of this Agreement pursuant to Section 8.01(c), the Escrow Agent shall pay the Deposit (together with any earned interest) to Buyer. ARTICLE IX. INDEMNIFICATION 9.01 Survival. The representations and warranties of Seller with respect to Sections 2.07 (Inventory) and 2.12 (Accounts Receivable) will survive the Closing and shall expire 90 days after the Closing Date. The representations and warranties of Seller with respect to Sections 2.03 (Assumed Contracts), 2.04 (Intellectual Property), 2.05 (Title) and 2.13 (Software) shall survive for 6 months after Closing. The representations and warranties of Buyer with respect to Section 3.04 (HSR Matters) shall survive for 6 months after Closing. No other representations or warranties of Buyer or Seller shall survive Closing. Following the Closing, the right to indemnification based on representations, warranties, covenants and obligations in this Agreement as set forth in -30- this Article IX shall be the sole remedy of the parties hereto and will not be affected by any investigation conducted with respect to, or any knowledge acquired (or capable of being acquired) at any time, whether before or after the execution and delivery of this Agreement or the Closing Date, with respect to the accuracy or inaccuracy of or compliance with, any such representation, warranty, covenant or obligation. The waiver of any condition based on the accuracy of any representation or warranty, or on the performance of or compliance with any covenant or obligation, will not affect the right to indemnification based on such representations, warranties, covenants and obligations. 9.02 Indemnification by Seller From and after the Closing, Seller hereby agrees to indemnify, defend and hold Buyer and its officers, directors, agents and employees (the "Buyer Indemnified Parties"), harmless from, against and in respect of any and all losses, claims, suits, actions, proceedings, awards, judgments, settlements, fines, penalties, liabilities, obligations, damages, deficiencies, costs or expenses (including reasonable expenses of investigation and attorneys' fees) net of any insurance proceeds and tax benefits if, as and when received, in either case to which such Buyer Indemnified Party is entitled by virtue of any of the foregoing (collectively "Claims") arising out of or resulting from: (i) any breach of a covenant or misrepresentation by Seller of a representation or warranty which expressly survives Closing pursuant to Section 9.1 hereof; (ii) any liability for Taxes incurred on or before the Closing Date; (iii) the Excluded Assets; and (iv) the Retained Liabilities. 9.03 Indemnification by Buyer From and after the Closing, Buyer hereby agrees to indemnify, defend and hold harmless Seller and its officers, directors, agents and employees (the "Seller Indemnified Parties") from, against and in respect of any and all Claims arising out of or resulting from (i) any breach of any warranty or misrepresentation by Buyer or the breach or nonperformance of any covenant, agreement or obligation to be performed on the part of Buyer under this Agreement, or in any closing certificate contemplated hereby or in any Schedule hereto, (ii) any Assumed Obligations and (iii) except for the Retained Liabilities and the Excluded Assets, the use of the Purchased Assets after the Closing Date. 9.04 Limitations (a) Notwithstanding anything contained in this Agreement to the contrary, neither party shall be liable for any amounts for which an Indemnified Party (as defined below) is otherwise entitled to indemnification in connection with the breach or inaccuracy of any representation or warranty or any breach of any covenant contained herein until the aggregate -31- amount for which such Indemnified Party is entitled to indemnification with respect to all such Claims for indemnification in the aggregate exceeds One Million Dollars ($1,000,000) (the "Threshold"), at which time such party shall be liable for any such excess. In determining the foregoing Threshold and in otherwise determining the amount to which the Indemnified Party is entitled to assert a claim for indemnification pursuant to this Article IX, only actual losses shall be considered. The Threshold shall not apply (i) with respect to Buyer's claims hereunder, as to any Claims related to (A) the Excluded Assets, (B) the Retained Liabilities or (C) any breach or inaccuracy of any representation or warranty relating to Sections 2.07 (Inventory) and 2.12 (Accounts Receivable) and (ii) with respect to Seller's claims hereunder, as to any Claims related to the payment of all amounts due to Seller pursuant to Sections 1.05 (Payment of Purchase Price) and 1.05 (Post-Closing Adjustment). The Threshold shall not apply as to any Claims arising from fraud committed by the Indemnifying Party against the Indemnified Party with respect to the transactions contemplated under this Agreement. The parties hereto waive as against each other any claim to consequential, special, exemplary or punitive damages except to the extent consequential, special, exemplary or punitive damages are awarded to a third person against an Indemnified Party in circumstances in which such Indemnified Party is entitled to indemnification hereunder such consequential, special, exemplary or punitive damages so awarded shall be payable to such Indemnified Party hereunder. (b) Notwithstanding anything to the contrary contained in this Article IX, the amount for which Buyer shall be entitled to, and Seller liable for, indemnification hereunder shall not exceed the following: (i) the aggregate amount recoverable from Seller for indemnification claims arising from the representations and warranties of Seller with respect to Sections 2.07 (Inventory) and 2.12 (Accounts Receivable) shall not exceed the excess of $25,000,000 over the Downward Adjustment Amount and (ii) the aggregate amount recoverable from Seller for indemnification claims arising from the breach of any covenant by Seller or the representations and warranties of Seller with respect to Sections 2.03 (Assumed Contracts), 2.04 (Intellectual Property), 2.05 (Title) and 2.13 (Software) shall not exceed $5,000,000. Indemnification claims arising from the representations and warranties of Seller with respect to Sections 2.07 (Inventory) and 2.12 (Accounts Receivable) shall be satisfied first from the Accounts Receivable/Inventory Holdback Amount and, to the extent the Accounts Receivable/Inventory Holdback Amount is insufficient to cover any such claims (subject to the maximum allowable amounts set forth in the preceding sentence), Seller agrees to satisfy any such claims. Indemnification claims arising from the representations and warranties of Seller with respect to Sections 2.03 (Assumed Contracts) and 2.04 (Intellectual Property), 2.05 (Title) and 2.13 (Software) shall be satisfied solely from the Escrow Amount. Seller and Buyer agree that under no circumstances shall the Escrow Agent release any of the Escrow Amount to Buyer to satisfy any amounts owed to Buyer in respect of any indemnification claims arising from the representations and warranties of Seller with respect to Sections 2.07 (Inventory) and 2.12 (Accounts Receivable). Notwithstanding the foregoing, if Seller has not paid any amounts due to Buyer on account of an undisputed Downward Adjustment Amount pursuant to Section 1.05 hereof, Seller agrees to use any funds remaining in the Escrow Amount immediately prior to its release to Seller, towards the satisfaction of each unpaid Downward Adjustment. (c) The obligation of Seller to indemnify Buyer in connection with the representations and warranties of Seller contained in Sections 2.07 (Inventory) and 2.12 -32- (Accounts Receivable) shall terminate on the later of (i) ninety (90) days following the Closing or (ii) fifteen (15) days following the resolution of any dispute relating to the Audit. The obligation of Seller to indemnify Buyer in connection with the representations and warranties of Seller contained in Sections 2.03 (Assumed Contracts), 2.04 (Intellectual Property), 2.05 (Title) and 2.13 (Software) shall terminate 6 months after the Closing Date. Notwithstanding the foregoing, the respective indemnification obligations of the parties hereunder shall not expire with respect to any Claim brought within such specified time periods until the indemnification obligation, if any, with respect to such Claim shall have been finally determined and paid. 9.05 Indemnification Procedure In any case under this Agreement where Seller has indemnified a Buyer Indemnified Party or Buyer has indemnified a Seller Indemnified Party (the indemnifying party hereinafter the "Indemnifying Party" and the party entitled to indemnification hereinafter the "Indemnified Party") against any Claim, indemnification shall be conditioned on compliance with the procedure and shall be subject to the limitations outlined below: (a) Provided that prompt notice is given of a Claim for which indemnification might be claimed under this Article IX, unless the failure to provide such notice does not actually and materially prejudice the interests of the Indemnifying Party, the Indemnifying Party promptly will defend, contest, or otherwise protect against any such Claim at its own cost and expense. Such notice shall describe the Claim in reasonable detail and shall indicate the amount (estimated, if necessary) of the loss that has been or may be suffered by an Indemnified Party. (b) An Indemnified Party may, but will not be obligated to, participate at its own expense in a defense thereof by counsel of its own choosing, but the Indemnifying Party shall be entitled to control the defense unless such Indemnified Party has relieved the Indemnifying Party from liability with respect to the particular matter, provided that the Indemnifying Party may only settle or compromise the matter subject to indemnification without the consent of the Indemnified Party if such settlement includes a complete release of all Indemnified Parties as to the matters in dispute and provided further that such Indemnified Party will not unreasonably withhold consent to any settlement or compromise that requires its consent. (c) In the event the Indemnifying Party fails to timely defend, contest, or otherwise protect against any such Claim, an Indemnified Party may, but will not be obligated to, defend, contest, or otherwise protect against the same, and make any reasonable compromise or settlement thereof and recover (subject to the limitations set forth in Section 9.04) the entire costs thereof from the Indemnifying Party, including reasonable attorneys' fees, disbursements and all amounts paid as a result of such Claim or the compromise or settlement thereof; provided, however, that (i) an Indemnified Party may only settle or compromise the matter subject to indemnification without the consent of the Indemnifying Party if such settlement includes a complete release of the Indemnifying Party as to the matters in dispute and provided further that the Indemnifying Party will not unreasonably withhold consent to any settlement or compromise that requires its consent and (ii) if the Indemnifying Party subsequently undertakes the defense of such matter, an Indemnified Party shall be entitled to recover from the Indemnifying Party only -33- those costs incurred in the defense prior to such time the Indemnifying Party undertakes the defense of such matter together with the reasonable costs of providing assistance. (d) The Indemnified Parties shall cooperate and provide such assistance as the Indemnifying Party may reasonably request in connection with the defense of the matter subject to indemnification and in connection with recovering from any third parties amounts that the Indemnifying Party may pay or be required to pay by way of indemnification hereunder. The Indemnified Parties shall take commercially reasonable steps to protect its position with respect to any matter that may be the subject of indemnification hereunder in the same manner as it would any similar matter where no indemnification is available. ARTICLE X. MISCELLANEOUS 10.01 Entire Agreement. This Agreement (including the attached Schedules) constitutes the sole understanding of the parties with respect to the subject matter hereof. Matters disclosed by Seller to Buyer pursuant to any Article of this Agreement shall be deemed to be disclosed with respect to all Articles of this Agreement. No amendment, modification, or alteration of the terms or provisions of this Agreement shall be binding unless the same shall be in writing and duly executed by the parties hereto. 10.02 Use of Names. Effective upon the Closing, Seller shall have no right to use the "Converse" name and any of the Trademarks and other Intellectual Property acquired by Buyer and Seller shall take all necessary and appropriate steps to avoid the use of such names or variants thereof; provided, however, that (a) Seller shall have the right to use the name "Converse" in connection with the Bankruptcy Case and (b) Buyer grants Seller the limited right, for a period not to exceed 120 days after the Closing, to use the name "Converse" or variants thereof in connection with the orderly sale of its remaining assets, so long as such use does not interfere with the operation of Buyer's business and its use of the Purchased Assets. At any time following the Closing when Seller has any rights to use the name "Converse" pursuant to the proviso contained in the foregoing sentence, Seller agrees to take necessary steps to avoid any confusion over the ownership of the "Converse" name. Subject to the foregoing, at the Closing, Seller shall take all actions necessary to (i) change its name in accordance with this paragraph, and (ii) execute such documents as are necessary to permit Buyer to utilize the "Converse" name in its corporate name. 10.03 Successors and Assigns. This Agreement may not be assigned by either Buyer or Seller without the prior written consent of the other party hereto, and any such assignment contrary to the terms hereof shall be null and void and of no force or effect. If this Agreement is assigned with such consent, the terms and conditions hereof shall be binding upon and shall inure to the benefit of the parties hereto and their respective assigns. Notwithstanding the provisions of this Section 10.03, Buyer may assign its rights and obligations under this Agreement to any subsidiary of Buyer, without the prior written consent of Seller provided that Buyer shall remain obligated to pay the Purchase Price. -34- 10.04 Counterparts. This Agreement may be executed in one or more counterparts, each of which shall for all purposes by deemed to be an original and all of which shall constitute the same instrument. 10.05 Headings, Interpretation. The headings of the Articles and paragraphs of this Agreement are inserted for convenience only and shall not be deemed to constitute part of this Agreement or to affect the construction hereof. For purposes of this Agreement, the words "include", "includes" or "including" shall be deemed to incorporate and be followed by the phrase "without limitation." 10.06 Modification and Waiver. At any time prior to the Closing Date, the parties hereto may (a) extend the time for the performance of any of the obligations or other acts of the other parties hereto, (b) waive any inaccuracies in the representations and warranties contained herein or in any document delivered pursuant hereto, and (c) waive compliance with any of the agreements or conditions contained herein. Any agreement on the part of a party hereto to any such extension or waiver shall only be valid if set forth in an instrument in writing signed on behalf of such party. 10.07 Expenses, etc. Except as specifically provided herein, each of Seller and Buyer shall pay all costs and expenses incurred by it or on its behalf in connection with this Agreement and the transactions contemplated hereby, including, without limiting the generality of the foregoing, fees and expenses of its own consultants, accountants, and counsel. Each party shall bear the expenses of any finder, broker, agent or other intermediary who may have acted for or on behalf of Buyer or Seller in connection with the negotiation or consummation of the transactions contemplated by this Agreement. 10.08 Notices. All notices and other communications required or permitted hereunder shall be in writing and shall be delivered by hand, transmitted via facsimile or sent via nationally recognized overnight courier (receipt confirmed) addressed IF TO SELLER TO: Converse Inc. One Fordham Road North Reading, MA 01864 Attention: Glenn N. Rupp and Jack Green, Esq. Facsimile: 978-664-7529/7579 with a copy to: Willkie Farr & Gallagher 787 Seventh Avenue New York, NY 10019 Attention: Myron Trepper, Esq. Michael J. Kelly, Esq. Facsimile: 212-728-8111 -35- IF TO BUYER TO: c/o Cre-8-net Ventures 591 Redwood Highway Suite 2180 Mill Valley, CA 94941 Attention: Mr. Marsden S. Cason, President Facsimile: 415-383-7698 with a copy to: Arnold & Porter 555 Twelfth Street N.W. Washington, D.C. 20004-1206 Attention: Robert Ott, Esq. Facsimile: (202) 942-5999 and Stutman, Treister & Glatt 3699 Wilshire Boulevard Suite 900 Los Angeles, CA 90010-2739 Attention: Robert A Greenfield Ronald L. Fein Facsimile: (213) 251-5288 Any notice which is delivered in the manner provided herein shall be deemed to have been duly given to the party to whom it is directed upon actual receipt by such party (or its agent for notices hereunder) or at such time as delivery is refused by the addressee upon presentation. 10.09 Governing Law. This Agreement shall be construed in accordance with and governed by the laws of the State of New York without reference to its conflicts of laws principles. 10.10 Announcements. From the date hereof until the Closing Date, Seller and Buyer shall afford each other the opportunity to review in advance any public announcements, including those to either party's employees, of the transaction contemplated by this Agreement. For all periods prior to Closing, no public announcement shall be made without such prior review and the consent of the other party to the form of the public announcement, such consent not to be unreasonably withheld. However, prior review and consent of the other party shall not be required with respect to any legally required communication either to a party's employees or otherwise. -36- 10.11 Compliance with Bulk Sales Laws. Buyer and Seller hereby waive compliance by Buyer and Seller with the bulk sales law and any other similar laws in any applicable jurisdiction in respect of the transactions contemplated by this Agreement. 10.12 Binding Nature of Agreement. This Agreement shall not be binding on Seller unless and until the Approval Order is entered. 10.13 Seller's Knowledge. As used in this Agreement, the term "Seller's knowledge" refers to the actual knowledge of Glenn Rupp, Herbert Rothstein, Alistair Thorburn, Jack Green, James Lawlor, Robert Sharp, Steven Dodge, Laura Kelley and James Faulkner. -37- IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be executed by their duly authorized representatives as of the date first above written. CONVERSE INC. By: /s/ Glenn N. Rupp -------------------------- Name: Glenn N. Rupp Title: Chairman and Chief Executive Officer FOOTWEAR ACQUISITION, INC. By: /s/ Marsden S. Cason -------------------------- Name: Marsden S. Cason Title: President -38- EX-23.1 5 dex231.txt CONSENT OF PRICEWATERHOUSECOOPERS LLP EXHIBIT 23.1 ------------ CONSENT OF INDEPENDENT ACCOUNTANTS We hereby consent to the incorporation by reference in this Registration Statement on Form S-8 of Converse Inc. of our report dated April 12, 2001 relating to the consolidated financial statements and financial statement schedule, which appears in this Annual Report on Form 10-K. PricewaterhouseCoopers LLP Boston, Massachusetts April 16, 2001 -----END PRIVACY-ENHANCED MESSAGE-----