<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-Q
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
--- EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1999
--- TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE EXCHANGE
ACT OF 1934
For the transition period from to
-------------- --------------
Commission File Number: 0-28596
THE NORTH FACE, INC.
(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C>
Delaware 94-3204082
(State or other jurisdiction (I.R.S. Employer Identification No.)
of incorporation or organization)
407 Merrill Avenue, Carbondale, Colorado 81623
(Address of principal executive offices) (Zip Code)
</TABLE>
(970) 704-2300
(Registrant's telephone number, including area code)
Not applicable.
(Former name, former address and formal fiscal year,
if changed since last report)
Indicate by check mark whether registrant (1) has filed all reports required to
be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
--- ---
The number of shares of Common Stock, $0.0025 par value per share, outstanding
on August 9, 1999, was 12,731,000.
<PAGE>
THE NORTH FACE, INC.
JUNE 30, 1999
INDEX TO FORM 10-Q
<TABLE>
<CAPTION>
PAGE NO.
<S> <C> <C>
PART I. FINANCIAL INFORMATION
Item 1 - Financial Statements (unaudited)
Condensed Consolidated Balance Sheets as of June 30, 1999,
December 31, 1998 and June 30, 1998 2
Condensed Consolidated Statements of Operations for the Three and
Six Months Ended June 30, 1999 and 1998 3
Condensed Consolidated Statements of Cash Flows for the
Six Months Ended June 30, 1999 and 1998 4
Notes to Condensed Consolidated Financial Statements 5
Item 2 - Management's Discussion and Analysis of Financial Condition and
Results of Operations 9
Item 3 - Quantitative and Qualitative Disclosure About Market Risk 14
PART II. OTHER INFORMATION
Item 1 - Legal Proceedings 15
Item 6 - Exhibits and Reports on Form 8-K 16
</TABLE>
1
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ITEM 1. FINANCIAL STATEMENTS
THE NORTH FACE, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except share and per share amounts)
(unaudited)
<TABLE>
<CAPTION>
June 30, December 31, June 30,
1999 1998 1998
-------- ----------- --------
<S> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 5,946 $ 13,452 $ 5,303
Trade accounts receivable, net 57,408 71,460 49,791
Other receivables 7,108 10,069 6,445
Inventories 71,839 57,457 64,852
Tax benefit receivable 13,926 6,470 6,581
Deferred taxes 3,666 3,661 2,865
Other current assets 6,830 4,692 4,061
-------- -------- --------
Total current assets 166,723 167,261 139,898
Property and equipment, net 32,387 25,916 20,072
Trademarks and intangibles, net 33,516 33,975 28,405
Other assets 4,742 5,492 6,274
-------- -------- --------
Total assets $237,368 $232,644 $194,649
======== ======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable, accrued expenses and other current liabilities $ 35,524 $ 40,463 $ 30,428
Short-term borrowings and current portion of long-term debt and
capital lease obligations 68,432 55,910 40,985
-------- -------- --------
Total current liabilities 103,956 96,373 71,413
Long-term debt and obligations under capital leases 13,651 5,360 4,435
Other long-term liabilities 7,023 7,000 6,045
-------- -------- --------
Total liabilities 124,630 108,733 81,893
-------- -------- --------
Minority Interest 642 701 --
Commitments and contingencies -- -- --
Stockholders' equity:
Common stock, $.0025 par value--shares authorized 50,000,000; issued
and outstanding: 12,726,000 at June 30, 1999, 12,494,000
at December 31, 1998 and 12,337,000 at June 30, 1998 32 31 31
Additional paid-in capital 103,809 101,049 97,761
Retained earnings 8,584 21,660 14,647
Accumulated other comprehensive income--cumulative translation
adjustments (329) 470 317
-------- -------- --------
Total stockholders' equity 112,096 123,210 112,756
-------- -------- --------
Total liabilities and stockholders' equity $237,368 $232,644 $194,649
======== ======== ========
</TABLE>
See accompanying notes to condensed consolidated financial statements.
2
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THE NORTH FACE, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share amounts)
(unaudited)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
---------------------- ---------------------
1999 1998 1999 1998
-------- ------- -------- -------
<S> <C> <C> <C> <C>
Net sales $ 54,596 $43,171 $105,852 $88,875
Cost of sales 30,681 24,261 58,590 50,040
-------- ------- -------- -------
Gross profit 23,915 18,910 47,262 38,835
Operating expenses 31,692 21,253 59,389 41,578
Other operating expenses 2,837 1,518 4,440 1,518
-------- ------- -------- -------
Operating loss (10,614) (3,861) (16,567) (4,261)
Interest expense (1,467) (848) (2,788) (1,522)
Other income (expense), net (353) 517 (2,081) 220
-------- ------- -------- -------
Loss before income tax benefit (12,434) (4,192) (21,436) (5,563)
Income tax benefit (4,849) (1,613) (8,360) (2,141)
-------- ------- -------- -------
Net loss $ (7,585) $(2,579) $(13,076) $(3,422)
======== ======= ======== =======
Net loss per share:
Basic $ (.60) $ (0.22) $ (1.03) $ (0.29)
Diluted $ (.60) $ (0.22) $ (1.03) $ (0.29)
Weighted average shares outstanding:
Basic 12,726 11,968 12,707 11,752
Diluted 12,726 11,968 12,707 11,752
</TABLE>
See accompanying notes to condensed consolidated financial statements.
3
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THE NORTH FACE, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(unaudited)
<TABLE>
<CAPTION>
Six Months Ended
June 30,
------------------------
1999 1998
-------- --------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $(13,076) $ (3,422)
Adjustments to reconcile net loss to cash used in operating activities:
Depreciation and amortization 6,686 3,073
Loss from the disposal of property and equipment -- 912
Provision for doubtful accounts 2,660 220
Tax benefit of exercise of stock options 131 1,306
Other (5) (43)
Effect of changes in:
Accounts receivable 11,391 (1,266)
Inventories (14,350) (18,171)
Income tax receivable (7,456) (782)
Other assets 1,344 (1,816)
Accounts payable, accrued expenses and other current liabilities (4,947) 76
-------- --------
NET CASH USED IN OPERATING ACTIVITIES (17,622) (19,913)
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Deposit for investment in La Sportiva S.r.l. -- (2,488)
Purchases of property and equipment (8,855) (6,090)
Proceeds from the sale of property and equipment -- 43
-------- --------
NET CASH USED IN INVESTING ACTIVITIES (8,855) (8,535)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowings on long-term debt 10,000 --
Repayments of long-term debt (592) (624)
Proceeds from revolver, net 10,291 15,134
Collection of note receivable -- 6,549
Proceeds from issuance of stock 130 8,181
Redemption of LaSportiva USA preferred stock (59) --
-------- --------
NET CASH PROVIDED BY FINANCING ACTIVITIES 19,770 29,240
-------- --------
Effect of foreign currency fluctuations on cash (799) --
-------- --------
(DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS (7,506) 792
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 13,452 4,511
-------- --------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 5,946 $ 5,303
======== ========
SUPPLEMENTAL CASH FLOW INFORMATION:
Cash paid for:
Interest $ 2,538 $ 1,354
Income Taxes 423 20
Noncash financing activities:
Issuance of common stock for note receivable -- 6,549
Issuance of common stock for land 2,500 --
Acquisition of property and equipment through capital leases 1,114 --
</TABLE>
See accompanying notes to condensed consolidated financial statements.
4
<PAGE>
THE NORTH FACE, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
NOTE 1. BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements of
The North Face, Inc. and its subsidiaries (the "Company") have been prepared
pursuant to the rules and regulations of the Securities and Exchange Commission.
Certain information and footnote disclosures normally included in annual
financial statements prepared in accordance with generally accepted accounting
principles have been condensed or omitted pursuant to such rules and
regulations. Accordingly, the interim unaudited financial statements should be
read in conjunction with the financial statements included in the Company's
Annual Report on Form 10-K for the fiscal year ended December 31, 1998 (the
"Form 10-K"). Operating results for the three and six months ended June 30, 1999
are not necessarily indicative of the results that may be expected for the
fiscal year ending December 31, 1999.
These financial statements have been prepared by the Company in a manner
consistent with that used in the preparation of the consolidated financial
statements included in the Form 10-K. In the opinion of management, the
accompanying financial statements reflect all adjustments, consisting of only
normal and recurring adjustments, necessary for a fair presentation of the
financial position, results of operations, and cash flows for the periods
presented. All significant intercompany accounts and transactions have been
eliminated.
The Condensed Consolidated Balance Sheet as of December 31, 1998, has been
derived from the Consolidated Balance Sheet as of December 31, 1998 included in
the Form 10-K.
Reclassification. Certain reclassifications have been made to the 1998
financial statements to conform to the 1999 presentation. Such reclassifications
had no effect on net earnings.
NOTE 2. NEW CORPORATE HEADQUARTERS
On January 11, 1999, the Company issued 206,188 shares of common stock with
a market value of $12.125 per share as consideration for the purchase of land to
be used for its new corporate headquarters in Carbondale, Colorado.
NOTE 3. COMMITMENTS AND CONTINGENCIES
On February 27, 1999, the Company entered into a Transaction Agreement (the
"Transaction Agreement") with TNF Acquisition LLC ("TNF"), an affiliate of
Leonard Green & Partners, L.P. ("LGP"). The Transaction Agreement provides for a
tender offer for all of the Company's outstanding stock (other than shares held
by James G. Fifield, President and Chief Executive Officer) at $17 cash per
share and the acquisition of control of the Company by LGP and Mr. Fifield. On
March 5, 1999, the Company withdrew its tender offer. The Transaction Agreement
remained in full force and effect although LGP had informed the Company that
they were reevaluating the transactions contemplated by the Transaction
Agreement (the "Transactions"). On July 31, 1999 the Company announced that it
had agreed to extend until August 31, 1999, the termination date under the
Transaction Agreement. In agreeing to this extension, the parties also agreed to
cap at $2.7 million the expenses payable by The North Face to TNF if the
Transactions are not consummated. The parties intend to use the 30-day extension
period for additional due diligence and to determine an agreed upon price for
the Transactions. There can be no assurance that the Transactions will be
consummated at all or on terms favorable to the Company's shareholders. If the
Transaction Agreement is terminated, the Company could be required under certain
circumstances, to pay TNF up to a $7 million termination fee plus up to $2.7
million of TNF's expenses associated with the Transactions.
5
<PAGE>
In connection with the Transactions and following the Company's accounting
related announcements which reported the restatement of the Company's 1997
Consolidated Financial Statements and the Company's 1998 interim Condensed
Consolidated Financial Statements, several lawsuits have been filed against the
Company. There can be no assurance that the Company will successfully defend
these lawsuits. Regardless of whether the Transactions are consummated or of the
outcome of these lawsuits, the Company will likely incur significant related
expenses and costs that could have an adverse effect on the Company's business
and operations.
During the first week of March 1999, various complaints were filed against
the Company and its Board of Directors in the Delaware Court of Chancery and in
the California Superior Court, Alameda County in connection with the
Transactions. The complaints, filed on behalf of a purported class of the
Company's shareholders, generally allege that the Transactions are unfair and
inadequate to the Company's shareholders and charge the defendants with self-
dealing and breach of fiduciary duties. The various complaints generally request
injunctive relief to prevent the consummation of the Transactions, and seek
other remedies in the event the Transactions are completed. The Company has not
yet responded to these complaints.
Beginning in March 1999, purported class action lawsuits were filed in
federal district court against the Company and certain of its former and current
officers and directors alleging violations of the federal securities laws. These
complaints (collectively, the "Securities Litigation") have been consolidated in
federal district court in Colorado. The lawsuits generally allege that the
defendants made false and misleading statements about the Company's business and
financial results during a time period from April 1997 through March 1999. The
Company believes it has meritorious defenses to these claims and intends to
contest them vigorously. An unfavorable resolution of the Securities Litigation
could have a material adverse effect on the business, results of operations or
financial condition of the Company.
On April 6, 1999, a shareholder derivative action purportedly on behalf of
the Company, captioned Eng v. Cason, et al., Civil Action No. 810726-0, was
filed in California Superior Court, Alameda County. The complaint alleges that
the Company's directors and various current and former officers violated
California law and breached fiduciary duties to the Company by engaging in
alleged wrongful conduct from April 25, 1997 through March 12, 1999, including
the conduct complained of in the Securities Litigation. The Company is named
solely as a nominal defendant, against whom the plaintiff seeks no recovery.
6
<PAGE>
NOTE 4. OTHER OPERATING EXPENSES
During the three and six months ended June 30, 1999 the Company recorded
expenses of $2.8 and $4.4 million, respectively, related to (i) relocating a
portion of its corporate headquarters to Carbondale, Colorado, (ii) the
realignment of its San Leandro, California facility, (iii) establishing a Hong
Kong operation to facilitate its sourcing in Asia and (iv) the planned closing
of its Vacaville, California distribution center and start-up of its Lenexa,
Kansas distribution center.
NOTE 5. OTHER COMPREHENSIVE LOSS
The following is a summary of the calculation of other comprehensive loss
(in thousands):
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
------------------ ------------------
1999 1998 1999 1998
------- ------- -------- -------
<S> <C> <C> <C> <C>
Net loss........................................... $(7,585) $(2,579) $(13,076) $(3,422)
Translation adjustments............................ (253) (65) (799) -----
------- ------- -------- -------
Other comprehensive loss........................... $(7,838) $(2,644) $(13,875) $(3,422)
======= ======= ======== =======
</TABLE>
NOTE 6. EARNINGS PER SHARE
The Company calculates basic earning per share (EPS) by dividing net income
by the weighted average number of common shares outstanding for the period.
Diluted EPS takes into account the effect of dilutive instruments, such as stock
options, and uses the average share price for the period in determining the
number of incremental shares that are to be added to the weighted average number
of shares outstanding. Diluted EPS for the three and six months ended June 30,
1999 and 1998 exclude any effect of such instruments because their inclusion
would be antidilutive.
The following is a summary of the calculation of the number of shares used
in calculating basic and diluted EPS (in thousands):
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
------------------ ------------------
1999 1998 1999 1998
------- ------- -------- -------
<S> <C> <C> <C> <C>
Shares used to compute basic EPS........... 12,726 11,968 12,707 11,752
Add: effect of dilutive securities........ ---- ---- ---- ----
------- ------- -------- -------
Shares used to compute diluted EPS......... 12,726 11,968 12,707 11,752
======= ======= ======== =======
</TABLE>
NOTE 7. CREDIT FACILITY
On August 13, 1999, the Company received a written waiver from the
financial institutions providing the Company's credit facility for violations of
certain of the Company's financial covenants set forth in the agreements
relating to the credit facility that existed at that date relating to larger
than anticipated losses in the first six months of 1999.
The Company expects to continue to be out of compliance with certain of
its financial covenants under its credit facility for the remainder of the year
and is working with its banks to obtain amendments of these covenants. The
Company expects that its cost of borrowing under its credit facility will
increase approximately 20-25% as a result of obtaining these waivers and
amendments. There can be no assurance that the Company Will obtain such
requested amendments or that the Company's cost of borrowing will not exceed the
above estimate.
7
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Overview--Factors That May Affect Future Results
When used below in connection with matters that may occur in the future,
the words "anticipate," "estimate," "expect" or similar words identify forward
looking statements within the meaning of federal securities laws.
Forward-looking statements below are based on the Company's current expectations
of future events. The matters described in the forward-looking statements are
subject to risks and uncertainties. The actual results of these matters may
differ substantially from the results anticipated by the Company. The Company
cannot assure that future results will meet its current expectations. Risks and
uncertainties relating to forward looking statements and to the Company's
business include, but are not limited to, those described herein, under "Factors
That May Affect Our Business," in the Company's Annual Report on Form 10-K for
the fiscal year ended December 31, 1998 and in other documents that may be
subsequently filed with the Securities and Exchange Commission.
RESULTS OF OPERATIONS
The following tables set forth, for the periods indicated, certain items in
the Company's consolidated statements of operations as a percentage of net sales
(except for income taxes, which are shown as a percentage of pretax income). The
results of operations for the three and six months ended June 30, 1999 and 1998
are not necessarily indicative of future results to be expected for the full
year.
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
------------------ ------------------
1999 1998 1999 1998
------- ------- -------- -------
<S> <C> <C> <C> <C>
Net sales 100.0% 100.0% 100.0% 100.0%
Gross profit 43.8% 43.8% 44.6% 43.7%
Operating expenses 59.5% 49.2% 56.9% 46.8%
Other operating expenses 3.7% 3.5% 3.4% 1.7%
Operating loss (19.4)% (8.9)% (15.7)% (4.8)%
Interest expense (2.7)% (2.0)% (2.8)% (1.7)%
Loss before Income tax benefit (22.8)% (9.7)% (20.3)% (6.3)%
Income tax benefit (39.0)% (38.5)% (39.0)% (38.5)%
Net loss (13.9)% (6.0)% (12.4)% (3.8)%
</TABLE>
Three Months Ended June 30, 1999 Compared to Three Months Ended June 30, 1998
Net Sales. Net sales increased by 26.4% to $54.6 million from $43.2 million for
the three months ended June 30, 1999 (the "Second Quarter 1999") over the three
months ended June 30, 1998 (the "Second Quarter 1998").
Net sales to wholesale customers increased by 26.0% to $46.0 million from
$36.5 million for the Second Quarter 1999 compared to the Second Quarter 1998.
This increase was primarily a result of increased unit sales to the Company's
existing wholesale customers resulting from (i) the introduction of the
Company's footwear product line in the first quarter of 1999; (ii) expansion
into new distribution; (iii) increased sales through the summit shop program,
and; (iv) continued strong sales of existing products.
8
<PAGE>
Retail sales in the U.S. and Canada increased 18.2% to $7.8 million
compared to $6.6 million in the prior year. The increase is due to an increase
in the number of the Company's outlet stores operating during the Second Quarter
1999 and an overall improved sales performance for the division as a whole.
Licensing revenues included in net sales increased to $0.8 million for the
Second Quarter 1999 compared to $0.1 million for the Second Quarter 1998 related
to new licensing arrangements in the Far East.
Gross Profit. Gross profit as a percentage of net sales for the Second Quarter
1999 was flat compared to the Second Quarter 1998 at 43.8%. Overall gross profit
as a percent of sales increased during Second Quarter 1999 compared to the
Second Quarter 1998 related to the higher percentage of license revenues to
total sales during 1999 offset by the lower level of retail sales as a
percentage of total sales in 1999 (which carry higher than the average blended
margin), as well as increases in inventory reserves during the Second Quarter
1999.
Operating Expenses. Operating expenses, which include selling, marketing, and
general administrative expenses, increased by 48.8% to $31.7 million from $21.3
million for the Second Quarter 1999 compared to the Second Quarter 1998
primarily as a result of a significant ramp up of media and promotional spending
in the Second Quarter 1999, increases in variable and fixed costs to support the
growth of the Company's business, and a $2.1 million expense related to
accommodations made to two wholesale distributor customers to keep product sold
to these customers during 1998 out of unfavorable distribution channels.
Increases related to business growth were principally in the area of the
introduction of the Company's footwear product line, new product development,
information systems improvements, higher distribution costs, operating costs of
new outlets, and depreciation.
Other Operating Expenses. During the Second Quarter 1999, the Company recorded
other operating expenses of $2.8 million related to the planned closing of its
Vacaville, California distribution center and start up of its Lenexa, Kansas
distribution center, the realignment of its San Leandro, California facility,
relocating a portion of its corporate headquarters to Carbondale, Colorado, and
professional fees related to the restatement of its 1997 and 1998 financial
statements. The Company expects to spend another $3 to $4 million in operating
expenses related to these efforts, as well as the termination of certain
European independent sales representatives, over the next 6 months.
Interest Expense. Net interest expense for the Second Quarter 1999 increased to
$1.5 million from $0.8 million for the Second Quarter 1998. The increase is due
to higher average borrowings during the Second Quarter 1999 as the Company
continues to invest in upgrading its information technology systems, expansion
of its summit shop program, opening of new outlets, as well as an overall
increase in the scope of its operating activities.
Other Expenses. During the Second Quarter 1999, the Company recorded other
expenses of $0.4 million. These expenses are principally related to losses on
foreign exchange contracts and the Company's tender offer Transaction Agreement
with TNF Acquisition LLC (see Note 3 of Notes to Condensed Consolidated
Financial Statements).
Income Tax Benefit. Income tax benefit as a percentage of pretax loss
was approximately 39% for both the Second Quarter 1999 and the Second Quarter
1998.
9
<PAGE>
Six Months Ended June 30, 1999 Compared to Six Months Ended June 30, 1998
Net Sales. Net sales increased by 19.1% to $105.9 million from $88.9 million for
the six months ended June 30, 1999 (the "First Half 1999") over the six months
ended June 30, 1998 (the "First Half 1998").
Net sales to wholesale customers increased by 14.2% to $84.7 million from
$74.2 million for the first half 1999 compared to the first half 1998. This
increase was primarily a result of increased unit sales to the Company's
existing wholesale customers resulting from (i) the introduction of the
Company's footwear product line in the first half of 1999; (ii) expansion into
new distribution; (iii) increased sales through the summit shop program, and;
(iv) continued strong sales of existing products.
Retail sales in the U.S. and Canada increased 30.3% to $18.9 million
compared to $14.5 million in the prior year. The increase is due to an increase
in the number of the Company's outlet stores operating during the First Half
1999 and an overall improved sales performance for the division as a whole.
Licensing revenues included in net sales increased to $2.3 million for the
First Half 1999 compared to $0.2 million for the First Half 1998 related to new
licensing arrangements in the Far East.
Gross Profit. Gross profit as a percentage of net sales for the First Half 1999
was 44.6% compared to 43.7% the First Half 1998. Overall gross profit as a
percent of sales increased during First Half 1999 compared to the First Half
1998 related to the higher percentage of license revenues to total sales during
1999 offset partially by the lower level of retail sales as a percentage of
total sales in 1999 (which carry higher than the average blended margin), as
well as increases in inventory reserves during the First Half 1999.
Operating Expenses. Operating expenses, which include selling, marketing, and
general administrative expenses, increased by 42.8% to $59.4 million from $41.6
million for the First Half 1999 compared to the First Half 1998 primarily as a
result of a significant ramp up of media and promotional spending in the First
Half 1999, increases in variable and fixed costs to support the growth of the
Company's business, and a $2.1 million expense in the Second Quarter 1999
related to accommodations made to two wholesale distributor customers to keep
product sold to these customers during 1998 out of unfavorable distribution
channels. Increases related to business growth were principally in the area of
the introduction of the Company's footwear product line, new product
development, information systems improvements, higher distribution costs,
operating costs of new outlets, and depreciation.
Other Operating Expenses. During the First Half 1999, the Company recorded other
operating expenses of $4.4 million related to the planned closing of its
Vacaville, California distribution center and start up of its Lenexa, Kansas
distribution center, the realignment of its San Leandro, California facility,
relocating a portion of its corporate headquarters to Carbondale, Colorado, and
professional fees related to the restatement of its 1997 and 1998 financial
statements. The Company expects to spend another $3 to $4 million in operating
expenses related to these efforts, as well as the termination of certain
European independent sales representatives, over the next 6 months.
Interest Expense. Net interest expense for the First Half 1999 increased to $2.8
million from $1.5 million for the First Half 1998. The increase is due to higher
average borrowings during the First Half 1999 as the Company continues to invest
in upgrading its information technology systems, expansion of its summit shop
program, opening of new outlets, as well as an overall increase in the scope of
its operating activities, offset by lower average borrowing rates in 1999
compared to 1998.
10
<PAGE>
Other Expenses. During the First Half 1999, the Company recorded other expenses
of $2.1 million. These expenses are principally related to the Company's tender
offer Transaction Agreement with TNF Acquisition LLC (see Note 3 of Notes to
Condensed Consolidated Financial Statements) and losses on foreign exchange
contracts.
Income Tax Benefit. Income tax benefit as a percentage of pretax loss
was approximately 39% for both the First Half 1999 and the First Half 1998.
SEASONALITY
The Company's business is subject to seasonal and quarterly fluctuations.
Historically, the Company has realized substantially all of its profits in the
third quarter and has recognized losses during the first and second quarter,
with the exception of the first quarter of 1997. The Company's results of
operations may fluctuate from quarter to quarter as a result of, among other
things, the amount and timing of shipments to wholesale customers, government
shipments, the timing and magnitude of discounts in retail stores, advertising
and marketing expenditures, increases in the number of employees and overhead to
support growth and store opening costs. The Company anticipates that it will
continue to incur net losses during the first and second calendar quarters for
the foreseeable future. Additionally, the Company's effective tax rate can vary
significantly from quarter to quarter due to the relative mix of earnings from
the Company's domestic and international operations, which are taxed at
different rates.
YEAR 2000 COMPLIANCE
Many currently installed computer systems and software products are coded
to accept only six digit entries in the date code field. These date code fields
will need to accept eight digit entries to distinguish 21st century dates from
20th century dates. As a result, during the next year, computer systems,
software and some non-information technology ("IT") products used by many
companies may need to be upgraded to comply with such "Year 2000" requirements.
State of Readiness. We have conducted an internal review of both our
information systems and significant non-IT systems. We are involved in an
enterprise-wide project to upgrade or modify portions of our software so that
our computer systems will meet Year 2000 requirements. We have been using both
external and internal resources to reprogram or upgrade our software. We plan to
complete the modifications and upgrades, including testing, of all information
systems by November 1999. No significant Year 2000 problems have been identified
in the Company's non-IT systems.
Costs to Address the Year 2000 Issue. Based on Management's current
estimates, the total cost for addressing the Year 2000 issue is estimated to be
approximately $750,000 of which approximately $600,000 has been incurred through
June 30, 1999.
Risks Presented by the Year 2000 Issue. We believe that the modifications
and upgrades to our software will mitigate any Year 2000 problems associated
with our internal systems. However, if we do not complete the process of
modifying and upgrading our software in a timely manner, or at all, or if we do
not identify computer information systems and non-IT systems that need to be
upgraded, the Year 2000 issue could have a material impact on our operations. We
have surveyed our significant vendors and other third parties on whom we rely to
ensure that they will convert their systems in a timely manner. We currently are
in the process of analyzing third party responses to our survey. We cannot be
sure that other companies will convert their systems effectively or in a timely
manner. If third parties, such as suppliers, manufacturers and other vendors,
fail to meet Year 2000 requirements, our business could be
11
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materially adversely affected.
Contingency Plans. The Company's Year 2000 plan includes the development of
contingency plans in the event that the Company has not completed all of its
remediation plans in a timely manner or any third parties who provide goods or
services essential to the Company's business fail to appropriately address their
Year 2000 issues. The Company plans to conclude the development of these plans
by November 1999.
STOCK MARKET RISKS
The trading price of the Company's Common Stock has fluctuated
significantly since the Company's initial public offering in July 1996, and may
fluctuate in the future as a result of many factors, including the Company's
operating results, new products introduced by the Company or its competitors,
market conditions for the Company's products, changes in earnings estimates by
analysts, actual results reported by the Company which may be better or worse
than estimates provided by analysts, insider selling of common stock and
speculation in the trade or business press. The trading price may also be
affected by retail industry, stock market, or economic factors unrelated to the
Company's operating performance. Future sales of substantial amounts of Common
Stock by existing shareholders may also adversely affect prevailing market
prices for the Common Stock and could impair the Company's ability to raise
equity capital in the future. As of June 30, 1999, the Company's directors,
officers and certain other affiliates beneficially owned approximately 9% of the
outstanding shares of the Company's Common Stock.
LIQUIDITY AND CAPITAL RESOURCES
The Company estimates that its capital expenditures in 1999 will be
approximately $15 to $17 million. As of June 30, 1999, capital expenditures,
including property and equipment financed through capital leases, totaled
approximately $10.0 million. This amount will be used principally for investing
in summit shops, the upgrade of management information systems, the opening of
outlet stores and store upgrades, and other activities.
The Company anticipates that it will be able to operate its business within
the maximum line available under the Company's credit facility for at least the
next 12 months, however expects to seek additional financing over the course of
the next several months to support the growth of the Company's business. There
can be no assurance that the Company will not require additional capital in 1999
or subsequent years.
On August 13, 1999, the Company received a written waiver from the
financial institutions providing the Company's credit facility for violations of
certain of the Company's financial covenants set forth in the agreements
relating to the credit facility that existed at that date relating to larger
than anticipated losses in the first six months of 1999.
The Company expects to continue to be out of compliance with certain of its
financial covenants under its credit facility for the remainder of the year and
is working with its banks to obtain amendments to these covenants. The Company
expects that its cost of borrowing under its credit facility will increase
approximately 20-25% as a result of obtaining these waivers and amendments.
There can be no assurance that the Company will obtain such requested amendments
or that the Company's cost of borrowing will not exceed the above estimate.
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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
The Company is exposed to market risks, which include foreign currency
risks, interest rate risks and inflation risk. The Company does not engage in
financial transactions for trading or speculative purposes.
Foreign Currency Exchange Rate Risk. The Company's inventory purchases from
contract manufacturers in the Far East are denominated in United States dollars;
however, purchase prices for the Company's products may be impacted by
fluctuations in the exchange rate between the United States dollar and the local
currencies of the contract manufacturers, which may have the effect of
increasing the Company's cost of goods in the future. In addition, the Company's
sales in Europe and Canada are denominated in the local currencies of the
applicable specialty retailer, which may have a negative impact on profit
margins or the rate of growth of sales in those countries if the U.S. dollar
were to strengthen significantly. Due to the number of foreign currencies
involved and the fact that not all of these foreign currencies fluctuate in the
same manner against the United States dollar, the Company cannot quantify in any
meaningful way the potential effect of such fluctuations on future income.
The Company sources product in U.S. dollars and sells product throughout
the world, but primarily in the United States, Canada and Europe. To reduce the
Company's exposure to changes in the U.S. dollar value of foreign sales and
receivables the Company enters into forward options and contracts. This hedging
of foreign exchange risk is carried out on a seasonal basis with each season
running for six months of the year, spring being January through June and Fall
being July through December. In general, the Company hedges for the current
season and the next season.
The Company may be affected by the current devaluation of the Asian
currencies due to the Company's importing of raw materials to Asia. Furthermore,
the Company may be affected by economic and political conditions in each of the
countries in which it operates. Risks associated with operating in the
international arena include: (i) economic instability, including the possible
revaluation of currencies; (ii) extreme currency exchange fluctuations where the
Company has not entered into foreign currency forward and option contracts to
manage exposure to certain foreign currency commitments hedged any forward
transactions; (iii) changes to import or export regulations (including quotas);
(iv) labor or civil unrest; and (v) in certain parts of the world, political
instability. The Company has not as yet been materially affected by any such
risks, but cannot predict the likelihood of such developments occurring or the
impact of any such risks to the future profitability of the Company.
Interest Rate Risk. The interest payable on the Company's bank line of
credit is based on variable interest rates and therefore affected by changes in
market interest rates. If interest rates on existing variable rate debt rose 75
basis points, the Company's results from operations and cash flows would have
been impacted by approximately $320,000 for the six months ended June 30, 1999.
Inflation Risk. The Company believes that the relatively moderate rates of
inflation over the last two years in the United States, where it primarily
competes, have not had a significant effect on its net sales or results of
operations. Higher rates of inflation have been experienced in a number of
foreign countries in which the Company's products are manufactured, but this has
not had a material effect on the Company's net sales or results of operations.
In the past, the Company has been able to offset its cost increases by
negotiation, increasing selling prices or changing suppliers.
13
<PAGE>
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
During the first week of March 1999, various complaints were filed against
the Company and its Board of Directors in the Delaware Court of Chancery and in
the California Superior Court, Alameda County in connection with the
transactions (the "Transactions") contemplated by the Transaction Agreement
dated February 27, 1999, between the Company and TNF Acquisition LLC. The
complaints, filed on behalf of a purported class of the Company's shareholders,
generally allege that the Transactions are unfair and inadequate to the
Company's shareholders and charge the defendants with self-dealing and breach of
fiduciary duties. The various complaints generally request injunctive relief to
prevent the consummation of the Transactions, and seek other remedies in the
event the Transactions are completed. The Company has not yet responded to these
complaints.
Beginning in March 1999, purported class action lawsuits were filed in
federal district court against the Company and certain of its former and current
officers and directors alleging violations of the federal securities laws. These
complaints (collectively, the "Securities Litigation") have been consolidated in
federal district court in Colorado. The lawsuits generally allege that the
defendants made false and misleading statements about the Company's business and
financial results during a time period from April 1997 through March 1999. The
Company believes it has meritorious defenses to these claims and intends to
contest them vigorously. An unfavorable resolution of the Securities Litigation
could have a material adverse effect on the business, results of operations or
financial condition of the Company.
On April 6, 1999, a shareholder derivative action purportedly on behalf of
the Company, captioned Eng v. Cason, et al., Civil Action No. 810726-0, was
filed in California Superior Court, Alameda County. The complaint alleges that
the Company's directors and various current and former officers violated
California law and breached fiduciary duties to the Company by engaging in
alleged wrongful conduct from April 25, 1997 through March 12, 1999, including
the conduct complained of in the Securities Litigation. The Company is named
solely as a nominal defendant, against whom the plaintiff seeks no recovery.
14
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ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
2.1(6) Stock Purchase Agreement, dated as of July 1, 1998, among The North
Face, Inc. and La Sportiva USA, Inc.
2.2(6) Registration Rights Agreement dated as of July 1, 1998, among The
North Face, Inc. and the stockholders of La Sportiva USA, Inc.
2.3(11) Transaction Agreement, dated as of February 27, 1999, by and between
the Registrant and TNF Acquisition LLC, a Delaware limited liability
company whose sole member is Green Equity Investors III, L.P., a
Delaware limited partnership.
2.4 Amendment to Transaction agreement with TNF Acquisition LLC dated
July 31, 1999.
3.1(2) Amended and Restated Certificate of Incorporation of The North Face,
Inc.
3.2(1) Amended and Restated By-laws of The North Face, Inc.
10.1(1)** Management Stock Purchase and Non-Competition Agreement, dated as of
June 6, 1994, among TNF Holdings Company, Inc.,* Marsden S. Cason and
William A. McFarlane, as amended by Amendment No. 1, dated as of June
22, 1995.
10.2(7)** Management Stock Pledge Agreement, dated as of May 13, 1998, among
The North Face, Inc., and James G. Fifield.
10.3(1) Stock Purchase Agreement, dated as of December 28, 1993, between TNF
Holdings Company, Inc.* and Kabushiki Kaisha Goldwin, as amended by
Memorandum, dated as of March 29,1994, among TNF Holdings Company,
Inc.* and Kabushiki Kaisha Goldwin, and Memorandum No. 2, dated as of
May 20, 1994, between TNF Holdings Company, Inc.* and Kabushiki
Kaisha Goldwin.
10.4(1) Securityholders Agreement, dated as of June 7, 1994, among TNF
Holdings Company, Inc.,* Marsden S. Cason, William A. McFarlane, J.H.
Whitney & Co., Whitney 1990 Equity Fund, L.P., Whitney Subordinated
Debt Fund, L.P., Richard T. Peery, Jack L. Richardson, Philip S.
Schlein and Kenneth F. Siebel, as amended by Amendment No. 1, dated
as of June 22, 1995.
10.5(1) Registration Rights Agreement, dated as of June 7, 1994, among TNF
Holdings Company, Inc.,* J.H. Whitney & Co., Whitney 1990 Equity
Fund, L.P., Whitney Subordinated Debt Fund, L.P., Marsden S. Cason
and William A. McFarlane, as amended by Amendment No. 1, dated as of
June 22, 1995, and Amendment No. 2, dated as of May 20, 1996.
10.6(1) Amended and Restated Loan and Security Agreement, dated as of March
1, 1995, between The North Face, Inc. and Heller Financial, Inc., as
Agent and as a Lender, as amended by First Amendment, dated as of May
4, 1995, Second Amendment, dated as of August, 1995, Third Amendment,
dated as of March 27, 1996, and Fourth Amendment, dated May 8, 1996.
15
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10.6A(1) Second Amended and Restated Loan and Security Agreement, dated as of
June, 1996, between The North Face, Inc. and Heller Financial, Inc.,
as Agent and as a Lender.
10.6B(3) Third Amended and Restated Loan and Security Agreement, dated as of
April 7, 1997, between The North Face, Inc. and Heller Financial,
Inc., as Agent and as a Lender.
10.7(2)** TNF Holdings Company, Inc.* 1994 Stock Incentive Plan, as amended.
10.8(5)** The North Face, Inc. 1995 Stock Incentive Plan, as amended.
10.9(1)** The North Face, Inc. 1996 Stock Incentive Plan.
10.9A(10)**The North Face, Inc. 1996 Stock Incentive Plan, as amended September
1, 1998.
10.10(1)** The North Face, Inc. 1996 Employee Stock Purchase Plan.
10.11(1)** The North Face, Inc. 1996 Directors' Stock Option Plan.
10.12(9)** The North Face, Inc. 1998 Nonstatutory Stock Option Plan.
10.13(1) Trademark License, dated October 29, 1993, between The North Face and
W.L. Gore & Associates, Inc.
10.14(10) Trademark License, dated September 30, 1998, between The North Face,
Inc. and Youngone Corporation.
10.15(8) Loan Agreement dated as of September 2, 1998 (the "Loan Agreement")
between The North Face, Inc., The North Face (Europe) Limited and The
North Face, Hong Kong, Limited as Borrowers, The Industrial Bank of
Japan, Limited, New York Branch and IBJ Schroder Business Credit
Corporation as Arrangers, The Industrial Bank of Japan, Limited, New
York Branch as Syndication Agent, Documentation Agent and as a
Lender, IBJ Schroder Business Credit Corporation as Administrative
Agent, Collateral Agent and as a Lender, and Certain Financial
Institutions.
10.15A(8) Amendment to the Loan Agreement, dated as of September 11, 1998.
10.15B Amendment and Waiver Agreement, dated as of August 13, 1999.
10.16(4) First Amendment and Purchase Agreement dated June 15, 1998 by and
between The North Face, Inc., Gianinetti Investment Corp., R.P.
Sewell & Company, a Colorado Partnership, Richard Bradley and David
F. Baggerman and Agreement to Amend/Extend Contract dated December
24, 1998 by and between The North Face, Inc., Gianinetti Investment
Corp., R.P. Sewell & Company, a Colorado Partnership, Richard Bradley
and David F. Baggerman.
- ---------------
(1) Incorporated by reference to the Company's Registration Statement on Form
S-1 (No. 333-04107) filed on May 20, 1996 and amendments thereto, filed
with the Securities and Exchange Commission on June 3, 1996 and June 24,
1996.
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(2) Incorporated by reference to the Company's Registration Statement on Form
S-1 (No. 333-14945) filed with the Securities and Exchange Commission on
October 28, 1996.
(3) Incorporated by reference to the Company's Annual Report on Form 10-K for
the fiscal year ended December 31, 1997 filed with the Securities and
Exchange Commission on March 6, 1998.
(4) Incorporated by reference to the Company's Registration Statement on Form
S-3 (No. 333-70405) filed with the Securities and Exchange Commission on
January 11, 1999.
(5) Incorporated by reference to the Company's Annual Report on Form 10-K for
the fiscal year ended December 31, 1996 filed with the Securities and
Exchange Commission on March 28, 1997.
(6) Incorporated by reference to the Company's Registration Statement on Form
S-3 (No. 333-58629) filed with the Securities and Exchange Commission on
July 7, 1998.
(7) Incorporated by reference on Schedule 13D filed with the Securities and
Exchange Commission on May 13, 1998.
(8) Incorporated by reference to the Company's Report on Form 10-Q for the
period ended September 30, 1998 filed with the Securities and Exchange
Commission on November 13, 1998.
(9) Incorporated by reference to the Company's Registration Statement on Form
S-8 (No. 59003) filed with the Securities and Exchange Commission on July
14, 1998.
(10) Incorporated by reference to the Company's Annual Report on Form 10-K for
the fiscal year ended December 31, 1998 filed with the Securities and
Exchange Commission on May 7, 1999.
(11) Incorporated by reference to the Company's Report on Form 8-K filed with
the Securities and Exchange Commission on March 5, 1999.
* TNF Holdings Company, Inc., a Delaware corporation, changed its name to The
North Face, Inc. on June 8, 1994.
** Indicates management contract or compensatory plan or arrangement.
27.1 Financial Data Schedule
(b) Reports on Form 8-K
Form 8-K filed on April 1, 1999 contained the Company's press releases
announcing, (i) the evaluation of the accounting treatment of certain
transactions by the audit committee of the Board of Directors; (ii) that in
connection with the audit of its financial statements for the year ended
December 31, 1998, Deloitte & Touche informed the audit committee of the Board
of Directors that it had questions regarding certain transactions; and (iii) the
completion of the investigation of the accounting treatment of certain
transactions by the audit committee of the Board of Directors.
Form 8-K filed on April 20, 1999 contained the Company's press release
announcing that the Company had not filed its annual report on Form 10-K for the
year ended December 31, 1998 because the annual
17
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audit by its external auditors was not complete. The Company also announced that
trading of its shares had been halted.
Form 8-K filed on May 20, 1999 contained the Company's press release announcing
that the Company had filed its annual report on Form 10-K for the year ended
December 31, 1998. The Company also announced that it had filed an amended
annual report on Form 10-K for the year ended December 31, 1997, as well as an
amended quarterly report on Form 10-Q for each of the first three quarters of
1998. The Company stated that it expected to file its quarterly report on Form
10-Q for the first quarter of 1999 by May 24, 1999. The Company also announced
that its Transaction Agreement with Leonard Green & Partners, L.P. was in full
force and effect although Leonard Green & Partners had informed the Company that
they are reevaluating the transactions contemplated by the Transaction
Agreement.
Form 8-K filed on June 1, 1999 contained the Company's press release reporting
the Company's financial results for the first quarter ended March 31, 1999.
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<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
THE NORTH FACE, INC.
(Registrant)
Dated: August 13, 1999 By: /s/ James G. Fifield
---------------------------------
James G. Fifield
President and Chief Executive Officer
Acting Chief Financial Officer
(Principal Financial and Accounting
Officer of the Registrant)
19
<PAGE>
INDEX OF EXHIBITS
The following exhibits are included herein:
2.4 Amendment to Transaction agreement with TNF Acquisition LLC dated July
31, 1999.
10.15B Amendment and Waiver Agreement, dated as of August 13, 1999.
27.1 Financial Data Schedule
20
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EXHIBIT 2.4
AMENDMENT TO
THE TRANSACTION AGREEMENT
THIS AMENDMENT TO THE TRANSACTION AGREEMENT (this "Amendment") is made and
entered into as of July 31, 1999 by and between The North Face, Inc., a Delaware
corporation (the "Company"), and TNF Acquisition LLC, a Delaware limited
liability company ("TNF"), with reference to the following facts:
A. The Company and TNF are parties to that certain Transaction Agreement
dated February 27, 1999, as amended as of the date hereof (the
"Transaction Agreement").
B. TNF wishes to extend the term of the Transaction Agreement and in
consideration therefor TNF has agreed to the other amendments set forth
below.
NOW, THEREFORE, in consideration of the premises and other good and
valuable consideration, the receipt and adequacy of which is hereby
acknowledged, the parties hereto agree that the following sections of the
Transaction Agreement shall be amended as follows:
The phrase "July 31, 1999" shall be deleted from the first sentence of
Section 10.1.5 of the Transaction Agreement and replaced with the phrase "August
31, 1999."
The parties hereby agree that, notwithstanding anything to the contrary
contained in the Transaction Agreement, (i) the Company agrees to reimburse TNF
for its Expenses (as that term is defined in Section 10.3 of the Transaction
Agreement), as limited by subsection (ii) of this paragraph, if the transactions
contemplated by the Transaction Agreement are not consummated and (ii) the
maximum aggregate amount payable for such Expenses pursuant to Section 10.3 of
the Transaction Agreement shall be limited to $2,200,000 for all Expenses
incurred by TNF through July 31, 1999 plus up to $500,000 of newly incurred
reasonable documented Expenses incurred between August 1 and August 31, 1999.
Payment pursuant to this paragraph shall be made in accordance with the timing
and manner set forth in the Transaction Agreement.
The parties hereby agree that (i) there is no basis for any termination of
the Transaction Agreement as a result of any alleged violation of Section 8.5
thereof prior to the date hereof; (ii) any prior attempt to terminate the
Transaction Agreement by either party is withdrawn and null and void; and (iii)
subject to the provisions of Section 8.5 of the Transaction Agreement, no
violation of the Transaction Agreement will result if the Company retains BT
Alex. Brown to assist it in evaluating its strategic alternatives.
<PAGE>
Except as specifically amended hereby, the Transaction Agreement remains in
full force and effect.
IN WITNESS HEREOF, the parties hereto have caused this Amendment to be
signed by their respective officers thereunto duly authorized as of the date
first written above.
THE NORTH FACE, INC.,
a Delaware Corporation
By: /s/ Marsden S. Cason
-------------------------------
Name: Marsden S. Cason
Title: Chairman
TNF ACQUISITION LLC,
a Delaware limited liability company
By: /s/ Jonathan Seiffer
-------------------------------
Name: Jonathan Seiffer
Title: Vice President
<PAGE>
Exhibit 10.15B
AMENDMENT AND WAIVER AGREEMENT
AMENDMENT AND WAIVER AGREEMENT, dated as of August 13, 1999, to the Loan
Agreement dated as of September 2, 1998 (as amended to date, and as the same may
be further amended, supplemented, restated or modified from time-to-time in
accordance with its terms, the "Loan Agreement") among The North Face, Inc.
("TNFI"), The North Face (Europe) Limited ("TNFE") and The North Face Hong Kong,
Limited ("THFHK") and together with TNFI and TNFHK, each a "Borrower" and
collectively, the "Borrowers"), The Industrial Bank of Japan, Limited, New York
Branch as Syndication Agent and Documentation Agent, IBJ Whitehall Business
Credit Corporation (formerly known as IBJ Schroder Business Credit Corporation)
as Administrative Agent and Collateral Agent and the financial institutions
parties thereto from time-to-time. Capitalized terms used but not defined herein
have the meanings given such terms in the Loan Agreement.
WHEREAS, the Borrowers are in violation of Sections 6.2, 6.4, 6.5 and 6.6 for
each of the fiscal quarters ending March 31, 1999 and June 30, 1999 (such
violations, collectively referred to as the "Financial Covenant Violations").
WHEREAS, the Borrowers have requested and the Lenders and the Administrative
Agent have agreed to certain waivers and amendments to the Loan Agreement.
NOW THEREFORE, for valuable consideration, the receipt and sufficiency of which
is hereby acknowledged, the parties hereto agree as follows:
1. WAIVER
1.1 The Administrative Agent and the Lenders hereby waive each of the
Financial Covenant Violations.
2. AMENDMENTS TO LOAN AGREEMENT
2.1 The Loan Agreement is amended by adding the following definition in its
appropriate alphabetical order in Section 1.1:
"Applicable Commercial Rate Margin" means, as of August 13, 1999, one
percent (1.00%). The Applicable Commercial Rate Margin shall be adjusted
(up or down) prospectively on a quarterly basis based on a rolling four
quarter calculation of the Senior Leverage Ratio as determined based on
Borrowers' quarterly financial statements. Adjustments in the Applicable
Commercial Rate Margin will be determined by reference to the following
grid:
------------- ----------------------------- --------------------------
Level Senior Leverage Ratio Applicable Margin
------------- ----------------------------- --------------------------
------------- ----------------------------- --------------------------
1 (greater than)=2.75 1.00%
------------- ----------------------------- --------------------------
------------- ----------------------------- --------------------------
2 2.25 - 2.74 0.75%
------------- ----------------------------- --------------------------
------------- ----------------------------- --------------------------
3 1.75 - 2.24 0.50%
------------- ----------------------------- --------------------------
------------- ----------------------------- --------------------------
4 1.25 - 1.74 0.25%
------------- ----------------------------- --------------------------
------------- ----------------------------- --------------------------
5 (less than) 1.25 --
------------- ----------------------------- --------------------------
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2.2 The grid contained in the definition of "Applicable Margin" in Section 1.1
of the Loan Agreement is amended in its entirety to read as follows:
------------- ----------------------------- --------------------------
Level Senior Leverage Ratio Applicable Margin
------------- ----------------------------- --------------------------
------------- ----------------------------- --------------------------
1 (greater than)=2.75 2.50%
------------- ----------------------------- --------------------------
------------- ----------------------------- --------------------------
2 2.25 - 2.74 2.25%
------------- ----------------------------- --------------------------
------------- ----------------------------- --------------------------
3 1.75 - 2.24 2.00%
------------- ----------------------------- --------------------------
------------- ----------------------------- --------------------------
4 1.25 - 1.74 1.75%
------------- ----------------------------- --------------------------
------------- ----------------------------- --------------------------
5 (less than) 1.25 1.50%
------------- ----------------------------- --------------------------
2.3 The definition of "Prime Rate" in Section 1.1 of the Loan Agreement is
amended by deleting the phrase "minus one half of one percent (0.50%)" at
the end of clause (a) thereof, and inserting in its place the phrase "plus
the Applicable Commercial Rate Margin".
2.4 The penultimate paragraph in Section 2.2(A) of the Loan Agreement is
amended by inserting the phrase "and the Applicable Commercial Rate
Margin" immediately after the term "the Applicable Margin" where such term
appears in the first, seventh and ninth lines thereof.
2.5 Section 2.3(B) of the Loan Agreement is amended by deleting the phrase
"three eighths of one percent (.375%)" in the third line from the end of
such section and replacing it with the phrase "one half of one percent
(.500%)".
2.6 Section 6.3 of the Loan Agreement is amended by adding the following
proviso at the end of the first sentence thereof:
"; provided that from August 13, 1999 through December 31, 1999, the
Borrowers shall not, without the prior written approval of the
Administrative Agent, make any Capital Expenditures that the Borrowers had
not committed to make prior to August 13, 1999".
2.7 The Loan Agreement is amended by adding the following as new section 7.17:
"7.17 Restriction on Stock Repurchase. No Borrower shall repurchase any of
its own Common Stock or the Common Stock of any other Borrower".
3. Miscellaneous
3.1 Each of the Borrowers reaffirms and restates the representations and
warranties set forth in the Loan Agreement, as applicable, and all such
representations and warranties shall be true and correct on the date
hereof with the same force and effect as if made on such date. Each of the
Borrowers represents and warrants as to itself (which representations and
warranties shall survive the execution and delivery hereof) to the Agent
that:
(a) This Amendment and Waiver Agreement has been duly executed and
delivered by a duly authorized officer on behalf of each of the
Borrowers, and constitutes the legal,
2
<PAGE>
valid and binding obligations of each, enforceable in accordance with
its terms, except as enforcement thereof may be subject to the effect
of any applicable (i) bankruptcy, insolvency, reorganization,
moratorium or similar law affecting creditors' rights generally and
(ii) general principles of equity (regardless of whether enforcement
is sought in a proceeding in equity or at law); and
(b) The execution, delivery and performance of this Amendment and Waiver
Agreement will not violate any law, statute or regulation applicable
to any Borrower, or any order or decree of any court or governmental
instrumentality applicable to such company, or conflict with, or
result in the breach of, or constitute a default under any contractual
obligation of such company.
3.2 Each of the Borrowers hereby irrevocably and unconditionally confirms,
that notwithstanding this Amendment and Waiver Agreement, the Loan
Agreement and the other Loan Documents (including each Collateral
Document) are each ratified and confirmed in all respects and shall remain
in full force and effect in accordance with their respective terms.
3.3 Except as specifically set forth herein, nothing herein contained shall
constitute a waiver or be deemed to be a waiver, of any existing Default
or Event of Default and the Lenders and Administrative Agent reserve all
rights and remedies granted to them by the Loan Agreement, the other Loan
Documents, by law and otherwise.
3.4 All references to the Loan Agreement in any Loan Document shall mean the
Loan Agreement as amended hereby.
3.5 TNFI hereby agrees to pay a waiver fee to the Administrative Agent for the
pro rata benefit of the Lenders in the amount of $162,500. This Amendment
and Waiver Agreement shall not be effective until receipt by the
Administrative Agent of the foregoing waiver fee.
3.6 TNFI hereby agrees to deliver a final and complete financial statement for
the fiscal quarter ending June 30, 1999. The Administrative Agent hereby
acknowledges receipt of the foregoing. In addition, TNFI hereby agrees to
deliver to the Administrative Agent on or before August 31, 1999 a revised
forecast for the remainder of the 1999 Fiscal Year.
3.7 This Amendment and Waiver Agreement may be executed by the parties hereto
individually or in combination, in one or more counterparts, each of which
shall be an original and all of which shall constitute one and the same
agreement. A facsimile signature page shall constitute an original for the
purposes hereof.
3.8 Borrowers hereby agree in favor of the Administrative Agent and the
Lenders to enter into a further amendment to the Loan Agreement on or
prior to September 30, 1999 which amendment will have the overall effect
of converting the Loan Agreement to what the Administrative Agent and the
Lenders recognize as an asset based loan structure (such amendment, the
"ABL Amendment"). In addition to the foregoing, the ABL Amendment will
require, among other
3
<PAGE>
things that the Borrowers (i) obtain, at their own cost and expense, an
appraisal of their intellectual property, in form and substance
satisfactory to the Administrative Agent (ii) pay a monthly $5,000
collateral monitoring fee and (iii) enter into lock box agreements
granting dominion over their accounts to the Administrative Agent. In the
interim, the Borrowers agree to conduct monthly telephone updates with the
Administrative Agent and Lenders which updates will include the status of
litigation against any of the Borrowers. The Borrowers further confirm
that the Administrative Agent maintains the right, prior to entering into
the ABL Amendment, to establish reserves in the borrowing limits as the
Administrative Agent deems appropriate in its sole reasonable discretion.
3.9 TNFI, hereby agrees to pay all expenses incurred by the Administrative
Agent in connection with this Amendment and Waiver Agreement including but
not limited to the fees and expenses of Clifford Chance, counsel to the
Agent.
3.10 THIS AGREEMENT SHALL BE GOVERNED BY, AND CONSTRUED AND INTERPRETED IN
ACCORDANCE WITH, THE LAWS OF THE STATE OF NEW YORK, WITHOUT GIVING EFFECT
TO THE CONFLICTS OF LAWS PRINCIPLES THEREOF.
IN WITNESS WHEREOF, the parties hereto have caused this Waiver Agreement
to be duly executed as of the date first written above.
THE NORTH FACE, INC.
By:........................................
Name:
Title:
4
<PAGE>
THE NORTH FACE, (CANADA) INC.
By:........................................
Name:
Title:
THE NORTH FACE, HONG KONG, LIMITED
By:........................................
Name:
Title:
THE NORTH FACE (EUROPE) LIMITED
By:........................................
Name:
Title:
IBJ WHITEHALL BUSINESS CREDIT CORPORATION
as a Lender and as Administrative Agent
and Collateral Agent
By:........................................
Name:
Title:
THE INDUSTRIAL BANK OF JAPAN, LIMITED,
NEW YORK BRANCH, as a Lender and as
Syndication Agent
By:........................................
Name:
Title:
FLEET BANK, N.A.
By:........................................
Name:
Title:
BANK OF AMERICA
By:........................................
Name:
Title:
5
<PAGE>
BANQUE NATIONALE DE PARIS
By:........................................
Name:
Title:
NORWEST BANK, COLORADO
By:........................................
Name:
Title:
NATIONAL BANK OF CANADA
By:........................................
Name:
Title:
BANK ONE, COLORADO N.A.
By:........................................
Name:
Title:
COMERICA
By:........................................
Name:
Title:
6
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONDENSED STATEMENT OF OPERATIONS, THE CONDENSED BALANCE SHEET AND THE
ACCOMPANYING NOTES TO THE CONDENSED FINANCIAL STATEMENTS, AND IS QUALIFIED IN
ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C> <C>
<PERIOD-TYPE> 3-MOS 3-MOS
<FISCAL-YEAR-END> DEC-31-1999 DEC-31-1998
<PERIOD-START> APR-01-1999 APR-01-1998
<PERIOD-END> JUN-30-1999 JUN-30-1998
<CASH> 5,946 5,303
<SECURITIES> 0 0
<RECEIVABLES> 57,408 49,791
<ALLOWANCES> 0 0
<INVENTORY> 71,839 64,853
<CURRENT-ASSETS> 166,723 139,898
<PP&E> 32,387 20,072
<DEPRECIATION> 0 0
<TOTAL-ASSETS> 237,368 194,649
<CURRENT-LIABILITIES> 103,956 71,413
<BONDS> 0 0
0 0
0 0
<COMMON> 32 31
<OTHER-SE> 112,064 112,725
<TOTAL-LIABILITY-AND-EQUITY> 237,368 194,649
<SALES> 54,596 43,171
<TOTAL-REVENUES> 54,596 43,171
<CGS> 30,681 24,261
<TOTAL-COSTS> 30,681 24,261
<OTHER-EXPENSES> 34,529 22,771
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 1,467 848
<INCOME-PRETAX> (12,434) (4,192)
<INCOME-TAX> (4,849) (1,613)
<INCOME-CONTINUING> (7,585) (2,579)
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> (7,585) (2,579)
<EPS-BASIC> (0.60) (0.22)
<EPS-DILUTED> (0.60) (0.22)
</TABLE>
