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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 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 31, 1999
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
Commission file number 0-28596
THE NORTH FACE, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 94-3204082
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
2013 Farallon Drive, San Leandro, California 94577
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (510) 618-3500
Securities registered pursuant to Section 12(b) of the Act:
NONE
Securities registered pursuant to Section 12(g) of the Act:
COMMON STOCK, PAR VALUE $.0025 PER SHARE
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 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 [ ]
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. [ ]
As of April 10, 2000, the aggregate market value of the registrant's voting
stock held by non-affiliates was $24,717,131.
As of April 10, 2000, the number of shares of the registrant's Common Stock
outstanding was 12,757,229.
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PART I
Item 1. Business.
GENERAL
This Annual Report on Form 10-K contains forward-looking statements that
involve risks and uncertainties. The statements contained herein that are not
purely historical are forward-looking statements within the meaning of Section
27A of the Securities Act and Section 21E of the Exchange Act, including without
limitation statements regarding the Company's expectations, beliefs, intentions
or strategies regarding the future. All forward-looking statements included in
this document or incorporated by reference herein are based on information
available to the Company on the date hereof, and the Company assumes no
obligation to update any such forward-looking statements. Actual results,
events, or performance could differ materially from those anticipated in these
forward-looking statements as a result of a variety of factors, including those
set forth in "Factors that may Affect the Company's Business," and elsewhere
herein.
The North Face, Inc., a Delaware corporation, was founded in 1965 by outdoor
enthusiasts as a retailer of high performance climbing and backpacking
equipment. The North Face, Inc., together with its consolidated subsidiaries
("The North Face" or the "Company"), designs and distributes technically
sophisticated outerwear, snowsports gear, functional sportswear, tents, sleeping
bags, backpacks, daypacks, accessories and rugged footwear under The North
Face(R) name. Through its subsidiary, La Sportiva USA, the Company distributes
rock climbing shoes, mountaineering boots and other rugged footwear under the La
Sportiva(R) name. The Company believes that The North Face(R) is the world's
premier brand of high-performance outdoor apparel and equipment.
INDUSTRY OVERVIEW
Technical outdoor apparel and equipment historically have been used primarily
by professional climbers and serious outdoor enthusiasts. In recent years,
these products have become increasingly popular among a broader group of
consumers. The Company believes that this growth has been the result primarily
of: (i) an increase in outdoor recreational activities and adventure travel by
the general population; (ii) a shift in consumer preferences leading to a
growing demand for highly functional products at the expense of fashion-oriented
products; (iii) a growing acceptance of outdoor apparel as casual wear; and (iv)
an increase in the technical sophistication of products in this field.
The trend towards more active outdoor lifestyles is demonstrated by increased
participation in a variety of outdoor activities such as camping, hiking and
backpacking. A 1997 survey by the Travel Industry Association of America
indicated that one-half of U.S. adults, or 74 million people, have taken an
adventure travel trip in the past five years. Of these, 31 million engaged in
"hard" adventure activities like whitewater rafting, scuba diving and mountain
climbing. In addition, outdoor or rugged apparel has been increasingly worn as
casual clothing even by individuals who do not participate in outdoor activities
or require the functionality of a high-performance product. Casual wear in
general also has become increasingly popular, particularly in the workplace, as
evidenced by the dramatic increase in "casual days" and the increased prevalence
of "brown shoes."
The Company believes that consumers recently have demonstrated an increasing
preference for functional, performance-oriented products. Purchase decisions
often are driven as much by a desire to create a particular perception of
themselves as healthy and active as by an actual need for these products. An
example of this trend is the growing popularity of sport utility vehicles, which
have become one of the fastest growing segments of the automotive industry
despite the fact that most owners of such vehicles never venture off paved
streets. Additionally, over the last decade, there have been significant
technological advances in materials and designs that have increased product
functionality and performance. The number of
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products and product segments in the industry has increased dramatically as
marketers have developed and introduced specific products designed to suit a
greater variety of individual activities and conditions.
COMPANY OVERVIEW
The Company is a leading designer, distributor and marketer of technically
sophisticated outdoor apparel and equipment under The North Face brand name.
Over the past 35 years, the Company has built a strong and widely recognized
reputation for high-quality, innovative and technically sophisticated products,
which management believes has established The North Face as the world's premier
brand of outdoor apparel and equipment.
The Company offers a broad range of high-performance, technically
sophisticated outdoor apparel and equipment, including outerwear, functional
sportswear ("Tekware(R)"), snowsports gear, rugged footwear, tents, sleeping
bags, backpacks and other products designed for outdoor activities. As a result
of the more than 30 years of experience gained as a provider of outdoor apparel
and equipment to many of the world's most challenging high altitude and polar
expeditions, management believes that The North Face(R) brand has achieved the
highest level of authenticity in the outdoor apparel and equipment industry. The
Company's goal is to offer the most technically advanced products in its field
and to establish the industry standard in each of its product categories. The
Company designs many of its products for extreme applications such as high
altitude mountaineering, rock and ice climbing, and back-country skiing and
snowboarding. While management believes that only a small fraction of consumers
who buy the Company's products purchase them exclusively for participation in
such activities, the ability of its products to achieve high levels of
performance under extreme conditions reinforces The North Face brand identity.
In April 2000, the Company executed a definitive merger agreement (the "VF
Merger Agreement") providing for the acquisition of all the outstanding shares
of the Company by VF Corporation ("VF") for $2.00 per share. As a first step in
the transaction, a subsidiary of VF will commence a cash tender offer for all
the outstanding shares of the Company at $2.00 per share. The offer will be
conditioned, among other things, upon a majority of the issued and outstanding
shares being tendered and not withdrawn prior to the expiration of the offer.
Following successful completion of the tender offer, the VF subsidiary will be
merged into The North Face and each outstanding share will be converted into the
right to receive $2.00 in cash.
As set forth in greater detail below, the Company's difficulties in meeting
its loan agreement covenants and financing needs, its losses from operations,
its negative working capital position and the scheduled expiration of its credit
facility on April 15, 2000 have raised substantial doubt about its ability to
continue as a going concern. As a consequence, if, for any reason, the tender
offer and merger contemplated by the VF Merger Agreement are not consummated,
the Company will be required to consider seeking protection under Chapter 11 of
the Bankruptcy Code.
PRODUCTS
The Company offers a broad range of outerwear, equipment, Tekware(R),
Ascentials (accessories), snowsports gear, rugged footwear and other products
designed for outdoor activities, such as mountaineering, climbing, backpacking,
skiing, snowboarding, hiking, trekking and adventure travel. The Company
designs its products to function as "equipment for the body," and its goal is to
offer the most technically advanced products in its field and to establish the
industry standard in each of its product categories. The Company designs many
of its products for extreme applications such as high altitude mountaineering,
rock and ice climbing, and back-country skiing and snowboarding. While
management believes that only a small fraction of consumers who buy the
Company's products participate in such activities, the ability of its products
to achieve high levels of performance under extreme conditions reinforces The
North Face brand identity. The Company also strives to offer products at more
moderate
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price-points that appeal to a broader consumer base, are higher in quality than
competitive products and incorporate many of the features, materials and
technologies used in its most technically advanced designs. As a result of the
more than 30 years of experience gained as a provider of outdoor apparel and
equipment to many of the world's most challenging high altitude and polar
expeditions, management believes that The North Face(R) has achieved the highest
level of authenticity in the outdoor apparel and equipment industry. Management
believes that its dedication to producing high-quality, innovative and
technically sophisticated products is exemplified by its marketing statement,
"For over thirty years, individuals whose lives depend on the performance of
their gear consistently choose The North Face," which differentiates The North
Face from any other company in the outdoor apparel and equipment industry.
The Company's products are often used in severe weather and other extreme
conditions. For example, in 1997, the Company began selling portaledges used as
sleeping platforms in big wall rock climbing. There can be no assurance that
insurance maintained by the Company will cover possible future losses from
product liability claims.
The North Face(R) products are original designs and most carry a lifetime
warranty for the original owner against defects in materials and workmanship.
The Company maintains a warranty reserve for the lifetime warranty offered on
many of its products, but cannot assure that future claims will not exceed this
reserve. Further, in the event that the Company experiences problems with
product quality or reliability, its reputation as a provider of high-quality
products could suffer, which could have a material adverse effect on the
Company's business.
In 1998, sales of outerwear, equipment, Tekware, snowsports gear, Ascentials,
and other products represented approximately 50%, 15%, 13%, 9%, 8%, and 5%, of
net sales, respectively. In 1999, the Company began to offer rugged footwear
under The North Face brand. In 1999, sales of outerwear, equipment, Tekware,
footwear, snowsports gear, Ascentials, and other products represented
approximately 48%, 16%, 13%, 7%, 7%, 6%, and 3% of net sales, respectively.
Outerwear
The Company's outerwear products are organized into two categories,
Expedition System Outerwear and Technical Outerwear. The Company's outerwear is
designed to provide protection from various combinations of cold, wet and windy
conditions and to accommodate the range of motion required for the most extreme
outdoor activities. In addition, many of the Company's outerwear products are
designed to adapt to varying conditions and situations, taking into account the
unpredictability of the weather and the fact that some outdoor activities
alternate between periods of extreme exertion and total rest, requiring a proper
balance between ventilation and insulation. Each year, the Company enhances its
outerwear lines by adding new products and design innovations. For example, in
1999 the Company added WL Gore Paclite(R), a two-ply waterproof fabric that is
15% lighter than the product it replaced, and Malden Aircore(R) fleece, a
warmer, reduced-weight fleece material, to its range of technologically superior
products. In addition, in 1999 the Company introduced an advanced "core venting"
air circulation and ventilation system to its range of technologically superior
design features. In a May 1998 BACKPACKER Magazine survey, The North Face(R) was
ranked as a leading brand in the outerwear category by 64% of the respondents,
significantly more than any other brand.
Equipment
The Company offers three lines of technical outdoor equipment: tents, sleeping
bags and backpacks (including daypacks). Equipment is integral to The North Face
brand identity and helps define the Company's position in the marketplace.
Equipment is critical to The North Face(R) image and reputation and plays an
extremely important role in the Company's research, development, field-testing
and marketing activities.
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Tekware
In 1996, the Company entered the broader casual sportswear market with its
introduction of Tekware, a line of high-performance functional sportswear made
from a new generation of synthetic fabrics and developed in collaboration with
E.I. DuPont de Nemours & Co. ("DuPont") and other companies. Tekware is offered
in three lines: (i) Bouldering/Climbing; (ii) Trail Running/Performance; and
(iii) Trekking/Adventure Travel. Each line offers styles for men and women and
features a collection of pants, shorts, shirts, pullovers, fleece garments, wind
jackets, vests, tank tops and tights. The synthetic fabrics from which the
Company's Tekware products are made offer significant advantages, such as rapid
drying and resistance to shrinking, tearing, fading, staining, mildewing and
wrinkling.
Ascentials
Ascentials is comprised of the Company's line of technical apparel and
equipment accessories, including a range of lumbar packs, cargo bags, T-shirts,
high-performance thermal underwear, hats and gloves/mittens, which have been
tested extensively in extreme conditions by the Company's team of elite
athletes. In 1998 the Company introduced ballistics luggage and other
accessories targeted at a wide audience of hikers, students and travelers.
Snowsports Gear
The Company's snowsports gear is designed for backcountry skiing and
snowboarding. The North Face(R) snowsports gear products include parkas,
jackets, anoraks, ski pants, ski suits, gloves and other accessories. These
products offer technically advanced features for weather and water protection,
freedom of movement and appropriate ventilation. Other features include the use
of tough, abrasion-resistant fabrics, like Kevlar, that are strategically
overlaid or inset for added protection in areas of excessive wear and tear, such
as the shoulders and elbows. While the design of these products is primarily
geared toward extreme users, they have become increasingly popular among
recreational and more casual users.
Rugged Footwear
The Company entered into the rugged footwear market in 1999 with The North
Face branded products in two key categories: Trail Running and Trekking. The
Trekking category is the largest category of the rugged footwear business, while
the Trail Running category is the fastest growing segment.
RESEARCH, DESIGN AND DEVELOPMENT
The Company's goal is to offer the most technically advanced products in its
industry and to establish the industry standard for quality and performance in
each of the Company's product categories. To remain on the leading edge of
product design and materials technology, the Company evaluates trends, monitors
the needs and desires of consumers and works internally and with its suppliers
to develop new materials and products and to enhance product designs.
The Company regularly reviews its product lines and actively seeks input from
a variety of sources, including elite athletes, retailers, consumers and
suppliers. At the forefront of the product development effort is a product
development team, which includes experts in textiles and design engineering. The
product development team works primarily with staff designers and also with
outside contract designers.
The product development cycle for a new products, from initial design to
product introduction, is generally 12 to 18 months. New designs are tested by
the Company's teams of climbers, explorers and extreme skiers and by in-house
and independent laboratories, as well as by other Company personnel. The
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North Face maintains an in-house materials testing laboratory to perform a
variety of tests, including water resistance, air permeability, tear strength
and abrasion resistance.
MARKETING AND PROMOTION
The Company's goal is to increase brand awareness by projecting a high-
quality, technically sophisticated and authentic image that appeals to core
professionals and serious outdoor enthusiasts as well as to a broader segment of
consumers. The Company conveys such an image by featuring world-class climbers,
explorers, skiers and snowboarders using the Company's products on high
altitude, polar or backcountry expeditions. The Company's marketing materials
utilize language and images that, while directed to the extreme athlete, appeal
to a broader segment of consumers.
The Company believes that it has obtained a high level of brand awareness and
loyalty from the extreme users of its products. In order to bolster brand
loyalty and to further enhance its authentic image, the Company has supported
selected outdoor sporting events, high altitude and polar expeditions and the
teams of climbers, explorers and skiers it sponsors. The North Face(R) has been
a supplier of outerwear and equipment to many of the world's most challenging
expeditions for over 30 years. A small sampling of these expeditions includes
the 1969 Arctic Institute of North America Altitude Expedition; the 1978
American Woman's Himalayan Expedition; the 1987 International K-2 Expedition;
the 1989 Trans-Antarctica Expedition; the 1992 American Gasherbrum IV
Expedition; the 1994 Sagmartha Environmental Expedition; the 1995 Ak-Su
Kyrgyzstan Expeditions; the 1996 Shipton Spire Expeditions; the 1997 Women's
Morocco Expedition; the 1997 Queen Maud Land Expedition; the 1998 Mt. McKinley
Women's Expedition for Survivors of Breast Cancer; the 1998 Baffin Island
Expedition; and the 1999 Trango Tower Expedition.
Recognizing that the product choices of professional athletes influence
consumer preferences, the Company employs or sponsors several world-class
professional climbers, including Conrad Anker, Greg Child, Lynn Hill, Pete
Athans, Peter Croft, Yuji Hirayama, Jay Smith, and Katie Brown; extreme skiers
Scot Schmidt, Rick Armstrong, Rob DesLauriers, Kasha Rigby and Jeremy Nobis; and
backcountry snowboarders Jim Zellers, Jay Nelson and Megan Pishke. These
athletes are integral to the Company's product research, design and testing. In
addition, they participate in promotional activities on behalf of the Company,
including product demonstrations and appearances at exhibitions, tradeshows,
retailer clinics and promotional events, and appear in photographs to promote
the Company in catalogs, advertisements, posters and videos. The Company also
has relationships with the Professional Ski Instructors of America, the National
Ski Patrol, and the American Association of Snow Board Instructors, pursuant to
which each of these organizations endorses the Company's snowsports gear.
The Company's advertising campaign has consisted of a two-tiered strategy. The
first tier is a national campaign that consists of print advertising in targeted
vertical outdoor and snowsport publications (i.e., Outside, Backpacker, Rock and
Ice, Climbing, National Geographic Adventure, Skiing, and Powder). The second
tier is a regional campaign that consists of TV, radio, outdoor and local print
in key regional markets (i.e., Denver, Seattle, New York, Boston, Chicago and
Portland).
In December 1999 and January 2000, the Company made its national TV
programming debut with The North Face Expeditions, five one-hour documentary
specials hosted by rock star Sting and featuring The North Face sponsored
athletes and expeditions. The trips documented included climbing Mount Everest,
big wall climbing in the Himalayas, rock climbing in Madagascar, heli-skiing in
India, and back-country skiing in Pakistan. These inspirational stories followed
the athletes as they explored the unknown and faced challenges.
The North Face and Chevy Trucks have formed a marketing partnership that
includes future product opportunities. At the Detroit Auto Show in January
2000, Chevy Trucks unveiled the show vehicle, The Avalanche, The North Face
Edition. The Company worked with Chevrolet in developing this truck with
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unique seat material and trim with The North Face logo, unique floor mats,
exterior The North Face logo, The North Face summit pods that attach to the back
of the front bucket seats, and TNF water duffel bags designed exclusively for
the rear cargo bed.
SALES AND DISTRIBUTION
The Company currently sells its products primarily to a select group of
specialty outdoor, premium-sporting goods and major outdoor specialty retail
customers, such as Recreational Equipment, Inc. ("REI") and Eastern Mountain
Sports, Inc. To preserve the integrity of The North Face(R) brand identity, the
Company has historically limited its distribution to retailers that market
products that are consistent with the Company's quality standards and that
provide a high level of customer service and technical expertise.
Wholesale Sales
The Company's wholesale customers currently consist, primarily, of specialty
outdoor product retailers. The Company sells its products to approximately 1,500
wholesale customers in the United States, representing an estimated 2,300
storefronts. In Europe, the Company sells to approximately 1,200 wholesale
customers, representing an estimated 1,600 storefronts, and in Canada, the
Company sells its products to approximately 300 wholesale customers,
representing an estimated 500 storefronts.
The Company's products are sold to wholesale customers in the United States by
employee sales representatives, and in Canada and Europe by both employee and
independent sales representatives. Sales representatives conduct in-store
clinics to educate sales personnel on the technical qualities and uses of the
Company's products, provide customer support, review each retail account on a
periodic basis and assist the Company in forecasting levels of product needs.
Independent sales representatives in Canada and Europe are paid on a commission
basis.
The Company maintains a specialty retailer and customer service department to
handle orders and consumer inquiries as well as a warranty department to handle
the repair or replacement of defective or damaged merchandise. Most of the
Company's products are covered by a lifetime warranty, with the exception of
footwear and those products sold through the Company's outlet stores.
Because the Company expects its wholesale business to constitute an increasing
percentage of total sales going forward as compared to its sales in Company-
owned retail stores, overall gross margins may decline in the future. In
addition, sales returns in excess of anticipated amounts could have an adverse
effect on operations.
Summit Shops
In 1996, the Company introduced Summit Shops, which are year-round concept
shops dedicated to The North Face(R) products located within certain of its
customers' stores. Summit Shops are intended to increase sales at retailers
carrying the Company's products by offering an attractively designed,
professionally merchandised, dedicated selling space featuring a wide range of
The North Face(R) products. The objectives of the Summit Shops are to: (i)
provide year-round floor space within the Company's customers' stores that is
dedicated to The North Face(R) products; (ii) increase the Company's control
over the merchandising and appearance of the Company's products at the retail
level; (iii) create an increased awareness of the Company's products among
consumers; (iv) modernize the specialty retailers' approach to merchandising The
North Face(R) products; (v) improve the Company's ability to monitor its
customers' sales; and (vi) maintain a consistent product assortment and
marketing presentation at the retail level. The Company has designed the
appearance of each Summit Shop, including its fixtures, merchandise displays,
descriptive placards and graphic images, to increase consumer awareness of The
North Face(R) brand identity. The Company also provides sales and product
training for the retailers' personnel who work in the Summit Shops.
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At the end of 1999, there were a total of 461 Summit Shops. At the end of
1998, there were a total of 394 Summit Shops. These shops ranged in size from
140 to 2500 square feet and averaged approximately 425 square feet.
Company Operated Retail Stores
The Company's eight retail stores are an important component of its marketing
and product development strategies and provide a targeted environment in which
to merchandise and sell The North Face(R) product lines. Located primarily in
high-end retail shopping districts and regional shopping malls, these stores
carry a broad range of The North Face(R) products and a small offering of
complementary products from other manufacturers. The Company believes that as a
result of its ability to control the visual presentation and product assortment
in its retail stores, these stores help build brand awareness and introduce
consumers to a broad range of The North Face(R) products. These stores also
provide a means for the Company to test the appeal of new products and
merchandising techniques. By working closely with store personnel, many of whom
are outdoor enthusiasts, the Company also obtains customer feedback that
influences product design and development.
The Company's retail stores are located in the following cities: Denver and
Boulder, Colorado; Seattle, Washington; Oakbrook and Chicago, Illinois; and San
Francisco, Costa Mesa and Palo Alto, California. Although the Company considers
its retail stores to be an important aspect of its brand name strategy, the
Company currently has no plans to open additional retail stores.
Company Operated Outlet Stores
Outlet stores serve as an effective means of liquidating discontinued and
excess wholesale merchandise. The Company operates fourteen North American
outlet stores, located in the following cities: Berkeley, San Francisco,
Carlsbad, Desert Hills, and San Jose, California; Freeport, Maine; Woodbury, New
York; Bend, Oregon; Birch Run, Michigan; Wrentham, Massachusetts; San Marcos,
Texas; Dawsonville, Georgia; Cookstown (Toronto) and Quebec, Canada. In
addition, the Company operates one outlet in Switzerland and opened an
additional outlet in Italy in January, 2000. The Company has no plans to open
any additional outlets in 2000.
Distribution
In May 1998, the Company initiated outsourcing of distribution for its
business in Canada. In July 1999, the Company outsourced its distribution in the
U.S. and experienced significant delays and difficulties during the Fall 1999
shipping period. As a result, in December 1999, the Company terminated its
contract with its original third party distributor and a new provider was
engaged for its U.S. distribution. The new provider began integrating systems,
procedures and personnel during December 1999 and the beginning of January 2000.
There can be no assurance that the Company will be able to resolve its
distribution difficulties or that third-party outsourcing partners will be able
to service the Company's customers adequately in the future. In addition, the
costs of outsourcing may be greater than anticipated.
In Europe, the Company operates a distribution and administrative facility in
Port Glasgow, Scotland.
All the Company's products are shipped by third-party carriers.
Fluctuations in Sales
Sales of the Company's products historically have fluctuated due to conditions
beyond the Company's control, such as weather, economic cycles, and other
conditions that affect consumer spending. The Company, like other retailers,
also is subject to seasonal and quarterly fluctuations. 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, the timing of
international licensing and royalty contracts, advertising and marketing
expenditures, increases in the number of employees and overhead, and costs
associated with new growth and new store openings.
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INTERNATIONAL OPERATIONS
International sales accounted for approximately 28%, 25% and 26% of the
Company's net sales in 1999, 1998 and 1997, respectively. The Company utilizes
an integrated worldwide approach to product development, sourcing and marketing
in order to reduce costs, achieve consistent Company-wide quality standards and
create a unified global brand. By offering substantially the same product lines
and promoting the same image in catalogs, advertising and point of purchase
materials, the Company has positioned The North Face(R) brand in Europe to be
consistent with the brand image in the United States and Canada.
The Company's business is subject to the risks generally associated with doing
business abroad. These risks include adverse fluctuations in currency exchange
rates (particularly those of the U.S. dollar against certain foreign
currencies), changes in import duties or quotas, the imposition of taxes or
other charges on imports, the impact of foreign government regulation, political
unrest, disruption or delays of shipment and changes in economic conditions in
countries in which the Company's suppliers are located.
Europe
The Company has operated in Europe for more than 15 years and believes that it
is recognized as a leader in the design, marketing and distribution of
technically sophisticated outdoor apparel and equipment. The Company's European
operations are headquartered in Port Glasgow, Scotland and the Company maintains
a Sales and Marketing office in Volpago del Montello, Italy. Its primary markets
are the United Kingdom, Germany, Italy, France, Spain, Sweden, Denmark and The
Netherlands. In May 1998, the Company closed its manufacturing operation in its
Scotland facility and converted the space to warehousing and distribution
facilities to support its European markets.
Canada
The Company's Canadian operations are headquartered in Quebec, Montreal. Since
early 1995, the Company has sold its products in Canada through independent
sales representatives to customers located primarily in British Columbia,
Ontario, and Quebec. Prior to 1995, the Company's products were sold in Canada
through a licensee. In May 1998, the Company consolidated certain administrative
and customer service functions of its Canadian operations within the United
States, and outsourced to a third party the Canadian distribution function.
Asia
In Japan and Korea, substantially all the Company's trademarks are owned by
Kabushiki Kaisah Goldwin ("Goldwin"), a leading manufacturer and distributor of
high-end sports and outdoor apparel and equipment. The North Face(R) is a
leading high-performance outdoor brand in Japan. The Company and Goldwin work
closely together in the areas of product design, sourcing and brand imaging. The
Company believes that Goldwin shares the Company's strategy of building a
unified global brand. The Company benefits from this relationship by selling
certain products to Goldwin and by charging an administrative fee for orders
Goldwin adds to the Company's production. In Hong Kong and Macau, the Company's
products are sold through a licensee, Mitsui & Co., Ltd. ("Mitsui"). In China
and Nepal, the Company's products are sold through a licensee, Youngone
Corporation, and, in Thailand, the Company's products are sold through another
licensee, Thai Outdoor Sports. The Company plans to continue to pursue sales
opportunities in other Asian and Pacific Rim countries.
SOURCING AND MANUFACTURING
The Company sources its products from approximately 40 unaffiliated
manufacturers primarily located in Hong Kong, China, Taiwan, Korea, Indonesia,
Bangladesh, Thailand, the United States, and Portugal. The Company believes that
it enjoys good relationships with its suppliers and manufacturers and has the
ability to secure the necessary capacity to meet any forseeable increase in
demand for its products.
To ensure that products manufactured for the Company are consistent with its
quality standards, the Company manages all key aspects of the production
process, including establishing product specifications, selecting the materials
to be used and the suppliers of such materials, and negotiating the prices for
such
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materials. The Company maintains a staff of quality control specialists, which
conducts on-site inspections throughout the production process, including at the
mills before the fabrics are shipped, at the factories as the products are made
and, finally, just before the finished products are shipped. In connection with
these quality control efforts, in 1999 the Company opened an office in Hong
Kong, which management believes will facilitate more rapid product development,
prototyping and manufacturing and allow the Company to achieve higher levels of
quality control over products manufactured in Asia.
The Company has no long-term contracts with its manufacturing sources, and it
competes with other companies for production facilities and import quota
capacity. None of the manufacturers used by the Company produce the Company's
products exclusively. The Company has occasionally received, and may in the
future receive, shipments of products from manufacturers that fail to conform to
the Company's quality control standards. Any disruption in the Company's ability
to obtain manufacturing services could have a material adverse effect on the
Company's business.
The Company requires its independent manufacturers to operate in compliance
with applicable laws and regulations. Although the Company's internal and vendor
operating guidelines promote ethical business practices and the Company's
sourcing personnel periodically visit and monitor the operations of its
independent manufacturers, the Company does not control these vendors or their
labor practices. The violation of labor or other laws by an independent
manufacturer of the Company, or the divergence of an independent manufacturer's
labor practices from those generally accepted as ethical in the United States,
could result in adverse publicity for the Company and could have a material
adverse effect on the Company.
Certain important materials used in the Company's products are only available
from one or a limited number of independent suppliers. The Company's future
success may depend upon the Company's continued ability to purchase supplies of
technically advanced textiles developed by third-parties. There can be no
assurance that the Company will be able to obtain adequate supplies of
technically advanced materials in the future or that favorable purchase terms or
other arrangements with suppliers (such as suppliers' funding of development
costs and co-operative advertising arrangements) will continue.
The Company imports a significant portion of its merchandise from contract
manufacturers located in the Far East, including China. From time to time, the
U.S. government has considered imposing punitive tariffs on apparel and other
exports from China. The imposition of any such tariffs could disrupt the supply
of the Company's products, which could have a material adverse effect on the
Company's results of operations.
MANAGEMENT INFORMATION SYSTEMS
The Company's management information and electronic data processing systems
consist of a full range of financial, distribution, merchandising, forecasting
and retail systems. During 1999, the Company successfully addressed Year 2000
issues. There has been no business interruption due to the Year 2000 issue. In
December 1999, the Company implemented the first phase of its new Enterprise
system. This implementation included data conversion, software modification,
interfaces, setup, and training. During the course of 2000, additional
functionality will be introduced and final major enhancements completed. The
Company believes that expected improvements made in 2000 and beyond, along with
routine upgrades and other enhancements, should be sufficient to accommodate the
Company for the foreseeable future. However, there can be no assurance that any
system implementation or system upgrades will be completed in a timely manner,
will be adequate to meet the needs of the Company, and will not strain the
Company's financial resources.
10
<PAGE>
COMPETITION
The markets for the Company's products are highly competitive, with
competition based primarily on price, quality, brand name and service. The
recent growth in the outdoor apparel and equipment markets has encouraged the
entry of many new competitors as well as increased competition from established
companies. Although management believes that it does not compete directly with
any single company with respect to its entire range of products, the Company
does have significant competitors within each product category. In addition, as
the Company expands its product lines and offers products at a broader range of
price points, it will likely come into competition with additional outdoor
apparel and equipment companies.
Further, the Company has recently begun experiencing increased competition
from major brand-name apparel companies who are attempting to duplicate the
Company's styles, particularly in the area of functional sportswear, outerwear
and footwear. These competitors are larger and have significantly greater
financial, marketing and other resources than the Company. While the Company
believes that it has been able to compete successfully because of its heritage,
brand image and recognition, the broad range and quality of its products, and
its selective distribution and customer service policies, including the lifetime
warranty that most of its products carry, there can be no assurance that the
Company will be able to maintain or increase its market share in the future.
Consumer demand for the Company's products may be adversely affected, if
consumer interest in outdoor activities does not grow or declines. In addition,
some competitors may have more resources to advertise and market their products.
If the Company is unable to respond successfully to changes in consumer
preferences, or if consumer preferences shift toward competing products or away
from the Company's product categories altogether, the Company's business would
be adversely affected. The Company cannot assure future growth or consumer
demand for its products. If consumer interest in outdoor activities grows, more
competitors, who are better financed, may enter the market.
TRADEMARKS AND LICENSING
The Company considers its trademarks to be among its most valuable assets
and has numerous trademark registrations in the United States, Europe and other
foreign countries. Among the Company's trademarks are The North Face(R), 'N'
Design logo(R), Remote Terrain Gear(R), Extreme Gear(R), A5 and Design(R),
Expedition System(R), Extreme(R), Tekware(R), Steep Tech(R), Quick Pitch(R),
Hydrenaline(TM), Search and Rescue(R), VaporWick(R), Hydroseal(R), UltraWick(TM)
and Windy Pass(R). Because of the popularity of many of the Company's products
and their strong brand identity and distinctive design, The North Face(R) brand
in recent years has been subject to unauthorized copying and mislabeling of
imitation goods. The Company maintains an aggressive program of trademark
enforcement and cooperation with domestic and foreign customs officials and
other authorities, and will continue to vigorously defend its trademarks against
infringement. There is no assurance that the Company's efforts to stop or reduce
the copying or counterfeiting of its trademarks or products will be successful,
that the Company's trademarks will not violate the proprietary rights of others,
or that the Company will be able to avoid or successfully defend challenges to
its trademarks or other intellectual property in the United States or abroad.
The Company has licensed its trademarks to Mitsui, which markets Company-
designed products under The North Face(R) name in Hong Kong and Macau. In 1998,
the Company entered into trademark license agreements with Youngone Corporation
for China and Nepal. In addition, in Japan and Korea substantially all the
Company's trademarks are owned by Goldwin. In 1999, the Company entered into a
trademark license agreement with Thai Outdoor Sports for Thailand.
11
<PAGE>
EMPLOYEES
As of December 31, 1999, the Company had 429 non-retail store employees, of
which 272 were employed in the United States, 124 in Europe, 7 in Canada and 16
in Hong Kong. In addition, the Company had 430 retail store employees. None of
the employees are currently covered by a collective bargaining agreement. The
Company believes that its relations with its employees are good.
Item 2. Properties.
The principal executive and administrative offices of the Company are located
at 2013 Farallon Drive, San Leandro, California. The general location, use and
approximate size of the Company's principal properties, all of which, other than
the facility in Scotland, are leased, are set forth below:
<TABLE>
<CAPTION>
LOCATION USE APPROXIMATE SIZE
- ---------------------- ------------------------------------ -------------------
<S> <C> <C>
San Leandro, California Executive and administrative offices 151,085 square feet
Vacaville, California Distribution Center (subleased) 250,445 square feet
San Francisco, California Retail store 12,371 square feet
Palo Alto, California Retail store 10,700 square feet
Costa Mesa, California Retail store 7,083 square feet
Seattle, Washington Retail store 6,504 square feet
Denver, Colorado Retail store 17,000 square feet
Boulder, Colorado Retail store 4,342 square feet
Chicago, Illinois Retail store 15,192 square feet
Oakbrook, Illinois Retail store 4,000 square feet
Berkeley, California Outlet 14,150 square feet
San Francisco, California Outlet 10,000 square feet
Freeport, Maine Outlet 10,070 square feet
Quebec, Canada Outlet 3,089 square feet
Cookstown, Canada Outlet 4,500 square feet
Woodbury, New York Outlet 3,780 square feet
Birch Run, Michigan Outlet 5,500 square feet
Bend, Oregon Outlet 5,940 square feet
Carlsbad, California Outlet 6,428 square feet
Wrentham, Massachusetts Outlet 6,252 square feet
Dawsonville, Georgia Outlet 5,590 square feet
Desert Hills, California Outlet 6,536 square feet
San Jose, California Outlet 8,343 square feet
San Marcos, Texas Outlet 3,748 square feet
Carbondale, Colorado Former administrative office 3.5 acres
Carbondale, Colorado Land held for sale 24 acres
Port Glasgow, Scotland Administrative office and 77,200 square feet
distribution center
Quebec, Canada Administrative office 5,868 square feet
Hong Kong Administrative office 9,045 square feet
Kansas City, MO Distribution Center 238,659 square feet
Volpago del Montello, Italy Sales and marketing office 12,600 square feet
Boulder, Colorado Sales office 4,300 square feet
Poolesville, Maryland Sales office 2,629 square feet
Boulder, Colorado La Sportiva USA administrative office 8,000 square feet
and distribution center
New York, New York Showroom 2,000 square feet
Medriso, Switzerland Outlet 646 square feet
Cornuda, Italy Outlet 2,800 square feet
</TABLE>
12
<PAGE>
Item 3. Legal Proceedings.
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 provided for a
tender offer for all the Company's outstanding stock (other than shares held by
James G. Fifield, former President and Chief Executive Officer) at $17.00 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 it was reevaluating the transactions contemplated by the
Transaction Agreement (the "Transactions"). On September 1, 1999, the
Transaction Agreement was terminated and the Company agreed to pay LGP $2.2
million to reimburse LGP for expenses associated with the terminated Transaction
Agreement.
In 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 alleged
that the Transactions were unfair and inadequate to the Company's shareholders
and charged the defendants with self-dealing and breach of fiduciary duties. The
complaints generally requested injunctive relief to prevent the consummation of
the Transactions, and sought other remedies in the event the Transactions were
completed. The Company has filed a motion to dismiss these claims.
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 consolidated action generally alleges
that the Company made false and misleading statements about its financial
results from January 22, 1998 through April 16, 1999. The Company has filed a
motion to dismiss these claims.
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 alleged 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 was named solely as a
nominal defendant, against whom the plaintiff sought no recovery. The Alameda
Superior Court granted the Company's motion to dismiss the derivative complaint
with leave to amend.
In December 1999, a case, FDX Supply Chain Services, Inc. v. The North Face,
Inc., No. 99-2569, was filed in federal district court in the district of
Kansas. The dispute arises out of contract in which FDX agreed to provide
warehouse services to the Company, fill orders and ship the Company's products
to customers nationwide from the Company's warehouse facility in Lenexa, Kansas.
The Company terminated the contract in December 1999. The lawsuit alleges
damages of $5.2 million for breach of contract. The Company has filed
counterclaims seeking $25 million in damages, alleging that the damage
limitation provisions of the agreement should not apply because of FDX's
misrepresentations inducing the Company to enter into the agreement and FDX's
gross failure to perform. FDX has moved to dismiss all the Company's
counterclaims because of, inter alia, the damage limitation provisions of the
agreement.
Item 4. Submission of Matters to a Vote of Security Holders.
None.
13
<PAGE>
PART II
Item 5. Market for Registrants Common Equity and Related Stockholder Matters.
The Company's Common Stock is listed on the NASDAQ National Market and trades
under the symbol "TNFI." As of March 28, 2000, there were approximately 185
stockholders of record. Information concerning certain dividend restrictions
under the Company's credit facility is set forth in "Management's Discussion and
Analysis of Financial Condition and Results of Operation-Liquidity and Capital
Resources" below. The Company does not anticipate paying any dividends in the
foreseeable future.
Following are the high and low closing prices for the Company's Common Stock
for each of the four quarters of 1999, 1998 and 1997:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1999 HIGH LOW
---------------------------- ------ ------
<S> <C> <C>
First Quarter $16.63 $11.63
Second Quarter $12.44 $ 8.63
Third Quarter $11.63 $ 5.94
Fourth Quarter $ 6.94 $ 4.06
YEAR ENDED DECEMBER 31, 1998 HIGH LOW
---------------------------- ------ ------
First Quarter $28.38 $20.75
Second Quarter $26.13 $20.50
Third Quarter $24.25 $ 9.50
Fourth Quarter $14.38 $ 9.50
YEAR ENDED DECEMBER 31, 1997 HIGH LOW
---------------------------- ------ ------
First Quarter $21.75 $16.00
Second Quarter $19.50 $13.63
Third Quarter $26.88 $18.50
Fourth Quarter $27.63 $18.75
</TABLE>
14
<PAGE>
Item 6. Selected Consolidated Financial Data
THE NORTH FACE, INC.
SELECTED CONSOLIDATED FINANCIAL DATA
(In thousands, except per share data)
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
----------------------------------------
1995 1996 1997 1998 1999
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Net Sales $121,534 $158,226 $203,247 $247,096 $ 237,977
Operating income (loss) 10,524 13,544 16,133 10,686 (82,997)
Income (loss) before provision for taxes 5,583 9,275 13,146 5,843 (97,938)
Net income (loss) 3,485 5,664 7,955 3,592 (100,481)
Net income (loss) per share:
Basic $ 1.07 $ 0.84 $ 0.70 $ 0.30 $ (7.90)
Diluted $ 0.47 $ 0.62 $ 0.69 $ 0.29 $ (7.90)
Weighted average shares outstanding:
Basic 3,249 6,742 11,297 12,121 12,723
Diluted 7,434 9,183 11,578 12,485 12,723
AS OF DECEMBER 31,
---------------------------------------
1995 1996 1997 1998 1999
-------- -------- -------- -------- --------
BALANCE SHEET DATA
Working capital $ 22,668 $ 51,799 $ 61,995 $ 68,546 $ (10,040)
Total assets 84,508 110,587 167,449 232,644 187,539
Short-term debt 4,838 95 25,734 55,910 88,294
Long-term debt 36,388 135 5,177 5,360 1,174
Stockholders' equity 20,568 86,499 100,141 123,210 25,489
</TABLE>
15
<PAGE>
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations
THE NORTH FACE, INC.
SUMMARY FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
AS A PERCENTAGE OF SALES
YEARS ENDED DECEMBER 31, (EXCEPT FOR INCOME TAXES)
-------------------------------- -------------------------------
1997 1998 1999 1997 1998 1999
--------- --------- ---------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
Net sales $203,247 $247,096 $ 237,977 100.0% 100.0% 100.0%
Gross profit 92.483 111,962 83,691 45.5% 45.3% 35.2%
Operating expenses 76,350 101,276 166,688 37.6% 41.0% 70.0%
Operating income (loss) 16,133 10,686 (82,997) 7.9% 4.3% (34.9%)
Interest expense (2,238) (4,907) (8,307) (1.1%) (2.0%) (3.5%)
Other income (expense), net (749) 64 (6,634) (0.4%) -- (2.8%)
Income (loss) before provision for taxes 13,146 5,843 (97,938) 6.5% 2.4% (41.2%)
Provision for income taxes 5,191 2,251 2,543 39.5% 38.5% (2.6%)
Net income (loss) $ 7,955 $ 3,592 $(100,481) 3.9% 1.5% (42.2%)
</TABLE>
The following table sets forth the Company's net sales by distribution channel
as well as domestic versus international net sales:
FOR THE YEARS ENDED DECEMBER 31,
--------------------------------
1997 1998 1999
---------- --------- ---------
Wholesale customers $168,543 $202,747 $184,284
Company-operated retail 34,704 44,349 53,693
-------- -------- --------
Total net sales $203,247 $247,096 $237,977
======== ======== ========
United States $150,798 $186,443 $172,369
International 52,449 60,653 65,608
-------- -------- --------
Total net sales $203,247 $247,096 $237,977
======== ======== ========
GENERAL
In April 2000, the Company executed the VF Merger Agreement providing for the
acquisition of all the outstanding shares of the Company by VF for $2.00 per
share. As a first step in the transaction, a subsidiary of VF will commence a
cash tender offer for all the outstanding shares of the Company at $2.00 per
share. The offer will be conditioned, among other things, upon a majority of the
issued and outstanding shares being tendered and not withdrawn prior to the
expiration of the offer. Following successful completion of the tender offer,
the VF subsidiary will be merged into The North Face and each outstanding share
will be converted into the right to receive $2.00 in cash.
The Company's difficulties in meeting its loan agreement covenants and
financing needs, its losses from operations, its negative working capital
position and the scheduled expiration of its credit facility on April 15, 2000
have raised substantial doubt about its ability to continue as a going concern.
As a consequence, if, for any reason, the tender offer and merger contemplated
by the VF Merger Agreement are not
16
<PAGE>
consummated, the Company will be required to consider seeking protection under
Chapter 11 of the Bankruptcy Code.
Investments in La Sportiva Businesses. On July 2, 1998, the Company acquired a
20% interest in La Sportiva S.p.A. (formerly La Sportiva S.r.l.), a premier
manufacturer and distributor of trekking, mountaineering, and climbing footwear
located in Ziano di Fiemme, Italy, for a purchase price of $2.5 million, and
incurred direct costs of approximately $0.6 million, for a total purchase price
of approximately $3.1 million. The Company has accounted for its 20% interest
in La Sportiva S.p.A. under the equity method. The purchase price of La Sportiva
S.p.A. exceeded the Company's proportionate share of the net assets acquired by
$2.4 million, which was recorded as goodwill and has been amortized on a
straight line basis over 40 years.
In a related transaction on July 2, 1998, the Company acquired 100% of the
outstanding common stock of La Sportiva USA, (which owns the exclusive rights to
distribute footwear for La Sportiva S.p.A. in the United States) for a purchase
price of approximately $3.9 million. The purchase price includes $3.1 million,
which was paid in 133,335 shares of the Company's Common Stock and $0.8 million
in cash to be paid to the former owners of La Sportiva USA over five years.
The purchase price of La Sportiva USA exceeded the fair value of the net assets
acquired by approximately $3.8 million, which was recorded as goodwill and is
being amortized on a straight line basis over 40 years. The acquisition was
recorded under the purchase method of accounting. The Company has consolidated
the results of La Sportiva USA beginning on July 2, 1998.
On January 13, 2000, the Company sold its 20% interest in La Sportiva S.p.A.
to the majority shareholders for $2.3 million. In addition, the Company is
attempting to sell La Sportiva USA.
Products. In 1997, sales of outerwear, equipment, Tekware, snowsport gear,
Ascentials, and other products represented approximately 48%, 20%, 12%, 9%, 6%
and 5%, respectively, of net sales. In 1998, sales of outerwear, equipment,
Tekware, snowsport gear, Ascentials, and other products represented
approximately 50%, 15%, 13%, 9%, 8% and 5%, respectively, of net sales. In 1999,
sales of outerwear, equipment, Tekware, footwear, snowsports gear, Ascentials,
and other products represented approximately 48%, 16%, 13%, 7%, 7%, 6%, and 3%,
respectively, of net sales.
Distribution. The North Face is a global company with operations in the
United States, Europe and Canada. The Company sells its products to a select
group of mountaineering, backpacking and skiing retailers, premium sporting
goods retailers and major outdoor specialty retail chains. The Company sells its
products to approximately 3,000 wholesale customers representing approximately
4,400 storefronts. Additionally, the Company's products are sold under
trademark licensing agreements in Hong Kong, China, Thailand, Nepal and Macau.
In addition, in Japan and Korea substantially all the Company's trademarks are
owned by Goldwin.
Order Cycle. The North Face currently is engaged primarily in a two season
wholesale business, Spring (January to June) and Fall (July to December).
Wholesale customers place preseason orders, which generally are non-cancelable,
with the Company from one to eight months prior to the beginning of the season.
Reorders are placed throughout the season and products are shipped based on
availability. Preseason orders have typically accounted for approximately 75% of
total sales to wholesale customers.
Production Cycle. Based on preseason orders and expected reorders, the
Company places Buy 1 production orders with its contract manufacturers
representing approximately 50% - 60% of the season's purchases six to seven
months before the beginning of the season. Four months prior to the beginning
of the season, the Company places Buy 2 to cover the remaining demand. Fixed
production prices are agreed upon approximately three months prior to placement
of such production orders. As a result, the Company's production costs are
relatively predictable one season in advance of the delivery of products.
17
<PAGE>
Management of Inventory. Success in the technical outdoor apparel industry is
dependent in part, on a company's ability to manage its inventory of merchandise
in proportion to the demand for such merchandise. If the Company miscalculates
the consumer demand for its products or its ability to execute customer orders
in a timely manner, it may be faced with significant excess inventory and excess
fabric for some products and missed opportunities for others. Weak sales and
resulting markdowns and/or write-offs could cause the Company's profitability to
be significantly impaired and may have a material adverse effect on the
Company's financial condition and results of operations.
Summit Shops. At the end of 1998, the Company had 394 Summit Shops and, at
the end of 1999, the Company had 461 Summit Shops. The Company's current Summit
Shop program provides a selection of Summit Shop formats, each varying in size
and design in order to match Summit Shop designs with the dealer's environment
and capacity. The Company does not plan to add more Summit Shops in 2000, but
may move existing shops from one dealer to another.
Company Operated Retail Sales. As of December 31, 1999, the Company operated
eight full-price retail stores and fifteen outlets. Subsequent to December 31,
1999, the Company opened one outlet store in Italy. The Company currently does
not plan to open any additional retail or outlet stores in 2000.
Government Sales. The North Face historically has produced tents and other
products for the U.S. government. The timing of these sales has fluctuated
historically and is dependent on the Company's obtaining and retaining contracts
from the government. The timing of the sales under these contracts can affect
the Company's quarterly results. Sales from government contracts totaled $0.3
million in 1999 compared to $1.8 million in 1998. There can be no assurance that
the Company will obtain any additional contracts to produce products for the
government in the future.
Year Ended December 31, 1999 Compared to Year Ended December 31, 1998
Net Sales. Net sales decreased by 3.7% to $238.0 million for 1999 compared to
1998.
Net sales to wholesale customers decreased by 9.1% to $184.3 million from
$202.7 million for 1999 compared to 1998. This decrease related primarily to
difficulties encountered by the Company when it outsourced its U.S. distribution
of products to a third party distributor. These difficulties included the
inability to ship the volume ordered by customers, resulting in cancellations in
Fall 1999, as well as inaccurate shipping, resulting in chargebacks and returns
from customers.
Company-operated retail and outlet store sales increased by 21.1% to $53.7
million from $44.3 million for 1999 compared to 1998. This increase was
attributable to the opening of six new outlet stores during 1999 as well as the
annualized revenue generated by the opening of five outlet stores during 1998.
Gross Profit. Gross profit as a percentage of net sales declined from 45.3%
in 1998 to 35.2% in 1999. This decrease is primarily due to the following: (1)
$11.8 million of chargebacks from customers resulting from shipping difficulties
discussed above; (2) $7.3 million of discounts offered in Fall 1999 as a result
of shipping difficulties discussed above; (3) inventory shrinkage at the newly
outsourced U.S. distribution center; (4) the write-down of excess inventory to
estimated realizable value; and, (5) lower retail margins resulting from
liquidation sales to dispose of excess inventory as well as a larger proportion
of retail sales coming from outlet business due to the outlet store openings in
1998 and 1999.
Operating Expenses. Operating expenses include selling, marketing, and general
and administrative expenses. Operating expenses increased by 64.6% to $166.7
million from $101.3 million for 1999 compared to 1998. The 1999 operating
expenses included the write down of the value of its trademark by $22.7 million
to reflect the estimated value based on the price reflected in the VF Merger
Agreement. The Company also
18
<PAGE>
wrote down the value of the goodwill for La Sportiva S.p.A. and La Sportiva USA
by $2.9 million to bring the balance to the estimated market value realization.
Furthermore, the increase in operating expenses is attributed to an increase of
$8.1 million related to the closure of the Company's Vacaville, California
distribution center, the start-up of its Lenexa, Kansas distribution center,
higher actual costs of distribution by the Company's third party distributor, a
$2.6 million accommodation made to two wholesale distributor customers, and $5.1
million higher media and promotional spending. In addition, depreciation and
amortization expense was $5.0 million higher in 1999 related to higher capital
spending on information systems and Summit Shops. The Company also incurred $8.4
million of higher executive and corporate administration expenses primarily due
to bank charges, legal fees, consulting fees, and severance costs in 1999
compared to 1998. In addition, product development costs and information system
costs were each $1.0 million higher in 1999. Due to the operating costs of
outlets opened in the second half of 1998 and in 1999, retail store costs were
$3.3 million higher in 1999 compared to 1998. Furthermore, European operating
costs were $1.9 million higher in 1999 primarily related to higher sales volume
in Europe.
Interest Expense. Interest expense increased to $8.3 million from $4.9
million for 1999 compared to 1998 primarily as a result of higher borrowings
during 1999 as the Company invested in upgrading its information systems,
opening new outlets and the expansion of the Summit Shop program, as well as
higher operating costs.
Other Expenses. During 1999, the Company incurred other expenses of $6.6
million, of which $4.1 million is related to the transactions contemplated by
the Transaction Agreement (see Note 4 of notes to Consolidated Financial
Statements). The remaining other expense was primarily related to foreign
exchange losses.
Provision For Income Taxes. Provision for income taxes as a percent of pretax
income or loss was approximately -2.6% for 1999 compared to 38.5% for 1998. This
change in the effective income tax rate reflects a full valuation allowance,
recorded in the fourth quarter, for the tax benefit related to net operating
loss carryforwards due to the uncertainty of future earnings.
Year Ended December 31, 1998 Compared to Year Ended December 31, 1997
Net Sales. Net sales increased by 21.6% to $247.1 million for 1998 compared
to 1997.
Net sales to wholesale customers increased by 20.3% to $202.7 million from
$168.5 million for 1998 compared to 1997. This increase related primarily to
increased unit shipments to the Company's new and existing wholesale customers
resulting from: (i) the introduction of new products, including new products
within the Outerwear and Tekware categories; (ii) significant growth in sales of
Outerwear products, which accounted for approximately 50% of total sales in 1998
compared to 48% in 1997; (iii) continued growth of existing products; (iv)
continued growth in international sales; and (v) the opening of new Summit Shops
during 1998.
Company-operated retail and outlet store sales increased by 27.8% to $44.3
million from $34.7 million for 1998 compared to 1997. This increase was
attributable to comparable store sales increases as well as the opening of five
new outlet stores: Quebec in February; Woodbury Common, New York in May; Bend,
Oregon in July; Carlsbad, California in August; and Birch Run, Michigan in
September.
Gross Profit. Gross profit as a percentage of net sales declined from 45.5%
in 1997 to 45.3% in 1998 primarily due to consignment sales with lower gross
margins, primarily in the third quarter.
Operating Expenses. Operating expenses include selling, marketing, and
general and administrative expenses. Operating expenses increased by 32.6% to
$101.3 million in 1998 from $76.3 million compared to
19
<PAGE>
1997, primarily as a result of increases in variable and fixed costs to support
the growth of the Company's business. In addition, during 1998, the Company
recorded charges of $1.7 million related to the closing of a manufacturing
facility in Scotland, the closure of its Canadian distribution facility and the
termination of its German sales agent. Also during 1998, the Company recorded
expenses of $5.7 million related primarily to (i) relocating a portion of its
corporate headquarters to Carbondale, Colorado; (ii) the realignment of its San
Leandro, California administrative facility; and (iii) establishing a Hong Kong
operation to facilitate its sourcing of products in Asia.
Interest Expense. Interest expense increased to $4.9 million from $2.2
million for 1998 compared to 1997 primarily as a result of higher borrowings
from the Company's $130 million credit facility established in September 1998 to
support expansion and working capital requirements.
Provision For Income Taxes. Provision for income taxes as a percent of pretax
income was approximately 38.5% for 1998 compared to 39.5% for 1997. This
decrease in the effective income tax rate reflects the application of tax
credits for research and developments activities as well as the mix of the
Company's pretax earnings among domestic and international operations, which are
subject to different tax rates.
20
<PAGE>
QUARTERLY DATA AND SEASONALITY
The following table sets forth certain unaudited financial data for each of
the Company's eight fiscal quarters ended December 31, 1999. The operating
results for any quarter are not necessarily indicative of results for any future
period.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1999
------------------------------------------
(In thousands) Q1 Q2 Q3 Q4
-------- --------- --------- ----------
<S> <C> <C> <C> <C>
Net sales $51,256 $ 54,596 $ 70,997 $ 61,128
Gross profit 23,347 23,915 29,522 6,907
Operating income (loss) (5,953) (10,614) (9,789) (56,641)
Net income (loss) (5,491) (7,585) (10,663) (76,742)*
Net income (loss) per share:
Basic $ (0.43) $ (0.60) $ (0.84) $ (6.02)
Diluted $ (0.43) $ (0.60) $ (0.84) $ (6.02)
Weighted average shares outstanding:
Basic 12,687 12,726 12,733 12,743
Diluted 12,687 12,726 12,733 12,743
</TABLE>
* Net loss in the fourth quarter of 1999 includes the recording of a $27.7
million valuation allowance for the tax benefit related to net operating loss
carryforwards due to the uncertainty of future earnings, a $25.6 million
impairment of intangible assets, and an $11.8 million adjustment to accounts
receivable and sales as a result of chargebacks from customers related to
inaccurate shipping.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1998
--------------------------------------
(In thousands) Q1 Q2 Q3 Q4
-------- --------- ------- --------
<S> <C> <C> <C> <C>
Net sales $45,704 $ 43,171 $93,645 $64,576
Gross profit 19,925 18,910 41,242 31,885
Operating income (loss) (400) ( 3,861) 13,368 1,579
Net income (loss) (843) ( 2,579) 7,229 (215)
Net income (loss) per share:
Basic $ (0.07) $ (0.22) $ 0.58 $ (0.02)
Diluted $ (0.07) $ (0.22) $ 0.57 $ (0.02)
Weighted average shares outstanding:
Basic 11,539 11,968 12,481 12,491
Diluted 11,539 11,968 12,752 12,491
</TABLE>
The Company, like other retailers, is subject to seasonal and quarterly
fluctuations. 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, the timing of international licensing and royalty
contracts, advertising and marketing expenditures, increases in the number of
employees and overhead to support growth and store opening costs.
LIQUIDITY AND CAPITAL RESOURCES
The Company has a revolving credit facility, which provides for borrowings up
to $115.0 million until December 31, 1999, and thereafter up to $100.0 million,
with the actual borrowings limited based on the amount of eligible receivables
and inventory. In addition, the credit facility includes a $15.0 million term
21
<PAGE>
note facility, which calls for $0.75 million to be repaid quarterly beginning on
October 1, 1999. The credit facility also includes certain financial covenants
and restrictions on new indebtedness and the payment of cash dividends. The
revolving line of credit and the term note facility bear interest at variable
rates (10.75% at December 31, 1999). This credit facility expired on March 31,
2000 and was amended in March 2000 to extend the expiration date to April 15,
2000.
The Company experienced significant liquidity problems in the third and
fourth quarters of 1999 as a result of the shipping difficulties encountered
when it outsourced its U.S. distribution of products to a third party
distributor. Late shipments significantly reduced the Company's sales,
profitability, and borrowing base.
As a result of the liquidity problems, the Company was charged an amendment
fee of $400,000 in November 1999 and paid an additional $575,000 extension fee
in December 1999 as the bank credit facility was not repaid in full by December
31, 1999. Also, the Company issued to the lender 202,597 warrants to purchase
the Company's common stock at an exercise price of $4.1825, which became
exercisable beginning on January 15, 2000, as the bank credit facility was not
repaid in full by that date.
In February 2000, the Company's bank credit facility was amended to increase
the borrowing limit to the available collateral plus $16.0 million and to
reflect certain changes in the financial and reporting covenants, among other
things. In addition, the interest rate increased by 0.5% under this amendment.
The Company was charged an amendment fee of $1.0 million which was paid upon the
signing of the amendment, and a deferred fee of $3.5 million, which was payable
on the earlier of (1) the sale of at least 51% of the outstanding shares or the
assets of the Company or (2) June 15, 2000. In April 2000, the Company and the
lender signed a waiver and agreement reducing the deferred fee from $3.5 million
to $876,000 for the transactions comtemplated by the VF Merger Agreement.
The Company estimates that its capital expenditures in 2000 will be
approximately $4.0 million. This amount will be used principally for the
upgrade of management information systems and updates of current Summit Shops.
In 1999, capital expenditures, including property and equipment financed through
capital leases, was $17.7 million, which was primarily used for investing in
Summit Shops, the upgrade of management information systems, the opening of
outlet stores and store upgrades, and general corporate purposes.
Impact of New Accounting Pronouncements
See Note 2 to the Consolidated Financial Statements for a discussion of the
impact of new accounting standards.
Item 7a. 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.
22
<PAGE>
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. At December 31, 1999, the Company held the
following foreign currency derivatives all of which expire during 2000:
<TABLE>
<CAPTION>
CURRENCY OPEN CONTRACT CURRENCY OPEN CONTRACT U.S. FAIR
(In thousands) VALUE DOLLAR VALUE VALUE
---------------------- ------------------ -----
<S> <C> <C> <C>
Contracts:
Euro 26,149 $26,312 $2,054
Swedish Kroners 16,746 2,048 76
Danish Kroners 17,300 2,567 222
Swill Francs 2,681 1,875 179
Canadian Dollars 4,900 3,393 8
------- ------
Total $36,195 $2,539
</TABLE>
In January 2000, the Company sold all open foreign exchange contracts at a net
gain of $1.1 million.
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 80 basis
points, the Company's results from operations and cash flows would have been
impacted by approximately $837,000.
Inflation Risk. The Company believes that the relatively moderate rates of
inflation over the last three 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.
23
<PAGE>
Item 8. Financial Statements and Supplementary Data.
THE NORTH FACE, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share amounts)
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
-----------------------------------
1999 1998 1997
----------- ---------- ----------
<S> <C> <C> <C>
Net sales $ 237,977 $247,096 $203,247
Cost of sales 154,286 135,134 110,764
--------- -------- --------
Gross profit 83,691 111,962 92,483
Operating expenses 166,688 101,276 76,350
--------- -------- --------
Operating income (loss) (82,997) 10,686 16,133
Interest expense (8,307) (4,907) (2,238)
Other income (expense), net (6,634) 64 (749)
--------- -------- --------
Income (loss) before provision for income taxes (97,938) 5,843 13,146
Provision for income taxes 2,543 2,251 5,191
--------- -------- --------
Net income (loss) $(100,481) $ 3,592 $ 7,955
========= ======== ========
Net income (loss) per share:
Basic $(7.90) $0.30 $0.70
Diluted $(7.90) $0.29 $0.69
Weighted average shares outstanding:
Basic 12,723 12,121 11,297
Diluted 12,723 12,485 11,578
</TABLE>
See Notes to the Consolidated Financial Statements
24
<PAGE>
THE NORTH FACE, INC.
CONSOLIDATED BALANCE SHEETS
(In thousands, except share and per share amounts)
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------
1999 1998
--------- --------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 11,824 $ 13,452
Trade accounts receivable, net 40,284 71,460
Other receivables 3,403 10,069
Inventories 82,365 57,457
Deferred taxes 247 3,661
Other current assets 6,696 8,820
-------- --------
Total current assets 144,819 164,919
Property and equipment, net 32,859 25,916
Trademarks and intangibles, net 7,454 33,975
Debt issuance costs, net 828 1,730
Other assets 1,579 6,104
-------- --------
Total assets $187,539 $232,644
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 47,506 $ 22,773
Accrued employee expenses 3,041 5,063
Short-term borrowings and current portion of long-term
debt and capital lease obligations 88,294 55,910
Income taxes payable 1,674 1,508
Other current liabilities 14,344 11,119
-------- --------
Total current liabilities 154,859 96,373
Long-term debt and capital lease obligations 1,174 5,360
Other long-term liabilities 5,375 7,000
-------- --------
Total liabilities 161,408 108,733
-------- --------
Minority interest 642 701
Commitments and contingencies (Notes 11, 12 and 15) -- --
Stockholders' equity:
Preferred stock, $1.00 par value-shares authorized 4,000,000;
none issued and outstanding -- --
Common stock, $.0025 par value-shares authorized 50,000,000;
issued and outstanding 12,744,000 and 12,494,000, respectively 32 31
Additional paid-in capital 103,920 101,049
Retained earnings (accumulated deficit) (78,821) 21,660
Accumulated other comprehensive income - cumulative translation
adjustments 358 470
-------- --------
Total stockholders' equity 25,489 123,210
-------- --------
Total liabilities and stockholders' equity $187,539 $232,644
======== ========
</TABLE>
See Notes to the Consolidated Financial Statements
25
<PAGE>
THE NORTH FACE, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
----------------------------------
1999 1998 1997
---------- --------- ---------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)............................................................. $(100,481) $ 3,592 $ 7,955
Adjustments to reconcile net income (loss) to cash used in operating
activities:
Depreciation and amortization............................................... 13,370 7,728 5,130
Loss on disposal of property and equipment.................................. 1,677 2,235 2,869
Adjustment to warranty accrual.............................................. 1,495 (90) (895)
Write down of trademark and goodwill........................................ 25,596 -- --
Deferred income taxes....................................................... 3,414 (796) (375)
Issuance of notes payable for tender offer expenses......................... 2,226 -- --
Provision for doubtful accounts............................................. 15,425 799 278
Tax benefit of exercise of stock options.................................... 148 1,285 4,803
Other....................................................................... -- (43) --
Changes in operating assets and liabilities (net of effects of acquisition):
Accounts receivable......................................................... 15,751 (22,849) (27,618)
Inventories................................................................. (24,908) (9,717) (15,207)
Income tax receivable....................................................... 4,593 (671) --
Other assets................................................................ 8,735 (5,279) (11,714)
Accounts payable, accrued liabilities and other liabilities................. 22,982 9,272 13,435
--------- -------- --------
NET CASH USED IN OPERATING ACTIVITIES: (9,977) (14,534) (21,339)
--------- -------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Cash acquired as a result of the purchase of La Sportiva USA.................. -- 235 --
Investment in La Sportiva, S.r.l.............................................. -- (3,086) --
Purchases of property and equipment........................................... (15,891) (17,236) (13,935)
Other......................................................................... -- 43
--------- -------- --------
NET CASH USED IN INVESTING ACTIVITIES......................................... (15,891) (20,044) (13,935)
--------- -------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Long-term debt proceeds....................................................... 10,000 -- 6,826
Repayments of long-term debt.................................................. (1,839) (348) (546)
Proceeds from revolver, net................................................... 16,025 30,707 24,400
Payment of debt issuance costs................................................ -- (1,915) (94)
Collection of note receivable................................................. -- 6,549 --
Proceeds from issuance of stock............................................... 224 8,373 889
Redemption of La Sportiva USA preferred stock................................. (59) -- --
--------- -------- --------
NET CASH PROVIDED BY FINANCING ACTIVITIES..................................... 24,351 43,366 31,475
--------- -------- --------
Effect of foreign currency fluctuations on cash............................... (111) 153 (5)
--------- -------- --------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS.............................. (1,628) 8,941 (3,804)
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR.................................. 13,452 4,511 8,315
--------- -------- --------
CASH AND CASH EQUIVALENTS, END OF YEAR........................................ $ 11,824 $ 13,452 $ 4,511
========= ======== ========
NONCASH INVESTING ACTIVITY--ISSUANCE OF COMMON STOCK
FOR THE ACQUISITION OF LA SPORTIVA USA:
Purchase of working capital................................................... $ -- $ (798) $ --
Purchase of property and equipment............................................ -- (28) --
Purchase of other long-term assets............................................ -- (34) --
Assumption of other long-term liabilities..................................... -- 702 --
Excess purchase price over the fair value of net assets acquired.............. -- (3,835) --
Redeemable preferred stock.................................................... -- 876
--------- -------- --------
TOTAL ISSUANCE OF COMMON STOCK FOR THE ACQUISITION OF
LA SPORTIVA USA............................................................ -- $ (3,117) --
========= ======== ========
SUPPLEMENTAL CASH FLOW INFORMATION:
Cash paid for:
Interest...................................................... $ 6,630 $ 3,934 $ 2,136
Income taxes.................................................. $ 4,070 $ 4,398 $ 4,488
Noncash financing activities:
Issuance of common stock for land............................. $ 2,500 $ -- $ --
Issuance of common stock for note receivable.................. $ -- $ 6,549 $ --
Acquisition of property and equipment through capital leases.. $ 1,786 $ -- $ --
</TABLE>
See Notes to the Consolidated Financial Statements
26
<PAGE>
THE NORTH FACE, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(In thousands)
<TABLE>
<CAPTION>
PREFERRED STOCK COMMON STOCK ADDITIONAL
--------------------------- ----------------------------
PAID-IN
SHARES AMOUNT SHARES AMOUNT CAPITAL
------------- ------------ ------------- ------------- ----------
<S> <C> <C> <C> <C> <C>
January 1, 1997 -- -- 11,200 $29 $ 76,130
Net income -- -- -- -- --
Other comprehensive income -
translation adjustments -- -- -- -- --
Comprehensive income -- -- -- -- --
Exercise of stock options including
tax benefit -- -- 286 -- 5,354
Sale of common stock -- -- -- -- --
Employee stock purchase plan -- -- 16 -- 243
----------- ---------- ------------ ----------- ------------
December 31, 1997 -- -- 11,502 $29 $ 81,727
Net income -- -- -- -- --
Other comprehensive income -
Translation adjustments -- -- -- -- --
Comprehensive income -- -- -- -- --
Exercise of stock options including
tax benefit -- -- 177 -- 1,867
Sale of common stock -- -- 665 2 14,048
Shares issued for acquisition of
La Sportiva USA -- -- 133 -- 3,117
Employee stock purchase plan -- -- 17 -- 290
----------- ---------- ----------- ------------ ------------
December 31, 1998 -- -- 12,494 $31 $101,049
Net loss -- -- -- -- --
Other comprehensive income -
Translation adjustments -- -- -- -- --
Comprehensive loss -- -- -- -- --
Exercise of stock options including
tax benefit -- -- 21 -- 159
Sale of common stock -- -- 206 1 2,500
Employee stock purchase plan -- -- 23 -- 212
----------- ---------- ---------- ------- ------------
December 31, 1999 -- -- 12,744 $32 $103,920
=========== ========== ========== ======= ============
<CAPTION>
ACCUMULATED
OTHER
COMPREHENSIVE
RETAILED INCOME (LOSS)-
EARNINGS CUMULATIVE
SUBSCRIPTIONS (ACCUMULATED COMPREHENSIVE TRANSLATION
AVAILABLE DEFICIT) INCOME (LOSS) ADJUSTMENTS TOTAL
------------- --------- ------------- --------------- ----------
<S> <C> <C> <C> <C> <C>
January 1, 1997 (95) $ 10,113 -- $ 322 $ 86,499
Net income -- 7,955 $ 7,955 -- 7,955
Other comprehensive income -
translation adjustments -- -- (5) (5) (5)
Comprehensive income -- -- $ 7,950 -- --
=========
Exercise of stock options including
tax benefit 95 -- -- 5,449
Sale of common stock -- -- -- --
Employee stock purchase plan -- -- -- 243
------- --------- ----- ---------
December 31, 1997 $ -- $ 18,068 $ 317 $ 100,141
Net income -- 3,592 $ 3,592 -- 3,592
Other comprehensive income -
Translation adjustments -- -- 153 153 153
Comprehensive income -- -- $ 3,745 -- --
=========
Exercise of stock options including
tax benefit -- -- -- 1,867
Sale of common stock -- -- -- 14,050
Shares issued for acquisition of
La Sportiva USA -- -- -- 3,117
Employee stock purchase plan -- -- -- 290
------- --------- ----- ---------
December 31, 1998 -- $ 21,660 $ 470 $ 123,210
Net loss -- (100,481) $(100,481) -- (100,481)
Other comprehensive income -
Translation adjustments -- -- (112) (112) (112)
Comprehensive loss -- -- $(100,593) -- --
=========
Exercise of stock options including
tax benefit -- -- -- 159
Sale of common stock -- -- -- 2,501
Employee stock purchase plan -- -- -- 212
------- --------- ----- ---------
December 31, 1999 $ -- $(78,821) $ 358 $ 25,489
======= ========= ===== =========
</TABLE>
See Notes to the Consolidated Financial Statements
27
<PAGE>
THE NORTH FACE, INC.
CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
1. Business and Basis of Presentation
The North Face, Inc. designs and distributes technically sophisticated
outerwear, snowsports gear, functional sportswear, tents, sleeping bags,
backpacks, daypacks, accessories and rugged footwear under The North Face(R)
name. Through its subsidiary, La Sportiva(R) USA, the Company distributes rock
climbing shoes, mountaineering boots and other rugged footwear under the La
Sportiva name. The Company sells its products to select specialty retailers
throughout the United States, Europe and Canada. As of December 31, 1999 the
Company also operated 8 retail stores and 15 outlets.
The accompanying financial statements have been prepared on a going concern
basis, which contemplates the realization of assets and the satisfaction of
liabilities in the normal course of business. As shown in the financial
statements, during the year ended December 31, 1999, the Company incurred net
losses of $100.5 million, and, as of that date, the Company's current
liabilities exceeded its current assets by $10.0 million. These factors, among
others, raise substantial doubt about the Company's ability to continue as a
going concern.
The financial statements do not include any adjustments relating to the
recoverability and classification of recorded asset amounts or the amounts and
classification of liabilities that might be necessary should be Company be
unable to continue as a going concern. As described in Note 10, the Company's
bank credit facility expires on April 15, 2000; therefore, the outstanding loan
($85.5 million) has been classified as a current liability. In April 2000, the
Company executed a definitive merger agreement (the "VF Merger Agreement")
providing for the acquisition of all the outstanding shares of the Company by VF
Corporation ("VF") for $2.00 per share. As a first step in the transaction, a
subsidiary of VF will commence a cash tender offer for all the outstanding
shares of the Company at $2.00 per share. The offer will be conditioned, among
other things, upon a majority of the issued and outstanding shares being
tendered and not withdrawn prior to the expiration of the offer. Following
successful completion of the tender offer, the VF subsidiary will be merged into
The North Face and each outstanding share will be converted into the right to
receive $2.00 in cash.
The Company's difficulties in meeting its loan agreement covenants and
financing needs, its losses from operations, its negative working capital
position and the scheduled expiration of its credit facility on April 15, 2000
have raised substantial doubt about its ability to continue as a going concern.
As a consequence, if, for any reason, the tender offer and merger contemplated
by the VF Merger Agreement are not consummated, the Company will be required to
consider seeking protection under Chapter 11 of the Bankruptcy Code.
2. Summary of Significant Accounting Policies
Principles of Consolidation. The consolidated financial statements include
the financial statements of The North Face, Inc. and its subsidiaries. All
significant intercompany accounts have been eliminated.
Use of 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 amounts could differ from those estimates.
Foreign Currency Translation. The assets and liabilities of the Company's
foreign subsidiaries have been translated into U.S. dollars using the exchange
rates in effect at period end, and the revenues and expenses have been
translated into U.S. dollars using the average exchange rates in effect during
the period. Adjustments resulting from translating foreign financial statements
into U.S. dollars are reported as translation adjustments as a separate
component of stockholders' equity. Aggregate transaction losses for 1999, 1998
and 1997 were $927,000, $192,000 and $698,000, respectively.
Cash Equivalents represent short-term investments with original maturities of
less than three months.
28
<PAGE>
Accounts Receivable from wholesale customers are recorded upon the sale of
inventory to independent retailers and distributors net of a provision for
estimated returns. A sale occurs when inventories are shipped and title and risk
of loss have transferred from the Company to the buyer. Seasonal goods are
generally shipped to retailers prior to the selling season. The Company offers
extended payment terms for preseason orders.
Inventories are stated at the lower of average cost or market. The Company
principally contracts for the manufacture of its products in the U.S., Asia and
Europe. Costs related to these inventories represent landed cost, which consists
of the price paid to third party manufacturers and inbound duties and freight.
Trademarks and Intangibles consist primarily of trademarks and goodwill and
are being amortized on a straight-line basis over forty years. The Company
assesses impairment of long-lived assets on a periodic basis in accordance with
SFAS 121, "Accounting for the Impairment of Long-Lived Assets and Long-Lived
Assets to Be Disposed Of". Accumulated amortization at December 31, 1999 and
1998 was approximately $4.6 million and $3.6 million, respectively. Amortization
expense was $940,000, $860,000 and $785,000 for the years ended December 31,
1999, 1998 and 1997, respectively. In the fourth quarter of 1999, the Company
recognized impairment in the amount of $22.7 million in order to state the value
of Company's equity consistent with the purchase price proposed under the VF
Merger Agreement. In addition, in the fourth quarter of 1999, the Company
recognized impairment in the amount of $2.9 million because of management's
decision to sell La Sportiva S.p.A. and La Sportiva USA. The fair value of the
impaired assets were recorded based on the estimated sales price of these
businesses.
Property and Equipment is stated at cost. Depreciation and amortization is
computed using the straight-line method over the remaining estimated useful life
of the asset (or over the remaining lease term, if shorter, for capital leases).
The estimated useful lives of certain categories are as follows:
Leasehold improvements 5 - 10 years
Machinery and equipment 5 years
Furniture, fixtures and office equipment 3 - 7 years
Expenditures for replacements and improvements are capitalized; maintenance
and repairs are expensed as incurred.
Investment in La Sportiva S.p.A. The Company accounts for its 20% interest in
La Sportiva S.p.A. using the equity method and the investment is included in
other assets in the accompanying balance sheet. See Note 3.
Product Warranty. Substantially all of the Company's products, except
footwear, carry a lifetime warranty for defects in quality and workmanship which
allows the Company to repair or replace, at its option, the products found to
have a manufacturing defect. The Company maintains warranty departments in the
U.S., Canada and Europe and repairs or replaces items returned under warranty.
The Company's estimated liability for future warranty claims related to past
sales at December 31, 1999, and 1998 is approximately $5.6 million and $4.1
million, respectively, of which the non-current portion of $4.5 million and $3.0
million is classified as other long-term liabilities as of December 31, 1999 and
1998, respectively. The current portion of the warranty liability is $1.1
million and $1.1 million and is classified as other current liabilities as of
December 31, 1999 and 1998, respectively. Warranty expense was approximately
$1,771,000, $1,504,000 and $1,496,000 for the years ended December 31, 1999,
1998 and 1997, respectively.
Deferred Rent. Certain of the Company's operating leases contain
predetermined fixed increases of the minimum rental rate during the initial
lease term. For these leases, the Company recognizes the related rental expense
on a straight-line basis over the life of the lease and records the difference
between the amount charged to rent expense and the rent paid as deferred rent.
Income Taxes. The Company applies an asset and liability approach that
requires the recognition of deferred tax assets and liabilities for the expected
future tax consequences of events that have been recognized in the Company's
financial statements or tax returns. In estimating future tax consequences, the
Company generally considers all expected future events other than enactment of
changes in the tax laws or rates. Deferred taxes are provided for temporary
differences between assets and liabilities for financial reporting purposes and
for income tax purposes and valuation allowances are recorded against net
deferred tax assets where appropriate. No U.S. income tax provisions
29
<PAGE>
have been provided on the cumulative undistributed earnings of foreign
operations as it is the Company's intention to utilize those earnings in those
foreign operations for an indefinite period of time.
Minority Interest. Minority interest represents redeemable preferred stock of
La Sportiva USA owned by the majority shareholders of La Sportiva S.p.A. The
redeemable preferred stock has a 1% cumulative dividend and is redeemable in
minimum increments of $50,000 per year.
Earnings Per Share. Basic earnings per share (EPS) is computed by dividing
net income by the weighted average number of common shares outstanding for the
period. Diluted earnings per share is computed by dividing net earnings by the
diluted weighted average number of common shares outstanding during the period.
Diluted EPS reflects the potential dilution that could occur upon exercise of
outstanding stock options. Diluted EPS for the year ended December 31, 1999
exclude any effect of all stock options 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):
Years Ended December 31,
------------------------
1999 1998 1997
------- ------- ------
Shares used to compute basic EPS 12,723 12,121 11,297
Add effect of dilutive securities:
Stock options -- 364 281
------ ------ ------
Shares used to compute diluted EPS 12,723 12,485 11,578
====== ====== ======
Stock-Based Compensation. Statement of Financial Accounting Standards No.
123, "Accounting for Stock-based Compensation (SFAS No. 123)", allows either
adoption of a fair value method for accounting for stock-based compensation
plans or continuation of accounting under Accounting Principles Board ("APB")
Opinion No. 25, "Accounting for Stock Issued to Employee", and related
interpretations with supplemental disclosures. The Company has chosen to account
for its stock options using the intrinsic value based method prescribed in APB
Opinion No. 25 and, accordingly, does not recognize compensation expense for
stock option grants made at an exercise price equal to or in excess of the fair
market value of the stock at the date of grant. Pro forma net income and
earnings per share amounts as if the fair value method had been adopted are
presented in Note 13. SFAS No. 123 does not impact the Company's results of
operations, financial position or cash flows.
Derivatives. Gains and losses on forward foreign exchange contracts used to
hedge foreign currency denominated receivables are recognized currently. Gains
and losses related to qualifying hedges of preseason orders (which are
considered firm commitments) are deferred and recognized in income when the
hedged transaction occurs.
Comprehensive Income (Loss). In the first quarter of 1998, the Company
adopted SFAS No. 130, "Reporting Comprehensive Income," which established
standards for reporting and displaying comprehensive income and its components
in financial statements. Comprehensive income is defined as net income and all
non-owner changes in stockholders' equity. Accumulated other comprehensive
income consists entirely of foreign currency translation adjustments and is
presented in the statement of shareholders equity.
Estimated Fair Value of Financial Instruments. SFAS No. 107, "Disclosures
about Fair Value of Financial Instruments", requires disclosure of the estimated
fair value of financial instruments. The carrying values of cash and cash
equivalents, accounts receivable and accounts payable approximates their
estimated fair values due to the short-term nature of those instruments. The
carrying value of the Company's debt approximates its estimated fair value based
on interest rates available to the Company and debt instruments with similar
terms.
30
<PAGE>
Segment Data. During the year ended December 31, 1998, the Company adopted
SFAS No. 131, "Disclosures about Segments of an Enterprise and Related
Information" (SFAS 131). SFAS 131 supersedes SFAS 14, "Financial Reporting for
Segments of a Business Enterprise", replacing the "industry segment" approach
with the "management" approach. The management approach designates the internal
reporting that is used by management for making operating decisions and
assessing performance as the source of the Company's reportable segments. SFAS
131 also requires disclosures about products and services, geographic areas and
major customers. The adoption of SFAS 131 did not affect results of operations
or the financial position of the Company but did affect the disclosure of
segment information.
New Accounting Pronouncement. In June 1998, the Financial Accounting
Standards Board issued SFAS No. 133 "Accounting for Derivative Instruments and
Hedging Activities" (SFAS 133). SFAS No. 133 establishes accounting and
reporting standards for derivative instruments, including certain derivative
instruments embedded in other contracts, and for hedging activities. The
statement requires that an entity recognize all derivatives as either assets or
liabilities in the statement of financial position and measure those instruments
at fair value. This statement is effective for fiscal years beginning after June
15, 2000 and is not to be applied retroactively to financial statements for
prior periods. Management has not assessed the impact of the adoption of SFAS
No. 133.
Reclassifications. Certain amounts in the 1998 and 1997 financial statements
have been reclassified to conform with the 1999 presentation. Such
reclassifications had no effect on earnings.
3. Investments in La Sportiva Businesses
On July 2, 1998, the Company acquired a 20% interest in La Sportiva S.r.l., a
premier manufacturer and distributor of trekking, mountaineering, and climbing
footwear located in Ziano di Fiemme, Italy for a purchase price of $2.5 million,
and incurred direct costs of approximately $0.6 million, for a total purchase
price of approximately $3.1 million. In August 1998, La Sportiva S.r.l. changed
its name to La Sportiva S.p.A. The majority shareholders of La Sportiva S.p.A.
have a "put option" which may require the Company to purchase, in a single
transaction, an additional 31% interest in La Sportiva S.p.A. for 6.8 billion
lira ($3.5 million at December 31, 1999). This put option may be exercised at
any time during the period beginning on July 1, 2000 and ending on July 1, 2003.
After the expiration of the "put option" and until December 31, 2004, the
Company may exercise a "call option" which, if exercised, would require the
majority shareholders of La Sportiva S.p.A. to sell an additional 31% interest
to the Company for 6.8 billion lira ($3.5 million at December 31, 1999). The
Company has accounted for its 20% interest in La Sportiva S.p.A. under the
equity method. The purchase price of La Sportiva S.p.A. exceeded the Company's
proportionate share of the net assets acquired by $2.4 million, which was
recorded as goodwill and is being amortized on a straight line basis over 40
years.
In October 1998, the Company entered into a foreign exchange contract, whereby
it hedged the potential future payment of the put and call options of 6.8
billion lira ($3.5 million at December 31, 1999). In connection with that
transaction, the Company recorded a $583,000 and $231,000 foreign exchange loss
in its statement of operations for the years ended December 31, 1999 and 1998,
respectively.
31
<PAGE>
Summary financial information for La Sportiva S.p.A. as of December 31, 1999
and 1998 and for the year ended December 31, 1999 and for the period from July
2, 1998 to December 31, 1998 is as follows (in thousands):
<TABLE>
<CAPTION>
1999 1998
----------- -----------
<S> <C> <C>
Current assets $ 6,097 $ 6,253
Noncurrent assets 4,210 6,339
------- -------
Total assets $10,307 $12,592
======= =======
Current liabilities $ 3,349 $ 4,701
Noncurrent liabilities 3,049 4,170
------- -------
Total liabilities 6,398 8,871
Shareholders' equity 3,909 3,721
------- -------
Total liabilities and shareholders' equity $10,307 $12,592
======= =======
Net sales, including sales to La Sportiva USA of $2,253 (1999)
and $1,013 (1998) $ 9,096 $ 4,474
Income before income taxes 1,336 85
Net income 673 14
</TABLE>
In a related transaction on July 2, 1998, the Company acquired 100% of the
outstanding common stock of La Sportiva USA, (which owns the exclusive rights to
distribute footwear for La Sportiva S.p.A. in the United States) located in
Boulder, Colorado, for a purchase price of approximately $3.9 million. The
purchase price includes $3.1 million which was paid in 133,335 shares of the
Company's common stock and additional $0.8 million in cash to be paid to the
former owners of La Sportiva USA over five years.
The purchase price of La Sportiva USA exceeded the fair value of the net
assets acquired by approximately $3.8 million, which was recorded as goodwill
and was initially amortized on a straight line basis over 40 years. The
acquisition was recorded under the purchase method of accounting. The Company
has consolidated the results of La Sportiva USA beginning on July 2, 1998.
On January 13, 2000, the Company sold its 20% interest in La Sportiva S.p.A.
to the majority shareholders for 4.3 billion lira ($2.3 million). As a result of
this sale, the Company sold its foreign exchange contract for 6.8 billion lira
in January 2000. In addition, the Company is attempting to sell La Sportiva USA.
The goodwill for La Sportiva S.p.A. and La Sportiva USA was written down by
$2,879,000 in 1999 to reduce the balance to the estimated market value.
4. Terminated Agreement to Sell the Company
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. ("LPG"). The Transaction Agreement provided for a
tender offer for all of the Company's outstanding stock (other than shares held
by James G. Fifield, former 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 September 1, 1999, the
Transaction Agreement was terminated and the Company agreed to pay LGP $2.2
million in expenses associated with the terminated Transaction Agreement. Such
transaction expenses are payable in installments to LGP through June 2000. Also
in connection with the termination of the Transaction Agreement, Mr. Fifield
resigned as the Company's Chief Executive
32
<PAGE>
Officer. Total expenses incurred in connection with the terminated agreement
during the year ended December 31, 1999 were $4.1 million which are included in
other expenses.
5. Accounts Receivable
The allowance for doubtful accounts was $2,246,000, $1,743,000 and $1,321,000
as of December 31, 1999, 1998 and 1997, respectively. Write-offs to accounts
receivable during the years ended December 31, 1999, 1998 and 1997 were
approximately $3,622,000, $377,000 and $239,000, respectively. Additionally, an
adjustment was made in 1999 to reduce accounts receivable and sales by
$11,803,000 as a result of chargebacks from customers related to inaccurate
shipping.
During the years ended December 31, 1999, 1998 and 1997, no customer accounted
for more than 10% of net sales.
6. Inventories
Inventories as of December 31, 1999 and 1998 consist of (in thousands):
1999 1998
------- -------
Finished goods $80,452 $51,655
Work in progress 120 239
Raw materials 1,793 5,563
------- -------
Total inventories $82,365 $57,457
======= =======
7. Property and Equipment
Property and equipment as of December 31, 1999 and 1998 consist of (in
thousands):
1999 1998
--------- ---------
Leasehold improvements $ 11,077 $ 10,500
Furniture, fixtures and office equipment 40,226 27,167
Machinery and equipment 2,578 2,578
Land 2,943 --
-------- --------
56,824 40,245
Less accumulated depreciation and amortization (23,965) (14,329)
-------- --------
Total property and equipment, net $ 32,859 $ 25,916
======== ========
Depreciation and amortization expense related to property and equipment was
$11,558,000, $6,637,000, and $4,218,000 for the years ended December 31, 1999,
1998 and 1997, respectively. Maintenance and repair expense was $991,000,
$740,000 and $648,000 for the years ended December 31, 1999, 1998 and 1997,
respectively.
33
<PAGE>
8. Income Taxes
The Company's pre tax income before extraordinary items consisted of (in
thousands):
For the Years Ended December 31,
---------------------------------
1999 1998 1997
----------- --------- ---------
U.S. $(97,973) $2,127 $ 8,582
Foreign 35 3,716 4,564
-------- ------ -------
$(97,938) $5,843 $13,146
======== ====== =======
The provision for income taxes consists of the following (in thousands):
For the Years Ended December 31,
------------------------------------
1999 1998 1997
------------ ---------- ----------
Federal:
Current $ 949 $1,261 $2,698
Deferred 595 (434) 61
State:
Current 218 374 632
Deferred 123 (257) 240
Foreign:
Current 626 1,600 1,805
Deferred 32 (293) (245)
------ ------ ------
$2,543 $2,251 $5,191
====== ====== ======
Reconciliation of the U.S. Federal statutory rate to the Company's effective
tax rate is as follows:
For the Years Ended December 31,
---------------------------------
1999 1998 1997
------ ------ ------
Statutory rate (35.0%) 34.0% 34.0%
State income taxes, net of federal benefit 0.1% 3.1% 4.3%
Foreign tax 0.7% -- --
Valuation allowance 38.7% -- --
Other (1.9%) 1.4% 1.2%
------ ------ ------
Effective income tax rate 2.6% 38.5% 39.5%
====== ====== ======
Deferred income taxes for the Company reflect the tax effects of temporary
differences between amounts of assets and liabilities for financial reporting
purposes and such amounts measured by tax laws.
34
<PAGE>
Significant components of the net deferred tax assets as of December 31, 1999
and 1998 are as follows (in thousands):
1999 1998
--------- --------
Deferred tax assets:
Inventory costs not yet deductible $ 1,295 $ 2,281
Depreciation 546 657
Liabilities not yet deductible for tax 12,666 3,356
Net operating losses 19,561 --
Intangibles 4,805 --
Valuation allowance (37,947) --
-------- -------
926 6,294
-------- -------
Deferred tax liabilities:
Intangibles -- (4,154)
Liabilities deductible for tax not book (679) (1,143)
-------- -------
(679) (5,297)
-------- -------
Net deferred tax assets $ 247 $ 997
======== =======
Due to the uncertainty surrounding the realization of its deferred tax assets,
the Company recorded a valuation allowance in the fourth quarter of 1999.
The Company has available federal net operating loss carryforwards totaling
$49.6 million which expire in 2019. The Company has available state net
operating loss carryforwards totaling approximately $35.0 million which begin to
expire in 2004.
The cumulative amount of undistributed earnings of the European and Canadian
subsidiaries, which the Company intends to indefinitely reinvest outside of the
United States and upon which deferred income taxes are not provided, is
approximately $11.5 million at December 31, 1999.
9. Employee Benefit Plans
The Company's European subsidiary has a contributory defined benefit pension
plan covering substantially all full-time employees. Benefits are based on years
of service and compensation. The Company funds the plan in amounts not less than
the minimum statutory requirements in the United Kingdom. The plan's assets
consist of a mutual fund which invests in equity securities.
Net pension plan expense (income) consisted of the following for the years
ended December 31 (in thousands):
1999 1998 1997
-------- ------ ------
Service cost $ 62 $ 100 $ 101
Interest cost 363 358 291
Expected return on plan assets (562) (324) (269)
Recognized net actuarial gain (1,388) (186) (14)
------- ----- -----
Net pension plan expense (income) $(1,525) $ (52) $ 109
======= ===== =====
35
<PAGE>
The changes in the projected benefit obligation and plan assets for the years
ended December 31 were as follows (in thousands):
1999 1998
-------- -------
Changes in projected benefit obligation:
Projected benefit obligation at beginning of year $ 4,081 $3,981
Service cost 62 100
Interest cost 363 358
Actuarial gain (1,388) (195)
Benefits paid (199) (163)
------- ------
Projected benefit obligation at end of year 2,919 4,081
------- ------
Changes in plan assets:
Fair value of plan assets at beginning of year 4,107 3,600
Actual return on plan assets 332 257
Employer contributions 281 355
Employee contributions 36 58
Benefits paid (199) (163)
------- ------
Fair value of plan assets at end of year 4,557 4,107
------- ------
Pension asset liability $ 1,638 $ 26
======= ======
The weighted average assumptions for 1999 and 1998 were as follows:
Discount rate 9%
Expected return on plan assets 9%
Rate of compensation increase 7%
Effective January 1998, the Company has made available a profit sharing
retirement plan. Under the plan employee and company contributions qualify for
favorable tax treatment under Section 401(k) of the Internal Revenue Code. Under
the 401(k) plan, the Company offers a discretionary match, based on company
growth and profits (paid in The North Face, Inc., Common Stock). Employee
contributions are always 100% vested. Employer contributions will be vested at
20% per year; 100% after five years. The Company's Board of Directors has
approved the allocation of a 25% matching contribution on a maximum of 6% of
employee compensation contributed to the plan in accordance with the terms of
the plan for the year ended 1998. The Company's matching contribution was
$86,000 and $130,000 for the year ended December 31, 1999 and 1998,
respectively.
The Company's subsidiary, La Sportiva USA, also has a profit sharing plan. La
Sportiva USA makes discretionary matching contributions up to 15% of the
participant's annual salary. Employee contributions are 100% vested. Company
matching contributions made by La Sportiva USA vest over a period of six years.
La Sportiva USA made discretionary contributions of $64,000 and $44,000 for the
year ended December 31, 1999 and the period from July 2, 1998 through December
31, 1998, respectively.
36
<PAGE>
10. Debt
Total debt as of December 31, 1999 and 1998 consists of the following (in
thousands):
1999 1998
--------- ---------
Revolving line of credit $ 71,204 $ 55,107
Term note 14,250 5,000
Mortgage -- 72
Notes payable 2,080 499
-------- --------
Total 87,534 60,678
Less: current portion (87,534) (55,778)
-------- --------
Long-term debt $ 0 $ 4,900
======== ========
The Company has a Global Senior Secured Revolving Credit Facility with the
Industrial Bank of Japan, Limited, New York Branch (as syndication agent and
documentation agent), and IBJ Whitehall Business Credit Corporation (as
arrangers, collateral agent and as administrative agent for itself and other
lenders), and other financial institutions. The credit facility includes a term
note, a revolving line of credit and a letter of credit facility. This credit
facility expired on March 31, 2000 and was amended in March 2000 to extend the
expiration date to April 15, 2000.
The term note facility calls for $0.75 million to be repaid quarterly
beginning on October 1, 1999 with the outstanding principal balance due and
payable on the termination date of the loan agreement. The revolving line of
credit provides for borrowings up to $115.0 million until December 31, 1999, and
thereafter up to $100.0 million with the actual borrowings limited based on the
amount of eligible receivables and inventory (approximately $77.7 million of
collateral at December 31, 1999). The eligible inventory collateral is limited
to $50.0 million. The credit facility provides a sublimit facility for letters
of credit up to a maximum of $40.0 million (approximately $5.5 million
outstanding as of December 31, 1999). Borrowings and outstanding letters of
credit under the credit facility are secured by substantially all of the assets
of the Company. The credit facility also includes certain financial covenants
and restrictions on new indebtedness and the payment of cash dividends.
Until November 1999, the term note carried interest payable monthly at the
higher of (a) the bank's base commercial lending rate minus .50% or (b) .50%
above the federal funds effective rate plus the applicable margin. The interest
on the revolving line of credit carried interest payable monthly at a rate of
either (1) the prime rate which is the higher of (a) the bank's base commercial
lending rate minus .50% or (b) .50 above the federal funds effective rate plus
the applicable margin, or (2) LIBOR plus the applicable margin, at the option of
the Company. In November 1999, the Company's interest rates were amended to the
bank's base commercial lending rate plus 2.0% during any period in which the
Company utilizes a special inventory advance rate in the calculation of the
collateral. At December 31, 1999, the Company's interest rate was 10.75% on the
revolving line of credit and the term loan.
Fees for outstanding letters of credit are payable at 1.5% per annum. The
Company also pays a monthly unused line fee on the revolving line of credit at
.375% per annum. The Company was charged an amendment fee of $400,000 in
November 1999 and paid an additional $575,000 extension fee in December 1999 as
the bank credit facility was not repaid in full by December 31, 1999. Also, the
Company issued the lender 202,597 warrants to purchase the Company's common
stock at an exercise price of $4.8125 which became exercisable beginning on
January 15, 2000,as the bank credit facility was not repaid in full by that
date.
In February 2000, the Company's bank credit facility was amended to increase
the borrowing limit to the available collateral plus $16.0 million and to
reflect certain changes in the financial and reporting covenants, among other
things. In addition, the interest rate increased by 0.5% under this amendment.
The Company was charged an amendment fee of
37
<PAGE>
$1.0 million which was paid upon the signing of the amendment and a deferred fee
of $3.5 million, which was payable on the earlier of (1) the sale of at least
51% of the outstanding shares or assets of the Company or (2) June 15, 2000. In
April 2000, the Company and the lender signed a waiver and agreement reducing
the deferred fee from $3.5 million to $876,000 for the transactions contemplated
by the VF Merger Agreement.
11. Leases
The Company leases buildings, equipment and vehicles under non-cancelable
lease agreements that expire at various dates through 2006. The leases generally
provide for renewal options for periods ranging from three to ten years. The
building leases generally provide for additional rents based on store sales and
for payment of taxes, insurance and maintenance expenses related to the leased
assets.
Future minimum lease payments under all leases with initial or remaining non-
cancelable lease terms in excess of one year as of December 31, 1999 are as
follows (in thousands):
CAPITAL OPERATING
YEARS ENDING DECEMBER 31, LEASES LEASES
- ------------------------- -------- ---------
2000 834 6,516
2001 780 5,632
2002 283 4,601
2003 133 3,220
2004 -- 2,052
Thereafter -- 1,219
------ -------
Minimum lease commitments $2,030 $23,240
====== =======
Less: amount representing interest (174)
------
Present value of net minimum lease payments 1,856
Less: current portion (751)
------
Long-term portion $1,105
======
The cost of property under capitalized leases was $2,426,000 and $636,000, as
of December 31, 1999 and 1998, respectively, and primarily represents furniture,
fixtures and office equipment. Accumulated amortization related to these leases
was approximately $1,035,000 and $350,000 as of December 31, 1999 and 1998,
respectively.
Rental expense for operating leases was as follows (in thousands):
1999 1998 1997
--------- --------- ---------
Minimum rentals $7,129 $5,375 $4,651
Contingent rentals 533 215 90
------ ------ ------
$7,662 $5,590 $4,741
====== ====== ======
12. 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
38
<PAGE>
provided for a tender offer for all the Company's outstanding stock (other than
shares held by James G. Fifield, former President and Chief Executive Officer)
at $17.00 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 it was reevaluating the transactions contemplated by
the Transaction Agreement (the "Transactions"). On September 1, 1999, the
Transaction Agreement was terminated and the Company agreed to pay LGP $2.2
million to reimburse LGP for expenses associated with the terminated Transaction
Agreement.
In 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 alleged
that the Transactions were unfair and inadequate to the Company's shareholders
and charged the defendants with self-dealing and breach of fiduciary duties. The
complaints generally requested injunctive relief to prevent the consummation of
the Transactions, and sought other remedies in the event the Transactions were
completed. The Company has filed a motion to dismiss these claims.
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 consolidated action generally alleges
that the Company made false and misleading statements about its financial
results from January 22, 1998 through April 16, 1999. The Company has filed a
motion to dismiss these claims.
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 alleged 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 was named solely as a
nominal defendant, against whom the plaintiff sought no recovery. The Alameda
Superior Court granted the Company's motion to dismiss the derivative complaint
with leave to amend.
In December 1999, a case, FDX Supply Chain Services, Inc. v. The North Face,
Inc., No. 99-2569, was filed in federal district court in the district of
Kansas. The dispute arises out of contract in which FDX agreed to provide
warehouse services to the Company, fill orders and ship the Company's products
to customers nationwide from the Company's warehouse facility in Lenexa, Kansas.
The Company terminated the contract in December 1999. The lawsuit alleges
damages of $5.2 million for breach of contract. The Company has filed
counterclaims seeking $25 million in damages, alleging that the damage
limitation provisions of the agreement should not apply because of FDX's
misrepresentations inducing the Company to enter into the agreement and FDX's
gross failure to perform. FDX has moved to dismiss all the Company's
counterclaims because of, inter alia, the damage limitation provisions of the
agreement.
Income Taxes. The Internal Revenue Service ("IRS") is presently examining the
Company's Federal tax returns for the taxable years ended December 31, 1994
through 1996. The IRS is also examining intercompany transfer prices. The
outcome of these examinations and any related liabilities, if any, cannot
presently be determined. The Company has made no provision for any liability
that might result, as management is of the opinion that the Company will not
sustain any significant adjustments as a result of these examinations.
Purchase Commitments. The Company has approximately $57.4 million and $46.2
million of purchase commitments as of December 31, 1999 and 1998, respectively,
related to goods ordered for future production in the normal course of business.
Certain of these commitments are collateralized by outstanding letters of
credit. See Note 10.
39
<PAGE>
Derivatives. The Company's international subsidiaries sell merchandise
throughout Europe and Canada. These sales are denominated in the local currency
of the retailer's country. Additionally, certain of the purchases of the
Company's international subsidiaries are denominated in U.S. dollars. To protect
the Company from the risk that the eventual net cash inflows resulting from the
sale of products to foreign customers will be adversely affected by changes in
exchange rates, the Company's subsidiaries enter into forward exchange contracts
and options (hedging instruments) to hedge their foreign denominated accounts
receivable, matched firm orders and anticipated orders. At December 31, 1999,
the Company held the following foreign currency derivatives, all of which expire
during 2000:
CURRENCY OPEN CONTRACT OPEN CONTRACT U.S. FAIR
(In thousands) CURRENCY VALUE DOLLAR VALUE VALUE
-------------- ------------------ -----
Contracts:
Euro 26,149 $26,312 $2,054
Swedish Kroners 16,746 2,048 76
Danish Kroners 17,300 2,567 222
Swiss Francs 2,681 1,875 179
Canadian Dollars 4,900 3,393 8
------- ------
Total $36,195 $2,539
In January 2000, the Company sold all open foreign exchange contracts at a net
gain of $1.1 million.
13. Stockholders' Equity
On May 13, 1998, an employment agreement was executed between the Company and
James G. Fifield, its Chief Executive Officer, President and Director. In
connection with the employment agreement in May 1998, the Company sold 665,060
shares of its common stock to Mr. Fifield for $21.125 per share for a total of
$14,049,000. Mr. Fifield pledged 310,030 shares of the common stock in
connection with a full recourse promissory note in favor of the company for the
principal sum of $6,549,000. In June 1998, the promissory note plus interest at
an annual rate of 5.43% was repaid by Mr. Fifield and the 310,030 pledged shares
of common stock were issued to Mr. Fifield.
On January 11, 1999, the Company issued 206,188 shares of common stock at
$12.125 per share as consideration for the purchase of land to be used for its
new corporate headquarters in Carbondale, Colorado.
Preferred Share Purchase Rights. The Company has 4,000,000 shares of
authorized preferred stock of which 100,000 shares have been designated as
Series A participating preferred stock. On July 6, 1998, pursuant to a Preferred
Shares Rights Agreement between the Company and American Stock Transfer & Trust,
Co. as Rights Agent, the Company's Board of Directors declared a dividend of one
right (a "Right") to purchase one one-thousandth of a share of the Company's
Series A participating preferred stock, $1.00 par value per share, ("Series A
Preferred") for each outstanding share of common stock, $0.0025 par value per
share, of the Company. The dividend was provided to stockholders of record as of
the close of business on July 20, 1998. Each Right entitles the registered
holder to purchase from the Company, under certain circumstances, one one-
thousandth of a share of Series A preferred at an exercise price of $140.00
subject to adjustment. Each share of Series A participating preferred stock
entitles the holder to 1,000 votes on all matters submitted the vote of the
shareholders.
Preferred Stock. Upon consummation of the Company's initial public offering,
all outstanding shares of the Company's Preferred Stock, including accrued
dividends, were converted into 4,220,808 shares of Common Stock. Preferred
Shareholders were entitled to dividends of 10% of the face value payable
quarterly in either cash or additional shares of Preferred Stock, were
convertible into Common Stock, carried liquidation preferences of face value and
had voting rights on an as-converted basis.
40
<PAGE>
1994 Stock Incentive Plan. In 1994, the Company adopted the 1994 Stock
Incentive Plan (the "1994 Plan") to issue non-qualified stock options ("NQSOs")
to purchase shares of common stock. All NQSOs were granted at an exercise price
that was, at the time of grant, an amount equal to the fair market value of a
share of common stock, as determined by the Board of Directors. Additionally,
1,159,950 restricted shares of common stock were granted under the 1994 Plan
pursuant to the payment of cash and delivery of promissory notes totaling
$261,250 due June 7, 2004, bearing interest at a rate of 9.0% per annum. As of
December 31, 1999, substantially all of the restricted stock had been converted
into common stock and the promissory notes had been repaid. The Company
currently does not anticipate making additional grants under the 1994 Plan.
1995 and 1996 Stock Incentive Plans. The Company's 1995 Stock Incentive Plan
(the "1995 Plan") was adopted by the Company in April 1995, and the Company's
1996 Stock Incentive Plan (the "1996 Plan") was adopted by the Company in May
1996. The terms of the 1995 Plan and the 1996 Plan (together, the "Option
Plans") are substantially the same, except where noted below.
A maximum of 1,524,820 shares of common stock (subject to adjustment in the
case of certain stock splits, stock dividends, and reorganizations) have been
reserved for issuance pursuant to options granted under the Option Plans. NQSOs
granted under the 1995 Plan and NQSOs granted to officers under the 1996 Plan
become fully vested on June 7, 2004, with accelerated vesting over four years
based upon specified performance goals and expire on June 7, 2004. NQSOs granted
under the 1996 Plan to employees vest over 4 years and expire on June 7, 2004.
In the first quarter of 1998 an amendment to the Company's 1996 Plan was
ratified by shareholders to increase the number of shares of common stock
reserved for issuance by 600,000 shares. The Company currently does not
anticipate making additional grants under the 1995 Plan.
Under the 1996 Plan, options with respect to no more than 400,000 shares may
be granted to any individual in any year and no options may be granted to a
person who, at the time of grant, owns shares possessing 10% or more of the
total combined voting power of all classes of stock of the Company. All of the
Company's officers, directors and other salaried employees are eligible to
receive options under the option plans.
The exercise price of an option granted under the option plans may not be less
than 100% of the fair market value of a share of common stock at the date of
grant and no options may be exercisable more than ten years following the date
of grant. For grants to non-officers under the 1996 Plan, vesting must be at
least 20% per year following the date of grant, unless otherwise permitted by
applicable law.
1996 Directors' Stock Option Plan. The 1996 Directors' Stock Option Plan (the
"Directors' Plan") was adopted by the Company in May 1996. A total of 100,000
shares of Common Stock has been reserved for issuance under the Directors' Plan.
The Directors' Plan provides for the grant of non-qualified stock options to
purchase 25,000 shares to each non-employee director of the Company initially
elected to the Board after the effective date of the Directors' Plan. Because
the disinterested administration requirement of Rule 16b-3 promulgated under the
Securities Exchange Act of 1934 ceased to be applicable to awards made under all
equity based plans of the Company, no further grants will be made as described
in the preceding sentence and in lieu thereof awards will be made under the
Directors' Plan on a discretionary basis to non-employee directors of the
Company.
1998 Nonstatutory Stock Option Plan. The Company's 1998 Nonstatutory Stock
Option Plan was adopted in May 1998 and amended in September 1998. A maximum of
1,700,000 shares have been reserved for issuance pursuant to options granted
under the Plan. NQSO's granted under the 1998 Plan vest as determined by the
Plan Administrator. The term of the Plan is ten years and should expire in March
2008.
Stock Warrants. In November 1999, the Company issued their credit facility
lender 202,597 contingent warrants to purchase the Company's common stock at an
exercise price of $4.8125 which became exercisable beginning on January 15, 2000
when the bank credit facility was not repaid in full by that date.
41
<PAGE>
Activity for all of the Company's stock option plans from January 1, 1996
through December 31, 1998 was as follows:
<TABLE>
<CAPTION>
1999 1998 1997
----------------------------- ----------------------------- ----------------------------
WEIGHTED AVERAGE WEIGHTED AVERAGE WEIGHTED AVERAGE
SHARES EXERCISE PRICE SHARES EXERCISE PRICE SHARES EXERCISE PRICE
---------- ---------------- ---------- ---------------- --------- ----------------
<S> <C> <C> <C> <C> <C> <C>
Outstanding, beginning of year 3,248,309 $12.08 1,146,666 $12.41 1,069,602 $ 6.60
Granted 1,142,000 6.24 4,368,400 15.03 492,600 18.52
Exercised (20,343) 4.48 (177,018) 3.27 (286,011) 1.93
Cancelled (1,389,437) 16.67 (2,089,739) 19.18 (129,525) 10.84
--------- --------- ---------
Outstanding, end of year 2,980,529 $ 7.77 3,248,309 $12.08 1,146,666 $12.41
========= ========= =========
Options exercisable at year end 1,472,517 $ 7.55 498,572 $ 6.12 390,071 $ 4.31
========= ========= =========
Weighted average fair
value of options granted
during the year $ 2.57 $ 8.12 $ 7.35
====== ====== ======
</TABLE>
The following table summarizes additional information about stock options
outstanding at December 31, 1999.
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
------------------- -------------------
WEIGHTED
AVERAGE WEIGHTED WEIGHTED
REMAINING AVERAGE AVERAGE
RANGE OF SHARES CONTRACTUAL EXERCISE SHARES EXERCISE
EXERCISE PRICES OUTSTANDING LIFE PRICE OUTSTANDING PRICE
--------------- ----------- ----------- -------- ----------- -------
<S> <C> <C> <C> <C> <C>
$0.22 To $ 7.44 1,357,532 8.91 $ 5.32 593,926 $ 4.27
9.56 To 14.38 1,617,997 8.08 9.79 877,341 9.74
18.22 To 25.63 5,000 8.36 20.50 1,250 20.50
--------- ----------
$0.22 To $25.63 2,980,529 8.46 7.77 1,472,517 7.55
========= ==========
</TABLE>
In September 1998, options to purchase 1,803,650 shares of common stock were
repriced from a weighted average exercise price of $19.65 to a weighted average
exercise price of $9.625 which was equal to market value at the date of
repricing. Options issued to certain of the Company's outside Directors and
certain other individuals were not included in the repricing.
Employee Stock Purchase Plan. The 1996 Employee Stock Purchase Plan (the
"Employee Plan"), adopted in May 1996, reserves a total of 150,000 shares of
common stock for issuance. Under the Employee Stock Purchase Plan, eligible
full-time employees can choose to have up to 10% of their annual base earnings
withheld to purchase the company's common stock. The purchase price of the
stock is 85% of the lower of the beginning of the offering period or end of the
offering period market price. During 1999 and 1998, employees purchased
approximately 24,300 and 17,100 shares respectively at an average price of $6.55
and $15.28, respectively. At December 31, 1999, 87,706 shares are available for
future issuance.
Pro Forma Stock Option Information. The Company accounts for its stock- based
awards using the intrinsic value method in accordance with Accounting Principles
Board Opinion No. 25, "Accounting For Stock Issued To
42
<PAGE>
Employees" and its related interpretations. No compensation cost has been
recognized in the financial statements for employee stock arrangements.
Had compensation cost for the Company's stock-based compensation plans been
recorded in accordance with the fair value method of SFAS 123, the Company's net
income (loss) and net income (loss) per share for 1999, 1998 and 1997 would
approximate the following pro forma amounts (in thousands, except per share
data):
1999 1998 1997
----------- ------ ------
Net income (loss):
As reported $(100,481) $3,592 $7,955
Pro forma (105,007) 1,442 6,957
Diluted net income (loss) per share:
As reported $ (7.90) $ 0.29 $ 0.69
Pro forma (8.66) $ 0.13 $ 0.61
For purposes of computing the above pro forma amounts, the fair value of each
option granted during 1999, 1998, and 1997 was estimated as of the date of grant
using the Black-Scholes option-pricing model. This model requires subjective
assumptions, including future stock price volatility and expected date of
exercise, which greatly affects the calculated values. The following weighted
average assumptions were used in calculating the fair value of the options
granted: (i) dividend yield of 0% for 1999, 1998 and 1997; (ii) expected
volatility of 85.5% for 1999, 78.5% for 1998, and 58.6% for 1997; (iii) risk-
free interest rate of 6.01%, 5.32% and 6.56% for 1999, 1998 and 1997,
respectively; and (iv) expected life from vesting to exercise of 6 months for
1999, 1998 and 1997. Forfeitures are recognized as they occur.
The effects of applying SFAS 123 in this pro forma disclosure may not be
indicative of future pro forma amounts, because the fair value method has not
been applied to awards granted prior to 1995.
14. Segment Information
The Company manages its business segments primarily based on sales
distribution channels. The Company's reportable segments are wholesale and
Company-operated retail. Sales to wholesale customers include sales to the U.S.
government. Both operating segments sell products as further described in Note
1.
The accounting policies of the segments are the same as those described in the
"Summary of Significant Accounting Policies" in Note 2. The Company evaluates
the performance of its segments based solely on net sales and gross profit. The
Company does not separately identify assets or liabilities of the segments for
management reporting purposes.
43
<PAGE>
Summary information by segment for the years ended December 31, 1998, 1997 and
1996 is as follows (in thousands):
1999 1998 1997
-------- -------- --------
Net sales:
Wholesale $184,284 $202,747 $168,543
Company-operated retail 53,693 44,349 34,704
-------- -------- --------
Total $237,977 $247,096 $203,247
======== ======== ========
Gross profit:
Wholesale $ 58,054 $ 88,542 $ 73,542
Company-operated retail 25,637 23,420 18,941
-------- -------- --------
Total $ 83,691 $111,962 $ 92,483
======== ======== ========
Net sales and long-lived assets related to operations in the United States,
Canada and Europe as of and for the years ended December 31, 1999, 1998 and 1997
are as follows (in thousands):
1999 1998 1997
-------- -------- --------
Net sales:
United States $172,369 $186,443 $150,798
Canada 14,775 14,546 12,661
Europe 50,833 46,107 39,788
-------- -------- --------
Total $237,977 $247,096 $203,247
======== ======== ========
Long-lived assets:
United States $ 37,513 $ 63,319 $ 46,195
Canada 1,589 1,798 1,665
Europe 3,618 2,608 1,628
-------- -------- --------
Total $ 42,720 $ 67,725 $ 49,488
======== ======== ========
Net sales relating to major product types for the years ended December 31,
1999, 1998 and 1997 are as follows (in thousands):
1999 1998 1997
-------- -------- --------
Outerwear $113,973 $123,212 $ 98,291
Equipment 38,211 35,829 40,235
Tekware(R) 29,873 33,072 24,130
Other 55,920 54,983 40,591
-------- -------- --------
$237,977 $247,096 $203,247
======== ======== ========
44
<PAGE>
15. Subsequent Events
In February 2000, the Company's bank credit facility was amended to increase
the borrowing limit to the available collateral plus $16.0 million and to
reflect certain changes in the financial and reporting covenants, among other
things. In addition, the interest rate increased by 0.5% under this amendment.
The Company was charged an amendment fee of $1.0 million which was paid upon the
signing of the amendment and a deferred fee of $3.5 million which is payable on
the earlier of (1) the sale of at least 51% of the outstanding shares or assets
of the Company or (2) June 15, 2000. In April 2000, the Company and the lender
signed a waiver and agreement reducing the deferred fee from $3.5 million to
$876,000.
In March 2000, the Company's bank credit facility expiration date was extended
from March 31, 2000 to April 15, 2000.
In April 2000, the Company executed the VF Merger Agreement providing for the
acquisition of all the outstanding shares of the Company by VF for $2.00 per
share. As a first step in the transaction, a subsidiary of VF will commence a
cash tender offer for all the outstanding shares of the Company at $2.00 per
share. The offer will be conditioned, among other things, upon a majority of the
issued and outstanding shares being tendered and not withdrawn prior to the
expiration of the offer. Following successful completion of the tender offer,
the VF subsidiary will be merged into The North Face and each outstanding share
will be converted into the right to receive $2.00 in cash.
The Company's difficulties in meeting its loan agreement covenants and
financing needs, its losses from operations, its negative working capital
position and the scheduled expiration of its credit facility on April 15, 2000
have raised substantial doubt about its ability to continue as a going concern.
As a consequence, if, for any reason, the tender offer and merger contemplated
by the VF Merger Agreement are not consummated, the Company will be required to
consider seeking protection under Chapter 11 of the Bankruptcy Code.
On January 13, 2000 the Company sold its 20% interest in La Sportiva S.p.A. to
the majority shareholders for 4.3 billion lira ($2.3 million).
In February 2000, the Company closed its Carbondale, Colorado administrative
facility and relocated those employees to its headquarters facility in San
Leandro, California. The Company expects to incur approximately $2.6 million in
2000 in operating expenses related to the closure of its Carbondale, Colorado
facility and the relocation of its employees to its San Leandro facility.
45
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and the Stockholders of The North Face, Inc.:
We have audited the accompanying consolidated balance sheets of The North Face,
Inc. and its subsidiaries as of December 31, 1999 and 1998 and the related
consolidated statements of operations, stockholders' equity and cash flows for
each of the three years in the period ended December 31, 1999. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits. We did not audit the financial statements of The North Face (Europe)
Limited (a consolidated subsidiary), which statements reflect total assets
constituting 21% and 16% respectively, of consolidated total assets as of
December 31, 1999 and 1998, and total revenues constituting 21%, 19%, and 20%,
respectively, of consolidated total revenues for each of the three years in the
period ended December 31, 1999. Those statements were audited by other auditors
whose reports (which include an explanatory paragraph expressing substantial
doubt about The North Face (Europe) Limited's ability to continue as a going
concern) have been furnished to us, and our opinion, insofar as it relates to
the amounts included for The North Face (Europe) Limited, is based solely on the
reports of such other auditors.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards 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. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, based on our audits and the reports of the other auditors, such
consolidated financial statements present fairly, the financial position of The
North Face, Inc. and its subsidiaries as of December 31, 1999 and 1998, and the
results of their operations and their cash flows for each of the three years in
the period ended December 31, 1999 in conformity with accounting principles
generally accepted in the United States of America.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note 1 to the
financial statements, the Company's 1999 loss, negative working capital at
December 31, 1999, and the expiration of its bank credit facility on April 15,
2000 raise substantial doubt about its ability to continue as a going concern.
Management's plans in regard to these matters are also discussed in Note 1. The
financial statements do not include any adjustments that might result from the
outcome of this uncertainty.
/s/ Deloitte & Touche LLP
Deloitte & Touche LLP
San Francisco, California
April 12, 2000
46
<PAGE>
THE NORTH FACE (EUROPE) LIMITED
REPORT OF INDEPENDENT AUDITORS
To the Board of Directors and the Shareholders of The North Face (Europe)
Limited:
We have audited the accompanying consolidated balance sheet of The North Face
(Europe) Limited (the "Company") and its subsidiary undertaking (together, the
"Group") as of December 31, 1999 and the related consolidated statements of
profit and loss account for the year then ended, expressed in pounds sterling,
which, as described in the financial statements of The North Face (Europe)
Limited (pages 1 to 19) have been prepared on the basis of accounting principles
generally accepted in the United Kingdom. These financial statements are the
responsibility of the Directors of the Company. Our responsibility is to express
an opinion on these financial statements based on our audit.
We conducted our audit in accordance with generally auditing standards in the
United Kingdom, which are substantially the same as auditing standards generally
accepted in the United States. These standards 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 examination, on a test
basis, of evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audit provides a
reasonable basis for our opinions.
In our opinion, the financial statements referred to above present fairly, in
all material aspects, the consolidated financial position of The North Face
(Europe) Limited and its subsidiary as of December 31, 1999 and their
consolidated results of operations for the year then ended, in conformity with
accounting principles generally accepted in the United Kingdom.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note 1 to the
financial statements, The North Face Inc. (the parent company) will recognise a
significant loss in 1999, has negative working capital at December 31, 1999 and
its current bank credit facility expires on April 15, 2000, all of which raises
substantial doubt about its ability to continue as a going concern. Management's
plans in regard to these matters are also discussed in Note 1. The financial
statements do not include any adjustments that might result from the outcome of
this uncertainty.
United Kingdom accounting principles vary in certain material respects from
accounting principles generally accepted in the United States. The application
of the latter would have affected the determination of consolidated
shareholders' equity and consolidated financial position as of December 31, 1999
and the determination of consolidated net income for the year then ended to the
extent summarized in Notes 23 and 24 to the consolidated financial statement of
The North Face (Europe) Limited.
/s/ Grant Thornton
Grant Thornton
Chartered Accountants
Glasgow, Scotland
April 12, 2000
<PAGE>
THE NORTH FACE (EUROPE) LIMITED
REPORT OF INDEPENDENT AUDITORS
To the Board of Directors and the Shareholders of The North Face (Europe)
Limited:
We have audited the accompanying consolidated balance sheet of The North Face
(Europe) Limited (the "Company") and its subsidiary undertaking (together, the
"Group") as of December 31, 1998 and December 31, 1997 and the related
consolidated statements of profit and loss account for the years then ended,
expressed in pounds sterling, which, as described in the financial statements
of The North Face (Europe) Limited (pages 1 to 19) have been prepared on the
basis of accounting principles generally accepted in the United Kingdom. These
financial statements are the responsibility of the Directors of the Company. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing standards
in the United Kingdom, which are substantially the same as auditing standards
generally accepted in the United States. These standards 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 examination, on
a test basis, of evidence supporting the amounts and disclosures in the
financial statements. An audit also includes assessing the accounting principles
used and significant estimates made by management, as well as evaluating the
overall financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material aspects, the consolidated financial position of The North Face
(Europe) Limited and its subsidiary as of December 31, 1998 and December 31,
1997 and their consolidated results of operations for the years then ended, in
conformity with accounting principles generally accepted in the United Kingdom.
United Kingdom accounting principles vary in certain material respects from
accounting principles generally accepted in the United States. The application
of the latter would have affected the determination of consolidated
shareholders' equity and consolidated financial position as of December 31, 1998
and December 31, 1997 and the determination of consolidated net income for the
years then ended to the extent summarized in Notes 23 and 24 to the consolidated
financial statement of The North Face (Europe) Limited.
/s/ Grant Thornton
Grant Thornton
Chartered Accountants
Glasgow, Scotland
April 12, 2000
<PAGE>
FINANCIAL REPORTING
Management of The North Face, Inc. is responsible for the information and
representations contained in this report. The financial statements have been
prepared in conformity with the generally accepted accounting principles we
considered appropriate in the circumstances and include some amounts based on
our best estimates and judgments. Other financial information in this report is
consistent with these financial statements.
The Company's accounting systems include controls designed to reasonably
assure that assets are safeguarded from unauthorized use or disposition and
which provide for the preparation of financial statement in conformity with
generally accepted accounting principles. These systems are supplemented by the
selection and training of qualified financial personnel and an organizational
structure providing for appropriate segregation of duties.
The Board of Directors pursues its responsibilities for these financial
statements through its Audit Committee, presently consisting of two outside
directors of the Company. The Audit Committee is responsible for recommending to
the Board of directors the appointment of the independent auditors and reviews
with the independent auditors and management the scope and the results of the
annual audit, the effectiveness of the accounting control system and other
matters relating to the financial affairs of the company as they deem
appropriate. The independent auditors have full access to the committee, with
and without the presence of management, to discuss any appropriate matters.
/s/ Geoffrey D. Lurie /s/ Michael A. Leinwand
Geoffrey D. Lurie Michael A. Leinwand
Chief Executive Officer Acting Chief Financial Officer
47
<PAGE>
Item 9. Changes in and Disagreements With Accountants on Accounting and
Financial Disclosure
None.
PART III
Item 10. Directors and Executive Officers of the Registrant.
The information required by this item is incorporated by reference from
registrant's definitive proxy statement to be filed pursuant to Regulation 14a.
Section 16(a) Beneficial Ownership Reporting Compliance.
One required Report on Form 4 or Form 5 was not filed on a timely basis by
Mr. Simon in 1998 or 1999, respectively. One required Report on Form 4 or Form 5
was not filed on a timely basis by Mr. Fifield in 1998 or 1999, respectively. To
the Company's knowledge, based solely upon its review of the Forms submitted to
the Company by Mr. Simon and Mr. Fifield, neither Mr. Simon nor Mr. Fifield have
failed to file a Form required by Section 16(a) of the Exchange Act.
Item 11. Executive Compensation.
The information required by this item is incorporated by reference from
registrant's definitive proxy statement to be filed pursuant to Regulation 14a.
Item 12. Security Ownership of Certain Beneficial Owners and Management.
The information required by this item is incorporated by reference from
registrant's definitive proxy statement to be filed pursuant to Regulation 14a.
Item 13. Certain Relationships and Related Transactions.
The information required by this item is incorporated by reference from
registrant's definitive proxy statement to be filed pursuant to Regulation 14a.
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K.
(a) 1. INDEX TO FINANCIAL STATEMENTS
Financial Statements:
Consolidated Balance Sheets as of December 31, 1998 and 1997
Consolidated Statements of Operations for the
Years Ended December 31, 1998, 1997 and 1996
Consolidated Statements of Shareholders' Equity for the
Years Ended December 31, 1998, 1997 and 1996
Consolidated Statements of Cash Flows for the
Years Ended December 31, 1998, 1997 and 1996
Notes to Consolidated Financial Statements
Independent Auditors' Reports
48
<PAGE>
2. Financial Statement Schedules
All schedules are omitted because of the absence of the conditions under which
they are required or because the required information is set forth in the
condensed consolidated financial statements and notes thereto.
49
<PAGE>
3. Exhibits
Exhibit No. Description
- ----------- -----------
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 Agreement and Plan of Merger by and among VF Corporation, Sequoia
Acquisition, and The North Face, Inc.
3.1(2) Amended and Restated Certificate of Incorporation 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.
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.
50
<PAGE>
10.9(1)** The North Face, Inc. 1996 Stock Incentive Plan.
10.9A** 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.
10.16(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.
21.1(10) List of Subsidiaries of The North Face, Inc.
23.1 Consent of Deloitte & Touche LLP.
23.2 Consent of Grant Thornton.
27.1 Financial Data Schedule.
(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.
(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.
51
<PAGE>
(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.
(b) Reports on Form 8-K: as filed with the Securities and Exchange Commission
on July 7, 1998.
(c) Reports on Form 8-K/A: as filed with the Securities and Exchange Commission
on July 21, 1998.
(c) The exhibits required by Item 601 are filed herewith.
(d) The financial statement schedules required by Regulation S-X are filed
herewith.
* 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.
52
<PAGE>
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.
April 13, 2000 The North Face, Inc.
(Registrant)
By: /s/ Geoffrey D. Lurie
--------------------------------
Geoffrey D. Lurie
Chief Executive Officer
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears
below hereby constitutes and appoints Robert P. Bunje, Geoffrey D. Lurie, and
Michael A. Leinwand, and each of them, his true and lawful agent, proxy and
attorney-in-fact, with full power of substitution and resubstitution, for him
and in his name, place and stead, in any and all capacities, to (i) act on, sign
and file with the Securities and Exchange Commission any and all amendments to
this report on Form 10-K together with all schedules and exhibits thereto, (ii)
act on, sign and file such certificates, instruments, agreements and other
documents as may be necessary or appropriate in connection therewith, and (iii)
take any and all actions which may be necessary or appropriate to be done, as
fully for all intents and purposes as he might or could do in person, hereby
approving, ratifying and confirming all that such agent, proxy and attorney-in-
fact or any of his substitutes may lawfully do or cause to be done by virtue
thereof.
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 dates indicated.
Signature Title or Capacity Date
--------- ----------------- ----
/s/ Robert P. Bunje Chairman April 13, 2000
- ---------------------
Robert P. Bunje
/s/ Geoffrey D. Lurie Chief Executive Officer April 13, 2000
- ---------------------
Geoffrey D. Lurie and Director, (Principal Executive
Officer)
/s/ Michael A. Leinwand Acting Chief Financial Officer April 13, 2000
- ---------------------
Michael A. Leinwand (Principal Financial and Accounting
Officer)
/s/ Karl Heinz Salzburger President and Director April 13, 2000
- ---------------------
Karl Heinz Salzburger
/s/ William N. Simon Vice Chairman and Director April 13, 2000
- ---------------------
William N. Simon
53
<PAGE>
/s/ Michael F. Doyle Director April 13, 2000
- ---------------------
Michael F. Doyle
54
<PAGE>
EXHIBIT INDEX
Exhibit No. Description
- ----------- -----------
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 Agreement and Plan of Merger by and among of Corporation, Sequioa
Acquisition, and The North Face, Inc.
3.1(2) Amended and Restated Certificate of Incorporation 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.
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.
55
<PAGE>
10.9(1)** The North Face, Inc. 1996 Stock Incentive Plan.
10.9A** 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.
10.16(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.
21.1(10) List of Subsidiaries of The North Face, Inc.
23.1 Consent of Deloitte & Touche LLP.
23.2 Consent of Grant Thornton.
27.1 Financial Data Schedule.
(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.
(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.
56
<PAGE>
(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.
(b) Reports on Form 8-K: as filed with the Securities and Exchange Commission on
July 7, 1998.
(c) Reports on Form 8-K/A: as filed with the Securities and Exchange Commission
on July 21, 1998.
(c) The exhibits required by Item 601 are filed herewith.
(d) The financial statement schedules required by Regulation S-X are filed
herewith.
* 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.
57
<PAGE>
AGREEMENT AND PLAN OF MERGER
by and among
VF CORPORATION
SEQUOIA ACQUISITION, INC.
and
THE NORTH FACE, INC.
dated
April 7, 2000
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
<S> <C>
ARTICLE I THE OFFER AND MERGER................................................... 2
Section 1.1 The Offer................................................... 2
Section 1.2 Company Actions............................................. 3
Section 1.3 Directors................................................... 4
Section 1.4 The Merger.................................................. 5
Section 1.5 Effective Time.............................................. 6
Section 1.6 Closing..................................................... 6
Section 1.7 Directors and Officers of the Surviving Corporation......... 6
Section 1.8 Effects of the Merger....................................... 6
Section 1.9 Stockholders' Meeting....................................... 6
Section 1.10 Merger Without Meeting of Stockholders...................... 7
Section 1.11 Earliest Consummation....................................... 7
ARTICLE II CONVERSION OF SECURITIES.............................................. 7
Section 2.1 Conversion of Capital Stock................................. 7
Section 2.2 Dissenting Shares........................................... 8
Section 2.3 Surrender of Shares; Stock Transfer Books................... 8
Section 2.4 Company Stock Plans......................................... 10
Section 2.5 Adjustments................................................. 11
Section 2.6 Lost Certificates........................................... 11
ARTICLE III REPRESENTATIONS AND WARRANTIES OF THE COMPANY........................ 11
Section 3.1 Corporate Existence and Power............................... 11
Section 3.2 Corporate Authorization..................................... 12
Section 3.3 Consents And Approvals; No Violations....................... 12
Section 3.4 Capitalization.............................................. 13
Section 3.5 Subsidiaries................................................ 14
Section 3.6 SEC Documents............................................... 14
Section 3.7 Financial Statements........................................ 15
Section 3.8 Absence Of Undisclosed Liabilities.......................... 15
Section 3.9 Information in Proxy Statement and Offer Documents.......... 15
Section 3.10 Absence of Certain Changes.................................. 16
Section 3.11 Taxes....................................................... 17
Section 3.12 Employee Matters............................................ 18
Section 3.13 Litigation; Compliance With Laws............................ 20
Section 3.14 Labor Matters............................................... 20
Section 3.15 Certain Contracts and Arrangements.......................... 21
Section 3.16 Environmental Matters....................................... 21
Section 3.17 Intellectual Property....................................... 22
Section 3.18 Opinion Of Financial Advisor................................ 23
</TABLE>
-i-
<PAGE>
TABLE OF CONTENTS
(continued)
<TABLE>
<CAPTION>
Page
----
<S> <C>
Section 3.19 Board Recommendation................................................ 23
Section 3.20 Rights Plan; Antitakover Statues.................................... 23
Section 3.21 Finders' Fees....................................................... 24
ARTICLE IV REPRESENTATIONS AND WARRANTIES OF PARENT AND PURCHASER........................ 24
Section 4.1 Corporate Existence and Power....................................... 24
Section 4.2 Authorization....................................................... 24
Section 4.3 Consents And Approvals; No Violations............................... 25
Section 4.4 Information in Proxy Statement...................................... 26
Section 4.5 Share Ownership..................................................... 26
Section 4.6 Financing........................................................... 26
Section 4.7 Finders' Fees....................................................... 26
ARTICLE V CONDUCT OF BUSINESS PENDING THE MERGER......................................... 26
Section 5.1 Acquisition Proposals............................................... 26
Section 5.2 Interim Operations of the Company................................... 27
Section 5.3 No Solicitation..................................................... 27
Section 5.4 Notices of Certain Events........................................... 28
ARTICLE VI ADDITIONAL AGREEMENTS......................................................... 29
Section 6.1 Proxy Statement..................................................... 29
Section 6.2 Meeting of Stockholders of the Company.............................. 29
Section 6.3 Additional Agreements............................................... 29
Section 6.4 Access; Confidentiality............................................. 29
Section 6.5 Consents and Approvals.............................................. 30
Section 6.6 Publicity........................................................... 30
Section 6.7 Directors' and Officers' Insurance and Indemnification.............. 30
Section 6.8 Purchaser Compliance................................................ 31
Section 6.9 Best Efforts........................................................ 31
Section 6.10 Employee Benefits................................................... 32
Section 6.11 Further Assurances.................................................. 32
ARTICLE VII CONDITIONS................................................................... 33
Section 7.1 Conditions to Each Party's Obligations to Effect the Merger......... 33
ARTICLE VIII TERMINATION................................................................. 33
Section 8.1 Termination......................................................... 33
Section 8.2 Effect of Termination............................................... 34
ARTICLE IX MISCELLANEOUS................................................................. 35
Section 9.1 Amendment and Modification.......................................... 35
</TABLE>
-ii-
<PAGE>
TABLE OF CONTENTS
(continued)
<TABLE>
<S> <C>
Section 9.2 Non-Survival of Representations and Warranties.................. 35
Section 9.3 Expenses........................................................ 35
Section 9.4 Notices......................................................... 36
Section 9.5 Interpretation.................................................. 37
Section 9.6 Counterparts.................................................... 37
Section 9.7 Entire Agreement; No Third Party Beneficiaries.................. 37
Section 9.8 Severability.................................................... 38
Section 9.9 Specific Performance............................................ 38
Section 9.10 Governing Law................................................... 38
Section 9.11 Jurisdiction.................................................... 38
Section 9.12 WAIVER OF JURY TRIAL............................................ 38
Section 9.13 Assignment...................................................... 38
</TABLE>
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<PAGE>
AGREEMENT AND PLAN OF MERGER
AGREEMENT AND PLAN OF MERGER (the "Agreement"), dated April 7, 2000, by and
---------
among VF Corporation, a Pennsylvania corporation ("Parent"), Sequoia Acquisition
------
Inc., a Delaware corporation and a wholly owned subsidiary of Parent
("Purchaser"), and The North Face, Inc., a Delaware corporation (together with
---------
its subsidiaries from time to time (except as the context may otherwise
require), (the "Company")).
-------
WHEREAS, the Board of Directors of each of Parent, Purchaser and the
Company has approved, and deems it advisable and in the best interests of its
respective stockholders to consummate, the acquisition of the Company by Parent
upon the terms and subject to the conditions set forth herein;
WHEREAS, in furtherance thereof, it is proposed that Purchaser make a cash
tender offer (the "Offer") to acquire all shares (the "Shares") of the issued
----- ------
and outstanding common stock, par value $0.0025 per share, of the Company
(including the associated preferred share purchase rights issued pursuant to the
Rights Agreement (as defined in Section 3.20)), for $2.00 per share, net to the
seller in cash (such price, or any such higher price per Share as may be paid in
the Offer, being referred to herein as the "Offer Price" and the aggregate being
-----------
referred to herein as the "Offer Consideration");
-------------------
WHEREAS, also in furtherance of such acquisition, the Board of Directors of
each of Parent, Purchaser and the Company have each approved the Merger (as
defined below) following the Offer in accordance with the General Corporation
Law of the State of Delaware (the "DGCL") and upon the terms and subject to the
----
conditions set forth herein, whereby each issued and outstanding Share not owned
directly or indirectly by Parent, Purchaser or the Company will be converted
into the right to receive an amount equal to the Offer Price in cash; and
WHEREAS, the Board of Directors of the Company (the "Company Board of
----------------
Directors") has determined that the consideration to be paid for each Share in
- ---------
the Offer and the Merger is fair to the holders of such Shares and has resolved
to recommend that the holders of such Shares accept the Offer and approve this
Agreement and each of the transactions contemplated hereby upon the terms and
subject to the conditions set forth herein.
NOW, THEREFORE, in consideration of the foregoing and the mutual
representations, warranties, covenants and agreements set forth herein, the
parties hereto agree as follows:
<PAGE>
ARTICLE I
THE OFFER AND MERGER
Section 1.1 The Offer.
---------
(a) Provided that this Agreement shall not have been terminated in
accordance with Article VIII hereof and none of the events set forth in Annex A
shall have occurred and be existing, as promptly as practicable (but in no event
later than the later of (i) ten business days after a public announcement of the
execution of this Agreement and (ii) the first business day following the filing
by the Company with the United States Securities and Exchange Commission (the
"SEC") of its Annual Report on Form 10-K for the Fiscal Year Ended December 31,
---
1999 (the "1999 10-K")), Purchaser shall, and Parent shall cause Purchaser to,
---------
commence (within the meaning of Rule 14d-2 under the Securities Exchange Act of
1934, as amended (the "Exchange Act")) the Offer at the Offer Price. Subject
------------
only to the conditions set forth in Annex A hereto, Purchaser shall, and Parent
shall cause Purchaser to, accept for payment and pay for all Shares validly
tendered and not withdrawn pursuant to the Offer prior to its expiration date.
The Offer shall be made by means of an offer to purchase (the "Offer to
--------
Purchase") subject to the conditions set forth in Annex A hereto. Purchaser
- --------
expressly reserves the right to waive any conditions to the Offer and to make
any change in the terms or conditions to the Offer, provided that, except as
--------
provided in Section 1.1(d), Purchaser shall not, without the prior consent of
the Company, (i) decrease the Offer Price or change the form of consideration
payable in the Offer, (ii) decrease the number of Shares sought to be purchased
in the Offer, (iii) impose conditions to the Offer in addition to those set
forth in Annex A, (iv) amend any condition of the Offer set forth in Annex A, or
(v) amend or waive satisfaction of the Minimum Condition (as defined in Annex A
hereto). Purchaser shall on the terms and subject to the prior satisfaction or
waiver of the conditions of the Offer, accept for payment, and pay for, Shares
tendered as soon as it is legally permitted to do so under applicable law,
subject to Section 1.1(d) (the "Acceptance Date"). Parent shall provide or
---------------
cause to be provided to Purchaser on a timely basis the funds necessary to
accept for payment, and pay for, any Shares that Purchaser becomes obligated to
accept for payment, and pay for, pursuant to the Offer.
(b) As soon as practicable on the date the Offer is commenced,
Parent and Purchaser shall file with the SEC a Statement on Schedule TO
(together with all amendments and supplements thereto and including the exhibits
thereto, the "Schedule TO") with respect to the Offer. The Schedule TO will
-----------
contain (including as an exhibit) or incorporate by reference the Offer to
Purchase and a form of letter of transmittal and summary advertisement
(collectively, together with any amendments and supplements thereto, the "Offer
-----
Documents"). Parent and Purchaser agree that the Offer Documents will comply in
- ---------
all material respects with the provisions of applicable Federal securities laws
and shall not contain any untrue statement of a material fact or omit to state
any material fact required to be stated therein or necessary in order to make
the statements made therein, in light of the circumstances under which they were
made, not misleading.
(c) Each of Parent and Purchaser will take all steps necessary to
cause the Offer Documents to be filed with the SEC as promptly as practicable
after the public announcement of the
-2-
<PAGE>
execution of this Agreement. Each of Parent and Purchaser will promptly correct
any information in the Offer Documents if and to the extent that it shall have
become false or misleading in any material respect, and Purchaser further will
take all steps necessary to cause the Schedule TO or the Offer Documents as so
corrected to be filed with the SEC and to be disseminated to holders of the
Shares, in each case as promptly as practicable. The Company and its counsel
shall be given the reasonable opportunity to review the Offer Documents,
including the initial Schedule TO (as well as all amendments or supplements
thereto), before any such document is filed with the SEC. In addition, Parent
and Purchaser will provide the Company and its counsel with any comments or
other communications, whether written or oral, Parent, Purchaser or their
counsel may receive from time to time from the SEC or its staff with respect to
the Offer Documents promptly after the receipt of such comments or other
communications.
(d) The Offer shall be made by means of an Offer to Purchase which
shall provide for an initial expiration date of twenty (20) business days from
the date of commencement (the "Initial Expiration Date"). Parent and Purchaser
-----------------------
agree that Purchaser shall not terminate or withdraw the Offer or extend the
expiration date of the Offer unless at the expiration date of the Offer the
conditions to the Offer shall not have been satisfied or earlier waived;
provided that notwithstanding the foregoing, Purchaser may, without the consent
- --------
of the Company, extend the Offer on one occasion following the time that all of
the conditions to the Offer have been satisfied as of the scheduled expiration
date of the Offer for a period not to exceed five (5) business days, if the
number of Shares tendered, together with any Shares beneficially owned by Parent
or Purchaser or any other subsidiary of Parent, is less than 90% of the Shares
outstanding on the scheduled expiration date of the Offer; provided, further,
-------- -------
that if Purchaser elects to extend the Offer as set forth in the immediately
preceding proviso, the obligation of Purchaser, and of Parent to cause Purchaser
to, accept for payment, purchase and pay for all of the Shares tendered pursuant
to the Offer and not withdrawn shall be subject only to the Minimum Condition
and the conditions set forth in Sections (a), (b) and (g) of Annex A.
Section 1.2 Company Actions
---------------
(a) The Company represents that the Company Board of Directors has
(i) unanimously determined that each of the Agreement, the Offer and the Merger
are fair to and in the best interests of the stockholders of the Company, (ii)
duly approved this Agreement and the transactions contemplated hereby, including
the Offer and the Merger (collectively, the "Transactions"), and such approval
------------
is sufficient to render Section 203 of the DGCL inapplicable to this Agreement,
and (iii) subject to the terms and conditions of this Agreement, resolved to
recommend that the stockholders of the Company accept the Offer and tender their
shares thereunder to Purchaser and approve and adopt this Agreement and the
Merger. The Company further represents that Deutsche Bank Securities Inc. ("DB")
--
has delivered to the Company's Board of Directors its written opinion that the
consideration to be paid in the Offer and the Merger is fair to the holders of
Shares from a financial point of view. The Company will promptly furnish Parent
with a list of its stockholders, mailing labels and any available listing or
computer file containing the names and addresses of all record holders of Shares
and lists of securities positions of Shares held in stock depositories, in each
case true and correct as of the most recent practicable date, and will
-3-
<PAGE>
provide to Parent such additional information (including updated lists of
stockholders, mailing labels and lists of securities positions) and such other
assistance as Parent may reasonably request in connection with the Offer.
(b) As soon as practicable on the date the Offer is commenced, the
Company shall file with the SEC a Solicitation/Recommendation Statement on
Schedule 14D-9 (together with all amendments or supplements thereto and
including the exhibits thereto, the "Schedule 14D-9") which shall, subject to
--------------
Section 5.3 of this Agreement, contain the recommendation referred to in clause
(iii) of Section 1.2(a) hereof. The Schedule 14D-9 will comply in all material
respects with the provisions of applicable federal securities laws and, on the
date filed with the SEC and on the date first published or sent to the Company's
stockholders, shall not contain any untrue statement of a material fact or omit
to state any material fact required to be stated therein or necessary in order
to make the statements made therein, in light of the circumstances under which
they were made, not misleading. The Company further agrees to take all steps
necessary to cause the Schedule 14D-9 to be filed with the SEC and to be
disseminated to holders of the Shares, in each case, as and to the extent
required by applicable federal securities laws. The Company shall mail, or cause
to be mailed, such Schedule 14D-9 to the stockholders of the Company at the same
time the Offer Documents are first mailed to the stockholders of the Company
together with such Offer Documents. The Company agrees promptly to correct any
information in the Schedule 14D-9 if and to the extent that it shall have become
false or misleading in any material respect and the Company further agrees to
take all steps necessary to cause the Schedule 14D-9 as so corrected to be filed
with the SEC and to be disseminated to holders of the Shares, in each case, as
and to the extent required by applicable federal securities laws. Parent and its
counsel shall be given the opportunity to review and comment on the Schedule
14D-9 and any other material to be filed by the Company with the SEC in
connection with the Offer before it is filed with the SEC. In addition, the
Company agrees to provide Parent, Purchaser and their counsel with any comments,
whether written or oral, that the Company or its counsel may receive from time
to time from the SEC or its staff with respect to the Schedule 14D-9 promptly
after the receipt of such comments or other communications.
Section 1.3 Directors
---------
(a) Subject to compliance with applicable law, promptly upon the
purchase by Purchaser pursuant to the Offer of such number of Shares which
represents a majority of all outstanding Shares on a fully diluted basis, Parent
shall be entitled to designate the number of directors, rounded up to the next
whole number, on the Company Board of Directors as is equal to the product of
(i) the total number of directors on such Board (determined after giving effect
to the directors designated by Parent pursuant to this sentence) and (ii) the
percentage (expressed as a decimal) that the aggregate number of Shares
beneficially owned by Parent bears to the total number of Shares then
outstanding. In furtherance thereof, the Company shall, upon the request of
Parent promptly secure the resignations of such number of its incumbent
directors as is necessary to enable Parent's designees to be elected to the
Company Board of Directors and shall take all actions available to the Company
to cause Parent's designees to be so elected, subject to compliance with Section
14(f) of the Exchange Act and Rule 14f-1 promulgated thereunder.
-4-
<PAGE>
(b) The Company shall promptly take all actions required pursuant
to Section 14(f) of the Exchange Act and Rule 14f-1 promulgated thereunder in
order to fulfill its obligations under Section 1.3(a) hereof, and shall include
in the Schedule 14D-9 mailed to stockholders promptly after the commencement of
the Offer (or an amendment thereof or an information statement pursuant to Rule
14f-1 if Purchaser has not theretofore designated directors) such information
with respect to the Company and its officers and directors as is required under
Section 14(f) and Rule 14f-1 in order to fulfill its obligations under Section
1.3(a). Parent or Purchaser shall supply the Company information with respect to
either of them and their nominees, officers, directors and affiliates required
by such Section 14(f) and Rule 14f-1.
(c) In the event that Parent's designees are elected to the
Company Board of Directors, subject to the other terms of this Agreement and
until the Effective Time, the Company Board of Directors shall have at least two
directors who are directors on the date hereof and neither of whom is an officer
of the Company nor a designee, stockholder, affiliate or associate (within the
meaning of the federal securities laws) of Parent (one or more of such
directors, the "Independent Directors"), provided that, in such event, if the
--------------------- -------- ----
number of Independent Directors shall be reduced below two for any reason
whatsoever, any remaining Independent Director shall be entitled to designate
persons to fill such vacancies who shall be deemed Independent Directors for
purposes of this Agreement or, if no Independent Director then remains, the
other directors shall designate one person to fill one of the vacancies who
shall not be a stockholder, affiliate or associate of Parent or Purchaser and
such person shall be deemed to be an Independent Director for purposes of this
Agreement. Notwithstanding anything in this Agreement to the contrary, in the
event that Parent's designees are elected to the Company Board of Directors,
after the acceptance for payment of Shares pursuant to the Offer and prior to
the Effective Time, the affirmative vote of a majority of the Independent
Directors shall be required to (a) amend or terminate this Agreement on behalf
of the Company, (b) exercise or waive any of the Company's rights, benefits or
remedies hereunder, (c) extend the time for performance of Purchaser's
obligations hereunder or (d) take any other action by the Company Board of
Directors under or in connection with this Agreement.
Section 1.4 The Merger. In accordance with the applicable provisions of
----------
this Agreement and the DGCL, at the Effective Time (as defined in Section 1.5),
the Company and Purchaser shall consummate a merger (the "Merger") pursuant to
------
which (a) Purchaser shall be merged with and into the Company and the separate
corporate existence of Purchaser shall thereupon cease, (b) the Company shall be
the successor or surviving corporation in the Merger (sometimes hereinafter
referred to as the "Surviving Corporation") and shall continue to be governed by
---------------------
the laws of the State of Delaware, and (c) the separate corporate existence of
the Company with all of its rights, privileges, immunities, powers and
franchises shall continue unaffected by the Merger, except as set forth in this
Section 1.4. Pursuant to the Merger, (x) the Certificate of Incorporation of
the Company (the "Certificate of Incorporation") shall be amended in its
----------------------------
entirety to read as the Certificate of Incorporation of Purchaser in effect
immediately prior to the Effective Time, except that Article I thereof shall
read as follows: "The name of the Corporation is THE NORTH FACE, INC." and, as
so amended, shall be the certificate of incorporation of the Surviving
Corporation until thereafter amended as provided by law and such Certificate of
Incorporation and (y) the Bylaws of Purchaser (the "Bylaws"), as in effect
------
immediately prior to the Effective Time (as hereinafter defined), shall be
-5-
<PAGE>
the Bylaws of the Surviving Corporation until thereafter amended as provided by
law, such Certificate of Incorporation or such Bylaws.
Section 1.5 Effective Time. As soon as practicable after the satisfaction
--------------
or waiver of the conditions set forth in Article VII hereof, Parent, Purchaser
and the Company shall cause to be executed and filed on the Closing Date (as
defined in Section 1.6) (or on such other date as Parent and the Company may
agree) with the Secretary of State of the State of Delaware (the "Secretary of
------------
State") in the manner required by the DGCL a certificate of merger, and the
- -----
parties shall take such other and further actions as may be required by law to
make the merger effective. The time the Merger becomes effective in accordance
with applicable law is hereinafter referred to as the "Effective Time."
--------------
Section 1.6 Closing. The closing of the Merger (the "Closing") shall take
------- -------
place at 10:00 a.m. on a date to be specified by the parties, which shall be no
later than the second business day after satisfaction or waiver of all of the
conditions set forth in Article VII hereof (the "Closing Date"), at the offices
------------
of Proskauer Rose LLP, 1585 Broadway, New York, New York, unless another date or
place is agreed to in writing by the parties hereto.
Section 1.7 Directors and Officers of the Surviving Corporation. Subject
---------------------------------------------------
to applicable law, the directors of Purchaser and the officers of the Company at
the Effective Time shall, from and after the Effective Time, be the directors
and officers of the Surviving Corporation until their successors shall have been
duly elected or appointed or qualified or until their earlier death, resignation
or removal in accordance with the Certificate of Incorporation and the Bylaws.
If, at the Effective Time, a vacancy shall exist on the Company Board of
Directors or in any office of the Surviving Corporation, such vacancy may
thereafter be filled in the manner provided by law.
Section 1.8 Effects of the Merger. At the Effective Time, the Merger
---------------------
shall have the effects set forth in the DGCL. Without limiting the generality of
the foregoing, and subject thereto, at the Effective Time all the property,
rights, privileges, powers and franchises of the Company and Purchaser shall
vest in the Surviving Corporation, and all debts, liabilities and duties of the
Company and Purchaser shall become the debts, liabilities and duties of the
Surviving Corporation.
Section 1.9 Stockholders' Meeting. If required by the Certificate of
---------------------
Incorporation and/or applicable law in order to consummate the Merger, the
Company, acting through its Board of Directors, shall, in accordance with
applicable law:
(i) duly call, give notice of, convene and hold a special
meeting of its stockholders (the "Special Meeting") as promptly as practicable
---------------
following the acceptance for payment and purchase of Shares by Purchaser
pursuant to the Offer for the purpose of considering and taking action upon the
approval of the Merger and the adoption of this Agreement; and otherwise comply
with all legal requirements applicable to such meeting. Subject to Section 5.3,
the Board of Directors of the Company shall recommend the approval and adoption
of the Merger, this Agreement and the transactions contemplated hereby to the
Company's stockholders;
-6-
<PAGE>
(ii) promptly prepare and file with the SEC a preliminary
proxy or information statement relating to the Merger and this Agreement and use
its best efforts (x) to obtain and furnish the information required to be
included by the SEC in the Proxy Statement (as hereinafter defined) and to
respond promptly to any comments made by the SEC with respect to the preliminary
proxy or information statement and cause a definitive proxy or information
statement, including any amendment or supplement thereto (the "Proxy Statement")
---------------
and all other proxy materials to be mailed to its stockholders, and (y) to
obtain the necessary approvals of the Merger, Agreement and the transactions
contemplated hereby by its stockholders; and
(iii) subject to Section 5.3, include in the Proxy
Statement the recommendation of the Board of Directors that stockholders of the
Company vote in favor of the approval of the Merger and the adoption of this
Agreement.
(b) Parent will provide the Company with the information
concerning Parent and Purchaser required to be included in the Proxy Statement.
Parent shall vote, or cause to be voted, all of the Shares then owned by it and
Purchaser or any of its other subsidiaries and affiliates in favor of the
approval of the Merger and the approval and adoption of this Agreement
Section 1.10 Merger Without Meeting of Stockholders. Notwithstanding
--------------------------------------
Section 1.9 hereof, in the event that Parent, Purchaser and any other
subsidiaries of Parent shall have acquired in the aggregate at least 90% of the
outstanding Shares pursuant to the Offer or otherwise, the parties hereto shall
take all necessary and appropriate action to cause the Merger to become
effective as soon as practicable after the acceptance for payment of and payment
for Shares by Purchaser pursuant to the Offer, without a meeting of stockholders
of the Company, in accordance with the DGCL.
Section 1.11 Earliest Consummation. Each party hereto shall use its best
---------------------
efforts to consummate the Merger as soon as practicable.
ARTICLE II
CONVERSION OF SECURITIES
Section 2.1 Conversion of Capital Stock. As of the Effective Time, by
----------------------------
virtue of the Merger and without any action on the part of the holders of any
Shares or holders of any class or series of common stock, par value $1.00 per
share, of Purchaser ("Purchaser Common Stock"):
----------------------
(a) Each issued and outstanding share of Purchaser Common Stock
shall be converted into and become one validly issued, fully paid and
nonassessable share of common stock of the Surviving Corporation and shall
constitute the only outstanding shares of capital stock of the Surviving
Corporation.
-7-
<PAGE>
(b) All Shares held by the Company as treasury stock or owned by
Parent, Purchaser or any other subsidiary of Parent shall be cancelled and
retired, and shall cease to exist and no consideration shall be delivered in
exchange therefor.
(c) Each issued and outstanding Share immediately before the
Effective Time (other than any Shares to be cancelled pursuant to Section 2.1(b)
and any Dissenting Shares (as hereinafter defined)) shall be cancelled and
extinguished and be converted into the right to receive the Offer Price in cash,
payable to the holder thereof, without interest (the "Merger Consideration"),
--------------------
upon surrender of the certificate formerly representing such Share in the manner
provided in Section 2.3 hereof.
Section 2.2 Dissenting Shares. Notwithstanding Section 2.1 hereof, Shares
-----------------
outstanding immediately prior to the Effective Time and held by a holder who has
not voted in favor of the Merger or consented thereto in writing and who has
demanded appraisal for such shares in accordance with the DGCL ("Dissenting
----------
Shares") shall not be converted into the right to receive the Merger
- ------
Consideration as provided in Section 2.1, unless and until such holder fails to
perfect or withdraws or otherwise loses his right to appraisal and payment under
the DGCL. If, after the Effective Time, any such holder fails to perfect or
withdraws or loses his right to appraisal, then such Dissenting Shares shall
thereupon be treated as if they had been converted as of the Effective Time into
the right to receive the Merger Consideration, if any, to which such holder is
entitled, without interest or dividends thereon. The Company shall give Parent
prompt notice of any demands received by the Company for appraisal of Shares,
and Parent shall have the right to participate in all negotiations and
proceedings with respect to such demands. Except with the prior written consent
of Parent, the Company shall not make any payment with respect to, or settle or
offer to settle, any such demands.
Section 2.3 Surrender of Shares; Stock Transfer Books.
-----------------------------------------
(a) Before the consummation of the Merger, (i) Purchaser shall
designate a bank or trust company reasonably acceptable to the Company to act as
paying agent for the holders of Shares (the "Paying Agent") for the payment of
------------
the Merger Consideration, and (ii) Parent shall deposit or shall cause to be
deposited with the Paying Agent in a separate fund established for the benefit
of the holders of Shares, for payment in accordance with this Article II,
through the Paying Agent (the "Payment Fund"), immediately available funds in
------------
amounts necessary to make the payments pursuant to the Merger to holders of
Shares. The Paying Agent shall invest portions of the Payment Fund as Parent
directs in obligations of or guaranteed by the United States of America, in
commercial paper obligations receiving the highest investment grade rating from
both Moody's Investors Services, Inc. and Standard & Poor's Corporation, or in
certificates of deposit, bank repurchase agreements or banker's acceptances of
commercial banks with capital exceeding $1,000,000,000 (collectively, "Permitted
---------
Investments"); provided, however, that the maturities of Permitted Investments
- ----------- -------- -------
shall be such as to permit the Paying Agent to make prompt payment to former
holders of Shares entitled thereto as contemplated by this Agreement. Parent
shall cause the Payment Fund to be promptly replenished to the extent of any
losses incurred as a result of Permitted Investments. If for any reason
(including losses) such funds are inadequate to pay the amounts to
-8-
<PAGE>
which holders of Shares shall be entitled under this Agreement, Parent shall in
any event be liable for payment thereof. Such funds deposited with the Paying
Agent pursuant to this Section 2.3 shall not be used for any purpose except as
expressly provided in this Agreement. From time to time at or after the
Effective Time, Parent shall take all lawful action necessary to make the
appropriate cash payments, if any, to holders of Dissenting Shares. Prior to the
Effective Time, Parent shall enter into appropriate commercial arrangements to
ensure effectuation of the immediately preceding sentence.
(b) As soon as reasonably practicable after the Effective Time,
the Paying Agent shall mail to each holder of record of a certificate or
certificates, which immediately prior to the Effective Time represented
outstanding Shares (the "Certificates"), whose Shares were converted pursuant to
------------
Section 2.1 into the right to receive the Merger Consideration (i) a letter of
transmittal (which shall specify that delivery shall be effected and that the
risk of loss of and title to the Certificates shall pass, only upon delivery of
the Certificates to the Paying Agent and shall be in such form and have such
other provisions not inconsistent with this Agreement as Parent may specify) and
(ii) instructions for use in effecting the surrender of Certificates in exchange
for payment of the Merger Consideration (together, the "Transmittal Documents").
---------------------
Upon surrender of a Certificate for cancellation to the Paying Agent or to such
other agent or agents as may be appointed by Parent, together with such letter
of transmittal, duly executed, the holder of such Certificate shall be entitled
to receive in exchange therefor the Merger Consideration for each Share formerly
represented by such Certificate, and the Certificate so surrendered shall
forthwith be cancelled. If payment of the Merger Consideration is to be made to
a person other than the person in whose name the surrendered Certificate is
registered, it shall be a condition of payment that the Certificate so
surrendered shall be properly endorsed or shall otherwise be in proper form for
transfer and that the person requesting such payment shall have paid any
transfer and other taxes required by reason of the payment of the Merger
Consideration to a person other than the registered holder of the Certificate
surrendered or shall have established to the satisfaction of the Surviving
Corporation that such tax either has been paid or is not applicable. Until
surrendered as contemplated by this Section 2.3, each Certificate shall be
deemed at any time after the Effective Time to represent only the right to
receive the Merger Consideration in cash as contemplated by this Section 2.3.
Upon the surrender of Certificates in accordance with the terms and instructions
contained in the Transmittal Documents, Purchaser shall cause the Paying Agent
to pay the holder of such Certificates in exchange therefor cash in an amount
equal to the Merger Consideration multiplied by the number of Shares represented
by such Certificate (other than Certificates representing Dissenting Shares and
Certificates representing Shares held by Purchaser).
(c) At the Effective Time, the stock transfer books of the Company
shall be closed and there shall not be any further registration of transfers of
shares of any shares of capital stock thereafter on the records of the Company.
From and after the Effective Time, the holders of certificates evidencing
ownership of the Shares outstanding immediately prior to the Effective Time
shall cease to have any rights with respect to such Shares, except as otherwise
provided for herein or by applicable law. If, after the Effective Time,
Certificates are presented to the Surviving Corporation, they shall be cancelled
and exchanged for cash as provided in this Article II. No interest shall accrue
or be paid on any cash payable upon the surrender of a Certificate or
Certificates which immediately before the Effective Time represented outstanding
Shares.
-9-
<PAGE>
(d) Promptly following the date which is six months after the
Effective Time, the Surviving Corporation shall be entitled to require the
Paying Agent to deliver to it any cash (including any interest received with
respect thereto), Certificates and other documents in its possession relating to
the transactions contemplated hereby, which had been made available to the
Paying Agent and which have not been disbursed to holders of Certificates, and
thereafter such holders shall be entitled to look to the Surviving Corporation
(subject to abandoned property, escheat or similar laws) only as general
creditors thereof with respect to the Merger Consideration payable upon due
surrender of their Certificates, without any interest thereon. Notwithstanding
the foregoing, neither the Surviving Corporation nor the Paying Agent shall be
liable to any holder of a Certificate for Merger Consideration delivered to a
public official pursuant to any applicable abandoned property, escheat or
similar law. Any amounts remaining unclaimed by holders of Shares two years
after the Effective Time (or such earlier date immediately prior to such time
when the amounts would otherwise escheat to or become property of any
governmental authority) shall become, to the extent permitted by applicable law,
the property of Parent free and clear of any claims or interest of any Person
previously entitled thereto.
(e) Any portion of the Merger Consideration made available to the
Paying Agent pursuant to Section 2.3(a) to pay for Shares for which appraisal
rights have been perfected shall be returned to Parent, upon demand.
(f) The Merger Consideration paid in the Merger shall be net to
the holder of Shares in cash, subject to reduction only for any applicable
Federal, state, local or foreign withholding taxes or, as set forth in Section
2.3(b), stock transfer taxes payable by such holder.
Section 2.4 Company Stock Plans.
-------------------
(a) Immediately after the Acceptance Date, each holder of a then
outstanding option under any employee stock option or compensation plan or
arrangement (the "Options"), whether or not then exercisable or fully vested,
and each holder of the warrants to purchase an aggregate of 202,597 Shares
issued to certain parties (collectively, the "Warrants"), shall, in settlement
--------
thereof, receive for each Share subject to such Option, or Warrant, an amount
(net of any applicable withholding tax) in cash equal to the difference between
the Offer Price and the per Share exercise price of such Option, or Warrant, to
the extent the Offer Price is greater than the per Share exercise price of such
Option or Warrant (such excess amount with respect to Options being hereinafter
referred to as the "Option Consideration," and such amount with respect to the
--------------------
Warrants being hereinafter referred to as the "Warrant Consideration");
---------------------
provided, however, that with respect to any person subject to Section 16(a) of
- -------- -------
the Exchange Act, any such amount shall be paid as soon as practicable after the
first date payment can be made without liability to such person under Section
16(b) of the Exchange Act. Prior to the Acceptance Date, the Company shall use
its reasonable efforts to obtain all necessary consents or releases from holders
of Options and holders of Warrants, and take any such other action as may be
reasonably necessary to give effect to the transactions contemplated by this
Section 2.4 (except for such action that may require the approval of the
Company's stockholders) and to otherwise cause each Option, and each Warrant, to
be surrendered to the Company and cancelled at the Acceptance Date. The
surrender of an Option, or
-10-
<PAGE>
Warrant, to the Company shall be deemed a release of any and all rights the
holder had or may have had in such Option or Warrant, other than the right to
receive the Option Consideration or Warrant Consideration. Parent shall provide
the Company with sufficient funds to make the payments required by this Section
2.4.
(b) Notwithstanding anything in this Agreement to the contrary, a
vote of a majority of the Independent Directors shall be required to amend this
Section 2.4 in any manner adverse to the holders of Options or Warrants
described herein.
Section 2.5 Adjustments. If, during the period between the date of this
-----------
Agreement and the Effective Time, any change in the outstanding Shares shall
occur, including by reason of any reclassification, recapitalization, stock
split or combination, exchange or readjustment of Shares, or stock dividend
thereon with a record date during such period, but excluding the issuance of
Shares upon exercise of currently outstanding Options or Warrants in accordance
with their terms, the cash payable pursuant to the Offer, the Merger
Consideration and any other amounts payable pursuant to this Agreement shall be
appropriately adjusted.
Section 2.6 Lost Certificates. If any Certificate shall have been lost,
-----------------
stolen or destroyed, upon the making of an affidavit of that fact by the person
claiming such Certificate to be lost, stolen or destroyed and, if required by
the Surviving Corporation, the posting by such person of a bond, in such
reasonable amount as the Surviving Corporation may direct, as indemnity against
any claim that may be made against it with respect to such Certificate, the
Paying Agent will pay, in exchange for such lost, stolen or destroyed
Certificate, the Merger Consideration to be paid in respect of the Shares
represented by such Certificate, as contemplated by this Article.
ARTICLE III
REPRESENTATIONS AND WARRANTIES OF THE COMPANY
The Company represents and warrants to Parent and Purchaser, subject to
such exceptions as are specifically disclosed in writing in the disclosure
letter supplied by the Company to Parent, which disclosure shall provide an
exception to or otherwise qualify only the representations or warranties of
Company specifically referred to in such disclosure, and such other
representations and warranties to which such disclosure manifestly appears to be
applicable (the "Company Disclosure Schedule"), as follows:
---------------------------
Section 3.1 Corporate Existence and Power. The Company is a corporation
-----------------------------
duly incorporated, validly existing and in good standing under the laws of the
State of Delaware, and has all corporate powers and all governmental licenses,
authorizations, permits, consents and approvals (collectively, "Licenses")
--------
required to carry on its business as now conducted except for failures to have
any such License which would not, in the aggregate, have a Company Material
Adverse Effect (as defined below). The Company is duly qualified to do business
as a foreign corporation and is in good standing in each jurisdiction where the
character of the property owned, leased or operated by it or the nature of its
activities makes such qualification necessary, except in such jurisdictions
where failures to be so qualified would not reasonably be expected to, in the
aggregate, have a Company
-11-
<PAGE>
Material Adverse Effect. As used herein, the term "Company Material Adverse
------------------------
Effect" means a material adverse effect on the financial condition, business,
- ------
assets or results of operations of the Company and its Subsidiaries (as defined
in Section 3.5 hereof), taken as a whole, provided, however, that in no event
-------- -------
shall any effect that results from (a) changes affecting the retail industry
generally, (b) changes affecting the United States economy generally, or (c) a
so-called "going concern" qualification in respect of the Company's financial
statements for the year ended December 31, 1999 or the absence of liquidity or
capital resources giving rise thereto or the adverse effect on the Company's
relations with customers, suppliers and others proximately resulting therefrom
constitute a Company Material Adverse Effect. The Company has heretofore made
available to Parent true and complete copies of the Certificate of Incorporation
and the Bylaws of the Company as currently in effect.
Section 3.2 Corporate Authorization. The Company has the requisite
-----------------------
corporate power and authority to execute and deliver this Agreement and to
perform its obligations hereunder. The execution and delivery of this Agreement
and the performance of its obligations hereunder have been duly and validly
authorized, and this Agreement has been approved, by the Board of Directors of
the Company and no other corporate proceedings on the part of the Company, other
than with respect to the Merger, the approval and adoption of the Merger and
this Agreement by the Company's stockholders to the extent required by the
Certificate of Incorporation and by applicable law, are necessary to authorize
the execution, delivery and performance of this Agreement. This Agreement has
been duly executed and delivered by the Company and constitutes, assuming due
authorization, execution and delivery of this Agreement by Parent and Purchaser,
a valid and binding obligation of the Company, enforceable against the Company
in accordance with its terms, subject to the effects of bankruptcy, insolvency,
fraudulent conveyance, reorganization, moratorium and other similar laws
affecting creditors' rights generally, general equitable principles (whether
considered in a proceeding in equity or at law) and an implied covenant of good
faith and fair dealing.
Section 3.3 Consents And Approvals; No Violations
-------------------------------------
(a) None of the execution and delivery of this Agreement, the
performance by the Company of its obligations hereunder or the consummation by
the Company of the transactions contemplated hereby will (i) conflict with or
result in any breach of any applicable law or any provision of the Certificate
of Incorporation or the Bylaws of the Company; (ii) require any consent or other
action by any Person under or result in a violation or breach of, or constitute
(with or without due notice or lapse of time or both) a default (or give rise to
any right of termination, cancellation or acceleration or obligation to
repurchase, repay, redeem or acquire or any similar right or obligation) under
any of the terms, conditions or provisions of any note, mortgage, letter of
credit, other evidence of indebtedness, guarantee, license, lease or agreement
or similar instrument or obligation to which the Company or any of its
Subsidiaries (as defined in Section 3.5 hereof) is a party or by which any of
them or any of their assets may be bound or (iii) assuming that the filings,
registrations, notifications, authorizations, consents and approvals referred to
in subsection (b) below have been obtained or made, as the case may be, violate
any applicable law or any order, injunction, decree, statute, rule or regulation
of any Governmental Entity to which the Company or any of its Subsidiaries (as
defined in Section 3.5 hereof) is subject, excluding from the foregoing clauses
(ii)
-12-
<PAGE>
and (iii) such requirements, defaults, breaches, rights or violations (A) that
would not, in the aggregate, reasonably be expected to have a Company Material
Adverse Effect and would not have a material adverse effect on the ability of
the Company to perform its obligations hereunder or (B) that become applicable
as a result of the business or activities in which Parent or Purchaser or any of
their respective affiliates is or proposes to be engaged or any acts or
omissions by, or facts specifically pertaining to, Parent or Purchaser.
(b) No filing or registration with, notification to, or
authorization, consent or approval of, any government or any agency, court,
tribunal, commission, board, bureau, department, political subdivision or other
instrumentality of any government (including any regulatory or administrative
agency), whether federal, state, multinational (including, but not limited to,
the European Community), provincial, municipal, domestic or foreign (each, a
"Governmental Entity") is required in connection with the execution and delivery
-------------------
of this Agreement by the Company, the performance by the Company of its
obligations hereunder or the consummation by the Company of the transactions
contemplated hereby, except (i) the filing of an agreement of merger together
with an officer's certificate of the Company and Purchaser in accordance with
the DGCL; (ii) compliance with any applicable requirements of the Hart-Scott-
Rodino Antitrust Improvements Act of 1976, as amended, and the rules and
regulations thereunder (the "HSR Act"), or any foreign laws regulating
-------
competition, antitrust, investment or exchange controls; (iii) compliance with
any applicable requirements of the Securities Act of 1933, as amended, and the
rules and regulations thereunder (the "Securities Act") and the Securities
--------------
Exchange Act of 1934, as amended, and the rules and regulations thereunder (the
"Exchange Act"); (iv) compliance with any applicable requirements of state blue
------------
sky or takeover laws and (v) such other consents, approvals, orders,
authorizations, notifications, registrations, declarations and filings (A) the
failure of which to be obtained or made would not, in the aggregate, reasonably
be expected to have a Company Material Adverse Effect and would not have a
material adverse effect on the ability of the Company to perform its obligations
hereunder or (B) that become applicable as a result of the business or
activities in which Parent or Purchaser or any of their respective affiliates is
or proposes to be engaged or any acts or omissions by, or facts specifically
pertaining to, Parent or Purchaser.
Section 3.4 Capitalization. The authorized capital stock of the Company
--------------
consists of 50,000,000 shares of Common Stock. As of March 9, 2000, there were
12,751,896 shares of Common Stock issued and outstanding. All shares of capital
stock of the Company have been, and all Shares that may be issued pursuant to
the Option Plans (as defined below) will be, when issued in accordance with the
respective terms thereof, duly authorized and validly issued and are fully paid
and nonassessable and were not issued in violation of any preemptive rights. The
Company has no shares of its capital stock reserved for issuance, except for
shares reserved for issuance pursuant to Options issued under the Company's 1994
Stock Incentive Plan, 1995 Stock Incentive Plan, 1996 Stock Incentive Plan, 1996
Directors' Stock Option Plan and 1998 Nonstatutory Stock Option Plan (the
"Option Plans"), which Options as of the date of this Agreement cover the number
------------
of shares, and have the vesting dates and exercise prices, as set forth in
Section 3.4 of the Company Disclosure Schedule, 202,597 shares reserved for
issuance pursuant to outstanding Warrants and 87,706 shares reserved for
issuance pursuant to the Company's Employee Stock Purchase Program. Except as
set forth in Section 3.4 of the Company Disclosure Schedule, there are no pre-
emptive rights or
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<PAGE>
outstanding subscriptions, options, warrants, rights, convertible securities or
other agreements or commitments of any character relating to the issued or
unissued capital stock or other securities of the Company or any of the
Company's Subsidiaries (as defined in Section 3.5). After the Effective Time,
the Surviving Corporation will have no obligation to issue, transfer or sell any
shares of the Company's capital stock or capital stock of the Surviving
Corporation (except as contemplated by Section 2.4 hereof). Except as set forth
in this Section 3.4 and for changes since March 9, 2000, resulting from the
exercise of employee stock options outstanding on such date and the issuance of
up to 87,706 shares pursuant to the Company's Employee Stock Purchase Program,
there are no outstanding (i) shares of capital stock or voting securities of the
Company, (ii) securities of the Company convertible into or exchangeable for
shares of capital stock or voting securities of the Company or (iii) options or
other rights to acquire from the Company, or other obligations of the Company to
issue, any capital stock, voting securities or securities convertible into or
exchangeable for capital stock or voting securities of the Company. There are no
outstanding obligations of the Company or any of its Subsidiaries to repurchase,
redeem or otherwise acquire any of the Company's capital stock. No Subsidiary of
the Company owns any capital stock or other voting securities of the Company.
Section 3.5 Subsidiaries.
------------
(a) Each Subsidiary of the Company (i) is a corporation duly
incorporated, validly existing and in good standing under the laws of its
jurisdiction of incorporation, (ii) has all corporate powers and all Licenses
required to carry on its business as now conducted and (iii) is duly qualified
to do business as a foreign corporation and is in good standing in each
jurisdiction where the character of the property owned or leased by it or the
nature of its activities makes such qualification necessary, except for failures
of this representation and warranty to be true which would not, in the
aggregate, have a Company Material Adverse Effect. For purposes of this
Agreement, "Subsidiary" means with respect to any Person, any corporation or
----------
other legal entity of which such Person owns, directly or indirectly, more than
50% of the outstanding stock or other equity interests, the holders of which are
entitled to vote for the election of the board of directors or other governing
body of such corporation or other legal entity. All Subsidiaries and their
respective jurisdictions of incorporation are identified in Section 3.5 of the
Company Disclosure Schedule.
(b) All of the outstanding capital stock of, or other voting
securities or ownership interests in, each Subsidiary of the Company, is owned
by the Company, directly or indirectly, free and clear of any lien, security
interest or other encumbrance (a "Lien") and free of any other limitation or
----
restriction (including any restriction on the right to vote, sell or otherwise
dispose of such capital stock or other voting securities or ownership
interests), except for the security interest of the banks under the Company's
loan agreement referred to in Section 3.21 of the Company Disclosure Schedule
(the "Loan Agreement").
--------------
Section 3.6 SEC Documents. Except for the 1999 10-K, which has not yet
-------------
been filed, the Company has filed all required reports, proxy statements,
registration statements, forms and other documents with the SEC since December
31, 1997 (the "Company SEC Documents"). As of their respective dates, and
---------------------
giving effect to any amendments thereto or restatements thereof, (a) the
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Company SEC Documents complied, and, at the time the 1999 10-K is filed, the
1999 10-K will comply, in all material respects with the requirements of the
Securities Act or the Exchange Act, as the case may be, and the applicable rules
and regulations of the SEC promulgated thereunder and (b) none of the Company
SEC Documents contained, and, at the time the 1999 10-K is filed, the 1999 10-K
will not contain, any untrue statement of a material fact or omitted to state
any material fact required to be stated therein or necessary in order to make
the statements therein, in light of the circumstances under which they were (or,
in the case of the 1999 10-K, will be) made, not misleading.
Section 3.7 Financial Statements. The financial statements of the Company
--------------------
(including, in each case, any notes and schedules thereto) included in the
Company SEC Documents giving effect to any amendment thereto or restatements
thereof (a) were prepared from the books and records of the Company and its
Subsidiaries, (b) comply as to form in all material respects with all applicable
accounting requirements and the rules and regulations of the SEC with respect
thereto, (c) are in conformity with United States generally accepted accounting
principles ("GAAP"), applied on a consistent basis (except in the case of
----
unaudited statements, as permitted by Form 10-Q as filed with the SEC under the
Exchange Act) during the periods involved and (d) fairly present, in all
material respects, the consolidated financial position of the Company and its
consolidated Subsidiaries as of the dates thereof and the consolidated results
of their operations and cash flows for the periods then ended (subject, in the
case of unaudited statements, to normal year-end audit adjustments which were
not and are not expected to be, individually or in the aggregate, material in
amount).
Section 3.8 Absence Of Undisclosed Liabilities. Except as set forth in
----------------------------------
the Company SEC Documents or in Sections 3.12, 3.13, 3.15 or 3.21 of the Company
Disclosure Schedule, and except for liabilities and obligations incurred in the
ordinary course of business consistent with past practices since the date of the
most recent consolidated balance sheet included in the Company SEC Documents,
except for those that could not, in the aggregate, reasonably be expected to
have a Company Material Adverse Effect, neither the Company nor any of its
Subsidiaries has any liabilities or obligations of any nature (whether accrued,
absolute, contingent or otherwise) and there is no existing condition,
situation, or set of circumstances that could reasonably be expected to result
in such a liability.
Section 3.9 Information in Proxy Statement and Offer Documents
--------------------------------------------------
(a) The Proxy Statement, if any (or any amendment thereof or
supplement thereto), at the date mailed to Company shareholders and at the time
of the meeting of the Company shareholders to be held in connection with the
Merger, will not contain any untrue statement of a material fact or omit to
state any material fact required to be stated therein or necessary in order to
make the statements therein, in light of the circumstances under which they are
made, not misleading, except that no representation is made by the Company with
respect to statements made therein based on information supplied in writing by
Parent or Purchaser expressly for inclusion in the Proxy Statement. The Proxy
Statement will comply in all material respects with the provisions of the
Exchange Act and the rules and regulations thereunder.
-15-
<PAGE>
(b) The information with respect to the Company or any of its
Subsidiaries that the Company furnishes to Parent specifically for use in the
Offer Documents, at the time of the filing thereof, at the time of any
distribution or dissemination thereof and at the time of the consummation of the
Offer, will not contain any untrue statement of a material fact or omit to state
any material fact necessary in order to make the statements made therein, in the
light of the circumstances under which they were made, not misleading.
Section 3.10 Absence of Certain Changes. Except as set forth in Section
--------------------------
3.10 of the Company Disclosure Schedule, since December 31, 1999, the Company
and its Subsidiaries have conducted their respective businesses only in the
ordinary and usual course consistent with past practices. Since December 31,
1999, there has not occurred (i) any event, change or effect (including the
incurrence of any liabilities of any nature, whether or not accrued, contingent
or otherwise) having, or which would reasonably be expected to have,
individually or in the aggregate, a Company Material Adverse Effect; (ii) any
declaration, setting aside or payment of any dividend or other distribution
(whether in cash, stock or property) with respect to the equity interests of the
Company or any of its Subsidiaries or any repurchase, redemption or other
acquisition by the Company or its Subsidiaries of any outstanding shares of
capital stock or other securities of, or other ownership interests in, the
Company or any of its Subsidiaries; (iii) any change in accounting principles or
methods, except insofar as may be required by a change in GAAP; (iv) any
amendment of any material term of any outstanding security of the Company or any
of its Subsidiaries; (v) any incurrence, assumption or guarantee by the Company
or any of its Subsidiaries of any indebtedness for borrowed money other than in
the ordinary course of business or in accordance with the Loan Agreement; (vi)
any creation or other incurrence by the Company or any of its Subsidiaries of
any Lien on any material asset other than in the ordinary course of business
consistent with past practices or in accordance with the Loan Agreement; (vii)
any making of any loan, advance or capital contributions to or investment in any
entity, other than loans, advances or capital contributions to or investments in
its wholly-owned Subsidiaries made in the ordinary course of business consistent
with past practices; (viii) any damage, destruction or other casualty loss
(whether or not covered by insurance) affecting the business or assets of the
Company or any of its Subsidiaries that has had or could reasonably be expected
to have, individually or in the aggregate, a Company Material Adverse Effect;
(ix) any transaction or commitment made, or any contract or agreement entered
into, by the Company or any of its Subsidiaries relating to its assets or
business (including the acquisition or disposition of any assets) or any
relinquishment by the Company or any of its Subsidiaries of any contract or
other right, in either case, material to the Company and its Subsidiaries,
taking as a whole, other than transactions and commitments in the ordinary
course of business consistent with past practices, those contemplated by the
Agreement and the amendment to the Loan Agreement referred to in Section 3.21 of
the Company Disclosure Schedule; (x) any (1) grant of any severance or
termination pay to (or amendment to any existing arrangement with) any director,
officer or employee of the Company or any of its Subsidiaries, (2) increase in
benefits payable under any existing severance or termination pay policies or
employment agreements, (3) entering into any employment, deferred compensation
or other similar agreement (or any amendment to any such existing agreement)
with any director, officer or employee of the Company or any of its
Subsidiaries, (4) establishment, adoption or amendment (except as required by
applicable law) of any collective bargaining, bonus, profit-sharing, thrift,
pension, retirement, deferred compensation,
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compensation, stock option, restricted stock or other benefit plan or
arrangement covering any director, officer or employee of the Company or any of
its Subsidiaries, or (5) increase in compensation, bonus or other benefits
payable to any director, officer or employee of the Company or any of its
subsidiaries, other than in the ordinary course of business consistent with past
practices; or (xi) any labor dispute, other than routine individual grievances,
or any activity or proceeding by a labor union or representative thereof to
organize any employees of the Company or any of its Subsidiaries, which
employees were not subject to a collective bargaining agreement at December 31,
1999, or any lockouts, strikes, slowdowns, work stoppages or threats thereof by
or with respect to such employees.
Section 3.11 Taxes.
-----
(a) Except as set forth in Section 3.11 of the Company Disclosure
Schedule, (1) all federal, state, local and foreign Tax Returns (as defined
below) required to be filed by or on behalf of the Company, each of its
Subsidiaries, and each affiliated, combined, consolidated or unitary group of
which the Company or any of its Subsidiaries is a member (a "Company Group")
have been timely filed, and all returns filed are complete and accurate except
to the extent any failure to file or any inaccuracies in filed returns would
not, individually or in the aggregate, have a Company Material Adverse Effect;
(2) all Taxes (as defined below) due and owing by the Company, any Subsidiary of
the Company or any Company Group have been paid, or adequately reserved for in
accordance with GAAP, (3) there is no presently pending or, to the knowledge of
the Company, contemplated or scheduled material claim, audit, examination,
deficiency, refund litigation, proposed adjustment or matter (each a "Tax
Issue") in controversy with respect to any Taxes due and owing by the Company,
any Subsidiary of the Company or any Company Group, nor has the Company or any
Subsidiary of the Company filed any waiver of the statute of limitations
applicable to the assessment or collection of any Tax; (4) all assessments for
Taxes due and owing by the Company, any Subsidiary of the Company or any Company
Group with respect to completed and settled examinations or concluded litigation
have been paid; (5) neither the Company nor any Subsidiary of the Company is a
party to any tax indemnity agreement, tax sharing agreement or other agreement
under which the Company or any Subsidiary of the Company could become liable to
another person as a result of the imposition of a Tax upon any person, or the
assessment or collection of such a Tax; and (6) the Company and each of its
Subsidiaries has complied in all material respects with all rules and
regulations relating to the withholding of Taxes.
(b) For purposes of this Agreement, (i) "Taxes" means all taxes,
-----
levies or other like assessments, charges or fees (including estimated taxes,
charges and fees), including, without limitation, income, corporation, advance
corporation, gross receipts, transfer, excise, property, sales, use, value-
added, license, payroll, withholding, social security and franchise or other
governmental taxes, duties or charges, imposed by the United States or any
state, county, local or foreign government or subdivision or agency thereof, and
such term shall include any interest, penalties or additions to tax attributable
to such taxes and (ii) "Tax Return" means any report, return, statement or other
----------
written information required to be supplied to a taxing authority in connection
with Taxes.
-17-
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Section 3.12 Employee Matters.
----------------
(a) Except for any plan, fund, program, agreement or arrangement that
is subject to the laws of any jurisdiction outside the United States, Schedule
3.12(a) of the Company Disclosure Schedule contains a true and complete list of
each material deferred compensation, incentive compensation, and equity
compensation plan; material "welfare" plan, fund or program (within the meaning
of Section 3(1) of the Employee Retirement Income Security Act of 1974, as
amended ("ERISA")); material "pension" plan, fund or program (within the meaning
-----
of Section 3(2) of ERISA); each material employment, termination or severance
agreement; and each other material employee benefit plan, fund, program,
agreement or arrangement, in each case, that is in writing and sponsored,
maintained or contributed to or required to be contributed to by the Company or
by any trade or business, whether or not incorporated (each, an "ERISA
-----
Affiliate"), that together with the Company would be deemed a "single employer"
- ---------
within the meaning of Section 4001(b) of ERISA, or to which the Company or an
ERISA Affiliate is party, whether written or oral, for the benefit of any
employee, consultant, director or former employee, consultant or director of the
Company or any Subsidiary of the Company. The plans, funds, programs,
agreements and arrangements listed on Schedule 3.12(a) of the Company Disclosure
Schedule are referred to herein collectively as the "Plans."
-----
(b) With respect to each Plan, the Company has heretofore delivered
or made available to Parent true and complete copies of the Plan and any
amendments thereto (or if the Plan is not a written Plan, a description
thereof), any related trust or other funding vehicle, the most recent reports or
summaries required under ERISA or the Code and the most recent determination
letter received from the Internal Revenue Service with respect to each Plan
intended to qualify under Section 401 of the Code.
(c) Neither the Company nor any ERISA Affiliate nor any predecessor
thereof sponsors, maintains or contributes to, or has in the past sponsored,
maintained or contributed to, any Plan subject to Title IV of ERISA.
(d) No Plan is a "multiemployer plan," as defined in Section 3(37) of
ERISA, nor is any Plan a plan described in Section 4063(a) of ERISA.
(e) Each Plan has been operated and administered in all material
respects in accordance with its terms and applicable law, including, but not
limited to, ERISA and the Code.
(f) Each Plan intended to be "qualified" within the meaning of
Section 401(a) of the Code has received a favorable determination letter from
the Internal Revenue Service, or in the case of such a Plan for which a
favorable determination letter has not yet been received, the applicable
remedial amendment period under Section 401(b) of the Code has not expired and
each trust forming a part thereof is exempt from tax pursuant to Section 501(a)
of the Code.
(g) Except as set forth in Section 3.12(g) of the Company Disclosure
Schedule, no Plan provides medical, surgical, hospitalization, death or similar
benefits (whether or not insured) for employees or former employees of the
Company or any Subsidiary for periods extending beyond
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<PAGE>
their retirement or other termination of service, other than (i) coverage
mandated by applicable law, (ii) death benefits under any "pension plan," or
(iii) benefits the full cost of which is borne by the current or former employee
(or his or her beneficiary), dependant or other covered person.
(h) There are no pending, or to the knowledge of the Company,
threatened or anticipated, claims that would reasonably be expected to have a
Company Material Adverse Effect by or on behalf of any Plan, by any employee or
beneficiary covered under any such Plan, or otherwise involving any such Plan
(other than routine claims for benefits).
(i) Except as set forth in Section 3.12 of the Company Disclosure
Schedule, the consummation of the transactions contemplated by this Agreement
will not, either alone or in combination with another event, (i) entitle any
current or former employee or officer of the Company or any ERISA Affiliate to
severance pay, unemployment compensation or any other payment, except as
expressly provided in this Agreement, or (ii) accelerate the time of payment or
vesting, or increase the amount of compensation due any such employee or
officer, other than payments, accelerations or increases (x) under employee
benefit plans that are subject to the laws of a jurisdiction outside of the
United States and are listed on Section 3.12(i) of the Company Disclosure
Schedule or (y) mandated by applicable law.
(j) No amounts payable under the Plans will fail to be deductible for
federal income tax purposes by virtue of Section 280G of the Code.
(k) There has been no amendment to, written interpretation or
announcement (whether or not written) by the Company relating to, or change in
employee participation or coverage under, a Plan which would increase materially
the expense of maintaining such Plan above the level of the expense incurred in
respect thereof for the fiscal year ended prior to the date hereof.
(l) To the knowledge of the Company, all employee benefit plans that
are subject to the laws of any jurisdiction outside the United States have been
maintained in substantial compliance with their terms and are in material
compliance with such applicable laws, including relevant Tax laws, and the
requirements of any trust deed under which they were established, except for
such exceptions to the foregoing which, in the aggregate, would not reasonably
be expected to have a Company Material Adverse Effect. Section 3.12(l) of the
Company Disclosure Schedule lists all material employee pension benefit plans
that are subject to the laws of any jurisdiction outside the United States
except for such plans that are governmental or statutory plans.
(m) Section 3.12(m) of the Company Disclosure Schedule lists each
agreement, arrangement, understanding or contract (a "Severance Contract") that
------------------
provides for severance, termination of employment, retention or other special
transaction bonus or similar benefit, or other similar benefits, to any employee
or former employee of the Company ("Severance Benefits") and identifies the
------------------
Severance Benefits thereunder (it being understood that the omission from
Schedule 3.12(m) of the Company Disclosure Schedule of Severance Contracts under
which the aggregate amount of Severance Benefits is less than $100,000 shall not
be deemed a misrepresentation). No Severance Contract listed in such Section
3.12(m) entitles any such employee or former employee to
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<PAGE>
receive any such benefit if the individual's employment is terminated for
"cause" or if the individual otherwise commits (by action or omission) an act
constituting "cause".
Section 3.13 Litigation; Compliance With Laws.
--------------------------------
(a) Except as set forth in the Company SEC Documents, in Section 3.13
of the Company Disclosure Schedule or as otherwise covered by insurance, there
is no action, suit, investigation or proceeding pending against, or to the
knowledge of the Company threatened against, the Company, any Subsidiary of the
Company, any present or former officer, director or employee of the Company or
any Subsidiary or any other person for whom the Company may be liable or any of
their respective properties before any court or arbitrator or any Governmental
Entity which would reasonably be expected to have a Company Material Adverse
Effect.
(b) The Company and its Subsidiaries are and, since January 1, 1998,
have been in compliance with, and to the knowledge of the Company are not under
investigation with respect to and have not been threatened to be charged with or
been given notice of any violation of, any applicable laws, ordinances, rules,
orders and regulations of any federal, state, local or foreign governmental
authority applicable to their respective businesses and operations, except for
such violations, if any, which, in the aggregate, would not reasonably be
expected to have a Company Material Adverse Effect. All governmental approvals,
permits and Licenses required to conduct the business of the Company and its
Subsidiaries have been obtained, are in full force and effect and are being
complied with except for such violations and failures to have Licenses in full
force and effect, if any, which, individually or in the aggregate, could not
reasonably be expected to have a Company Material Adverse Effect.
Section 3.14 Labor Matters.
-------------
(a) The Company and its Subsidiaries are in compliance with all
currently applicable laws respecting employment and employment practices, terms
and conditions of employment and wages and hours, and are not engaged in any
unfair labor practice, failure to comply with which or engagement in which, as
the case may be, would reasonably be expected to have a Company Material Adverse
Effect. The Company is in compliance with, and is performing in all material
respects all its obligations under, the Conciliation Agreement between the U.S.
department of Labor/ESA, Office of Federal Contract Compliance Programs and the
Company.
(b) As of the date of this Agreement (i) there is no labor strike,
dispute, slowdown, stoppage or lockout actually pending or, to the knowledge of
the Company, threatened against the Company; (ii) to the knowledge of the
Company, no union organizing campaign with respect to the Company's employees is
underway; (iii) there is no unfair labor practice charge or complaint against
the Company pending or, to the knowledge of the Company, threatened before the
National Labor Relations Board or any similar state or foreign agency; (iv)
there is no written grievance pending relating to any collective bargaining
agreement or other grievance procedure; (v) to the knowledge of the Company, no
charges with respect to or relating to the Company are pending before the Equal
Employment Opportunity Commission or any other agency responsible for the
prevention of unlawful employment practices; and (vi) there are no collective
bargaining
-20-
<PAGE>
agreements with any union covering employees of the Company, except for such
exceptions to the foregoing clauses (i) through (v) which, individually or in
the aggregate, would not reasonably be expected to have a Company Material
Adverse Effect.
Section 3.15 Certain Contracts and Arrangements. Except as set forth in
----------------------------------
Section 3.15 of the Company Disclosure Schedule, each contract or agreement to
which the Company or any of its Subsidiaries is a party or by which any of them
is bound is in full force and effect, and neither the Company nor any of its
Subsidiaries, nor, to the knowledge of the Company, any other party thereto, is
in breach of, or default under, any such contract or agreement, and no event has
occurred that with notice or passage of time or both would constitute such a
breach or default thereunder by the Company or any of its Subsidiaries, or, to
the knowledge of the Company, any other party thereto, except for such failures
to be in full force and effect and such breaches and defaults which, in the
aggregate, would not reasonably be expected to have a Company Material Adverse
Effect.
Section 3.16 Environmental Matters.
---------------------
(a) (i) "Environmental Claim" means any claim, action, cause of
-------------------
action, investigation or written notice by any person or entity alleging
potential liability (including, without limitation, potential liability for
investigatory costs, cleanup costs, governmental response costs, natural
resources damages, property damages, personal injuries, or penalties) arising
out of, based on or resulting from (A) the presence or release of any Hazardous
Materials at any location, currently or formerly leased, owned or operated by
the Company or any of its Subsidiaries or (B) any matters relating to the
Company or any of its Subsidiaries and relating to or arising out of any
Environmental Law (as defined hereafter).
(ii) "Environmental Laws" means all federal, state, local
------------------
and foreign laws (including, without limitation, common law) and any
regulations, treaty, permit or governmental restriction, or any agreement with
any governmental authority, relating to pollution or protection of the
environment, including, without limitation, laws relating to releases or
threatened releases of pollutants, contaminants, wastes or chemicals or any
toxic, radioactive, ignitable, corrosive, reactive or otherwise hazardous
substances, wastes or materials or otherwise relating to the manufacture,
processing, distribution, use, treatment, storage, transport or handling of
pollutants, contaminants, wastes or chemicals or any toxic, radioactive,
ignitable, corrosive, reactive or otherwise hazardous substances, wastes or
materials.
(iii) "Hazardous Materials" means all substances defined as
-------------------
hazardous materials, hazardous wastes, hazardous substances, oils, pollutants or
contaminants or other chemical substances in, or regulated as such under, any
Environmental Law.
(b) (i) The Company and its Subsidiaries are and have been in
compliance with all applicable Environmental Laws (which compliance includes,
but is not limited to, the possession by the Company and its Subsidiaries of all
permits and other governmental authorizations required under applicable
Environmental Laws, and compliance with the terms and conditions thereof),
except where failures to be in compliance would not, in the aggregate,
reasonably be expected to have a Company Material Adverse Effect. Neither the
Company nor any of its
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<PAGE>
Subsidiaries has received any written communication alleging that the Company or
any of its Subsidiaries is not in such compliance or may have liability under
any Environmental Law, except where failures to be in compliance or such
liability would not, in the aggregate, reasonably be expected to have a Company
Material Adverse Effect.
(ii) There is no Environmental Claim pending or threatened
against the Company or any of its Subsidiaries that could result in any
environmental liability that would, in the aggregate, reasonably be expected to
result in a Company Material Adverse Effect.
(iii) There are no present or past actions, activities,
circumstances, conditions, events or incidents that could result in any
environmental liability that would, individually or in the aggregate, reasonably
be expected to result in a Company Material Adverse Effect.
(c) There has been no environmental investigation, study, audit,
test, review or other analysis conducted of which the company or any Subsidiary
has knowledge in relation to the current or prior business of the Company or any
Subsidiary or any property or facility currently or formerly owned, leased or
operated by the Company or any Subsidiary which has not been delivered to
Purchaser at least five days prior to the date hereof.
(d) Neither the Company nor any subsidiary owns, leases or operates
any real property, or conducts any operations, in New Jersey or Connecticut.
(e) For purposes of this Section 3.16, "Company" and "Subsidiary"
------- ----------
shall include any entity which is, in whole or in part, a predecessor of the
Company or any Subsidiary.
Section 3.17 Intellectual Property.
---------------------
(a) The Company and its Subsidiaries own or have the right to use all
material Intellectual Property (as defined hereafter) reasonably necessary for
the Company and its Subsidiaries to conduct their business as it is currently
conducted. Schedule 3.17(a) of the Company Disclosure Schedule contains a
complete and accurate list of all patent applications and issued patents; and
all registrations for trademarks, service marks and trade names, copyrights,
domain names and trade dress used or held for use by the Company or any of its
Subsidiaries in the conduct of their business specifying as to each such item,
as applicable: (i) the owner or owners of the item, (ii) the jurisdictions in
which the item is issued or registered or in which any application for issuance
or registration has been filed, (iii) the respective registration or application
number of the item and (iv) the date of application and registration of the
item. Section 3.17(b) of the Company Disclosure Schedule contains a complete and
accurate list of all material agreements to which the Company or any Subsidiary
is a party that provides for the license or sublicense of Intellectual Property.
(b) (i) All of the registrations relating to material Intellectual
Property owned by the Company and its Subsidiaries are valid, subsisting and
unexpired, free of all liens or encumbrances (other than pursuant to the Loan
Agreement), and have not been abandoned; (ii) to the knowledge of the Company,
the Company does not infringe the intellectual property rights of any
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<PAGE>
third party in any respect that would reasonably be expected to have,
individually or in the aggregate, a Company Material Adverse Effect; (iii) no
judgment, decree, injunction, rule or order has been rendered by Governmental
Entity which would limit, cancel or question the validity of, or the Company's
or its Subsidiaries' rights in and to, any Intellectual Property owned by the
Company in any respect that would reasonably be expected to have, individually
or in the aggregate, a Company Material Adverse Effect; and (iv) the Company has
not received notice of any pending or threatened suit, action or adversarial
proceeding that seeks to limit, cancel or question the validity of, or the
Company's or its Subsidiaries' rights in and to, any Intellectual Property,
which would reasonably be expected to have, individually or in the aggregate, a
Company Material Adverse Effect.
(c) For purposes of this Agreement "Intellectual Property" shall mean
---------------------
all rights, privileges and priorities provided under U.S., state and foreign law
relating to intellectual property, including without limitation all (x) (1)
proprietary inventions, discoveries, processes, formulae, patterns, designs,
methods, techniques, procedures, concepts, developments, technology, new and
useful improvements to any of the foregoing and proprietary know-how relating
thereto, whether or not patented or eligible for patent protection; (2)
copyrights and copyrightable works; (3) trademarks, service marks, trade names,
domain names and trade dress, the goodwill of any business symbolized thereby,
and all common law rights relating thereto; (4) trade secrets and other
confidential information; (y) all registrations, applications and recordings for
any of the foregoing and (z) licenses or other similar agreements granting to
the Company or any of its Subsidiaries the rights to use any of the foregoing.
Section 3.18 Opinion Of Financial Advisor. The Company has received the
----------------------------
opinion of DB to the effect that, as of the date hereof, the consideration to be
received by the holders of Shares is fair from a financial point of view to such
holders.
Section 3.19 Board Recommendation. The Board of Directors of the Company,
--------------------
at a meeting duly called and held, has approved this Agreement and (i)
determined that this Agreement and the transactions contemplated hereby,
including the Offer and the Merger, taken together are fair to and in the best
interests of the stockholders of the Company; and (ii) resolved to recommend
that the stockholders of the Company tender their Shares into the Offer, adopt
this Agreement and approve the Merger.
Section 3.20 Rights Plan; Antitakover Statues. The Board of Directors of
--------------------------------
the Company has approved and adopted an amendment to the Preferred Shares Rights
Agreement between the Company and American Stock Transfer and Trust Co., dated
as of July 6, 1998 (the "Rights Agreement") which provides that neither the
----------------
execution and delivery of this Agreement nor the consummation of any of the
transactions contemplated by this Agreement shall cause Parent or Purchaser to
be deemed to be "Acquiring Persons" within the meaning of the Rights Agreement
-----------------
and the Company has taken all other action necessary to render the rights issued
pursuant to the Rights Agreement inapplicable to the Offer, the Merger, this
Agreement and the transactions contemplated hereby. The Company has taken all
action necessary to exempt the Offer, the Merger, this Agreement and the
transactions contemplated hereby from the provisions of Section 203 of DGCL,
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<PAGE>
and, accordingly, no such Section nor other antitakeover or similar statute or
regulation applies or purports to apply to any such transaction. No other
"control share acquisition," "fair price," "moratorium" or other antitakeover
laws or regulations enacted under U.S. state or federal laws apply to this
Agreement or any of the transactions contemplated hereby.
Section 3.21 Finders' Fees. Except for DB, whose fees will be paid by
-------------
the Company, there is no investment banker, broker, finder or other intermediary
which has been retained by, or is authorized to act on behalf of, the Company or
any Subsidiary of the Company that would be entitled to any fee or commission
from the Company, any Subsidiary of the Company, Parent or any of Parent's
affiliates upon consummation of the transactions contemplated by this Agreement.
ARTICLE IV
REPRESENTATIONS AND WARRANTIES OF PARENT AND PURCHASER
Parent and Purchaser, jointly and severally, represent and warrant to the
Company subject to such exceptions as are specifically disclosed in writing in
the disclosure letter and referencing a specific representation supplied by
Parent to Company, which disclosure shall provide an exception to or otherwise
qualify the representations or warranties of Parent specifically referred to in
such disclosure and such other representations and warranties to the extent such
disclosure shall reasonably appear to be applicable to such other
representations or warranties (the "Parent Disclosure Schedule"), as follows:
--------------------------
Section 4.1 Corporate Existence and Power. Each of Parent and Purchaser
-----------------------------
is a corporation duly incorporated (or other entity duly organized), validly
existing and in good standing under the laws of its jurisdiction of
incorporation, has all corporate or other power, as the case may be, and all
Licenses required to carry on its business as now conducted except for failures
to have any such License which would not, in the aggregate, have a Parent
Material Adverse Effect (as defined below). Each of Parent and Purchaser is
duly qualified to do business and is in good standing in each jurisdiction where
the character of the property owned, leased or operated by it or the nature of
its activities makes such qualification necessary, except for those
jurisdictions where failures to be so qualified would not reasonably be expected
to, in the aggregate, have a Parent Material Adverse Effect. As used herein,
the term "Parent Material Adverse Effect" means a material adverse effect on the
------------------------------
financial condition, business, assets or results of operations of Parent and its
Subsidiaries, taken as a whole, provided, however, that in no event shall any
-------- -------
effect that results from (a) changes affecting the retail industry generally or
(b) changes affecting the United States economy generally, constitute a Parent
Material Adverse Effect.
Section 4.2 Authorization. Each of Parent and Purchaser has the requisite
-------------
power and authority to execute and deliver this Agreement and to perform its
obligations hereunder. The execution and delivery of this Agreement and the
performance of its obligations hereunder have been duly and validly authorized
by the Boards of Directors of Parent and Purchaser, by Parent as the sole
stockholder of Purchaser, this Agreement has been approved by the Board of
Directors of Purchaser, and no other proceedings on the part of Parent or
Purchaser are necessary to authorize the
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execution, delivery and performance of this Agreement. This Agreement has been
duly executed and delivered by each of Parent and Purchaser and constitutes,
assuming due authorization, execution and delivery of this Agreement by the
Company, a valid and binding obligation of each of Parent and Purchaser,
enforceable against each of them in accordance with its terms, subject to the
effects of bankruptcy, insolvency, fraudulent conveyance, reorganization,
moratorium and other similar laws affecting creditors' rights generally, general
equitable principles (whether considered in a proceeding in equity or at law)
and an implied covenant of good faith and fair dealing.
Section 4.3 Consents And Approvals; No Violations.
-------------------------------------
(a) Neither the execution and delivery of this Agreement nor the
performance by each of Parent and Purchaser of its obligations hereunder will
(i) conflict with or result in any breach of any provision of the articles of
incorporation or bylaws (or other governing or organizational documents) of
Parent or Purchaser, as the case may be, or (ii) result in a violation or breach
of, or constitute (with or without due notice or lapse of time or both) a
default (or give rise to any right of termination, cancellation or acceleration
or obligation to repurchase, repay, redeem or acquire or any similar right or
obligation) under any of the terms, conditions or provisions of any note,
mortgage, letter of credit, other evidence of indebtedness, guarantee, license,
lease or agreement or similar instrument or obligation to which any of Parent or
Purchaser is a party or by which any of them or any of the respective assets
used or held for use by any of them may be bound or (iii) assuming that the
filings, registrations, notifications, authorizations, consents and approvals
referred to in subsection (b) below have been obtained or made, as the case may
be, violate any order, injunction, decree, statute, rule or regulation of any
Governmental Entity to which either Parent or Purchaser is subject, excluding
from the foregoing clauses (ii) and (iii) such requirements, defaults, breaches,
rights or violations (A) that would not, in the aggregate, reasonably be
expected to have a Parent Material Adverse Effect and would not reasonably be
expected to have a material adverse effect on the ability of either Parent or
Purchaser to consummate the transactions contemplated hereby or (B) that become
applicable as a result of any acts or omissions by, or facts specifically
pertaining to, the Company.
(b) No filing or registration with, notification to, or
authorization, consent or approval of, any Governmental Entity is required in
connection with the execution and delivery of this Agreement by each of Parent
and Purchaser or the performance by any of them of their respective obligations
hereunder, except (i) the filing of an agreement of merger together with an
officer's certificate of the Company and Purchaser in accordance with the DGCL;
(ii) compliance with any applicable requirements of the HSR Act or any foreign
laws regulating competition, antitrust, investment or exchange controls; (iii)
compliance with any applicable requirements of the Securities Act and the
Exchange Act; (iv) compliance with any applicable requirements of state blue sky
or takeover laws; and (v) such other consents, approvals, orders,
authorizations, notifications, registrations, declarations and filings, the
failure of which to be obtained or made would not reasonably be expected to have
a Material Adverse Effect and would not have a material adverse effect on the
ability of either Parent or Purchaser to perform their respective obligations
hereunder or that become applicable as a result of any acts or omissions by, or
facts specifically pertaining to, the Company.
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<PAGE>
Section 4.4 Information in Proxy Statement. None of the information
------------------------------
supplied by Parent or Purchaser in writing expressly for inclusion or
incorporation by reference in the Proxy Statement (or any amendment thereof or
supplement thereto) will, at the date mailed to shareholders and at the time of
the meeting of shareholders to be held in connection with the Merger, contain
any untrue statement of a material fact or omits to state any material fact
required to be stated therein or necessary in order to make the statements made
therein, in light of the circumstances under which they are made, not
misleading.
Section 4.5 Share Ownership. Neither Parent nor Purchaser beneficially
---------------
owns any shares of capital stock of the Company.
Section 4.6 Financing. Parent has, or will have prior to the expiration
---------
of the Offer, sufficient funds to consummate the transactions contemplated by
this Agreement, including payment in full for all Shares validly tendered into
the Offer or outstanding at the Effective Time.
Section 4.7 Finders' Fees. Except for Salomon Smith Barney Inc., whose
-------------
fees will be paid by Parent, there is no investment banker, broker, finder or
other intermediary that might be entitled to any fee or commission in connection
with or upon consummation of the transactions contemplated by this Agreement
based upon arrangements made by or on behalf of Parent or Purchaser.
ARTICLE V
CONDUCT OF BUSINESS PENDING THE MERGER
Section 5.1 Acquisition Proposals. The Company will notify Purchaser
---------------------
promptly (but in no event later than 24 hours) if any proposals are received by,
any information is requested from, or any negotiations or discussions are sought
to be initiated or continued with the Company or its executive officers,
directors, investment bankers, attorneys, accountants or other agents, in each
case in connection with any Acquisition Proposal (as defined below). The
Company shall provide such notice orally and in writing and, subject to the
Company's directors' performance of their fiduciary duties, shall identify the
person or entity making, and the terms and conditions of, any such Acquisition
Proposal, indication or request. Subject to the Company's directors'
performance of their fiduciary duties, the Company shall keep Parent fully
informed, on a current basis, of the status and details of any such Acquisition
Proposal, indication or request. The Company agrees that it will immediately
cease and cause to be terminated any existing activities, discussions or
negotiations with any parties conducted heretofore with respect to any
Acquisition Proposal. As used in this Agreement, "Acquisition Proposal" shall
--------------------
mean any tender or exchange offer involving the Company, any proposal for a
merger, consolidation or other business combination involving the Company, any
proposal or offer to acquire in any manner a substantial equity interest in, or
a substantial portion of the business or assets of, the Company or any material
Subsidiary (other than immaterial or insubstantial assets or inventory in the
ordinary course of business or assets held for sale), any proposal or offer with
respect to any recapitalization or restructuring with respect to the Company or
any material Subsidiary or any proposal or offer with respect to any other
transaction similar to any
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of the foregoing with respect to the Company other than pursuant to the
transactions to be effected pursuant to this Agreement.
Section 5.2 Interim Operations of the Company. From the date hereof until
---------------------------------
the Effective Time, the Company and its Subsidiaries shall conduct their
businesses in the ordinary course consistent with past practice and shall use
their best efforts to preserve intact their business organizations and
relationships with third parties and to keep available the services of their
present officers and employees. Without limiting the generality of the
foregoing, from the date hereof until the Effective Time:
(a) The Company will not adopt or propose any change to its
certificate of incorporation or bylaws;
(b) The Company will not, and will not permit any of its Subsidiaries
to, merge or consolidate with any other Person or acquire a material amount of
stock or assets of any other Person;
(c) The Company will not, and will not permit any of its Subsidiaries
to, sell, lease, license or otherwise dispose of any material subsidiary or
material amount of assets, securities or property (including, without
limitation, the stock or assets of La Sportiva USA, Inc.) except pursuant to
existing contracts or commitments and in the ordinary course consistent with
past practice;
(d) The Company will not, and will not permit any of its Subsidiaries
to, knowingly take any action that would make any representation and warranty of
the Company hereunder inaccurate in any respect at, or as of any time prior to,
the Effective Time; and
(e) The Company will not, and will not permit any of its Subsidiaries
to, agree or commit to do any of the foregoing.
Section 5.3 No Solicitation.
---------------
(a) Except as provided in Section 5.3(b) below, the Company, from the
date of this Agreement until the earlier of termination of this Agreement or the
Acceptance Date, will not nor shall it authorize or permit its officers,
directors, employees, investment bankers, attorneys, accountants and other
agents to directly or indirectly (i) initiate, solicit or knowingly encourage,
or knowingly take any action to facilitate the making of, any offer or proposal
which constitutes or is reasonably likely to lead to any Acquisition Proposal,
(ii) enter into any agreement with respect to any Acquisition Proposal, (iii) in
the event of an unsolicited Acquisition Proposal for the Company, engage in
negotiations or discussions with, or provide any information or data to, or
afford access to the business, properties, assets, books or records of the
Company or any of its Subsidiaries to, otherwise cooperate in any way with, or
knowingly assist, participate in, facilitate or encourage any effort by, any
person or entity (other than Parent, any of its affiliates or representatives)
relating to any Acquisition Proposal or grant any waiver or release under any
standstill or similar agreement with respect to any class of equity securities
of the Company or any of its Subsidiaries; provided,
--------
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<PAGE>
however, that nothing contained in this Section 5.3 or any other provision
- -------
hereof shall prohibit the Company or the Company Board of Directors from (i)
taking and disclosing to the Company's stockholders its position with respect to
a tender or exchange offer by a third party pursuant to Rules 14d-9 and 14e-2
promulgated under the Exchange Act or (ii) making such disclosure to the
Company's stockholders as, in the good faith judgment of the Board of Directors
is necessary for the Company Board of Directors to comply with its fiduciary
duties to the Company's stockholders under applicable law.
(b) Notwithstanding the foregoing, prior to the acceptance of Shares
pursuant to the Offer, the Company may furnish information concerning its
business, properties or assets to any person or entity pursuant to a
confidentiality agreement with terms no less favorable to the Company than those
contained in the Confidentiality Agreement, dated January 20, 2000, entered into
between Parent and the Company (the "Confidentiality Agreement") and may
-------------------------
negotiate and participate in discussions and negotiations with such person or
entity concerning an Acquisition Proposal if (x) such entity or group has on an
unsolicited basis submitted a bona fide written proposal to the Company relating
to any such transaction which the Board of Directors determines in good faith,
after receiving advice from a nationally recognized investment banking firm and
taking into account all the terms and conditions of the Acquisition Proposal,
including any break-up fees, expense reimbursement provisions and conditions to
consummation, are more favorable and provide greater value to all the Company's
stockholders than as provided hereunder and for which financing, to the extent
required, is then fully committed or reasonably determined to be available by
the Board of Directors of the Company and (y) in the opinion of the Company
Board of Directors, the failure to provide such information or access or to
engage in such discussions or negotiations would cause the Board of Directors to
violate its fiduciary duties to the Company's stockholders under applicable law
(an Acquisition Proposal which satisfies clauses (x) and (y) being referred to
herein as a "Superior Proposal"). The Company shall promptly, and in any event
-----------------
within 24 hours following receipt of a Superior Proposal, notify Parent of the
receipt of the same and prior to entering into a confidentiality agreement with
such person or entity.
(c) Except as set forth herein, neither the Board of Directors of the
Company nor any committee thereof shall (i) withdraw or modify, or propose to
withdraw or modify, in a manner adverse to Parent or Purchaser, the approval or
recommendation by such Board of Directors or any such committee of the Offer,
this Agreement or the Merger, (ii) approve or recommend or propose to approve or
recommend, any Acquisition Proposal or (iii) enter into any agreement with
respect to any Acquisition Proposal. Notwithstanding the foregoing, prior to the
time of acceptance for payment of Shares in the Offer, the Board of Directors of
the Company may (subject to the terms of this Agreement) withdraw or modify its
approval or recommendation of the Offer, this Agreement or the Merger, in each
case, in connection with a Superior Proposal, or approve or recommend a Superior
Proposal.
Section 5.4 Notices of Certain Events. The Company shall promptly notify
-------------------------
Parent of:
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(a) any notice or other communication from any person or entity
alleging that the consent of such person or entity is or may be required in
connection with the transactions contemplated by this Agreement;
(b) any notice or other communication from any governmental or
regulatory agency or authority in connection with the transactions contemplated
by this Agreement; and
(c) any actions, suits, claims, investigations or proceedings
commenced or, to its knowledge, threatened against, relating to or involving or
otherwise affecting the Company or any of its Subsidiaries that, if pending on
the date of this Agreement, would have been required to have been disclosed
pursuant to Section 3.12, 3.13 or 3.20, as the case may be, or that relate to
the consummation of the transactions contemplated by this Agreement.
ARTICLE VI
ADDITIONAL AGREEMENTS
Section 6.1 Proxy Statement. As promptly as practicable after the
---------------
consummation of the Offer and if required by the Exchange Act, the Company shall
prepare and file with the SEC, and shall use its best efforts to respond
promptly to any comments made by the SEC, and promptly thereafter shall mail to
stockholders, the Proxy Statement. In such event, the Proxy Statement shall
contain the recommendation of the Board of Directors in favor of the Merger.
Section 6.2 Meeting of Stockholders of the Company. At the Special
--------------------------------------
Meeting, if any, the Company shall use its best efforts to solicit from
stockholders of the Company proxies in favor of the Merger and shall take all
other action necessary or, in the reasonable opinion of Purchaser, advisable to
secure any vote or consent of stockholders required by the DGCL to effect the
Merger. Parent and Purchaser agree that each shall vote, or cause to be voted,
in favor of the Merger all Shares directly or indirectly beneficially owned by
it.
Section 6.3 Additional Agreements. Each of the parties hereto agrees to
---------------------
use its best efforts to obtain in a timely manner all necessary waivers,
consents and approvals and to effect all necessary registrations and filings,
and to use all reasonable efforts to take, or cause to be taken, all other
actions and to do, or cause to be done, all other things necessary, proper or
advisable to consummate and make effective as promptly as practicable the
transactions contemplated by this Agreement.
Section 6.4 Access; Confidentiality. From the date hereof to the
-----------------------
Effective Time, upon reasonable notice and subject to the terms of the
Confidentiality Agreement, the Company shall (and shall cause each of its
Subsidiaries to) afford to the officers, employees, accountants, counsel,
financing sources and other representatives of Parent, reasonable access, during
normal business hours during the period prior to the Acceptance Date, to all its
properties, books, contracts, commitments and records and, during such period,
the Company shall (and shall cause each of its subsidiaries to), subject to any
limitations imposed by law with respect to records of employees,
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furnish promptly to the Parent upon Parent's request (a) a copy of each report,
schedule, registration statement and other document filed or received by it
during such period pursuant to the requirements of federal securities laws and
(b) all other information concerning its business, properties and personnel as
Parent may reasonably request. The Company shall instruct the employees,
counsel, financial advisors, auditors and other authorized representatives of
the Company and its Subsidiaries to cooperate with Parent in its investigation
of the Company and its Subsidiaries. No information or knowledge obtained by
Parent in any investigation pursuant to this Section shall affect or be deemed
to modify any representation or warranty made by the Company hereunder.
Section 6.5 Consents and Approvals. Each of Parent, Purchaser and the
----------------------
Company will take all reasonable actions necessary to comply promptly with all
legal requirements which may be imposed on it with respect to this Agreement and
the Transactions (which actions shall include, without limitation, furnishing
all information required under the HSR Act and in connection with approvals of
or filings with any other Governmental Entity) and will promptly cooperate with
and, subject to such confidentiality agreements as may be reasonably necessary
or requested, furnish information to each other or their counsel in connection
with any such requirements imposed upon any of them or any of their subsidiaries
in connection with this Agreement and the Transactions.
(a) Each of the Company, Purchaser and Parent shall take all
reasonable actions (including cooperating with each other) necessary to file as
soon as practicable notifications under the HSR Act, or under comparable merger
notification laws of non-U.S. jurisdictions and to respond as promptly as
practicable to any inquiries received from the Federal Trade Commission and the
Antitrust Division of the Department of Justice or the authorities of such other
jurisdiction for additional information or documentation and to respond as
promptly as practicable to all inquiries and requests received from any State
Attorney General or other Governmental Entity in connection with antitrust
matters.
Section 6.6 Publicity. Parent and the Company will consult with each
---------
other before issuing any press release or making any public statement with
respect to this Agreement or the transactions contemplated hereby and, except
for any release or statement that may be required by applicable law or any
listing agreement with any national securities exchange, will not issue any such
press release or make any such public statement prior to such consultation.
Section 6.7 Directors' and Officers' Insurance and Indemnification.
------------------------------------------------------
Parent shall cause the Surviving Corporation, and the Surviving Corporation
hereby agrees, to do the following:
(a) For six years after the Effective Time, the Surviving
Corporation shall indemnify and hold harmless the present and former officers
and directors of the Company (each an "Indemnified Person") in respect of acts
------------------
or omissions occurring at or prior to the Effective Time to the fullest extent
permitted by the DGCL or any other applicable laws or as provided under the
certificate of incorporation and bylaws in effect on the date hereof, provided
--------
that such indemnification shall be subject to any limitation imposed from time
to time under applicable law.
(b) For six years after the Effective Time, the Surviving
Corporation shall provide officers' and directors' liability insurance in
respect of acts or omissions occurring prior to the
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Effective Time covering each such Indemnified Person currently covered by the
Company's officers' and directors' liability insurance policy on terms with
respect to coverage and amount no less favorable than those of such policy in
effect on the date hereof, provided that, in satisfying its obligation under
--------
this Section 6.7(b), the Surviving Corporation shall not be obligated to pay
premiums in excess of 200% of the amount per annum the Company paid in its last
full fiscal year, which amount Company has disclosed to Parent prior to the date
hereof.
(c) If Parent, the Surviving Corporation or any of its successors
or assigns (i) consolidates with or merges into any other person or entity and
shall not be the continuing or surviving corporation or entity of such
consolidation or merger, or (ii) transfers or conveys all or substantially all
of its properties and assets to any person or entity, then, and in each such
case, to the extent necessary, proper provision shall be made so that the
successors and assigns of Parent or the Surviving Corporation, as the case may
be, shall assume the obligations set forth in this Section 6.7.
(d) The rights of each Indemnified Person under this Section 6.7
shall be in addition to any rights such Person may have under the certificate of
incorporation or bylaws of the Company or any of its Subsidiaries, under the
DGCL or any other applicable laws or under any agreement of any Indemnified
Person with the Company or any of its Subsidiaries. These rights shall survive
consummation of the Merger for the periods set forth above and are intended to
benefit, and shall be enforceable by, each Indemnified Person.
Section 6.8 Purchaser Compliance. Parent shall cause Purchaser to comply
--------------------
with all of its obligations under this Agreement.
Section 6.9 Best Efforts.
------------
(a) Prior to the Closing, upon the terms and subject to the
conditions of this Agreement, Purchaser and the Company, agree to use their
respective best efforts to take, or cause to be taken, all actions, and to do,
or cause to be done, all things reasonably necessary and appropriate, under any
applicable laws and regulations to consummate and make effective the
transactions contemplated by this Agreement as promptly as practicable
including, but not limited to (i) the preparation and filing of all forms,
registrations and notices required to be filed to consummate the transactions
contemplated by this Agreement and the taking of such actions as are necessary
to obtain any requisite approvals, consents, orders, exemptions or waivers by
any third party or Governmental Entity, and (ii) the satisfaction of the other
parties' conditions to Closing. In addition, no party hereto shall take any
action after the date hereof that would reasonably be expected to materially
delay the obtaining of, or result in not obtaining, any permission, approval or
consent from any Governmental Entity necessary to be obtained prior to the
acceptance for payment, and payment for, the Shares in the Offer or the Closing.
(b) Prior to the Closing, each party shall promptly consult with
the other parties hereto with respect to and subject to such confidentiality
agreements as may be reasonably necessary or requested, provide any necessary
information with respect to and provide the other (or its counsel)
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<PAGE>
copies of, all filings made by such party with any Governmental Entity or any
other information supplied by such party to a Governmental Entity in connection
with this Agreement and the transactions contemplated by this Agreement. Each
party hereto shall promptly inform the other of any communication from any
Governmental Entity regarding any of the transactions contemplated by this
Agreement unless otherwise prohibited by law. If any party hereto or affiliate
thereof receives a request for additional information or documentary material
from any such Government Entity with respect to the transactions contemplated by
this Agreement then such party will endeavor in good faith to make, or cause to
be made, as soon as reasonably practicable and after consultation with the other
party, an appropriate response in compliance with such request. To the extent
that transfers of permits or Environmental Permits are required as a result of
execution of this Agreement or consummation of the transactions contemplated
hereby, the Company shall use its commercially reasonable efforts to effect such
transfers.
(c) Notwithstanding anything else contained herein, the provisions
of Sections 6.3 and 6.5 and this Section 6.9 shall not be construed to require
any party to undertake any particular efforts or to take any particular action
if the result thereof would give rise to one of the events or conditions set
forth in Section (a) of Annex A.
Section 6.10 Employee Benefits.
-----------------
(a) Parent agrees that the Company will honor and, on and after
the Effective Time, Parent will cause the Surviving Corporation to honor all
employment, benefit, severance, termination, consulting and retirement
agreements to which the Company or any of its subsidiaries presently is a party,
including the Plans.
(b) Parent shall cause the Surviving Corporation to take such
actions as are necessary so that, until December 31, 2000, employees of the
Company and its subsidiaries during such period will be provided such employee
benefit plans and programs (other than incentive compensation or similar
programs) as will provide benefits which in the aggregate are not materially
less favorable than those provided to such employees as of the date hereof under
the Plans.
(c) Nothing in this Section 6.10 will be or be deemed to be for
the benefit of, or enforceable by, any person who is not a party hereto,
including, without limitation, any employee of the Company, the Surviving
Corporation or any of their respective subsidiaries or shall be deemed to limit
the Surviving Corporation's or its subsidiaries' ability to modify or eliminate
any Plan.
Section 6.11 Further Assurances. At and after the Effective Time, the
------------------
officers and directors of the Surviving Corporation will be authorized to
execute and deliver, in the name and on behalf of the Company or Purchaser, any
deeds, bills of sale, assignments or assurances and to take and do, in the name
and on behalf of the Company or Purchaser, any other actions and things to vest,
perfect or confirm of record or otherwise in the Surviving Corporation any and
all right, title and interest in, to and under any of the rights, properties or
assets of the Company acquired or to be acquired by the Surviving Corporation as
a result of, or in connection with, the Merger.
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ARTICLE VII
CONDITIONS
Section 7.1 Conditions to Each Party's Obligations to Effect the Merger.
-----------------------------------------------------------
The respective obligations of each party to effect the Merger shall be subject
to the satisfaction on or prior to the Closing Date of each of the following
conditions, any and all of which may be waived in whole or in part by Parent,
Purchaser and the Company, as the case may be, to the extent permitted by
applicable law:
(a) Stockholder Approval. If required by the DGCL, this Agreement
--------------------
shall have been approved and adopted by the Company's stockholders in accordance
with such law; provided, however, that Parent and Purchaser shall vote all
-------- -------
Shares purchased in the Offer in favor of such approval;
(b) Statutes; Court Orders. No statute, rule, regulation,
----------------------
judgment, injunction, order or decree shall prohibit the consummation of the
Merger; and
(c) Purchase of Shares in Offer. Purchaser shall have purchased,
---------------------------
or caused to be purchased, the Shares pursuant to the Offer; provided, that this
-------- ----
condition shall be deemed to have been satisfied with respect to the obligation
of Parent and Purchaser to effect the Merger if Purchaser fails to accept for
payment or pay for Shares pursuant to the Offer in violation of the terms of the
Offer or of this Agreement.
ARTICLE VIII
TERMINATION
Section 8.1 Termination. This Agreement may be terminated and the
-----------
transactions contemplated herein may be abandoned at any time before the
Effective Time, whether before or after stockholder approval thereof (provided,
--------
however, that if Shares are purchased pursuant to the Offer, Parent may not in
- -------
any event terminate this Agreement):
(a) By mutual written consent of Parent and the Company; or
(b) By Parent or the Company if, without any material breach by
such terminating party of its obligations under this Agreement, the purchase of
Shares pursuant to the Offer shall not have occurred on or before June 15, 2000;
or
(c) By either Parent or the Company if there shall be any law or
regulation that makes acceptance for payment of, and payment for, the Shares
pursuant to the Offer or consummation of the Merger illegal or otherwise
prohibited or a court of competent jurisdiction or other Governmental Entity
shall have issued an order, decree or ruling or taken any other action, in each
case permanently restraining, enjoining or otherwise prohibiting the
transactions contemplated
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by this Agreement and such judgment, injunction, order or decree shall have
become final and nonappealable; or
(d) By the Company, but only prior to the Acceptance Date, if it
shall have received a Superior Proposal which the Board of Directors has
determined is more favorable to the stockholders of the Company than the
transactions contemplated hereby in the manner permitted by, and in compliance
with, Section 5.3, provided that the Company shall have paid any amounts due
--------
pursuant to Section 9.3 in accordance with the terms, and at the times,
specified therein, and provided, further, that, unless the Company's Board of
-------- -------
Directors is advised by its principal, independent legal advisor that it would
be in contravention of the performance of the directors' fiduciary duties to do
so, (i) the Company notifies Parent, in writing and at least 72 hours prior to
such termination, promptly of its intention to terminate this Agreement and to
enter into a binding written agreement concerning an Acquisition Proposal that
constitutes a Superior Proposal of the nature described in Section 5.3(b),
attaching the most current version of such agreement (or a description of all
material terms and conditions thereof), and (ii) Parent does not make, within 72
hours of receipt of such written notification, an offer that is at least as
favorable to the shareholders of the Company as such Superior Proposal, it being
understood that the Company shall not enter into any such binding agreement
during such 72-hour period;
(e) By Parent, but only prior to the Acceptance Date, if (i) the
Company Board of Directors shall have withdrawn, modified, or changed in any
adverse respect its recommendation of this Agreement, the Merger and the
transactions contemplated hereby, (ii) the Company Board of Directors shall have
recommended to its stockholders a Superior Proposal, or (iii) resolved to do any
of the foregoing, provided that in no way shall such termination release the
--------
Company from its obligation to pay any amounts due pursuant to Section 9.3 in
accordance with the terms, and at the times, specified therein; or
(f) By Parent, if the 1999 10-K shall not have been filed on or
prior to May 1, 2000.
Section 8.2 Effect of Termination. In the event of the termination of
---------------------
this Agreement as provided in Section 8.1 hereof, written notice thereof shall
forthwith be given to the other party or parties specifying the provision hereof
pursuant to which such termination is made (unless the Agreement is terminated
pursuant to Section 8.1(a)), and this Agreement shall forthwith become null and
void and there shall be no liability on the part of any party or its directors,
officers or shareholders, except for the provisions of this Section 8.2 and
Section 9.3 hereof; provided, however, that nothing in this Section 8.2 shall
-------- -------
relieve any party to this Agreement of liability for any willful or intentional
breach of this Agreement.
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ARTICLE IX
MISCELLANEOUS
Section 9.1 Amendment and Modification. Subject to applicable law and
--------------------------
except as otherwise provided in the Agreement, this Agreement may be amended,
modified and supplemented in any and all respects, whether before or after any
vote of the stockholders of the Company contemplated hereby, by written
agreement of the parties hereto, by action taken by their respective Boards of
Directors or equivalent governing bodies, but, after the purchase of Shares
pursuant to the Offer, no amendment shall be made which decreases the Merger
Consideration and, after the approval of this Agreement by the stockholders, no
amendment shall be made which by law requires further approval by such
stockholders without obtaining such further approval. This Agreement may not be
amended except by an instrument in writing signed on behalf of each of the
parties hereto.
Section 9.2 Non-Survival of Representations and Warranties. None of the
----------------------------------------------
representations and warranties in this Agreement or in any schedule, instrument
or other document delivered pursuant to this Agreement shall survive the
acceptance for payment, and payment for, the Shares by Purchaser pursuant to the
Offer.
Section 9.3 Expenses.
--------
(a) Except as expressly set forth in Section 9.3(b) below, all
fees, costs and expenses incurred in connection with this Agreement and the
transactions contemplated hereby shall be paid by the party incurring such fees,
costs and expenses.
(b) If a Payment Event occurs, then the Company shall pay Parent
(by wire transfer of immediately available funds), if, pursuant to clause (x) of
the definition of Payment Event below, simultaneously with the occurrence of
such Payment Event or, if pursuant to clause (y) of the definition of Payment
Event below, within two Business Days following such Payment Event a fee equal
to $5 million. Upon such termination, the Company shall also reimburse Parent
and its Affiliates (by wire transfer of immediately available funds), no later
than two Business Days after such termination, for 100% of their Expenses (as
defined in clause (c) below). "Payment Event" means (x) the termination of this
-------------
Agreement pursuant to Sections 8.1(d) or (e), or (y) if any Acquisition Proposal
has been made prior to the expiration or termination of the Offer, the
occurrence of any of the following events (in the case of clauses (i), (ii) and
(iii) below, whether or not the Third Party referred to therein was the person
or entity making the Acquisition Proposal) within 12 months of the termination
of this Agreement pursuant to Section 8.1(b) whereby stockholders of the Company
receive, pursuant to any such event, cash, securities or other consideration
having an aggregate value, when taken together with the value of any securities
of the Company or its Subsidiaries otherwise held by such stockholders after
such event, in excess of $2.00 per Share: (i) the Company merges with or into,
or is acquired, directly or indirectly, by merger or otherwise by, a person or
entity which is not an Affiliate of Parent or Purchaser (a "Third Party"); (ii)
-----------
a Third Party, directly or indirectly, acquires more than 50% of the total
assets of the Company and its Subsidiaries, taken as a whole; (iii) a Third
Party, directly or indirectly, acquires more than 50% of the outstanding Shares;
or (iv) the Company adopts or implements a plan of
-35-
<PAGE>
liquidation, recapitalization or share repurchase relating to more than 50% of
the outstanding Shares or an extraordinary dividend relating to more than 50% of
the outstanding Shares or 50% of the assets of the Company and its Subsidiaries,
taken as a whole.
(c) As used herein, the term "Expenses" shall mean all of
--------
Parent's, Purchaser's and their affiliates' reasonable out-of-pocket expenses
(including all fees and expenses of counsel, accountants, experts, investment
bankers, financial and other consultants to Parent, Purchaser and their
affiliates) incurred by them or on their behalf in connection with the
transactions contemplated by this Agreement, including, but not limited to, in
connection with the negotiation, preparation, execution and performance of this
Agreement and the Parent's due diligence investigation of the Company.
(d) The Company acknowledges that the agreements contained in this
Section 9.3 are an integral part of the transactions contemplated by this
Agreement and that, without these agreements, Parent and Purchaser would not
enter into this Agreement. Accordingly, if the Company fails to pay any amount
due to Parent pursuant to this Section 9.3 promptly, it shall also pay any costs
and expenses incurred by Parent or Purchaser in connection with a legal action
to enforce this Agreement that results in a judgment against the Company for
such amount.
Section 9.4 Notices. All notices and other communications hereunder shall
-------
be in writing and shall be deemed given if delivered personally, telecopied
(which is confirmed) or sent by a nationally recognized overnight courier
service, such as Federal Express (providing proof of delivery), to the parties
at the following addresses (or at such other address for a party as shall be
specified by like notice):
(a) if to Parent or Purchaser, to:
Candace S. Cummings
Vice President, Administration and General Counsel
VF Corporation
628 Green Valley Road, Suite 500
Greensboro, NC 27408
Telephone: (336) 547-6000
Facsimile: (336) 547-7630
(b) with a copy to:
George R. Bason, Jr.
Davis Polk & Wardwell
450 Lexington Avenue
New York, NY 10017
Telephone: (212) 450-4000
Facsimile: (212) 450-4800
-36-
<PAGE>
if to the Company, to:
The North Face, Inc.
2013 Farollon Drive
San Leandro, California 94577
Attention: Chairman of the Board of Directors and
Chief Executive Officer
Telephone: (510) 618-3500
Facsimile: (510) 618-3557
with a copy to:
Proskauer Rose, LLP
1585 Broadway
New York, NY 10036
Attention: Edward W. Kerson, Esq.
Telephone: (212) 969-3290
Facsimile: (212) 969-2900
Section 9.5 Interpretation. When a reference is made in this Agreement to
--------------
Sections, such reference shall be to a Section of this Agreement unless
otherwise indicated. Whenever the words "include," "includes" or "including" are
used in this Agreement they shall be deemed to be followed by the words "without
limitation." As used in this Agreement, the term "affiliates" shall have the
meaning set forth in Rule 12b-2 of the Exchange Act. As used in this Agreement,
the term "Person" shall mean a natural person, partnership, corporation, limited
liability company, business trust joint stock company, trust, unincorporated
association, joint venture, Governmental Entity or other entity or organization.
Section 9.6 Counterparts. This Agreement may be executed in two or more
------------
counterparts, each of which shall be considered one and the same agreement and
shall become effective when two or more counterparts have been signed by each of
the parties and delivered to the other parties.
Section 9.7 Entire Agreement; No Third Party Beneficiaries. This
----------------------------------------------
Agreement and the Confidentiality Agreement:
(a) constitute the entire agreement among the parties with respect
to the subject matter hereof and thereof and supersedes all other prior
agreements and understandings, both written and oral, among the parties or any
of them with respect to the subject matter hereof and thereof (provided that the
-------- ----
provisions of this Agreement shall supersede any conflicting provisions of the
Confidentiality Agreement), and
(b) except as provided in Section 6.7, is not intended to confer
upon any person other than the parties hereto any rights or remedies hereunder.
-37-
<PAGE>
Section 9.8 Severability. If any term or other provision of this
------------
Agreement is invalid, illegal or incapable of being enforced by rule of law or
public policy, all other conditions and provisions of this Agreement shall
nevertheless remain in full force and effect so long as the economic or legal
substance of the transactions contemplated hereby is not affected in any manner
adverse to any party. Upon such determination that any term or other provision
is invalid, illegal or incapable of being enforced, the parties hereto shall
negotiate in good faith to modify this Agreement so as to effect the original
intent of the parties as closely as possible in an acceptable manner to the end
that transactions contemplated hereby are fulfilled to the extent possible.
Section 9.9 Specific Performance. The parties acknowledge and agree that
--------------------
any breach of the terms of this Agreement would give rise to irreparable harm
for which money damages would not be an adequate remedy and accordingly the
parties agree that, in addition to any other remedies, each shall be entitled to
enforce the terms of this Agreement by a decree of specific performance without
the necessity of proving the inadequacy of money damages as a remedy.
Section 9.10 Governing Law. This Agreement shall be governed by and
-------------
construed in accordance with the laws of the State of Delaware without giving
effect to the principles of conflicts of law thereof.
Section 9.11 Jurisdiction. Any suit, action or proceeding seeking to
------------
enforce any provision of, or based on any matter arising out of or in connection
with, this Agreement or the transactions contemplated hereby may be brought in
any federal court located in the State of Delaware or any Delaware state court,
and each of the parties hereby consents to the jurisdiction of such courts (and
of the appropriate appellate courts therefrom) in any such suit, action or
proceeding and irrevocably waives, to the fullest extent permitted by law, any
objection that it may now or hereafter have to the laying of the venue of any
such suit, action or proceeding in any such court or that any such suit, action
or proceeding brought in any such court has been brought in an inconvenient
form. Process in any such suit, action or proceeding may be served on any party
anywhere in the world, whether within or without the jurisdiction of any such
court. Without limiting the foregoing, each party agrees that service of process
on such party as provided in Section 12.01 shall be deemed effective service of
process on such party.
Section 9.12 WAIVER OF JURY TRIAL. EACH OF THE PARTIES HERETO IRREVOCABLY
--------------------
WAIVES ANY AND ALL RIGHT TO TRIAL BY JURY IN ANY LEGAL PROCEEDING ARISING OUT OF
OR RELATED TO THIS AGREEMENT OR THE TRANSACTIONS CONTEMPLATED HEREBY.
Section 9.13 Assignment. This Agreement shall not be assigned by any of
----------
the parties hereto (whether by operation of law or otherwise) without the prior
written content of the other parties, except that Purchaser may assign, in its
sole discretion, any or all of its rights, interests and obligations hereunder
to Parent or any other subsidiary of Parent. Subject to the preceding sentence,
but without relieving any party hereto of any obligation hereunder, this
Agreement will be binding upon, inure to the benefit of and be enforceable by
the parties and their respective successors and assigns.
-38-
<PAGE>
IN WITNESS WHEREOF, Parent, Purchaser and the Company have caused this
Agreement to be signed by their respective officers thereunto duly authorized as
of the date first written above.
VF CORPORATION
By: _____________________________
Name:
Title:
SEQUOIA ACQUISITION, INC.
By: _____________________________
Name:
Title:
THE NORTH FACE, INC.
By: _____________________________
Name:
Title:
<PAGE>
ANNEX A
Notwithstanding any other provisions of the Offer, Purchaser shall not be
required to accept for payment or, subject to any applicable rules and
regulations of the SEC, including Rule 14e-1(c) under the Exchange Act (relating
to Purchaser's obligation to pay for or return tendered Shares promptly after
termination or expiration of the Offer), pay for, and may delay the acceptance
for payment of or, subject to the restriction referred to above, the payment
for, any tendered Shares (A) unless (i) there are validly tendered and not
withdrawn prior to the expiration date for the Offer that number of Shares
which, when added to the Shares owned by Purchaser, will represent at least a
majority of the outstanding Shares on a fully diluted basis (the "Minimum
-------
Condition"), (ii) any applicable waiting period under the HSR Act has expired or
- ---------
terminated prior to expiration of the Offer; and/or (B) if at any time on or
after the date of the Agreement and before the expiration date of this Offer, if
any of the following events shall have occurred and be continuing:
(a) (i) there shall be instituted or pending any action or proceeding
by any government or governmental authority or agency, domestic, foreign or
supranational, before any court or governmental authority or agency,
domestic, foreign or supranational, (A) challenging or seeking to make
illegal, to delay materially or otherwise directly or indirectly to
restrain or prohibit the making of the Offer, the acceptance for payment of
or payment for some or all of the Shares by Parent or Purchaser or the
consummation of the Merger, (B) seeking to obtain material damages or
otherwise directly or indirectly relating to the transactions contemplated
by the Offer or the Merger, (C) seeking to restrain or prohibit Parent's
ownership or operation (or that of its Affiliates) of all or any material
portion of the business or assets of the Company and its Subsidiaries,
taken as a whole, or of Parent and its Subsidiaries, taken as a whole, or
to compel Parent or any of its Affiliates to dispose of or hold separate
all or any material portion of the business or assets of the Company and
its Subsidiaries, taken as a whole, or of Parent and its Subsidiaries,
taken as a whole, (D) seeking to impose or confirm material limitations on
the ability of Parent, Purchaser or any of Parent's other Affiliates
effectively to exercise full rights of ownership of the Shares, including
the right to vote any Shares acquired or owned by Parent, Purchaser or any
of Parent's other Affiliates on all matters properly presented to the
Company's stockholders, (E) seeking to require divestiture by Parent,
Purchaser or any of Parent's other Affiliates of any Shares or (F) that
otherwise, in the judgment of Parent, is likely to have a Company Material
Adverse Effect or a Parent Material Adverse Effect (any action or
proceeding described in clauses (A) through (E), a "Significant
-----------
Proceeding"); or (ii) there shall be instituted or pending any other
----------
Significant Proceeding, or any development shall have occurred in any
action or proceeding pending on the date hereof that, in each case, in the
judgment of Parent is reasonably likely to result in a Company Material
Adverse Effect or a Parent Material Adverse Effect; or
(b) there shall have been any action taken, or any statute, rule,
regulation, injunction, order or decree proposed, enacted, enforced,
promulgated, issued or deemed applicable to the Offer or the Merger, by any
court, government or governmental authority or agency, domestic, foreign or
A-1
<PAGE>
supranational, other than the application of the waiting period provisions of
the HSR Act to the Offer or the Merger, that, in the judgment of Parent, is
likely, directly or indirectly, to result in any of the consequences referred to
in clauses (i)(A) through (F) of paragraph (a) above; or
(c) any change shall have occurred or been threatened (or any development
shall have occurred or been threatened involving a prospective change) in the
business, assets, liabilities, financial condition, capitalization, operations
or results of operations of the Company or any of its Subsidiaries that, in the
reasonable judgment of Parent, is or is likely to have a Company Material
Adverse Effect; or
(d) any of the representations and warranties of the Company contained in
the Agreement shall not be true and correct when made, (ii) any of the
representations and warranties of the Company contained in the Agreement (other
than Section 3.11(a)(3)) shall not be true and correct at any time prior to the
consummation of the Offer as if made at and as of such time or (iii) the
representation set forth in Section 3.11(a)(3) of the Agreement shall not be
true and correct at any time prior to the consummation of the Offer as if made
at and as of such time due to the existence of a Tax Issue or Tax Issues that
would, individually or in the aggregate, be reasonably likely to have a Material
Adverse Effect; or
(e) the Company shall have breached or failed to perform or comply in all
material respects with the obligations under the Agreement to be performed or
complied with by it; or
(f) the Agreement shall have been terminated in accordance with its terms;
or
(g) prior to the purchase of Shares pursuant to the Offer, an Acquisition
Proposal for the Company exists and the Board shall have withdrawn or materially
modified or changed (including by amendment of the Schedule 14D-9) in a manner
adverse to Purchaser its recommendation of the Offer, the Agreement or the
Merger; or
(h) it shall have been publicly disclosed or Purchaser shall have
otherwise learned that (1) any person or "group" (as defined in Section 13(d)(3)
of the Exchange Act), other than Parent or its affiliates or any group of which
any of them is a member or any person or group that, on the date of the
Agreement, has beneficial ownership (determined pursuant to Rule 13(d)-3
promulgated under the Exchange Act) of more than 10% of the outstanding Shares
and which had filed a Schedule 13D or 13G with the SEC on or prior to March 31,
2000, shall have acquired beneficial ownership of more than 10% of any class or
series of capital stock of the Company (including the Shares), through the
acquisition of stock, the formation of a group or otherwise, or shall have been
granted an option, right or warrant, conditional or otherwise, to acquire
beneficial ownership of more than 10% of any class or series of capital stock of
the Company (including the Shares); or (2) any person or group that, prior to
March 31, 2000, had filed a Schedule 13D or 13G with the SEC, shall have
acquired beneficial ownership of additional shares of any class or series of
capital stock of the Company (including the Shares), through the acquisition of
stock, the formation of a group or otherwise, constituting 5% or more any such
class or series; or (3) any person or group shall have entered into a definitive
agreement or agreement in principle with the Company with respect to a merger,
consolidation or other business combination with the Company; or
A-2
<PAGE>
(i) the Company or any material Subsidiary shall commence a voluntary case
or other proceeding seeking liquidation, reorganization or other relief with
respect to itself or its debts under any bankruptcy, insolvency, reorganization
or other similar law now or hereafter in effect or seeking the appointment of a
trustee, receiver, liquidator, custodian or other similar official of it or any
substantial part of its property, or shall consent to any such relief or to the
appointment of or taking possession by any such official in an involuntary case
or other proceeding commenced against it, or shall make a general assignment for
the benefit of creditors, or shall fail generally to pay its debts as they
become due, or shall take any corporate action to authorize any of the
foregoing; or
(j) an involuntary case or other proceeding shall be commenced against the
Company or any material Subsidiary seeking liquidation, reorganization or other
relief with respect to it or its debts under any bankruptcy, insolvency,
reorganization or other similar law now or hereafter in effect or seeking the
appointment of a trustee, receiver, liquidator, custodian or other similar
official of it or any substantial part of its property; or an order for relief
shall be entered against the Company or any Subsidiary under the federal
bankruptcy laws as now or hereafter in effect; or
(k) the Company's and its Subsidiaries' existing lenders and their
Affiliates shall not have continued to fund the business of the Company and its
Subsidiaries on substantially the same basis as had been applicable prior to the
date of the Agreement;
which, in the sole judgment of Purchaser in any such case, and regardless of the
circumstances (including any action or omission by Purchaser or Parent) giving
rise to any such condition, makes it inadvisable to proceed with such acceptance
for payment.
The foregoing conditions are for the sole benefit of Parent and Purchaser,
may be asserted by Parent or Purchaser regardless of the circumstances giving
rise to such condition and may be waived by Parent or Purchaser in whole or in
part at any time and from time to time in the sole discretion of Parent or
Purchaser, subject in each case to the terms of this Agreement. The failure by
Parent or Purchaser at any time to exercise any of the foregoing rights shall
not be deemed a waiver of any such right and each such right shall be deemed an
ongoing right which may be asserted at any time and from time to time.
The capitalized terms used in this Annex A shall have the meanings set
forth in the Agreement and Plan of Merger among the Parent, Purchaser and the
Company to which it is annexed (the "Agreement").
A-3
<PAGE>
EXHIBIT 23.1
We consent to the incorporation by reference in Registration Statements Nos.
333-58629 and 333-70405 on Form S-3 and Registration Statements Nos. 333-12243
and 333-12633 on Form S-8 of The North Face, Inc. of our report dated April 12,
2000 (which expresses an unqualified opinion and includes an explanatory
paragraph referring to the substantial doubt of the ability of the Company to
continue as a going concern), appearing in this Annual Report on Form 10-K of
The North Face, Inc. for the year ended December 31, 1999.
DELOITTE & TOUCHE LLP
San Francisco, California
April 13, 2000
58
<PAGE>
Exhibit 23.2
We have issued our reports dated April 12, 2000 on The North Face (Europe)
Limited financial statements for each of the three years in the period ended
December 31, 1999, which accompany the consolidated financial statements of The
North Face, Inc. appearing in the December 31, 1999 Annual Report on Form 10-K.
Our December 31, 1999 report expresses an unqualified opinion and includes an
explanatory paragraph referring to the substantial doubt of the ability of The
North Face (Europe) Limited to continue as a going concern. We consent to the
incorporation by reference in the Registration Statements Nos. 333-58629 and
333-70405 on Form S-3 and Registration Statements Nos. 333-12243 and 333-12633
on Form S-8 of The North Face, Inc. of the aforementioned reports on The North
Face (Europe) Limited dated April 12, 2000.
GRANT THORNTON
Glasgow, Scotland
April 13, 2000
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C> <C>
<PERIOD-TYPE> YEAR YEAR
<FISCAL-YEAR-END> DEC-31-1999 DEC-31-1998
<PERIOD-START> JAN-01-1999 JAN-01-1998
<PERIOD-END> DEC-31-1999 DEC-31-1998
<CASH> 11,824 13,452
<SECURITIES> 0 0
<RECEIVABLES> 43,687 81,529
<ALLOWANCES> 0 0
<INVENTORY> 82,365 57,457
<CURRENT-ASSETS> 144,819 164,919
<PP&E> 32,859 25,916
<DEPRECIATION> 0 0
<TOTAL-ASSETS> 187,539 232,644
<CURRENT-LIABILITIES> 154,859 96,373
<BONDS> 0 0
0 0
0 0
<COMMON> 32 31
<OTHER-SE> 25,457 123,179
<TOTAL-LIABILITY-AND-EQUITY> 187,539 232,644
<SALES> 237,977 247,096
<TOTAL-REVENUES> 237,977 247,096
<CGS> 154,286 135,134
<TOTAL-COSTS> 154,286 135,134
<OTHER-EXPENSES> 166,688 101,276
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 8,307 4,907
<INCOME-PRETAX> (97,938) 5,843
<INCOME-TAX> 2,543 2,251
<INCOME-CONTINUING> (100,481) 3,592
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> (100,481) 3,592
<EPS-BASIC> (7.90) .30
<EPS-DILUTED> (7.90) .29
</TABLE>
