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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
----------------
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1996
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. [ ]
On March 17, 1997, the aggregate market value of the registrant's voting
stock held by non-affiliates was $104,386,599.
As of March 17, 1997, the number of shares of the registrant's Common Stock
outstanding was 11,204,865.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant's Annual Report to stockholders for the fiscal
year ended December 31, 1996, are incorporated by reference in Parts I, II and
IV of this report, and portions of the registrant's definitive Proxy Statement
for the Annual Meeting of stockholders scheduled for May 13, 1997, are
incorporated by reference in Part III of this report.
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PART I
ITEM 1. BUSINESS.
GENERAL
The North Face, Inc., a Delaware corporation, together with its consolidated
subsidiaries (the "Company"), designs and distributes technically sophisticated
outerwear, skiwear, functional sportswear, tents, sleeping bags and backpacks,
all under The North Face-Registered Trademark- name. The Company believes that
The North Face-Registered Trademark- is the world's premier brand of
high-performance outdoor apparel and equipment.
In 1994, the Company acquired substantially all of the assets and assumed
certain liabilities of its predecessor, The North Face, a California
corporation, in a transaction approved by a bankruptcy court administering
the bankruptcy proceedings commenced in January 1993 by the predecessor's
parent company Odyssey Holding, Inc. and certain corporate affiliates of
Odyssey. The Company was formed for the purpose of owning and operating the
predecessor's former business. Marsden S. Cason, Chairman and a director of
the Company, and William N. Simon, Chief Executive Officer, President and a
director of the Company, served as officers and directors of the predecessor
and certain corporate affiliates of the predecessor. See the biographical
information for these two individuals under "Executive Officers of The North
Face, Inc." in this Item 1 of Part I of this report.
Certain statements in this report marked with an asterisk (*) are forward
looking, and actual results may differ materially from the results expected by
the Company. The Company's future growth and operating results may be adversely
affected by a number of factors, including those set forth under "Factors That
May Affect Our Business" and elsewhere below in Item 1 of this report. There
may also be important, unforeseen risks not described herein.
Portions of the Company's 1996 Annual Report to its stockholders for the fiscal
year ended December 31, 1996 (the "1996 Annual Report") are incorporated herein
by certain references below and included as Exhibit 13 to this report.
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 by the general population, (ii) a
growing demand for highly functional products, (iii) a growing acceptance of
outdoor apparel as casual wear and (iv) an increase in the technical
sophistication of products in this field.
PRODUCTS
The Company offers a broad range of high-performance, technically-oriented
outerwear, skiwear, outdoor equipment and functional sportswear ("Tekware")
designed for extreme applications, such as high altitude mountaineering, ice
climbing, rock climbing, backpacking, skiing and snowboarding. The Company
characterizes its apparel-related products as "equipment for the body." As a
result of the experience gained through over 30 years as the brand of choice for
many of the world's most challenging high altitude and polar expeditions, The
North Face-Registered Trademark- has achieved a unique level of authenticity.
The North Face-Registered Trademark- products are original designs and carry a
lifetime warranty for the original owner against defects in materials and
workmanship. In 1995, sales of outerwear, equipment, skiwear and other products
represented approximately 50%, 25%, 14% and 11%, respectively, of net sales. In
1996, sales of outerwear, equipment, skiwear, Tekware and other products
represented approximately 52%, 25%, 12%, 7% and 4%, respectively, of net sales.
The Company's goal is to offer the most technically advanced products in its
field and to establish the industry standard in each product category.* The
Company designs its leading edge products for extreme applications, such as high
altitude mountaineering, ice climbing and polar expeditions, which it believes
represents only a small fraction of its potential customers. These leading edge
products serve to reinforce The North Face-Registered Trademark- brand image
while appealing to
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non-extreme users. The Company also strives to offer
products at more moderate price-points that remain "best of class" by
incorporating many of the features, materials and technology used in its leading
edge designs.* The Company believes that this product design philosophy
enhances The North Face-Registered Trademark- brand while appealing to the
broader consumer market.
OUTERWEAR
The Company's outerwear is engineered to provide protection in cold, wet and
windy conditions and to accommodate the range of motion required for the most
extreme activities. It is 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.* Overall, the Company introduced 108 new outerwear products for
1997. The Company now offers four principal lines of outerwear and a line of
Technical Apparel Accessories.
EXPEDITION SYSTEM-Registered Trademark- is an advanced, integrated cold weather
clothing system in which several pieces (including full body suits, pants,
jackets, vests, anoraks and accessories) work together in layers to create
warmth, protection and safety. Since 1994, the Company has significantly
expanded the Expedition System-Registered Trademark- product line by creating
new families of products around existing products, such as the Mountain Light
and Denali fleece families, adding new product segments, such as the Himalayan
and Kichatna Series, significantly upgrading and restyling existing products,
such as the Nuptse Series, and adding products specifically designed for women.
WEATHER SYSTEMS is a collection of four distinct series of outerwear designed to
provide protection in wet and windy conditions, while maintaining comfort
throughout variations of season, temperature, moisture and wind, and over a wide
range of activities. For example, the Hydrenaline-TM- Series, introduced in
1994, is a technically advanced line of shell outerwear based on a proprietary
microfiber fabric, Hydrenaline-TM- , that combines features of breathability and
water resistance and is ideal for hiking, running, mountain biking, cross
country skiing and other aerobic outdoor activities.
SEARCH AND RESCUE-TM- introduced a new concept to the outdoor industry. This
collection of one piece suits, shells and fleece is designed to support and
protect mountain search and rescue teams in extreme weather conditions. Although
intended for search and rescue experts, several pieces within the collection are
expected to appeal to consumers who desire its protective attributes for less
extreme outdoor activities.
REMOTE TERRAIN GEAR ("RTG") was created for backcountry snowboarding and
combines elements of the Company's Expedition System with unique snowboarding
features to create products such as pants that are cut in the seated
snowboarding position. Unlike most snowboarding clothing which caters to the
fashion tastes of snowboarders, the highly functional RTG is expected to appeal
to a performance-oriented snowboarding market.
TECHNICAL APPAREL ACCESSORIES includes a wide range of high-performance thermal
underwear, head wear, gloves and mittens which have been tested extensively
throughout the world in extreme conditions. This collection was expanded
significantly in 1996 with the introduction of nine new products.
TEKWARE-TM-
In 1996, the Company entered the broader casual apparel market with its
introduction of Tekware,-TM- an innovative line of high-performance outdoor
apparel 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, Climbing, Training and Trekking,
each with styles for men and women. Each line features a broad collection of
pants, shorts, shirts, pullovers, vests, tank tops and tights, each in several
styles. Tekware is designed for serious outdoor pursuits and is especially
functional for everyday use. The Company currently offers 101 Tekware products
for Spring 1997 and is offering 111 Tekware products for Fall 1997.* Preseason
orders for Tekware for the 1997 Spring season increased more than 165% over the
1996 Spring season.
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ADVANTAGES OF TEKWARE-TM- OVER COTTON CLOTHING
Features Tekware Cotton
- -------- ------- ------
Quick Drying /X/
Abrasion Resistant /X/
Shrink Resistant /X/
Tear Resistant /X/
Fade Resistant /X/
Stain Resistant /X/
Mildew Resistant /X/
Tekware provides an effective complement to the Company's other product
offerings and will continue to be prominently featured in the Summit Shops.*
The Company believes Tekware will be very appealing to wholesale customers and
will increase the amount of selling space devoted to The North Face-Registered
Trademark- products.* The Company believes Tekware's broad, year-round product
line and consistent new product introductions will help create sustained
consumer interest in The North Face-Registered Trademark- brand.* In addition,
unlike some of the Company's other product categories, Tekware has the potential
to become a repeat or "replenishment" business as consumers purchase new
sportswear to complement or replenish their existing wardrobes.*
EQUIPMENT
Equipment is critical to The North Face-Registered Trademark- image and
reputation and plays an extremely important role in its research and
development, field testing and marketing activities. The Company offers four
comprehensive lines of technical outdoor equipment: tents, sleeping bags,
backpacks and accessories. The Company has increased its equipment sales over
the last two years by introducing new products and refining existing products.
The Company has introduced 64 new equipment products for 1997.
TENTS. The Company is regarded as the premier supplier of expedition tents
built to withstand extreme weather conditions. The Company currently offers an
extensive line of 22 tent models, designed to suit a wide variety of weather
conditions and applications. The Company offers 9 expedition-quality tents,
including models such as the VE-25, long renowned as the world's finest base
camp tent, and the Mountain Tent, rated by CLIMBING MAGAZINE in 1995 as the best
two-person expedition tent. The Company's best selling tents are its
three-season and recreational tents that also offer superior features and are
used by a wide range of consumers for backpacking and camping.
SLEEPING BAGS. The Company offers 41 models of sleeping bags for mountaineering
and backpacking that differ in insulations, shell fabrics and linings. The
Company offers 16 models in its goose down line and 25 models in its synthetic
insulated line of sleeping bags to provide comfort in temperatures ranging from
- -35 F to 40 F. During 1995 and 1996, the Company introduced several innovations
in fabrics, insulation and construction of both its goose down and synthetic
insulated lines. For Fall 1996, the Company introduced synthetic sleeping bags
made from Polarguard 3D, a high-performance product developed by Hoechst
Corporation ("Hoechst"), in close collaboration with the Company.
BACKPACKS. The Company offers a comprehensive line of backpacks grouped into
three categories: (i) large volume, internal frame packs for extended
backcountry trips; (ii) "tech packs" for sport specific activities and (iii) day
packs. The large volume, internal frame pack category consists of three
different lines based on differing load carrying efficiencies. These packs are
made in a range of torso lengths and in sizes to fit both men and women. The
"tech pack" line consists of 15 models of sport specific packs designed with the
participation of the Company teams of climbers, explorers and extreme skiers for
specific activities, such as high altitude climbing, ice climbing, rock
climbing, backcountry skiing and snowboarding. During 1996, the Company
introduced new lines of daypacks, lumbar packs and cargo bags providing an
opportunity for a wide audience of hikers, students and the general public to
own a The North Face-Registered Trademark- product at a more moderate price. For
1997, the Company has introduced 45 new products in the categories of backpacks,
"tech packs," day packs, cargo bags and pack accessories.
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SKIWEAR
The Company offers skiwear designed for extreme skiing in remote areas. While
the Company's skiwear is designed for extreme users, it has become increasingly
popular among recreational skiers. The North Face-Registered Trademark- skiwear
products include parkas, jackets, anoraks, ski pants, ski suits, gloves and
other accessories. The Company's six skiwear collections -- Heli, Steep Tech-
Registered Trademark-, Men's Extreme-Registered Trademark- Gear, Women's
Extreme-Registered Trademark- Gear, Men's Extreme-Registered Trademark- Light
and Women's Extreme-Registered Trademark- Light -- have been designed for
specific applications, including helicopter skiing and backcountry skiing. The
Company's skiwear offers highly technical features for optimal weather
protection, maximum freedom of movement and appropriate ventilation, including
the use of tough, abrasion-resistant fabrics, such as Kevlar, that are
strategically overlaid or inset for added protection in areas of excessive wear
and tear, such as shoulders and elbows. The Company's skiwear collections are
reviewed annually and are redesigned, as appropriate, to add innovative
features.* For 1997, the Company has introduced 59 new skiwear products.
PRODUCT DESIGN AND DEVELOPMENT
The Company's goal is to offer the most technically advanced products in the
world that establish the industry standard in each of the Company's product
categories.* To remain on the leading edge of product design and materials
technology, the Company continually evaluates trends, monitors the needs and
desires of its consumers and works with its materials suppliers to develop new
materials and products and enhance product designs.*
The Company regularly reviews its product lines and actively seeks input from a
variety of sources. At the forefront of the product development effort is a 25
- -member product development team, which includes experts in textiles and design
engineering. This team, which is responsible for overseeing testing of designs
and introducing new outerwear, outdoor equipment, skiwear and Tekware, is
organized along major product lines, each with a product manager. The product
development team works with staff designers and also with outside contract
designers. The Company's teams of climbers, explorers and extreme skiers also
are important components of the Company's product design and development effort.
The product development cycle, from initial design to introduction, can take
from 12 to 18 months, with tents and backpacks requiring more time than other
products. A new product may be produced in several prototypes before being
submitted for testing. 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 The North Face personnel. The Company maintains a
materials testing laboratory to execute a variety of tests, including water
resistance, air permeability, tear strength and abrasion resistance.
The Company's products are designed with materials that are essential to their
technical performance. Most of these materials are developed in collaboration
with major suppliers, such as W. L. Gore & Associates, Inc., DuPont, Hoechst,
Malden Mills, Burlington Industries, Inc. and Mitsui Textiles. The Company
generally does not have written agreements with these suppliers. The Company
works closely with these suppliers to develop high-performance materials that
result in lighter, stronger and more efficient products. With an innovative
material, the Company generally seeks proprietary use or an exclusivity period,
usually one to two years, after which the supplier is free to make the material
generally available. These suppliers frequently provide much of the funding for
research and development of the materials they are developing for the Company,
and often contribute to the costs of promoting products incorporating their
material.*
MARKETING AND PROMOTION
The Company's goal is to increase brand awareness by projecting a technical,
extreme and authentic image that appeals to professionals and serious outdoor
enthusiasts as well as to broader segments of the population.* The Company
conveys an extreme and highly technical 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, also
create an emotional connection with broader segments of the population.
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Management believes that the Company has obtained a high level of brand
awareness and loyalty from the extreme users of its products. In order to
bolster the loyalty of these individuals and to further enhance its extreme
image, the Company is increasing its support of selected high altitude and polar
expeditions and its teams of climbers, explorers and skiers.* The North Face-
Registered Trademark- products have been the brand choice of 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; 1978 American Woman's Himalayan Expedition; 1987 International K-2
Expedition; 1989 Trans-Antarctica Expedition; 1992 American Gasherbrum IV
Expedition; 1994 Sagmartha Environmental Expedition; 1995 Ak-Su Kyrgyzstan
Expeditions; and 1996 Shipton Spire Expeditions.
Recognizing that the product choices of professional athletes influence consumer
preferences, the Company employs and/or has entered into contracts with several
world-class professional climbers, including Conrad Anker, Kitty
Calhoun-Grissom, Greg Child, Lynn Hill, Alex Lowe and Jay Smith; extreme skiers
Scot Schmidt and Rob and Eric DesLauriers; and backcountry snowboarders Jim and
Bonnie Zellers. These athletes are essential to the Company's product design
and testing. In addition, they participate in promotional activities on behalf
of the Company, including demonstrations and appearances at exhibitions, trade
shows, retailer clinics and promotional events, and appear in photos to promote
the Company in catalogs, advertisements, posters and videos. The Company has
entered into relationships with the Professional Ski Instructors of America and
with the National Ski Patrol pursuant to which each of these organizations
endorses the Company's skiwear.
In 1994, the Company began an ongoing comprehensive consumer advertising
campaign in outdoor and ski publications. The Company's advertisements appear
in magazines such as OUTSIDE, CLIMBING MAGAZINE, BACKPACKER and POWDER. The
Company also has received editorial coverage in a wide range of general interest
publications, including VOGUE, ELLE, ESQUIRE, GQ and THE NEW YORK TIMES. The
Company provides a wide assortment of point of purchase advertising support to
retailers, including catalogs, descriptive product hang tags and visual aids.
Many of these point of purchase marketing tools are integrated into the
Company's newly developed Summit Shops. The Company also promotes sales by
operating sizable product displays at three industry trade shows, two of which
are held in the Spring and one in the Fall of each year. In 1996, the Company
incurred expenditures for advertising and promotional activities which were
approximately 4% of net sales.
SUMMIT SHOPS
In the third quarter of 1996, the Company introduced Summit Shops, year-round
concept shops dedicated to The North Face-Registered Trademark- products located
within certain of its wholesale customers' stores. Summit Shops are intended to
increase sales at existing specialty retailers by offering an attractively
designed, professionally merchandised, dedicated selling space featuring a broad
array of The North Face-Registered Trademark- products.* The objectives of the
Summit Shops are to (i) have dedicated year-round selling floor space within
selected specialty retailers' stores; (ii) help the Company's specialty
retailers compete against mainstream apparel retailers; (iii) create a repeat
customer base; (iv) modernize the specialty retailers' approach to merchandising
The North Face-Registered Trademark- products; (v) provide the ability to
closely monitor retail sell-through at specialty retailers; and (vi) maintain a
consistent product assortment at the specialty 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-Registered Trademark- brand and image. The Company
provides merchandising support for the Summit Shops, while the specialty
retailer provides the customer service and sales personnel. The Company also
provides sales and product training for the specialty retailers' personnel who
work in the Summit Shops. Each Summit Shop is expected to follow certain
operational guidelines and maintain minimum inventory levels.
In the first half of 1996, a major outdoor retail chain opened The North Face-
Registered Trademark- concept shops, the precursors to Summit Shops, in 14 of
its stores. Based on the initial performance of the 14 concept shops, an
additional 28 Summit Shops were opened in the Company's wholesale customer
stores during the last half of 1996. These shops averaged approximately 550
square feet in size. The Company expects to open a minimum of 100 additional
Summit Shops in 1997. * While the Company expects that an average 550 square
foot Summit Shop will require a total investment for furniture and fixtures of
approximately $35,000, all or a substantial majority of which will be provided
by the Company, there can be no assurance that Summit Shops will not require
substantially more total capital investment.*
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SELECTIVE DISTRIBUTION
To preserve the integrity of The North Face-Registered Trademark- image and
reputation, the Company currently limits its distribution to retailers that
market products that are consistent with the Company's technical standards and
that provide a high level of customer service and technical expertise. The
Company currently sells its products to a select group of specialty
mountaineering, backpacking and skiing retailers, premium sporting goods
retailers and major outdoor specialty retail chains. The Company does not sell
its products to national general sporting goods chains or to discount stores.
The Company sells its products in the United States to approximately 840
wholesale customers, representing an estimated 1,200 store fronts. In Canada,
the Company sells its products to approximately 210 wholesale customers,
representing an estimated 250 store fronts, and in Europe, it sells to
approximately 450 wholesale customers, representing an estimated 750 store
fronts. Major customers of the Company include Recreational Equipment Inc. and
Eastern Mountain Sports, Inc.
No single customer accounted for more than 10% of net sales in 1996. Certain
information concerning preseason orders, inventory, seasonality, quarterly
fluctuation of operating results, government orders and working capital is set
forth under the captions "General," "Quarterly Data and Seasonality" and
"Liquidity and Capital Resources" in "Management's Discussion and Analysis of
Financial Condition and Results of Operations" included in the 1996 Annual
Report, and is incorporated herein by reference.
While the Company will continue to add selected wholesale customers, it
anticipates focusing primarily on increasing sales at existing wholesale
customers.* To accomplish this, the Company developed Summit Shops and
established a new core inventory replenishment program. The Company believes
that Summit Shops will increase sales by increasing selling space devoted to,
and improving the merchandising of, The North Face-Registered Trademark-
products.* By increasing availability of the Company's best selling products,
the Company believes its new core inventory replenishment program will enable it
to provide consistent product flow to both the Summit Shops and its other
wholesale customers.* The Company expects the new core inventory replenishment
program to increase the sales of its strongest selling items by increasing the
Company's ability to meet strong reorder demand.*
The Company's products are sold to wholesale customers in the United States by
its employee sales representatives, and in Canada and Europe by 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. 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. All of the
Company's products (other than those sold through the Company's outlet stores)
are covered by a lifetime warranty. Defective or damaged products returned to
the Company generally are replaced or repaired within 10 to 14 days of receipt.
Warranty expenses in 1996 were approximately 1% of net sales. Although the
Company does not expect warranty expenses to increase as a percentage of net
sales, there can be no assurance that such expenses will not increase
significantly in the future as a percentage of net sales.*
The Company currently distributes in the United States ("U.S.") primarily out of
a 146,500 square foot facility in San Leandro, California, of which
approximately 80,000 square feet is dedicated for distribution. This facility
also houses the Company's executive and administrative headquarters. The
Company has a secondary U.S. distribution facility in Richmond, California,
consisting of approximately 106,000 square feet. In June 1997, the Company will
move its main distribution center to a 250,445 square foot facility in
Vacaville, California.* The San Leandro distribution facility will operate as a
secondary facility, and the lease in Richmond, California will terminate in
April 1997.* In Canada, the Company operates a 22,200 square foot distribution
and administrative facility in Toronto, Ontario, and in Europe, the Company
operates a 77,200 square foot distribution and administrative facility in Port
Glasgow, Scotland. The majority of the Company's products are shipped by UPS
and common carriers.
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RETAIL OPERATIONS
RETAIL STORES. The Company's retail operations are an important component of
its marketing and product development strategies and provide a distinctive
environment in which to merchandise and sell The North Face-Registered
Trademark- product line. Located primarily in high-end retail shopping
districts and regional shopping malls, these stores carry a broad range of The
North Face-Registered Trademark- outerwear, equipment, skiwear and Tekware as
well as complementary products such as footwear and accessories from other
manufacturers. As a result of the Company's ability to control the visual
presentation and product assortment in its retail stores, the stores help build
brand awareness and introduce consumers to a broad range of The North Face-
Registered Trademark- 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 following table shows the approximate retail selling space at each of the
Company's nine retail stores:
Approximate
Selling Year
Location Square Footage Opened
-------- -------------- ------
Denver, CO.................. 8,500 1973
Boulder, CO................. 3,400 1982
Seattle, WA................. 4,600 1985
Oakbrook, IL................ 3,000 1991
San Francisco, CA........... 8,100 1991
Schaumberg, IL.............. 3,400 1991
Costa Mesa, CA.............. 5,500 1993
Palo Alto, CA............... 7,800 1994
Chicago, IL................. 12,000 1995
Although the Company considers its retail stores to be an important aspect of
its business strategy, the Company currently has no plans to open additional
retail stores, particularly given its focus on the introduction of additional
Summit Shops in 1997.* The Company believes that Summit Shops will provide many
of the same benefits as its Company-operated retail stores and that the
substantially reduced operational and financial commitments associated with
Summit Shops will result in a higher return on investment.*
OUTLET STORES. The Company also operates three outlet stores, located in
Berkeley and San Francisco, California and Freeport, Maine. The outlets serve
primarily as an effective means to liquidate discontinued merchandise.
INTERNATIONAL OPERATIONS
International sales accounted for approximately 26% of the Company's net sales
in 1996. In 1996, the Company implemented an integrated world-wide approach to
product development, sourcing and marketing in order to reduce costs, ensure
consistent worldwide operations and create a unified global brand. By offering
the same product lines and promoting the same extreme image in catalogs,
advertising and point of purchase materials, the Company has positioned The
North Face-Registered Trademark- brand in Europe consistently with the brand
image in the United States and Canada. Outside the United States, The North
Face products are sold to wholesale customers in Europe and Canada through the
Company's wholly-owned subsidiaries and by a licensee in Hong Kong and Macao.
In Japan and Korea, substantially all of the Company's trademarks are owned by
Kabushiki Kaisha Goldwin ("Goldwin").
Financial information concerning the Company's foreign and domestic operations
by geographical area is included in Note 13 to Consolidated Financial Statements
in the 1996 Annual Report and is incorporated herein by reference.
EUROPE. The Company believes that it is currently well positioned in Europe to
take advantage of the same industry trends that are occurring in the United
States.* Although the Company has operated in Europe for more than 13 years
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and believes it is recognized as a leader in the design, marketing and
distribution of highly technical outdoor apparel and equipment, only recently
has it begun to devote additional resources in Europe to increase sales.* The
Company's European operations are headquartered in Scotland. The Company
distributes its products directly to approximately 450 wholesale customers
representing an estimated 750 store fronts throughout Europe. Its primary
markets are the United Kingdom, Germany, Italy, France, Spain, Sweden,
Denmark and The Netherlands. Independent sales agents reporting to the
Company's sales director are responsible for sales in each country.
CANADA. The Company's Canadian operations are headquartered in Toronto,
Ontario, and include a distribution center and a customer and warranty service
center. Since early 1995, the Company has sold its products in Canada through
independent sales representatives to approximately 210 wholesale customers
representing an estimated 250 store fronts in Canada, primarily in British
Columbia, Ontario and Quebec. Prior to 1995, the Company's products were sold
in Canada through a licensee. During 1995, the Company undertook the following
initiatives in Canada: (i) established a sales, sales support, finance and
distribution facility in Toronto; (ii) hired a general manager to head the
Canadian operations; (iii) significantly expanded the available product
categories; and (iv) integrated the marketing and sourcing efforts with those of
the U.S. operations. The Company believes that additional growth opportunities
exist in the Canadian market.*
ASIA. In Japan and Korea, substantially all of the Company's trademarks are
owned by Goldwin, a leading manufacturer and distributor of high-end sports and
outdoor apparel and equipment. The North Face-Registered Trademark- is the
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
products made in the United States to Goldwin and by charging an administration
fee for orders which Goldwin adds to the Company's production in China and
Southeast Asia. In Hong Kong and Macao, the Company's products are sold through
a licensee, Mitsui & Co., Ltd. ("Mitsui"). The Company plans to capitalize on
its growing worldwide strength by exploring sales opportunities in other Asian
and Pacific Rim countries.*
SOURCING AND MANUFACTURING
The Company sources virtually all of its products through approximately 50
unaffiliated manufacturers in North America and Asia, including Hong Kong,
China, Taiwan, Korea, Indonesia, Bangladesh, Thailand and the Philippines. The
Company's European subsidiary operates a small manufacturing factory in Scotland
which accounts for a minor portion of the Company's total production. The
Company has implemented a global sourcing strategy that is expected to enable it
to achieve greater economies of scale, improve gross margins and maintain
uniform quality standards for its products.* The Company believes that it
enjoys good relationships with its suppliers and manufacturers and has the
ability to secure the necessary capacity to meet increased demand for its
products.*
To ensure that products manufactured by others are consistent with its
standards, the Company manages all key aspects of the production process,
including establishing product specifications, selecting the materials to be
used to produce its products and the suppliers of such materials, and
negotiating the prices for such 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, before the finished
products are shipped.
The Company currently is engaged primarily in a two season, wholesale business,
Spring (January to June) and Fall (July to December). Wholesale customers place
preseason orders from one to five months prior to the beginning of the season
for deliveries throughout the season. Reorders are taken throughout the season
and are based on availability. With the introduction of the Company's new
Tekware line and Summit Shops, the Company anticipates that it increasingly will
be supplying its products on a year-round basis.* The Company has recently
introduced a core inventory replenishment program, under which it maintains
stocks of key products.
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The Company's Merchandise Forecasting and Planning Department analyzes
information which it receives from the Company's various sales arms and develops
forecasts for the Company's products. These forecasts are regularly updated to
reflect advance orders and reorders and are turned into production quantities.
The Company's Product Acquisition Department, in turn, issues purchase orders to
the Company's unaffiliated manufacturers. Unaffiliated manufacturers purchase
the materials specified by the Company and manufacture and ship the products to
the Company. The Company's unaffiliated manufacturers sell finished products to
the Company on an FOB basis and are at risk for the quality and timely delivery
of the products. In 1996, approximately 35 to 40% of the Company's total
production requirements were financed with letters of credit; the balance is
purchased under open terms ranging from 14 to 60 days.
MANAGEMENT INFORMATION SYSTEMS
The Company believes that a high level of computerization is essential to
maintain and improve its competitive position. The Company's management
information and electronic data processing systems consist of a full range of
retail, financial, distribution and merchandising systems. The Company
currently anticipates spending a total of approximately $2.0 to $2.5 million in
1997 to upgrade its management information systems, with particular emphasis in
sourcing, core inventory replacement and forecasting, and believes that once in
place, the upgraded systems, along with routine upgrades, will be sufficient to
accommodate the Company's anticipated growth in sales and planned expansion for
the foreseeable future.* However, there can be no assurance that any upgrades
of its management information systems will be completed in a timely manner, that
any such upgrades will be adequate to meet the needs of the Company or that
these upgrades will not strain the Company's financial resources.
COMPETITION
The markets for the Company's products are highly competitive, and the recent
growth in these markets has encouraged the entry of many new competitors as well
as increased competition from established companies. Although the Company
believes that it does not compete directly with any single company with respect
to its entire range of products, within each product category the Company has
significant competitors. In addition, 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. 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
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 its products carry, there can be no assurance that the Company
will be able to maintain or increase its market share in the future. The
failure of the Company to compete successfully would materially and adversely
affect the Company's business and results of operations.
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-Registered
Trademark-, 'N' Design logo-Registered Trademark-, Extreme-Registered Trademark-
, Tekware-TM- , Steep Tech-Registered Trademark-, Quick Pitch-TM- , Hydrenaline-
TM- , Search and Rescue-TM- and VaporWick-TM- . Because of the popularity of
many of the Company's products and their strong brand identity and distinctive
design, The North Face-Registered Trademark- brand in recent years has
frequently 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.*
Currently, the Company has licensed its trademarks to Mitsui which markets
Company-designed products under The North Face-Registered Trademark- name in
Hong Kong and Macao.
In June 1994, Goldwin purchased from the Company substantially all of the
trademarks and trademark applications owned by the Company in Japan and Korea
and obtained the exclusive right to sell and distribute products under the
Company's trademarks in Japan and Korea. At the same time, the Company entered
into a marketing arrangement with
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Goldwin that ensures that brand, product image and distribution strategies
are synchronized. The Company benefits from this relationship by selling
products made in the U.S. to Goldwin and by charging an administrative fee
for orders which Goldwin adds to the Company's production in China and
Southeast Asia.
EMPLOYEES
As of December 31, 1996, the Company had 572 employees, of which 419 were
employed in the United States, 141 in Europe and 12 in Canada. None of these
employees is currently covered by collective bargaining agreements. The Company
believes that its relations with its employees are good.
FACTORS THAT MAY AFFECT OUR BUSINESS.
CONSUMER PREFERENCES. Consumer demand for the Company's products may be
adversely affected if consumer interest in outdoor activities does not grow or
declines. 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.
MANAGING GROWTH. If the Company's business grows, the Company may have
increased difficulties in managing product design, hiring, marketing,
distribution, management information and other resources, and in obtaining
supplies, manufacturing services and working capital. The Company's future
profitability will be critically dependent on its ability to achieve and manage
potential future growth effectively.
WHOLESALE STRATEGY. The Company's wholesale customers consist almost
exclusively of specialty outdoor product retailers. The Company cannot assure
that its existing customers will increase their purchases of the Company's
products, that future preseason wholesale orders will increase, or that the
Company will be able to fill reorders during each season. Because the Company
expects its wholesale business to constitute an increasing percentage of total
sales going forward, overall gross margins may continue to decline in the
future. The Company's wholesale strategy also depends on its ability to achieve
increased sales through its Summit Shop program. Risks of this program include
sourcing and managing higher inventory levels, funding all or most of the cost
of the Summit Shop fixtures without assurance of additional sales and profits,
and the need to supply products that maintain consumer demand on a year round
basis. There can be no assurance that additional Summit Shops will be opened in
a timely manner or that their cost or performance will meet the Company's
expectations. If the Summit Shop program is unsuccessful, the Company risks
writeoffs of inventory and fixtures that could have a material adverse effect on
the Company's business. The Company believes that the success of its Summit
Shop program will be highly dependent on market acceptance of its recently
introduced Tekware-TM- line of products.
DEPENDENCE ON NEW PRODUCTS. To continue its growth, the Company must
successfully introduce new products and improvements to existing products on an
ongoing basis. Risks of new product introductions include targeting new markets
involving more casual outdoor uses, offering products in wider price ranges,
product obsolescence, increased costs and competition, possible consumer
rejection of new products or styles and possible dilution of the Company's
product image. In 1996, the Company introduced "Tekware-TM-," a line of
synthetic outdoor apparel. The Company's limited experience in marketing casual
apparel, limited distribution channels, and possible consumer resistance to
synthetic fabrics could result in slow sales of Tekware-TM-.
RELIANCE ON UNAFFILIATED MANUFACTURERS. The Company currently relies on
approximately 50 unaffiliated manufacturers to produce nearly all of its
products, with ten of the manufacturers producing approximately 75% of the
Company's products for 1996. The Company has no long-term contracts with its
manufacturing sources, and it competes with other companies for production
facilities and import quota capacity. Any disruption in the Company's ability
to obtain manufacturing services could have a material adverse effect on the
Company's business. 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. The Company established a core
inventory replenishment program in October 1996 to
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facilitate reorders of core products, and cannot assure that this program
will meet reorder requirements or avoid excess inventory.
KEY SUPPLIES. 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.
The Company cannot assure that it will be able to obtain in the future adequate
supplies of technically advanced materials or that desired purchase terms or
other benefits of past purchases, such as suppliers' funding of development
costs and co-op advertising arrangements, will continue.
FLUCTUATIONS IN SALES. Sales of the Company's products historically have
fluctuated due to external conditions such as weather and economic recessions or
other conditions which reduce consumer spending.
INTERNATIONAL OPERATIONS. The Company's business is subject to the risks
generally associated with doing business abroad. The Company imports more than
50% of its merchandise from contract manufacturers located outside of the United
States, primarily in the Far East. A significant portion of the Company's
products is produced in 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.
COMPETITION AND TRADEMARKS. The Company faces intense competition from major
brand name apparel companies, other large companies, and smaller businesses
specializing in outdoor products. The Company owns and uses a number of
trademarks, some of which may be important in maintaining or creating a
competitive advantage and consumer demand. Certain competitors in the United
States and abroad have copied and may in the future copy certain of the
Company's trademarks and designs. The Company is also aware of certain
counterfeiting of the Company's products. Without authorization by the
Company, a third party has filed an application in China to register as a
trademark the Chinese characters for "North Face" and a copy of the Company's
"N" design. Unless successfully opposed, this application could result in
material adverse consequences to the Company's business. 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.
KEY PERSONNEL. The Company recently announced a shift in its executive
responsibilities pursuant to which Marsden S. Cason was named Chairman of the
Board of Directors and William N. Simon was named Chief Executive Officer in
addition to his role as President. This change was due in part to health
considerations affecting Mr. Cason. The unanticipated loss of one or more
current senior executives or key employees could have a significant adverse
effect on the Company's business.
PRODUCT AND WARRANTY LIABILITY. The Company's products are used often in severe
weather conditions. In 1997 the Company began selling portaledges used as
sleeping platforms in big wall rock climbing. There is no assurance that
insurance maintained by the Company will cover possible future losses from
product liability claims. The Company maintains a warranty reserve for the
lifetime warranty offered on 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.
STOCK MARKET RISKS. The trading price of the Company's Common Stock has
fluctuated significantly since the Company's initial public offering in July
1996, and may fluctuate in the future as a result of many factors, including the
Company's operating results, new products introduced by the Company or its
competitors, market conditions for the Company's products, changes in earnings
estimates by analysts, results reported by the Company which are more or less
than estimates by analysts, and speculation in the trade or business press. The
trading price may also be affected by retail industry, stock market, or economic
factors unrelated to the Company's operating performance. Future sales of
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substantial amounts of Common Stock by existing stockholders may also adversely
affect prevailing market prices for the Common Stock and could impair the
Company's ability to raise equity capital in the future. As of March 17, 1997,
the Company's directors, officers and certain other affiliates beneficially
owned approximately 45% of the outstanding shares of the Company's Common Stock.
EXECUTIVE OFFICERS OF THE NORTH FACE, INC.
Name Age Position
---- --- --------
Marsden S. Cason 53 Chairman and Director
William N. Simon 49 Chief Executive Officer, President
and Director
Roxanna Prahser 38 Chief Financial Officer
Carlo Armenise 47 Vice President of Operations
Todd Katz 34 Vice President of Sales
Tucker Hacking 41 Vice President of Product
Acquisitions
Jack A. Boys 38 Vice President of Marketing
Roger Kase 49 Vice President of Product
Development
Mr. Cason has been Chairman of the Company since February 1997, served as Chief
Executive Officer of the Company from June 1994 to February 1997, and served as
a director since June 1994. Mr. Cason joined the Company's predecessor in
January 1993 as President and director and served as a director and executive
officer of several affiliates of the predecessor. Prior to joining the
Company's predecessor, from May 1991 through January 1993, Mr. Cason was the
Chief Executive Officer of Carol Management Company and Doral Resort Hotels, an
owner and manager of condominiums, hotels and conference centers. Prior to May
1991, Mr. Cason was involved in various business ventures as a chief executive
officer.
Mr. Simon has been Chief Executive Officer of the Company since February 1997,
President of the Company since December 1995, and a director of the Company
since June 1995. From May 1988 through June 1994, Mr. Simon served as the
Chairman of the Board of the Company's predecessor and was Vice Chairman of the
Company from June 1994 to December 1995. From November 1978 through June 1994,
Mr. Simon was Chairman and Chief Executive Officer of Odyssey Worldwide Holdings
B.V. ("Odyssey"), a designer and manufacturer of high-end sports and outdoor
apparel, and an executive officer and director of several other Odyssey
affiliates. Mr. Simon has been involved in the design, manufacturing and sales
of outdoor clothing and equipment for over 26 years. In January 1993, Odyssey
and certain holding companies affiliated with Odyssey filed for protection in
the United States under Chapter 11 of the U.S. Bankruptcy Code. In September
1994, Mr. Simon filed a petition under Chapter 7 of the U.S. Bankruptcy Code
and in January 1995 was granted a discharge by the bankruptcy court and the
proceeding was dismissed. Mr. Simon personally had guaranteed substantially all
of the indebtedness of Odyssey and its affiliated companies and his bankruptcy
filing was made in order to terminate his personal liability for these corporate
obligations.
Ms. Prahser has been Chief Financial Officer of the Company since January 1996.
Ms. Prahser served as the Vice President of Finance for the Company from May
1995 through January 1996 and as Director of Finance for the Company and its
predecessor from March 1993 through May 1995. Prior to joining the Company's
predecessor, Ms. Prahser spent 12 years at Arthur Andersen & Co., where she was
an audit manager.
Mr. Armenise has been Vice President of Operations since March 1997. Mr.
Armenise served as the Vice President of Retail for the Company from April 1996
through March 1997. Prior to joining the Company, Mr. Armenise was with Coach
Leatherware Inc., a manufacturer, wholesaler and retailer of leather goods and
apparel, from September 1992 through April 1996. His last position with Coach
was as Director of Full Price Stores from June 1994 through April 1996. Prior
to that, Mr. Armenise was with Gucci America, Inc. from June 1977 through
September 1992 and served as its West Coast Assistant Regional Manager from
January 1990 through September 1992. Mr. Armenise has 19 years of experience in
the specialty retail and apparel industries.
Mr. Katz has been Vice President of Sales for the Company since January 1997.
From October 1994 to December 1996, Mr. Katz managed regional sales for the
Company as an independent contractor in the northwestern United States.
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From October 1988 to October 1994, Mr. Katz served as a regional sales
manager for W. L. Gore & Associates, Inc., manufacturer of
Gore-Tex-Registered Trademark-fabrics and other leading outdoor industry
material technologies.
Mr. Hacking has been Vice President of Product Acquisitions for the Company
since April 1996 and Director of Product Acquisitions for the Company and its
predecessor from April 1993 through April 1996. From January 1990 to April
1993, Mr. Hacking owned and operated TTH Enterprises, Inc., a company
specializing in the sports apparel industry. Previously, Mr. Hacking spent over
10 years with Adidas in Europe and the United States, last serving as the
general manager of operations and sourcing for Adidas America, Inc. Mr. Hacking
has over 18 years of experience in the apparel industry.
Mr. Boys joined the Company as Vice President of Marketing in March 1996. From
December 1993 to March 1996, Mr. Boys was Vice President of Marketing for Avia
Group International, Inc., a manufacturer of athletic footwear, and from August
1992 to December 1993 he was Vice President of Marketing for Le Coq Sportif
International, an athletic footwear and apparel manufacturer. Prior to August
1992, Mr. Boys spent over 10 years with Converse Inc., an athletic footwear
company, where he held various senior marketing management positions.
Mr. Kase joined the Company as Vice President of Product Development in May
1995. From September 1993 through May 1995, he was Chief Operating Officer for
Cary Children's Clothing and from April 1991 through July 1993, he was Vice
President --Apparel Division for Sam & Libby Inc., a manufacturer of footwear.
Mr. Kase has over 20 years of experience in the apparel industry in both design
and operations, including 10 years as an executive with Esprit de Corp., a
manufacturer of women's clothing.
ITEM 2. PROPERTIES.
The principal executive and administrative offices of the Company are
located at 2013 Farallon Drive, San Leandro, California. The Company has
recently signed a lease in Vacaville, California, which will be its primary
distribution facility.* The lease for space used as a distribution center in
Richmond, California, expires in April 1997. 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:
Approximate Gross
Location Use Square Feet
-------- --- -----------
San Leandro, CA Executive and administrative offices and 146,500
distribution center
Vacaville, CA Distribution Center (commencing June 1997) 250,445
Richmond, CA Distribution Center (through April 1997) 106,000
San Francisco, CA Retail store 12,300
Palo Alto, CA Retail store 10,700
Costa Mesa, CA Retail store 7,100
Seattle, WA Retail store 6,000
Denver, CO Retail store 17,000
Boulder, CO Retail store 4,300
Chicago, IL Retail store 15,200
Oakbrook, IL Retail store 4,000
Schaumberg, IL Retail store 5,000
Berkeley, CA Outlet 14,200
San Francisco, CA Outlet 10,000
Freeport, ME Outlet 10,000
Port Glasgow, Scotland European headquarters, distribution 77,200
center and manufacturing facility
Brampton, Ontario Canadian headquarters and distribution 22,200
center
14
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ITEM 3. LEGAL PROCEEDINGS.
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
Not applicable.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS.
The Company's Common Stock is listed on the Nasdaq National Market and
trades under the symbol "TNFI." At March 17, 1997, there were approximately 51
stockholders of record. Information concerning certain dividend restrictions
under the Company's credit facility is incorporated in this report by reference
from page 19 of the 1996 Annual Report. 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 the third and fourth quarters of 1996:
Q3 1996 Q4 1996
------- -------
High $32 $29 3/4
Low $15 1/4 $16
ITEM 6. SELECTED FINANCIAL DATA.
Selected financial data for the Company is incorporated in this report by
reference from page 1 of the 1996 Annual Report.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
Management's Discussion and Analysis of Financial Condition and Results of
Operations is incorporated in this report by reference from pages 16 through 21
of the 1996 Annual Report.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
The consolidated financial statements of the Company, together with the
report thereon of Deloitte & Touche LLP, independent auditors, are incorporated
in this report by reference from pages 22 through 34 of the 1996 Annual Report.
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.
Information concerning the directors of the Company and compliance with
Section 16(a) of the Securities Exchange Act of 1934 is incorporated in this
report by reference from the text under the captions "Proposal 1 - Election of
Directors" and "Section 16(a) Beneficial Ownership Reporting Compliance"
included in the Company's Proxy
15
<PAGE>
Statement for the Annual Meeting of Stockholders on May 13, 1997. Information
concerning the executive officers of the Company is set forth under the caption
"Executive Officers of The North Face, Inc." in Item 1 of Part I of this report.
ITEM 11. EXECUTIVE COMPENSATION.
Information concerning executive compensation is incorporated in this
report by reference from the text and tables under the caption "Executive
Officer Compensation" included in the Company's Proxy Statement for the Annual
Meeting of Stockholders on May 13, 1997. Information concerning compensation of
directors is incorporated in this report by reference from the text under the
caption "Proposal 1 - Election of Directors" included in that proxy statement.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
Information concerning security ownership of certain beneficial owners and
management is incorporated in this report by reference from the text and table
under the caption "Stock Ownership of Certain Beneficial Owners and Management"
included in the Company's Proxy Statement for the Annual Meeting of Stockholders
on May 13, 1997.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
Information concerning certain relationships and related transactions
with executive officers, directors and security holders known to the Company
to own of record more than 5% of the Company's Common Stock is incorporated
in this report by reference from the text under the captions "Executive
Officer Compensation --Compensation Committee Interlocks and Insider
Participation" included in the Company's Proxy Statement for the Annual
Meeting of Stockholders on May 13, 1997.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.
(a)(1) The following consolidated financial statements of The North Face,
Inc. and independent auditors' report are incorporated in this report by
reference from the Company's 1996 Annual Report to Stockholders filed as Exhibit
13 hereto:
Consolidated Balance Sheets
Consolidated Statements of Operations
Consolidated Statements of Cash Flows
Consolidated Statements of Stockholders' Equity
Notes to Consolidated Financial Statements
Independent Auditors' Report
(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 consolidated financial statements and notes thereto.
(3) Exhibits
Exhibit No. Description
3.1(2) Amended and Restated Certificate of Incorporation of The North Face,
Inc.
3.2(A)(1) Amended and Restated By-laws of The North Face, Inc.
16
<PAGE>
4.1(1) Specimen Common Stock Certificate of The North Face, Inc.
10.1(1) Subordinated Note and Common Stock Purchase Agreement, dated as of
June 7, 1994, between TNF Holdings Company, Inc.,* and Whitney
Subordinated Debt Fund, L.P., as amended by Amendment No. 1, dated
as of March 1, 1995, and Amendment No. 2, dated as of March 27,
1996.
10.1A(1) Subordinated Promissory Note due June 7, 2001 (issued pursuant to
the Subordinated Note and Common Stock Purchase Agreement, dated as
of June 7, 1994, as amended, included in 10.1).
10.1B(1) Form of Amendment No. 3, dated as of , 1996, to Subordinated Note
and Common Stock Purchase Agreement (included in Exhibit 10.1).
10.1C(1) Form of Amended and Restated Promissory Note due June 7, 2001
(included in Exhibit 10.1A).
10.2(1) Preferred Stock Purchase Agreement, dated as of June 7, 1994, among
TNF Holdings Company, Inc.,* Whitney 1990 Equity Fund, L.P. and
J.H. Whitney & Co., as amended by Amendment No. 1, dated as of
March 1, 1995, and Amendment No. 2, dated as of March 27, 1996.
10.2B(1) Form of Amendment No. 3, dated as of , 1996, to Preferred Stock
Purchase Agreement (included in Exhibit 10.2).
10.3(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.
10.4(1) Investor Stock Purchase Agreement, dated as of June 7, 1994, among
TNF Holdings Company, Inc.,* Richard T. Peery, Jack L.
Richardson, Philip S. Schlein and Kenneth F. Siebel.
10.5(1) Stock Purchase Agreement, dated as of December 28, 1993, between
TNF Holdings Company, Inc., a California corporation, and Kabushiki
Kaisha Goldwin, as amended by Memorandum, dated as of March 29,
1994, among TNF Holdings Company, Inc., a California corporation,
and Kabushiki Kaisha Goldwin, and Memorandum No. 2, dated as of
May 20, 1994, between TNF Holdings Company, Inc., a California
corporation, and Kabushiki Kaisha Goldwin.
10.6(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.
10.7(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.
10.8(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.
10.8A(1) Form of 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.
10.9(2)** TNF Holdings Company, Inc.* 1994 Stock Incentive Plan, as amended.
17
<PAGE>
10.10** The North Face, Inc. 1995 Stock Incentive Plan, as amended
10.11(1)** The North Face, Inc. 1996 Stock Incentive Plan.
10.12(1)** The North Face, Inc. 1996 Employee Stock Purchase Plan.
10.13(1)** The North Face, Inc. 1996 Directors' Stock Option Plan.
10.14(1)** Letter Employment Agreement, dated June 8, 1994, between Roxanna
Prahser and TNF Holdings Company, Inc.*
10.15(1)** Letter Employment Agreement, dated May 3, 1995, between Roger Kase
and The North Face, Inc.
10.16** Letter Employment Agreement dated March 15, 1996, between Carlo
Armenise and The North Face, Inc.
10.17(1)** Confidential Change in Status and General Release Agreement,
entered into on April 25, 1996, to be effective on and as of
December 19, 1995, by and between William A. McFarlane and The
North Face, Inc.
10.18(1) Trademark License, dated October 29, 1993, between the North Face
and W.L. Gore & Associates, Inc.
11.1 Computation of Pro Forma Net Income (Loss) Per Share.
13 1996 Annual Report to Stockholders
21.1(1) List of Subsidiaries of The North Face, Inc.
23.1 Consent of Deloitte & Touche LLP.
24.1 Powers of Attorney. Contained on page 19 of this report and
incorporated herein by reference.
27.1 Financial Data Schedule.
* 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.
(1) Incorporated by reference to the Company's Registration Statement on Form
S-1 (No. 333-04107) and amendments thereto, filed with the Securities
and Exchange Commission on May 20, 1996, 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.
(b) Reports on Form 8-K: none.
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.
March 28, 1997 The North Face, Inc.
(Registrant)
By ______________________
William N. Simon
Chief Executive Officer
18
<PAGE>
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears
below hereby constitutes and appoints Marsden S. Cason, William N. Simon and
Roxanna Prahser, and each of them, his or her true and lawful agent, proxy and
attorney-in-fact, with full power of substitution and resubstitution, for him or
her and in his or her 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 or she might or could do in
person, hereby approving, ratifying and confirming all that such agent, proxy
and attorney-in-fact or any of his or her subsititutes 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.
Signatures Title or Capacities Date
---------- ------------------- ----
/s/ Marsden S. Cason
- --------------------------- Chairman and Director March 27 ,1997
Marsden S. Cason
/s/ William N. Simon
- --------------------------- Chief Executive Officer, President March 26, 1997
William N. Simon and Director (Principal Executive
Officer)
/s/ Roxanna Prahser
- --------------------------- Chief Financial Officer (Principal March 26, 1997
Roxanna Prahser Financial and Accounting Officer)
/s/ Ray E. Newton, III
- --------------------------- Director March 24, 1997
Ray E. Newton, III
- --------------------------- Director March , 1997
Peter M. Castleman
/s/ James Fifield
- --------------------------- Director March 25, 1997
James Fifield
/s/ Michael Doyle
- --------------------------- Director March 24, 1997
Michael Doyle
19
<PAGE>
EXHIBIT INDEX
Exhibit No. Description
3.1(2) Amended and Restated Certificate of Incorporation of The North Face,
Inc.
3.2(A)(1) Amended and Restated By-laws of The North Face, Inc.
4.1(1) Specimen Common Stock Certificate of The North Face, Inc.
10.1(1) Subordinated Note and Common Stock Purchase Agreement, dated as of
June 7, 1994, between TNF Holdings Company, Inc.,* and Whitney
Subordinated Debt Fund, L.P., as amended by Amendment No. 1,
dated as of March 1, 1995, and Amendment No. 2, dated as of March
27, 1996.
10.1A(1) Subordinated Promissory Note due June 7, 2001 (issued pursuant to
the Subordinated Note and Common Stock Purchase Agreement, dated
as of June 7, 1994, as amended, included in 10.1).
10.1B(1) Form of Amendment No. 3, dated as of , 1996, to Subordinated Note
and Common Stock Purchase Agreement (included in Exhibit 10.1).
10.1C(1) Form of Amended and Restated Promissory Note due June 7, 2001
(included in Exhibit 10.1A).
10.2(1) Preferred Stock Purchase Agreement, dated as of June 7, 1994,
among TNF Holdings Company, Inc.,* Whitney 1990 Equity Fund, L.P.
and J.H. Whitney & Co., as amended by Amendment No. 1, dated as
of March 1, 1995, and Amendment No. 2, dated as of March 27, 1996.
10.2B(1) Form of Amendment No. 3, dated as of , 1996, to Preferred Stock
Purchase Agreement (included in Exhibit 10.2).
10.3(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.
10.4(1) Investor Stock Purchase Agreement, dated as of June 7, 1994, among
TNF Holdings Company, Inc.,* Richard T. Peery, Jack L.
Richardson, Philip S. Schlein and Kenneth F. Siebel.
10.5(1) Stock Purchase Agreement, dated as of December 28, 1993, between
TNF Holdings Company, Inc., a California corporation, and
Kabushiki Kaisha Goldwin, as amended by Memorandum, dated as of
March 29, 1994, among TNF Holdings Company, Inc., a California
corporation, and Kabushiki Kaisha Goldwin, and Memorandum No. 2,
dated as of May 20, 1994, between TNF Holdings Company, Inc., a
California corporation, and Kabushiki Kaisha Goldwin.
10.6(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.
10.7(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.
<PAGE>
10.8(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.
10.8A(1) Form of 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.
10.9(2)** TNF Holdings Company, Inc.* 1994 Stock Incentive Plan, as amended.
10.10** The North Face, Inc. 1995 Stock Incentive Plan, as amended
10.11(1)** The North Face, Inc. 1996 Stock Incentive Plan.
10.12(1)** The North Face, Inc. 1996 Employee Stock Purchase Plan.
10.13(1)** The North Face, Inc. 1996 Directors' Stock Option Plan.
10.14(1)** Letter Employment Agreement, dated June 8, 1994, between Roxanna
Prahser and TNF Holdings Company, Inc.*
10.15(1)** Letter Employment Agreement, dated May 3, 1995, between Roger Kase
and The North Face, Inc.
10.16** Letter Employment Agreement dated March 15, 1996, between Carlo
Armenise and The North Face, Inc.
10.17(1)** Confidential Change in Status and General Release Agreement,
entered into on April 25, 1996, to be effective on and as of
December 19, 1995, by and between William A. McFarlane and The
North Face, Inc.
10.18(1) Trademark License, dated October 29, 1993, between the North Face
and W.L. Gore & Associates, Inc.
11.1 Computation of Pro Forma Net Income (Loss) Per Share.
13 1996 Annual Report to Stockholders
21.1(1) List of Subsidiaries of The North Face, Inc.
23.1 Consent of Deloitte & Touche LLP.
24.1 Powers of Attorney. Contained on page 19 of this report and
incorporated herein by reference.
27.1 Financial Data Schedule.
* 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.
(1) Incorporated by reference to the Company's Registration Statement on Form
S-1 (No. 333-04107) and amendments thereto, filed with the Securities
and Exchange Commission on May 20, 1996, 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.
<PAGE>
EXHIBIT 10.10
THE NORTH FACE, INC.
1995 STOCK INCENTIVE PLAN
(AS AMENDED)
<PAGE>
TABLE OF CONTENTS
THE NORTH FACE, INC.
1995 STOCK INCENTIVE PLAN
ARTICLE I
GENERAL.......................................................................1
1.1 PURPOSE..............................................................1
1.2 ADMINISTRATION.......................................................1
1.3 PERSONS ELIGIBLE FOR AWARDS..........................................2
1.4 TYPES OF AWARDS UNDER PLAN...........................................2
1.5 SHARES AVAILABLE FOR AWARDS..........................................2
1.6 DEFINITIONS OF CERTAIN TERMS.........................................3
ARTICLE II
AWARDS UNDER THE PLAN.........................................................3
2.1 AGREEMENTS EVIDENCING AWARDS.........................................3
2.2 GRANT OF STOCK OPTIONS...............................................4
2.3 EXERCISE OF OPTIONS..................................................4
2.4 TERMINATION OF EMPLOYMENT; DEATH.....................................5
ARTICLE III
MISCELLANEOUS.................................................................6
3.1 AMENDMENT OF THE PLAN; MODIFICATION OF AWARDS........................6
3.2 RESTRICTIONS.........................................................6
3.3 NONASSIGNABILITY.....................................................7
3.4 WITHHOLDING TAXES....................................................7
3.5 RIGHT OF DISCHARGE RESERVED..........................................7
3.6 NATURE OF PAYMENTS...................................................7
3.7 NON-UNIFORM DETERMINATIONS...........................................8
3.8 OTHER PAYMENTS OR AWARDS.............................................8
3.9 SECTION HEADINGS.....................................................8
3.10 EFFECTIVE DATE AND TERM OF PLAN......................................8
3.11 GOVERNING LAW........................................................9
i
<PAGE>
ARTICLE I
GENERAL
1.1 PURPOSE
The purpose of the The North Face, Inc. 1995 Stock Incentive Plan (the
"Plan") is to provide for officers and other employees (including directors
whether or not employees) of, and consultants to, The North Face, Inc. (The
"Company") an incentive (a) to enter into and remain in the service of the
Company, (b) to enhance the long-term performance of the Company, and (c) to
acquire a proprietary interest in the success of the Company.
1.2 ADMINISTRATION
1.2.1 Subject to Section 1.2.6, the Plan shall be administered by the
Compensation Committee (the "Committee") of the board of directors of the
Company (the "Board"), which shall consist of not less than two directors (at
least a majority of which are not officers or employees of the Company) and to
which the Board shall grant power to authorize the issuance of the Company's
capital stock pursuant to awards granted under the Plan. The members of the
Committee shall be appointed by, and serve at the pleasure of, the Board.
1.2.2 The Committee shall have the authority (a) to exercise all of the
powers granted to it under the Plan, (b) to construe, interpret and implement
the Plan and any Plan Agreements executed pursuant to Section 2.1, (c) to
prescribe, amend and rescind rules and regulations relating to the Plan,
including rules governing its own operations, (d) to make all determinations
necessary or advisable in administering the Plan, (e) to correct any defect,
supply any omission and reconcile any inconsistency in the Plan, and (f) to
amend the Plan to reflect changes in applicable law.
1.2.3 Actions of the Committee shall be taken by the vote of a majority
of its members. Any action may be taken by a written instrument signed by a
majority of the Committee members, and action so taken shall be fully as
effective as if it had been taken by a vote at a meeting.
1.2.4 The determination of the Committee on all matters relating to the
Plan or any Plan Agreement shall be final, binding and conclusive.
1.2.5 No member of the Committee shall be liable for any action or
determination made in good faith with respect to the Plan or any award
thereunder.
1.2.6 Notwithstanding anything to the contrary contained herein: (a)
until the Board shall appoint the members of the Committee, the Plan shall be
administered by the Board; and (b) the Board may, in its sole discretion, at any
time and from time to time, resolve to administer
1
<PAGE>
the Plan. In either of the foregoing events, the term "Committee" as used
herein shall be deemed to mean the Board.
1.3 PERSONS ELIGIBLE FOR AWARDS
Awards under the Plan may be made to such officers, directors, and other
employees of the Company, and to such consultants to the Company (collectively,
"key persons"), as the Committee shall in its sole discretion select with
consideration given to recommendations by senior management.
1.4 TYPES OF AWARDS UNDER PLAN
Awards under the Plan shall be in the form of nonqualified stock options.
The term "award" means any award of nonqualified stock options under the Plan.
1.5 SHARES AVAILABLE FOR AWARDS
1.5.1 The total number of shares of common stock of the Company, par
value $.01 per share ("Common Stock"), with respect to which awards may be
granted pursuant to the Plan shall not exceed 224,000 shares. Such shares may
be authorized but unissued Common Stock or authorized and issued Common Stock
held in the Company's treasury or acquired by the Company for the purposes of
the Plan. The Committee may direct that any stock certificate evidencing shares
issued pursuant to the Plan shall bear a legend setting forth such restrictions
on transferability as may apply to such shares pursuant to the Plan.
1.5.2 If there is any change after May 17, 1996, in the outstanding
shares of Common Stock by reason of a stock dividend or distribution, stock
split-up, recapitalization, combination or exchange of shares, or by reason
of any merger, consolidation, spinoff or other corporate reorganization in
which the Company is the surviving corporation, the number of shares
available for issuance both in the aggregate and with respect to each
outstanding award, and the purchase price per share under outstanding awards,
shall be equitably adjusted by the Committee, whose determination shall be
final, binding and conclusive. After any adjustment made pursuant to this
Section 1.5.2, the number of shares subject to each outstanding award shall
be rounded to the nearest whole number.
1.5.3 Any shares subject to an award under the Plan that remain
unissued upon the cancellation or termination of such award for any reason
whatsoever, shall again become available for awards under the Plan. Except as
provided in this Section 1.5, there shall be no limit on the number or the value
of the shares of Common Stock issuable to any individual under the Plan.
2
<PAGE>
1.6 DEFINITIONS OF CERTAIN TERMS
1.6.1 The "Fair Market Value" of a share of Common Stock on any day
shall be the Fair Market Value of a share of Common Stock on any day determined
by the Committee; the Fair Market Value of a share of Common Stock as of the
date of adoption of the Plan is FIVE DOLLARS ($5.00) per share. The "Fair
Market Value" of all or part of an option on any day shall be the product of (a)
the number of shares for which such option (or part thereof) is then
exercisable, multiplied by (b) the excess of the Fair Market Value of a share of
Common Stock on such day over the exercise price with respect to such option.
1.6.2 The term "employment" means, in the case of a grantee of an award
under the Plan who is not an employee of the Company, the grantee's association
with the Company as a consultant or otherwise.
1.6.3 A grantee shall be deemed to have a "termination of employment"
upon ceasing to be employed by the Company and all of its subsidiaries or by a
corporation assuming awards in a transaction to which section 424(a) of the Code
applies. The Committee may in its discretion determine (a) whether any leave of
absence constitutes a termination of employment for purposes of the Plan, (b)
the impact, if any, of any such leave of absence on awards theretofore made
under the Plan, and (c) when a change in a non-employee's association with the
Company constitutes a termination of employment for purposes of the Plan. The
Committee shall have the right to determine whether the termination of a
grantee's employment is a dismissal for cause and the date of termination in
such case, which date the Committee may retroactively deem to be the date of the
action that is cause for dismissal. Such determinations of the Committee shall
be final, binding and conclusive.
1.6.4 The terms "parent corporation" and "subsidiary corporation" have
the meanings given them in section 424(e) and (f) of the Code, respectively.
ARTICLE II
AWARDS UNDER THE PLAN
2.1 AGREEMENTS EVIDENCING AWARDS
Each award granted under the Plan shall be evidenced by a written agreement
("Plan Agreement") which shall contain such provisions as the Committee may in
its sole discretion deem necessary or desirable. By accepting an award pursuant
to the Plan, a grantee thereby agrees that the award shall be subject to all of
the terms and provisions of the Plan and the applicable Plan Agreement.
3
<PAGE>
2.2 GRANT OF STOCK OPTIONS
2.2.1 The Committee may grant nonqualified stock options to purchase
shares of Common Stock from the Company, to such persons, and in such amounts
and subject to such terms and conditions, as the Committee shall determine in
its sole discretion, subject to the provisions of the Plan.
2.2.2 Each Plan Agreement with respect to an option shall set forth the
amount (the "option exercise price") payable by the grantee to the Company upon
exercise of the option evidenced thereby. The option exercise price per share
shall be determined by the Committee in its sole discretion, provided that in no
event shall it be less than the Fair Market Value of a share of Common Stock.
2.2.3 Each Plan Agreement with respect to an option shall set forth the
periods during which the award evidenced thereby shall be exercisable, whether
in whole or in part. Such periods shall be determined by the Committee in its
sole discretion, provided that except as and to the extent that the Committee
may otherwise provide pursuant to Section 3.1.3, no option shall be exercisable
prior to the first anniversary of the date of grant.
2.3 EXERCISE OF OPTIONS
Subject to the provisions of this Article II, each option granted under the
Plan shall be exercisable as follows:
2.3.1 Unless the applicable Plan Agreement otherwise provides, an
option shall become exercisable on the tenth anniversary of the date the option
is granted.
2.3.2 Unless the applicable Plan Agreement otherwise provides, once an
installment becomes exercisable, it shall remain exercisable until expiration,
cancellation or termination of the award.
2.3.3 Unless the applicable Plan Agreement otherwise provides, an
option may be exercised from time to time as to all or part of the shares as to
which such award is then exercisable.
2.3.4 An option shall be exercised by the filing of a written notice
with the Company, on such form and in such manner as the Committee shall in its
sole discretion prescribe.
2.3.5 Any written notice of exercise of an option shall be accompanied
by payment for the shares being purchased. Such payment shall be made: (a) by
certified or official bank check (or the equivalent thereof acceptable to the
Company) for the full option exercise price; (b) by (i) delivery of shares of
Common Stock held by the optionee for the requisite period necessary to avoid a
charge to the Company's earnings for financial reporting purposes, and/or (ii)
conversion
4
<PAGE>
in whole or in part of an option (to the extent then exercisable), in either
case having a Fair Market Value (determined as of the exercise date) equal to
all or part of the option exercise price, together with a certified or official
bank check (or the equivalent thereof acceptable to the Company) for any
remaining portion of the full option exercise price; or (c) at the discretion of
the Committee and to the extent permitted by law, by such other provision,
consistent with the terms of the Plan, as the Committee may from time to time
prescribe.
2.3.6 Promptly after receiving payment of the full option exercise
price, the Company shall, subject to the provisions of Section 3.2, deliver to
the grantee or to such other person as may then have the right to exercise the
award, a certificate or certificates for the shares of Common Stock for which
the award has been exercised. If the method of payment employed upon option
exercise so requires, and if applicable law permits, an optionee may direct the
Company to deliver the certificate(s) to the optionee's stockbroker.
2.3.7 No grantee of an option (or other person having the right to
exercise such award) shall have any of the rights of a stockholder of the
Company with respect to shares subject to such award until the issuance of a
stock certificate to such person for such shares. Except as otherwise provided
in Section 1.5.2, no adjustment shall be made for dividends, distributions or
other rights (whether ordinary or extraordinary, and whether in cash, securities
or other property) for which the record date is prior to the date such stock
certificate is issued.
2.4 TERMINATION OF EMPLOYMENT; DEATH
2.4.1 Except to the extent otherwise provided in Section 2.4.2 or 2.4.3
or in the applicable Plan Agreement, all options not theretofore exercised shall
terminate upon termination of the grantee's employment for any reason (including
death). To the extent options held by a grantee are not exercisable on the date
of any such termination, such options shall not thereafter become exercisable.
2.4.2 If a grantee's employment terminates for any reason other than
death or dismissal for cause, the grantee (or his legal representative, if
applicable) may exercise any outstanding option on the following terms and
conditions: (a) exercise may be made only to the extent that the grantee was
entitled to exercise the award on the date of employment termination; and (b)
exercise must occur within three months after employment terminates, but in no
event after the expiration date of the award as set forth in the Plan Agreement.
2.4.3 If a grantee dies while employed by the Company or any
subsidiary, or after employment termination but during the period in which the
grantee's awards are exercisable pursuant to Section 2.4.2, any outstanding
option shall be exercisable on the following terms and conditions: (a) exercise
may be made only to the extent that the grantee was entitled to exercise the
award on the date of death; and (b) exercise must occur by the earlier of the
first anniversary of the grantee's death or the expiration date of the award.
Any such exercise of an award following a grantee's death shall be made only by
the grantee's executor or administrator, unless
5
<PAGE>
the grantee's will specifically disposes of such award, in which case such
exercise shall be made only by the recipient of such specific disposition. If a
grantee's personal representative or the recipient of a specific disposition
under the grantee's will shall be entitled to exercise any award pursuant to the
preceding sentence, such representative or recipient shall be bound by all the
terms and conditions of the Plan and the applicable Plan Agreement which would
have applied to the grantee including, without limitation, the provisions of
Section 3.2 hereof.
ARTICLE III
MISCELLANEOUS
3.1 AMENDMENT OF THE PLAN; MODIFICATION OF AWARDS
3.1.1 The Board may from time to time suspend, discontinue, revise or
amend the Plan in any respect whatsoever, except that no such amendment shall
materially impair any rights or materially increase any obligations under any
award theretofore made under the Plan without the consent of the Grantee (or,
upon the grantee's death, the person having the right to exercise the award).
For purposes of this Section 3.1, any action of the Board or the Committee that
alters or affects the tax treatment of any award shall not be considered to
materially impair any rights of any grantee.
3.1.3 The Committee may amend any outstanding Plan Agreement,
including, without limitation, by amendment which would (a) accelerate the time
or times at which the award may be exercised, or (b) waive or amend any goals,
restrictions or conditions set forth in the Agreement, or (c) extend the
scheduled expiration date of the award. However, any such cancellation or
amendment that materially impairs the rights or materially increases the
obligations of a grantee under an outstanding award shall be made only with the
consent of the grantee (or, upon the grantee's death, the person having the
right to exercise the award).
3.2 RESTRICTIONS
3.2.1 If the Committee shall at any time determine that any Consent (as
hereinafter defined) is necessary or desirable as a condition of, or in
connection with, the granting of any award under the Plan, the issuance or
purchase of shares or other rights thereunder, or the taking of any other action
thereunder (each such action being hereinafter referred to as a "Plan Action"),
then such Plan Action shall not be taken, in whole or in part, unless and until
such Consent shall have been effected or obtained to the full satisfaction of
the Committee.
3.2.2 The term "Consent" as used herein with respect to any Plan Action
means (a) any and all listings, registrations or qualifications in respect
thereof upon any securities exchange or under any federal, state or local law,
rule or regulation, (b) any and all written agreements and representations by
the grantee with respect to the disposition of shares, or with respect to any
other matter, which the Committee shall deem necessary or desirable to comply
with the terms of any such listing, registration or qualification or to obtain
an exemption from the requirement that
6
<PAGE>
any such listing, qualification or registration be made and (c) any and all
consents, clearances and approvals in respect of a Plan Action by any
governmental or other regulatory bodies.
3.3 NONASSIGNABILITY
No award or right granted to any person under the Plan or under any Plan
Agreement shall be assignable or transferable other than by will or by the laws
of descent and distribution. All rights granted under the Plan or any Plan
Agreement shall be exercisable during the life of the grantee or during the
period specified in Section 2.4.3 only by the grantee or the grantee's legal
representative.
3.4 WITHHOLDING TAXES
3.4.1 Whenever cash is to be paid pursuant to an award under the Plan,
the Company shall be entitled to deduct therefrom an amount sufficient in its
opinion to satisfy all federal, state and other governmental tax withholding
requirements related to such payment.
3.4.2 Whenever shares of Common Stock are to be delivered, or whenever
an option to purchase stock may be "converted" as a means of exercising the
option, pursuant to an award under the Plan, the Company shall be entitled to
require as a condition of delivery that the grantee remit to the Company an
amount sufficient in the opinion of the Company to satisfy all federal, state
and other governmental tax withholding requirements related thereto. With the
approval of the Committee, which it shall have sole discretion to grant, the
grantee may satisfy the foregoing condition by electing to have the Company
withhold from delivery shares having a value equal to the amount of tax to be
withheld. Such shares shall be valued at their Fair Market Value on the date as
of which the amount of tax to be withheld is determined (the "Tax Date").
Fractional share amounts shall be settled in cash. Such a withholding election
may be made with respect to all or any portion of the shares to be delivered
pursuant to an award.
3.5 RIGHT OF DISCHARGE RESERVED
Nothing in the Plan or in any Plan Agreement shall confer upon any grantee
the right to continue in the employ of the Company or affect any right which the
Company may have to terminate such employment.
3.6 NATURE OF PAYMENTS
3.6.1 Any and all grants of awards and issuances of shares of Common
Stock under the Plan shall be in consideration of services performed for the
Company by the grantee.
3.6.2 All such grants and issuances shall constitute a special
incentive payment to the grantee and shall not be taken into account in
computing the amount of salary or compensation of the grantee for the purpose of
determining any benefits under any pension, retirement, profit-
7
<PAGE>
sharing, bonus, life insurance or other benefit plan of the Company or under any
agreement between the Company and the grantee, unless such plan or agreement
specifically provides otherwise.
3.7 NON-UNIFORM DETERMINATIONS
The Committee's determinations under the Plan need not be uniform and may
be made by it selectively among persons who receive, or are eligible to receive,
awards under the Plan (whether or not such persons are similarly situated).
Without limiting the generality of the foregoing, the Committee shall be
entitled, among other things, to make non-uniform and selective determinations,
and to enter into non-uniform and selective Plan agreements, as to (a) the
persons to receive awards under the Plan, (b) the terms and provisions of awards
under the Plan, and (c) the treatment of leaves of absence pursuant to Section
1.6.4.
3.8 OTHER PAYMENTS OR AWARDS
Nothing contained in the Plan shall be deemed in any way to limit or
restrict the Company from making any award or payment to any person under any
other plan, arrangement or understanding, whether now existing or hereafter in
effect.
3.9 SECTION HEADINGS
The section headings contained herein are for the purpose of convenience
only and are not intended to define or limit the contents of said sections.
3.10 EFFECTIVE DATE AND TERM OF PLAN
The Plan was adopted by the Board and approved by the Company's
shareholders on ______________, 1995.
[the balance of this page is intentionally left blank.]
8
<PAGE>
3.11 GOVERNING LAW
All rights and obligations under the Plan shall be construed and
interpreted in accordance with the laws of the State of Delaware, without giving
effect to principles of conflict of laws.
The undersigned hold shares representing more than 75% of the voting power of
the capital stock of the Company entitled to vote on matters presented to the
stockholders as of _________, 1995, and hereby approve the 1995 Stock Incentive
Plan set forth above.
- ------------------------------------
Marsden S. Cason
J.H. Whitney & Co. Whitney Subordinated Debt
Fund, L.P.
By --------------------------------- By -------------------------------------
Ray E. Newton, III Ray E. Newton, III
Whitney 1990 Equity Fund, L.P.
By ---------------------------------
Ray E. Newton, III
<PAGE>
EXHIBIT 10.16
[LOGO] The North Face, Inc.
2013 Farallon Drive, San Leandro, CA 94577 (510) 618-3500
PERSONAL & CONFIDENTIAL
3/15/96
Mr. Carlo Armenise
2122 Century Parklane #214
Los Angeles, CA 90006
Dear Carlo:
I am pleased to confirm our offer of employment as Vice President of Retail at
The North Face, Inc. (the "Company"). In this position, you will report to me.
Your start date will be determined at a later date.
Compensation:
If you decide to join us, you will receive an annual salary of $160,000.00 which
will be paid biweekly in the amount of $6,153.85. The following benefits will
be provided by The North Face, Inc.
Benefits:
INSURANCE:
You will be eligible for medical and dental benefits on your first date of
hire.
MANAGEMENT INCENTIVE PLAN:
You will be eligible to participate in the Management Incentive Plan which
provides for up to 40% of your base salary. You and I will work through
the bonus plan.
STOCK INCENTIVE PLAN:
You will be eligible to participate in the Stock Incentive Plan (15,000
shares at $3.75 per share).
RELOCATION:
Reasonable relocation costs (of up to $10,000) and up to 6 months temporary
living expenses (of up to $12,000 total) will be provided by the Company.
SIGNING BONUS:
You will be eligible for a $45,000 signing bonus to be paid in a lump sum,
less applicable withholding taxes, on your first day of employment.
If you choose to accept this offer, your employment with The North Face, Inc.
will be voluntarily entered into and will be for no specified period. As a
result, you will be free to resign at any time, for any reason or for no reason,
as you deem appropriate. The North Face, Inc. will have a similar right and may
terminate its employment relationship with you at any time, with or without
cause. If the Company chooses to terminate your employment for any reason,
other than cause, then you will be entitled to six months severance at your then
current base rate of pay.
To indicate your acceptance of the Company's offer, please sign and date this
letter in the space provided below and return it to me no later than close of
business 3/22/96. This offer will expire on 3/22/96. Please note that this
employment offer is contingent upon your signing the Company's Confidentiality
Agreement (a copy of which is enclosed). This letter, along with any agreements
relating to confidential information between you and The North Face, Inc., sets
forth the terms of your employment with The North Face, Inc. and supersedes any
prior representations or
<PAGE>
agreements, whether written or oral. This letter may
not be modified or amended except by a written agreement, signed by The North
Face, Inc. and by you.
Please contact me if you have any questions regarding this employment offer or
any points covered in this letter. We look forward to receiving your positive
response and look forward to working with you as you join The North Face, Inc.
team.
Sincerely,
/s/ Marsden S. Cason
Marsden Cason
Chief Executive Officer
The North Face, Inc.
I hereby agree and/or accept employment with The North Face, Inc. and the terms
set forth above. I understand and agree to keep the contents of this letter
confidential.
/s/ Carlo Armenise 3/16/96
- --------------------------- -----------------------------------
Signature of Carlo Armenise Date
<PAGE>
EXHIBIT 11.1
THE NORTH FACE, INC.
COMPUTATION OF PRO FORMA EARNINGS PER SHARE (1)
(In thousands, except per share amounts)
Twelve Months Ended
December 31,
1996 1995
------ ------
Weighted average shares outstanding during the period:
Weighted Average Shares Outstanding....................... 4,739 3,238
Incremental shares from assumed
exercise of stock options (2).............................. 439 553
Shares issued upon conversion of Series A
Preferred Stock........................................... 4,008 3,643
------ ------
Weighted average common and common
equivalent shares outstanding............................. 9,186 7,434
====== ======
Income Before Extraordinary Loss......................... $5,664 $3,485
Extraordinary Loss....................................... ($863) $0
------ ------
Net Income.............................................. $4,801 $3,485
====== ======
Pro Forma Earnings per Share:
Income Before Extraordinary Loss ....................$0.62 $0.47
Extraordinary Loss, net of tax.................... ($0.10) $0.00
------ ------
Net Income....................................... $0.52 $0.47
====== ======
(1) Pro forma for all periods presented due to the assumed conversion, as of
the beginning of the period, of all outstanding shares of Preferred Stock
into Common Stock in conjunction with the Company's initial public offering
in July 1996.
(2) In accordance with the rules of the Securities and Exchange Commission,
common stock and common stock equivalents issued within one year prior to
the initial public offering effective July 8, 1996, have been considered
as outstanding for all periods using the treasury stock method (assuming a
market price of $14.00 in prior years), even though they are anti-dilutive
in loss periods.
1
<PAGE>
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
THE PREDECESSOR | THE COMPANY
--------------------------- | -----------------------------
FISCAL YEAR ENDED MARCH 31, | YEAR ENDED DECEMBER 31,
|
(IN THOUSANDS, EXCEPT PER SHARE DATA) 1992 1993 1994 | 1994 1995 1996
- ------------------------------------------------------------------------------------------|------------------------------------
| (PRO FORMA)
<S> <C> <C> <C> | <C> <C> <C>
Net sales $ 68,912 $ 86,710 $ 87,411 | $ 89,187 $ 121,534 $ 158,226
|
Operating income (loss) (3,454) (6,548) 3,794 | 7,334 10,524 13,544
|
Income (loss) before provision for taxes |
and extraordinary item (6,893) (9,991) 1,548 | 2,680 5,583 9,275
|
Income (loss) before extraordinary item $ (6,893) $(10,508) $ 826 | $ 1,708 $ 3,485 $ 4,801
|
Pro forma income per share |
before extraordinary item | $ 0.47 $ 0.62
|
Shares used in computing pro forma |
income per share before extraordinary item | 7,434 9,186
</TABLE>
<TABLE>
<CAPTION>
AS OF MARCH 31, | AS OF DECEMBER 31,
--------------------------- | -----------------------------
|
1992 1993 1994 | 1994 1995 1996
- ------------------------------------------------------------------------------------------|------------------------------------
<S> <C> <C> <C> | <C> <C> <C>
BALANCE SHEET DATA |
|
Working capital $ 31,040 $ 23,725 $ 22,987 | $ 14,189 $ 22,668 $ 50,438
|
Total assets 59,959 53,318 50,363 | 66,549 84,508 111,948
|
Short term debt 846 782 1,511 | 1,327 4,838 95
|
Long term debt 46,467 48,580 46,895 | 29,047 36,388 135
|
Stockholders' equity (2,951) (13,346) (13,130) | 17,179 20,568 86,499
</TABLE>
[GRAPH]
THE NORTH FACE 1996 ANNUAL REPORT | 1
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
SUMMARY FINANCIAL DATA
<TABLE>
<CAPTION>
AS PERCENTAGE OF SALES
YEAR ENDED DECEMBER 31, (EXCEPT FOR INCOME TAXES)
--------------------------- -----------------------------
(IN THOUSANDS, EXCEPT PER SHARE DATA) 1994 1995 1996 1994 1995 1996
- ------------------------------------------------------------------------------------------------------------------------------
(PRO FORMA)(1) (PRO FORMA)(1)
<S> <C> <C> <C> <C> <C> <C>
Net sales $ 89,187 $ 121,534 $ 158,226 100.0% 100.0% 100.0%
Gross profit 41,439 55,064 70,031 46.5 45.3 44.3
Operating expenses 34,105 44,540 56,487 38.3 36.6 35.7
Operating income 7,334 10,524 13,544 8.2 8.7 8.6
Interest expense (4,390) (5,530) (4,625) (4.9) (4.6) (2.9)
Other income (expense), net (264) 589 356 (0.3) 0.5 0.2
Income before provision for
taxes and extraordinary item 2,680 5,583 9,275 3.0 4.6 5.9
Provision for income taxes 972 2,098 3,611 36.3 37.6 38.9
Income before extraordinary item $ 1,708 $ 3,485 $ 5,664 1.9% 2.9% 3.6%
Pro forma income per share before
extraordinary item $ 0.47 $ 0.62
Shares used in computing pro forma
income per share before extraordinary item 7,434 9,186
</TABLE>
The following table sets forth, for the periods indicated, the Company's net
sales by distribution channel and for domestic compared to international net
sales:
YEAR ENDED DECEMBER 31,
----------------------------------
1994 1995 1996
- --------------------------------------------------------------------------------
(PRO FORMA)(1)
Wholesale customers $ 61,391 $ 87,386 $ 125,292
Company operated retail 26,877 29,968 32,768
Government 919 4,180 166
--------- ---------- ----------
Total net sales $ 89,187 $ 121,534 $ 158,226
========= ========== ==========
United States $ 70,822 $ 96,069 $ 120,027
International 18,365 25,465 38,199
--------- ---------- ----------
Total net sales $ 89,187 $ 121,534 $ 158,226
========= ========== ==========
(1) THE UNAUDITED PRO FORMA INFORMATION FOR THE YEAR ENDED DECEMBER 31, 1994
HAS BEEN PREPARED ASSUMING THE ACQUISITION OCCURRED ON JANUARY 1, 1994.
GENERAL
ACQUISITION The assets and certain of the liabilities of the Company's
predecessor were acquired in June 1994 (the "Acquisition") by the Company,
which had been formed for this purpose.
PRODUCTS In 1995, sales of outerwear, equipment, skiwear and other products
represented approximately 50%, 25%, 14% and 11%, respectively, of net sales. In
1996, sales of outerwear, equipment, skiwear, Tekware and other products
represented approximately 52%, 25%, 12%, 7% and 4%, respectively, of net sales.
DISTRIBUTION The North Face is a global company with operations in the United
States, Europe and Canada. To protect the integrity of The North Face brand
and ensure a high level of customer service, the Company limits the
distribution of its products to a select number of specialty retailers. The
Company sells its products to approximately 1,500 wholesale customers
representing approximately 2,200 store fronts.
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
noncancelable, with the Company from two to five 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 over 75% of total sales to wholesale customers and historically
have been an accurate indicator of actual product shipments; however, there
can be no assurance that preseason orders will be an accurate indicator of
actual product shipments in the future. The Company has decided to increase
its investment in inventory of core products to better allow it to capture
reorder opportunities. Accordingly, the foregoing percentages may decline in
the future. With the introduction of Tekware and Summit Shops, the Company
expects that it increasingly will be supplying its products to its wholesale
customers on a year round basis, which is expected to decrease preseason
orders as a percentage of total sales to wholesale customers. Preseason
orders for the 1997 Spring season were $42.6 million compared to $32.1
million preseason orders for the 1996 Spring season.
PRODUCTION CYCLE Based on preseason orders and expected reorders, the Company
places production orders with its contract manufacturers for an entire season
three to five months before the beginning of the season. 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. In the past,
the Company and its wholesale customers were unable to maximize sales of the
Company's
16| THE NORTH FACE 1996 ANNUAL REPORT
<PAGE>
most popular products due to the Company's strategy of determining
production quantities based primarily on preseason orders. As a result, the
Company frequently was unable to meet strong reorder demand for its most
popular items. In October 1996, the Company initiated a core inventory
replenishment program in which its core products and materials will be
inventoried for rapid reorder or manufacturing. As a result of this new
program, the Company will maintain higher levels of inventories.
SUMMIT SHOPS In 1996, The North Face introduced Summit Shops to increase
sales to wholesale customers. There were 14 concept shops, precursors to the
Summit Shops, opened in the first six months of 1996 and 28 Summit Shops
opened in the second half of 1996. The Company expects to open a minimum of
100 additional Summit Shops in 1997. Summit Shops are designed to showcase
the Company's products using more modern merchandising techniques, enhance
the Company's brand and increase sales, while minimizing investment. An
average 550 square foot Summit Shop is expected to require a total investment
for furniture and fixtures of approximately $35,000, all or a substantial
majority of which may be provided by the Company. However, there can be no
assurance that Summit Shops will not require substantially more total capital
investment. Additionally, the Company will incur certain additional marketing
and monitoring expenses associated with Summit Shops. The Company's wholesale
customers will operate the Summit Shops and own the inventory. The Company
will retain ownership of the furniture and fixtures used in the Summit Shops.
COMPANY OPERATED RETAIL SALES The North Face currently operates nine retail
stores and three outlets. New stores and outlets are included in comparable
store sales commencing in their thirteenth month of operation. The Company
currently does not plan to open any additional retail stores in the near future
because the Company believes that Summit Shops will provide comparable
merchandising and marketing benefits to those that are received from Company
operated retail stores, with a lower commitment of financial and operational
resources and a higher return on investment. The North Face's gross margins for
its Company operated retail stores are higher than for sales to its wholesale
customers. Consequently, due to the expected growing revenue contribution from
the Company's wholesale customers, the Company's overall gross margins are
expected to decline in the near term.
GOVERNMENT TENT SALES The North Face historically has produced tents for the
Marine Corps. The timing of these sales has fluctuated historically and is
dependent on the Company's obtaining contracts from the Marine Corps. The
timing of the sales under these contracts can significantly affect the
Company's quarterly results. In September 1996, the Company received a new
tent contract from the Marine Corps totaling approximately $0.9 million with
two options for an additional $0.9 million each. The Company expects
shipments to commence pursuant to this contract in 1997. There can be no
assurance, however, that the Company will obtain any additional contracts to
produce tents for the Marine Corps in the future.
CHANGE IN YEAR-END IN 1994, The North Face changed its fiscal year end to
December 31. Due to this change and the Acquisition, comparison of the nine
month period ended December 31, 1994 to the fiscal year ended March 31, 1994
is not meaningful. Therefore, the following discussion of results of
operations is based on the year ended December 31, 1995 compared to the pro
forma results for the year ended December 31, 1994, assuming the Acquisition
had taken place on January 1, 1994.
YEAR ENDED DECEMBER 31, 1996 COMPARED TO YEAR ENDED DECEMBER 31, 1995
NET SALES Net sales increased by 30.2% to $158.2 million from $121.5 million
for 1996 compared to 1995.
Net sales to wholesale customers increased by 43.4% to $125.3 million
from $87.4 million for 1996 compared to 1995. This increase related primarily
to increased unit shipments to the Company's existing wholesale customers
resulting from (i) the introduction of new products, including the initial
shipments of Tekware, (ii) continued strong sales of existing products, (iii)
better service to wholesale customers, (iv) a more targeted advertising and
marketing campaign and (v) the opening of 42 concept shops during 1996.
Company operated retail sales increased by 9.3% to $32.8 million from
$30.0 million for 1996 compared to 1995. This increase was attributable to
comparable store sales increases of 0.3% as well the opening of one new
retail store in October 1995 and one outlet in July 1996. In addition, the
Company closed two outlets in mid 1995.
Government sales decreased by 96.0% to $0.2 million from $4.2 million for
1996 compared to 1995. This decrease was due to the timing of government tent
shipments under a contract which was completed in 1995.
GROSS PROFIT Gross profit as a percentage of net sales for 1996 was 44.3%
compared to 45.3% for 1995. The lower margin was primarily attributable to
faster growth of wholesale sales compared to retail sales, as well as lower
wholesale margins related primarily to lower initial margins on the
introduction of the Company's new Tekware line.
OPERATING EXPENSES Operating expenses include selling, marketing and general
and administrative expenses. Operating expenses increased by 26.8% to $56.5
million from $44.5 million for 1996 compared to 1995, primarily as a result
of increases in variable and fixed costs to support the growth of the
Company's business and the expansion of the merchandising department to
launch the Summit Shops program
THE NORTH FACE 1996 ANNUAL REPORT | 17
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
as well as operating costs associated with the operation of a new retail store
and outlet. Operating expenses decreased slightly as a percentage of net sales
to 35.7% for 1996 from 36.6% for 1995, as a result of a lower growth rate in
operating expenses than in sales.
INTEREST EXPENSE Interest expense decreased to $4.6 million from $5.5 million
for 1996 compared to 1995 primarily as a result of the application of the
proceeds from the Company's initial public offering in July 1996 and secondary
offering in November 1996 used to repay debt, offset by higher levels of debt
incurred to finance working capital growth.
PROVISION FOR INCOME TAXES Provision for income taxes as a percent of pretax
income was approximately 38.9% for 1996 compared to 37.6% for 1995. This
increase relates to the mix of the Company's pretax earnings between the U.S.
and the United Kingdom, which have different tax rates.
EXTRAORDINARY ITEM In 1996, the Company reported a noncash extraordinary charge
of approximately $860,000, net of income taxes, as a result of substantially
restructuring both the Credit Facility and the Subordinated Note in connection
with the Company's initial public offering in July 1996.
YEAR ENDED DECEMBER 31, 1995 COMPARED TO PRO FORMA YEAR ENDED DECEMBER 31, 1994
NET SALES Net sales increased by 36.3% to $121.5 million from $89.2 million for
the year ended December 31, 1995 compared to the pro forma year ended December
31, 1994.
Net sales to wholesale customers increased by 42.3% to $87.4 million
from $61.4 million for 1995 compared to 1994. This increase related primarily
to increased unit shipments to the Company's existing wholesale customers
resulting from (i) the introduction of new products, such as day packs and
Nuptse downfilled jackets, (ii) continued strong sales of existing products,
such as the Mountain Light family, and (iii) better service to wholesale
customers. In addition, the Company's sales in Canada increased substantially
to $5.1 million due to the termination of the Company's licensing agreement
with a third party and the opening of the Company's new Canadian operations
in January 1995.
Company operated retail sales increased by 11.5% to $30.0 million from
$26.9 million for 1995 compared to 1994. This increase related to an increase
in comparable store sales of 13.4% primarily due to the higher level of
liquidations in 1995 at two outlet stores closed in 1995. In addition, the
Company opened one new retail store in October 1995.
Government (Marine Corps) sales increased to $4.2 million from $0.9
million for 1995 compared to 1994. This increase was due to the timing of
tent shipments under a U.S. government contract. The Acquisition in June 1994
delayed the timing of shipments under the government contract until January
1995. This contract was completed in 1995.
GROSS PROFIT Gross profit as a percentage of net sales for 1995 was 45.3%
compared to 46.5% for 1994. Gross profit for net sales to wholesale customers
was 43.2% in 1995 compared to 43.9% in 1994. Company-operated retail gross
profit in 1995 was 53.6% compared to 52.7% in 1994. While retail gross
margins were slightly higher, the Company's overall gross margin decreased
due to the higher relative portion of sales to wholesale customers. The lower
margins for sales to wholesale customers result primarily from lower margins
on the Company's new Canadian business which carries higher duty costs as
well as lower margins on sales to European customers. The increase in
Company-operated retail gross margin for 1995 resulted principally from the
lower percentage of outlet store sales to total retail sales because of the
closure of two Company-operated outlets in mid 1995.
OPERATING EXPENSES Operating expenses increased by 30.6% to $44.5 million from
$34.1 million for 1995 compared to 1994 due to increases in variable and fixed
costs to support the growth of the Company's business as well as operating and
startup costs of a new retail store that opened in October 1995. These expenses
decreased, however, as a percentage of net sales from 38.3% for 1994 to 36.6%
for 1995 as a result of a lower growth rate in operating expenses than in
sales.
INTEREST EXPENSE Interest expense increased to $5.5 million from $4.4 million
for 1995 compared to 1994, as a result of higher levels of debt incurred to
finance working capital growth.
PROVISION FOR INCOME TAXES Provision for income taxes as a percent of pretax
income was approximately 37.6% for 1995 compared to 36.3% for 1994. This
increase in effective rate relates to the mix of the Company's earnings, with
higher pretax earnings growth in the United States where the tax rate is higher
than in the United Kingdom.
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, 1996. The operating results
for any quarter are not necessarily indicative of results for any future period.
YEAR ENDED DECEMBER 31, 1996
----------------------------------------
(IN THOUSANDS) Q1 Q2 Q3 Q4
- -------------------------------------------------------------------------------
Net sales $ 31,020 $ 22,471 $ 68,138 $ 36,597
Gross profit 12,603 9,204 30,703 17,521
Operating income (loss) 139 (2,512) 13,031 2,886
Income (loss) before extraordinary
item (629) (2,410) 7,412 1,291
Pro forma income (loss) per share
before extraordinary item (.08) (.32) .70 .12
18 | THE NORTH FACE 1996 ANNUAL REPORT
<PAGE>
YEAR ENDED DECEMBER 31, 1995
----------------------------------------
(IN THOUSANDS) Q1 Q2 Q3 Q4
- -------------------------------------------------------------------------------
Net sales $ 23,500 $ 19,342 $ 50,061 $ 28,631
Gross profit 10,367 7,852 22,735 14,110
Operating income (loss) 1,057 (1,055) 8,456 2,066
Net income (loss) (85) (1,331) 4,565 336
Pro forma income (loss) per share (.01) (.18) .61 .05
The Company's business is subject to seasonal and quarterly
fluctuations. Historically, the Company has realized substantially all of its
profits in the third quarter and has recognized losses during the first and
second quarters. The Company's results of operations may fluctuate from
quarter to quarter as a result of, among other things, the amount and timing
of shipments to wholesale customers, government shipments, the timing and
magnitude of discounts in retail stores, advertising and marketing
expenditures, increases in the number of employees and overhead to support
growth and store opening costs. For example, the Company received $2.3
million and $1.7 million from the sale of tents to the Marine Corps in the
first and second quarters of 1995, respectively, but sold no tents to the
Marine Corps in the first and second quarters of 1996, resulting in
fluctuations that make period to period comparisons for these quarters less
meaningful. In addition, in the first quarter of 1996, Company operated
comparable store sales increased 23.7% over the first quarter of 1995 due
primarily to higher sales of discounted merchandise in the first quarter of
1996. In addition, in the third quarter of 1996 comparable store sales
decreased 17.9% over the third quarter of 1995 due primarily to the Company's
decision to shift the majority of sales of discounted merchandise from retail
stores to outlet stores, including the newly opened outlet store. Further,
during the second quarter of 1996, the Company significantly increased its
operating expenses due to increased sales commissions related to higher net
sales, the hiring of new executive officers, the expansion of the
merchandising department to launch the Summit Shop program and a significant
increase of product acquisition staff. Primarily as a result of the foregoing
factors and expenses associated with the operation of the new Chicago retail
store, the Company incurred a loss in the second quarter of 1996 which was
significantly larger than the loss incurred in the second quarter of 1995.
The Company anticipates that it will continue to incur net losses during the
first and second calendar quarters for the foreseeable future. Additionally,
the Company's effective tax rate can vary significantly from quarter to
quarter due to the relative mix of earnings from the Company's domestic and
international operations, which are taxed at different rates.
LIQUIDITY AND CAPITAL RESOURCES
In connection with the Acquisition, the Company issued 1,935,781 shares of
Preferred Stock and 2,271,064 shares of Common Stock in exchange for
approximately $12.3 million and borrowed $24.3 million pursuant to a
subordinated note. The proceeds from the issuance of the Preferred Stock,
Common Stock and subordinated note, together with borrowings under the Company's
credit facility, were used to fund the Acquisition.
Since June 7, 1994 (the date of the closing of the Acquisition), the
Company has satisfied its cash requirements through borrowings under its
credit facility and proceeds from its initial and secondary public offerings.
Its primary uses of cash have been to purchase merchandise inventories,
finance growth of the Company's accounts receivable, upgrade the Company's
management information systems and open one retail store and one outlet.
During the year ended December 31, 1996, the Company used approximately $4.8
million for operations, primarily due to increased levels of inventory and
accounts receivable. These funds were provided by borrowings under the
Company's credit facility and proceeds from the Company's initial public
offering in July 1996 and secondary offering in November 1996.
Historically, the Company's ability to maintain adequate levels of
inventory was constrained by its capital resources. In March 1995, the
Company obtained an increase in its credit facility. As a result, the Company
increased its levels of inventory in order to better enable it to meet
reorder demand in key products. The Company anticipates that inventory levels
will continue to increase as the Company expands its business and implements
its core inventory replenishment program. Such inventory increases are
expected to be financed by borrowings under the Company's credit facility.
The increased inventories resulting from this core inventory replenishment
program may result in increased excess inventory and material, increased
markdowns and lower margins.
The Company's credit facility provides for borrowings up to $60.0
million under its revolving line of credit with actual borrowings limited to
available collateral (approximately $28 million of gross availability as of
December 31, 1996) and for up to $5.0 million under a term note for capital
expenditures (approximately $3.9 million of remaining availability as of
December 31, 1996) from Heller Financial, Inc. and two banks. The credit
facility provides a sublimit for letters of credit of up to $15.0 million to
finance the Company's foreign purchases of merchandise inventories. As of
December 31, 1996, the Company had approximately $3.9 million of letters of
credit outstanding under the credit facility. The credit facility contains
certain financial covenants that require the Company to maintain a specified
minimum tangible net worth and interest coverage and leverage ratios, limit
capital expenditures and restrict the Company's ability to incur additional
indebtedness and pay cash dividends on its capital stock. The Company was in
compliance with these covenants as of December 31, 1996.
The Company estimates that its capital expenditures in 1997 will be
approximately $12 to $14 million. This amount will be used principally for
investment in Summit Shops, the upgrade of management information systems, the
expansion of the Company's administration, distribution and laboratory
facilities, expansion of its European sales and marketing operations and
remodeling of existing retail stores.
THE NORTH FACE 1996 ANNUAL REPORT | 19
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The Company anticipates that cash generated from operations and available
under the Company's credit facility will be sufficient to satisfy its cash
requirements for at least the next 12 months.
FOREIGN EXCHANGE FLUCTUATION
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.
During the last two years, exchange rate fluctuations have not had a material
impact on the Company's inventory costs or consolidated profit margins in
Europe or Canada. However, due to the number of foreign currencies involved
and the fact that not all of these foreign currencies fluctuate in the same
manner against the United States dollar, the Company cannot quantify in any
meaningful way the potential effect of such fluctuations on future income.
The Company engages in certain forward foreign exchange hedging activities
with respect to its European sales revenues, but does not engage in forward
foreign exchange hedging activities for its Canadian revenues. See Note 11 to
the Company's Consolidated Financial Statements.
INFLATION
The Company believes that the relatively moderate rates of inflation over the
last two years in the United States, where it primarily competes, have not
had a significant effect on its net sales or results of operations. Higher
rates of inflation have been experienced in a number of foreign countries in
which the Company's products are manufactured but also have 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 increasing
selling prices or changing suppliers.
IMPACT OF NEW ACCOUNTING STANDARDS
See Note 2 to the Consolidated Financial Statements for a discussion of the
impact of new accounting standards.
FACTORS THAT MAY AFFECT OUR BUSINESS
Certain statements set forth in this annual report which refer to future
financial items, economic performance or operations are forward looking, and
actual results may differ materially from the results expected by the
Company. The Company's future growth and operating results may be adversely
affected by a number of factors, including those set forth below and
elsewhere in this annual report. There may also be important, unforeseen
risks not described herein.
CONSUMER PREFERENCES Consumer demand for the Company's products may be
adversely affected if consumer interest in outdoor activities does not grow
or declines. 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.
MANAGING GROWTH If the Company's business grows, the Company may have increased
difficulties in managing product design, hiring, marketing, distribution,
management information and other resources, and in obtaining supplies,
manufacturing services and working capital. The Company's future profitability
will be critically dependent on its ability to achieve and manage potential
future growth effectively.
WHOLESALE STRATEGY The Company's wholesale customers consist almost
exclusively of specialty outdoor product retailers. The Company cannot assure
that its existing customers will increase their purchases of the Company's
products, that future preseason wholesale orders will increase, or that the
Company will be able to fill reorders during each season. Because the Company
expects its wholesale business to constitute an increasing percentage of
total sales going forward, overall gross margins may continue to decline in
the future. The Company's wholesale strategy also depends on its ability to
achieve increased sales through its Summit Shop program. Risks of this
program include sourcing and managing higher inventory levels, funding all or
most of the cost of the Summit Shop fixtures without assurance of additional
sales and profits, and the need to supply products that maintain consumer
demand on a year round basis. There can be no assurance that additional
Summit Shops will be opened in a timely manner or that their cost or
performance will meet the Company's expectations. If the Summit Shop program
is unsuccessful, the Company risks writeoffs of inventory and fixtures that
could have a material adverse effect on the Company's business. The Company
believes that the success of its Summit Shop program will be highly dependent
on market acceptance of its recently introduced Tekware-TM- line of products.
DEPENDENCE ON NEW PRODUCTS To continue its growth, the Company must
successfully introduce new products and improvements to existing products on
an ongoing basis. Risks of new product introductions include targeting new
markets involving more casual outdoor uses, offering products in wider price
ranges, product obsolescence, increased costs and competition, possible
consumer rejection of new products or styles and possible dilution of the
Company's product image. In 1996, the Company introduced Tekware-TM-, a line
of synthetic outdoor apparel.
20 | THE NORTH FACE 1996 ANNUAL REPORT
<PAGE>
The Company's limited experience in marketing casual apparel, limited
distribution channels, and possible consumer resistance to synthetic fabrics
could result in slow sales of Tekware-TM-.
RELIANCE ON UNAFFILIATED MANUFACTURERS The Company currently relies on
approximately 50 unaffiliated manufacturers to produce nearly all of its
products, with ten of the manufacturers producing approximately 75% of the
Company's products for 1996. The Company has no long-term contracts with its
manufacturing sources, and it competes with other companies for production
facilities and import quota capacity. Any disruption in the Company's ability
to obtain manufacturing services could have a material adverse effect on the
Company's business. 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. The Company established a core
inventory replenishment program in October 1996 to facilitate reorders of
core products, and cannot assure that this program will meet reorder
requirements or avoid excess inventory.
KEY SUPPLIES 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. The Company cannot assure that it will be able to obtain in the
future adequate supplies of technically advanced materials or that desired
purchase terms or other benefits of past purchases, such as suppliers'
funding of development costs and co-op advertising arrangements, will
continue.
FLUCTUATIONS IN SALES Sales of the Company's products historically have
fluctuated due to external conditions such as weather and economic recessions
or other conditions which reduce consumer spending.
INTERNATIONAL OPERATIONS The Company's business is subject to the risks
generally associated with doing business abroad. The Company imports more
than 50% of its merchandise from contract manufacturers located outside of
the United States, primarily in the Far East. A significant portion of the
Company's products is produced in 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.
COMPETITION AND TRADEMARKS The Company faces intense competition from major
brand name apparel companies, other large companies, and smaller businesses
specializing in outdoor products. The Company owns and uses a number of
trademarks, some of which may be important in maintaining or creating a
competitive advantage and consumer demand. Certain competitors in the United
States and abroad have copied and may in the future copy certain of the
Company's trademarks and designs. The Company is also aware of certain
counterfeiting of the Company's products. Without authorization by the
Company, a third party has filed an application in China to register as a
trademark the Chinese characters for "North Face" and a copy of the Company's
"N" design, and, unless successfully opposed, this application could result
in material adverse consequences to the Company's business. 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.
KEY PERSONNEL The Company recently announced a shift in its executive
responsibilities pursuant to which Marsden S. Cason was named Chairman of the
Board of Directors and William N. Simon was named Chief Executive Officer in
addition to his role as President. This change was due in part to health
considerations affecting Mr. Cason. The unanticipated loss of one or more
current senior executives or key employees could have a significant adverse
effect on the Company's business.
PRODUCT AND WARRANTY LIABILITY The Company's products are used often in
severe weather conditions. In 1997 the Company began selling portaledges used
as sleeping platforms in big wall rock climbing. There is no assurance that
insurance maintained by the Company will cover possible future losses from
product liability claims. The Company maintains a warranty reserve for the
lifetime warranty offered on 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.
STOCK MARKET RISKS The trading price of the Company's Common Stock has
fluctuated significantly since the Company's initial public offering in July
1996, and may fluctuate in the future as a result of many factors, including
the Company's operating results, new products introduced by the Company or
its competitors, market conditions for the Company's products, changes in
earnings estimates by analysts, results reported by the Company which are
more or less than estimates by analysts, and speculation in the trade or
business press. The trading price may also be affected by retail industry,
stock market, or economic factors unrelated to the Company's operating
performance. Future sales of substantial amounts of Common Stock by existing
stockholders may also adversely affect prevailing market prices for the
Common Stock and could impair the Company's ability to raise equity capital
in the future. As of March 17, 1997, the Company's directors, officers and
certain other affiliates beneficially owned approximately 45% of the
outstanding shares of the Company's Common Stock.
THE NORTH FACE 1996 ANNUAL REPORT | 21
<PAGE>
THE NORTH FACE, INC.
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, DECEMBER 31,
(IN THOUSANDS) 1995 1996
- --------------------------------------------------------------------------------
ASSETS
Current Assets:
Cash and cash equivalents $ 2,823 $ 8,315
Accounts receivable, net 16,582 24,149
Inventories 21,048 31,475
Deferred taxes 2,230 2,490
Other current assets 1,161 2,879
- --------------------------------------------------------------------------------
Total current assets 43,844 69,308
- --------------------------------------------------------------------------------
Property and equipment, net 8,388 12,039
Trademarks and intangibles, net 30,108 29,346
Debt issuance costs, net 1,739 58
Other assets 429 1,197
- --------------------------------------------------------------------------------
Total assets $ 84,508 $ 111,948
- --------------------------------------------------------------------------------
LIABILITIES & STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable $ 9,526 $ 11,327
Accrued employee expenses 921 1,924
Short-term borrowings and current portion of
long-term debt and capital lease obligations 4,838 95
Income taxes payable 561 1,010
Other current liabilities 5,330 4,514
- --------------------------------------------------------------------------------
Total current liabilities 21,176 18,870
Long-term debt and capital lease obligations 12,055 135
Other long-term liabilities 6,376 6,444
Subordinated debt 24,333 0
- --------------------------------------------------------------------------------
Total liabilities 63,940 25,449
- --------------------------------------------------------------------------------
Commitments and Contingencies
Stockholders' equity:
Series A Preferred Stock, $1.00 par value-shares
authorized 4,000,000; issued and outstanding
1,936,000 and 0, respectively 12,267 --
Cumulative Preferred Dividends Accrued 2,049 --
Common Stock, $.0025 par value-shares authorized
50,000,000; issued and outstanding 2,902,000 and
11,200,000, respectively 7 29
Additional paid-in capital 645 76,130
Subscriptions receivable (142) (95)
Retained earnings 6,071 10,113
Cumulative translation adjustments (329) 322
- -------------------------------------------------------------------------------
Total stockholders' equity 20,568 86,499
- -------------------------------------------------------------------------------
Total liabilities and stockholders' equity $ 84,508 $111,948
- -------------------------------------------------------------------------------
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
22 | THE NORTH FACE 1996 ANNUAL REPORT
<PAGE>
THE NORTH FACE, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
PREDECESSOR THE NORTH FACE, INC. (SUCCESSOR)
------------------ -----------------------------------------------------------------
FOR THE PERIOD FOR THE PERIOD FROM
FROM APRIL 1, 1994 JUNE 7, 1994 TO FOR THE YEAR ENDED FOR THE YEAR ENDED
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) TO JUNE 6, 1994 DECEMBER 31, 1994 DECEMBER 31, 1995 DECEMBER 31, 1996
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net Sales $9,085 $60,574 $121,534 $158,226
Cost of Sales 5,317 31,060 66,470 88,195
- ---------------------------------------------------------------------------------------------------------------------------------
Gross Profit 3,768 29,514 55,064 70,031
Operating Expenses 5,290 19,659 44,540 56,487
- ---------------------------------------------------------------------------------------------------------------------------------
Operating Income (Loss) (1,522) 9,855 10,524 13,544
Interest expense (58) (2,598) (5,530) (4,625)
Other Income, net 19 186 589 356
- ---------------------------------------------------------------------------------------------------------------------------------
Income (Loss) Before Provision for Income
Taxes, and Extraordinary Item (1,561) 7,443 5,583 9,275
Provision for Income Taxes 112 2,808 2,098 3,611
- ---------------------------------------------------------------------------------------------------------------------------------
Income (Loss) Before Extraordinary Item (1,673) 4,635 3,485 5,664
Extraordinary Gain (Loss) on Extinguishment
of Debt, Net of Income Taxes of $0 and $575 577 0 0 (863)
- ---------------------------------------------------------------------------------------------------------------------------------
Net Income (Loss) $(1,096) $4,635 $3,485 $4,801
- ---------------------------------------------------------------------------------------------------------------------------------
Pro forma Per Share Information:
Income Before Extraordinary Loss $ 0.47 $ 0.62
Extraordinary Loss, net of tax $ 0 $(0.10)
- ---------------------------------------------------------------------------------------------------------------------------------
Net Income $ 0.47 $ 0.52
- ---------------------------------------------------------------------------------------------------------------------------------
Weighted average shares used in pro forma per share calculation 7,434 9,186
- ---------------------------------------------------------------------------------------------------------------------------------
</TABLE>
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
THE NORTH FACE 1996 ANNUAL REPORT | 23
<PAGE>
THE NORTH FACE, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
PREDECESSOR THE NORTH FACE, INC. (SUCCESSOR)
------------------ -----------------------------------------------------------------
FOR THE PERIOD FOR THE PERIOD
FROM APRIL 1, 1994 JUNE 7, 1994 TO FOR THE YEAR ENDED FOR THE YEAR ENDED
(IN THOUSANDS) TO JUNE 6, 1994 DECEMBER 31, 1994 DECEMBER 31, 1995 DECEMBER 31, 1996
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $(1,096) $4,635 $3,485 $4,801
Adjustments to reconcile net income
(loss) to cash provided by (used in)
operating activities:
Depreciation and amortization 307 1,345 3,075 3,595
Deferred income taxes (93) (259) (441) (461)
Provision for doubtful accounts 66 268 338 215
Extraordinary (gain) loss (577) 0 0 863
Tax benefit of exercise of stock options 0 0 0 3,595
Effect of changes in:
Accounts receivable 1,851 (5,912) (3,434) (7,782)
Inventories 617 1,195 (8,980) (10,427)
Other assets (231) (542) (469) (1,908)
Accounts payable and accrued liabilities (473) 696 3,631 2,706
- ------------------------------------------------------------------------------------------------------------------------------
Net Cash Provided by (Used in)
Operating Activities 371 1,426 (2,795) (4,803)
INVESTING ACTIVITIES:
Acquisition of The North Face assets 0 (59,710) 0 0
Proceeds from sale of trademark 0 10,800 0 0
Acquisition of Canadian Subsidiary 0 0 (73) 0
Purchase of fixed assets (58) (327) (5,592) (5,982)
- ------------------------------------------------------------------------------------------------------------------------------
Net Cash Used in Investing Activities (58) (49,237) (5,665) (5,982)
FINANCING ACTIVITIES:
Debt proceeds 0 30,559 5,600 2,825
Debt repayments (729) (476) (2,595) (32,009)
Proceeds (payments) from revolver, net 0 (761) 7,847 (11,812)
Payment of debt acquisition costs 0 (2,413) (300) (262)
Proceeds from sale of stock 0 12,333 0 56,884
Change in due to/from affiliates, net (1,030) 0 0 0
- ------------------------------------------------------------------------------------------------------------------------------
Net Cash Provided by (Used in)
Financing Activities (1,759) 39,242 10,552 15,626
Effect of foreign currency fluctuations
on cash 65 (234) (95) 651
- ------------------------------------------------------------------------------------------------------------------------------
Increase (Decrease) in Cash and Cash
Equivalents (1,381) (8,803) 1,997 5,492
Cash and Cash Equivalents, Beginning
of Period 11,010 9,629 826 2,823
- ------------------------------------------------------------------------------------------------------------------------------
Cash and Cash Equivalents, End of Period $ 9,629 $ 826 $ 2,823 $8,315
- ------------------------------------------------------------------------------------------------------------------------------
SUPPLEMENTAL CASH FLOW INFORMATION:
Cash paid during the year for:
Interest $ 2,836 $ 2,398 $ 4,383 $ 4,859
- ------------------------------------------------------------------------------------------------------------------------------
Income taxes $ 0 $ 3,476 $ 1,785 $ 1,302
- ------------------------------------------------------------------------------------------------------------------------------
Non-Cash Transactions:
Issuance of stock $ 0 $ 706 $ 0 $ 0
- ------------------------------------------------------------------------------------------------------------------------------
Cancellation of stock and related
promissory note $ 0 $ 0 $ 119 $ 0
- ------------------------------------------------------------------------------------------------------------------------------
Conversion of Preferred Stock into
Common Stock $ 0 $ 0 $ 0 $15,075
- ------------------------------------------------------------------------------------------------------------------------------
</TABLE>
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
24 | THE NORTH FACE 1996 ANNUAL REPORT
<PAGE>
THE NORTH FACE, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
(IN THOUSANDS)
- -----------------------------------------------------------------------------------------------------------------------------------
PREFERRED STOCK COMMON STOCK CUMULATIVE TRANS-
------------------ ----------------------------- PREFERRED SUB- LATION
SHARES SHARES ADDITIONAL DIVIDENDS SCRIPTIONS RETAINED ADJUST-
DESCRIPTION OUTSTANDING AMOUNT OUTSTANDING AMOUNT CAPITAL ACCRUED RECEIVABLE EARNINGS MENTS TOTAL
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
PREDECESSOR
March 31, 1994 - - 1,000 $5,416 $ 3,882 - - $(22,015) $(413) $(13,130)
Net Loss - - - - - - - (1,096) - (1,096)
Translation Adjustments - - - - - - - - 65 65
- ----------------------------------------------------------------------------------------------------------------------------------
June 6, 1994 - - 1,000 $5,416 $ 3,882 - - $(23,111) $(348) $(14,161)
- ----------------------------------------------------------------------------------------------------------------------------------
THE NORTH FACE, INC. (SUCCESSOR)
Preferred Stock Issued 1,936 $12,267 - - - - - - - $ 12,267
Common Stock Issued - - 3,431 $ 8 $ 764 $(261) - - 511
Net Income - - - - - - - $ 4,635 - 4,635
Stock Dividends on
Preferred Stock - 0 - - - $ 696 - (696) - 0
Translation Adjustments - 0 - - - - - - $(234) (234)
- ----------------------------------------------------------------------------------------------------------------------------------
December 31, 1994 1,936 12,267 3,431 8 764 696 (261) 3,939 (234) 17,179
Net Income - - - - - - - 3,485 - 3,485
Cancellation of
Restricted Stock - - (529) (1) (119) - 119 - - (1)
Stock Dividends on
Preferred Stock - - - - - 1,353 - (1,353) - 0
Translation Adjustments - - - - - - - - (95) (95)
- -----------------------------------------------------------------------------------------------------------------------------------
December 31, 1995 1,936 12,267 2,902 7 645 2,049 (142) 6,071 (329) 20,568
Net Income - - - - - - - 4,801 - 4,801
Stock Dividends on
Preferred Stock - - - - - 759 - (759) - 0
Declaration of
Preferred Dividends 443 2,808 - - - (2,808) - - - 0
Conversion of
Preferred Stock (2,379) (15,075) 4,221 11 15,064 - - - - 0
Exercise of Stock Options
Including Tax Benefit - - 379 1 3,873 - 17 - - 3,891
Sale of Common Stock - - 3,829 10 56,578 - - - - 56,588
Cancellation of
Restricted Stock - - (131) - (30) - 30 - - 0
Translation Adjustments - - - - - - - - 651 651
- -----------------------------------------------------------------------------------------------------------------------------------
December 31, 1996 0 $ 0 11,200 $ 29 $76,130 $ 0 $ (95) $ 10,133 $ 322 $ 86,499
- -----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
THE NORTH FACE 1996 ANNUAL REPORT | 25
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. BUSINESS, ACQUISITION AND BASIS OF PRESENTATION
BUSINESS The North Face, Inc. designs and distributes technically sophisticated
outerwear, skiwear, functional sportswear, tents, sleeping bags and backpacks
under The North Face-Registered Trademark- name. The Company sells its products
to select specialty retailers throughout the United States, Europe, and Canada.
ACQUISITION On June 7, 1994, TNF Holdings Company, Inc. (a Delaware
Corporation) acquired substantially all of the net operating assets of The
North Face (the "Predecessor") (a California corporation) for approximately
$62.1 million cash (including transaction costs of approximately $2.4
million) plus assumed liabilities of approximately $18.4 million (the
"Acquisition"). TNF Holdings Company, Inc. then changed its name to The North
Face, Inc. (the "Successor"). The Acquisition was accounted for as a purchase
and accordingly, Successor recorded the assets acquired (including $41.8
million for trademarks) and liabilities assumed at their estimated fair
values. Subsequent to the purchase, an equity investor purchased Successor's
trademarks in Japan and Korea. Due to the Acquisition and resulting change in
accounting basis, and significant differences in the capital structures of
the Successor and the Predecessor, the accompanying consolidated financial
statements of the Successor may not be comparable to those of the
Predecessor. References to the Company throughout these notes to consolidated
financial statements refer to the operations of Successor and Predecessor
collectively.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION The consolidated financial statements include the
financial statements of The North Face, Inc. and its wholly-owned subsidiaries.
All 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.
CHANGE IN YEAR-END The Company changed its year-end to December 31 from March
31 effective December 31, 1994.
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.
CASH AND CASH EQUIVALENTS represent short-term investments with original
maturities of less than three months.
ACCOUNTS RECEIVABLE are recorded upon the sale of inventory to independent
retailers. 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 pre-season 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 of The North Face, Inc. represent trademarks (less
proceeds from sales of Japan and Korea trademarks) recorded in connection
with the Acquisition and are amortized on a straight-line basis over forty
years. Accumulated amortization at December 31, 1995 and 1996 was
approximately $1.2 million and $2.0 million, respectively. Amortization
expense was $453,000, $783,000, and $783,000 for the period from June 7, 1994
to December 31, 1994 and the years ended December 31, 1995 and 1996,
respectively.
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.
PRODUCT WARRANTY Substantially all of the Company's products carry a lifetime
warranty for defects in quality and workmanship. The Company maintains
warranty departments in the U.S., Canada and Europe and repairs the majority
of items returned under warranty. The Company's estimated liability for
future warranty claims related to past sales at December 31, 1995 and 1996 is
approximately $4.5 million and $4.9 million, respectively, of which the
non-current portion of $3.6 million and $3.8 million is classified as other
long term liabilities as of December 31, 1995 and 1996, respectively. The
current portion of the warranty liability is $.9 million and $1.2 million and
is classified as other current liabilities as of December 31, 1995 and 1996,
respectively. Warranty expense was approximately $156,000, $467,000,
$1,004,000 and $1,711,000 for the period from April 1, 1994 to June 6, 1994
(the "two-month period"), the period from June 7, 1994 to December 31, 1994
(the "seven-month period"), and the years ended December 31, 1995 and 1996,
respectively.
26 | THE NORTH FACE 1996 ANNUAL REPORT
<PAGE>
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 in accordance
with Statement of Financial Accounting Standards (SFAS) No. 109, Accounting for
Income Taxes. SFAS No. 109 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, SFAS No. 109 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 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.
PRO FORMA EARNINGS PER SHARE Upon consummation of the Company's initial
public offering, all outstanding shares of Series A Preferred Stock were
converted into 4,220,808 shares of Common Stock. The pro forma net income per
share and shares used in pro forma per share calculations for the year ended
December 31, 1996 and 1995 reflect this conversion as of the beginning of
each period. In accordance with the rules of the Securities and Exchange
Commission, all common stock equivalents issued within one year of the
Company's anticipated initial public offering have been considered
outstanding for all periods using the treasury stock method. Due to the
conversion of the Series A Preferred Stock into Common Stock historical
earnings per share is not meaningful.
STOCK-BASED COMPENSATION The Company accounts for stock-based awards to
employees using the intrinsic value method in accordance with APB25, ACCOUNTING
FOR STOCK ISSUED TO EMPLOYEES.
DERIVATIVES Gains and losses on forward foreign exchange contracts used to
hedge foreign currency denominated receivables are recognized currently and
included in the carrying amount of such receivable. 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.
SFAS NO. 121 The Company adopted SFAS No. 121, "Accounting for the Impairment of
Long Lived Assets and Long Lived Assets to be Disposed of" ("SFAS 121") for the
year ended December 31, 1996. SFAS 121 establishes recognition and measurement
criteria for losses whenever events or changes in circumstances indicate that
the carrying value of assets may not be recoverable. There was no effect on the
Company's consolidated financial statements as a result of the adoption of SFAS
121.
3. ACCOUNTS RECEIVABLE
The allowance for doubtful accounts was $1,067,000 and $1,282,000 as of
December 31, 1995 and 1996, respectively. Write-offs to accounts receivable
during the two month period ended June 7, 1994, the seven month period ended
December 31, 1994, and the years ended December 31, 1995 and 1996 were
approximately $123,000, $27,000, $71,000 and $212,000, respectively.
During the two-month period ended June 6, 1994, the seven-month period ended
December 31, 1994 and the years ended December 31, 1995 and 1996, no customer
accounted for more than 10% of net sales.
4. INVENTORIES
Inventories as of December 31, 1995 and 1996 consist of:
(IN THOUSANDS) 1995 1996
- -------------------------------------------------------------------------------
Finished goods $ 18,414 $ 28,473
Work in progress 237 793
Raw materials 2,397 2,209
- -------------------------------------------------------------------------------
Total inventories $ 21,048 $ 31,475
- -------------------------------------------------------------------------------
5. PROPERTY AND EQUIPMENT
Property and equipment as of December 31, 1995 and 1996 consist of:
(IN THOUSANDS) 1995 1996
- -------------------------------------------------------------------------------
Leasehold improvements $ 4,985 $ 7,246
Furniture, fixtures and office equipment 4,310 7,459
Machinery and equipment 830 1,476
- -------------------------------------------------------------------------------
Subtotal 10,125 16,181
Less accumulated depreciation and amortization (1,737) (4,142)
- -------------------------------------------------------------------------------
Total property and equipment, net $ 8,388 $ 12,039
- -------------------------------------------------------------------------------
THE NORTH FACE 1996 ANNUAL REPORT | 27
<PAGE>
Depreciation and amortization expense related to property and equipment was
$99,000, $653,000, $1,268,000 and $2,302,000 for the two-month period ended
June 7, 1994, the seven-month period ended December 31, 1994, and the years
ended December 31, 1995 and 1996, respectively. Maintenance and repair
expense was $80,500, $241,500, $565,000 and $671,000 for the two-month period
ended June 7, 1994, the seven-month period ended December 31, 1994, and the
years ended December 31, 1995 and 1996, respectively.
6. INCOME TAXES
The provision for income taxes consists of the following:
<TABLE>
<CAPTION>
PREDECESSOR THE NORTH FACE, INC. (SUCCESSOR)
------------------ -----------------------------------------------------------------
FOR THE PERIOD FOR THE PERIOD FROM
FROM APRIL 1, 1994 JUNE 7, 1994 TO FOR THE YEAR ENDED FOR THE YEAR ENDED
(IN THOUSANDS) TO JUNE 6, 1994 DECEMBER 31, 1994 DECEMBER 31, 1995 DECEMBER 31, 1996
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Federal
Current $ 0 $ 2,179 $ 825 2,514
Deferred 0 (327) 375 (338)
State
Current 0 530 202 679
Deferred 0 (31) 77 (80)
Foreign
Current 205 358 641 879
Deferred (93) 99 (22) (43)
- ------------------------------------------------------------------------------------------------------------------------------
$ 112 $ 2,808 $ 2,098 $ 3,611
- ------------------------------------------------------------------------------------------------------------------------------
</TABLE>
The Predecessor was not in a U.S. federal tax paying position prior to the
Acquisition due to the availability of net operating loss (NOL)
carryforwards. These NOL carryforwards are not available to The North Face,
Inc. as a result of the Acquisition.
Reconciliation of the U.S. Federal statutory rate to the Company's
effective tax rate is as follows:
<TABLE>
<CAPTION>
PREDECESSOR THE NORTH FACE, INC. (SUCCESSOR)
------------------ -----------------------------------------------------------------
FOR THE PERIOD FOR THE PERIOD FROM
FROM APRIL 1, 1994 JUNE 7, 1994 TO FOR THE YEAR ENDED FOR THE YEAR ENDED
(IN THOUSANDS) TO JUNE 6, 1994 DECEMBER 31, 1994 DECEMBER 31, 1995 DECEMBER 31, 1996
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Statutory rate 34.0% 34.0% 34.0% 34.0%
State income taxes, net of federal benefit 0.0% 4.4% 4.2% 4.3%
Net losses without tax benefit (40.4%) 0.0% 0.0% 0.0%
Other (0.8%) (0.7%) (0.6%) 0.6%
- ------------------------------------------------------------------------------------------------------------------------------
Effective tax rate (7.2%) 37.7% 37.6% 38.9%
- ------------------------------------------------------------------------------------------------------------------------------
</TABLE>
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.
Significant components of the net deferred tax asset as of December 31, 1995
and 1996 are as follows:
(IN THOUSANDS) 1995 1996
- -------------------------------------------------------------------------------
Deferred Tax Asset:
Inventory costs not yet deductible $ 313 $ 1,048
State tax provisions 86 0
Depreciation 271 522
Liabilities not yet deductible 2,591 2,661
- -------------------------------------------------------------------------------
3,261 4,231
- -------------------------------------------------------------------------------
Deferred Tax Liabilities:
Depreciation (83) (97)
Intangibles (2,883) (3,169)
Liabilities deductible for tax not book (100) (261)
- -------------------------------------------------------------------------------
(3,066) (3,527)
- -------------------------------------------------------------------------------
Net Deferred Income Tax Asset $ 195 $ 704
===============================================================================
28 | THE NORTH FACE 1996 ANNUAL REPORT
<PAGE>
Of the $195,000 net deferred income tax asset at December 31, 1995,
$2,230,000 is recorded as a current asset and $2,035,000 is included in other
long-term liabilities in the consolidated balance sheet. Of the $704,000 net
deferred income tax asset at December 31, 1996, $2,490,000 is recorded as a
current asset and $1,786,000 is included in other long-term liabilities in
the consolidated balance sheet.
The cumulative amount of undistributed earnings of the European and
Canadian foreign subsidiaries, which the Company intends to indefinitely
reinvest outside of the United States and upon which deferred income taxes
are not provided, approximates $6.8 million at December 31, 1996.
7. PENSION PLAN
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 investments in the Discretionary Managed Fund
operated by Prudential Portfolio Managers Limited.
Net pension plan expense consisted of the following:
<TABLE>
<CAPTION>
PREDECESSOR THE NORTH FACE, INC. (SUCCESSOR)
------------------ -----------------------------------------------------------------
FOR THE PERIOD FOR THE PERIOD FROM
FROM APRIL 1, 1994 JUNE 7, 1994 TO FOR THE YEAR ENDED FOR THE YEAR ENDED
(IN THOUSANDS) TO JUNE 6, 1994 DECEMBER 31, 1994 DECEMBER 31, 1995 DECEMBER 31, 1996
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Service cost $ 19 $ 55 $ 55 $ 76
Interest cost on projected benefit
obligations 30 89 180 222
Actual return on plan assets 12 35 (323) (378)
Net amortization (32) (94) 176 176
- ------------------------------------------------------------------------------------------------------------------------------
Net pension plan expense $ 29 $ 85 $ 88 $ 96
- ------------------------------------------------------------------------------------------------------------------------------
Contributions to the plan $ 69 $ 217 $ 346 $ 371
- ------------------------------------------------------------------------------------------------------------------------------
</TABLE>
Actuarial present value of the benefit obligation as of December 31, 1995 and
1996 is as follows:
(IN THOUSANDS) 1995 1996
- -------------------------------------------------------------------------------
Accumulated benefit obligation $ 1,431 $ 2,897
Additional amounts related to pension benefit
obligation compensation increases 186 221
- -------------------------------------------------------------------------------
Projected benefit obligation 1,617 3,118
Less fair value of assets (1,118) (2,571)
- -------------------------------------------------------------------------------
Projected benefit obligation in excess of fair value $ 499 $ 547
- -------------------------------------------------------------------------------
The projected benefit obligation of $499,000 and $547,000 at December 31, 1995
and 1996, respectively, is included in other long-term liabilities in the
consolidated balance sheet. The significant assumptions for 1995 and 1996 were
as follows:
Discount rate 9%
Expected long term rate of return on plan assets 9%
Rate of increase in future compensation levels 7%
8. DEBT
Long-term debt as of December 31, 1995 and 1996 consists of the following:
(IN THOUSANDS) 1995 1996
- -------------------------------------------------------------------------------
Term note $ 4,600 $ 0
Revolving line of credit 11,812 0
Other 213 123
- -------------------------------------------------------------------------------
Total 16,625 123
Less: current portion (4,630) (26)
- -------------------------------------------------------------------------------
Long-term debt $ 11,995 $ 97
- -------------------------------------------------------------------------------
Effective July 8, 1996, in conjunction with the initial public offering (see
Note 12), the Company entered into a Second Amended and Restated Loan and
Security agreement (the "Facility"), expiring in February 2000, with a group of
three financial institutions, which includes a term note, a revolving line of
credit and a letter of credit facility. The term note (availability up to
$5,000,000) is payable in
THE NORTH FACE 1996 ANNUAL REPORT | 29
<PAGE>
pro rata quarterly installments based on amount outstanding beginning July 1,
1997 and carries interest payable monthly at the bank's Prime Rate minus .25%
or at LIBOR plus 1.5%. There were no borrowings on the term note at December
31, 1996. The revolving line of credit provides for borrowing up to $60.0
million with the actual borrowings limited to available collateral,
representing eligible receivables and inventory (approximately $28 million of
gross availability as of December 31, 1996). Interest on the revolving line
of credit is payable monthly at prime minus .25% or LIBOR plus 1.5%, at the
option of the Company. The revolving line of credit agreement provides a sub
limit facility for letters of credit up to a maximum of $15 million
(approximately $3.9 million outstanding as of December 31, 1996). Fees for
outstanding letters of credit are payable quarterly at 2.0% per annum. The
Company also pays a monthly unused line fee on the revolver at .5% per annum.
Borrowings and outstanding letters of credit under the Facility are secured
by substantially all of the assets of the Company. The Facility includes
certain financial covenants and restrictions on new indebtedness and the
payment of cash dividends. The Company was in compliance with all of its
financial covenants as of December 31, 1996.
In addition, the Company has a European overdraft facility of
approximately $4.2 million. The Company also has a European letter of credit
facility. The bank overdraft facility is reduced by the value of outstanding
letters of credit at that time. As of December 31, 1996, the Company had
outstanding letters of credit under the European facility of approximately
$1.5 million.
In connection with the restructuring of the credit facility at the date of
the initial public offering, the Company recorded a non-cash extraordinary
loss in 1996 related to the previous facility of $186,000, net of tax
benefits of $124,000, representing the write-off of the remaining deferred
debt issuance costs.
In May 1994, the Predecessor settled three notes payable with a face value
of $1,302,000 for cash of $725,000. These settlements resulted in an
extraordinary gain of $577,000.
9. SUBORDINATED DEBT
In connection with the Acquisition, the Company issued approximately $24.3
million of subordinated debt which was scheduled to mature on June 7, 2001
with 10.1% interest payable quarterly. In 1996, the Company repaid all of its
subordinated debt using proceeds of the Company's initial public offering and
secondary offering (see Note 12). The Company incurred approximately $1.6
million of debt issuance costs related to the subordinated debt which were
being amortized over the life of the debt. Accumulated amortization of these
costs at December 31, 1995 was approximately $357,000.
In connection with the restructuring of the subordinated debt at the date
of the initial public offering, the Company recorded a non-cash extraordinary
loss in 1996 of $677,000, net of tax benefits of $451,000, representing the
write-off of the remaining deferred debt issuance costs.
10. 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, 1996 are as
follows:
(IN THOUSANDS)
- -------------------------------------------------------------------------------
YEAR ENDING DECEMBER 31, CAPITAL LEASES OPERATING LEASES
- -------------------------------------------------------------------------------
1997 $ 75 $ 3,873
1998 14 3,623
1999 14 3,627
2000 14 3,396
2001 3 2,752
Thereafter 0 5,469
- -------------------------------------------------------------------------------
Minimum lease commitments 120 $ 22,740
================
Less: amount representing interest (13)
- -------------------------------------------------------
Present value of net minimum lease payments 107
Less: current portion (69)
- -------------------------------------------------------
Long term portion $ 38
=======================================================
The cost of property under capitalized leases was $254,00 and $314,000, as of
December 31, 1995 and 1996, respectively, and primarily represents furniture,
fixtures and office equipment. Accumulated amortization related to these leases
was approximately $174,000 and $249,000 as of December 31, 1995 and 1996,
respectively.
Rental expense for operating leases was $640,000, $1,921,000, $2,690,000
and $3,881,000 for the period from April 1, 1994 to June 6, 1994, the period
from June 7, 1994 to December 31, 1994, and for the years ended December 31,
1995 and 1996, respectively.
30 | THE NORTH FACE 1996 ANNUAL REPORT
<PAGE>
11. COMMITMENTS AND CONTINGENCIES
LITIGATION The Company is party to claims and litigation that arise in the
normal course of business. Management believes that the ultimate outcome of
these claims and litigation will not have a material impact on the consolidated
financial statements of the Company taken as a whole.
PURCHASE COMMITMENTS The Company has approximately $39.1 million of purchase
commitments as of December 31, 1996 related to goods ordered for future
production in the normal course of business. Certain of these commitments are
collateralized by the outstanding letters of credit (see Note 8).
DERIVATIVES The Company's European subsidiary sells merchandise throughout
Europe. These sales are denominated in the local currency of the retailer's
country. 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 European
subsidiary enters into forward exchange contracts to hedge its foreign
currency denominated accounts receivables and firm sales commitments. The
terms of the forward exchange contracts are generally less than one year. As
of December 31, 1996 the Company had open forward contracts to sell foreign
currencies for British pounds as follows: $2.9 million German marks, $1.5
million French francs, $1.2 million Dutch guilders, $1.2 million Italian
lira, $.7 million Spanish pesatas, $.5 million Swiss francs, and $.4 million
Swedish kronas. Deferred gains and losses on these transactions are
immaterial at December 31, 1996.
12. STOCKHOLDER'S EQUITY
COMMON STOCK In connection with the Acquisition, on June 7, 1994 the Company
issued 2,271,000 shares of common stock with a par value of $.0025 per share
for cash of $166,000, services rendered of $26,000 and debt issuance costs of
$320,000. In July and November 1996, the Company sold 2,823,611 and 1,000,000
shares, respectively, of its Common Stock in public offerings at prices of
$14.00 and $23.50, respectively, per share, yielding net proceeds of
approximately $56.7 million after deducting underwriting discounts of $4.0
million and expenses of $2.4 million related to the offering. The proceeds
were used to repay certain portions of the Company's line of credit and
senior and subordinated indebtedness.
SERIES A PREFERRED STOCK In connection with the Acquisition, on June 7, 1994
the Company issued 1,935,781 shares of Series A Preferred Stock for cash of
$12,166,667 and for services rendered of approximately $100,000. Series A
Preferred Stock were entitled to dividends of 10% of the face value payable
quarterly in either cash or additional shares of Series A Preferred Stock,
were convertible into common stock, carried liquidation preferences of face
value and had voting rights on an as converted basis. Upon consummation of
the Company's initial public offering, all outstanding shares of Series A
Preferred Stock, including accrued dividends, were converted into 4,220,808
shares of Common Stock.
1994 STOCK INCENTIVE PLAN On June 7, 1994, the Company adopted the 1994 Stock
Incentive Plan (the "1994 Plan"), pursuant to which non-qualified stock options
("NQSOs") to purchase an aggregate of 537,106 shares of Common Stock with a
weighted average exercise price of $1.05 per share are outstanding as of
December 31,1996. 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, 1996,
$117,612 of principal and interest was unpaid on these notes. Options and
restricted shares under the 1994 Plan become fully vested on June 7, 2004, with
accelerated vesting over the four years following the date of grant based upon
specified performance goals, except for 365,280 shares which vested at the time
of the Company's initial public offering. 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 924,820 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 and Incentive Stock Options ("ISOs") granted under the 1996 Plan to
employees vest over 4 years and expire on June 7, 2004. Options to purchase
248,640 and 239,350 shares have been granted as of December 31, 1996 at an
average exercise price of $4.37 and $17.35 under the 1995 and 1996 Plans,
respectively. 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.
THE NORTH FACE 1996 ANNUAL REPORT | 31
<PAGE>
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 nonemployee 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
nonemployee directors of the Company. Options to purchase 50,000 shares have
been granted under the Directors' Plan at an average exercise price of $25.63
as of December 31, 1996.
Activity for all of the Company's stock option plans from June 7, 1994
through December 31, 1996 was as follows:
<TABLE>
<CAPTION>
1994 1995 1996
-------------------------- ------------------------- ------------------------
WEIGHTED AVERAGE WEIGHTED AVERAGE WEIGHTED AVERAGE
SHARES EXERCISE PRICE SHARES EXERCISE PRICE SHARES EXERCISE PRICE
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Outstanding at beginning of year 0 -- 444,000 $ 0.23 1,080,008 $ 0.90
Granted 444,000 $ 0.23 808,267 $ 1.13 431,430 $ 14.52
Exercised 0 -- -- -- (379,450) $ 0.73
Canceled 0 -- (172,259) $ 0.23 (62,386) $ 0.23
------- --------- ---------
Outstanding at end of year 444,000 $ 0.23 1,080,008 $ 0.90 1,069,602 $ 6.60
------- --------- ---------
Options exercisable at year end 0 -- 443,139 $ 0.96 533,833 $ 1.09
------- --------- ---------
Options available for future grant 444,600
---------
Weighted average fair value of
options granted during the year $ 0.17 $ 5.05
------- ------
</TABLE>
The following table summarizes additional information about stock options
outstanding at December 31, 1996:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
------------------------------------------------------------ -------------------------------------
WEIGHTED WEIGHTED WEIGHTED
AVERAGE REMAINING AVERAGE EXERCISE AVERAGE EXERCISE
RANGE OF EXERCISE PRICE SHARES OUTSTANDING CONTRACTUAL LIFE PRICE SHARES EXERCISABLE PRICE
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
$ .22 to $ 1.13 629,292 7.43 $ 1.06 533,833 $ 1.09
$ 3.38 to $ 9.60 223,110 7.43 7.40 -- --
$20.34 to $25.62 217,200 7.69 21.83 -- --
----------- -----------
$ .22 to $25.62 1,069,602 7.49 6.60 533,833 $ 1.09
----------- -----------
</TABLE>
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. Generally, Company employees are eligible to
participate in the Employee Plan if they have been employed by the Company
for at least 90 days and are currently working at least 20 hours per week.
The Employee Plan permits eligible employees to purchase Common Stock through
payroll deductions, which may not exceed 10% of the employee's compensation.
The price at which stock is purchased under the Employee Plan is equal to 85%
of the fair market value of the Common Stock on the first day of the
applicable offering period or the last day of the applicable offering period,
whichever is lower. Unless terminated earlier, the Employee Plan will
terminate on the date on which eligible employees become entitled to purchase
a number of shares greater than the number of reserved shares available for
purchase. A total of 5,094 shares have been issued under the Employee Plan as
of December 31, 1996. At December 31, 1996, 144,906 shares are available for
future issuance.
PRO FORMA STOCK OPTION INFORMATION As discussed in Note 2, the Company
continues to account for its stock-based awards using the intrinsic value
method in accordance with Accounting Principles Board No. 25, ACCOUNTING FOR
STOCK ISSUED TO EMPLOYEES and its related interpretations. Accordingly, 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 in
1995 and 1996 been recorded in accordance with the fair value method of SFAS
123, the Company's net income and earnings per share for 1995 and 1996 would
approximate the pro forma amounts shown as follows:
32 | THE NORTH FACE 1996 ANNUAL REPORT
<PAGE>
<TABLE>
<CAPTION>
1995 1996
--------------------- ---------------------
(IN THOUSANDS, EXCEPT PER SHARE DATA) AS REPORTED PROFORMA AS REPORTED PROFORMA
- -----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Income before extraordinary item $ 3,485 $ 3,443 $ 5,664 $ 5,458
Income per share before extraordinary item $ 0.47 $ 0.46 $ 0.62 $ 0.59
</TABLE>
For purposes of computing the above pro forma amounts, the fair value of each
option granted during 1995 and 1996 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, (ii) expected volatility of 45% (for options
granted subsequent to the filing of the S-1 in connection with the initial
public offering and 0% (for options granted prior to the filing), (iii) risk-
free interest rate of 6.38%, and (iv) expected life from vesting to exercise of
6 months.
The effects of applying SFAS 123 in this pro forma disclosure may not be
indicative of future pro forma amounts. SFAS 123 does not apply to awards
granted prior to 1995.
13. SEGMENT INFORMATION
The following table summarizes the Company's operations by geographical area.
The Company's intercompany sales are insignificant.
<TABLE>
<CAPTION>
(IN THOUSANDS) UNITED STATES CANADA EUROPE CONSOLIDATED
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
For the period from April 1 1994 to June 6, 1994
Net sales $ 5,714 $ 0 $ 3,371 $ 9,085
Operating income (loss)/ (1,830) 0 308 (1,522)
Income (loss) before provision for income taxes and
extraordinary item (1,868) 0 307 (1,561)
Identifiable assets 36,840 0 9,086 45,926
For the period from June 7, 1994 to December 31, 1994
Net sales $ 49,899 $ 0 $ 10,675 $ 60,574
Operating income 8,268 0 1,587 9,855
Income before provision for income taxes and
extraordinary item 5,556 0 1,887 7,443
Identifiable assets 57,323 0 9,226 66,549
For the fiscal year ended December 31, 1995
Net sales $ 96,069 $5,130 $ 20,335 $121,534
Operating income (loss) 8,635 (200) 2,089 10,524
Income (loss) before revision for income taxes and
extraordinary item 3,749 (271) 2,105 5,583
Identifiable assets 72,411 1,617 10,480 84,508
For the fiscal year ended December 31, 1996
Net sales $120,027 $ 9,462 $ 28,737 $158,226
Operating income 10,482 582 2,480 13,544
Income before provision for income taxes and
extraordinary item 6,332 2,461 482 9,275
Identifiable assets 93,419 3,769 14,760 111,948
</TABLE>
14. RELATED PARTY TRANSACTIONS
A shareholder of the Company provided management services to the Company from
June 7,1994 through June 30, 1996 for an annual fee of $250,000, payable
quarterly. These services terminated as of the date of the Company's initial
public offering during 1996.
15. 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
value of cash and cash equivalents, accounts receivable, accounts payable and
debt approximates their estimated fair values at December 31, 1996.
THE NORTH FACE 1996 ANNUAL REPORT | 33
<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 ("Successor") as of December 31, 1996 and 1995
and the related consolidated statements of operations, stockholders' equity
and cash flows for the years ended December 31, 1995 and 1996, and the period
from June 7, 1994 through December 31, 1994, and the consolidated statements
of operations, stockholders' equity and cash flows of The North Face
("Predecessor") for the period from April 1, 1994 through June 6, 1994. These
financial statements are the responsibility of the Predecessor's and
Successor's management. 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. 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, the Successor consolidated financial statements referred
to above present fairly, in all material respects, the financial position of
The North Face, Inc. and its subsidiaries as of December 31, 1996 and 1995
and the results of their operations and their cash flows for the years ended
December 31, 1995 and 1996 and for the period from June 7, 1994 through
December 31, 1994, in conformity with generally accepted accounting
principles. Further, in our opinion, the Predecessor consolidated financial
statements referred to above present fairly, in all material respects, the
results of their operations and their cash flows for the period from April 1,
1994 through June 6, 1994 in conformity with generally accepted accounting
principles.
/s/ Deloitte & Touche LLP
Deloitte & Touche LLP
San Francisco, California
January 31, 1997
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 statements in conformity with
generally accepted accounting principles. These systems are supplemented by
the selections and training for 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/ William N. Simon /s/ Roxanna Prahser
William N. Simon Roxanna Prahser
Chief Executive Officer Chief Financial Officer
and President
34 | THE NORTH FACE 1996 ANNUAL REPORT
<PAGE>
EXHIBIT 23.1
INDEPENDENT AUDITORS' CONSENT
We consent to the incorporation by reference in Registration Statements Nos.
333-12243 and 333-12633 each on Form S-8 of The North Face, Inc. of our report
dated January 31, 1997 incorporated by reference in this Annual Report on Form
10-K of The North Face, Inc. for the year ended December 31, 1996.
/s/ Deloitte & Touche LLP
Deloitte & Touche LLP
San Francisco, California
March 26, 1997
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> DEC-31-1996
<CASH> 8,315
<SECURITIES> 0
<RECEIVABLES> 25,431
<ALLOWANCES> 1,282
<INVENTORY> 31,475
<CURRENT-ASSETS> 69,308
<PP&E> 16,181
<DEPRECIATION> 4,142
<TOTAL-ASSETS> 111,948
<CURRENT-LIABILITIES> 18,870
<BONDS> 0
0
0
<COMMON> 29
<OTHER-SE> 86,470
<TOTAL-LIABILITY-AND-EQUITY> 111,948
<SALES> 158,226
<TOTAL-REVENUES> 0
<CGS> 88,195
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 56,487
<LOSS-PROVISION> 215
<INTEREST-EXPENSE> 4,625
<INCOME-PRETAX> 9,275
<INCOME-TAX> 3,611
<INCOME-CONTINUING> 5,664
<DISCONTINUED> 0
<EXTRAORDINARY> (863)
<CHANGES> 0
<NET-INCOME> 4,801
<EPS-PRIMARY> 0.62
<EPS-DILUTED> 0.62
</TABLE>
