UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-Q
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
- ----- SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1998
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE EXCHANGE ACT
- ----- OF 1934
For the transition period from ______________ to ______________
Commission File Number 0-28596
THE NORTH FACE, INC.
(Exact name of registrant as specified in its charter)
Delaware 94-3204082
(State or other jurisdiction (I.R.S. Employer Identification No.)
of incorporation or organization)
2013 Farallon Drive, San Leandro, California 94577
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (510) 618-3500
Former name, former address and former fiscal year,
if changed since last report: N/A
Indicate by check mark whether registrant (1) has filed all reports required to
be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
------ -----
The number of shares of Common Stock, $0.0025 par value per share, outstanding
on August 11, 1998, was 12,481,312.
<PAGE>
THE NORTH FACE, INC.
JUNE 30, 1998
INDEX TO FORM 10-Q
PART I. FINANCIAL INFORMATION PAGE NO.
Item 1 - Financial Statements (unaudited)
Condensed Consolidated Balance Sheets 3
Condensed Consolidated Statements of Operations 4
Condensed Consolidated Statements of Cash Flows 5
Notes to Condensed Consolidated Financial Statements 6
Item 2 - Management's Discussion and Analysis of Financial
Condition and Results of Operations 7
Item 3 - Quantitative and Qualitative Disclosures About
Market Risk 14
PART II. OTHER INFORMATION
Item 1 - Legal Proceedings 14
Item 4 - Submission of Matters to a Vote of Security Holders 14
Item 6 - Exhibits and Reports on Form 8-K 14
<PAGE>
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
THE NORTH FACE, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except share and per share amounts)
(unaudited)
<TABLE>
<CAPTION>
June 30, December 31, June 30,
1998 1997 1997
------------ ------------ ------------
<S> <C> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents......................... $5,303 $4,511 $1,695
Trade accounts receivable, net.................... 49,791 52,255 23,253
Other receivables................................. 6,445 6,112 4,405
Income tax receivable............................. 3,550 3,465 3,491
Advances to suppliers............................. 530 744 --
Inventories....................................... 62,369 44,697 47,326
Deferred taxes.................................... 2,779 2,779 --
Other current assets.............................. 7,752 4,390 4,799
------------ ------------ ------------
Total current assets............................ 138,519 118,953 84,969
Property and equipment, net....................... 22,428 22,955 16,725
Trademarks and intangibles, net................... 28,405 29,066 29,460
Other assets...................................... 6,461 3,306 2,452
------------ ------------ ------------
Total assets.................................... $195,813 $174,280 $133,606
============ ============ ============
LIABILITIES & STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable, accrued expenses, and other
current liabilities............................. 27,420 34,102 19,327
Short term borrowings and current portion of
long-term debt and capital lease obligations.... 40,985 25,734 19,520
------------ ------------ ------------
Total current liabilities....................... 68,405 59,836 38,847
Long-term debt and obligations under capital
leases.......................................... 4,435 5,177 942
Other long-term liabilities....................... 5,854 5,974 6,576
------------ ------------ ------------
Total liabilities............................... 78,694 70,987 46,365
------------ ------------ ------------
Stockholders' equity:
Common Stock, $.0025 par value - shares authorized
50,000,000; issued and outstanding; 12,337,000
at June 30, 1998 and 11,502,000 at December 31, 1997; 31 29 29
Additional paid-in capital........................ 97,761 81,727 78,609
Subscriptions receivable.......................... -- -- (15)
Retained earnings................................. 19,010 21,220 8,341
Accumulated other comprehensive income -
Translation adjustment.......................... 317 317 277
------------ ------------ ------------
Total stockholders' equity...................... 117,119 103,293 87,241
------------ ------------ ------------
Total liabilities and stockholders' equity...... $195,813 $174,280 $133,606
============ ============ ============
</TABLE>
See accompanying notes to consolidated financial statements
<PAGE>
THE NORTH FACE, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share amounts)
(unaudited)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
--------------------- -------------------
1998 1997 1998 1997
---------- ---------- --------- ---------
<S> <C> <C> <C> <C>
Net Sales.......................... $42,553 $31,087 $90,362 $70,429
Cost of Sales...................... 23,564 18,046 50,381 40,173
---------- ---------- --------- ---------
Gross Profit....................... 18,989 13,041 39,981 30,256
Operating Expenses................. 20,801 15,975 40,712 32,748
Facility Closure Charge............ 1,620 0 1,620 0
---------- ---------- --------- ---------
Operating Loss..................... (3,432) (2,934) (2,351) (2,492)
Interest Expense................... (848) (301) (1,522) (420)
Other Income (Expense), net........ (133) (87) 220 (25)
---------- ---------- --------- ---------
Loss Before Benefit for
Income Taxes .................... (4,413) (3,322) (3,653) (2,937)
Benefit for Income Taxes........... (1,743) (1,315) (1,443) (1,165)
---------- ---------- --------- ---------
Net Loss........................... ($2,670) ($2,007) ($2,210) ($1,772)
========== ========== ========= =========
Net Loss Per Share:
Basic......................... ($0.22) ($0.18) ($0.19) ($0.16)
Diluted....................... ($0.22) ($0.18) ($0.19) ($0.16)
Weighted Average Shares Outstanding:
Basic......................... 11,968 11,222 11,752 11,220
Diluted....................... 11,968 11,222 11,752 11,220
</TABLE>
See accompanying notes to consolidated financial statements
<PAGE>
THE NORTH FACE, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(unaudited)
<TABLE>
<CAPTION>
Six Months Ended
June 30,
----------------------
1998 1997
---------- ----------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
NET INCOME....................................... ($2,210) ($1,772)
Adjustments to reconcile net loss to cash
used in operating activities:
Depreciation and amortization.................. 3,081 1,886
Provision for doubtful accounts................ 723 736
Tax benefit of exercise of stock options....... 1,306 2,339
Other.......................................... (43) 2
Effect of changes in:
Accounts receivable............................ 1,741 (2,584)
Inventories.................................... (17,672) (15,851)
Income tax receivable.......................... (85) (2,197)
Other assets................................... (3,930) (4,073)
Accounts payable, accrued liabilities, and..........
other liabilities............................ (2,492) 684
---------- ----------
NET CASH USED IN OPERATING ACTIVITIES... (19,581) (20,830)
---------- ----------
INVESTING ACTIVITIES:
Deposit for acquisition of business.............. (2,488) 0
Purchase of fixed assets......................... (6,379) (6,109)
---------- ----------
NET CASH USED IN INVESTING ACTIVITIES............ (8,867) (6,109)
---------- ----------
FINANCING ACTIVITIES:
Borrowings on long term debt..................... 64 1,793
Long term debt repayments........................ (688) (134)
Proceeds from revolver, net...................... 15,134 18,573
Payment of debt acquisition costs................ 0 (88)
Proceeds from issuance of stock.................. 14,730 220
---------- ----------
NET CASH PROVIDED BY FINANCING ACTIVITIES... 29,240 20,364
---------- ----------
Effect of foreign currency fluctuations on cash.. 0 (45)
---------- ----------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS. 792 (6,620)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD... 4,511 8,315
---------- ----------
CASH AND CASH EQUIVALENTS, END OF PERIOD......... $5,303 $1,695
========== ==========
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>
THE NORTH FACE, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
NOTE 1. BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements of The
North Face, Inc. and its subsidiaries (the "Company") have been prepared
pursuant to the rules and regulations of the Securities and Exchange
Commission. Certain information and footnote disclosures normally included in
annual financial statements prepared in accordance with generally accepted
accounting principles have been condensed or omitted pursuant to such rules
and regulations. Operating results for the six month period ended June 30,
1998 are not necessarily indicative of the results that may be expected for the
fiscal year ending December 31, 1998. Accordingly, the interim unaudited
financial statements should be read in conjunction with the financial
statements included in the Form 10-K.
These financial statements have been prepared by the Company in a manner
consistent with that used in the preparation of the consolidated financial
statements included in the Company's Annual Report on Form 10-K for the fiscal
year ended December 31, 1997 (the "Form 10-K"). In the opinion of management,
the accompanying financial statements reflect all adjustments, consisting of
only normal and recurring adjustments, necessary for a fair presentation of
the financial position, results of operations, and cash flows for the periods
presented. All significant intercompany accounts and transactions have been
eliminated. Certain reclassifications have been made to prior year amounts to
conform with current year presentation.
The financial statements included herein are unaudited. The Condensed
Consolidated Balance Sheet as of December 31, 1997, has been derived from the
Consolidated Balance Sheet as of December 31, 1997 included in the Form 10-K.
NOTE 2. RECENTLY ISSUED ACCOUNTING STANDARDS
In the first quarter of 1998, the Company adopted Statement of
Financial Accounting Standards No. 130, "Reporting Comprehensive Income,"
which established standards for reporting and displaying comprehensive income
and its components in financial statements. Comprehensive income is defined as
net income and all nonowner changes in shareholders' equity. Accumulated
other comprehensive income consists entirely of foreign currency translation
adjustments. Total comprehensive loss for the quarters ended June 30, 1998
and 1997 was $2,735,000 and $1,882,000, respectively and $2,210,000 and
$1,817,000 for the six months ended June 30, 1998 and 1997, respectively.
NOTE 3. FACILITY CLOSURE CHARGE
During the quarter ended June 30, 1998 the Company recorded a one-time charge
of $1,620,000, or $.08 per share (basic and diluted), related to the closing
of an out-dated manufacturing facility in Scotland and the integration of its
Canadian subsidiary into a combined North American business operation.
NOTE 4. SUBSEQUENT EVENTS
On July 2, 1998, the Company acquired a 51% interest in La Sportiva
S.r.L., a premier manufacturer and distributor of trekking, mountaineering,
and climbing footwear located in Ziano di Fiemme, Italy for a total purchase
price of $6.4 million. Of the $6.4 million purchase price, the Company paid
$2.5 million in cash and will pay the balance of $3.9 million, in either cash
or in the Company's common stock, in two to five years. In a related
transaction, the Company acquired 100% of La Sportiva USA on July 2, 1998 for
a purchase price of $3.0 million which was paid in 133,335 shares of the
Company's common stock. Both acquisitions will be recorded in the third
quarter of 1998 under the purchase method of accounting. The Company will
consolidate the results of La Sportiva S.r.L. and La Sportiva USA beginning on
July 2, 1998.
In July 1998, the Company announced plans to relocate a portion of its
corporate headquarters to Carbondale, Colorado in August 1998. In addition,
the Company announced its intention to establish a Hong Kong operation to
facilitate its sourcing of products in Asia and a planned reorganization of its
San Leandro facility. The Company expects the costs relating to these
announcements to be approximately $6 to $7 million of which $4.2 million is
estimated to be incurred in 1998.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Overview - Factors That May Affect Future Results
When used below in connection with matters that may occur in the future, the
words "anticipate," "estimate," "expect" or similar words identify forward
looking statements within the meaning of federal securities laws. Forward
looking statements below are based on the Company's current expectations of
future events. The matters described in the forward looking statements are
subject to risks and uncertainties. The actual results of these matters may
differ substantially from the results anticipated by the Company. The Company
cannot assure that future results will meet its current expectations. Risks
and uncertainties relating to forward looking statements and to the Company's
business include, but are not limited to, those described below, under
"Factors That May Affect Our Business", in the Company's Annual Report on Form
10-K for the fiscal year ended December 31, 1997 and in other documents that
may be subsequently filed with the Commission.
RESULTS OF OPERATIONS
The following tables set forth, for the periods indicated, certain items in the
Company's consolidated statements of operations as a percentage of net sales
(except for income taxes, which are shown as a percentage of pretax income).
The results of operations for the three and six month periods ended June 30,
1998 and 1997 are not necessarily indicative of future results to be expected
for the full year.
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
--------------------- -------------------
1998 1997 1998 1997
---------- ---------- --------- ---------
<S> <C> <C> <C> <C>
Net Sales.......................... 100.0 % 100.0 % 100.0 % 100.0
Gross Profit....................... 44.6 42.0 44.2 43.0
Operating Expenses................. 48.9 51.4 45.1 46.5
Facility Closure Charge............ 3.8 0.0 1.8 0.0
Operating Loss..................... (8.1) (9.4) (2.6) (3.5)
Interest Expense................... 2.0 1.0 1.7 0.6
Loss Before Benefit for
Income Taxes .................... (10.4) (10.7) (4.0) (4.2)
Benefit for Income Taxes........... (39.5) (39.6) (39.5) (39.7)
Net Loss........................... (6.3) (6.5) (2.4) (2.5)
</TABLE>
Three Months Ended June 30, 1998 Compared to Three Months Ended June 30, 1997
Net Sales. Net sales increased by 36.9% to $42.6 million from $31.1 million
for the three months ended June 30, 1998 (the "Second Quarter 1998") over the
three months ended June 30, 1997 (the "Second Quarter 1997").
Net sales to wholesale customers increased by 40.7% to $36.0 million from $25.6
million for the Second Quarter 1998 compared to the Second Quarter 1997. This
increase was primarily a result of increased unit sales to the Company's
existing wholesale customers resulting from (i) continued strong sales of
existing products, (ii) increased sales through the Summit Shop program, and
(iii) a shift in timing of Fall sales from July to June due to requested
customer delivery dates.
Retail sales in the US and Canada increased by 19.2% to $6.6 million from $5.5
million for the Second Quarter 1998 compared to the Second Quarter 1997. On a
comparable store basis, retail sales increased by 12.7% (approximately 9.6%
for retail stores and 17.2% for outlets). This increase is primarily the
result of a successful sale held at the outlets in May and a better
merchandising mix of inventory at both the outlets and retail stores, and a
more volume oriented pricing strategy at the outlets.
Gross Profit. Gross profit as a percentage of net sales for the Second Quarter
1998 was 44.6% compared to 42.0% for the Second Quarter 1997. The increase in
gross margin was primarily attributable to continued management of
non-profitable products, improved pricing in production and operating leverage.
Operating Expenses. Operating expenses, which include selling, marketing, and
general administrative expenses, increased by 30.2% to $20.8 million from
$16.0 million for the Second Quarter 1998 compared to the Second Quarter 1997.
The increase of $4.8 million is primarily due to increases in variable and
fixed costs to support the growth of the Company's business. However,
operating expenses, as a percentage of net sales declined from 51.4% to 48.9%,
reflecting the Company's improved operating expense leverage.
Facility Closure Charge. During the Second Quarter 1998 the Company recorded a
one-time charge of $1.6 million related to the closing of an out-dated
manufacturing facility in Scotland and the integration of its Canadian
subsidiary into a combined North American business operation.
Interest Expense. Interest expense for the Second Quarter 1998 increased to
$0.8 million from $0.3 million for the Second Quarter 1997. The low level of
interest in the Second Quarter 1997 was primarily a result of the Company
using the proceeds from its two public offerings in 1996 to repay debt which
allowed the Company to maintain a low level of debt in early 1997.
Provision for Income Taxes. Income taxes as a percent of pretax loss was
approximately 39.5% for the Second Quarter 1998 compared to 39.6% for the
Second Quarter 1997. This fluctuation relates to the estimated mix of the
Company's pretax earnings in the U.S., Canada, and the United Kingdom, which
have different tax rates.
Six Months Ended June 30, 1998 Compared to Six Months Ended June 30, 1997
Net Sales. Net sales increased by 28.3% to $90.4 million from $70.4 million
for the six months ended June 30, 1998 (the "First Six Months 1998") compared
to the six months ended June 30, 1997 (the "First Six Months 1997").
Net sales to wholesale customers increased by 33.4% to $75.9 million
from $56.9 million for the First Six Months 1998 compared to the First Six
Months 1997. This increase was primarily a result of increased unit sales to
the Company's existing wholesale customers resulting from continued strong
sales of existing products and increased sales through the Summit Shop program.
Retail sales in the US and Canada increased by 7.0% to $14.5 million
from $13.5 million for the First Six Months 1998 compared to First Six Months
1997. On a comparable store basis, retail sales increased by 2.3%
(approximately 1.0% for retail stores and 4.7% for outlets). This increase is
due to a successful sale held at the outlets in May and a better merchandising
mix of inventory during the Second Quarter 1998, offset by poor sales in
January and early February due to inadequate inventory levels of retail
product in that period.
Gross Profit. Gross profit as a percentage of net sales for the First Six
Months 1998 was 44.2% compared to 43.0% for the First Six Months 1997. The
higher gross margin was primarily attributable to continued management of
non-profitable products, improved pricing in production and operating leverages.
Operating Expenses. Operating expenses, which include selling, marketing, and
general and administrative expenses, increased by 24.3% to $40.7 million from
$32.7 million for the First Six Months 1998 compared to the First Six Months
1997. The increase of $8.0 million is primarily due to increases in variable
and fixed costs to support the growth of the Company's business. However,
operating expenses as a percentage of net sales declined from 46.5% to 45.1%,
reflecting the Company's improved operating expense leverage.
Facility Closure Charge. During the First Six Months 1998 the Company recorded
a one-time charge of $1.6 million related to the closing of an out-dated
manufacturing facility in Scotland and the integration of its Canadian
subsidiary into a combined North American business operation.
Interest Expense. Interest expense increased to $1.5 million from $.4 million
for the First Six Months 1998 compared to the First Six Months 1997. The low
level of interest in the First Six Months 1997 was primarily a result of the
Company using the proceeds from its two public offerings in 1996 to repay debt
which allowed the Company to maintain a low level of debt in early 1997.
Provision for Income Taxes. Income taxes as a percent of pretax loss was
approximately 39.5% for the First Six Months 1998 compared to 39.7% for the
First Six Months 1997. This fluctuation related to the estimated mix of the
Company's pretax earnings in the United States, Canada, and the United Kingdom,
which have different tax rates.
LIQUIDITY AND CAPITAL RESOURCES
Historically, the Company's ability to maintain adequate levels of inventory
was constrained by its capital resources. As a result of increases in its
credit facility, as well as the Company's public offerings in 1996, the
Company has increased its levels of inventory in order to better meet demand
for its key products. The Company anticipates that inventory levels will
continue to increase as the Company expands its business and continues to
improve its core inventory replenishment program. Such inventory increases
are expected to be financed by borrowings under the Company's credit facility.
The Company's current credit facility provides for borrowings up to $60.0
million under its revolving line of credit. In addition, the Company has a
term note for capital expenditures of $4.8 million at June 30, 1998. The
credit facility also provides a sub-limit for letters of credit of up to $25.0
million to finance the Company's purchases of product from foreign suppliers.
As of June 30, 1998, the Company had approximately $6.3 million of letters of
credit outstanding under the credit facility. The credit facility contains
certain financial covenants that the Company was in compliance with as of June
30, 1998.
In the Second Quarter 1998 the Company received $14.0 million resulting from
the issuance of 665,060 shares of the Company's common stock which were
purchased by James G. Fifield, the Company's President and Chief Executive
Officer.
The Company estimates that its capital expenditures in 1998 will be
approximately $18.0 million. This amount is expected to be used principally
for investment in Summit Shops, the upgrade of management information systems,
the expansion of the Company's administration and distribution facilities, the
establishment of operating facilities in Colorado, the expansion of its
European sales and marketing operations and the remodeling of existing retail
stores.
The Company anticipates that cash generated from operations, cash available
under the Company's credit facility and through increased bank financing, will
be sufficient to satisfy its cash requirements for at least the next 12 months.
YEAR 2000 COMPLIANCE
Many currently installed computer systems and software products are coded to
accept only six digit entries in the date code field. These date code fields
will need to accept eight digit entries to distinguish 21st century dates from
20th century dates. As a result, in less that two years, computer systems and
software used by many companies may need to be upgraded to comply with such
"Year 2000" requirements.
The Company has conducted an internal review of its information systems and is
involved in an enterprise wide project to upgrade or modify portions of its
software so that its computer systems will properly utilize dates beyond
December 31, 1999. The Company has been using both external and internal
resources to reprogram or upgrade its software for the Year 2000 issue. The
Company plans to complete the modifications and upgrades, including testing,
by the end of 1998. The total cost for addressing the Year 2000 issue of
approximately $400,000, which is based on management's current estimates, is
not expected to be material to the Company's operations. The Company believes
that with modifications and upgrades of its software the Year 2000 issue can
be mitigated. However, if such modifications and conversions are not made, or
are not completed timely, the Year 2000 issue could have a material impact on
the operations of the Company.
The Company has surveyed significant vendors and others on whom it relies to
assure that their systems will be converted in a timely manner. The Company
is currently in the process of analyzing the responses to this survey. There
can be no assurance that the systems of other companies will be converted on
time or that a failure to convert by another company would not have a material
adverse effect on the Company. In addition, the purchasing patterns of
customers and potential customers may be affected by Year 2000 issues as
companies expend significant resources to upgrade their current software
systems for Year 2000 compliance. These expenditures may result in reduced
funds available to purchase products such as those offered by the Company,
which could have a material adverse effect on the Company's business,
operating results, and financial condition.
FACTORS THAT MAY AFFECT OUR BUSINESS
Certain statements set forth herein which refer to future financial items,
economic performance or operations are forward looking, and actual results may
differ materially from the result expected by the Company. The Company's
future growth and operating results may be adversely effected by a number of
factors, including those set forth below and elsewhere herein. 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 declines or does
not grow. 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 effected. 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 and
effectively managing 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 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
write-offs 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
Tekware? line of products, which was introduced in 1996.
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 May 1998, the Company announced its intention to
design and contract for the manufacturing of a line of outdoor performance
footwear, scheduled to launch in Spring 1999. There can be no assurance that
this new effort by the Company will be successful.
Reliance on Unaffiliated Manufacturers. The Company currently relies on
approximately 50 unaffiliated manufacturers to produce nearly all of its
products, with 10 of the manufacturers producing approximately 75% of the
Company's products in 1997 and early 1998. 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. None of the manufacturers used by
the Company produces the Company's products exclusively. The Company has
occasionally received, and may in the future receive, shipments of products
from manufacturers that fail to conform to the Company's quality control
standards. The Company established its core inventory replenishment program
to facilitate reorders of core products, and cannot assure that this program
will meet reorder requirements or avoid excess inventory.
The Company requires its independent manufacturers to operate in compliance
with applicable laws and regulations. Although the Company's internal and
vendor operating guidelines promote ethical business practices and the
Company's sourcing personnel periodically visit and monitor the operations of
its independent manufacturers, the Company does not control these vendors or
their labor practices. The violation of labor or other laws by an independent
manufacturer of the Company, or the divergence of an independent
manufacturer's labor practices from those generally accepted as ethical in the
United States, could result in adverse publicity for the Company and could
have a material adverse effect on the Company.
Key Suppliers. Certain important material 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 a supplier's funding of
development costs and co-op advertising arrangements, will continue.
Fluctuation 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, which are beyond the
Company's control.
International Operations. The Company's business is subject to the risks
generally associated with doing business abroad. The Company imports more
than 60% 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 tariff could disrupt the supply
or substantially increase the cost of the Company's products, either of 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 from 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's future success will depend, in part, upon the
continued efforts of its key executive officers and other key personnel and
upon the Company's ability to successfully retain current personnel and
recruit and retain new personnel. There can be no assurance that any of such
persons will remain executive officers or employees of the Company in the
future. The unanticipated loss of one or more current senior executives or
key employees, or the failure to adequately replace any departed executive or
key employee on a timely basis, could have a significant adverse effect on the
Company's business. During the Second Quarter 1998, William N. Simon resigned
from his position as President and Chief Executive Officer and assumed the
position of Vice Chairman and James G. Fifield was appointed as the Company's
new President and Chief Executive Officer. In addition, James P. Reilly has
recently joined the Company as its Chief Operating Officer. There can be no
assurance that any newly-hired executive or key employee can successfully
manage the Company's operations.
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 effected by retail industry, stock market, or
economic factors unrelated to the Company's performance. Future sales of
substantial amounts of Common Stock by existing stockholders may also
adversely effect prevailing market prices for the Common Stock and could
impair the Company's ability to raise equity capital in the future.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET
RISK
Not applicable.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
None material.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The following matters were approved at the Company's annual meeting of
stockholders on March 31, 1998:
(a) The following class II Directors were elected:
Name For Withheld
James Fifield 10,746,749 18,021
William Simon 10,746,955 17,815
(b) The ratification of an amendment to the Company's 1996 Stock Incentive Plan
to increase the number of shares of Common Stock reserved for issuance
thereunder by 600,000 shares to a total of 1,283,950.
For Against Abstain
5,036,653 3,310,404 11,612
(c) The ratification of the selection of Deloitte & Touche LLP as independent
auditors of the Company for its fiscal year ending December 31, 1998.
For Against Abstain
10,751,568 6,449 6,753
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
(11.1) Computation of Per Share Earnings
(27.1) Financial Data Schedule
(b) Reports on Form 8-K
Form 8-K dated June 30, 1998 was filed on July 7, 1998 disclosing recent
acquisitions, the plan to relocate a portion of the Company's executive
offices and reorganize other operations of the Company, the plan to establish
a facility in Hong Kong to manage the Company's relationship with certain
third party manufacturers, and the adoption of a Stockholder Rights Plan.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
THE NORTH FACE, INC.
(Registrant)
Dated: August 14, 1998 By: /s/ James G. Fifield_____________
James G. Fifield
Chief Executive Officer
Dated: August 14, 1998 By: /s/ Christopher F. Crawford_
Christopher F. Crawford
Chief Financial Officer
(Principal Financial and Accounting
Officer of the Registrant)
INDEX OF EXHIBITS
The following exhibits are included herein:
11.1 Computation of Net Income Per Share
27.1 Financial Data Schedule
EXHIBIT 11.1
THE NORTH FACE, INC.
COMPUTATION OF NET LOSS PER SHARE
(In thousands, except per share amounts)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
------------------- ------------------
1998 1997 1998 1997
--------- --------- -------- ---------
<S> <C> <C> <C> <C>
Weighted average shares outstanding
during the period:
Weighted average shares outstanding - basic 11,968 11,222 11,752 11,220
Incremental shares from assumed
exercise of stock options............ . 0 0 0 0
--------- --------- -------- ---------
Weighted average common and common
equivalent shares outstanding - diluted 11,968 11,222 11,752 11,220
========= ========= ======== =========
Net Loss................................ ($2,670) ($2,007) ($2,210) ($1,772)
========= ========= ======== =========
Net Loss Per Share
Basic.............................. ($0.22) ($0.18) ($0.19) ($0.16)
Diluted............................ ($0.22) ($0.18) ($0.19) ($0.16)
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND> THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION
EXTRACTED FROM THE CONDENSED STATEMENT OF OPERATIONS, THE
CONDENSED BALANCE SHEET AND THE ACCOMPANYING NOTES TO THE
CONDENSED FINANCIAL STATEMENTS, AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C> <C>
<PERIOD-TYPE> 3-MOS 3-MOS
<FISCAL-YEAR-END> DEC-31-1998 DEC-31-1997
<PERIOD-START> APR-01-1998 APR-01-1997
<PERIOD-END> JUN-30-1998 JUN-30-1997
<CASH> 5,303 1,695
<SECURITIES> 0 0
<RECEIVABLES> 56,236 <F1> 27,658 <F1>
<ALLOWANCES> 0 0
<INVENTORY> 62,369 47,326
<CURRENT-ASSETS> 138,519 84,969
<PP&E> 22,428 <F1> 16,725 <F1>
<DEPRECIATION> 0 0
<TOTAL-ASSETS> 195,813 133,606
<CURRENT-LIABILITIES> 68,405 38,847
<BONDS> 0 0
0 0
0 0
<COMMON> 31 29
<OTHER-SE> 117,088 87,212
<TOTAL-LIABILITY-AND-EQUITY> 195,813 133,606
<SALES> 42,553 31,087
<TOTAL-REVENUES> 42,553 31,087
<CGS> 23,564 18,046
<TOTAL-COSTS> 23,564 18,046
<OTHER-EXPENSES> 20,801 15,975
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 848 301
<INCOME-PRETAX> (4,413) (3,322)
<INCOME-TAX> (1,743) (1,315)
<INCOME-CONTINUING> (2,670) (2,007)
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> (2,670) (2,007)
<EPS-PRIMARY> ($0.22) ($0.18)
<EPS-DILUTED> ($0.22) ($0.18)
<FN>
<F1>REPRESENTS NET AMOUNT
</FN>
</TABLE>
