Monday, March 1, 1999
DJIA 9272.89 -33.69 (-0.36%) S&P 500 1227.14 -11.19 (-0.90%) Nasdaq 2269.13 -18.90 (-0.83%) Russell 2000 391.58 -0.68 (-0.17%) 30-Year Bond 93 29/32 -1 11/32 5.67 Yield

An Investment Opinion
by Warren Gump

The North Face Privatized

Having tired of the scrutiny faced by public companies, apparel marketer The North Face (Nasdaq: TNFI) today announced a recapitalization through which public shareholders will receive $17.00 per share in cash. The stock climbed $3 1/2 to $16 3/8 in morning trading. Merchant banking firm Leonard Green & Partners, L.P. and James Fifield, CEO of The North Face will control the firm once the recapitalization is complete.

The North Face has done a good job building its brand since coming public in July of 1996 at $14 per share. Over the past two years, sales have increased an average of 29% annually. Earnings have also increased, with ongoing net income of $1.11 per share last year, up 16%. Those solid numbers disappointed investors, though, as they were below the 25% long-term growth estimates of Wall Street analysts. In addition, many investors (including myself) were spooked by the company's weakening balance sheet.

In particular, I was concerned about the company's surging accounts receivable. Last year, receivables soared 59%, rising to $83 million from $52 million. During this same time, sales rose 36%. With a longer cash conversion cycle, The North Face needed to tap deeper into its credit lines to tide it over until distributors paid. Worse yet, high receivables often signal that a company is "stuffing" its distribution channels to meet sales projections. If this is true, the company might see slower future sales and be forced to mark down existing inventory.

This recapitalization demonstrates that management doesn't believe the rising receivables are a problem. They may be right, but it's unfortunate that we won't be able to see financial statements in the future. My guess is that accounts receivable and inventory relative to sales will decline dramatically over the next two years as management focuses on producing cash flow to pay off its debt. If they had done that over the past two years, the stock would likely be much higher than it currently is.

Don't feel bad for North Face employees, though. While the stock has gone virtually nowhere since its IPO, employees are making out pretty well. During last year's third quarter, 1.75 million options were repriced from a weighted average exercise price of $19.688 to $9.625 per share (the fair market value on the date of the repricing). Assuming these options are entitled to the $17.00 buyout price, employees will earn 76% compared to the weighted average value of zero they would have been worth several months ago. That's a hefty bonus for those employees who stuck with the company.


Hotel holding company Patriot American Hospitality (NYSE: PAH) moved ahead $7/16 to $5 7/8 on the news that it will change its name to Wyndham International Inc. -- the name of its operating company -- and drop its status as a real estate investment trust. Patriot has reached an agreement to receive an equity infusion of up to $1 billion from an investor group headed by Apollo Real Estate Advisors of New York, along with $2.45 in financing commitments from Chase Manhattan Bank (NYSE: CMB) and the Bear Stearns (NYSE: BSC). Founder Paul Nussbaum will step down as chairman and CEO.

Shares of telecommunications systems, products, and services company Reltec Corp. (NYSE: RLT) jumped $7 1/4 to $29 after London's General Electric Co. PLC -- no relation to General Electric (NYSE: GE) -- agreed to buy the company for $29 1/2 per share in cash, a 36% premium over Friday's finish. A taped replay of a Reltec conference call about the deal will be available starting at 2:30 p.m. ET today by calling 1-402-220-9382 through 5 p.m. Friday.

Heavy equipment maker Caterpillar Inc. (NYSE: CAT) rolled up $1 3/4 to $47 5/16 after CEO Glen Barton and former CEO Donald V. Fites said in a Friday afternoon press release that "we're positioned to reap the benefits where economies are thriving, and continue to do so. But we've planned for potential downturns as well."

Disk drive maker Quantum Corp. (Nasdaq: QNTM) spun ahead $3 1/8 to $19 9/16 on news that it will replace its common stock with two classes of tracking stock to reflect the performance of its two main businesses: its hard disk drive segment and its digital linear tape drive and storage systems operation.

Health benefits management services company Advance Paradigm (Nasdaq: ADVP) won $5 7/16 to $41 1/2 after announcing plans to buy Integrated Pharmaceutical Services, the pharmacy benefit management company of Foundation Health Systems (NYSE: FHS), for $70 million in cash.

Medical products maker MiniMed Inc. (Nasdaq: MNMD) grew $4 3/8 to $89 5/8 after it announced that an expert panel voted to give the company a "conditional recommendation" for approval of its continuous blood-sugar monitor for diabetics by the Food and Drug Administration (FDA). The company says it plans to address the conditions stipulated by the panel "immediately."

Bank holding company Imperial Bancorp (NYSE: IMP) rose $1 1/4 to $19 1/2 after announcing plans to sell its stake in financial services holding company Imperial Credit Industries (Nasdaq: ICII) to Leucadia National Corp. (NYSE: LUK) for $9.25 per share, a 7% premium over Friday's closing price. Imperial Bancorp's after-tax gain on the sale is expected to be about $12 million.

Car rental company Hertz (NYSE: HRZ) added $3 15/16 to $43 3/4 following the news that it will raise rates on all of its U.S. non-contract car rental prices by $3 per day effective today.

Marketing services firm Intelliquest Information Group (Nasdaq: IQST) rose $1 3/8 to $12 1/4 following its report of Q4 EPS of $0.04, ahead of last year's $0.07 loss but $0.02 off the market's consensus projection. The company brought in Piper Jaffray to help examine strategic alternatives. "1998 was a rebuilding year," said CEO Brian Sharples, "but the board of directors continues to believe that the company's current market price undervalues our core assets."

Biopharmaceutical firm NeXstar Pharmaceuticals (Nasdaq: NXTR) advanced $1 5/16 to $15 1/8 after Gilead Sciences (Nasdaq: GILD) agreed to buy NeXstar in a stock deal valuing the company at about $17.53 per share, about a 27% premium over Friday's closing price.

Travel services provider Preview Travel (Nasdaq: PTVL) soared ahead $1 to $21 3/8 after announcing deals with five advertisers: AT&T (NYSE: T), Hewlett-Packard (NYSE: HWP), Ticketmaster Online-CitySearch (Nasdaq: TMCS), Discover Brokerage and AutoConnect.

Regional Bell operating company US West (NYSE: USW) took on $1 91/6 to $54 7/8 after Merrill Lynch upgraded the stock to near-term and long-term "buy" from "accumulate."

Financial services company Lehman Brothers Holdings (NYSE: LEH) deposited a gain of $2 7/16 to $55 7/16 after Donaldson, Lufkin & Jenrette upgraded the stock to "buy" from "market perform" and upgraded the brokerage sector to "outperform" from "market perform."


Ambulance and busing services provider Laidlaw (NYSE: LDW) dropped $1 3/16 to $6 1/2 after saying losses at its ambulance business and weather-related operating losses at its school bus unit will result in fiscal Q2 EPS between $0.10 and $0.13, missing the $0.18 or $0.19 the company said analysts had been expecting. The company also said a restructuring of its ambulance business will result in a Q3 charge of around $250 million.

PC and computing products maker Compaq Computer (NYSE: CPQ) lost another $2 3/16 to $33 3/16 after leading most of the PC box-builders lower on Friday with a 14% drop. Today, the company said it is cutting the U.S. estimated selling prices of selected Deskpro EP models by as much as 9%. The prices of selected Armada PCs are being cut by as much as 11%. Elsewhere in PC-land, Gateway (NYSE: GTW) lost $2 9/16 to $70 1/8, IBM (NYSE: IBM) fell $3 1/4 to $166 1/2, and Hewlett-Packard (NYSE: HWP) slid $1 5/16 to $65 1/8.

Chip giant Intel (Nasdaq: INTC) moved down $5 1/16 to $114 7/8 after Donaldson, Lufkin & Jenrette lowered its opinion on the firm to "market perform" from "buy." The brokerage also cut Intel's fiscal 1999 earnings estimate to $4.50 per share from $4.65 per share, reportedly on worries of slowing PC sales.

Online auction website operator eBay (Nasdaq: EBAY) traded down $17 5/8 to $316 3/8 after the company said late Friday that it received requests from the federal government about a month ago to produce certain records and information as part of an investigation of possible illegal transactions on its website. For more details, grab some leftover Breakfast With the Fool.

Computer products e-commerce technologies provider pcOrder.com (Nasdaq: PCOR) slipped $4 3/8 to $42 3/4 after rising 55% in its first day of trading on Friday after selling 2.2 million shares in an initial public offering at a price of $21 per share.

Investors called the cops on Party City Corp. (Nasdaq: PCTY) this morning, sending the party supplies retailer's shares down $7/8 to $10 1/16. The company said its recent rapid growth has delayed its fiscal 1998 audit but stated that the year's financial results will be reported later this month. The report will show that Q4 operating expenses were about $1 million higher than expected, which will have a "corresponding effect" on earnings.

Propane and natural gas distribution company UGI Corp. (NYSE: UGI) tanked $4 9/16 to $15 3/4 after agreeing to buy printing and imaging products distributor Unisource Worldwide (NYSE: UWW) for $1.5 billion in stock and assumed debt. UGI also announced a plan to repurchase 6.6 million of its shares, or 20% of the total shares outstanding.

State and local government consulting firm MAXIMUS Inc. (NYSE: MMS) was knocked down $2 3/16 to $25 3/4 after agreeing to acquire privately held fleet management software developer Control Software for 700,000 shares, or $23.1 million.

Several semiconductor capital equipment makers fell this morning on downgrades from Salomon Smith Barney. Automated test equipment manufacturer Credence Systems (Nasdaq: CMOS) lost $1 9/16 to $19 9/16 on a downgrade to "outperform" from "buy." Automated manufacturing systems designer Asyst Technologies (Nasdaq: ASYT), which was lowered to "neutral" from "buy," slid $2 to $19 1/2, and thin film materials and equipment provider ATMI Inc. (Nasdaq; ATMI) slipped $1 3/4 to $21 on a downgrade to "neutral" from "outperform."

Biopharmaceutical company Hollis-Eden Pharmaceuticals (Nasdaq: HEPH) slumped $2 3/8 to $19 after President and Vice Chairman Terren Peizer resigned to pursue "non-operational business opportunities." On the bright side, the company said that the FDA has given the green light to start dosing patients in a Phase I/II clinical trial of its HE2000 drug, a potential HIV and AIDS treatment.


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