EXHIBIT 4
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TNF ACQUISITION, LLC
TNF INVESTMENT, LLC
February 26, 1999
Xxxxx Xxxxxxx
000 Xxxxxxx Xxxxxx
Xxxxxxxxxx, Xxxxxxxx 00000
Re: The North Face, Inc. Change of Control Transaction
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Dear Xx. Xxxxxxx:
TNF Acquisition LLC ("TNFA") and TNF Investment LLC ("TNFI") are
delivering this letter to you in connection with and coincident with the
execution of the Transaction Agreement By and Between TNFA and The North Face,
Inc. (the "Company"), dated as of the date hereof (the "Transaction Agreement").
The purpose of this letter is to memorialize certain agreements you, TNFA and
TNFI have reached related to the consummation of the transactions contemplated
by the Transaction Agreement (collectively, the "Transaction"). Specifically,
this letter describes the agreements among you, on one hand, and TNFA and TNFI,
on the other hand, regarding (i) the treatment in the Transaction of all of the
shares of Company common stock currently held by you and your wife (the "Owned
Company Stock"), (ii) additional direct or indirect purchases of Company equity
you may make at the Closing, (iii) the treatment in the Transaction of your
400,000 options to purchase Company common stock, at a per-share exercise price
of $9.63, the vesting and exercisability of which will be accelerated pursuant
to their terms at the closing of the Transaction (the "Vested In-the-Money
Options"), (iv) the treatment in the Transaction of your 500,000 options to
purchase Company common stock, at a per-share exercise price of $21.00, the
vesting and exercisability of which will be accelerated pursuant to their terms
at the closing of the Transaction (the "Vested Out- of-the-Money Options"), and
(v) the general terms and conditions of your continued employment with the
Company following the closing of the Transaction (the "Closing").
1. Owned Company Stock.
The Owned Company Stock (or Company equity into which the Owned Company
Stock is converted pursuant to the Transaction Agreement in connection with the
Transaction, which for purposes of this letter will continue to be referred to
as the "Owned Company Stock") will continue to be outstanding at and after the
Closing. The Owned Company Stock will be part of the only class of Company
equity outstanding immediately after the closing. The Owned Company Stock will
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constitute that percentage of such class of Company equity issued and
outstanding immediately following the Closing equal to (I) the value of the
Owned Company Stock at the Closing, based on the price paid in connection with
the Transaction to common shareholders of the Company for their stock (the "Deal
Price"), divided by (ii) the sum of (A) the amount in clause (I), (B) the cash
equity contribution made to the Company, directly or indirectly, by TNFA and any
of its affiliates, (C) the cash equity contribution made to the Company,
directly or indirectly, by you pursuant to Item 2 below and (D) the value of any
Company common equity held by members of the Company's Board of Directors (the
"Board") or management (other than you) which continues outstanding following
the Closing, based on the Deal Price. For example, if the Owned Company Stock
has a value of $12.2 million based on the Deal Price, the cash equity
contribution by TNFA and its affiliates to the Company is $87.8 million, you
make no additional cash contribution pursuant to Item 2 below and no other
members of the Board or management continue to own outstanding Company equity
after the Closing, then the Owned Company Stock will represent 12.2%
[$12.2M/($12.2M + $87.8M)] of the total issued and outstanding Company equity
immediately following the Closing.
You and TNFI will enter into a Stockholders Agreement at the Closing
reflecting your rights with respect to the Owned Company Stock post-closing (the
"Stockholders Agreement"). The Stockholders Agreement will include customary
terms and conditions as if you were an investment fund similar to Green Equity
Investors III, L.P. and were making a minority investment in the Company in an
amount of the value of the Owned Company Stock, including the following:
A. Piggyback registration rights, allowing you to elect to
register in a public offering a proportional amount of the Owned Company Stock
based on the proportion of TNFI's Company equity which it so registers in a
public offering. If, in the underwriter's opinion, a cutback of the offering is
desirable, your equity will be cut back prior to TNFI's equity; provided that
this provision shall apply to the first public offering in which TNFI sells
stock only, and such cutback shall be on a proportional basis for any additional
public offerings.
B. At anytime after six months after the Company completes an
initial public offering ("IPO"), you will have one demand registration right (at
the Company's expense). TNFI may piggyback on such demand but if, in the
underwriter's opinion, a cutback of the offering is desirable, TNFI's equity
will be cut back prior to your equity.
C. If there is an IPO, the Company will, coincident with the
IPO, either register the equity underlying all your options pursuant to the IPO
Form S-1 or pursuant to a Form S-8 (with Form S-3 reoffer prospectus).
D. Tag-along sale rights, allowing you to elect to sell a
proportional amount of the Owned Company Stock in a transaction other than a
public
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offering, based on the proportion of TNFI's Company equity which it so sells in
such transaction.
E. Drag-along sale rights, allowing TNFI to elect to cause you
to sell a proportional amount of the Owned Company Stock in a transaction other
than a public offering, based on the proportion of TNFI's Company equity which
it so sells in such transaction.
F. A right of first refusal, requiring you to offer to sell to
TNFI any of the Owned Company Stock for which you have received a bona fide
offer from a third party which you intend to accept, on the terms and conditions
contained in such offer. This provision will not apply to transfers made by you
(i) without consideration to charities or relatives, or to trusts, partnerships
or other organizations on any of their behalf, or (ii) in a public offering.
G. So long as you are employed by the Company, you will be
nominated to be a member of the Board of Directors of the Company (the "Board"),
and TNFI will vote its equity in your favor. Any representatives of TNFI who are
members of the Board will vote for you to be Chairman of the Board and a member
of the Board's executive committee, compensation committee and any other
committee of the Board you request, so long as such committee is not legally
required to be comprised solely of outside directors or the Board, based on the
advice of counsel, determines that it would be inadvisable for you to be a
member of such committee. After you no longer are employed by the Company, you
will continue to be nominated to be a member of the Board, and TNFI will vote
its equity in your favor, so long as you continue to own 80% in aggregate of the
Owned Company Stock and "Additional Owned Company Stock" (as defined in Item 2
below); provided that such percentage will be adjusted downward proportionally
to reflect a sale by you of any of the Owned Company Stock and Additional Owned
Company Stock pursuant to the tag-along or drag-along rights described above.
2. Additional Purchase of Company Equity.
You may purchase, directly from the Company or through a purchase of
equity in TNFI or TNFA (at your option), additional Company equity, of the
single class issued and outstanding immediately following the Closing, in any
amount less than or equal to the excess, if any, of (i) $17 million over (ii)
the value of the Owned Company Stock based on the Deal Price (the "Additional
Owned Company Stock"). The Additional Owned Company Stock will constitute that
percentage of such class of Company equity issued and outstanding immediately
following the Closing equal to (I) the dollar amount paid by you for the
Additional Owned Company Stock, divided by (ii) the sum of (A) the amount in
clause (i), (B) the cash equity contribution made to the Company, directly or
indirectly, by TNFA, TNFI and any of their affiliates, (C) the value, based on
the Deal Price, of the Owned Company Stock and (D) the value of any Company
common equity held by members of the Company's Board of Directors (the "Board")
or management (other than you) which
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continues outstanding following the Closing, based on the Deal Price. For
example, if you purchase Additional Owned Company Stock for $2.8 million, the
Owned Company Stock has a value of $12.2 million based on the Deal Price, the
cash equity contribution by TNFA and its affiliates to the Company is $87.8
million, and no other members of the Board or management continue to own
outstanding the Company equity after the Closing, then the Additional Owned
Company Stock will represent 2.72% [$2.8M/($2.8M + $87.8M + $12.2M)] of the
total issued and outstanding Company equity immediately following the Closing.
The Additional Owned Company Stock will be subject to (and entitled to
the benefits of) the Stockholders Agreement, as if it were Owned Company Stock.
3. Vested In-the-Money Options.
The Vested In-the-Money Options will remain outstanding following the
Closing, subject to adjustment as described below. The per-share exercise price
will be adjusted to an amount equal to 30% of the fair market value of one share
of the Company's issued and outstanding equity immediately following the
Closing, based on the per-share price paid for Company equity by TNFA and you in
connection with the Transaction. The number of shares to which the Vested
In-the-Money Options are subject also shall be adjusted, so that the aggregate
"spread" in such options following the adjustment (i.e., the aggregate excess of
the fair market value of the Company equity subject to such options, computed as
provided above in this Item 3, over the aggregate adjusted exercise price of
such options, also computed as provided above in this Item 3) is equal to the
aggregate spread in the pre-adjustment Vested In-the- Money Options at the
Closing, based on the Deal Price.1/ Other than the adjustments described above,
the terms will remain substantially the same as those of the Vested In-the-Money
Options (e.g., term and expiration).
Shares obtained by you upon the exercise of Vested In-the-Money Options
will become subject to (and entitled to the benefits of) the Stockholders
Agreement, as if such shares were Owned Company Stock.
4. Vested Out-of-the-Money Options.
The Vested Out-of-the-Money Options will be canceled as of the Closing.
In lieu of those options, you will receive a new grant of ten-year options to
purchase Company equity (the "New Company Options"). The number of shares to
which the New Company Options will be subject will be equal to six percent (6%)
of the fully diluted equity of the Company (including for this purpose all
Company equity underlying any options outstanding immediately following the
Closing, and all Company equity underlying any options not so outstanding, but
reserved for future
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1/ You, TNFA and TNFI will discuss the adjustment methodology further, and may
ultimately agree on a methodology other than that described herein.
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issuance). The per-share exercise price of the New Company Options will be the
fair market value of one share of Company equity immediately following the
Closing, based on the per-share price paid for the Company equity by TNFA and
you in connection with the Transaction.
50% of the New Company Options will vest in equal portions on each of
the first five anniversaries of the date of grant (the "Time Vested Options").
The other 50% of the New Company Options (the "Performance Options") will vest
based on the attainment of pre-established performance goals, with one-fifth of
such options available for vesting in each of the first five calendar years
including and following the Closing (i.e., calendar years 1999-2003) based on
the attainment of performance goals in those years. The performance goals for
each year shall be mutually agreed upon on an annual basis by you and (i) TNFI,
with respect to 1999 (and such goals shall be established prior to the Closing)
and (ii) the Company Board of Directors, with respect to 2000-2003. The
Performance Options will contain a "Clawback" feature, pursuant to which you
will have the opportunity to vest in any portion of such options as to which the
applicable performance year has expired, based on cumulative performance in such
year and the following year.
The New Company Options will contain provisions accelerating vesting of
all the unvested options upon a "Change in Control" of the Company. Upon a
termination of your employment by the Company without "Cause" or by you with
"Good Reason" (each quoted term to be defined in your employment agreement), all
of the Time Vested Options shall become immediately vested and exercisable.
Subject in all cases to their scheduled termination date, the vested New Company
Options will expire (i) two years following your termination of employment prior
to an IPO for any reason other than by the Company with Cause or by you without
Good Reason, (ii) one year following your termination of employment at or after
an IPO for any reason other than by the Company with Cause or by you without
Good Reason, and (iii) 90 days following your termination of employment by the
Company with Cause or by you without Good Reason.
Other than as stated above, the provisions of the New Company Options
(e.g., term, manner of exercise) will be substantially the same as those now
contained in the Vested Out-of-the-Money Options.
5. Continued Employment.
You will enter into an amended and restated employment agreement with
the Company, effective as of the Closing, to reflect the terms and conditions of
your continued employment with the Company. Other than as is inconsistent with
matters discussed in this letter, such employment agreement will be materially
identical with the existing Employment Agreement between you and the Company,
effective as of May 18, 1998. The employment agreement will provide that at your
election you will be entitled to receive additional vested options in lieu of
all or a portion of any salary increases or bonuses, on terms to be determined
by the Board
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and communicated to you prior to the time you make such election. The employment
agreement will include a provision granting you reimbursement for business use
of your private aircraft, provided that either (i) you continue to use the same
model aircraft you use today or (ii) the reimbursement paid to you is not
materially greater than that incurred by you today ($15,000/month + $850/hour),
other than on account of increases in cost which reasonably would have been
expected to apply if you had continued using the same model aircraft you use
today.
Please sign this letter where indicated below to reflect that you agree
to its terms. Once this letter has been signed by you, TNFA and TNFI, it will be
a binding agreement between you and TNFA and TNFI (governed by the laws of the
State of California, without regard to conflicts of law), subject only to (i)
the consummation of the Transaction and (ii) as to Sections 3, 4 and 5 of this
letter, approval by holders of at least 75% of the voting power of all
outstanding stock of the Company immediately following the Closing, excluding
such stock owned by you and your wife (and TNFI agrees to vote its equity in
favor of such approval as part of the Closing). Although you, TNFA and TNFI
agree to diligently work to execute formal documentation of the items described
in this letter no later than the Closing, the failure to do so shall not obviate
your, TNFA's and TNFI's obligation to comply with the terms hereof and, in the
case of TNFI, to cause the Company to so comply on and after the Closing. As of
the Closing, whether or not TNFA is merged into the Company, this letter shall
become an obligation of the Company and TNFA and TNFI shall take any necessary
action to cause that to occur. This letter represents the entire agreement of
the parties hereto as to the subject matter hereof as of the date of this
letter.
Sincerely,
TNF ACQUISITION, LLC
By: Xxxxxxxx X. Xxxxxxxx, Manager
/s/ Xxxxxxxx X. Xxxxxxxx
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TNF INVESTMENT, LLC
By: Xxxxxxxx X. Xxxxxxxx, Manager
/s/ Xxxxxxxx X. Xxxxxxxx
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AGREED AND ACCEPTED
/s/ Xxxxx Xxxxxxx
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Xxxxx Xxxxxxx
