<PAGE>
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 September 30, 1999
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES 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)
407 Merrill Avenue, Carbondale, Colorado 81623
(Address of principal executive offices) (Zip Code)
(970) 704-2300
(Registrant's telephone number, including area code)
Not applicable.
(Former name, former address and formal fiscal year, if changed since last
report)
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 November 10, 1999, was 12,740,920.
<PAGE>
THE NORTH FACE, INC.
September 30, 1999
INDEX TO FORM 10-Q
<TABLE>
<CAPTION>
PAGE NO.
<C> <S> <C>
PART I. FINANCIAL INFORMATION
Item 1 - Financial Statements (unaudited)
Condensed Consolidated Balance Sheets as of September 30, 1999,
December 31, 1998 and September 30, 1998 2
Condensed Consolidated Statements of Operations for the Three
and Nine Months Ended September 30, 1999 and 1998 3
Condensed Consolidated Statements of Cash Flows for the
Nine Months Ended September 30, 1999 and 1998 4
Notes to Condensed Consolidated Financial Statements 6
Item 2 - Management's Discussion and Analysis of Financial Condition and
Results of Operations 9
Item 3 - Quantitative and Qualitative Disclosure About Market Risk 14
PART II. OTHER INFORMATION
Item 1 - Legal Proceedings 15
Item 6 - Exhibits and Reports on Form 8-K 16
</TABLE>
1
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ITEM 1. FINANCIAL STATEMENTS
THE NORTH FACE, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except share and per share amounts)
(unaudited)
<TABLE>
<CAPTION>
September 30, December 31, September 30,
1999 1998 1998
------------- ------------- -------------
ASSETS
<S> <C> <C> <C>
Current assets:
Cash and cash equivalents $ 10,068 $ 13,452 $ 2,284
Accounts receivable, net 70,479 81,529 103,507
Inventories 81,767 57,457 58,705
Deferred income taxes 3,679 3,661 2,877
Other current assets 9,175 11,162 7,988
------- -------- --------
Total current assets 175,168 167,261 175,361
Property and equipment, net 33,543 25,916 23,443
Trademarks and intangibles, net 33,282 33,975 34,397
Debt acquisition costs 1,404 1,730 1,456
Deferred income taxes 14,141 -- --
Other assets 2,887 3,762 3,422
------- -------- --------
Total assets $260,425 $232,644 $238,079
======== ======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable, accrued expenses and other current liabilities $ 37,116 $ 40,463 $ 38,669
Short-term borrowings and current portion of long-term debt and
capital lease obligations 112,286 55,910 63,157
-------- -------- --------
Total current liabilities 149,402 96,373 101,826
Long-term debt and obligations under capital leases 1,282 5,360 5,562
Other long-term liabilities 6,954 7,000 6,519
-------- -------- --------
Total liabilities 157,638 108,733 113,907
Minority interest 642 701 701
Commitments and contingencies (see Note 5) -- -- --
Stockholders' equity:
Common stock, $.0025 par value-shares authorized 50,000,000;
issued and outstanding; 12,734,000 at September 30, 1999,
12,494,000 at December 31, 1998 and 12,486,000 at September 30, 1998 32 31 31
Additional paid-in capital 103,870 101,049 101,050
Retained earnings (accumulated deficit) (2,079) 21,660 21,875
Accumulated other comprehensive income-cumulative translation
adjustments 322 470 515
-------- -------- --------
Total stockholders' equity 102,145 123,210 123,471
-------- -------- --------
Total liabilities and stockholders' equity $260,425 $232,644 $238,079
======== ======== ========
</TABLE>
See accompanying notes to condensed consolidated financial statements.
2
<PAGE>
THE NORTH FACE, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share amounts)
(unaudited)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
--------------------- -----------------------
1999 1998 1999 1998
---------- --------- ----------- ----------
<S> <C> <C> <C> <C>
Net sales $ 70,997 $ 93,645 $ 176,850 $182,520
Cost of sales 41,475 52,403 100,064 102,443
-------- -------- --------- --------
Gross profit 29,522 41,242 76,786 80,077
Operating expenses 34,876 24,456 94,265 66,034
Other operating expenses 4,435 3,418 8,876 4,936
-------- -------- --------- --------
Operating income (loss) (9,789) 13,368 (26,355) 9,107
Interest expense (2,181) (1,648) (4,966) (3,170)
Other income (expense), net (3,286) 35 (5,369) 255
-------- -------- --------- --------
Income (loss) before income taxes (15,256) 11,755 (36,690) 6,192
Income tax benefit (expense) 4,593 (4,526) 12,951 (2,385)
-------- -------- --------- --------
Net income (loss) $(10,663) $ 7,229 $ (23,739) $ 3,807
======== ======== ========= ========
Net income (loss) per share:
Basic $(.84) $.58 $(1.87) $.32
Diluted $(.84) $.57 $(1.87) $.31
Weighted average shares outstanding:
Basic 12,733 12,481 12,715 11,996
Diluted 12,733 12,752 12,715 12,263
</TABLE>
See accompanying notes to condensed consolidated financial statements.
3
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THE NORTH FACE, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(unaudited)
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
--------------------
1999 1998
--------- ---------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $(23,739) $ 3,807
Adjustments to reconcile net income (loss) to cash used in operating activities:
Depreciation and amortization 10,130 5,126
Loss from the disposal of property and equipment 940 1,167
Issuance of note payable for tender offer expenses 2,226 --
Provision for doubtful accounts 1,747 608
Tax benefit of exercise of stock options 142 1,347
Other -- (31)
Effect of changes in (net of effects of acquisition):
Accounts receivable 3,664 (48,394)
Inventories (24,259) (10,965)
Other assets (5,670) 1,092
Accounts payable, accrued expenses and other current liabilities (3,397) 6,904
Decrease in other long-term liabilities (46) --
-------- --------
NET CASH USED IN OPERATING ACTIVITIES (38,262) (39,339)
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Cash acquired as a result of the purchase of La Sportiva USA -- 235
Deposit for investment in La Sportiva S.r.l. -- (3,086)
Purchases of property and equipment (13,307) (11,422)
Proceeds from the sale of property and equipment -- 43
-------- --------
NET CASH USED IN INVESTING ACTIVITIES (13,307) (14,230)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Long-term debt borrowings 10,000 --
Repayments of long-term debt (775) (429)
Proceeds from revolver, net 38,987 38,237
Payment of debt acquisition costs -- (1,525)
Collection of note receivable -- 6,549
Proceeds from issuance of common stock 180 8,312
Redemption of La Sportiva USA preferred stock (59) --
-------- --------
NET CASH PROVIDED BY FINANCING ACTIVITIES 48,333 51,144
-------- --------
Effect of foreign currency fluctuations on cash (148) 198
-------- --------
NET DECREASE IN CASH AND CASH EQUIVALENTS (3,384) (2,227)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 13,452 4,511
-------- --------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 10,068 $ 2,284
======== ========
SUPPLEMENTAL CASH FLOW INFORMATION:
Cash paid for:
Interest $ 4,695 --
Income taxes 428 --
</TABLE>
See accompanying notes to condensed consolidated financial statements.
4
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THE NORTH FACE, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS - continued
(In thousands)
(unaudited)
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
-----------------------
1999 1998
------- --------------
<S> <C> <C>
NON CASH INVESTING ACTIVITY - ISSUANCE OF COMMON
STOCK FOR THE ACQUISITION OF LA SPORTIVA USA:
Purchase of working capital $ --- $ (798)
Purchase of property and equipment --- (28)
Assumption of other long-term assets --- (34)
Assumption of other long-term liabilities --- 702
Excess purchase price over the fair value of net assets acquired --- (3,835)
Redeemable preferred stock --- 876
----- --------
TOTAL ISSUANCE OF COMMON STOCK FOR THE ACQUISITION
OF LA SPORTIVA USA: $ --- $ (3,117)
===== ========
NON CASH FINANCING ACTIVITIES:
Issuance of common stock for note receivable $ --- $6,549
Issuance of common stock for land 2,500 ---
Acquisition of property and equipment through capital leases 1,860 ---
</TABLE>
See accompanying notes to condensed consolidated financial statements.
5
<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 U.S. 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. Accordingly, the interim unaudited financial statements should be
read in conjunction with the financial statements included in the Company's
Annual Report on Form 10-K for the fiscal year ended December 31, 1998 (the
"Form 10-K"). Operating results for the three and nine months ended September
30, 1999 are not necessarily indicative of the results that may be expected for
the fiscal year ending December 31, 1999.
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 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.
The condensed consolidated balance sheet as of December 31, 1998, has been
derived from the consolidated balance sheet as of December 31, 1998 included in
the Form 10-K.
Reclassifications. Certain reclassifications have been made to the 1998
financial statements to conform to the 1999 presentation. Such
reclassifications had no effect on net earnings.
NOTE 2. TERMINATED AGREEMENT TO SELL THE COMPANY
On February 27, 1999, the Company entered into a Transaction Agreement (the
"Transaction Agreement") with TNF Acquisition LLC ("TNF"), an affiliate of
Leonard Green & Partners, L.P. ("LGP"). The Transaction Agreement provided for
a tender offer for all of the Company's outstanding stock (other than shares
held by James G. Fifield, former President and Chief Executive Officer) at $17
cash per share and the acquisition of control of the Company by LGP and Mr.
Fifield. On March 5, 1999, the Company withdrew its tender offer. The
Transaction Agreement remained in full force and effect although LGP had
informed the Company that they were reevaluating the transactions contemplated
by the Transaction Agreement (the "Transactions"). On July 31, 1999 the Company
announced that it had agreed to extend until August 31, 1999, the termination
date under the Transaction Agreement. In agreeing to this extension, the parties
also agreed to cap at $2.7 million the expenses payable by The North Face to TNF
if the Transactions were not consummated. On September 1, 1999, the Company
announced that the Transaction Agreement had been terminated. In September
1999, the Company agreed to pay LGP $2.2 million in expenses associated
with the terminated
6
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Transaction Agreement. Such transaction expenses are payable in installments to
LGP through June 2000. Also in connection with the termination of the
Transaction Agreement, Jim Fifield resigned as the Company's Chief Executive
Officer. Total expenses incurred in connection with the terminated agreement
during the three and nine months ended September 30, 1999 were $2.3 million and
$3.8 million, respectively, which are included in other expenses.
NOTE 3. CREDIT FACILITY
In September 1998, the Company entered into a new $130.0 million revolving
credit facility. The credit facility includes a $15.0 million term note facility
and a $115.0 million revolving line of credit facility. The revolving line of
credit provides a sublimit facility for letters of credit up to a maximum of
$40.0 million. The revolving line of credit bears interest at variable rates
(ranging from 7.88% to 9.25% at September 30, 1999). The Company had outstanding
term loans of $15.0 million at September 30, 1999, with interest rates of 7.88%
and 9.25%. The revolving line of credit provides for borrowings up to $115.0
million with the actual borrowings limited to available collateral, representing
eligible receivables and inventory. The credit facility includes certain
financial covenants and restrictions on new indebtedness and the payment of cash
dividends.
On November 11, 1999, the Company's bank credit facility was amended
whereby the financial covenants were changed and as of December 31, 1999, the
revolving credit facility reduces from $115 million to $100 million. The Company
anticipates that it will be in compliance with its bank covenants for the
remainder of the year. The credit facility now expires on March 31, 2000. The
cost of borrowing under its credit facility will increase approximately 15-20%
as a result of this amendment. There can be no assurance that the Company's cost
of borrowing will not increase even further or that the Company will be able to
maintain compliance with its financial covenants, or that the Company will be
able to refinance its debt when it is due on March 31, 2000. The Company was
charged an amendment fee of $400,000 and is required to pay an additional
$575,000 extension fee if the bank credit facility is not repaid in full by
December 31, 1999. Also, in connection with the amendment, the Company granted
the lender 202,597 contingent warrants to purchase the Company's common stock at
an exercise price of $4.8125 which are exercisable beginning on January 15, 2000
if the bank credit facility is not repaid in full. If the bank credit facility
is repaid in full prior to January 15, 2000, the contingent warrants expire.
NOTE 4. NEW CORPORATE HEADQUARTERS
On January 11, 1999, the Company issued 206,188 shares of common stock with
a market value of $12.125 per share as consideration for the purchase of land to
be used for its new corporate headquarters in Carbondale, Colorado.
NOTE 5. COMMITMENTS AND CONTINGENCIES
In connection with the Transactions and following the Company's accounting
related announcements which reported the restatement of the Company's 1997
consolidated financial statements and the Company's 1998 interim condensed
consolidated financial statements, several lawsuits have been filed against the
Company. There can be no assurance that the Company will successfully defend
these lawsuits. Regardless of whether the Transactions are consummated or of
the outcome of these lawsuits, the Company will likely incur significant related
expenses and costs that could have an adverse effect on the Company's business
and operations.
7
<PAGE>
During the first week of March 1999, various complaints were filed against
the Company and its Board of Directors in the Delaware Court of Chancery and in
the California Superior Court, Alameda County in connection with the
Transactions. The complaints, filed on behalf of a purported class of the
Company's shareholders, generally allege that the Transactions are unfair and
inadequate to the Company's shareholders and charge the defendants with self-
dealing and breach of fiduciary duties. The various complaints generally
request injunctive relief to prevent the consummation of the Transactions, and
seek other remedies in the event the Transactions are completed. The Company has
not yet responded to these complaints.
Beginning in March 1999, purported class action lawsuits were filed in
federal district court against the Company and certain of its former and current
officers and directors alleging violations of the federal securities laws.
These complaints (collectively, the "Securities Litigation") have been
consolidated in federal district court in Colorado. The consolidated action
generally alleges that the Company made false and misleading statements about
its financial results during a time period from January 22, 1998 through April
16, 1999. The Company believes it has meritorious defenses to these claims and
intends to contest them vigorously. An unfavorable resolution of the Securities
Litigation could have a material adverse effect on the business, results of
operations or financial condition of the Company.
On April 6, 1999, a shareholder derivative action purportedly on behalf of
the Company, captioned Eng v. Cason, et al., Civil Action No. 810726-0, was
filed in California Superior Court, Alameda County. The complaint alleges that
the Company's directors and various current and former officers violated
California law and breached fiduciary duties to the Company by engaging in
alleged wrongful conduct from April 25, 1997 through March 12, 1999, including
the conduct complained of in the Securities Litigation. The Company is named
solely as a nominal defendant, against whom the plaintiff seeks no recovery.
NOTE 6. OTHER OPERATING EXPENSES
During the three and nine months ended September 30, 1999, the Company
recorded expenses of $4.4 and $8.9 million, respectively, related to (i)
relocating a portion of its corporate headquarters to Carbondale, Colorado, (ii)
the closure of its Vacaville, California distribution center and the start-up of
its Lenexa, Kansas distribution center, (iii) professional fees related to the
restatement of the Company's 1997 and 1998 financial statements, and (iv) the
severance of certain executive management personnel.
NOTE 7. COMPREHENSIVE INCOME (LOSS)
The following is a summary of the calculation of comprehensive income (loss) (in
thousands):
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30 September 30
------------------------------ -----------------------------
1999 1998 1999 1998
---------------- ------------- -------------- --------------
<S> <C> <C> <C> <C>
Net income (loss)......................... $(10,663) $7,229 $(23,739) $3,807
Other comprehensive income (loss)-
translation adjustments.................. 651 198 (148) 198
---------------- ------------- -------------- --------------
Comprehensive income (loss)............... $(10,012) $7,427 $(23,887) $4,005
================ ============= ============== ==============
</TABLE>
8
<PAGE>
NOTE 8. EARNINGS PER SHARE
The Company calculates basic earning per share (EPS) by dividing net income
by the weighted average number of common shares outstanding for the period.
Diluted EPS takes into account the effect of dilutive instruments, such as stock
options, and uses the average share price for the period in determining the
number of incremental shares that are to be added to the weighted average number
of shares outstanding. Diluted EPS for the three and nine months ended
September 30, 1999 exclude any effect of such instruments because their
inclusion would be antidilutive.
The following is a summary of the calculation of the number of shares used
in calculating basic and diluted EPS (in thousands):
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30 September 30
------------------------------ -----------------------------
1999 1998 1999 1998
---------------- ------------- -------------- --------------
<S> <C> <C> <C> <C>
Shares used to compute basic EPS.......... 12,733 12,481 12,715 11,996
Add: effect of dilutive securities -
stock options............................ ---- 271 ---- 267
---------------- ------------- -------------- --------------
Shares used to compute diluted EPS........ 12,733 12,752 12,715 12,263
================ ============= ============== ==============
</TABLE>
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 herein, under "Factors
That May Affect Our Business," in the Company's Annual Report on Form 10-K for
the fiscal year ended December 31, 1998 and in other documents that may be
subsequently filed with the Securities and Exchange Commission.
9
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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 nine months ended September 30, 1999 and
1998 are not necessarily indicative of future results to be expected for the
full year.
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
---------------------- ---------------------
1999 1998 1999 1998
---------- ---------- ---------- ---------
<S> <C> <C> <C> <C>
Net sales 100% 100% 100% 100%
Gross profit 41.6% 44.0% 43.4% 43.9%
Operating expenses 49.1% 26.1% 53.3% 36.2%
Other operating expenses 6.2% 3.6% 5.0% 2.7%
Operating income (loss) (13.8%) 14.3% (14.9%) 5.0%
Interest expense (3.1%) (1.8%) (2.8%) (1.7%)
Income (loss) before income taxes (21.5%) 12.6% (20.7%) 3.4%
Income tax benefit (expense) 30.1% (38.5%) 35.3% (38.5%)
Net income (loss) (15.0%) 7.7% (13.4%) 2.1%
</TABLE>
Three Months Ended September 30, 1999 Compared to Three Months Ended September
30, 1998
Net Sales. Net sales decreased by 24.2% to $71.0 million from $93.6 million for
the three months ended September 30, 1999 (the "Third Quarter 1999") over the
three months ended September 30, 1998 (the "Third Quarter 1998").
The decrease in sales was primarily attributable to the decrease in U.S.
wholesale sales of $24.4 million or 44.5% to $30.4 million from $54.8 million in
the Third Quarter 1999 to the Third Quarter 1998 respectively. This decrease is
primarily attributable to difficulties encountered by the Company when it
outsourced its U.S. distribution of products to a third party distributor. The
decrease in wholesale sales was partially mitigated by an increase in retail
sales of $3.0 million or 22.7% to $16.0 million compared to $13.0 million in the
prior year. This increase is primarily due to the opening of four new stores.
Gross Profit. The decrease in gross profit of $11.7 million is primarily related
to a sales decrease in our U.S. wholesale operation of $24.4 million which
resulted in a gross profit decrease of $11.0 million. This decrease is primarily
attributable to difficulties encountered by the Company when it outsourced its
U.S. distribution of products to a third party distributor. In addition, there
was a decline in the gross profit margins in our retail operations of
approximately $1.0 million as a result of liquidation sales to dispose of excess
inventory.
Operating Expenses. Operating expenses, which include selling, marketing, and
general administrative expenses, increased by 42.6% to $34.9 million from $24.5
million for the Third Quarter 1999 compared to the Third Quarter 1998.
Contributing to the increased costs were additional expenses approximating $3.3
million associated with outsourcing the distribution of the Company's U.S.
products through a third party distributor. Further, the Company incurred
approximately $2.7 million in additional expenses in the Third Quarter 1999 as
compared to Third Quarter 1998 in connection with its discount and customer
collection programs. Also contributing to increases in costs for the Third
Quarter 1999 compared to the Third Quarter 1998 was an increase in its
depreciation expense of approximately $1.3 million due to accelerated
depreciation for software costs which are near the end of their useful lives,
increased charges for its summit shop program, and higher depreciation costs
related to furniture, fixtures and equipment in its temporary Carbondale,
Colorado corporate offices. The balance of the increases were primarily due to
increases in variable and fixed costs to support the Company's current business
needs.
10
<PAGE>
Other Operating Expenses. During the Third Quarter 1999, the Company incurred
other operating expenses of $4.4 million which included approximately $1.4
million start-up costs related to the outsourcing of its U.S. products to a
third party distributor and approximately $2.4 million primarily in connection
with the severance of certain executive management personnel. During the Third
Quarter of 1998, the Company incurred costs of approximately $2.4 million
primarily for the relocation of its corporate headquarters to Carbondale,
Colorado.
Interest Expense. Net interest expense for the Third Quarter 1999 increased to
$2.2 million from $1.6 million for the Third Quarter 1998. The increase was
primarily due to higher average borrowings during the Third Quarter 1999 as
compared to the Third Quarter 1998 as the Company continues to invest in
upgrading its information technology systems, opening of new outlets, expansion
of its Summit Shop program as well as an overall increase in the scope of its
operating activities.
Other Expenses. During the Third Quarter 1999, the Company incurred other
expenses of $3.3 million related to the Company's tender offer Transaction
Agreement with TNF Acquisition LLC (see Note 2 of notes to condensed
consolidated financial statements). In connection with the terminated
Transaction Agreement, the Company made a $2.2 million provision for
transaction costs owed to LGP.
Income Tax Benefit (Expense). The effective income tax rate was 30.1% for the
Third Quarter 1999, compared to a 38.5% income tax expense for the Third Quarter
1998. The change was primarily attributable to state loss carry forward
limitations as well as permanent income tax differences.
Nine Months Ended September 30, 1999 Compared to Nine Months Ended September 30,
1998
Net Sales. Net sales decreased by 3.1% to $176.9 million from $182.5 million
for the nine months ended September 30, 1999 over the nine months ended
September 30, 1998.
Net sales to U.S. wholesale customers decreased by 18.4% to $87.6 million
from $107.4 million for the nine months of 1999 compared to the nine months
1998. This decrease was primarily attributable to difficulties encountered by
the Company when it outsourced its U.S. distribution of products to a third
party distributor. This sales decrease was offset by increases in European
wholesale sales, La Sportiva USA sales and retail sales of approximately $14.4
million.
Gross Profit. The decrease in gross profit of $3.3 million is primarily related
to a sales decrease in our U.S. wholesale division of $19.7 million which
resulted in a gross profit decrease of $8.7 million. In addition to this
decrease there was a decline in the gross profit margins in our retail
operations of approximately $1.4 million or 3.9% as a result of liquidation
sales to dispose of excess inventory. These decreases were mitigated by sales
increases in our European wholesale sales, La Sportiva USA wholesale sales and
retail sales resulting in gross profit increases of approximately $6.9 million.
Operating Expenses. Operating expenses, which include selling, marketing, and
general administrative expenses, increased by 42.8% to $94.3 million from $66.0
million for the nine months ended September 30, 1999 compared to the nine months
ended September 30, 1998 or $28.2 million. Contributing to the increased costs
were additional expenses approximating $3.3 million related to the distribution
of the Company's U.S. products to a third party distributor, $2.7 million in
connection its discount and customer collection programs, and $2.1 million
related to accommodations made to two wholesale distribution customers. In
addition, the Company incurred additional costs in its media and promotional
spending as well as increased costs related to the introduction of its footwear
product line, new product development, information system improvements and
operating costs of new outlets.
11
<PAGE>
Other Operating Expenses. During the nine months ending September 30, 1999, the
Company incurred other operating expenses of $8.9 million which included
approximately $4.2 million related to the outsourcing of its U.S. products to a
third party distributor and $2.8 million primarily in connection with the
severance of certain executive management personnel. Also contributing to the
increase was costs related to the realignment of its San Leandro, California
facility, relocating a portion of its corporate headquarters to Carbondale,
Colorado, professional fees related to the restatement of its 1997 and 1998
financial statements and establishing a Hong Kong operation.
Interest Expense. Net interest expense for the nine months 1999 increased to
$5.0 million from $3.2 million for the same period in 1998. The increase is
primarily due to higher average borrowings during the Second and Third Quarter
1999 as the Company continues to invest in upgrading its information technology
systems, opening of new outlets, expansion of its Summit Shop program as well as
an overall increase in the scope of its operating activities.
Other Expenses. During the first nine months of 1999, the Company incurred
other expenses of $5.4 million of which $3.8 million is related to the Company's
tender offer Transaction Agreement with TNF Acquisition LLC (see Note 2 of notes
to condensed consolidated financial statements) and losses on foreign exchange
contracts.
Income Tax Benefit (Expense). The effective income tax rate was approximately
35.3% for the nine months ended September 30, 1999, compared to a 38.5% for the
nine months ended September 30, 1998. The change was primarily attributable to
state loss carry forward limitations as well as permanent differences.
FACTORS THAT MAY AFFECT THE COMPANY'S BUSINESS
Key Personnel. The Board of Directors recently appointed Robert Bunje as the
Chairman of the Board to fill the vacancy created by Marsden Cason's
resignation. In addition, several key members of our senior management team have
recently joined the Company, including Geoffrey D. Lurie, our Chief Executive
Officer and Karl Heinz Salzburger, our President. The Company's future success
will depend upon the ability of these new key employees and our new Chairman to
effectively integrate themselves into our business and to work together as a
management team, and upon the Company's ability to successfully recruit and
retain new directors, executive officers and other key personnel. There can be
no assurance that any of such persons will remain directors, executive officers
or employees of the Company in the future. There can be no assurance that any
existing or newly hired director, executive officer or key employee can
successfully manage or contribute to the Company's operations. To the extent the
Company is not successful in retaining the services of any of its directors,
executive officers or other key personnel and recruiting and retaining the
services of new directors, executive officers or other key personnel, the
Company may not be able to operate its business which may have a significant
adverse effect on the Company's valuation and market price of its Common Stock.
Tender Offer. On February 27, 1999, the Company entered into a Transaction
Agreement (the "Transaction Agreement") with TNF Acquisition LLC ("TNF"), an
affiliate of Leonard Green & Partners, L.P. ("LGP"). The Transaction Agreement
provided for a tender offer for all of the Company's outstanding stock (other
than shares held by James G. Fifield, the Company's former President and Chief
Executive Officer) at $17 cash per share and the acquisition of control of the
Company by LGP and Mr. Fifield. On March 5, 1999, the Company withdrew its
tender offer. The Transaction Agreement was terminated on September 1, 1999. In
connection with the termination of the Transaction Agreement, the Company is
required to pay LGP $2.2 million for expenses associated with the terminated
Transaction Agreement.
In connection with the Transaction Agreement and following the Company's
accounting-related announcements, which reported the restatement of the
Company's 1997 Consolidated Financial Statements and 1998 interim Condensed
Consolidated Financial Statements, several lawsuits have been filed against
the Company. There can be no assurance that the Company will successfully
defend these lawsuits. Regardless of the outcome of these lawsuits, the
Company will likely incur significant related expenses and costs that could
have a material adverse affect on the Company's business and operations. See
"Item 3. Legal Proceedings."
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, actual results reported by the Company which may be
better or worse than estimates provided by analysts, sales of common stock by
insiders, speculation in the trade or business press, present and future
litigation, results of such litigation, and recent and future turnover of senior
management. 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
September 30, 1999, the Company's directors, officers and certain other
affiliates beneficially owned approximately 9% of the outstanding shares of the
Company's Common Stock.
Outsourcing of Distribution. In May 1998, the Company initiated outsourcing of
distribution for its business in Canada. In July 1999, the Company initiated
outsourcing of distribution in the U.S. The Company experienced significant
delays and difficulties with its distribution of products since the change in
July. There can be no assurance that the Company will be able to resolve its
distribution difficulties or that third-party outsourcing partners will be able
to service the Company's customers adequately in the future. In addition, the
costs of outsourcing may be greater than anticipated.
Wholesale Strategy. The Company's wholesale customers currently consist,
primarily, 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 as compared to its sales in Company-owned retail stores,
overall gross margins may decline in the future. Sales returns in excess of
anticipated amounts could have an adverse effect on operations.
Reliance on Unaffiliated Manufacturers. The Company currently relies on
approximately 35 unaffiliated manufacturers to produce nearly all of its
products, with ten of the manufacturers producing approximately 80% of the
Company's products for the first three quarters of 1999. 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 produce the Company's products exclusively. The Company has occasionally
received, and may in the future receive, shipments of products from
manufacturers that fail to conform to the Company's quality control standards.
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.
Consumer Preferences. Consumer demand for the Company's products may be
adversely affected if consumer interest in outdoor activities does not grow or
declines. In addition, some competitors may have more resources to advertise and
market their products. If the Company is unable to respond successfully to
changes in consumer preferences, or if consumer preferences shift toward
competing products or away from the Company's product categories altogether, the
Company's business would be adversely affected. The Company cannot assure future
growth or consumer demand for its products. If consumer interest in outdoor
activities grows, more competitors, who are better financed, may enter the
market.
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. There can be no assurance that the Company
will be successful in obtaining adequate capital to finance its growth
strategies.
Management of Inventory. Success in the technical outdoor apparel industry is
dependent in part, on a company's ability to manage its inventory of merchandise
in proportion to the demand for such merchandise. If the Company miscalculates
the consumer demand for its products it may be faced with significant excess
inventory and excess fabric for some products and missed opportunities for
others. Weak sales and resulting markdowns and/or write-offs could cause the
Company's profitability to be significantly impaired and may have a material
adverse effect on the Company's financial condition and results of operations.
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.
There can be no assurance that the Company will be able to obtain adequate
supplies of technically advanced materials in the future or that favorable
purchase terms or other arrangements with suppliers (such as suppliers' funding
of development costs and co-operative advertising arrangements) will continue.
Fluctuations in Sales. Sales of the Company's products historically have
fluctuated due to conditions, such as weather and economic recessions or other
conditions which reduce consumer spending, which are beyond the Company's
control.
Risk Associated with Seasonality. The Company's business, like other retailers,
is subject to seasonal and quarterly fluctuations. The Company's results of
operations may fluctuate from quarter to quarter as a result of, among other
things, the amount and timing of shipments to wholesale customers, government
shipments, the timing and magnitude of discounts in retail stores, the timing of
international licensing and royalty contracts, advertising and marketing
expenditures, increases in the number of employees and costs associated with new
growth and new store openings.
International Operations. The Company's business is subject to the risks
generally associated with doing business abroad. These risks include adverse
fluctuations in currency exchange rates (particularly those of the U.S. dollar
against certain foreign currencies), changes in import duties or quotas, the
imposition of taxes or other charges on imports, the impact of foreign
government regulation, political unrest, disruption or delays of shipment and
changes in economic conditions in countries in which the Company's suppliers are
located. The Company imports approximately 73% 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. There can be no assurance that the Company's
competition will not develop products that are superior to the Company's
products. Furthermore, 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. 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.
Effect of Certain Provisional Anti-Takeover Effects of Stockholders Rights Plan,
Certificate of Incorporation, Bylaws and Delaware Law. The Company has adopted
a Stockholder Rights Plan to protect the Company's investors in the event of an
unfriendly takeover. The Stockholder Rights Plan could have the effect of making
it more difficult for a third-party to acquire a majority of the outstanding
voting stock. Further, certain provisions of Delaware law and the Company's
Certificate of Incorporation and Bylaws could delay or make more difficult a
merger, tender offer or proxy contest involving the Company. While such
provisions are intended to maximize stockholder value, they may have the effect
of discouraging takeovers that could be in the best interest of certain
stockholders. There is no assurance that such provisions will not have an
adverse effect on the market value of the Company's Common Stock.
Product and Warranty Liability. The Company's products are often used in severe
weather and other extreme conditions. For example, in 1997, the Company began
selling portaledges used as sleeping platforms in big wall rock climbing. There
can be no assurance that insurance maintained by the Company will cover possible
future losses from product liability claims. The Company maintains a warranty
reserve for the lifetime warranty offered on many of its products, but cannot
assure that future claims will not exceed this reserve. Further, in the event
that the Company experiences problems with product quality or reliability, its
reputation as a provider of high-quality products could suffer, which could have
a material adverse effect on the Company's business.
Reliance on Management Information Systems. Currently, the Company is upgrading
its capabilities and systems associated with product acquisition, merchandise
allocation and financial accounting, which have not kept pace with the Company's
growth. The Company has made significant investments to improve existing
management information systems and implement new systems in these areas during
1999. There can be no assurance that these improvements will be successfully
implemented. Failure to implement and integrate such systems could have a
material adverse effect on the Company's business, financial condition and
results of operations.
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, during the next year,
computer systems, software and some non-information technology ("IT") products
used by many companies may need to be upgraded to comply with such "Year 2000"
requirements.
State of Readiness. We have conducted an internal review of both our
information systems and significant non-IT systems. We are involved in an
enterprise-wide project to upgrade or modify portions of our software so that
our computer systems will meet Year 2000 requirements. We have been using both
external and internal resources to reprogram or upgrade our software. We plan to
complete the modifications and upgrades, including testing, of all information
systems by early December 1999. No significant Year 2000 problems have been
identified in the Company's non-IT systems.
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Costs to Address the Year 2000 Issue. Based on management's current
estimates, the total cost for addressing the Year 2000 issue is estimated to be
approximately $750,000 of which approximately $611,000 has been incurred through
September 30, 1999.
Risks Presented by the Year 2000 Issue. We believe that the modifications
and upgrades to our software will mitigate any Year 2000 problems associated
with our internal systems. However, if we do not complete the process of
modifying and upgrading our software in a timely manner, or at all, or if we do
not identify computer information systems and non-IT systems that need to be
upgraded, the Year 2000 issue could have a material impact on our operations. We
have surveyed our significant vendors and other third parties on whom we rely to
ensure that they will convert their systems in a timely manner. We currently are
in the process of analyzing third party responses to our survey. We cannot be
sure that other companies will convert their systems effectively or in a timely
manner. If third parties, such as suppliers, manufacturers and other vendors,
fail to meet Year 2000 requirements, our business could be materially adversely
affected.
Contingency Plans. The Company's Year 2000 plan includes the development of
contingency plans in the event that the Company has not completed all of its
remediation plans in a timely manner or any third parties who provide goods or
services essential to the Company's business fail to appropriately address their
Year 2000 issues. The Company plans to conclude the development of these plans
by November 1999.
LIQUIDITY AND CAPITAL RESOURCES
In September 1998, the Company entered into a new $130.0 million revolving
credit facility. The credit facility includes a $15.0 million term note facility
and a $115.0 million revolving line of credit facility. The revolving line of
credit provides a sublimit facility for letters of credit up to a maximum of
$40.0 million. The revolving line of credit bears interest at variable rates
(ranging from 7.88% to 9.25% at September 30, 1999). The Company had outstanding
term loans of $15.0 million at September 30, 1999, with interest rates of 7.88%
and 9.25%. The revolving line of credit provides for borrowings up to $115.0
million with the actual borrowings limited to available collateral, representing
eligible receivables and inventory. The credit facility includes certain
financial covenants and restrictions on new indebtedness and the payment of cash
dividends.
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The Company experienced significant liquidity problems in the third quarter
of 1999 as a result of the shipping difficulties encountered when it outsourced
its U.S. distribution of products to a third party distributor. Late shipments
significantly reduced the Company's sales, profitability and its borrowing base.
Effective November 11, 1999, the Company's bank credit facility was amended
to reflect certain changes in the financial covenants, among other things. As of
December 31, 1999 the revolving credit facility reduces from $115 million to
$100 million. The Company currently anticipates that it will be in compliance
with its bank covenants for the remainder of the year. The credit facility now
expires on March 31, 2000. The cost of borrowing under its credit facility will
increase approximately 15-20% as a result of this amendment. There can be no
assurance that the Company's cost of borrowing will not increase even further or
that the Company will be able to maintain compliance with its financial
covenants, or that the Company will be able to refinance its debt when it is due
on March 31, 2000. The Company was charged an amendment fee of $400,000 and is
required to pay an additional $575,000 extension fee if the bank credit facility
is not repaid in full by December 31, 1999. Also, in connection with the
amendment, the Company granted the lender 202,597 contingent warrants to
purchase the Company's common stock at an exercise price of $4.8125 which are
exercisable beginning on January 15, 2000 if the bank credit facility is not
repaid in full. If the bank credit facility is repaid in full prior to January
15, 2000, the contingent warrants expire.
The Company anticipates that it will be able to operate its business within
the maximum line available under the Company's credit facility; however, it
expects to seek additional financing over the course of the next several months
to support the growth of the Company's business. There can be no assurance that
the Company will not require additional capital in 1999 or in subsequent years
or that it will be able to obtain such capital if required.
The Company estimates that its capital expenditures for all 12 months
of 1999 will be approximately $16.0 to $18.0 million. For the nine months ended
September 30, 1999, capital expenditures, including property and equipment
financed through capital leases, totaled approximately $15.2 million. Capital
expenditures will be used principally for investing in summit shops, the upgrade
of management information systems, the opening of outlet stores and store
upgrades general corporate purposes.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
The Company is exposed to market risks, which include foreign currency
risks, interest rate risks and inflation risk. The Company does not engage in
financial transactions for trading or speculative purposes.
Foreign Currency Exchange Rate Risk. The Company's inventory purchases from
contract manufacturers in the Far East are denominated in United States dollars;
however, purchase prices for the Company's products may be impacted by
fluctuations in the exchange rate between the United States dollar and the local
currencies of the contract manufacturers, which may have the effect of
increasing the Company's cost of goods in the future. In addition, the Company's
sales in Europe and Canada are denominated in the local currencies of the
applicable specialty retailer, which may have a negative impact on profit
margins or the rate of growth of sales in those countries if the U.S. dollar
were to strengthen significantly. Due to the number of foreign currencies
involved and the fact that not all of these foreign currencies fluctuate in the
same manner against the United States dollar, the Company cannot quantify in any
meaningful way the potential effect of such fluctuations on future income.
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The Company sources product in U.S. dollars and sells product throughout
the world, but primarily in the United States, Canada and Europe. To reduce the
Company's exposure to changes in the U.S. dollar value of foreign sales and
receivables the Company enters into forward options and contracts. This hedging
of foreign exchange risk is carried out on a seasonal basis with each season
running for six months of the year, spring being January through June and Fall
being July through December. In general, the Company hedges for the current
season and the next season.
The Company may be affected by the current devaluation of the Asian
currencies due to the Company's importing of raw materials to Asia.
Furthermore, the Company may be affected by economic and political conditions in
each of the countries in which it operates. Risks associated with operating in
the international arena include: (i) economic instability, including the
possible revaluation of currencies; (ii) extreme currency exchange fluctuations
where the Company has not entered into foreign currency forward and option
contracts to manage exposure to certain foreign currency commitments hedged any
forward transactions; (iii) changes to import or export regulations (including
quotas); (iv) labor or civil unrest; and (v) in certain parts of the world,
political instability. The Company has not as yet been materially affected by
any such risks, but cannot predict the likelihood of such developments occurring
or the impact of any such risks to the future profitability of the Company.
Interest Rate Risk. The interest payable on the Company's bank line of
credit is based on variable interest rates and therefore affected by changes in
market interest rates.
Inflation Risk. 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 this has
not had a material effect on the Company's net sales or results of operations.
In the past, the Company has been able to offset its cost increases by
negotiation, increasing selling prices or changing suppliers.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
During the first week of March 1999, various complaints were filed against
the Company and its Board of Directors in the Delaware Court of Chancery and in
the California Superior Court, Alameda County in connection with the
transactions (the "Transactions") contemplated by the Transaction Agreement
dated February 27, 1999, between the Company and TNF Acquisition LLC. The
complaints, filed on behalf of a purported class of the Company's shareholders,
generally allege that the Transactions are unfair and inadequate to the
Company's shareholders and charge the defendants with self-dealing and breach of
fiduciary duties. The various complaints generally request injunctive relief to
prevent the consummation of the Transactions, and seek other remedies in the
event the Transactions are completed. The Company has not yet responded to these
complaints.
Beginning in March 1999, purported class action lawsuits were filed in
federal district court against the Company and certain of its former and current
officers and directors alleging violations of the federal securities laws. These
complaints (collectively, the "Securities Litigation") have been consolidated in
federal district court in Colorado. The consolidated action generally alleges
that the Company made false and misleading statements about its financial
results during a time period from January 22, 1998 through April 16, 1999. The
Company believes it has meritorious defenses to these claims and intends to
contest them vigorously. An unfavorable resolution of the Securities Litigation
could have a material adverse effect on the business, results of operations or
financial condition of the Company.
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On April 6, 1999, a shareholder derivative action purportedly on behalf of
the Company, captioned Eng v. Cason, et al., Civil Action No. 810726-0, was
filed in California Superior Court, Alameda County. The complaint alleges that
the Company's directors and various current and former officers violated
California law and breached fiduciary duties to the Company by engaging in
alleged wrongful conduct from April 25, 1997 through March 12, 1999, including
the conduct complained of in the Securities Litigation. The Company is named
solely as a nominal defendant, against whom the plaintiff seeks no recovery.
ITEM 5. OTHER INFORMATION
In November 1999, the Company entered into employment agreements with each
of Geoffrey D. Lurie and Karl Heinz Salzburger.
The North Face (Italy) S.r.l. entered into a separate employment
agreement with Karl Heinz Salzburger in November 1999.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
2.1(6) Stock Purchase Agreement, dated as of July 1, 1998, among The North
Face, Inc. and La Sportiva USA, Inc.
2.2(6) Registration Rights Agreement dated as of July 1, 1998, among The
North Face, Inc. and the stockholders of La Sportiva USA, Inc.
2.3(11) Transaction Agreement, dated as of February 27, 1999, by and between
the Registrant and TNF Acquisition LLC, a Delaware limited liability company
whose sole member is Green Equity Investors III, L.P., a Delaware limited
partnership.
2.4(12) Amendment to Transaction agreement with TNF Acquisition LLC dated
July 31, 1999.
3.1(2) Amended and Restated Certificate of Incorporation of The North Face,
Inc.
3.2(1) Amended and Restated By-laws of The North Face, Inc.
10.1(1)** Management Stock Purchase and Non-Competition Agreement, dated as of
June 6, 1994, among TNF Holdings Company, Inc.,* Marsden S. Cason and William A.
McFarlane, as amended by Amendment No. 1, dated as of June 22, 1995.
10.2(7)** Management Stock Pledge Agreement, dated as of May 13, 1998, among The
North Face, Inc., and James G. Fifield.
10.3(1) Stock Purchase Agreement, dated as of December 28, 1993, between TNF
Holdings Company, Inc.* and Kabushiki Kaisha Goldwin, as amended by Memorandum,
dated as of March 29,1994, among TNF Holdings Company, Inc.* and Kabushiki
Kaisha Goldwin, and Memorandum No. 2, dated as of May 20, 1994, between TNF
Holdings Company, Inc.* and Kabushiki Kaisha Goldwin.
10.4(1) Securityholders Agreement, dated as of June 7, 1994, among TNF
Holdings Company, Inc.,* Marsden S. Cason, William A. McFarlane, J.H. Whitney
& Co., Whitney 1990 Equity Fund, L.P., Whitney Subordinated Debt Fund, L.P.,
Richard T. Peery, Jack L. Richardson, Philip S. Schlein and Kenneth F. Siebel,
as amended by Amendment No. 1, dated as of June 22, 1995.
10.5(1) Registration Rights Agreement, dated as of June 7, 1994, among TNF
Holdings Company, Inc.,* J.H. Whitney & Co., Whitney 1990 Equity Fund, L.P.,
Whitney Subordinated Debt Fund, L.P., Marsden S. Cason and William A.
McFarlane, as amended by Amendment No. 1, dated as of June 22, 1995, and
Amendment No. 2, dated as of May 20, 1996.
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10.6(1) Amended and Restated Loan and Security Agreement, dated as of March 1,
1995, between The North Face, Inc. and Heller Financial, Inc., as Agent and as a
Lender, as amended by First Amendment, dated as of May 4, 1995, Second
Amendment, dated as of August, 1995, Third Amendment, dated as of March 27,
1996, and Fourth Amendment, dated May 8, 1996.
10.6A(1) Second Amended and Restated Loan and Security Agreement, dated as of
June, 1996, between The North Face, Inc. and Heller Financial, Inc., as Agent
and as a Lender.
10.6B(3) Third Amended and Restated Loan and Security Agreement, dated as of
April 7, 1997, between The North Face, Inc. and Heller Financial, Inc., as Agent
and as a Lender.
10.7(2)** TNF Holdings Company, Inc.* 1994 Stock Incentive Plan, as amended.
10.8(5)** The North Face, Inc. 1995 Stock Incentive Plan, as amended.
10.9(1)** The North Face, Inc. 1996 Stock Incentive Plan.
10.9A(10)** The North Face, Inc. 1996 Stock Incentive Plan, as amended September
1, 1998.
10.10(1)** The North Face, Inc. 1996 Employee Stock Purchase Plan.
10.11(1)** The North Face, Inc. 1996 Directors' Stock Option Plan.
10.12(9)** The North Face, Inc. 1998 Nonstatutory Stock Option Plan.
10.13(1) Trademark License, dated October 29, 1993, between The North Face and
W.L. Gore & Associates, Inc.
10.14(10) Trademark License, dated September 30, 1998, between The North Face,
Inc. and Youngone Corporation.
10.15(8) Loan Agreement dated as of September 2, 1998 (the "Loan Agreement")
between The North Face, Inc., The North Face (Europe) Limited and The North
Face, Hong Kong, Limited as Borrowers, The Industrial Bank of Japan, Limited,
New York Branch and IBJ Schroder Business Credit Corporation as Arrangers, The
Industrial Bank of Japan, Limited, New York Branch as Syndication Agent,
Documentation Agent and as a Lender, IBJ Schroder Business Credit Corporation as
Administrative Agent, Collateral Agent and as a Lender, and Certain Financial
Institutions.
10.15A(8) Amendment to the Loan Agreement, dated as of September 11, 1998.
10.15B(13) Amendment and Waiver Agreement, dated as of August 13, 1999.
10.15C Amendment No. 4 to the Loan Agreement, dated as of November 11,
1999.
10.16(4) First Amendment and Purchase Agreement dated June 15, 1998 by and
between The North Face, Inc., Gianinetti Investment Corp., R.P. Sewell &
Company, a Colorado Partnership, Richard Bradley and David F. Baggerman and
Agreement to Amend/Extend Contract dated December 24, 1998 by and between The
North Face, Inc., Gianinetti Investment Corp., R.P. Sewell & Company, a Colorado
Partnership, Richard Bradley and David F. Baggerman.
10.17 Employment Agreement, dated as of November 4, 1999, between The North
Face and Geoffrey D. Lurie.
10.18 Employment Agreement, dated as of November 4, 1999, between The North
Face and Karl Heinz Salzburger.
10.19 Employment Agreement, dated as of November 1, 1999, between The North
Face and Karl Heinz Salzburger.
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27.1 Financial Data Schedule
(1) Incorporated by reference to the Company's Registration Statement on Form
S-1 (No. 333-04107) filed on May 20, 1996 and amendments thereto, filed
with the Securities and Exchange Commission on June 3, 1996 and June 24,
1996.
(2) Incorporated by reference to the Company's Registration Statement on Form
S-1 (No. 333-14945) filed with the Securities and Exchange Commission on
October 28, 1996.
(3) Incorporated by reference to the Company's Annual Report on Form 10-K for
the fiscal year ended December 31, 1997 filed with the Securities and
Exchange Commission on March 6, 1998.
(4) Incorporated by reference to the Company's Registration Statement on Form
S-3 (No. 333-70405) filed with the Securities and Exchange Commission on
January 11, 1999.
(5) Incorporated by reference to the Company's Annual Report on Form 10-K for
the fiscal year ended December 31, 1996 filed with the Securities and
Exchange Commission on March 28, 1997.
(6) Incorporated by reference to the Company's Registration Statement on Form
S-3 (No. 333-58629) filed with the Securities and Exchange Commission on
July 7, 1998.
(7) Incorporated by reference on Schedule 13D filed with the Securities and
Exchange Commission on May 13, 1998.
(8) Incorporated by reference to the Company's Report on Form 10-Q for the
period ended September 30, 1998 filed with the Securities and Exchange
Commission on November 13, 1998.
(9) Incorporated by reference to the Company's Registration Statement on Form
S-8 (No. 59003) filed with the Securities and Exchange Commission on July
14, 1998.
(10) Incorporated by reference to the Company's Annual Report on Form 10-K for
the fiscal year ended December 31, 1998 filed with the Securities and
Exchange Commission on May 7, 1999.
(11) Incorporated by reference to the Company's Report on Form 8-K filed with
the Securities and Exchange Commission on March 5, 1999.
(12) Incorporated by reference to the Company's Report on Form 8-K filed with
the Securities and Exchange Commission on August 17, 1999.
(13) Incorporated by reference to the Company's Report on Form 10-Q for the
period ended June 30, 1999 filed with the Securities and Exchange
Commission on August 16, 1999.
* 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.
(b) Reports on Form 8-K
Form 8-K filed on August 17, 1999 contained an Amendment to the Transaction
Agreement between the Company and TNF Acquisition LLC, an affiliate of Leonard
Green & Partners, L.P. extending the termination date of the Transaction
Agreement to August 31, 1999. The Form 8-K also contained the August 2, 1999
press release reporting the extension of the termination date of the Transaction
Agreement to August 31, 1999.
18
<PAGE>
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: November 15, 1999 By: /s/ Geoffrey D. Lurie
---------------------------------
Chief Executive Officer
19
<PAGE>
INDEX OF EXHIBITS
The following exhibits are included herein:
10.15C Amendment No. 4 to the Loan Agreement, dated as of November 11, 1999.
10.17 Employment Agreement, dated as of November 4, 1999, between The North
Face and Geoffrey D. Lurie.
10.18 Employment Agreement, dated as of November 4, 1999, between The North
Face and Karl Heinz Salzburger.
10.19 Employment Agreement, dated as of November 1, 1999, between The North
Face and Karl Heinz Salzburger.
27.1 Financial Data Schedule
20
<PAGE>
Exhibit 10.15C
AMENDMENT AGREEMENT No. 4
AMENDMENT AGREEMENT No. 4 (the "Amendment Agreement"), dated as of November 11,
1999, to the Loan Agreement dated as of September 2, 1998 (as amended to date,
and as the same may be further amended, supplemented, restated or modified from
time-to-time in accordance with its terms, the "Loan Agreement") among The North
Face, Inc. ("TNFI"), The North Face (Europe) Limited ("TNFE") and The North Face
Hong Kong, Limited ("THNHK"; and together with TNFI and TNFE, each a "Borrower"
and collectively, the "Borrowers"), The Industrial Bank of Japan, Limited, New
York Branch as Syndication Agent and Documentation Agent, IBJ Whitehall Business
Credit Corporation (formerly known as IBJ Schroder Business Credit Corporation)
as Administrative Agent and Collateral Agent and the financial institutions
parties thereto from time-to-time. Capitalized terms used but not defined herein
have the meanings given such terms in the Loan Agreement.
WHEREAS, the Borrowers have requested and the Lenders and the Administrative
Agent have agreed to amend certain provisions of the Loan Agreement.
NOW THEREFORE, for valuable consideration, the receipt and sufficiency of which
is hereby acknowledged, the parties hereto agree as follows:
1. Amendment to loan agreement
1.1 The following definitions shall be added to Section 1.1 of the Loan
Agreement in their proper alphabetical order:
"Amendment Agreement No. 4" means, Amendment Agreement No. 4, dated as of
November 11, 1999, among the parties hereto.
"Availability" means, at any time (i) the lesser at such time of (x) the
Revolving Loan Commitment and (y) the sum of (A) the TNFI Borrowing Limit
plus (B) the Overall Borrowing Limit, minus (ii) the sum at such time of (x)
the unpaid principal balance of, and accrued interest and fees on, the
Revolving Loan and (y) the Risk Participation Reserve.
"Eligible Accounts" means, as at any date of determination, the aggregate of
all Accounts of TNFI, TNFE, La Sportiva USA and, subject to the last
sentence of this definition, of TNF Canada, that the Administrative Agent,
in its credit judgment, deems to be eligible for borrowing purposes.
Without limiting the generality of the foregoing, unless otherwise agreed by
the Administrative Agent, the following Accounts are not Eligible Accounts:
---
a. Any Account which, at the date of issuance of the respective invoice
therefor, was (i) payable more than sixty (60) days after the date of
issuance of such invoice or (ii) solely with respect to Accounts under a
payment dating program which is consistent with normal industry practices
and approved by the Administrative Agent ("Dating Program"), payable
later than the last day of the Dating Program;
<PAGE>
b. Any Dating Program Account which remains unpaid for more than thirty (30)
days after the due date under the Dating Program or any other Account
which remains unpaid for more than thirty (30) days after the due date
specified in the original invoice or for more than ninety (90) days after
invoice date if no due date was specified;
c. Any Account due (i) to TNFI or TNF Canada from a customer whose principal
place of business is located outside the United States of America or
Canada or (ii) to TNFE from a customer whose principal place of business
is located outside of Europe unless such Account is backed by a letter of
credit, in form and substance and issued by a bank reasonably acceptable
to the Administrative Agent, in its sole discretion, provided that such
letter of credit is by its terms transferable and has been delivered to
the Collateral Agent, on behalf of Lenders, as additional collateral;
d. Any Account due from a customer which the Administrative Agent has
notified Borrower does not have an acceptable credit standing (as
determined in the sole discretion of the Administrative Agent);
e. Any Account with respect to which the customer is the United States of
America or any department, agency or instrumentality thereof unless the
applicable Loan Party has, with respect to such Account, fully complied
with the Federal Assignment of Claims Act (31 U.S.C. Section 3727) unless
such Account is backed by a letter of credit, in form and issued by a
bank acceptable to the Administrative Agent;
f. Any Account with respect to which the customer is an Affiliate of any
Loan Party or a director, officer, agent, stockholder or employee of any
Loan Party or any of its Affiliates;
g. Any Account due from a customer if more than thirty percent (30%) of the
aggregate amount of Accounts of such customer have at the time remained
unpaid for more than thirty (30) days after the due date and/or, with
respect to Dating Program Accounts, more than thirty (30) days after the
due date of the Dating Program;
h. Any Account with respect to which there is any unresolved dispute with
the respective customer (but only to the extent of such dispute);
i. Any Account evidenced by an "instrument" (as defined in the UCC) not in
the possession of the Collateral Agent, on behalf of Lenders;
j. Any Account with respect to which the Collateral Agent, on behalf of
Lenders, does not have a valid, first priority and fully perfected
security interest;
k. Any Account subject to any Lien except those in favor of the Collateral
Agent, on behalf of Lenders;
l. Any Account with respect to which the customer is the subject of any
bankruptcy or other insolvency proceeding;
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<PAGE>
m. Any Account due from a customer to the extent that such Account, if taken
together with all Accounts due from the same customer and owing to either
TNFI, TNF Canada and/or TNFE would exceed in the aggregate an amount
equal to twenty-five percent (25%) of the aggregate of all Accounts of
such Loan Party at said date;
n. Any Account with respect to which the customer's obligation to pay is
conditional or subject to a repurchase obligation or right to return or
with respect to which the goods or services giving rise to such Account
have not been delivered (or performed, as applicable) and accepted by
such account debtor, including progress billings, bill and hold sales,
guaranteed sales, sale or return transactions, sales on approval or
consignment sales;
o. Any Account with respect to which the customer is located in New Jersey,
Minnesota, or any other state denying creditors access to its courts in
the absence of a Notice of Business Activities Report or other similar
filing, unless TNFI has either qualified as a foreign corporation
authorized to transact business in such state or has filed a Notice of
Business Activities Report or similar filing with the applicable state
agency for the then current year; and
p. Any Account with respect to which the customer is a creditor of any Loan
Party (including a customer to which any Loan Party owes a credit
balance); provided, however, that any such Account shall only be
ineligible as to that portion of such Account which is less than or equal
to the amount owed by the applicable Loan Party to such customer.
Accounts owing to TNF Canada shall only be included in "Eligible Accounts"
to the extent that, in addition to all of the foregoing, a first priority
perfected security interest therein has been granted by TNF Canada to TNFI
to secure the Intercompany Advance (which Intercompany Advance and
accompanying security shall have been subjected to a first priority
perfected security interest in favor of the Collateral Agent for the benefit
of the Lenders).
"Eligible Inventory" means, as at any date of determination, the value
(determined in Dollars at the lower of cost or market on a first-in, first-
out basis) of all Inventory owned by and in the possession of (i) TNFI and
LaSportiva USA and located in the United States of America and (ii) of TNFE
and located in Scotland and in any case that Administrative Agent, in its
sole discretion, deems to be eligible for borrowing purposes. Without
limiting the generality of the foregoing, unless otherwise agreed by
Administrative Agent, the following is not Eligible Inventory: (a) raw
material and work-in-process; (b) finished goods which do not meet the
specifications of the purchase order for such goods; (c) Inventory which
Administrative Agent determines, in the exercise of its discretion, to be
unacceptable for borrowing purposes due to age, quality, type, category
and/or quantity; (d) Inventory with respect to which the Collateral Agent,
on behalf of Lenders, does not have a valid, first priority and fully
perfected security interest; (e) Inventory with respect to which there
exists any Lien in favor of any Person other than the Collateral Agent, on
behalf of Lenders; (f) Inventory which is obsolete, slow moving or
unmerchantable in the sole discretion of the Administrative Agent; (g)
Inventory which has been
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owned by a Borrower in excess of twelve months; and (h) Inventory produced
in violation of the Fair Labor Standards Act and subject to the so-called
"hot goods" provisions contained in Title 29 U.S.C. 215 (a)(i).
"Special Inventory Advance Rate" means (i) for the period of November 8,
1999, through December 26, 1999, 71% of Eligible Inventory, (ii) for the
period of December 27, 1999 through January 31, 2000, 63% of Eligible
Inventory, and (iii) for the period of February 1, 2000 through March 31,
2000, 75% of Eligible Inventory.
1.2 The definitions of "Domestic Accounts" and "Domestic Inventory" are hereby
deleted from Section 1.1 of the Loan Agreement.
1.3 The following definitions contained in Section 1.1 of the Loan Agreement are
amended in their entireties to read as set forth below:
"Applicable Margin" means the rate of two and three quarters percent
(2.75%).
"Eligible Foreign Subsidiary Inventory" means inventory (as so classified in
accordance with GAAP) of TNFE which is Eligible Inventory in which
Collateral Agent has obtained a first priority perfected security interest,
located in bonded warehouses in Scotland or in warehouses owned by TNFE in
Scotland, and in connection with which the Collateral Agent has received
landlord waivers, in form and substance reasonably acceptable to the
Collateral Agent.
"Intangible Assets" means the amount of intangible assets (determined in
conformity with GAAP) of each Borrower and its Subsidiaries, including,
without limitation, goodwill, trademarks, trade names, licenses,
organizational costs, deferred amounts, covenants not to compete, unearned
income, restricted funds and capitalized financing costs but Intangible
Assets shall not include reserves for deferred tax benefits.
"Inventory Sublimit" means the U.S. Dollar Equivalent of $50,000,000.
"Overall Borrowing Limit" means, as of any date of determination, an amount
equal to the sum of, without duplication, (a) eighty-five percent (85%) of
all Eligible Accounts of TNFE; plus (b) the lesser of (1) fifty percent
(50%) of Eligible Foreign Subsidiary Inventory (or, solely for the period of
November 8, 1999 through March 31, 2000, the Special Inventory Advance Rate
applicable for such period) and (2) the Inventory Sublimit less the
outstanding amount of Revolving Loans advanced to and the Risk Participation
Reserve attributable to TNFI which, in each case, is supported by Inventory
of TNFI; plus (c) forty-five percent (45%) of the aggregate amount of Risk
Participation Liability with respect to all outstanding Lender Letters of
Credit and Risk Participation Agreements used by TNFE to purchase Inventory;
less (d) the GAAP Reserve; less (e) in each category, such other reserves as
the Administrative Agent in its sole, reasonable discretion elects to
establish from time to time.
"Permitted Intercompany Advances" means advances from TNFI to TNF Canada in
the maximum aggregate amount of Five Hundred Thousand Dollars ($500,000)
outstanding at any
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<PAGE>
time, provided that any such advance is made pursuant to an intercompany
note in form and substance satisfactory to the Administration Agent which
intercompany note is pledged to collateral agent.
"Prime Rate" means a variable rate of interest per annum equal at all times
to the base commercial lending rate of IBJSBTC as is publicly announced to
be in effect from time to time, such rate to be adjusted automatically,
without notice, on the effective date of any change in such rate plus two
percent (2.00%). The base commercial lending rate announced by IBJSBTC is
determined from time to time by IBJSBTC as a means of pricing some loans to
its customers and is neither tied to any external rate of interest or index
nor does it necessarily reflect the lowest rate of interest actually charged
by IBJSBTC to any particular class or category of customers of IBJSBTC.
"TNFI Borrowing Limit" means, as of any date of determination, an amount
equal to the sum of, without duplication, (a) eighty-five percent (85%) of
Eligible Accounts of TNFI and La Sportiva USA; plus (b) the lesser of (1)
fifty percent (50%) of Eligible Inventory of TNFI (or, solely for the period
of November 8, 1999 through March 31, 2000, the Special Inventory Advance
Rate applicable for such period) and (2) the Inventory Sublimit less the
outstanding amount of Revolving Loans advanced to and the Risk Participation
Reserve attributable to the Foreign Subsidiaries which, in each case is
supported by Inventory of TNFI or Eligible Foreign Subsidiary Inventory;
plus (c) forty-five percent (45%) of the aggregate amount of Risk
Participation Liability with respect to all outstanding Lender Letters of
Credit and Risk Participation Agreements used by TNFI to purchase Eligible
Inventory; plus (d) eighty-five percent (85%) of Eligible Accounts of TNF
Canada; provided that the amounts available under this clause (d) shall not
exceed the unpaid amount of the Intercompany Inventory Account less reserves
for withholding taxes, if any, payable by TNF Canada with respect thereto;
less (e) the GAAP Reserve; less (f) in each category, such other reserves as
the Administrative Agent in its sole, reasonable discretion elects to
establish from time to time. Notwithstanding anything contained herein to
the contrary, the maximum amount of availability attributable to Eligible
Accounts of TNF Canada shall not exceed Fifteen Million Dollars
($15,000,000) at any time.
1.4 The definition of "Tangible Net Worth" in Section 1.1 of the Loan Agreement
is amended by (i) deleting clause (c) thereof and re-numbering the
subsequent clauses accordingly and (ii) adding the following sentence at the
end thereof: "Tangible Net Worth shall be adjusted to exclude the effect of
gains or losses solely as a result of a conversion of funds from one
currency to another".
1.5 Section 2.1(B) of the Loan Agreement is amended in its entirety to read as
follows:
Subject to the terms and conditions of this Agreement and in reliance upon
the representations and warranties of the Borrowers herein set forth, each
Lender agrees, severally but not jointly, to lend to TNFI and TNFE from time
to time such Lender's Pro Rata Share of the Revolving Loan. The Revolving
Loan Commitment shall be the U.S. Dollar Equivalent of One Hundred
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<PAGE>
Fifteen Million Dollars ($115,000,000) through December 30, 1999 and
thereafter, the Revolving Loan Commitment shall be the U.S. Dollar
Equivalent of One Hundred Million Dollars ($100,000,000). Amounts borrowed
under this subsection 2.1(B) may be repaid and reborrowed at any time prior
to the earlier of (i) the termination of the Revolving Loan Commitment
pursuant to Section 8.3 and (ii) the Termination Date. No Lender shall have
any obligation to make advances under this subsection 2.1(B) to the extent
any requested advance would cause the balance of the U.S. Dollar Equivalent
of all Revolving Loans then outstanding plus the Risk Participation Reserve
to exceed the then applicable (i) Overall Maximum Available Revolving Loan
Amount or (ii) (x) TNFI Maximum Available Revolving Loan Amount in the case
of a requested advance to TNFI or (y) TNFE Maximum Available Revolving Loan
Amount in the case of a requested advance to TNFE. Subject to the conditions
of this Agreement, Revolving Loans shall be made (i) at the request of TNFI
for its account, as requested in accordance with subsection 2.1(C), for
which TNFI (and not the Foreign Subsidiaries) shall be obligated, and (ii)
at the request of TNFE for its account, as requested in accordance with
subsection 2.1(C), and for which the Foreign Subsidiaries shall be jointly
and severally obligated. Each Applicable Maximum Available Revolving Loan
Amount shall be computed daily by reference to the daily sales register,
credit memorandum and remittance reports submitted by TNFI to Administrative
Agent pursuant to Section 5.1(S) as supplemented, in the sole discretion of
the Administrative Agent, by the most recent borrowing base certificate
submitted by TNFI to Administrative Agent pursuant to Section 5.1(T).
1.6 The following shall be added at the end of Section 2.1 of the Loan
Agreement:
(H) TNFHK Incurrence of Obligations
Notwithstanding anything contained herein to the contrary, TNFHK may
not request any Revolving Loans, the issuance of any Lender Letter of
Credit or the issuance of any Risk Participation Agreement and none of
the Administrative Agent, the L/C Issuing Bank or any Lender shall be
required to honor any such request. For purposes of this Section 2.1,
the term Borrowers shall only include TNFI and TNFE.
1.7 The first sentence of Section 2.1(E)(3) is amended in its entirety to
read as follows:
In addition to all other terms and conditions set forth in this Agreement,
the issuance by Administrative Agent or any L/C Issuing Bank of any Lender
Letter of Credit or Risk Participation Agreement shall be subject to the
conditions precedent that the Lender Letter of Credit, Risk Participation
Agreement and Underlying L/C be in such form, be for such amount, contain
such terms and support transactions for which purchase orders have been
received and reviewed by the Administrative Agent and matched to Inventory,
in all cases, to the extent required by the Administrative Agent and which
transactions are otherwise acceptable to Administrative Agent and/or the
relevant L/C Issuing Bank as applicable and be in an Alternative Currency.
1.8 Section 2.2 of the Loan Agreement is amended in its entirety to read as
follows:
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<PAGE>
2.2 Interest
(A) Rate of Interest
Notwithstanding anything contained herein to the contrary, the Loans
and all other Obligations shall bear interest from the date such Loans
are made or such other Obligations become due to the date paid at a
rate per annum equal to the Prime Rate. During any period in which
TNFI or TNFE utilizes the Special Inventory Advance Rate, the Loans
and other Obligations shall bear interest at a rate per annum equal to
the Prime Rate plus one quarter of one percent (0.25%).
After the occurrence of an Event of Default and for so long as such
Event of Default continues, the Loans and all other Obligations shall
bear interest at a rate per annum equal to two percent (2.0%) plus the
applicable interest rate (the "Default Rate").
(B) Computation and Payment of Interest
Interest on the Loans and all other Obligations shall be computed on
the daily principal balance on the basis of a 360-day year for the
actual number of days elapsed in the period during which it accrues.
In computing interest on any Loan, the date of funding of the Loan
shall be included and the date of payment of such Loan shall be
excluded; provided that if a Loan is repaid on the same day on which
it is made, one day's interest shall be paid on that Loan. Interest on
Prime Rate Loans and all other Obligations shall be payable to
Administrative Agent, for the benefit of Lenders, monthly in arrears
on the first day of each calendar month, on the date of any prepayment
of Loans and at maturity, whether by acceleration or otherwise.
(C) Interest Laws
Notwithstanding any provision to the contrary contained in this
Agreement or any other Loan Document, no Borrower shall be required to
pay, and neither Administrative Agent nor any Lender shall be
permitted to collect, any amount of interest in excess of the maximum
amount of interest permitted by law ("Excess Interest"). If any Excess
Interest is provided for or determined by a court of competent
jurisdiction to have been provided for in this Agreement or in any
other Loan Document, then in such event: (1) the provisions of this
subsection shall govern and control; (2) no Borrower nor any Loan
Party shall be obligated to pay any Excess Interest; (3) any Excess
Interest that Administrative Agent or, Collateral Agent any Lender may
have received hereunder shall be, at such Lender's option, (a) applied
as a credit against the outstanding principal balance of the
Obligations or accrued and unpaid interest (not to exceed the maximum
amount permitted by law), (b) refunded to the payor thereof, or (c)
any
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combination of the foregoing; (4) the interest rate(s) provided for
herein shall be automatically reduced to the maximum lawful rate
allowed from time to time under applicable law (the "Maximum Rate"),
and this Agreement and the other Loan Documents shall be deemed to
have been and shall be reformed and modified to reflect such
reduction; and (5) neither any Borrower nor any Loan Party shall have
any action against Administrative Agent, Collateral Agent or any
Lender for any damages arising out of the payment or collection of any
Excess Interest. Notwithstanding the foregoing, if for any period of
time interest on any Obligations is calculated at the Maximum Rate
rather than the applicable rate under this Agreement, and thereafter
such applicable rate becomes less than the Maximum Rate, the rate of
interest payable on such Obligations shall remain at the Maximum Rate
until each Lender shall have received the amount of interest which
such Lender would have received during such period on such Obligations
had the rate of interest not been limited to the Maximum Rate during
such period.
1.9 Section 2.5 of the Loan Agreement is amended by deleting the phrase "fifth
anniversary thereof" and inserting in its place, the date "March 31, 2000".
1.10 Clause (I) of Section 3.2 of the Loan Agreement is amended in its entirety
to read as follows:
"Since August 31, 1999, no event shall have occurred which has resulted in
or would reasonably be expected to have a Material Adverse Effect."
1.11 Section 5.1 of the Loan Agreement is amended by adding the following
clauses to the end thereof:
(S) Daily Accounts Reporting
------------------------
On a daily basis, TNFI will deliver to Administrative Agent (1) a
completed assignment schedule of all Accounts created by Borrowers,
together with a report of sales, remittances, credits and appropriate
back-up for the foregoing which may be in the form of an invoice
register or sales journal and, if requested by the Administrative
Agent, copies of invoices evidencing such sales and proofs of delivery
relating thereto; and (2) a daily management report (including
information regarding non-cash credits and adjustments), all in form
and substance satisfactory to the Administrative Agent.
(T) Borrowing Base Certificates, Registers and Journals.
---------------------------------------------------
On Wednesday of each week, TNFI will deliver to Administrative Agent,
for the previous week (1) a completed borrowing base certificate in
form and substance satisfactory to the Administrative Agent updated to
reflect the most recent sales and collections of Borrowers and TNF
Canada through the end of the previous week and the amount of the
Intercompany Inventory Account at the end of such week; (2) a completed
report of returns, backlog and back order position for the Borrowers
and
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TNF Canada, in form and substance acceptable to Administrative Agent;
(3) a completed inventory report, together with applicable back-up, in
form and substance acceptable to the Administrative Agent, of Borrowers
and TNF Canada; and (4) a schedule of in-transit Inventory.
(U) Availability and Cash Flow Forecast
-----------------------------------
On Wednesday of each second week, beginning November 17, 1999, TNFI
will deliver to Administrative Agent a rolling thirteen (13) week
forecast of Availability as well as cash flow of the Borrowers. The
foregoing report shall include a comparison of actual Availability and
cash flow to the forecast numbers contained in previous reports and
shall be in form and substance acceptable to the Administrative Agent.
(V) Reconciliation Reports, Inventory Reports, Listings and Agings and
------------------------------------------------------------------
Compliance.
----------
Within ten (10) Business Days after the last day of each calendar
month, TNFI will deliver to Administrative Agent, for the prior month:
(1) an aged trial balance of all then existing Accounts of Borrowers;
(2) an aged trial balance of all then existing accounts payable of
Borrowers; and (3) a reconciliation report which shall reconcile actual
activity to the aging of Accounts; (4) a report showing, in detail
acceptable to Administrative Agent, TNFI's Inventory in Canada and all
Inventory sold by TNFI to TNF Canada, and all additions to and payments
on the Intercompany Inventory Account; and (5) a compliance
certificate, duly executed by the chief executive officer of or chief
financial officer of TNFI showing compliance with the financial
covenants contained herein. Each of the foregoing shall be in form and
substance satisfactory to the Administrative Agent.
(W) Excess Inventory Report
-----------------------
Within ten (10) Business Days after the last day of each calendar
month, TNFI will deliver to Administrative Agent a report on "Excess
Inventory" of the Borrowers. For purposes of this report, Excess
Inventory shall include, without limitation, seasonal Inventory
originally projected to be sold prior to December 31, 1999 plus
Inventory owned by any Borrower for more than twelve (12) months.
1.12 Section 5.3 of the Loan Agreement is amended by deleting the phrase "such
inspections shall be limited to once in each Fiscal Year" where it appears
in the ninth and tenth lines thereof, and replacing it with the phrase
"such inspections shall be limited to once in each fiscal quarter of each
Fiscal Year".
1.13 The following shall be added immediately after Section 5.18 of the Loan
Agreement
5.19 Year 2000 Budget
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On or before December 10, 1999, the Administrative Agent shall have
received a budget for Borrowers' 2000 fiscal year which shall include a
summary of the business plan and financial operation projections for the
Borrowers and their Subsidiaries for such year (including principal
assumptions) and shall show reductions in Borrowers' expenses, all in form
and substance satisfactory to the Administrative Agent.
5.20 Physical Inventory
On or before December 4, 1999, TNFI shall deliver to the Administrative
Agent the results of a physical audit of all Inventory of the Borrowers,
the results of which shall not be, in the sole discretion of the
Administrative Agent, materially and adversely different than prior
Inventory reporting provided to the Administrative Agent pursuant to the
Loan Agreement.
5.21 Mortgage on Carbondale Property
On or prior to January 15, 2000, TNFI shall enter into a Mortgage, in an
amount to be determined by the Administrative Agent (which amount shall be
at least equal to the market value of the mortgaged property) and in form
and substance satisfactory to Administrative Agent, covering TNFI's
headquarters and surrounding property in Carbondale, Colorado. In
connection therewith, TNFI shall also deliver title insurance policies and
surveys as required by Section 5.15 hereof. TNFI hereby confirms that the
provisions of the second sentence of Section 5.15(A) hereof will not apply
to its property in Carbondale, Colorado. Execution (but not filing) of the
foregoing Mortgage shall take place on or before December 10, 1999.
5.22 Plan of Cash Infusion
On or prior to December 15, 1999, TNFI shall deliver to the Administrative
Agent, a plan for raising funds through the issuance of additional equity
or subordinated debt, such plan to be in form and substance reasonably
satisfactory to the Administrative Agent.
5.23 TNFE Excess Cash
TNFE shall not maintain cash on hand in excess of the U.S. Dollar
Equivalent of $500,000. At the close of business on each Thursday, TNFE
shall wire transfer to TNFI's account at Bank of America, Account
#1472000543, all amounts in TNFE's bank accounts in excess of $500,000,
such amounts to constitute payment of Loans under this Agreement.
5.24 Extension Fee
On or prior to December 31, 1999, TNFI shall pay to the Administrative
Agent, for the ratable benefit of the Lenders, an extension fee in the
amount of $575,000 unless the Obligations are paid in full prior to such
date.
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5.25 Consultant Access
The Administrative Agent intends to hire a financial consultant to monitor
and report directly to the Administrative Agent and the Lenders on all
matters relating to the Loan Documents and the credit extended thereunder.
Borrowers hereby agree that on and after December 10, 1999, Borrowers shall
grant to such financial consultant access to Borrowers' records and
management and shall cooperate with such consulting firm in its task of
monitoring and reporting on Borrowers' fiscal condition. Borrowers further
agree that the reasonable fees, costs and expenses of such financial
consultant are obligations of the Borrowers pursuant to Section 10.1.
1.10 Sections 6.1 and 6.2 of the Loan Agreement are amended in their
entireties to read as set forth below:
6.1 Tangible Net Worth
On each date listed below, Tangible Net Worth, shall exceed the amount
set forth opposite such date.
Date Amount
--------------- ----------------
9/30/99 $68,000,000
10/31/99 $68,000,000
11/30/99 $68,000,000
12/31/99 $68,000,000
1/31/00 $64,000,000
2/28/00 $63,000,000
3/31/00 $63,000,000
6.2 Maximum Outstanding Amount
On each date listed below, the U.S. Dollar Equivalent of all
outstanding Revolving Loans shall not exceed the amount set forth
opposite such date:
Date Amount
--------------- ----------------
11/14/99 $92,500,000
11/28/99 $87,500,000
12/19/99 $81,500,000
12/26/99 $75,000,000
1/02/00 $72,000,000
1/31/00 $75,000,000
2/28/00 $89,000,000
3/31/00 $86,000,000
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1.11 Section 6.4 of the Loan Agreement is hereby amended in its entirety to
read as set forth below:
6.4 Minimum Availability Amount
On each date listed below, Availability shall exceed the amount set
forth below opposite such date:
Date Amount
---------------- ---------------
11/14/99 $5,000,000
11/28/99 $4,000,000
12/19/99 $1,000,000
12/26/99 $3,500,000
1/02/00 $ 750,000
1/31/00 $ 500,000
2/28/00 $ 100,000
3/31/00 $ 250,000
1.12 Section 6.5 and 6.6 of the Loan Agreement are hereby deleted.
1.13 Section 7.4 of the Loan Agreement is amended by deleting clause (d)
thereof ("Permitted Acquisitions") and re-numbering the subsequent clauses
accordingly.
2. Conditions Precedent
This Amendment Agreement shall be effective upon the execution and
delivery of counterparts hereof by the parties hereto and the fulfillment
of the following conditions:
2.1 All representations and warranties contained in this Amendment Agreement
or otherwise made in writing to the Administrative Agent in connection
herewith shall be true and correct in all material respects.
2.2 No unwaived event shall have occurred and be continuing which constitutes
a Default or Event of Default.
2.3 The Administrative Agent shall have received, for the pro rata benefit of
the Lenders, an amendment fee in the amount of $400,000.
2.4 TNFI shall have executed the Warrant Agreement attached hereto as Exhibit
1 and shall have issued Warrant Certificates pursuant thereto to purchase
common stock of TNFI on the terms specified in the Warrant Agreement. The
aggregate number of shares for which all warrants may be exercised shall
equal $975,000 divided by the closing price of TNFI common stock on
November 10, 1999. Warrants shall be issued to each Lender pro rata to its
Commitment.
2.5 The Administrative Agent shall have received a favorable written legal
opinion, in form and substance acceptable to the Administrative Agent, of
Wilson Sonsini Goodrich & Rosati, counsel to the Borrowers.
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<PAGE>
2.6 The Administrative Agent shall have received a plan, in form and substance
acceptable to the Administrative Agent, for selling excess inventory of
TNFI and TNFE. For purposes of such plan, "excess inventory" shall
include, without limitation, inventory originally projected to be sold
prior to December 31, 1999 plus inventory owned by TNFI or any of TNFI's
Subsidiaries for more than twelve months.
2.7 The Administrative Agent and Lenders shall have been reimbursed for all
expenses incurred in connection with the negotiation and documentation of
this Amendment Agreement and the transactions contemplated herein,
including payment in full for all legal fees charged and costs and
expenses incurred by counsel in each case for which TNFI has received
bills.
2.8 The Administrative Agent shall have received evidence, in form and
substance satisfactory to the Administrative Agent, of the compliance by
the Borrowers with Section 5.10 of the Loan Agreement.
2.9 The Administrative Agent shall have received satisfactory evidence that
all security interests and liens granted to Collateral Agent pursuant to
any Loan Document have been duly perfected and constitute first priority
liens on the Collateral.
2.10 The Administrative Agent shall have received a complete list of
Subsidiaries of TNFI, including dormant Subsidiaries and Subsidiaries that
exist solely for tax purposes, such list to include a description of the
equity interest owned by TNFI in each such Subsidiary. In addition, the
Administrative Agent shall have received a list of trade names or other
names, if any, under which TNFI or any of its Subsidiaries conduct
business.
3. Miscellaneous
3.1 Each of the Borrowers reaffirms and restates the representations and
warranties set forth in the Loan Agreement, as applicable, and all such
representations and warranties shall be true and correct in all material
respects on the date hereof with the same force and effect as if made on
such date. Each of the Borrowers represents and warrants as to itself
(which representations and warranties shall survive the execution and
delivery hereof) to the Administrative Agent that:
(a) This Amendment Agreement has been duly executed and delivered by a
duly authorized officer on behalf of each of the Borrowers, and
constitutes the legal, valid and binding obligations of each, enforceable
in accordance with its terms, except as enforcement thereof may be subject
to the effect of any applicable (i) bankruptcy, insolvency,
reorganization, moratorium or similar law affecting creditors' rights
generally and (ii) general principles of equity (regardless of whether
enforcement is sought in a proceeding in equity or at law).
(b) The execution, delivery and performance of this Amendment Agreement
will not violate any law, statute or regulation applicable to any
Borrower, or any order or decree of any court or governmental
instrumentality applicable to such company, or conflict with, or
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<PAGE>
result in the breach of, or constitute a default under any contractual
obligation of such company.
3.2 Each of the Borrowers hereby irrevocably and unconditionally confirms,
that notwithstanding this Amendment Agreement, the Loan Agreement and the
other Loan Documents (including each Collateral Document) are each
ratified and confirmed in all respects and shall remain in full force and
effect in accordance with their respective terms.
3.3 Nothing herein contained (other than by way of the specific amendments
contained herein), shall constitute a waiver or be deemed to be a waiver,
of any existing Default or Event of Default, and the Lenders and
Administrative Agent reserve all rights and remedies granted to them by
the Loan Agreement, the other Loan Documents, by law and otherwise.
3.4 In consideration of the Lenders and the Administrative Agent entering into
this Amendment Agreement, each of the Borrowers hereby unconditionally
releases, waives and relinquishes (a) all claims, cross-claims and
defenses which it may have against the Administrative Agent, the
Collateral Agent and each Lender (collectively, the "Releasees") in
connection with the negotiation, execution, administration, performance or
enforcement of the Loan Agreement and each other Loan Document and (b) all
claims which it may have against any Releasee arising out of or in
connection with the negotiations concerning restructuring or otherwise
altering the obligations of the Borrowers under the Loan Agreement and
each other Loan Document.
3.5 All references to the Loan Agreement in any Loan Document shall mean the
Loan Agreement as amended hereby.
3.6 This Amendment Agreement may be executed by the parties hereto
individually or in combination, in one or more counterparts, each of which
shall be an original and all of which shall constitute one and the same
agreement. A facsimile signature page shall constitute an original for the
purposes hereof.
3.7 THIS AGREEMENT SHALL BE GOVERNED BY, AND CONSTRUED AND INTERPRETED IN
ACCORDANCE WITH, THE LAWS OF THE STATE OF NEW YORK, WITHOUT GIVING EFFECT
TO THE CONFLICTS OF LAWS PRINCIPLES THEREOF.
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<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Waiver Agreement to be
duly executed as of the date first written above.
THE NORTH FACE, INC.
By: ........................................
Name:
Title:
THE NORTH FACE (CANADA), INC.
By: ........................................
Name:
Title:
THE NORTH FACE, HONG KONG, LIMITED
By: ........................................
Name:
Title:
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<PAGE>
THE NORTH FACE (EUROPE) LIMITED
By: ........................................
Name:
Title:
IBJ WHITEHALL BUSINESS CREDIT
CORPORATION
as a Lender and as Administrative Agent
and Collateral Agent
By: ........................................
Name:
Title:
THE INDUSTRIAL BANK OF JAPAN,
LIMITED, NEW YORK BRANCH, as a
Lender and as Syndication Agent
By: ........................................
Name:
Title:
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<PAGE>
FLEET BANK, N.A.
By: ........................................
Name:
Title:
BANK OF AMERICA
By: ........................................
Name:
Title:
BANQUE NATIONALE DE PARIS
By: ........................................
Name:
Title:
NORWEST BANK COLORADO, N.A.
By: ........................................
Name:
Title:
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<PAGE>
NATIONAL BANK OF CANADA
By: ........................................
Name:
Title:
BANK ONE, COLORADO N.A.
By: ........................................
Name:
Title:
COMERICA
By: ........................................
Name:
Title:
-18-
<PAGE>
EXHIBIT 10.17
THE NORTH FACE, INC.
GEOFFREY D. LURIE EMPLOYMENT AGREEMENT
This Agreement is made by and between The North Face, Inc. (the "Company"),
and Geoffrey D. Lurie ("Executive") as of the date set forth by the parties
below.
1. Duties and Scope of Employment.
------------------------------
(a) Position; Employment Commencement Date; Duties. Executive's
----------------------------------------------
employment with the Company pursuant to this Agreement shall commence on
November 4, 1999 (the "Employment Commencement Date") and shall continue, unless
otherwise terminated earlier as provided in Section 4 hereof, until December 31,
2002 (the "Employment Term"). As of the Employment Commencement Date, the
Company shall employ the Executive as the Chief Executive Officer of the Company
reporting to the Board Directors of the Company (the "Board"); provided,
however, that Executive agrees to relinquish his duties as the Chief Executive
Officer of the Company and the Company agrees to offer Executive continued
employment in a capacity to be determined by the Board in the event that the
Board appoints Karl Heinz Salzburger to such position while Executive is
employed by the Company at any time between December 1, 2000 and January 31,
2001. At the end of the Employment Term, Executive and the Company understand
and acknowledge that Executive's employment with the Company will constitute
"at-will" employment. Executive and the Company acknowledge that after the
Employment Term, this employment relationship may be terminated at any time,
with or without good cause or for any or no cause, and with or without notice,
at the option either of the Company or Executive. While employed by the
Company, Executive shall render such business and professional services in the
performance of his duties, consistent with Executive's position within the
Company, as shall reasonably be assigned to him by the Board.
(b) Obligations. While employed by the Company, Executive shall
-----------
devote his full business efforts and time to the Company at the Company's United
States headquarters, subject to Executive's need to commute between the
Company's headquarters and his home until January 31, 2001. Executive agrees,
during the Employment Term, not to actively engage in any other employment,
occupation or consulting activity for any direct or indirect remuneration
without the prior approval of the Board; provided, however, that Executive may
(i) serve in any capacity with any civic, educational or charitable
organization, or as a member of corporate Boards of Directors or committees
thereof, without the approval of the Board, so long as such activities do not
interfere with his duties and obligations under this Agreement and (ii) remain
in an unpaid advisory role with Mahoney Cohen and Company, CPA, PC, provided
such role does not interfere with Executive's performance of his duties.
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<PAGE>
2. Board Membership. On the Employment Commencement Date, the Company
----------------
agrees to nominate Executive for Board membership.
3. Compensation and Benefits.
--------------------------
(a) Base Salary. While employed by the Company, the Company shall pay
-----------
the Executive as compensation for his services a base salary at the annualized
rate of $750,000, subject to annual increases at the discretion of the Board
(the "Base Salary"). Such salary shall be paid semi-monthly in accordance with
normal Company payroll practices and subject to the required withholding.
Executive understands and agrees that neither his job performance nor
promotions, commendations, bonuses or the like from the Company give rise to or
in any way serve as the basis for modification, amendment, or extension, by
implication or otherwise, of this Agreement.
(b) Annual Bonuses. During the Employment Term and for Company fiscal
--------------
years ending after December 31, 1999, Executive shall be eligible to receive an
annual cash bonus as established by the Compensation Committee of the Board (the
"Annual Bonus"). Executive shall receive the Annual Bonus based on the
achievement of the target milestones specified by the Compensation Committee in
its discretion (which shall be consistent with the milestones established for
Karl Heinz Salzburger) that pertain to the Company's (i) EBITDA, (ii) customer
base, and (iii) infrastructure for the fiscal year ending December 31, 2000; the
Company's (i) earnings per share, (ii) customer base, and (iii) infrastructure
for the fiscal year ending December 31, 2001; and the Company's (i) earnings per
share and (ii) infrastructure for the fiscal year ending December 31, 2002 (the
"Bonus Milestones"). For each such fiscal year, the Annual Bonus shall equal
(i) 0% of the Executive's Base Salary for such year if less than 75% of the
applicable Bonus Milestones are met, (ii) 33.33% of the Executive's Base Salary
for such year if 75% of the applicable Bonus Milestones are met, (iii) a scaled
linear percentage of the Executive's Base Salary (between 33.33% and 100%) for
such year if between 75% and 125% of the applicable Bonus Milestones are met
(e.g., Executive shall be entitled to 66.67% of his Base Salary for such year if
100% of the applicable Bonus Milestones are met), and (iv) 100% of the
Executive's Base Salary for such year if 125% or more of the applicable Bonus
Milestones are met. The payment of any Annual Bonus under this Section 3(b)
shall be subject to Executive's employment with the Company through the end of
the applicable Company fiscal year (which employment requirement does not apply
with the respect to the Annual Bonus component of Severance Benefits made
pursuant to Section 5 or with respect to the pro-rated bonus payment made
pursuant to Section 5). Executive's Annual Bonus shall be reviewed annually by
the Compensation Committee of the Board for possible increases in light of
Executive's performance and competitive data.
(c) Stock Options.
-------------
(i) Initial Option. Upon the Employment Commencement Date,
--------------
Executive shall be granted a stock option covering seven hundred fifty thousand
(750,000) shares of Company Common Stock with a per share exercise price equal
to the closing sale price of a share of
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<PAGE>
the Company's Common Stock on the market trading day prior to date of grant (the
"Option"). The Option shall have a term of ten years, provided, however, that
the Option shall terminate eighteen (18) months after Executive's termination of
services as an employee, consultant or director of the Company. Except as
otherwise specified in this Agreement, the Option is in all respects subject to
the terms, definitions and provisions of the Company's 1998 Nonstatutory Stock
Option Plan (the "NSO Plan"), as applicable, and the respective standard form of
option agreement thereunder (the "Option Agreement") (including, but not limited
to, "cashless exercise" rights as specified in the Option Agreement).
(ii) Vesting on Option. One hundred-fifty thousand (150,000)
-----------------
shares subject to the Option shall be immediately vested and exercisable on the
Employment Commencement Date. Except with respect to accelerated vesting
provided for elsewhere in this Agreement, two hundred thousand (200,000) shares
subject to the Option shall vest each anniversary of the Employment Commencement
Date, so as to be one hundred percent (100%) vested on the third (3rd)
anniversary of the Employment Commencement Date, subject to Executive remaining
employed by the Company on such vesting dates.
(iii) Additional Option. In the event that Karl Heinz
-----------------
Salzburger is appointed by the Board to serve as the Chief Executive Officer of
the Company while Executive is employed by the Company as otherwise provided
herein, and Executive elects to remain employed by the Company as otherwise
provided herein in a capacity to be determined by the Board, Executive shall be
granted an additional stock option covering two hundred thousand (200,000)
shares of Company Common Stock with a per share exercise price equal to the
closing sale price of a share of the Company's Common Stock on the market
trading day prior to the date of grant (the "Additional Option"). The Additional
Option shall have a term of ten years, provided, however, that the Additional
Option shall terminate eighteen (18) months after Executive's termination of
services as an employee, consultant or director of the Company. The Additional
Option shall vest monthly retroactive to the Employment Commencement Date over
the remaining months of the Employment Term so as to be fully vested at the end
of the Employment Term, subject to Executive remaining employed by the Company
on such vesting dates. Except as otherwise specified in this Agreement, the
Additional Option is in all respects subject to the terms, definitions and
provisions of the Company's NSO Plan, as applicable, and the respective standard
form of Option Agreement thereunder (including, but not limited to, "cashless
exercise" rights as specified in the Option Agreement).
(d) Relocation Reimbursements. During the Employment Term, the
-------------------------
Company will reimburse the Executive for reasonable business class travel and
living expenses, including airfare, hotel and/or housing accommodations,
incurred by Executive and his spouse traveling between the Company's offices and
New York. In the event that Executive is the Chief Executive Officer of the
Company on or after January 1, 2001, the Company will also reimburse the
Executive at such times thereafter for customary and reasonable relocation costs
and housing accommodations. Executive shall not be required to permanently
relocate to the Company's offices until January 31,
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<PAGE>
2001.
(e) Employee Benefits. During the Employment Term, Executive shall
-----------------
be eligible to participate in the employee benefit plans maintained by the
Company that are applicable to other senior management of the Company to the
full extent provided for under those plans, including, without limitation, the
Company's life, group health and disability insurance, profit-sharing, deferred
compensation and retirement plans, practices, policies and programs and the
Company's sick, personal, and vacation leave policies. The Company reserves the
right to cancel or change the benefit plans and programs it offers to its
employees at any time. Notwithstanding the foregoing, in the event that
Executive is not immediately eligible to participate in the employee benefit
plans maintained by the Company upon the Employment Commencement Date, the
Company shall reimburse Executive for group health, dental and vision plan
coverage premiums for Executive and his covered dependents for the period from
the Employment Commencement Date until the date that Executive and his
dependents become covered under the Company's group health, dental and vision
insurance plans.
(f) Director and Officer Insurance. During the Employment Term, the
------------------------------
Company shall procure Director and Officer Insurance coverage as mutually agreed
upon in good faith by the Board and Executive on behalf of Executive in
accordance with the Company's established procedures and policies as then in
effect.
(g) Bankruptcy Protection. If, on or before the end of the first
---------------------
(1st) year of Employment Term, a petition for relief is filed with respect to
the Company pursuant to any chapter of Title 11 of the United States Code, 11
U.S.C. (S)(S) 101-1330 (the "Bankruptcy Code"), then Executive shall be entitled
to receive a third-party guaranteed cash payment, by guarantee bond or letter of
credit, in an amount equal to eight hundred thousand dollars ($800,000), such
third-party payment to be made within ten (10) business days of the date of such
filing. To the maximum extent permitted by the Bankruptcy Code, Executive's
claim shall be a priority claim (as that term is used in the Bankruptcy Code) in
any proceeding initiated with respect to the Company under any chapter of the
Bankruptcy Code. Should the Company be unable to procure a guarantee bond or
letter of credit in the amount of $800,000 prior to November 24, 1999 in a form
reasonably satisfactory to Executive, Executive may, at his election, terminate
his employment with the Company and receive, subject to signing and not revoking
a release of claims with the Company in substantially the form attached hereto
as Exhibit B, a lump-sum cash payment in the amount of $800,000; provided,
---------
however, that Executive shall make reasonable commercial efforts at the
Company's expense after consultation with the Board of Directors to assist the
Company in procuring such bond or letter of credit.
(h) Automobile. The Company shall, in its discretion, either make
----------
available to Executive an automobile or pay Executive a reasonable monthly auto
allowance sufficient to lease or purchase an automobile and reimburse Executive
for the maintenance, operating and insurance costs of such automobile.
4. Termination of Employment.
-------------------------
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<PAGE>
(a) Involuntary Termination Without Cause. Subject to Section 6, if
-------------------------------------
the Company terminates Executive's employment other than for "Cause" (as defined
herein) or in the event that the Executive resigns within 30 days following the
appointment by the Board of Karl-Heinz Salzburger as Chief Executive Officer of
the Company as provided in Section 1(a), and the Executive signs and does not
revoke a release of claims with the Company in substantially the form attached
hereto as Exhibit B, then the Executive shall be entitled to the following
---------
payments and benefits (the "Severance Benefits"):
(i) Continued payments of Base Salary for a period equal to the
lesser of (i) the period ending December 31, 2002, or (ii) one and one-half
years; provided, however, that in no event shall the period of such payments be
less than one year (the applicable payment period is referred to herein as the
"Severance Period");
(ii) Continued Annual Bonus payments over the Severance Period,
payable bi-monthly and based on Executive's Annual Bonus for the prior year
(e.g., if Executive's prior year Annual Bonus is $500,000, the Severance Period
is one year - Executive receives the aggregate amount of $500,000 in continued
annual bonus payments bi-monthly over the Severance Period), or, if such
payments are triggered prior to December 31, 2000, based on 100% of Executive's
"on-target" bonus, (i.e., Executive's prior year "on-target" Annual Bonus is
deemed to be $500,000, the Severance Period is one and one-half years -
Executive receives the aggregate amount of $750,000 in continued annual bonus
payments bi-monthly over the Severance Period);
(iii) Immediate vesting of Executive's options as to that number
of additional shares that would have vested had Executive remained employed
during the Severance Period;
(iv) Company-paid (to the same extent as for active executives)
group health, dental and vision plan continuation coverage premiums for
Executive and his covered dependents under Title X of the Consolidated Budget
Reconciliation Act of 1985, as amended ("COBRA") through the lesser of (x)
eighteen (18) months from the date of Executive's termination of employment, or
(y) the date upon which the Executive and his dependents become covered under
another employer's group health, dental and vision insurance plans that provide
Executive and his dependents with comparable benefits and levels of coverage;
and
(v) A pro-rated bonus payment equal to 100% of Executive's Annual
Bonus as in effect for the Company's fiscal year prior to the date of
termination, pro-rated by multiplying such bonus amount by a fraction, the
numerator of which shall be the number of days prior to the date of termination
during the year of termination, and the denominator of which shall be three-
hundred and sixty-five; provided, however, that if Executive is terminated prior
to December 31, 2000, the Annual Bonus shall be deemed to be $500,000 for
purposes of the pro-rata calculation.
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<PAGE>
Notwithstanding the foregoing, if the Company terminates Executive's
employment other than for Cause prior to December 31, 2000, and the Executive
signs and does not revoke a release of claims with the Company in substantially
the form attached hereto as Exhibit B, then the Executive shall be entitled to
---------
both (i) the amount of Base Salary, Annual Bonus, and vesting on the options
that would have been earned had Executive remained employed with the Company
until December 31, 2000, and (ii) the Severance Benefits (computed as if the
date of termination was December 31, 2000) (all of the foregoing constitutes the
"Early Termination Severance Benefits").
For the purposes of this Agreement, "Cause" shall mean (i) Executive's
continued violation of Executive's obligation to perform the duties and
responsibilities normally required of a chief executive officer which are
willful or grossly negligent after Executive has been given written notice from
the Board of Directors describing Executive's violation; (ii) Executive's
engagement in willful or grossly negligent misconduct which is materially
injurious to the Company or its affiliates; (iii) Executive's conviction of or
plea of nolo contendere to a felony, (iv) Executive's committing a material act
---- ----------
of fraud against or material misappropriation of property belonging to the
Company or its affiliates; or (v) Executive's material breach of this Agreement
or any confidentiality or proprietary information agreement between Executive
and the Company. However, Executive may not be terminated for Cause without (i)
notice to Executive setting forth the reasons for the Company's intention to
terminate for Cause, and (ii) an opportunity for Executive, together with his
counsel, if any, to be heard before the Board and, further, such actions shall
not constitute Cause if they are cured by the Executive within thirty (30) days
following delivery to the Executive of a written explanation specifying the
basis for the Board's beliefs with respect to such Cause events.
(b) Constructive Termination Following Change of Control. Subject
----------------------------------------------------
to Section 6, if Executive resigns at any time within forty (40) days following
a "Constructive Termination" (as defined herein) that occurs within one (1)
month after a "Change of Control" (as defined herein), and the Executive signs
and does not revoke a release of claims with the Company in substantially the
form attached hereto as Exhibit B, then the Executive shall be entitled to the
---------
Severance Benefits.
For the purposes of this Agreement, "Change of Control" of the Company
shall mean the occurrence of any of the following events: (i) the consummation
of a merger or consolidation of the Company with any other corporation if the
merger or consolidation will result in the voting securities of the Company
outstanding immediately prior thereto representing (either by remaining
outstanding or by being converted into voting securities of the surviving
entity) less than sixty percent (60%) of the total voting power represented by
the voting securities of the Company or such surviving entity outstanding
immediately after such merger or consolidation; or (ii) any "person" (as such
term is used in Sections 13(d) and 14(d) of the Securities Exchange Act of 1934,
as amended) becoming the "beneficial owner" (as defined in Rule 13d-3 under said
Act), directly or indirectly, of securities of the Company representing more
than 40% of the total voting power represented by the Company's then outstanding
voting securities.
For the purposes of this Agreement, "Constructive Termination" shall mean
(i) the failure of
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<PAGE>
the Company to reconfirm Executive's duties following the Change of Control or
any material diminution of the Executive's duties, authority or responsibilities
relative to the Executive's duties, authority, or responsibilities as in effect
immediately prior to such diminution, except if agreed to in writing by the
Executive; provided, however, that a diminution in duties, authority or
responsibilities solely by virtue of the Company being acquired and made part of
a larger entity (as, for example, when the Executive remains Chief Executive
Officer of the Company following a Change of Control and is not made the Chief
Executive Officer of the acquiring corporation) shall not constitute
"Constructive Termination;" or (ii) the relocation of the Executive to a
facility or a location more than fifty (50) miles from the Executive's then
present location, without the Executive's written consent; provided, however,
that such actions shall not constitute Constructive Termination if they are
cured by the Company within thirty (30) days following delivery to the Company
of a written explanation specifying the basis for the Executive's beliefs with
respect to such Constructive Termination events.
(c) Total Disability of Executive. Upon Executive's becoming
-----------------------------
permanently and totally disabled (as defined in accordance with Internal Revenue
Code Section 22(e)(3) or its successor provision) during the Employment Term,
employment hereunder shall automatically terminate, all payments of compensation
by the Company to Executive hereunder shall immediately terminate (except as to
amounts already earned); provided, however, that Executive shall be entitled to
receive the Severance Benefits. Notwithstanding the foregoing, if Executive
becomes permanently and totally disabled prior to December 31, 2000, employment
hereunder shall automatically terminate, and Executive shall be entitled to
receive the Early Termination Severance Benefits.
(d) Death of Executive. If Executive dies while employed by the
------------------
Company pursuant to this Agreement, all payments of compensation by the Company
to Executive hereunder shall immediately terminate (except as to amounts already
earned, which shall be paid to his estate); provided, however, that Executive's
estate shall be entitled to receive the Severance Benefits. Notwithstanding the
foregoing, if Executive dies prior to December 31, 2000, then Executive's estate
shall be entitled to receive the Early Termination Severance Benefits.
(e) Other Termination of Employment. In the event Executive terminates
-------------------------------
employment with the Company for any reason other than (i) by the Company not for
Cause, (ii) by the Executive as a result of a Constructive Termination occurring
within one month following a Change of Control or (iii) for death or total
disability, then the options shall only be vested as to the extent vested as of
the date of termination of Executive's employment and Executive shall not
receive any severance pursuant to the terms of this Agreement.
(f) No Mitigation. Executive shall not be required to mitigate the
-------------
value of any severance payments or benefits contemplated by this Section, nor
shall any such payments or benefits be reduced by any earnings or benefits that
the Executive may receive from any other source.
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<PAGE>
6. Conditional Nature of Severance Payments.
----------------------------------------
(a) Noncompete. Executive acknowledges that the nature of the
----------
Company's business is such that if Executive were to become employed by, or
substantially involved in, the business of a competitor of the Company during
the twelve (12) months following the termination of Executive's employment with
the Company, it would be very difficult for the Executive not to rely on or use
the Company's trade secrets and confidential information. Thus, to avoid the
inevitable disclosure of the Company's trade secrets and confidential
information, Executive agrees and acknowledges that Executive's right to receive
the severance payments set forth above (to the extent Executive is otherwise
entitled to such payments) shall be conditioned upon the Executive not directly
or indirectly engaging in (whether as an employee, consultant, agent,
proprietor, principal, partner, stockholder, corporate officer, director or
otherwise), nor having any ownership interested in or participating in the
financing, operation, management or control of, any person, firm, corporation or
business that competes with Company by being engaged in the manufacture and sale
of products materially similar to the Company's line of products or is a
material customer of the Company, including by way of example, Adidas/Salomon,
AcrTeryx, Burton, Lowe Alpine, Marmot, Moonstone, Mountain Hardware, Nike and
Patagonia and any other entities similarly specializing in the manufacture and
sale of products materially similar to the Company's line of products; provided,
however, that Executive may enter into a consulting relationship with an entity
that competes with the Company following the termination of Executive's
employment with the Company without breach of this section if such relationship
is mutually agreed to by the Company and Executive. Upon any breach (excluding
de minimis breaches which cause no material harm to the Company) of this
section, all severance payments pursuant to this Agreement shall immediately
cease; provided, however, that Executive's actions will not be deemed to be a
breach of this section unless the Executive is given the opportunity to cure
such actions within thirty (30) days following delivery to the Executive of a
written explanation specifying the basis for the Company's beliefs with respect
to such events and he fails to cure such actions within such time. Ownership of
less than 3% of the outstanding voting stock of a publicly traded corporation
will not constitute a violation of this provision.
(b) Non-Solicitation. During Executive's employment and until one (1)
----------------
year after termination of Executive's employment with the Company for any
reason, Executive agrees and acknowledges that Executive's right to receive the
severance payments set forth above (to the extent Executive is otherwise
entitled to such payments) shall be conditioned upon Executive not either
directly or indirectly soliciting, inducing, attempting to hire, recruiting,
encouraging, taking away, hiring any employee of the Company or causing an
employee of the Company to leave his or her employment either for Executive or
for any other entity or person; provided, however, that Executive's actions will
not be deemed to be a breach of this section unless the Executive is given the
opportunity to cure such actions within thirty (30) days following delivery to
the Executive of a written explanation specifying the basis for the Company's
beliefs with respect to such events and he fails to cure such actions within
such time.
-8-
<PAGE>
(c) Understanding of Covenants. The Executive represents that he (i)
--------------------------
is familiar with the foregoing covenants not to compete and not to solicit, and
(ii) is fully aware of his obligations hereunder, including, without limitation,
the reasonableness of the length of time, scope and geographic coverage of these
covenants.
7. Assignment. Subject to Section 4, this Agreement shall be binding upon
----------
and inure to the benefit of (a) the heirs, executors and legal representatives
of Executive upon Executive's death and (b) any successor of the Company. Any
such successor of the Company shall be deemed substituted for the Company under
the terms of this Agreement for all purposes. As used herein, "successor" shall
include any person, firm, corporation or other business entity which at any
time, whether by purchase, merger or otherwise, directly or indirectly acquires
all or substantially all of the assets or business of the Company. None of the
rights of Executive to receive any form of compensation payable pursuant to this
Agreement shall be assignable or transferable except through a testamentary
disposition or by the laws of descent and distribution upon the death of
Executive. Any attempted assignment, transfer, conveyance or other disposition
(other than as aforesaid) of any interest in the rights of Executive to receive
any form of compensation hereunder shall be null and void.
8. Notices. All notices, requests, demands and other communications
-------
called for hereunder shall be in writing and shall be deemed given if (i)
delivered personally, (ii) one (1) day after being sent by Federal Express or a
similar commercial overnight service, or (iii) three (3) days after being mailed
by registered or certified mail, return receipt requested, prepaid and addressed
to the parties or their successors in interest at the following addresses, or at
such other addresses as the parties may designate by written notice in the
manner aforesaid:
If to the Company: The North Face, Inc.
2013 Farallon Drive
San Leandro, California 94557
Attn: Chief Financial Officer
----
If to Executive: Geoffrey D. Lurie
at the last residential address known by the Company.
cc: Robert E. Helpern, Esq.
Tannenbaum Helpern Syracuse & Hirschtritt LLP
900 Third Avenue
New York, New York 10022
9. Severability. In the event that any provision hereof becomes or is
------------
declared by a court of competent jurisdiction to be illegal, unenforceable or
void, this Agreement shall continue in full force and effect without said
provision.
10. Confidential Information and Invention Assignment. Executive agrees to
-------------------------------------------------
enter into
-9-
<PAGE>
the Company's Confidentiality Agreement attached hereto as Exhibit A
---------
(the "Confidentiality Agreement") upon commencing employment hereunder which
shall be deemed incorporated and a part hereof.
11. Entire Agreement. This Agreement, the Stock Option Plan, the NSO Plan,
----------------
the respective stock option agreements and the Confidentiality Agreement
represent the entire agreement and understanding between the Company and
Executive concerning Executive's employment relationship with the Company, and
supersede and replace any and all prior agreements and understandings concerning
Executive's employment relationship with the Company.
12. Arbitration and Equitable Relief.
--------------------------------
(a) Executive and the Company agree that any dispute or controversy
arising out of, relating to, or in connection with this Agreement, or the
interpretation, validity, construction, performance, breach, or termination
thereof shall be settled by arbitration to be held in Alameda County,
California, in accordance with the National Rules for the Resolution of
Employment Disputes then in effect of the American Arbitration Association (the
"Rules"). The arbitrator may grant injunctions or other relief in such dispute
or controversy. The decision of the arbitrator shall be final, conclusive and
binding on the parties to the arbitration. Judgment may be entered on the
arbitrator's decision in any court having jurisdiction.
(b) The arbitrator shall apply California law to the merits of any
dispute or claim, without reference to rules of conflict of law. The
arbitration proceedings shall be governed by federal arbitration law and by the
Rules, without reference to state arbitration law. Executive and the Company
hereby expressly consent to the personal jurisdiction and venue of the state and
federal courts located in California for any action or proceeding arising from
or relating to this Agreement and/or relating to any arbitration in which the
parties are participants.
(c) EXECUTIVE HAS READ AND UNDERSTANDS SECTION 12, WHICH DISCUSSES
ARBITRATION. EXECUTIVE UNDERSTANDS THAT BY SIGNING THIS AGREEMENT, EXECUTIVE
AGREES TO SUBMIT ANY FUTURE CLAIMS ARISING OUT OF, RELATING TO, OR IN CONNECTION
WITH THIS AGREEMENT, OR THE INTERPRETATION, VALIDITY, CONSTRUCTION, PERFORMANCE,
BREACH, OR TERMINATION THEREOF TO BINDING ARBITRATION, AND THAT THIS ARBITRATION
CLAUSE CONSTITUTES A WAIVER OF EXECUTIVE'S RIGHT TO A JURY TRIAL AND RELATES TO
THE RESOLUTION OF ALL DISPUTES RELATING TO ALL ASPECTS OF THE EMPLOYER/EXECUTIVE
RELATIONSHIP.
13. No Oral Modification, Cancellation or Discharge. This Agreement may
-----------------------------------------------
only be amended, canceled or discharged in writing signed by Executive and a
duly authorized officer (other than Executive) of the Company.
-10-
<PAGE>
14. Withholding. The Company shall be entitled to withhold, or cause to
-----------
be withheld, from payment any amount of withholding taxes required by law with
respect to payments made to Executive in connection with his employment
hereunder.
15. Acknowledgment. Executive acknowledges that he has had the
--------------
opportunity to discuss this matter with and obtain advice from his private
attorney, has had sufficient time to, and has carefully read and fully
understands all the provisions of this Agreement, and is knowingly and
voluntarily entering into this Agreement.
16. Legal Fee Reimbursement. The Company agrees to directly pay
-----------------------
Executive's reasonable legal fees associated with entering into this Agreement
up to $2,500 upon receiving invoices for such services.
17. Governing Law. This Agreement shall be governed by the internal
-------------
substantive laws, but not the choice of law rules, of the State of California.
IN WITNESS WHEREOF, the undersigned have executed this Agreement on the
respective dates set forth below:
THE NORTH FACE, INC.
/s/ William Simon
- ---------------------
William Simon
EXECUTIVE
/s/ Geoffrey D. Lurie
- ---------------------
GEOFFREY D. LURIE
Date: November 4, 1999
-11-
<PAGE>
EXHIBIT A
---------
The North Face, Inc.
Confidentiality Agreement
-------------------------
This Agreement is intended to set forth in writing certain aspects of my
responsibility as an Employee or Representative of The North Face, Inc.
In return for my employment by The North Face, Inc. I acknowledge and agree
that:
1. Effective Date:
This agreement ("Agreement") shall be effective as of the date below.
2. Confidentiality:
a. I will maintain in confidence and will not disclose or use
either during or after the term of my employment any proprietary or confidential
information belonging to The North Face, Inc. ("Confidential Information")
whether or not in written form, except to the extent required to perform duties
on behalf of The North Face, Inc. Confidential Information refers to any
information which has commercial value and concerns the business of The North
Face, Inc. or its customers or suppliers, which was disclosed to me by The North
Face, Inc. or its customers and suppliers, or which was learned, discovered,
developed, conceived, originated or prepared by me in the scope of my
employment. Such Confidential Information includes, but is not limited to
information relating to The North Face, Inc.'s product, product mix, designs,
processes, pricing, margins, merchandising plans and strategies, finances,
suppliers or customers, catalog mailing lists, sales and marketing plans, future
business plans, and any other information which is identified as confidential by
The North Face, Inc. I understand that Confidential Information does not include
any of the foregoing items which has become publicly known and made generally
available through no wrongful act of mine or of others who were under
confidentiality obligations as to the item or items involved or any of the
foregoing items that were independently developed, conceived, originated or
prepared by me outside of the scope of my employment. The obligations contained
in this Article 2 shall not apply to any information which becomes generally
known in the trade or industry other than as a result of a breach of this
Agreement.
3. The North Face, Inc.'s Materials:
Upon termination of my employment with The North Face, Inc. or at any time upon
The North Face, Inc.'s request, I will promptly deliver to The North Face, Inc.,
without retaining any copies, all documents and other material furnished to me
by The North Face Inc. or prepared by me in connection with my employment with
The North Face, Inc.
-12-
<PAGE>
4. Software:
The North Face, Inc. licenses the use of computer software from a variety of
outside companies. The North Face, Inc. does not own this software or its
related documentation and, unless authorized by the software developer, does not
have the right to reproduce it. With regard to use on local area networks or on
multiple machines, The North Face, Inc. employees shall use the software only in
accordance with the license agreement. The North Face, Inc. employees learning
of any misuse of software or related documentation within the company shall
notify the department manager or the Director of Data Processing. According to
the US. Copyright Law, illegal reproduction of software can result in civil
damages of as much as $100,000, and criminal penalties, including fines and
imprisonment. The North Face, Inc. employees who make, acquire or use
unauthorized copies of computer software shall be disciplined up to and
including immediate termination. The North Face, Inc. does not condone, and
will not tolerate the illegal duplication of software.
5. Competitive Employment:
During my term of employment with The North Face, Inc. I will not engage in any
employment, consulting, or other activity in any business competitive with The
North Face Inc. without The North Face, Inc.'s written consent, except as
permitted in the Employment Agreement that I entered into with the Company as of
November 4, 1999 (the "Employment Agreement").
6. Survival:
Notwithstanding the termination of my employment, Articles 2 ("Confidentiality")
and Article 3 ("Materials") shall survive such termination as set forth therein.
7. Specific Performance:
A breach of any of the provision of this Agreement will cause irreparable damage
to The North Face, Inc. for which there will no adequate remedy at law, and The
North Face, Inc. shall be entitled to injunctive relief and/or decree for
specific performance, and such other relief as may be proper (including monetary
damages if appropriate).
The North Face, Inc. Employee:
______________________ ________________________
Title:________________ ________________________
Date:_________________ Date:___________________
-13-
<PAGE>
Exhibit 10.18
THE NORTH FACE, INC.
KARL HEINZ SALZBURGER EMPLOYMENT AGREEMENT
This Agreement is made by and between The North Face, Inc. (the "Company"),
and Karl Heinz Salzburger ("Executive") as of the date set forth by the parties
below.
1. Duties and Scope of Employment.
------------------------------
(a) Position; Employment Commencement Date; Duties. Executive's
----------------------------------------------
employment with the Company pursuant to this Agreement shall commence on the
date on which Executive has complied with applicable United States immigration
laws and regulations respecting his provision of services to the Company in the
United States hereunder (the "Employment Commencement Date") and shall continue,
unless otherwise terminated earlier as provided in Section 4 hereof, until
December 31, 2002 (the "Employment Term"). As of the Employment Commencement
Date, the Company shall employ the Executive as the President of the Company
reporting to the Board Directors of the Company (the "Board"); provided,
however, that, between September 30, 2000 and January 1, 2001, the Executive
may, in his discretion, elect to have the Board consider his appointment to the
position of Chief Executive Officer of the Company as of January 1, 2001 and
provided further, that if Executive does not elect to be considered by the Board
for such position or if he elects to be considered but his election is rejected
by the Board, he may return to the position of Chief Executive Officer of the
Company's European Division at commensurate compensation terms as those set
forth in Section 3 and shall be entitled to receive severance compensation
pursuant to the terms set forth in Section 4 for the remainder of the Employment
Term. At the end of the Employment Term, Executive and the Company understand
and acknowledge that Executive's employment with the Company will constitute
"at-will" employment. Executive and the Company acknowledge that after the
Employment Term, this employment relationship may be terminated at any time,
with or without good cause or for any or no cause, and with or without notice,
at the option either of the Company or Executive. While employed by the
Company, Executive shall render such business and professional services in the
performance of his duties, consistent with Executive's position within the
Company, as shall reasonably be assigned to him by the Board.
(b) Obligations. While employed by the Company, Executive shall
-----------
devote his full business efforts and time to the Company. Executive agrees,
during the Employment Term, not to actively engage in any other employment,
occupation or consulting activity for any direct or indirect remuneration
without the prior approval of the Board; provided, however, that Executive may
serve in any capacity with any civic, educational or charitable organization, or
as a member of corporate Boards of Directors or committees thereof, without the
approval of the Board, so long as such activities do not interfere with his
duties and obligations under this Agreement.
-1-
<PAGE>
2. Board Membership. On the signing date, the Company agrees to nominate
----------------
Executive for Board membership.
3. Compensation and Benefits.
--------------------------
(a) Base Salary. Commencing on January 1, 2000, the Company shall
-----------
pay the Executive as compensation for his services a base salary at the
annualized rate of $400,000, subject to annual increases at the discretion of
the Board (the "Base Salary"); provided, however, that in the event that
Executive is appointed by the Board to serve as the Chief Executive Officer of
the Company, his Base Salary shall be increased to the annualized rate of
$600,000. Such salary shall be paid periodically in accordance with normal
Company payroll practices and subject to the required withholding. Executive
understands and agrees that neither his job performance nor promotions,
commendations, bonuses or the like from the Company give rise to or in any way
serve as the basis for modification, amendment, or extension, by implication or
otherwise, of this Agreement.
(b) Annual Bonuses. During the Employment Term and for Company
--------------
fiscal years ending after December 31, 1999, Executive shall be eligible to
receive an annual cash bonus in an amount to be determined by the Compensation
Committee of the Board (the "Annual Bonus"). Executive shall be eligible to
receive the Annual Bonus based on the achievement of the target milestones
specified by the Compensation Committee in its discretion that pertain to the
Company's (i) EBITDA, (ii) customer base, and (iii) infrastructure for the
fiscal year ending December 31, 2000; the Company's (i) earnings per share, (ii)
customer base, and (iii) infrastructure for the fiscal year ending December 31,
2001; and the Company's (i) earnings per share and (ii) infrastructure for the
fiscal year ending December 31, 2002 (the "Bonus Milestones"). For each such
fiscal year, the Annual Bonus shall equal (i) 0% of the Executive's Base Salary
for such year if less than 75% of the applicable Bonus Milestones are met, (ii)
33.33% of the Employee's Base Salary for such year if 75% of the applicable
Bonus Milestones are met, (iii) a scaled linear percentage of the Executive's
Base Salary (between 33.33% and 100%) for such year if between 75% and 125% of
the applicable Bonus Milestones are met (e.g., Executive shall be entitled to
66.67% of his Base Salary for such year if 100% of the applicable Bonus
Milestones are met), and (iv) 100% of the Employee's Base Salary for such year
if 125% or more of the applicable Bonus Milestones are met. The payment of any
Annual Bonus under this Section 3(b) shall be subject to Executive's employment
with the Company through the end of the applicable Company fiscal year (which
employment requirement does not apply with the respect to the Annual Bonus
component of severance payments made pursuant to Section 4). Executive's Annual
Bonus shall be reviewed annually by the Compensation Committee of the Board for
possible increases in light of Executive's performance and competitive data.
(c) Stock Options.
-------------
(i) Initial Option. Upon January 1, 2000, Executive shall be
--------------
granted a stock option covering 225,000 shares of Company Common Stock with a
per share exercise price
-2-
<PAGE>
equal to the closing sale price of a share of the Company's Common Stock on the
date of grant (the "Option"). The Option shall have a term of ten years,
provided, however, that the Option shall terminate eighteen (18) months after
Executive's termination of services as an employee, consultant or director of
the Company. Except as otherwise specified in this Agreement, the Option is in
all respects subject to the terms, definitions and provisions of the Company's
1998 Nonstatutory Stock Option Plan (the "NSO Plan"), as applicable, and the
respective standard forms of option agreement thereunder (the "Option
Agreement(s)").
(ii) Vesting on Initial Option. One-third (1/3rd) of the shares
-------------------------
subject to the Option shall vest each anniversary of the Employment Commencement
Date, so as to be one hundred percent (100%) vested on the third (3rd)
anniversary of the Employment Commencement Date, subject to Executive remaining
employed by the Company on such vesting dates.
(iii) Additional Option. In the event that Executive is
-----------------
appointed by the Board to serve as the Chief Executive Officer of the Company,
Executive shall be granted an additional stock option covering 125,000 shares of
Company Common Stock with a per share exercise price equal to the closing sale
price of a share of the Company's Common Stock on the date of grant (the
"Additional Option"). The Additional Option shall have a term of ten years,
provided, however, that the Additional Option shall terminate eighteen (18)
months after Executive's termination of services as an employee, consultant or
director of the Company. The Additional Option shall vest monthly from the date
of grant over the remaining months of the Employment Term, subject to Executive
remaining employed by the Company on such vesting dates. Except as otherwise
specified in this Agreement, the Additional Option shall be in all respects
subject to the terms, definitions and provisions of the Company's NSO Plan, as
applicable, and the respective forms of Option Agreement thereunder.
(d) Relocation Reimbursements. From the Employment Commencement Date
-------------------------
until January 1, 2001, the Company will reimburse the Executive for reasonable
business class travel and living expenses, including airfare and hotel
accommodations, incurred by the Executive traveling between the Company's
offices and Italy and for similar expenses incurred on behalf of his immediate
family with respect to their visiting and staying with Executive in the United
States, during the Year 2000. In addition, in the event that the Board
appoints Executive to serve as the Chief Executive Officer of the Company on or
after January 1, 2001, and Executive elects to serve as the Chief Executive
Officer of the Company, the Company shall reimburse Executive for (i) reasonable
moving expenses incurred by Executive and his family during their relocation
from Executive's primary European residence to the United States and for (ii)
reasonable housing accommodations to be mutually agreed to by the Company and
Executive.
(e) Employee Benefits. During the Employment Term, Executive shall
-----------------
be eligible to participate in the employee benefit plans maintained by the
Company that are applicable to other senior management of the Company to the
full extent provided for under those plans, including, without limitation, the
Company's life, group health and disability insurance, profit-
-3-
<PAGE>
sharing, deferred compensation and retirement plans, practices, policies and
programs. The Company reserves the right to cancel or change the benefit plans
and programs it offers to its employees at any time.
(f) Bankruptcy Protection. If, on or before the end of the first
---------------------
(1st) year of Employment Term, the Company files a petition pursuant to the
Bankruptcy Code under any chapter of the Bankruptcy Code, then Executive shall
be entitled to receive a third-party guaranteed cash payment in an amount equal
to eight hundred thousand dollars ($800,000), such payment to be made within ten
(10) business days of the date of such filing. To the maximum extent permitted
by the Bankruptcy Code, the Executive's claim shall be a priority claim (as that
term is used in the Bankruptcy Code) in any proceeding initiated under any
chapter of the Bankruptcy Code.
(g) Automobile. The Company shall, in its discretion, either make
----------
available to Executive an automobile or pay Executive a reasonable monthly auto
allowance sufficient to lease or purchase an automobile and reimburse Executive
for the maintenance and insurance costs of such automobile.
4. Termination of Employment.
-------------------------
(a) Involuntary Termination Without Cause. Subject to Executive's
-------------------------------------
compliance with Section 5, if the Company terminates Executive's employment
other than for Cause, and the Executive signs and does not revoke a release of
claims with the Company, then the Executive shall be entitled to the following
payments and benefits (the "Severance Benefits"):
(i) Continued payments of Base Salary for a period equal to the
lesser of (i) the period ending December 31, 2002, or (ii) one and one-half
years; provided, however, that in no event shall the period of such payments be
less than one year (the applicable payment period is referred to herein as the
"Severance Period");
(ii) Continued annual bonus payments over the Severance Period,
payable bi-monthly and based on Executive's Annual Bonus for the prior year, or,
if such payments are triggered prior to December 31, 2000, based on 100% of
Executive's "on-target" bonus (e.g., Executive's prior year Annual Bonus was
$600,000, the Severance Period is one and one-half years - Executive receives
the aggregate amount of $900,000 in continued annual bonus payments bi-monthly
over the Severance Period);
(iii) Accelerated vesting of Executive's Option(s) as to that
number of shares that would have vested had Executive remained employed during
the Severance Period;
(iv) Company-paid (to the same extent as for active executives)
group health, dental and vision plan continuation coverage premiums for
Executive and his covered dependents under Title X of the Consolidated Budget
Reconciliation Act of 1985, as amended ("COBRA") through the
-4-
<PAGE>
lesser of (x) eighteen (18) months from the date of Executive's termination of
employment, or (y) the date upon which the Executive and his dependents become
covered under another employer's group health, dental and vision insurance plans
that provide Executive and his dependents with comparable benefits and levels of
coverage; and
(v) A pro-rated bonus payment equal to 100% of Executive's
Annual Bonus as in effect for the Company's fiscal year prior to the date of
termination, pro-rated by multiplying such bonus amount by a fraction, the
numerator of which shall be the number of days prior to the date of termination
during such year, and the denominator of which shall be three-hundred and sixty-
five.
(b) Constructive Termination Following Change of Control. Subject to
----------------------------------------------------
Executive's compliance with Section 5, if Executive resigns at any time within
forty (40) days following a "Constructive Termination" (as defined herein) that
occurs within one (1) month after a "Change of Control" (as defined herein), and
the Executive signs and does not revoke a release of claims with the Company,
then the Executive shall be entitled to the Severance Benefits.
For the purposes of this Agreement, "Cause" shall mean (i) Executive's
continued violation of Executive's obligation to perform the duties and
responsibilities normally required of a chief executive officer which are
willful or grossly negligent after Executive has been given written notice from
the Board of Directors describing Executive's violation and Executive has had
thirty (30) days to cure such violation; (ii) Executive's engagement in willful
or grossly negligent misconduct which is materially injurious to the Company or
its affiliates; (iii) Executive's conviction of or plea of nolo contendere to a
---- ----------
felony, (iv) Executive's committing an act of fraud against or misappropriation
of property belonging to the Company or its affiliates; or (v) Executive's
material breach of this Agreement or any confidentiality or proprietary
information agreement between Executive and the Company. However, Executive may
not be terminated for Cause without (i) notice to Executive setting forth the
reasons for the Company's intention to terminate for Cause, and (ii) an
opportunity for Executive, together with his counsel, if any, to be heard before
the Board.
For the purposes of this Agreement, "Change of Control" of the Company
shall mean the occurrence of any of the following events: (i) the consummation
of a merger or consolidation of the Company with any other corporation if the
merger or consolidation will result in the voting securities of the Company
outstanding immediately prior thereto representing (either by remaining
outstanding or by being converted into voting securities of the surviving
entity) less than sixty percent (60%) of the total voting power represented by
the voting securities of the Company or such surviving entity outstanding
immediately after such merger or consolidation; or (ii) any "person" (as such
term is used in Sections 13(d) and 14(d) of the Securities Exchange Act of 1934,
as amended) becoming the "beneficial owner" (as defined in Rule 13d-3 under said
Act), directly or indirectly, of securities of the Company representing more
than 40% of the total voting power represented by the Company's then outstanding
voting securities.
-5-
<PAGE>
For the purposes of this Agreement, "Constructive Termination" shall mean
(i) any material diminution of the Executive's duties, authority or
responsibilities relative to the Executive's duties, authority as in effect
immediately prior to such reduction, except if agreed to in writing by the
Executive; provided, however, that a reduction in duties, authority or
responsibilities solely by virtue of the Company being acquired and made part of
a larger entity (as, for example, when the Executive remains Chief Executive
Officer of the Company following a Change of Control and is not made the Chief
Executive Officer of the acquiring corporation) shall not constitute "Good
Reason;" or (ii) the relocation of the Executive to a facility or a location
more than fifty (50) miles from the Executive's then present location, without
the Executive's written consent.
(c) Other Termination of Employment. In the event Executive
-------------------------------
terminates employment with the Company for any reason other than (i) by the
Company not for Cause or (ii) by the Executive as a result of a Constructive
Termination, then the Option shall only be vested as to the extent vested as of
the date of termination of Executive's employment and Executive shall not
receive any severance pursuant to the terms of this Agreement.
5. Conditional Nature of Severance Payments.
----------------------------------------
(a) Noncompete. Executive acknowledges that the nature of the
----------
Company's business is such that if Executive were to become employed by, or
substantially involved in, the business of a competitor of the Company during
the twelve (12) months following the termination of Executive's employment with
the Company, it would be very difficult for the Executive not to rely on or use
the Company's trade secrets and confidential information. Thus, to avoid the
inevitable disclosure of the Company's trade secrets and confidential
information, Executive agrees and acknowledges that Executive's right to receive
the severance payments set forth above (to the extent Executive is otherwise
entitled to such payments) shall be conditioned upon the Executive not directly
or indirectly engaging in (whether as an employee, consultant, agent,
proprietor, principal, partner, stockholder, corporate officer, director or
otherwise), nor having any ownership interested in or participating in the
financing, operation, management or control of, any person, firm, corporation or
business that competes with Company or is a customer of the Company, including,
but not limited to, Adidas/Salomon, AcrTeryx, Burton, Lowe Alpine, Marmot,
Moonstone, Mountain Hardware, Nike and Patagonia. Upon any breach of this
section, all severance payments pursuant to this Agreement shall immediately
cease.
(b) Non-Solicitation. Until one (1) year after termination of
----------------
Executive's employment, upon the termination of Executive's employment with the
Company for any reason, Executive agrees and acknowledges that Executive's right
to receive the severance payments set forth above (to the extent Executive is
otherwise entitled to such payments) shall be conditioned upon Executive not
either directly or indirectly soliciting, inducing, attempting to hire,
recruiting, encouraging, taking away, hiring any employee of the Company or
causing an employee to leave his or her employment either for Executive or for
any other entity or person.
-6-
<PAGE>
(c) Understanding of Covenants. The Executive represents that he
--------------------------
(i) is familiar with the foregoing covenants not to compete and not to solicit,
and (ii) is fully aware of his obligations hereunder, including, without
limitation, the reasonableness of the length of time, scope and geographic
coverage of these covenants.
6. Assignment. This Agreement shall be binding upon and inure to the
----------
benefit of (a) the heirs, executors and legal representatives of Executive upon
Executive's death and (b) any successor of the Company. Any such successor of
the Company shall be deemed substituted for the Company under the terms of this
Agreement for all purposes. As used herein, "successor" shall include any
person, firm, corporation or other business entity which at any time, whether by
purchase, merger or otherwise, directly or indirectly acquires all or
substantially all of the assets or business of the Company. None of the rights
of Executive to receive any form of compensation payable pursuant to this
Agreement shall be assignable or transferable except through a testamentary
disposition or by the laws of descent and distribution upon the death of
Executive following termination without cause. Any attempted assignment,
transfer, conveyance or other disposition (other than as aforesaid) of any
interest in the rights of Executive to receive any form of compensation
hereunder shall be null and void.
7. Notices. All notices, requests, demands and other communications
-------
called for hereunder shall be in writing and shall be deemed given if (i)
delivered personally, (ii) one (1) day after being sent by Federal Express or a
similar commercial overnight service, or (iii) three (3) days after being mailed
by registered or certified mail, return receipt requested, prepaid and addressed
to the parties or their successors in interest at the following addresses, or at
such other addresses as the parties may designate by written notice in the
manner aforesaid:
If to the Company: The North Face, Inc.
2013 Farallon Drive
San Leandro, California 94557
Attn: Chief Financial Officer
----
If to Executive: Karl Heinz Salzburger
at the last residential address known by the Company.
8. Severability. In the event that any provision hereof becomes or is
------------
declared by a court of competent jurisdiction to be illegal, unenforceable or
void, this Agreement shall continue in full force and effect without said
provision.
9. Confidential Information and Invention Assignment. Executive agrees to
-------------------------------------------------
enter into the Company's standard Confidentiality Agreement (the
"Confidentiality Agreement") upon commencing employment hereunder.
10. Entire Agreement. This Agreement, the Stock Option Plan, the NSO
----------------
Plan, the
-7-
<PAGE>
employment agreement entered into between Executive and The North Face (Italy)
S.r.l., the respective stock option agreements and the Confidentiality Agreement
represent the entire agreement and understanding between the Company and
Executive concerning Executive's employment relationship with the Company, and
supersede and replace any and all prior agreements and understandings concerning
Executive's employment relationship with the Company.
11. Arbitration and Equitable Relief.
--------------------------------
(a) Executive and the Company agree that any dispute or controversy
arising out of, relating to, or in connection with this Agreement, or the
interpretation, validity, construction, performance, breach, or termination
thereof shall be settled by arbitration to be held in Alameda County,
California, in accordance with the National Rules for the Resolution of
Employment Disputes then in effect of the American Arbitration Association (the
"Rules"). The arbitrator may grant injunctions or other relief in such dispute
or controversy. The decision of the arbitrator shall be final, conclusive and
binding on the parties to the arbitration. Judgment may be entered on the
arbitrator's decision in any court having jurisdiction.
(b) The arbitrator shall apply California law to the merits of any
dispute or claim, without reference to rules of conflict of law. The
arbitration proceedings shall be governed by federal arbitration law and by the
Rules, without reference to state arbitration law. Executive and the Company
hereby expressly consent to the personal jurisdiction of the state and federal
courts located in California for any action or proceeding arising from or
relating to this Agreement and/or relating to any arbitration in which the
parties are participants.
(c) EXECUTIVE HAS READ AND UNDERSTANDS SECTION 11, WHICH DISCUSSES
ARBITRATION. EXECUTIVE UNDERSTANDS THAT BY SIGNING THIS AGREEMENT, EXECUTIVE
AGREES TO SUBMIT ANY FUTURE CLAIMS ARISING OUT OF, RELATING TO, OR IN CONNECTION
WITH THIS AGREEMENT, OR THE INTERPRETATION, VALIDITY, CONSTRUCTION, PERFORMANCE,
BREACH, OR TERMINATION THEREOF TO BINDING ARBITRATION, AND THAT THIS ARBITRATION
CLAUSE CONSTITUTES A WAIVER OF EXECUTIVE'S RIGHT TO A JURY TRIAL AND RELATES TO
THE RESOLUTION OF ALL DISPUTES RELATING TO ALL ASPECTS OF THE EMPLOYER/EXECUTIVE
RELATIONSHIP.
12. No Oral Modification, Cancellation or Discharge. This Agreement may
-----------------------------------------------
only be amended, canceled or discharged in writing signed by Executive and a
duly authorized officer (other than Executive) of the Company.
13. Withholding. The Company shall be entitled to withhold, or cause to
-----------
be withheld, from payment any amount of withholding taxes required by law with
respect to payments made to Executive in connection with his employment
hereunder.
-8-
<PAGE>
14. Acknowledgment. Executive acknowledges that he has had the
--------------
opportunity to discuss this matter with and obtain advice from his private
attorney, has had sufficient time to, and has carefully read and fully
understands all the provisions of this Agreement, and is knowingly and
voluntarily entering into this Agreement.
15. Legal Fee Reimbursement. The Company agrees to directly pay
-----------------------
Executive's reasonable legal fees associated with entering into this Agreement
up to $2,500 upon receiving invoices for such services.
16. Governing Law. This Agreement shall be governed by the internal
-------------
substantive laws, but not the choice of law rules, of the State of California.
IN WITNESS WHEREOF, the undersigned have executed this Agreement on the
respective dates set forth below:
THE NORTH FACE, INC.
/s/ William Simon
- ----------------------------
William Simon
EXECUTIVE
/s/ Karl Heinz Salzburger
- ----------------------------
Karl Heinz Salzburger
Date: November 4, 1999
SIGNATURE PAGE OF EMPLOYMENT AGREEMENT
-9-
<PAGE>
EXHIBIT 10.19
THE NORTH FACE (ITALY) S.R.L.
KARL HEINZ SALZBURGER EMPLOYMENT AGREEMENT
This Agreement is made by and between the North Face (Italy) S.r.l., a
limited liability company incorporated under the laws of Italy and belonging to
the group of The North Face, Inc. (hereafter, The North Face, Inc. shall be
identified as the "Company"), and Karl Heinz Salzburger ("Executive") as of the
date set forth by the parties below.
1. Duties and Scope of Employment.
-------------------------------
(a) Position; Employment Commencement Date; Duties. Executive's
----------------------------------------------
employment with The North Face (Italy) S.r.l. pursuant to this Agreement shall
commence on November 1, 1999 (the "Employment Commencement Date") and shall
continue, unless otherwise terminated earlier as provided in Section 3 hereof,
until December 31, 2002 (the "Employment Term"). As of the Employment
Commencement Date, the Company shall employ the Executive as the President of
The North Face (Italy) S.r.l. While employed by The North Face (Italy) S.r.l.,
Executive shall render such business and professional services in the
performance of his duties, consistent with Executive's position within The North
Face (Italy) S.r.l., as shall reasonably be assigned to him by the Board.
(b) Obligations. While employed by The North Face (Italy) S.r.l.,
-----------
Executive shall devote his full business efforts and time to the Company.
Executive agrees, during the Employment Term, not to actively engage in any
other employment, occupation or consulting activity for any direct or indirect
remuneration without the prior approval of the Board; provided, however, that
Executive may serve in any capacity with any civic, educational or charitable
organization, or as a member of corporate Boards of Directors or committees
thereof, without the approval of the Board, so long as such activities do not
interfere with his duties and obligations under this Agreement.
2. Compensation and Benefits.
--------------------------
(a) Base Salary. From the Employment Commencement Date through the
-----------
period ending upon the date on which Executive becomes employed by the Company,
the North Face (Italy) S.r.l. shall pay the Executive as compensation for his
services a base salary at the annualized rate of $600,000. Thereafter, while
employed by the Company, The North Face (Italy) S.r.l. shall pay the Executive
as compensation for his services a base salary at the annualized rate of
$200,000, subject to annual increases at the discretion of the Board (the "Base
Salary"). Such salary shall be paid periodically in accordance with normal
North Face (Italy) S.r.l. payroll practices and subject to the required
withholding. Executive understands and agrees that neither his job performance
nor promotions, commendations, bonuses or the like from The North Face (Italy)
S.r.l. give rise to or in
1
<PAGE>
any way serve as the basis for modification, amendment, or extension, by
implication or otherwise, of this Agreement.
(b) Annual Bonuses. During the Employment Term and for Company
--------------
fiscal years ending after December 31, 1999, Executive shall be eligible to
receive an annual cash bonus in an amount to be determined by the Compensation
Committee of the Board (the "Annual Bonus"). Executive shall be eligible to
receive the Annual Bonus based on the achievement of the target milestones
specified by the Compensation Committee in its discretion that pertain to the
Company's (i) EBITDA, (ii) customer base, and (iii) infrastructure for the
fiscal year ending December 31, 2000; the Company's (i) earnings per share, (ii)
customer base, and (iii) infrastructure for the fiscal year ending December 31,
2001; and the Company's (i) earnings per share and (ii) infrastructure for the
fiscal year ending December 31, 2002 (the "Bonus Milestones"). For each such
fiscal year, the Annual Bonus shall equal (i) 0% of the Executive's Base Salary
for such year if less than 75% of the applicable Bonus Milestones are met, (ii)
33.33% of the Employee's Base Salary for such year if 75% of the applicable
Bonus Milestones are met, (iii) a scaled linear percentage of the Executive's
Base Salary (between 33.33% and 100%) for such year if between 75% and 125% of
the applicable Bonus Milestones are met (e.g., Executive shall be entitled to
66.67% of his Base Salary for such year if 100% of the applicable Bonus
Milestones are met), and (iv) 100% of the Employee's Base Salary for such year
if 125% or more of the applicable Bonus Milestones are met. The payment of any
Annual Bonus under this Section 2(b) shall be subject to Executive's employment
with the Company through the end of the applicable Company fiscal year (which
employment requirement does not apply with the respect to the Annual Bonus
component of severance payments made pursuant to Section 3). Executive's Annual
Bonus shall be reviewed annually by the Compensation Committee of the Board for
possible increases in light of Executive's performance and competitive data.
(c) Stock Options.
-------------
(i) Initial Option. Upon the Employment Commencement Date,
--------------
Executive shall be granted a stock option covering 325,000 newly issued shares
of Company Common Stock with a per share exercise price for underwriting equal
to the closing sale price of a share of the Company's Common Stock on the market
trading day prior to the date of grant (the "Option"). The Option shall have a
term of ten years, provided, however, that the Option shall terminate eighteen
(18) months after Executive's termination of services as an employee, consultant
or director of the Company. Except as otherwise specified in this Agreement, the
Option is in all respects subject to the terms, definitions and provisions of
the North Face's 1998 Nonstatutory Stock Option Plan (the "NSO Plan"), as
applicable, and the respective standard forms of option agreement thereunder
(the "Option Agreement(s)").
(ii) Vesting on Initial Option. 175,000 newly issued shares
-------------------------
subject to the Option shall be immediately vested and exercisable on the
Employment Commencement Date and
2
<PAGE>
50,000 shares subject to the Option shall vest each anniversary of the
Employment Commencement Date, so as to be one hundred percent (100%) vested on
the third (3rd) anniversary of the Employment Commencement Date, subject to
Executive remaining employed by the Company on such vesting dates. Vesting on
the Option shall be based solely on the provision of Executive's services in The
North Face (Italy) S.r.l. offices for The North Face (Italy) S.r.l.
(iii) Additional Option. In the event that Executive is
-----------------
appointed by the Board to serve as the Chief Executive Officer of the Company,
Executive shall be granted an additional stock option covering 125,000 newly
issued shares of Company Common Stock with a per share exercise price equal to
the closing sale price of a share of the Company's Common Stock on the market
trading day prior to the date of grant (the "Additional Option"). The Additional
Option shall have a term of ten years, provided, however, that the Additional
Option shall terminate eighteen (18) months after Executive's termination of
services as an employee, consultant or director of the Company. The Additional
Option shall vest monthly from the date of grant over the remaining months of
the Employment Term, subject to Executive remaining employed by the Company on
such vesting dates. Except as otherwise specified in this Agreement, the
Additional Option shall be in all respects subject to the terms, definitions and
provisions of the Company's NSO Plan, as applicable, and the respective forms of
Option Agreement thereunder.
(iv) Shares. The Company acknowledges and agrees that the
------
shares to be granted pursuant to this Option(s) shall be newly issued shares of
the Company's Common Stock.
(d) Employee Benefits. During the Employment Term, Executive shall
-----------------
be eligible to participate in the employee benefit plans maintained by the
Company that are applicable to other senior management of the Company to the
full extent provided for under those plans, including, without limitation, the
Company's life, group health and disability insurance, profit-sharing, deferred
compensation and retirement plans, practices, policies and programs. The Company
reserves the right to cancel or change the benefit plans and programs it offers
to its employees at any time.
3. Termination of Employment.
-------------------------
(a) Involuntary Termination Without Cause. Subject to Executive's
-------------------------------------
compliance with Section 4, if The North Face (Italy) S.r.l. terminates
Executive's employment other than for Cause, and the Executive signs and does
not revoke a release of claims with The North Face (Italy) S.r.l., then the
Executive shall be entitled to the following payments and benefits (the
"Severance Benefits"):
(i) Continued payments of Base Salary for a period equal to the
lesser of (i) the period ending December 31, 2002, or (ii) one and one-half
years; provided, however, that in no event shall the period of such payments be
less than one year (the applicable payment period is referred to herein as the
"Severance Period");
3
<PAGE>
(ii) Continued annual bonus payments over the Severance Period,
payable bi-monthly and based on Executive's Annual Bonus for the prior year, or,
if such payments are triggered prior to December 31, 2000, based on 100% of
Executive's "on-target" bonus (e.g., Executive's prior year Annual Bonus was
$600,000, the Severance Period is one and one-half years - Executive receives
the aggregate amount of $900,000 in continued annual bonus payments bi-monthly
over the Severance Period);
(iii) Accelerated vesting of Executive's Option(s) as to that
number of shares that would have vested had Executive remained employed during
the Severance Period;
(iv) Company-paid (to the same extent as for active executives)
group health, dental and vision plan continuation coverage premiums for
Executive and his covered dependents under Title X of the Consolidated Budget
Reconciliation Act of 1985, as amended ("COBRA") through the lesser of (x)
eighteen (18) months from the date of Executive's termination of employment, or
(y) the date upon which the Executive and his dependents become covered under
another employer's group health, dental and vision insurance plans that provide
Executive and his dependents with comparable benefits and levels of coverage;
and
(v) A pro-rated bonus payment equal to 100% of Executive's
Annual Bonus as in effect for the Company's fiscal year prior to the date of
termination, pro-rated by multiplying such bonus amount by a fraction, the
numerator of which shall be the number of days prior to the date of termination
during such year, and the denominator of which shall be three-hundred and sixty-
five.
(b) Constructive Termination Following Change of Control. Subject to
----------------------------------------------------
Executive's compliance with Section 4, if Executive resigns at any time within
forty (40) days following a "Constructive Termination" (as defined herein) that
occurs within one (1) month after a "Change of Control" (as defined herein) of
the Company, and the Executive signs and does not revoke a release of claims
with the Company, then the Executive shall be entitled to the Severance
Benefits.
For the purposes of this Agreement, "Cause" shall mean (i) Executive's
continued violation of Executive's obligation to perform the duties and
responsibilities normally required of a chief executive officer which are
willful or grossly negligent after Executive has been given written notice from
the Board of Directors describing Executive's violation and Executive has had
thirty (30) days to cure such violation; (ii) Executive's engagement in willful
or grossly negligent misconduct which is materially injurious to the Company or
its affiliates; (iii) Executive's conviction of or plea of nolo contendere to a
---- ----------
felony, (iv) Executive's committing an act of fraud against or misappropriation
of property belonging to the Company or its affiliates; or (v) Executive's
material breach of this Agreement or any confidentiality or proprietary
information agreement between Executive and the Company. However, Executive may
not be terminated for Cause without (i) notice to Executive
4
<PAGE>
setting forth the reasons for the Company's intention to terminate for Cause,
and (ii) an opportunity for Executive, together with his counsel, if any, to be
heard before the Board.
For the purposes of this Agreement, "Change of Control" of the Company
shall mean the occurrence of any of the following events: (i) the consummation
of a merger or consolidation of the Company with any other corporation if the
merger or consolidation will result in the voting securities of the Company
outstanding immediately prior thereto representing (either by remaining
outstanding or by being converted into voting securities of the surviving
entity) less than sixty percent (60%) of the total voting power represented by
the voting securities of the Company or such surviving entity outstanding
immediately after such merger or consolidation; or (ii) any "person" (as such
term is used in Sections 13(d) and 14(d) of the Securities Exchange Act of 1934,
as amended) becoming the "beneficial owner" (as defined in Rule 13d-3 under said
Act), directly or indirectly, of securities of the Company representing more
than 40% of the total voting power represented by the Company's then outstanding
voting securities.
For the purposes of this Agreement, "Constructive Termination" shall mean
(i) any material diminution of the Executive's duties, authority or
responsibilities relative to the Executive's duties, authority as in effect
immediately prior to such reduction, except if agreed to in writing by the
Executive; provided, however, that a reduction in duties, authority or
responsibilities solely by virtue of the Company being acquired and made part of
a larger entity (as, for example, when the Executive remains Chief Executive
Officer of the Company following a Change of Control and is not made the Chief
Executive Officer of the acquiring corporation) shall not constitute "Good
Reason;" or (ii) the relocation of the Executive to a facility or a location
more than fifty (50) miles from the Executive's then present location, without
the Executive's written consent.
(c) Other Termination of Employment. In the event Executive
-------------------------------
terminates employment with the North Face (Italy) S.r.l. or the Company for any
reason other than (i) by The North Face (Italy) S.r.l. or the Company not for
Cause or (ii) by the Executive as a result of a Constructive Termination, then
the Option shall only be vested as to the extent vested as of the date of
termination of Executive's employment and Executive shall not receive any
severance pursuant to the terms of this Agreement.
4. Conditional Nature of Severance Payments.
----------------------------------------
(a) Noncompete. Executive acknowledges that the nature of the
----------
Company's business is such that if Executive were to become employed by, or
substantially involved in, the business of a competitor of the Company during
the twelve (12) months following the termination of Executive's employment with
the Company, it would be very difficult for the Executive not to rely on or use
the Company's trade secrets and confidential information. Thus, to avoid the
inevitable disclosure of the Company's trade secrets and confidential
information, Executive agrees and acknowledges that Executive's right to receive
the severance payments set forth above (to the extent
5
<PAGE>
Executive is otherwise entitled to such payments) shall be conditioned upon the
Executive not directly or indirectly engaging in (whether as an employee,
consultant, agent, proprietor, principal, partner, stockholder, corporate
officer, director or otherwise), nor having any ownership interested in or
participating in the financing, operation, management or control of, any person,
firm, corporation or business that competes with Company or is a customer of the
Company, including, but not limited to, Adidas/Salomon, AcrTeryx, Burton, Lowe
Alpine, Marmot, Moonstone, Mountain Hardware, Nike and Patagonia. Upon any
breach of this section, all severance payments pursuant to this Agreement shall
immediately cease.
(b) Non-Solicitation. Until one (1) year after termination of
----------------
Executive's employment, upon the termination of Executive's employment with The
North Face (Italy) S.r.l. for any reason, Executive agrees and acknowledges that
Executive's right to receive the severance payments set forth above (to the
extent Executive is otherwise entitled to such payments) shall be conditioned
upon Executive not either directly or indirectly soliciting, inducing,
attempting to hire, recruiting, encouraging, taking away, hiring any employee of
The North Face (Italy) S.r.l. or causing an employee to leave his or her
employment either for Executive or for any other entity or person.
(c) Understanding of Covenants. The Executive represents that he (i)
--------------------------
is familiar with the foregoing covenants not to compete and not to solicit, and
(ii) is fully aware of his obligations hereunder, including, without limitation,
the reasonableness of the length of time, scope and geographic coverage of these
covenants.
5. Assignment. This Agreement shall be binding upon and inure to the
----------
benefit of (a) the heirs, executors and legal representatives of Executive upon
Executive's death and (b) any successor of The North Face (Italy) S.r.l. Any
such successor of The North Face (Italy) S.r.l. shall be deemed substituted for
The North Face (Italy) S.r.l. under the terms of this Agreement for all
purposes. As used herein, "successor" shall include any person, firm,
corporation or other business entity which at any time, whether by purchase,
merger or otherwise, directly or indirectly acquires all or substantially all of
the assets or business of The North Face (Italy) S.r.l. None of the rights of
Executive to receive any form of compensation payable pursuant to this Agreement
shall be assignable or transferable except through a testamentary disposition or
by the laws of descent and distribution upon the death of Executive following
termination without cause. Any attempted assignment, transfer, conveyance or
other disposition (other than as aforesaid) of any interest in the rights of
Executive to receive any form of compensation hereunder shall be null and void.
6. Notices. All notices, requests, demands and other communications
-------
called for hereunder shall be in writing and shall be deemed given if (i)
delivered personally, (ii) one (1) day after being sent by Federal Express or a
similar commercial overnight service, or (iii) three (3) days after being mailed
by registered or certified mail, return receipt requested, prepaid and addressed
to the parties or their successors in interest at the following addresses, or at
such other addresses as the parties may designate by written notice in the
manner aforesaid:
6
<PAGE>
If to the Company: The North Face (Italy) S.r.l.
Via Tagliamento 11
31040 Volpago del Montello (TV)
Italy
If to Executive: Karl Heinz Salzburger
at the last residential address known by the
company.
7. Severability. In the event that any provision hereof becomes or is
------------
declared by a court of competent jurisdiction to be illegal, unenforceable or
void, this Agreement shall continue in full force and effect without said
provision.
8. Confidential Information and Invention Assignment. Executive agrees to
-------------------------------------------------
enter into the Company's standard Confidentiality Agreement (the
"Confidentiality Agreement") upon commencing employment hereunder.
9. Entire Agreement. This Agreement, the employment agreement entered
-----------------
into between Executive and The North Face, Inc., the NSO Plan, the respective
stock option agreements and the Confidentiality Agreement represent the entire
agreement and understanding between the Company and Executive concerning
Executive's employment relationship with the Company, and supersede and replace
any and all prior agreements and understandings concerning Executive's
employment relationship with the Company.
10. Arbitration and Equitable Relief.
--------------------------------
(a) Executive and the Company agree that any dispute or controversy
arising out of, relating to, or in connection with this Agreement, or the
interpretation, validity, construction, performance, breach, or termination
thereof shall be settled by arbitration to be held in Alameda County,
California, in accordance with the National Rules for the Resolution of
Employment Disputes then in effect of the American Arbitration Association (the
"Rules"). The arbitrator may grant injunctions or other relief in such dispute
or controversy. The decision of the arbitrator shall be final, conclusive and
binding on the parties to the arbitration. Judgment may be entered on the
arbitrator's decision in any court having jurisdiction.
(b) The arbitrator shall apply California law to the merits of any
dispute or claim, without reference to rules of conflict of law. The
arbitration proceedings shall be governed by federal arbitration law and by the
Rules, without reference to state arbitration law. Executive and the Company
hereby expressly consent to the personal jurisdiction of the state and federal
courts located in California for any action or proceeding arising from or
relating to this Agreement and/or relating to any arbitration in which the
parties are participants.
7
<PAGE>
(c) EXECUTIVE HAS READ AND UNDERSTANDS SECTION, WHICH DISCUSSES
ARBITRATION. EXECUTIVE UNDERSTANDS THAT BY SIGNING THIS AGREEMENT, EXECUTIVE
AGREES TO SUBMIT ANY FUTURE CLAIMS ARISING OUT OF, RELATING TO, OR IN CONNECTION
WITH THIS AGREEMENT, OR THE INTERPRETATION, VALIDITY, CONSTRUCTION, PERFORMANCE,
BREACH, OR TERMINATION THEREOF TO BINDING ARBITRATION, AND THAT THIS ARBITRATION
CLAUSE CONSTITUTES A WAIVER OF EXECUTIVE'S RIGHT TO A JURY TRIAL AND RELATES TO
THE RESOLUTION OF ALL DISPUTES RELATING TO ALL ASPECTS OF THE EMPLOYER/EXECUTIVE
RELATIONSHIP.
11. No Oral Modification, Cancellation or Discharge. This Agreement may
-----------------------------------------------
only be amended, canceled or discharged in writing signed by Executive and a
duly authorized officer (other than Executive) of the Company.
12. Withholding. The Company shall be entitled to withhold, or cause to
-----------
be withheld, from payment any amount of withholding taxes required by law with
respect to payments made to Executive in connection with his employment
hereunder.
13. Acknowledgment. Executive acknowledges that he has had the
--------------
opportunity to discuss this matter with and obtain advice from his private
attorney, has had sufficient time to, and has carefully read and fully
understands all the provisions of this Agreement, and is knowingly and
voluntarily entering into this Agreement.
14. Governing Law. This Agreement shall be governed by the internal
-------------
substantive laws, but not the choice of law rules, of California, except as
required by the laws of Italy.
8
<PAGE>
IN WITNESS WHEREOF, the undersigned have executed this Agreement on the
respective dates set forth below:
THE NORTH FACE (ITALY) S.R.L.
/s/ William Simon
- ---------------------------
William Simon
EXECUTIVE
/s/ Karl Heinz Salzburger
- ---------------------------
Karl Heinz Salzburger
Date: November 4, 1999
SIGNATURE PAGE OF EMPLOYMENT AGREEMENT
9
<TABLE> <S> <C>
<PAGE>
<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 FINANCIAL STATEMENTS.
</LEGEND>
<S> <C> <C>
<PERIOD-TYPE> 3-MOS 3-MOS
<FISCAL-YEAR-END> DEC-31-1999 DEC-31-1998
<PERIOD-START> JUL-01-1999 JUL-01-1998
<PERIOD-END> SEP-30-1999 SEP-30-1998
<CASH> 10,068 2,284
<SECURITIES> 0 0
<RECEIVABLES> 66,048 97,196
<ALLOWANCES> 0 0
<INVENTORY> 81,767 58,705
<CURRENT-ASSETS> 175,168 175,361
<PP&E> 33,543 23,443
<DEPRECIATION> 0 0
<TOTAL-ASSETS> 260,425 238,079
<CURRENT-LIABILITIES> 137,402 101,826
<BONDS> 0 0
0 0
0 0
<COMMON> 32 31
<OTHER-SE> 102,113 123,440
<TOTAL-LIABILITY-AND-EQUITY> 260,425 238,079
<SALES> 70,997 93,644
<TOTAL-REVENUES> 70,997 93,644
<CGS> 41,475 52,402
<TOTAL-COSTS> 41,475 52,402
<OTHER-EXPENSES> 39,311 27,874
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 2,181 1,648
<INCOME-PRETAX> (15,256) 11,755
<INCOME-TAX> (4,593) 4,526
<INCOME-CONTINUING> (10,663) 7,229
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> (10,663) 7,229
<EPS-BASIC> (0.84) 0.58
<EPS-DILUTED> (0.84) 0.57
</TABLE>
