<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON DECEMBER 10, 1997
REGISTRATION NO. 333-
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- -------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
---------------
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
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SHOE PAVILION, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
---------------
<TABLE>
<CAPTION>
DELAWARE 5661
<S> <C> <C>
(STATE OR OTHER JURISDICTION OF (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) CLASSIFICATION CODE NUMBER) IDENTIFICATION NUMBER)
</TABLE>
3200-F REGATTA BOULEVARD
RICHMOND, CA 94804
(510) 970-9775
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF
REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
---------------
DMITRY BEINUS
CHIEF EXECUTIVE OFFICER AND PRESIDENT
SHOE PAVILION, INC.
3200-F REGATTA BOULEVARD
RICHMOND, CA 94804
(510) 970-9775
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE,
OF AGENT FOR SERVICE)
COPIES TO:
<TABLE>
<CAPTION>
<S> <C>
JOHN F. SEEGAL
BRETT E. COOPER GREGORY C. SMITH
GREGORY R. LIBERMAN KARYN R. SMITH
ORRICK HERRINGTON & SUTCLIFFE LLP LAURA RANDALL WOODHEAD
OLD FEDERAL RESERVE BANK BUILDING COOLEY GODWARD LLP
400 SANSOME STREET ONE MARITIME PLAZA, 20TH FLOOR
SAN FRANCISCO, CALIFORNIA 94111-3143 SAN FRANCISCO, CALIFORNIA 94111-3580
(415) 392-1122 (415) 693-2000
</TABLE>
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APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC:
As soon as practicable after this Registration Statement becomes effective.
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act,
check the following box. [_]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following
box and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [_]
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [_]
If this Form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [_]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [_]
CALCULATION OF REGISTRATION FEE
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<TABLE>
<CAPTION>
PROPOSED PROPOSED
TITLE OF EACH CLASS OF AMOUNT TO BE MAXIMUM OFFERING MAXIMUM AGGREGATE AMOUNT OF
SECURITIES TO BE REGISTERED REGISTERED(1) PRICE PER SHARE(2) OFFERING PRICE(2) REGISTRATION FEE
- ---------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Common Stock, $.001 par
value................. 2,070,000 shares $11.00 $22,770,000 $6,718
</TABLE>
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(1) Includes 270,000 shares that may be sold if the over-allotment option
granted to the Underwriters is exercised in full.
(2) Estimated solely for the purpose of calculating the registration fee
pursuant to Rule 457(a).
---------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT
SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS
REGISTRATION STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH
SECTION 8(A) OF THE SECURITIES ACT OF 1933 OR UNTIL THIS REGISTRATION
STATEMENT SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING
PURSUANT TO SAID SECTION 8(A), MAY DETERMINE.
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<PAGE>
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A +
+REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE +
+SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY +
+OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT +
+BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR +
+THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE A SALE OF ANY OF THESE +
+SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE +
+UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF +
+ANY SUCH STATE. +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
SUBJECT TO COMPLETION, DECEMBER 10, 1997
1,800,000 SHARES
[SHOE PAVILION LOGO]
COMMON STOCK
All 1,800,000 shares of Common Stock offered hereby are being sold by Shoe
Pavilion, Inc. ("Shoe Pavilion" or the "Company"). Prior to this offering,
there has been no public market for the Common Stock. See "Underwriting" for a
discussion of the factors to be considered in determining the initial public
offering price. It is currently anticipated that the initial public offering
price for the Common Stock will be between $9.00 and $11.00 per share.
Application has been made to list the Common Stock on the Nasdaq National
Market under the symbol "SHOE."
THE COMMON STOCK OFFERED HEREBY INVOLVES A HIGH DEGREE OF RISK. SEE "RISK
FACTORS" COMMENCING ON PAGE 6 OF THIS PROSPECTUS.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
<TABLE>
<CAPTION>
================================================================================
PRICE PROCEEDS
TO UNDERWRITING TO
PUBLIC DISCOUNTS(1) COMPANY(2)
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<S> <C> <C> <C>
Per Share....................................... $ $ $
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Total(3)........................................ $ $ $
================================================================================
</TABLE>
(1) Excludes a non-accountable expense allowance payable to the representative
of the Underwriters (the "Representative"). See "Underwriting" for
information relating to indemnification of the Underwriters.
(2) Before deducting offering expenses payable by the Company, estimated at
$800,000, including the Representative's non-accountable expense allowance.
(3) The Company has granted the Underwriters a 45-day option to purchase up to
270,000 additional shares of Common Stock solely to cover over-allotments,
if any. To the extent that the option is exercised, the Underwriters will
offer the additional shares at the Price to Public shown above. If the
option is exercised in full, the total Price to Public, Underwriting
Discounts and Proceeds to Company will be $ , $ and
$ , respectively. See "Underwriting."
The shares of Common Stock are offered by the several Underwriters, subject
to prior sale, when, as and if delivered to and accepted by them, and subject
to the right of the Underwriters to reject any order in whole or in part. It is
expected that delivery of the shares of Common Stock will be made against
payment therefor at the offices of Van Kasper & Company, San Francisco,
California, on or about , 1998.
VAN KASPER & COMPANY
, 1998
<PAGE>
[ART WORK]
IN CONNECTION WITH THIS OFFERING, THE UNDERWRITERS MAY OVER-ALLOT OR EFFECT
TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE COMMON STOCK
AT A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN MARKET. SUCH
TRANSACTIONS MAY BE EFFECTED IN THE NASDAQ NATIONAL MARKET OR OTHERWISE. SUCH
STABILIZING, IF COMMENCED, MAY BE DISCONTINUED AT ANY TIME.
2
<PAGE>
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by the more detailed
information, including "Risk Factors" and the Consolidated Financial Statements
and Notes thereto, appearing elsewhere in this Prospectus. The statements
contained in this Prospectus which are not historical facts are forward-looking
statements that are subject to risks and uncertainties that could cause actual
results to differ materially from those set forth in or implied by forward-
looking statements. Factors that could cause or contribute to such differences
include those discussed below, as well as those discussed elsewhere in this
Prospectus.
THE COMPANY
Shoe Pavilion, Inc., founded in 1979, is the largest independent off-price
footwear retailer on the West Coast that offers a broad selection of women's
and men's designer label and name brand merchandise. The Company was among the
first footwear retailers on the West Coast to expand the off-price concept into
the designer and name brand footwear market. As of December 1, 1997, the
Company operated 56 retail stores in California, Washington, Oregon and Nevada
under the trade names Shoe Pavilion and Shoe Pavilion's Designer Shoe
Warehouse. From 1993 through 1996, net sales and income before income taxes
increased at compound annual growth rates of 15.5% and 84.7%, respectively. For
the nine months ended September 30, 1997, net sales increased 46.7% to $32.2
million and income before income taxes increased 118.0% to $2.4 million
compared to the nine months ended September 30, 1996.
The Company offers quality designer and name brand footwear such as Amalfi,
Clarks, Dexter, Fila, Florsheim, Naturalizer and Rockport, typically at 30% to
70% below department store regular prices for the same shoes. Such price
discounts appeal to value-oriented consumers seeking quality brand name
footwear not typically found at other off-price retailers or mass
merchandisers. The Company is able to offer lower prices by (i) selectively
purchasing large blocks of production over-runs, over-orders, mid- and late-
season deliveries and last season's stock from manufacturers and other
retailers at significant discounts, (ii) sourcing in-season name brand and
branded design merchandise directly from factories in Italy, Brazil and China
and (iii) negotiating favorable prices with manufacturers by ordering
merchandise during off-peak production periods and taking delivery at one
central warehouse.
During the first nine months of 1997, the Company purchased its merchandise
from over 50 domestic and international vendors, independent resellers,
manufacturers and other retailers that have frequent excess inventory for sale.
Budgeted production over-runs due to the long lead-times associated with the
design and manufacturing of new shoes, as well as retail overstock, provide the
Company with a wide selection of branded merchandise. Women's dress and casual
shoes, men's dress and casual shoes and athletic footwear comprised
approximately 61%, 26% and 13%, respectively, of net sales for the nine months
ended September 30, 1997. The Company emphasizes brand name merchandise that it
believes has long-term consumer appeal.
The Company's stores utilize a self-service format that allows inventory to
be stored directly under a displayed shoe, thereby eliminating the need for a
stockroom and significantly increasing retail floor space. The functionality
and simplicity of this format enable flexible store layouts that can be easily
reconfigured to accommodate a new mix of merchandise. Moreover, this format
allows customers to locate all available sizes of a particular shoe and to try
them on for comfort and fit without a salesperson's assistance, thereby
reducing in-store staffing needs and allowing customers to make independent,
rapid purchasing decisions.
The Company's stores are strategically located in strip malls, outlet centers
and downtown locations, frequently in close proximity to other off-price
apparel retailers that attract similar customers. Stores generally range in
size from 3,000 to 14,000 square feet and offer between 15,000 and 25,000 pairs
of shoes. The Company opened, net of closures, two stores in 1995, three stores
in 1996, and 15 stores, to date, in 1997. In early 1997, the Company entered
the Los Angeles market by assuming the leasehold interests of Standard Shoes, a
Los Angeles based footwear retailer. The Company subsequently converted nine
Standard Shoes locations to Shoe Pavilion's Designer Shoe Warehouse stores.
3
<PAGE>
The Company's objective is to be the leading off-price retailer of designer
label and name brand footwear in each of the markets it serves. The Company
intends to create greater name recognition and presence by opening new stores
in existing markets, moving into new markets with multiple store openings and
pursuing opportunities to acquire local and regional footwear retailers. The
Company intends to open ten to 20 new stores, primarily in its existing
markets, in 1998.
The Company's executive offices are located at 3200-F Regatta Boulevard,
Richmond, California 94804, and its telephone number is (510) 970-9775.
THE OFFERING
Common Stock offered................ 1,800,000 shares
Common Stock to be outstanding
after the offering.................
6,300,000 shares(1)
Use of proceeds..................... To repay bank borrowings, fund a
distribution of S corporation earnings
to the Company's current sole
stockholder and for general corporate
purposes, including expansion. See "Use
of Proceeds."
Proposed Nasdaq National Market SHOE
symbol..............................
- --------------------
(1) Excludes shares of Common Stock issuable upon exercise of stock
options to be granted upon the completion of this offering. Also excludes
shares and shares of Common Stock reserved for future
issuance under the Company's 1998 Equity Incentive Plan (the "1998 Plan")
and Directors' Stock Option Plan (the "Directors' Plan"), respectively.
Unless otherwise indicated, all information in this Prospectus (i) assumes
that the Underwriters' over-allotment option is not exercised and (ii) gives
effect to the reorganization of the Company's capital structure, which will be
effected prior to the completion of this offering. The Company was incorporated
in Delaware in November 1997 as the holding company for Shoe Inn, Inc., a
Washington corporation formed in 1983. Upon the completion of this offering,
Shoe Inn, Inc. will become a wholly-owned subsidiary of Shoe Pavilion, Inc.
Unless otherwise stated, all references in this Prospectus to the Company
include Shoe Pavilion, Inc. and its subsidiary Shoe Inn, Inc. The Shoe Pavilion
name and logo are registered trademarks of the Company. This Prospectus also
includes trademarks and service marks of other companies.
4
<PAGE>
SUMMARY CONSOLIDATED FINANCIAL INFORMATION AND OPERATING DATA
(IN THOUSANDS, EXCEPT PER SHARE AND OPERATING DATA)
<TABLE>
<CAPTION>
NINE MONTHS
ENDED SEPTEMBER
YEAR ENDED DECEMBER 31, 30,
---------------------------------------------- ----------------
1992 1993 1994 1995 1996 1996 1997
------- ------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS
DATA:
Net sales............... $17,072 $19,687 $21,515 $25,539 $30,315 $21,936 $32,185
Gross profit............ 6,599 6,486 6,508 7,816 9,997 7,083 11,095
Income (loss) from
operations............. 1,404 461 (106) 1,172 1,775 1,309 2,738
Income (loss) before
income taxes........... 1,212 236 (510) 648 1,488 1,100 2,399
Pro forma (provision)
benefit for income
taxes(1)............... (435) (85) 183 (246) (566) (418) (905)
------- ------- ------- ------- ------- ------- -------
Pro forma net income
(loss)(1).............. $ 777 $ 151 $ (327) $ 402 $ 922 $ 682 $ 1,494
======= ======= ======= ======= ======= ======= =======
Pro forma net income per
share(1)............... $ 0.18 $ 0.29
======= =======
Weighted average shares
outstanding............ 5,215 5,215
======= =======
SELECTED OPERATING DATA:
Number of stores:
Opened during period... 3 7 9 6 9 5 16
Closed during period... 1 0 0 4 6 3 1
Open at end of period.. 20 27 36 38 41 40 56
Comparable store sales
increase (decrease)(2). 9.6% (9.1)% (12.4)% (1.0)% 8.0% 7.7% 2.5%
</TABLE>
<TABLE>
<CAPTION>
SEPTEMBER 30, 1997
----------------------
ACTUAL AS ADJUSTED(3)
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<S> <C> <C>
BALANCE SHEET DATA:
Working capital ......................................... $ 5,005 $14,612
Total assets ............................................ 22,840 32,890
Total indebtedness (including current portion) .......... 7,284 197
Stockholders' equity..................................... 6,093 16,143
</TABLE>
- --------------------
(1) For all periods indicated, the Company operated as an S corporation and was
not subject to federal and certain state income taxes. Prior to the
completion of this offering, the Company will become subject to federal and
state income taxes. Pro forma net income (loss) reflects federal and state
income taxes as if the Company had not elected S corporation status for
income tax purposes. Pro forma net income per share is based on the
weighted average number of shares of common stock outstanding during the
period plus the estimated portion of the shares being offered by the
Company (715,099 shares) which would be necessary to fund the distribution
of substantially all undistributed taxable S corporation earnings,
estimated to be $6.3 million as of September 30, 1997. See "Prior S
Corporation Status" and Note 3 of Notes to Consolidated Financial
Statements.
(2) The Company believes that the decreases in comparable store sales in 1994
and 1995 were due, in part, to temporary store closures and business
disruptions resulting from the reconfiguration of the Company's stores from
a traditional retail format to the current self-service format. The Company
believes that the increase in comparable store sales in 1996 was due, in
part, to the completion of the reconfiguration of the Company's comparable
stores.
(3) As adjusted to reflect (i) the sale of the shares of Common Stock offered
hereby at an assumed initial public offering price of $10.00 per share and
after deducting the estimated underwriting discount and commissions and
offering expenses and the application of the estimated net proceeds
therefrom, including the S corporation distribution of an estimated $6.3
million as of September 30, 1997 to the Company's current stockholder and
(ii) a nonrecurring tax benefit, which would have been $443,000 had the
termination of the Company's S corporation status occurred as of September
30, 1997. See "Prior S Corporation Status" and "Use of Proceeds."
5
<PAGE>
RISK FACTORS
In addition to the other information in this Prospectus, the following
factors should be considered carefully in evaluating an investment in the
shares of Common Stock offered by this Prospectus. The statements contained in
this Prospectus which are not historical facts are forward-looking statements
that are subject to risks and uncertainties that could cause actual results to
differ materially from those set forth in or implied by forward-looking
statements. Factors that could cause or contribute to such differences include
those discussed below, as well as those discussed elsewhere in this
Prospectus.
RISKS ASSOCIATED WITH EXPANSION
The Company has experienced rapid and substantial growth in net sales as
well as in its employee base. The Company's continued growth will depend to a
significant degree on its ability to expand its operations through the opening
of new stores, to operate these stores on a profitable basis and to increase
comparable store sales. The success of the Company's planned expansion will be
significantly dependent upon the Company's ability to locate suitable store
sites and negotiate acceptable lease terms. In addition, several other factors
could affect the Company's ability to expand, including the adequacy of the
Company's capital resources, the ability to hire, train and integrate
employees and the ability to adapt the Company's distribution and other
operational systems. There can be no assurance that the Company will achieve
its planned expansion or that any such expansion will be profitable. In
addition, there can be no assurance that the Company's expansion within its
existing markets will not adversely affect the individual financial
performance of the Company's existing stores or its overall operating results,
or that new stores will achieve net sales and profitability levels consistent
with existing stores, or at all. To manage its planned expansion, the Company
regularly evaluates the adequacy of its existing systems and procedures,
including product distribution facilities, store management, financial
controls and management information systems. However, there can be no
assurance that the Company will anticipate all of the changing demands that
expanded operations may impose on such systems. Failure to adapt its
distribution capabilities or other internal systems or procedures as required
could have a material adverse effect on the Company's business, financial
condition and results of operations.
The Company expects a portion of its 1998 store openings to be in markets
where the Company currently does not have extensive operations. Entry into a
new market carries special risks, including market acceptance, product mix and
competitive positioning strategies. The success of the Company's expansion
plan will depend upon the Company's ability to penetrate new markets
successfully. For example, the Company's recent expansion into the Los Angeles
market is dependent, to a significant extent, on the successful integration of
the converted Standard Shoes stores. If the conversion of these stores to Shoe
Pavilion's Designer Shoe Warehouse stores is not well received by customers or
the integration is otherwise unsuccessful, the Company's operating results
would be adversely affected. Management does not have prior experience in
conversions of this size, and there can be no assurance that the Company will
be able to successfully operate these or any other converted locations.
The Company actively monitors individual store performance and has closed
underperforming stores in the past, including four in 1995, six in 1996 and
one in 1997. The Company intends to continue to close underperforming stores
in the future, and if it were to close a number of stores, it could incur
significant closure costs and reductions in net sales. In addition, the
Company may be unable to close certain underperforming stores on a timely
basis because of lease terms. A significant increase in closure costs or the
inability to close one or more underperforming stores on a timely basis could
have a material adverse effect on the Company's business, financial condition
and results of operations.
INVENTORY AND SOURCING RISK
The Company's future success will be significantly dependent on its ability
to obtain merchandise that consumers want to buy, particularly name brand
merchandise with long-term retail appeal, and to acquire such merchandise
under favorable terms and conditions. For the nine months ended September 30,
1997, the Company's
6
<PAGE>
top ten suppliers accounted for 45.3% of inventory purchases, of which
purchases from Nine West Group, Inc. and The Rockport Company, Inc. accounted
for 10.5% and 8.6% of total inventory purchases, respectively. The
deterioration of the Company's relationship with any key vendor could result
in delivery delays, merchandise shortages or less favorable terms than the
Company currently enjoys. The Company deals with its suppliers on an order-by-
order basis and has no long-term purchase contracts or other contractual
assurances of continued supply or pricing. As the Company's operations expand,
its demand for off-price inventory will continue to increase. The Company's
products typically are manufacturing over-runs, over-orders, mid- or late-
season deliveries or last season's stock. The inability of the Company to
obtain a sufficient supply of readily salable, high margin inventory, to
negotiate favorable discount and payment agreements with its suppliers or to
sell large inventory purchases without markdowns could have a material adverse
effect on the Company's business, financial condition and results of
operations. See "Business--Sourcing and Purchasing."
RELIANCE ON KEY PERSONNEL
The Company's future success will be dependent, to a significant extent, on
the efforts and abilities of its executive officers, particularly Dmitry
Beinus, the Company's Chairman of the Board, President and Chief Executive
Officer. The Company has applied for key man life insurance in the amount of
$3.0 million on Mr. Beinus. The Company's Chief Financial Officer joined the
Company in September 1997. Accordingly, the Company's management team has not
had extensive experience working together. The loss of the services of any one
of the Company's executive officers could have a material adverse effect on
the Company's operating results. In addition, the Company's continued growth
will depend, in part, on its ability to attract, motivate and retain
additional skilled managerial and merchandising personnel. Competition for
such personnel is intense, and there can be no assurance that the Company will
be able to retain its existing personnel or attract additional qualified
personnel in the future. See "Management."
UNCERTAINTY OF FUTURE OPERATING RESULTS; FLUCTUATIONS IN COMPARABLE STORE
SALES
Although the Company recently has been profitable, there can be no assurance
that the Company will remain profitable in the future. Future operating
results will depend upon many factors, including general economic conditions,
the level of competition and the ability of the Company to acquire sufficient
inventory, achieve its expansion plans and effectively monitor and control
costs. There can be no assurance that the Company's recent gross margin levels
will be sustainable in the future. Historically, the Company's growth in net
sales has resulted primarily from new store openings, and the Company expects
that the primary source of future sales growth, if any, will continue to be
new store openings.
The Company's comparable store sales have fluctuated widely, and the Company
does not expect that comparable store sales will contribute significantly, if
at all, to future growth in net sales. The Company defines comparable stores
as those stores that have been open for at least 14 consecutive months. Stores
open less than 14 consecutive months are treated as new stores, and stores
closed during the period are excluded from comparable store sales. The
Company's comparable store sales decreased 9.1% in 1993, 12.4% in 1994 and
1.0% in 1995 and increased 8.0% in 1996 and 2.5% during the nine months ended
September 30, 1997. The Company believes that the decreases in comparable
store sales in 1994 and 1995 were due, in part, to temporary store closures
and business disruptions resulting from the reconfiguration of the Company's
stores from a traditional retail format to the current self-service format.
The Company believes that the increase in comparable store sales in 1996 was
due, in part, to the completion of the reconfiguration of the Company's
comparable stores. The Company does not anticipate realizing similar increases
in subsequent periods, and no assurance can be given as to the Company's
ability to maintain recent comparable store sales growth. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations."
RISKS ASSOCIATED WITH POSSIBLE ACQUISITIONS
The Company expects to pursue the acquisition of companies and assets that
complement its existing business. Acquisitions involve a number of special
risks, including the diversion of management's attention to the assimilation
of the operations and personnel of the acquired businesses, potential adverse
short-term effects
7
<PAGE>
on the Company's operating results and amortization of acquired intangible
assets. The Company has limited experience in identifying, completing and
integrating acquisitions. There can be no assurance that the Company will
identify attractive acquisition candidates, that acquisitions will be
consummated on acceptable terms or that any acquired companies will be
integrated successfully into the Company's operations.
SEASONALITY AND QUARTERLY FLUCTUATIONS
The Company has experienced in the past, and expects to continue to
experience, seasonal fluctuations in its net sales and net income.
Historically, net sales and net income have been weakest during the first
quarter and a majority of the Company's net sales and net income has been
realized during the second and third quarters. In anticipation of increased
sales activity during these quarters, the Company increases inventory
purchases in advance of these quarters. If, for any reason, the Company's net
sales were below seasonal norms during the second or third quarter, the
Company's business, financial condition and results of operations could be
materially adversely affected. The Company's quarterly results of operations
may also fluctuate significantly as a result of a variety of factors,
including timing of new store openings, level of net sales contributed by new
stores, merchandise mix, timing and level of price markdowns, availability of
inventory, store closures, advertising costs, competitive pressures and
changes in the demand for off-price footwear. Any such fluctuations could have
a material adverse effect on the market price of the Company's Common Stock.
See "Management's Discussion and Analysis of Financial Condition and Results
of Operations--Quarterly Operating Results."
DEPENDENCE ON CONSUMER SPENDING AND PREFERENCES
The success of the Company's operations depends upon a number of factors
relating to consumer spending, including employment levels, business
conditions, interest rates, inflation and taxation. There can be no assurance
that consumer spending will not decline in response to economic conditions,
thereby adversely affecting the Company's operating results.
All of the Company's products are subject to changing consumer preferences.
Consumer preferences could shift to types of footwear other than those that
the Company currently offers. Any such shift could have a material adverse
effect on the Company's operating results. The Company's future success will
depend, in part, on its ability to anticipate and respond to changes in
consumer preferences, and there can be no assurance that the Company will be
able to anticipate effectively or respond to such changes on a timely basis or
at all. Failure to anticipate and respond to changing consumer preferences
could lead to, among other things, lower net sales, excess inventory and lower
gross margins, any of which could have a material adverse effect on the
Company's business, financial condition and results of operations.
INTERNATIONAL PURCHASING
The Company purchases in-season name brand and branded-design merchandise
directly from factories in Italy, Brazil and China. Directly-sourced goods
accounted for approximately 13.4% and 15.1% of net sales in 1996 and the nine
months ended September 30, 1997, respectively. The Company has no long-term
contracts with direct manufacturing sources and competes with other companies
for production facilities. All of the manufacturers with which the Company
conducts business are located outside of the United States, and the Company is
subject to the risks generally associated with an import business, including
foreign currency fluctuations, unexpected changes in foreign regulatory
requirements, disruptions or delays in shipments and the risks associated with
United States import laws and regulations, including quotas, duties, taxes,
tariffs and other restrictions. There can be no assurance that the foregoing
factors will not disrupt the Company's supply of directly-sourced goods or
otherwise adversely impact the Company's business, financial condition and
results of operations in the future. See "Business--Sourcing and Purchasing."
8
<PAGE>
INVENTORY SHRINKAGE
The retail industry is subject to theft by customers and employees. By
converting to a self-service format, where shoppers have access to both shoes
of a pair, the Company substantially increased the need for store security.
Although the Company has implemented enhanced security procedures, there can
be no assurance that the Company will not suffer from significant inventory
shrinkage in the future, which could have a material adverse effect on the
Company's business, financial condition and results of operations. See
"Business--Video Merchandising and Security Systems."
COMPETITION
The retail footwear market is highly competitive, and the Company expects
the level of competition to increase. The Company competes with off-price and
discount retailers (e.g., Nordstrom Rack, Payless ShoeSource, Ross Dress for
Less and Famous Footwear), branded retail outlets (e.g., Nine West), national
retail stores (e.g., Nordstrom, Marshalls, Macy's, Sears, J.C. Penney,
Loehmann's, Robinsons-May and Mervyn's), traditional shoe stores and mass
merchants. Many of these competitors have stores in the markets in which the
Company now operates and in which it plans to expand. Many of the Company's
competitors have significantly greater financial, marketing and other
resources than the Company. In addition, there can be no assurance that future
participants will not enter the off-price segment of the footwear market.
Competitive pressures resulting from competitors' pricing policies could
materially adversely affect the Company's gross margins. There can be no
assurance that the Company will not face greater competition from other
national, regional or local retailers or that the Company will be able to
compete successfully with existing and new competitors. The inability of the
Company to respond to such competition could have a material adverse effect on
the Company's business, financial condition and results of operations.
FUTURE CAPITAL NEEDS
The Company expects that the net proceeds of this offering remaining after
the repayment of indebtedness and the payment of the stockholder distribution
described under "Use of Proceeds," together with anticipated cash flow from
operations and available borrowings under the Company's credit facility, will
satisfy its cash requirements for at least the next 12 months. However, the
Company may incur significant working capital requirements and capital
expenditures in connection with its growth strategy and otherwise. To the
extent that the foregoing cash resources are insufficient to fund the
Company's activities, including new store openings planned for 1998,
additional funds will be required. There can be no assurance that additional
financing will be available on reasonable terms or at all. Failure to obtain
such financing could delay or prevent the Company's planned expansion, which
could adversely affect the Company's business, financial condition and results
of operations. In addition, if additional capital is raised through the sale
of additional equity or convertible securities, dilution to the Company's
stockholders could occur. See "Use of Proceeds" and "Management's Discussion
and Analysis of Financial Condition and Results of Operations."
PRIOR S CORPORATION STATUS AND OTHER TAX MATTERS
Since August 1988, the Company has been an S corporation for federal and
certain state income tax purposes. Unlike a C corporation, an S corporation is
generally not subject to income tax at the corporate level. The Company
intends to terminate its status as an S corporation and become a C corporation
as of a date shortly before completion of this offering. If S corporation
status were denied for any period prior to this termination by reason of a
failure to satisfy the S corporation requirements of the Internal Revenue Code
of 1986, as amended (the "Code"), the Company would be subject to income tax
as a C corporation for such periods. The Company has made or will make
distributions to its sole stockholder equal to the amount of the taxable
income reported on the Company's federal tax returns for the period from
August 1988 through the day preceding the date of termination of the Company's
S corporation status (the "Termination Date"). The amount to be distributed to
this stockholder is estimated to be approximately $6.3 million as of September
30, 1997, which will be funded from the net proceeds of this offering. No
distributions will be made to the purchasers of the Company's Common Stock in
this offering. See "Prior S Corporation Status," "Dividend Policy" and "Use of
Proceeds."
9
<PAGE>
SUBSTANTIAL CONTROL BY SINGLE STOCKHOLDER
Following completion of the offering, Dmitry Beinus, the Company's Chairman
of the Board, President and Chief Executive Officer, will own approximately
71.4% of the Company's outstanding Common Stock (68.5% if the Underwriters'
over-allotment option is exercised in full). As a result, Mr. Beinus will be
able to decide all matters requiring stockholder approval, including the
election of directors and approval of significant corporate transactions.
Concentration of stock ownership could also have the effect of delaying or
preventing a change in control of the Company. See "Principal Stockholder" and
"Description of Capital Stock."
NO PRIOR MARKET; POSSIBLE VOLATILITY OF STOCK PRICE
Prior to the offering contemplated by this Prospectus, there has been no
public market for the Common Stock, and there can be no assurance that an
active public market will develop or be sustained after the offering. The
initial public offering price will be determined by negotiations between the
Company and the Underwriters based upon a number of factors. Upon commencement
of this offering, the Common Stock will be quoted on the Nasdaq National
Market, which has experienced and is likely to experience in the future
significant price and volume fluctuations, either of which could adversely
affect the market price of the Common Stock without regard to the operating
performance of the Company. In addition, the trading price of the Company's
Common Stock could be subject to wide fluctuations in response to quarterly
variations in operating results, fluctuations in the Company's comparable
store sales, announcements by other footwear retailers, the failure of the
Company's earnings to meet the expectations of securities analysts and
investors, as well as other events or factors. See "--Seasonality and
Quarterly Fluctuations" and "Underwriting."
DILUTION AND BENEFITS TO EXISTING STOCKHOLDER
Purchasers of the Common Stock offered by this Prospectus will suffer an
immediate and substantial dilution in the net tangible book value per share of
the Common Stock from the initial public offering price. The completion of the
offering will result in certain benefits to the Company's current stockholder.
The Company intends to use a portion of the net proceeds from the offering to
fund a distribution to the existing stockholder, which is intended as a
distribution of previously undistributed accumulated S corporation earnings.
As of September 30, 1997, the distribution was estimated to be $6.3 million.
See "Dilution" and "Prior S Corporation Status."
SHARES ELIGIBLE FOR FUTURE SALE
The sale of a substantial number of shares of Common Stock in the public
market following this offering could adversely affect the market price of the
Common Stock. Upon completion of this offering, the Company will have
outstanding an aggregate of 6,300,000 shares of Common Stock. All of the
shares of Common Stock sold in this offering will be freely tradeable without
restriction under the Securities Act of 1933, as amended (the "Securities
Act"), unless acquired by affiliates of the Company. All of the remaining
outstanding shares of Common Stock are "Restricted Shares" and are subject to
a lock-up agreement under which the stockholder has agreed not to sell or
otherwise dispose of any such shares for a period of one year after the date
of this Prospectus without the prior written consent of Van Kasper & Company.
Van Kasper & Company may release all or any portion of the shares subject to
the lock-up agreement, in its discretion, at any time without public
announcement. All of the Restricted Shares may become available for sale in
the public market immediately following expiration of the one-year lock-up
period subject to the volume and other limitations of Rule 144 under the
Securities Act.
The Company intends to file registration statements covering the sale of
1,000,000 shares and 100,000 shares of Common Stock reserved for issuance
under its 1998 Plan and Directors' Plan, respectively, shortly after the
consummation of this offering. See "Shares Eligible for Future Sale" and
"Management--Stock Plans."
10
<PAGE>
ANTI-TAKEOVER EFFECT OF CERTAIN CHARTER PROVISIONS
Upon completion of this offering, the Board of Directors will have the
authority to issue up to 1,000,000 shares of Preferred Stock, and to determine
the rights, preferences and restrictions of such shares, without further
stockholder approval. The rights of holders of Common Stock will be subject
to, and may be adversely affected by, the rights of the holders of any
Preferred Stock that may be issued in the future. The issuance of Preferred
Stock may have the effect of delaying or preventing a change in control of the
Company. In addition, certain provisions of the Company's Certificate of
Incorporation and Bylaws and of Delaware law could discourage potential
acquisition proposals and could delay or prevent a change in control of the
Company. Such provisions could diminish the opportunities for a stockholder to
participate in tender offers, including tender offers at a price above the
then-current market value of the Common Stock. Among other things, these
provisions (i) provide that only the Board of Directors or certain members
thereof or officers of the Company may call special meetings of the
stockholders; (ii) eliminate the ability of the stockholders to take action
without a meeting; and (iii) authorize the issuance of "blank check" preferred
stock having such designations, rights and preferences as may be determined
from time to time by the Board of Directors. See "Description of Capital
Stock."
FORWARD-LOOKING STATEMENTS
This Prospectus contains forward-looking statements within the meaning of
Section 27A of the Securities Act and Section 21E of the Securities Exchange
Act of 1934 which are subject to the "safe harbor" created by those sections.
These forward-looking statements include, but are not limited to, statements
concerning the Company's plans to: open or acquire additional stores; enter
new markets; purchase sizable quantities of off-price inventory; close
underperforming stores and utilize the Company's capital resources and the net
proceeds from this offering and the time periods related thereto. These
forward-looking statements may be found in the "Prospectus Summary," "Risk
Factors," "Use of Proceeds," "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and "Business." Forward-looking
statements not specifically set forth above may also be found in these and
other sections of this Prospectus. Actual results could differ materially from
those discussed in the forward-looking statements as a result of certain
factors, including those discussed in "Risk Factors" and elsewhere in this
Prospectus.
PRIOR S CORPORATION STATUS
Since August 1988, the Company has been treated for federal and certain
state income tax purposes as a corporation subject to taxation under
Subchapter S of the Code, and comparable state tax laws. As a result, the
Company's earnings through the day preceding the Termination Date, have been
or will be, as the case may be, taxed, with certain exceptions, for federal
and certain state income tax purposes directly to the Company's current
stockholder. The Termination Date will occur prior to the completion of this
offering.
The Company has previously made distributions to its stockholder to provide
the stockholder with funds to assist in paying federal and state income taxes
on the undistributed earnings of the Company. After the completion of this
offering, the Company will make an additional S corporation distribution to
the Company's current stockholder in an amount equal to all of the previously
undistributed S corporation earnings of the Company through the Termination
Date, estimated to be approximately $6.3 million as of September 30, 1997. See
"Use of Proceeds" and Note 3 of Notes to Consolidated Financial Statements.
The Company and the current stockholder intend to enter into an agreement that
provides for income taxes attributable to the periods prior to the Termination
Date to be borne by the current stockholder and for income taxes attributable
to the periods after the Termination Date to be borne by the Company.
Subsequent to the Termination Date, the Company will no longer be treated as
an S corporation and will be fully taxable pursuant to federal and state
income tax laws.
In connection with Shoe Pavilion's conversion to C corporation status, the
Company will record a nonrecurring tax benefit, which would have been $443,000
had the conversion occurred as of September 30, 1997.
11
<PAGE>
USE OF PROCEEDS
The net proceeds to the Company from the sale of the 1,800,000 shares
offered hereby (assuming an initial public offering price of $10.00 per share
and after deducting the estimated underwriting discount and commissions and
offering expenses) are expected to be approximately $15.9 million ($18.9
million if the Underwriters' over-allotment option is exercised in full).
Approximately $6.8 million will be used to repay the outstanding balance on
the revolving line of credit portion of the Company's credit facility. At
October 31, 1997, the revolving line of credit had aggregate principal
outstanding of approximately $6.8 million and bore interest at a rate of 8
3/4%. The line of credit expires on April 30, 1999. See Note 4 of Notes to
Consolidated Financial Statements. In addition, the Company will use a portion
of such proceeds to fund a distribution to its sole stockholder of certain
previously undistributed taxable earnings of the Company included or
includable in the taxable income of the stockholder as a result of the
Company's S corporation status. The amount of the distribution would have been
$6.3 million if the Termination Date had been September 30, 1997. See "Prior S
Corporation Status." The balance of the proceeds will be used for expansion
and general corporate purposes. Until the proceeds are employed for such
purposes, they will be invested in short-term, interest-bearing, investment-
grade instruments. The Company expects that the net proceeds of this offering
remaining after the repayment of indebtedness and the payment of the
stockholder distribution, together with anticipated cash flow from operations
and available borrowings under the Company's credit facility, will satisfy its
cash requirements for at least the next 12 months. See "Risk Factors--Future
Capital Needs."
DIVIDEND POLICY
The Company currently intends to retain its future earnings for use in its
business and does not currently anticipate paying cash dividends in the
foreseeable future, other than the distribution to the current stockholder in
connection with the termination of the Company's S corporation status. Since
August 1988, the Company has made distributions to its stockholder primarily
to allow the stockholder to pay taxes on earnings of the Company included or
includable in the taxable income of the stockholder as a result of the
Company's S corporation status. The Company's credit agreement prohibits the
payment of cash dividends without the lender's consent, other than payments to
its stockholder, as necessary, to satisfy the stockholder's income tax
requirements. See "Prior S Corporation Status."
12
<PAGE>
DILUTION
As of September 30, 1997, the net tangible book value of the Company was
approximately $6.1 million, or approximately $1.35 per share. Net tangible
book value per share is determined by dividing the net tangible book value
(total net tangible assets less total liabilities) of the Company by the
number of shares of Common Stock outstanding. After giving effect to (i) the
sale of the shares of Common Stock offered hereby at an assumed initial public
offering price of $10.00 per share and after deducting the estimated
underwriting discount and commissions and offering expenses, (ii) the
distribution to be made to the sole stockholder of undistributed taxable S
corporation earnings and (iii) a nonrecurring tax benefit, which would have
been $443,000 had the termination of the Company's S corporation status
occurred as of September 30, 1997, the pro forma tangible book value of the
Company as of September 30, 1997 would have been $16.1 million, or $2.56 per
share. This represents an immediate increase in net tangible book value of
$1.21 per share to the existing sole stockholder and an immediate dilution in
net tangible book value of $7.44 per share to new investors purchasing shares
in the offering. The following table illustrates this per share dilution:
<TABLE>
<S> <C> <C>
Assumed initial public offering price per share................. $10.00
Net tangible book value per share as of September 30, 1997..... $1.35
Increase per share attributable to the offering................ 1.21
-----
Pro forma net tangible book value per share after the offering.. 2.56
------
Dilution per share to new investors............................. $ 7.44
======
</TABLE>
The following table summarizes, on a pro forma basis as of September 30,
1997, the difference between the existing stockholder and the new investors
with respect to the number of shares of Common Stock purchased from the
Company, the total consideration paid to the Company and the average price per
share paid assuming an initial public offering price of $10.00 per share:
<TABLE>
<CAPTION>
SHARES PURCHASED TOTAL CONSIDERATION
----------------- ------------------- AVERAGE PRICE
NUMBER PERCENT AMOUNT PERCENT PER SHARE
--------- ------- ----------- ------- -------------
<S> <C> <C> <C> <C> <C>
Existing stockholder........ 4,500,000 71.4% $ 6,093,000 25.3% $ 1.35
New investors............... 1,800,000 28.6 18,000,000 74.7 10.00
--------- ----- ----------- -----
Total...................... 6,300,000 100.0% $24,093,000 100.0%
========= ===== =========== =====
</TABLE>
The foregoing tables exclude options to purchase shares of Common
Stock to be granted at the initial public offering price to certain employees
and non-employee directors of the Company upon the closing of this offering.
See "Management--Stock Plans." If any additional options were exercised, there
could be further dilution to new investors.
13
<PAGE>
CAPITALIZATION
The following table sets forth the capitalization of the Company as of
September 30, 1997, (i) on an actual basis, (ii) on a pro forma basis to
reflect termination of the Company's S corporation status, including the $6.3
million distribution of undistributed taxable S corporation earnings to the
Company's current stockholder and a nonrecurring tax benefit, which would have
been $443,000 had the termination of the Company's S corporation status
occurred as of September 30, 1997 and (iii) on a pro forma as adjusted basis
to reflect the issuance and sale of the shares of Common Stock offered hereby
at an assumed initial public offering price of $10.00 per share and after
deducting the estimated underwriting discounts and commissions and offering
expenses and the application of the net proceeds therefrom. See "Prior S
Corporation Status," "Use of Proceeds" and Note 3 of Notes to Consolidated
Financial Statements.
<TABLE>
<CAPTION>
SEPTEMBER 30, 1997
----------------------------
PRO FORMA
ACTUAL PRO FORMA AS ADJUSTED
------ --------- -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Short-term borrowings, including current portion
of long-term debt (1)............................ $7,161 $7,161 $ 74
====== ====== =======
Long-term debt, net of current portion(1)......... 123 123 123
------ ------ -------
Stockholders' equity:
Preferred stock, $.001 par value: 1,000,000
shares authorized; no shares outstanding........ -- -- --
Common stock, $.001 par value: 15,000,000 shares
authorized; 4,500,000 shares outstanding,
actual; 6,300,000 shares outstanding, pro forma
and pro forma as adjusted(2).................... 4 4 6
Additional paid-in capital....................... 812 199 16,137
Retained earnings................................ 5,277 -- --
------ ------ -------
Total stockholders' equity...................... 6,093 203 16,143
------ ------ -------
Total capitalization........................... $6,216 $ 326 $16,266
====== ====== =======
</TABLE>
- ---------------------
(1) For a description of the Company's debt, see Notes 4 and 5 of Notes to
Consolidated Financial Statements.
(2) Excludes shares of Common Stock issuable upon exercise of stock
options to be granted upon the completion of this offering. Also excludes
shares and shares of Common Stock reserved for future issuance
under the Company's 1998 Plan and the Directors' Plan, respectively.
14
<PAGE>
SELECTED CONSOLIDATED FINANCIAL AND OPERATING DATA
(IN THOUSANDS, EXCEPT PER SHARE AND OPERATING DATA)
The selected consolidated financial and operating data set forth below
should be read in conjunction with the Consolidated Financial Statements of
the Company and related Notes thereto and "Management's Discussion and
Analysis of Financial Condition and Results of Operations" included elsewhere
in this Prospectus. The selected statement of operations and balance sheet
data of the Company as of and for each of the fiscal years in the five-year
period ended December 31, 1996 and the nine-month period ended September 30,
1997 are derived from the Company's audited consolidated financial statements.
Such consolidated financial statements as of December 31, 1995 and 1996 and
September 30, 1997 and for each of the three fiscal years in the period ended
December 31, 1996 and the nine-month period ended September 30, 1997 are
included elsewhere in this Prospectus and have been audited by Deloitte &
Touche LLP, independent auditors, as stated in their report included herein.
The balance sheet data as of September 30, 1996 and statement of operations
data for the nine-month period ended September 30, 1996 are derived from
unaudited consolidated financial statements. In the opinion of management, the
unaudited consolidated financial statements of the Company have been prepared
on the same basis as the audited consolidated financial statements included
herein and include all adjustments necessary for the fair presentation of
financial position and results of operations for these periods, which
adjustments are only of a normal recurring nature. The pro forma information
and the information under the caption "Selected Operating Data" for all
periods set forth below are derived from unaudited data.
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30,
---------------------------------------------- ---------------------
1992 1993 1994 1995 1996 1996 1997
------- ------- ------- ------- ------- ------------- -------
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS
DATA:
Net sales............... $17,072 $19,687 $21,515 $25,539 $30,315 $21,936 $32,185
Cost of sales and
related occupancy
expenses............... 10,473 13,201 15,007 17,723 20,318 14,853 21,090
------- ------- ------- ------- ------- ------- -------
Gross profit............ 6,599 6,486 6,508 7,816 9,997 7,083 11,095
------- ------- ------- ------- ------- ------- -------
Selling expenses........ 3,849 4,525 4,976 4,835 5,592 4,009 5,884
General and
administrative
expenses............... 1,346 1,500 1,638 1,809 2,630 1,765 2,473
------- ------- ------- ------- ------- ------- -------
Income (loss) from
operations............. 1,404 461 (106) 1,172 1,775 1,309 2,738
Interest and other
expense, net........... (192) (225) (404) (524) (287) (209) (339)
------- ------- ------- ------- ------- ------- -------
Income (loss) before
income taxes........... 1,212 236 (510) 648 1,488 1,100 2,399
Pro forma (provision)
benefit for income
taxes(1)............... (435) (85) 183 (246) (566) (418) (905)
------- ------- ------- ------- ------- ------- -------
Pro forma net income
(loss)(1).............. $ 777 $ 151 $ (327) $ 402 $ 922 $ 682 $ 1,494
======= ======= ======= ======= ======= ======= =======
Pro forma net income per
share(1)............... $ 0.18 $ 0.29
======= =======
Weighted average common
shares outstanding..... 5,215 5,215
======= =======
SELECTED OPERATING DATA:
Number of stores:
Opened during period... 3 7 9 6 9 5 16
Closed during period... 1 0 0 4 6 3 1
Open at end of period.. 20 27 36 38 41 40 56
Comparable store sales
increase (decrease)(2). 9.6% (9.1)% (12.4)% (1.0)% 8.0% 7.7% 2.5%
<CAPTION>
DECEMBER 31,
---------------------------------------------- SEPTEMBER 30,
1992 1993 1994 1995 1996 1997
------- ------- ------- ------- ------- -------------
<S> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Working capital......... $ 3,020 $ 3,020 $ 1,964 $ 2,876 $ 3,783 $ 5,005
Total assets............ 7,410 7,956 10,079 9,473 15,146 22,840
Total indebtedness
(including current
portion)............... 2,176 3,306 4,912 3,872 3,673 7,284
Stockholder's equity.... 2,736 2,740 2,083 2,695 4,567 6,093
</TABLE>
- -------------------
(1) For all periods indicated, the Company operated as an S corporation and
was not subject to federal and certain state income taxes. Prior to the
completion of this offering, the Company will become subject to federal
and state income taxes. Pro forma net income (loss) reflects federal and
state income taxes as if the Company had not elected S corporation status
for income tax purposes. Pro forma net income per share is based on the
weighted average number of shares of common stock outstanding during the
period plus the estimated portion of the shares being offered by the
Company (715,099 shares) which would be necessary to fund the distribution
of substantially all undistributed taxable S corporation earnings,
estimated to be $6.3 million as of September 30, 1997. See "Prior S
Corporation Status" and Note 3 of Notes to Consolidated Financial
Statements.
(2) The Company believes that the decreases in comparable store sales in 1994
and 1995 were due, in part, to temporary store closures and business
disruptions resulting from the reconfiguration of the Company's stores
from a traditional retail format to the current self-service format. The
Company believes that the increase in comparable store sales in 1996 was
due, in part, to the completion of the reconfiguration of the Company's
comparable stores.
15
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
The following discussion and analysis should be read in conjunction with the
Company's Consolidated Financial Statements and Notes thereto and the other
financial information included elsewhere in this Prospectus. Except for the
historical information contained herein, the discussions in this Prospectus
contain forward-looking statements that involve risks and uncertainties. The
Company's actual results could differ materially from those discussed herein.
Factors that could cause or contribute to such differences include, but are
not limited to, those discussed below and in the section entitled "Risk
Factors" as well as those discussed elsewhere in this Prospectus.
OVERVIEW
Shoe Pavilion, founded in 1979, is the largest independent off-price
footwear retailer on the West Coast that offers a broad selection of women's
and men's designer label and name brand merchandise. The Company was among the
first footwear retailers on the West Coast to expand the off-price concept
into the designer and name brand footwear market. As of December 1, 1997, the
Company operated 56 retail stores in California, Washington, Oregon and Nevada
under the trade names Shoe Pavilion and Shoe Pavilion's Designer Shoe
Warehouse.
The Company opened, net of closures, two stores in 1995, three stores in
1996 and 15 stores, to date, in 1997. In early 1997, the Company entered the
Los Angeles market by assuming the leasehold interests of Standard Shoes, a
Los Angeles based footwear retailer. In connection therewith, the Company
purchased the inventory of Standard Shoes at 60% of Standard Shoes' cost. The
Company subsequently converted nine Standard Shoes locations to Shoe
Pavilion's Designer Shoe Warehouse stores. The Company intends to open 10 to
20 new stores, primarily in its existing markets, in 1998.
The Company's growth in net sales historically has resulted primarily from
new store openings, and the Company expects that the primary source of future
sales growth, if any, will continue to be new store openings. The Company's
comparable store sales have fluctuated widely, and the Company does not expect
that comparable store sales will contribute significantly, if at all, to
future growth in net sales. The Company defines comparable stores as those
stores that have been open for at least 14 consecutive months. Stores open
less than 14 consecutive months are treated as new stores, and stores closed
during the period are excluded from comparable store sales. The Company's
comparable store sales decreased 9.1% in 1993, 12.4% in 1994 and 1.0% in 1995
and increased 8.0% in 1996 and 2.5% during the nine months ended September 30,
1997. The Company believes that the decreases in comparable store sales in
1994 and 1995 were due, in part, to temporary store closures and business
disruptions resulting from the reconfiguration of the Company's stores from a
traditional retail format to the current self-service format. The Company
believes that the increase in comparable store sales in 1996 was due, in part,
to the completion of the reconfiguration of the Company's comparable stores.
The Company does not anticipate realizing similar increases in subsequent
periods, and no assurance can be given as to the Company's ability to maintain
recent comparable store sales growth.
Between late 1993 and 1995, the Company reconfigured substantially all of
its stores from a traditional retail format to the current self-service
format. This reconfiguration resulted in increased expenses associated with
the conversion and decreased net sales due to the temporary closure of the
stores. The majority of the reconfigurations occurred during 1994 and
contributed to a loss before income taxes of $510,000 in 1994.
The Company acquires merchandise opportunistically to obtain favorable terms
and in quantities large enough to support future growth, which results in
increased inventory levels at various times throughout the year. As a result,
similar to other off-price retailers, the Company's inventory turnover rates
are typically less than full-price retailers.
Shoe Pavilion has been treated as an S corporation for federal and certain
state income tax purposes since August 1988. As a result, the Company's
earnings from August 1988 through the date preceding the
16
<PAGE>
Termination Date have been taxed, with certain exceptions, directly to the
Company's stockholder rather than to the Company. The Company's S corporation
status will terminate on the Termination Date, and the Company will be subject
to state and federal income taxes as a C corporation. All references to net
income in this "Management's Discussion and Analysis of Financial Condition
and Results of Operations" are presented as if the Company had been subject to
federal and state income taxes for the periods presented.
In connection with its conversion to C corporation status, the Company will
record a nonrecurring tax benefit, which would have been $443,000 had the
conversion occurred as of September 30, 1997.
RESULTS OF OPERATIONS
The following table sets forth, for the periods indicated, the relative
percentages that certain income and expense items bear to net sales:
<TABLE>
<CAPTION>
NINE MONTHS
ENDED
YEAR ENDED SEPTEMBER
DECEMBER 31, 30,
-------------------- ------------
1994 1995 1996 1996 1997
----- ----- ----- ----- -----
<S> <C> <C> <C> <C> <C>
Net sales............................... 100.0 % 100.0% 100.0% 100.0% 100.0%
Gross profit............................ 30.2 30.6 33.0 32.3 34.5
Selling expenses........................ 23.1 18.9 18.4 18.3 18.3
General and administrative expenses..... 7.6 7.1 8.7 8.0 7.7
----- ----- ----- ----- -----
Income (loss) from operations........... (0.5) 4.6 5.9 6.0 8.5
Interest and other expense, net......... (1.9) (2.0) (1.0) (0.9) (1.0)
----- ----- ----- ----- -----
Income (loss) before income taxes....... (2.4) 2.6 4.9 5.1 7.5
Pro forma (provision) benefit for income
taxes.................................. 0.9 (1.0) (1.9) (1.9) (2.8)
----- ----- ----- ----- -----
Pro forma net income (loss)............. (1.5)% 1.6% 3.0% 3.2% 4.7%
===== ===== ===== ===== =====
</TABLE>
COMPARISON OF NINE MONTHS ENDED SEPTEMBER 30, 1997 AND 1996
Net Sales. Net sales increased 46.7% to $32.2 million for the nine-month
period ended September 30, 1997 from $21.9 million for the nine-month period
ended September 30, 1996. This increase in net sales was primarily
attributable to new store sales, including sales from 16 stores opened during
the period, which contributed $11.1 million and a 2.5% increase in comparable
store sales of $482,000. Stores closed during 1996 and 1997 had contributed an
additional $1.3 million to net sales during the 1996 period.
Gross Profit. Gross profit increased 56.6% to $11.1 million for the nine-
month period ended September 30, 1997 from $7.1 million for the nine-month
period ended September 30, 1996, and increased as a percentage of net sales to
34.5% from 32.3%. The increase in gross profit was primarily attributable to
the Company's ability to purchase merchandise in larger quantities at a lower
cost per unit in the 1997 period as well as favorable gross profit margins on
the inventory purchased from Standard Shoes. Cost of sales includes landed
merchandise costs and occupancy costs. See "--Quarterly Operating Results."
Selling Expenses. Selling expenses consist of payroll and related costs,
advertising and promotional expenses. Selling expenses increased 46.8% to $5.9
million for the nine-month period ended September 30, 1997 from $4.0 million
for the nine-month period ended September 30, 1996, and remained flat as a
percentage of net sales at 18.3%. The increase in selling expenses was
primarily attributable to increases in payroll and related expenses as a
result of new stores and, to a lesser extent, advertising expenses. The
Company anticipates that selling expenses will increase in absolute dollars in
1998.
General and Administrative Expenses. General and administrative expenses
consist primarily of corporate and administrative expenses, including payroll,
employee benefits and warehousing costs. General and administrative expenses
increased 40.1% to $2.5 million for the nine-month period ended September 30,
1997
17
<PAGE>
from $1.8 million for the nine-month period ended September 30, 1996, and
decreased slightly as a percentage of net sales to 7.7% from 8.0%, primarily
as a result of improved expense leverage. The Company anticipates that general
and administrative expenses will increase in absolute dollars in 1998.
Interest and Other Expense, Net. Interest and other expense, net, increased
62.4% to $339,000 for the nine-month period ended September 30, 1997 from
$209,000 for the nine-month period ended September 30, 1996. The increase was
attributable to higher borrowings outstanding on the Company's revolving line
of credit to support increased inventory levels.
Pro Forma Taxes. The pro forma taxes on income for the nine-month period
ended September 30, 1997 were $905,000 compared to $418,000 for the nine-month
period ended September 30, 1996. The pro forma effective tax rate for the 1997
period was 37.7% compared to 38.0% for the 1996 period.
COMPARISON OF YEARS ENDED DECEMBER 31, 1996 AND 1995
Net Sales. Net sales increased 18.7% to $30.3 million for 1996 from $25.5
million for 1995. This increase in net sales for 1996 was primarily
attributable to new store sales, including sales from nine stores opened
during the period, which contributed $4.8 million and an 8.0% increase in
comparable store sales of $1.7 million. Stores closed during 1995 and 1996 had
contributed an additional $1.7 million to net sales during 1995.
Gross Profit. Gross profit increased 27.9% to $10.0 million for 1996 from
$7.8 million for 1995, and increased as a percentage of net sales to 33.0%
from 30.6%, primarily as a result of the Company's ability to purchase
merchandise in larger quantities at a lower cost per unit in 1996 and the
closure of certain underperforming stores in 1996.
Selling Expenses. Selling expenses increased 15.7% to $5.6 million for 1996
from $4.8 million for 1995, and decreased slightly as a percentage of net
sales to 18.4% from 18.9%, primarily due to a decrease in sales payroll as a
result of the reconfiguration of the Company's stores to a self-service
format.
General and Administrative Expenses. General and administrative expenses
increased 45.3% to $2.6 million for 1996 from $1.8 million for 1995, and
increased as a percentage of net sales to 8.7% from 7.1%, primarily as a
result of higher corporate payroll expenses, including a payment to the
Company's sole stockholder to fund income taxes.
Interest and Other Expense, Net. Interest and other expense, net, decreased
45.2% to $287,000 for 1996 from $524,000 for 1995, primarily due to lower
borrowings outstanding on the Company's line of credit.
Pro Forma Taxes. The pro forma taxes on income for 1996 were $566,000
compared to $246,000 for 1995. The pro forma effective tax rate for 1996 and
1995 was 38.0%.
COMPARISON OF YEARS ENDED DECEMBER 31, 1995 AND 1994
Net Sales. Net sales increased 18.7% to $25.5 million for 1995 from $21.5
million for 1994. This increase in net sales for 1995 was primarily
attributable to new store sales, including sales from six stores opened during
the period, which contributed $4.3 million. This increase was offset by a 1.0%
decrease in comparable store sales of $183,000. Stores closed during 1995 and
1994 had contributed an additional $200,000 to net sales during 1994.
Gross Profit. Gross profit increased 20.1% to $7.8 million for 1995 from
$6.5 million for 1994 and increased slightly as a percentage of net sales to
30.6% from 30.2%.
Selling Expenses. Selling expenses decreased 2.8% to $4.8 million for 1995
from $5.0 million in 1994, and decreased as a percentage of net sales to 18.9%
from 23.1%, primarily due to a decrease in sales payroll as a result of the
reconfiguration.
18
<PAGE>
General and Administrative Expenses. General and administrative expenses
increased 10.5% to $1.8 million for 1995 from $1.6 million for 1994, and
decreased slightly as a percentage of net sales to 7.1% from 7.6%.
Interest and Other Expense, Net. Interest and other expense, net, increased
29.8% to $524,000 for 1995 from $404,000 for 1994, primarily attributable to
the increase in borrowings outstanding on the Company's line of credit.
Pro Forma Taxes. The pro forma taxes on income for 1995 were $246,000
compared to an income tax benefit of $183,000 for 1994. The pro forma
effective tax rate for 1995 was 38.0% compared to 35.8% for 1994.
QUARTERLY OPERATING RESULTS
The following table presents certain unaudited actual and pro forma
financial data for each of the Company's last seven fiscal quarters. This data
has been derived from the Company's unaudited consolidated financial
statements that, in the opinion of management, include all adjustments
(consisting only of normal recurring adjustments) necessary to present fairly
the information for the periods presented when read in conjunction with the
Consolidated Financial Statements and Notes thereto included elsewhere herein.
The operating results for any quarter are not necessarily indicative of
results to be expected for any subsequent period. The pro forma adjustments
reflect federal and state income taxes as if the Company had not elected S
corporation status for income tax purposes.
<TABLE>
<CAPTION>
THREE MONTHS ENDED
-------------------------------------------------------------
SEPT.
MARCH 31 JUNE 30 SEPT. 30 DEC. 31 MARCH 31 JUNE 30 30
1996 1996 1996 1996 1997 1997 1997
-------- ------- -------- ------- -------- ------- -------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
Net sales............... $6,073 $7,980 $7,883 $8,379 $8,155 $12,174 $11,856
Gross profit............ 1,763 2,759 2,561 2,914 2,680 4,509 3,906
Income from operations.. 134 671 504 466 646 1,393 699
Income before income
taxes.................. 40 607 453 388 533 1,266 600
Pro forma provision for
income taxes........... (15) (230) (173) (148) (201) (478) (226)
------ ------ ------ ------ ------ ------- -------
Pro forma net income.... $ 25 $ 377 $ 280 $ 240 $ 332 $ 788 $ 374
====== ====== ====== ====== ====== ======= =======
Net sales............... 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%
Gross profit............ 29.0 34.6 32.5 34.8 32.9 37.0 32.9
Income from operations.. 2.2 8.4 6.4 5.6 7.9 11.4 5.9
Income before income
taxes.................. 0.7 7.6 5.7 4.6 6.5 10.4 5.1
Pro forma provision for
income taxes........... (0.3) (2.9) (2.1) (1.7) (2.4) (3.9) (1.9)
------ ------ ------ ------ ------ ------- -------
Pro forma net income.... 0.4% 4.7% 3.6% 2.9% 4.1% 6.5% 3.2%
====== ====== ====== ====== ====== ======= =======
</TABLE>
Net Sales and Gross Profit. In April 1997, the Company assumed the leasehold
interests of Standard Shoes and purchased Standard Shoes' inventory at 60% of
Standard Shoes' cost. During the quarter ended June 30, 1997, the Company
liquidated that inventory, which resulted in significant increases in net
sales, gross profit and gross profit as a percentage of net sales.
Income from Operations. In December 1996, the Company paid its sole
stockholder $264,000 to fund income taxes. The Company does not expect to make
similar payments in the future.
The Company has experienced, and expects to continue to experience, seasonal
fluctuations in its net sales and net income. Historically, net sales and net
income have been weakest during the first quarter and a majority of the
Company's net sales and net income has been realized during the second and
third quarters. In anticipation of increased sales activity during these
quarters, the Company increases inventory purchases in advance of these
quarters. If, for any reason, the Company's net sales were below seasonal
norms during the second or third
19
<PAGE>
quarter, the Company's business, financial condition and results of operations
could be materially adversely affected. The Company's quarterly results of
operations may also fluctuate significantly as a result of a variety of
factors, including timing of new store openings, the level of net sales
contributed by new stores, merchandise mix, the timing and level of price
markdowns, availability of inventory, store closures, advertising costs,
competitive pressures and changes in the demand for off-price footwear. Any
such fluctuations could have a material adverse effect on the market price of
the Company's Common Stock.
LIQUIDITY AND CAPITAL RESOURCES
The Company had $5.0 million in working capital as of September 30, 1997,
compared to $3.8 million as of December 31, 1996. The Company's capital
requirements relate primarily to merchandise inventory and leasehold
improvements. The Company's working capital needs are typically higher in the
second and third quarters as a result of increased inventory purchases for
spring and fall selling seasons.
Historically, the Company has funded its cash requirements primarily through
cash flow from operations and borrowings under its credit facility. Net cash
provided by (used in) operating activities for the nine months ended September
30, 1996 and 1997 was $1.8 million and ($1.8) million, respectively. Net cash
provided by (used in) operating activities was ($370,000), $1.1 million and
$566,000 for 1994, 1995 and 1996, respectively. Net cash provided by (used in)
operating activities historically has been driven primarily by net income
(loss) and fluctuations in inventory and accounts payable. Inventory levels
have increased throughout these periods due to a net increase in the number of
stores. During 1998, the Company anticipates that cash will be used primarily
for merchandise inventory and capital expenditures.
Capital expenditures were $359,000 and $1.1 million for the nine months
ended September 30, 1996 and 1997, respectively. Capital expenditures were
$905,000, $336,000 and $569,000 in 1994, 1995 and 1996, respectively.
Expenditures for the first nine months of 1997 were primarily for the build-
out of 16 new stores and the relocation of the Company's corporate office and
distribution center. Expenditures for the first nine months of 1996 were
primarily for the build-out of five new stores. The Company estimates that
capital expenditures for 1998, excluding the cost of any acquisitions, will
total approximately $2.5 million, primarily for the build-out of approximately
ten to 20 new stores and an upgrade of the Company's management information
systems.
Financing activities provided (used) cash of ($1.3) million and $2.9 million
for the nine months ended September 30, 1996 and 1997, respectively. The
increase in cash provided by financing activities for the nine months ended
September 30, 1997, primarily reflects additional borrowings under the
Company's credit facility to fund increased working capital requirements as a
result of a larger store base. This increase was partially offset by increased
stockholder distributions. Financing activities provided (used) cash of $1.5
million, ($1.0) million and $93,000 in 1994, 1995 and 1996, respectively.
Financing activities relate primarily to borrowings and payments on the
Company's credit facility and distributions to the sole stockholder as a
result of the Company's S corporation status. During 1994, 1995 and 1996 and
the first nine months of 1997, the Company made distributions to its sole
stockholder of $148,000, $0, $300,000 and $704,000, respectively. After the
completion of this offering, the Company will make an S corporation
distribution to its sole stockholder in an amount equal to all of the
previously undistributed S corporation earnings of the Company through the
Termination Date, estimated to be $6.3 million as of September 30, 1997. See
"Use of Proceeds," "Certain Transactions" and Note 3 of Notes to Consolidated
Financial Statements.
The Company has a credit facility agreement with a commercial bank, which
includes a revolving line of credit for $10.0 million expiring on April 30,
1999 along with a $500,000 term line available for the purchase or lease of
equipment. This line of credit is also available for the issuance of
commercial and standby letters of credit up to $3.0 million and $100,000,
respectively. The Company pays interest on outstanding amounts at a rate of
0.25% over the bank's prime rate or LIBOR plus 300 basis points at the
Company's option. Further, reductions in the interest rate are available
depending upon the borrowing base in relationship to the advance rate on the
credit facility. Borrowings under the credit facility are secured by inventory
and the sole stockholder's
20
<PAGE>
guarantee. The agreement contains restrictive covenants that require, among
other things, that the Company maintain working capital of at least $4.0
million, tangible net worth of at least $5.5 million and that total
indebtedness may not exceed 3.0 times tangible net worth. As of October 31,
1997, the unused and available portion of the credit facility was
approximately $3.2 million. The Company will use a portion of the net proceeds
of the offering to repay outstanding indebtedness under this credit facility.
See "Use of Proceeds."
As part of its growth strategy, the Company plans to pursue opportunities to
acquire complementary businesses, although no such transactions are being
considered as of the date of this Prospectus. To the extent that cash
resources are insufficient to fund the purchase price of future acquisitions,
if any, or the operations of any acquired business, additional external
capital may be required. There can be no assurance that additional financing
will be available on reasonable terms or at all. The Company believes that the
net proceeds of the offering, together with operating cash flow and borrowings
under its credit facility, will be sufficient to complete the Company's 1998
store expansion program and to satisfy the Company's other capital
requirements for at least the next 12 months. The Company's capital
requirements program may vary significantly from those anticipated depending
upon such factors as operating results, the number and timing of new store
openings, and the number and size of any future acquisitions.
Management is in the process of evaluating the potential effect on its
computer system resulting from the "Year 2000" problem. Under the Company's
ongoing program to enhance systems capabilities, management is implementing a
plan to resolve the potential issues associated with the "Year 2000" problem.
The costs of the modifications and enhancements, which are not known, will be
expensed as incurred.
IMPACT OF INFLATION
The Company does not believe that inflation has had a material impact on its
results of operations. However, there can be no assurance that inflation will
not have such an effect in future periods.
21
<PAGE>
BUSINESS
The statements contained in this Prospectus which are not historical facts
are forward-looking statements that are subject to risks and uncertainties
that could cause actual results to differ materially from those set forth in
or implied by forward-looking statements. Factors that could cause or
contribute to such differences include those discussed below, as well as those
discussed elsewhere in this Prospectus.
GENERAL
Shoe Pavilion, founded in 1979, is the largest independent off-price
footwear retailer on the West Coast that offers a broad selection of women's
and men's designer label and name brand merchandise. The Company was among the
first footwear retailers on the West Coast to expand the off-price concept
into the designer and name brand footwear market. As of December 1, 1997, the
Company operated 56 retail stores in California, Washington, Oregon and Nevada
under the trade names Shoe Pavilion and Shoe Pavilion's Designer Shoe
Warehouse.
The Company offers quality designer and name brand footwear such as Amalfi,
Clarks, Dexter, Fila, Florsheim, Naturalizer and Rockport, typically at 30% to
70% below department store regular prices for the same shoes. Such price
discounts appeal to value-oriented consumers seeking quality brand name
footwear not typically found at other off-price retailers or mass
merchandisers. The Company is able to offer lower prices by (i) selectively
purchasing large blocks of production over-runs, over-orders, mid- and late-
season deliveries and last season's stock from manufacturers and other
retailers at significant discounts, (ii) sourcing in-season name brand and
branded design merchandise directly from factories in Italy, Brazil and China
and (iii) negotiating favorable prices with manufacturers by ordering
merchandise during off-peak production periods and taking delivery at one
central warehouse.
During the first nine months of 1997, the Company purchased its merchandise
from over 50 domestic and international vendors, independent resellers,
manufacturers and other retailers that have frequent excess inventory for
sale. Budgeted production over-runs due to the long lead-times associated with
the design and manufacturing of new shoes, as well as retail overstock,
provide the Company with a wide selection of branded merchandise. Women's
dress and casual shoes, men's dress and casual shoes and athletic footwear
comprised approximately 61%, 26% and 13%, respectively, of net sales for the
nine months ended September 30, 1997. The Company emphasizes brand name
merchandise that it believes has long-term consumer appeal.
In early 1997, the Company entered the Los Angeles market by assuming the
leasehold interests of Standard Shoes, a Los Angeles based footwear retailer.
The Company subsequently converted nine Standard Shoes locations to Shoe
Pavilion's Designer Shoe Warehouse stores.
INDUSTRY BACKGROUND
According to published industry sources, total retail footwear sales in the
United States during 1996 were approximately $36.8 billion, representing a
3.4% increase over 1995 retail footwear sales, and are projected to increase
to over $43.0 billion in 2000. The footwear industry can be divided into high,
moderate, and value-priced segments. The high-priced segment, dominated by
department stores, generated 39.4% of total footwear sales in 1996. The value-
priced segment, which consists of discount and off-price retailers like Shoe
Pavilion, generated 40.9% of total footwear sales or $15.1 billion in 1996.
The value-priced segment was the largest retail footwear segment in 1996 and
continues to gain market share from the moderate-priced segment.
Distribution of footwear has undergone substantial changes since the early
1980s. During the past decade, consumers increasingly have sought "value" at
the retail level. The National Retail Federation reports that over the past
ten years, off-price sales accounted for 60% of all footwear sales. Footwear
analysts believe that the use
22
<PAGE>
of brand names within the retail environment may be the most powerful
marketing tool that retailers possess to attract consumers into stores and
that, while fashions and expectations change from season to season, several
top brands remain a stabilizing factor within the retail footwear market.
In addition to becoming more value-oriented, consumers are becoming more
time-efficient, and, consequently, convenience and selection have become
significant factors in purchasing decisions. The Company believes that
consumers prefer stores that offer a wide selection of high quality value-
priced shoes from an assortment of manufacturers, to retailers that specialize
in one particular brand. The Company believes that the off-price name brand
footwear market is currently under served, and that the Company is one of the
few retailers dedicated to this growing niche.
OPERATING STRATEGY
The Company's objective is to be the leading off-price retailer of designer
label and name brand footwear in each of the markets it serves. The Company's
operating strategy is designed to allow the Company to offer its customers
quality footwear typically at 30% to 70% below department store prices for the
same shoes. The following summarizes key elements of the Company's operating
strategy:
. Off-Price Concept, Premium Name Brands. The Company differentiates
itself from other off-price retailers and deep discount chains by
focusing on higher price point merchandise, extending the off-price
concept into the designer and name brand footwear market. As such, the
Company generally does not compete with other discount stores in
obtaining the majority of its merchandise. Similarly, while some
department store and brand name retail chains operate discount outlets,
such operations generally obtain merchandise from existing inventory of
their retail affiliates rather than from external sources. The Company's
focus on premium brand name footwear also enables store openings in
close proximity to other off-price footwear retailers. Some of the
Company's most successful stores have benefited from the heightened
consumer awareness and preference to shop at discount malls or outlet
centers, both of which typically include other off-price retailers.
. Broad Selection of Designer Footwear. The Company offers a broad
selection of quality footwear from over 75 name brands such as Amalfi,
Clarks, Dexter, Fila, Florsheim, Naturalizer and Rockport. The
availability and wide variety of premium brand names distinguish Shoe
Pavilion and serve to attract first time buyers and consumers who
otherwise might shop at more expensive department stores. The wide
variety of brand names also enables the Company to tailor its
merchandise from store to store to accommodate consumer preferences that
may vary by location.
. Selective Bulk Purchases; Diverse Vendor Network. The Company is able to
offer lower prices by selectively purchasing large blocks of over-runs,
over-orders, mid- and late-season deliveries and last season's stock
from over 50 domestic and international vendors, independent resellers,
manufacturers and other retailers at significant discounts. The
diversity and scope of its vendor network helps to provide a constant
source of quality merchandise, and the purchase of name brand,
traditional styles mitigates the likelihood of inventory writedowns. To
augment available merchandise with the latest in-season styles, the
Company purchases branded design footwear directly from factories in
Italy, Brazil and China.
. Self-Service Stores. Between late 1993 and 1995, the Company
reconfigured its stores from a traditional retail format to the current
self-service format. The Company believes that the self-service format
reinforces its off-price strategy and appeals to value-oriented
consumers. The Company's format allows inventory to be stored directly
under a displayed shoe, thereby eliminating the need for a stockroom and
significantly increasing retail floor space. The functionality and
simplicity of this format enable flexible store layouts that can be
easily rearranged to complement the current merchandise. Moreover, this
format allows customers to locate all available sizes of a particular
shoe and to try them on for comfort and fit without a salesperson's
assistance, thereby reducing in-store staffing needs and allowing
customers to make independent, rapid purchasing decisions.
23
<PAGE>
. Operating Efficiency and Controls. The Company is dedicated to
continually optimizing its operations and reducing costs. The Company
seeks to leverage its size, name recognition and market presence in
negotiating leases with landlords. In March 1997, the Company relocated
its headquarters and central distribution facility to Richmond,
California to improve efficiency and facilitate timely deliveries. The
Company believes that this 60,000 square foot facility can accommodate
the Company's planned growth for the foreseeable future. In 1994, the
Company installed a centralized video monitoring system which enables
remote viewing of a majority of the Company's stores.
GROWTH STRATEGY
Since opening its first store in 1979, the Company has grown through
internal expansion and operated 56 stores as of December 1, 1997. The Company
intends to continue to expand by opening new stores, enhancing comparable
store sales and pursuing acquisition opportunities.
. Continue New Store Openings. The Company intends to increase its
presence in its current markets and to enter new markets by selectively
opening new stores which can be served by the Company's distribution
infrastructure. When entering a new market, the Company prefers to open
multiple stores, thereby creating an immediate market presence and
enabling television advertising costs to be spread economically across a
number of stores. The Company opened six stores in 1995, nine stores in
1996 and 16 stores, to date, in 1997 and closed four stores in 1995, six
stores in 1996 and one store, to date, in 1997. The Company intends to
open ten to 20 stores, primarily in its existing markets, in 1998.
Management believes that new store openings in the Company's current
markets will further increase name recognition which, in turn, will
facilitate expansion into new markets.
. Increase Comparable Store Sales. Management intends to continue to seek
additional comparable store growth through a continuing refinement of
its store locations and merchandise selection. However, there can be no
assurance that the Company will experience comparable store growth in
the future.
. Pursue Acquisition Opportunities. The retail footwear industry is highly
fragmented and includes family and specialty shoe stores which represent
approximately 20% of total retail footwear sales. Accordingly,
management believes that a number of opportunities exist to acquire one
or more regional or local footwear retailers. The Company intends to
evaluate opportunities to acquire existing footwear retailers and
convert the acquired stores to the Company's off-price merchandising
concept.
The Company's ability to execute its strategy is subject to numerous risks
and uncertainties. There can be no assurance that the Company will be
successful in implementing its strategy or that its strategy, even if
implemented, will lead to successful achievement of the Company's objectives.
If the Company were unable to implement its strategy effectively, the
Company's business, financial condition and results of operations would be
materially adversely affected. See "Risk Factors."
MERCHANDISING
Unlike deep-discount retailers, Shoe Pavilion offers high quality
merchandise and a consistent selection of name brand dress and casual shoes
for men and women. List prices generally range between $19.99 and $69.99 for
women's shoes, and between $39.99 and $99.99 for men's shoes.
24
<PAGE>
Women's dress and casual shoes, men's dress and casual shoes and athletic
footwear comprised approximately 61%, 26% and 13%, respectively, of net sales
for the nine month period ended September 30, 1997. The principal categories
of footwear offered by Shoe Pavilion stores, and selected brands for each, are
summarized in the following table:
<TABLE>
<CAPTION>
WOMEN'S MEN'S ATHLETIC
------------ ----------- -----------
<S> <C> <C>
Amalfi Bally Adidas
Esprit Bass Asics
Evan-Picone Bostonian Avia
Hush Puppies Clarks Brooks
Life Stride Dexter Fila
Naturalizer Florsheim New Balance
Nickels Mario Bruni Riddell
Rockport Nunn Bush Saucony
Van Eli Rockport
Via Spiga Skechers
</TABLE>
THE SHOE PAVILION CONCEPT AND STORE DESIGN
Shoe Pavilion is a standardized concept that offers a bright, clean, low
maintenance and functional shopping environment to customers interested in
purchasing quality men's and women's value priced footwear. When opening
stores in markets where Shoe Pavilion stores currently exist, the Company
continues to use the store name Shoe Pavilion, whereas in other markets, the
Company uses the more descriptive store name Shoe Pavilion's Designer Shoe
Warehouse. The Company's stores carry between 15,000 and 25,000 pairs of shoes
and generally range in size from 3,000 to 14,000 square feet.
Between late 1993 and 1995, the Company reconfigured its stores from a
traditional retail format to the current self-service format. The Company
believes that the self-service format reinforces its off-price strategy and
appeals to value-oriented consumers. The Company's format allows inventory to
be stored directly under a displayed shoe, thereby eliminating the need for a
stockroom and significantly increasing retail floor space. The functionality
and simplicity of this format enable flexible store layouts that can be easily
rearranged to complement the current merchandise. Moreover, this format allows
customers to locate all available sizes of a particular shoe and to try them
on for comfort and fit without the need of a salesperson's assistance, thereby
reducing in-store staffing needs and allowing customers to make independent,
rapid purchasing decisions. The Company believes that these efficiencies and
selling strategies have improved the Company's financial performance while
addressing a shift in consumer buying patterns towards independent, value-
priced shopping.
SITE SELECTION, OPENING COSTS AND LEASES
The Company uses a number of brokers throughout the West Coast to identify
potential retail sites as well as possible acquisition candidates. Before
entering a new market, management reviews detailed reports on demographics;
spending, traffic, and consumption patterns; and other site and market related
data. As of December 1, 1997, 22 of the Company's stores were located in strip
malls, 14 were located in outlet centers, 13 were located in free standing
stores and seven were located in other types of facilities.
Opening costs for stores are typically minimal, excluding the initial
stocking of inventory. The Company estimates that its total cash requirements
to open a typical new store average $250,000 to $400,000, consisting of
approximately $40,000 to $50,000 for fixtures, equipment and leasehold
improvements; $200,000 to $325,000 for inventory; and the balance for working
capital needs. Costs vary from store to store depending on, among other
things, the location, size, property condition, and the tenant improvement
package offered by the landlord. The Company has been able to renegotiate some
of its existing leases to be more heavily revenue-based. The Company does not
own any of its real estate.
25
<PAGE>
The Company actively monitors individual store performance and has closed
underperforming stores, including four stores in 1995, six stores in 1996 and
one store, to date, in 1997. The relatively small investment required to open
new stores affords the Company the flexibility to close stores more quickly
than other retailers. The Company intends to continue to close underperforming
stores in the future. If the Company were to close a number of stores, it
could incur significant termination costs and reductions in net sales. In
addition, the Company may not be able to close certain underperforming stores
on a timely basis because of lease terms. A significant increase in
termination costs, or the inability to close one or more underperforming
stores on a timely basis, could have a material adverse effect on the
Company's business, financial condition and results of operations.
STORE LOCATIONS
As of December 1, 1997, the Company operated 56 retail stores in the states
of California, Washington, Oregon and Nevada. The number of stores in each
geographic area is set forth below:
<TABLE>
<CAPTION>
STORES AT YEAR END
------------------------
AS OF
LOCATION 1992 1993 1994 1995 1996 12/1/97
-------- ---- ---- ---- ---- ---- -------
<S> <C> <C> <C> <C> <C> <C>
Northern California(1)...................... 9 16 22 22 22 25
Southern California......................... 0 0 2 2 4 16
Nevada...................................... 0 0 1 1 1 1
Oregon...................................... 0 0 0 0 2 2
Washington.................................. 11 11 11 13 12 12
--- --- --- --- --- ---
Total...................................... 20 27 36 38 41 56
=== === === === === ===
</TABLE>
- ---------------------
(1)The Company intends to close one store in December 1997.
SOURCING AND PURCHASING
Vendors. During the first nine months of 1997, the Company purchased its
inventory from over 50 domestic and international vendors, independent
resellers and other retailers who have over bought merchandise. Name brands
sold include Amalfi, Clarks, Dexter, Fila, Florsheim, Naturalizer and
Rockport, among others. Since the Company has locations in a number of markets
along the West Coast, Shoe Pavilion can accommodate and distribute a wide
variety of merchandise that meets the needs of customers in different
geographic areas. For the nine months ended September 30, 1997, the Company's
top ten suppliers accounted for 45.3% of inventory purchases, of which
purchases from Nine West Group, Inc. and The Rockport Company, Inc. accounted
for 10.5% and 8.6% of total inventory purchases, respectively. The Company
purchases from its suppliers on an order-by-order basis and has no long-term
purchase contracts or other contractual assurances of continued supply or
pricing. Management believes that the strength and variety of its supplier
network mitigates much of the Company's exposure to inventory supply risks,
attracts first time buyers, and encourages repeat shopping. See "Risk
Factors--Inventory and Sourcing Risk."
Direct Sourcing. The Company purchases in-season name brand and branded
design merchandise directly from factories in Italy, Brazil and China. These
purchases include both labeled and non-labeled goods and provide a consistent
base of in-season merchandise. Directly sourced goods accounted for
approximately 13.4% and 15.1% of the Company's net sales in 1996 and the nine
months ended September 30, 1997, respectively. The Company purchases from its
manufacturing sources on an order-by-order basis and has no long-term purchase
contracts or other contractual assurances of continued supply or pricing. See
"Risk Factors--International Purchasing."
MARKETING
In 1996 and the nine months ended September 30, 1997, the Company spent
approximately 4.2% of net sales, or $1.3 million, and 4.4% of net sales, or
$1.4 million, respectively, on television advertising. The Company believes
that television advertising benefits all stores in a common viewing market.
The Company
26
<PAGE>
believes that advertising costs for a particular market will be more
effectively and economically leveraged as the number of stores increases in
that market. The Company generally does not use print advertising which it has
found to be less effective than television advertising. Shoe Pavilion's
signage is consistent among all of the locations, and highly visible at the
front and, when appropriate, rear of the store.
MERCHANDISE DISTRIBUTION
In March 1997, the Company relocated from a 20,000 square foot distribution
facility in Bellevue, Washington to a larger and more centrally located
facility in Richmond, California. This new 60,000 square foot distribution
facility also houses the Company's executive and administrative headquarters.
Vendors ship all products to this distribution center where the merchandise is
inspected, verified against the original purchase order, ticketed and
repackaged for shipment to stores. The Company believes that its distribution
facility can accommodate the Company's planned growth for the foreseeable
future.
VIDEO MERCHANDISING AND SECURITY SYSTEMS
During 1994, the Company installed a remote computer-based video system,
which allows management to monitor a majority of its stores. The operator of
the system can move the camera and view the entire retail floor without the
need for on-site assistance. A second stationary camera monitors the back door
at all times, sending pictures to headquarters whenever the door is opened.
Management believes that the security system provides the following benefits:
. Improved Merchandising and Store Appearance. Management can review the
condition of the store and its readiness for business. The operator can
insure that all merchandise is appropriately displayed, aisles are
clear, the checkout counter is uncluttered and deliveries have been
processed.
. Heightened Level of Security and Theft Deterrence. Management believes
that security cameras have served as a deterrent to theft and, as a
result, reduced in-store shrinkage. Management can monitor cash register
activities and any entry to the store.
During 1996, the Company installed "Checkpoint" security systems in all of
its stores as a further deterrent to shoplifters. By converting to a self-
service format, where shoppers have access to both shoes of a pair, the need
for store security greatly increased. Checkpoint is an electronic article
merchandising system that uses an advanced application of radio frequency
technology and an integrated alarm system to provide both audible and visible
signals of unauthorized removal of goods from the store. In addition to using
standard external reusable hard tags, the Company arranges for manufacturers
to embed detection devices within the soles of shoes. The tags and detection
devices must be deactivated at the checkout counter. Shoe Pavilion's system
allows the Company to combine various detection devices within one
comprehensive system. Shrinkage decreased from 1.8% of net sales for 1996 to
1.6% for the nine months ended September 30, 1997.
MANAGEMENT INFORMATION SYSTEMS
The Company's management information systems include a network of PC-based
workstations, host terminals and servers at the corporate office to support
corporate decision-making, along with PC-based point of sale (POS) systems at
each store. The POS system accumulates sales transaction data that are polled
via modem by the Company's main computer system nightly and reviewed by
management daily. The system's perpetual inventory feature enables the
Company's buyers to review and analyze daily the inventory levels at each
individual store by department, class and stock keeping unit to replenish
fast-selling items on a timely basis.
COMPETITION
The retail footwear market is highly competitive, and the Company expects
the level of competition to increase. The Company competes with off-price and
discount retailers (e.g., Nordstrom Rack, Payless
27
<PAGE>
ShoeSource, Ross Dress for Less and Famous Footwear), branded retail outlets
(e.g., Nine West), national retail stores (e.g., Nordstrom, Marshalls, Macy's,
Sears, J.C. Penney, Loehmann's, Robinsons-May and Mervyn's), traditional shoe
stores and mass merchants. Many of these competitors have stores in the
markets in which the Company now operates and in which it plans to expand.
Many of the Company's competitors have significantly greater financial,
marketing and other resources than the Company. In addition, there can be no
assurance that future participants will not enter the off-price segment of the
footwear market. Competitive pressures resulting from competitors' pricing
policies could materially adversely affect the Company's gross margins. There
can be no assurance that the Company will not face greater competition from
other national, regional or local retailers or that the Company will be able
to compete successfully with existing and new competitors. The inability of
the Company to respond to such competition could have a material adverse
effect on the Company's business, financial condition and results of
operations.
PROPERTIES
The Company's corporate offices and distribution facility are located in a
60,000 square foot facility in Richmond, California, which the Company
occupies under a lease expiring in 2002. As of December 1, 1997, the Company's
56 stores occupied an aggregate of approximately 350,000 square feet of space.
The Company leases all of its stores, with leases expiring between 1997 and
2002. The Company has options to renew most of its leases. See "--Store
Locations."
EMPLOYEES
As of September 30, 1997, the Company had approximately 213 full-time
employees and 169 part-time employees. The number of part-time employees
fluctuates depending upon seasonal needs. In November 1997, the Company's 13
warehouse employees voted to be represented by Local 315, International
Brotherhood of Teamsters. Challenges to the election were filed, and the
parties are awaiting certification by the National Labor Relations Board
("NLRB"). Should the NLRB issue a certification of the election, the Company
will meet with Local 315 to negotiate a collective bargaining agreement. The
Company generally considers its relationship with its employees to be good.
LEGAL PROCEEDINGS
The Company is not a party to any material litigation.
28
<PAGE>
MANAGEMENT
EXECUTIVE OFFICERS, DIRECTORS AND KEY PERSONNEL
The executive officers, directors and certain key personnel of the Company
and their ages as of the date of this Prospectus are as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<C> <C> <S>
Dmitry Beinus............. 45 Chairman of the Board, President and Chief
Executive Officer
Robert R. Hall............ 45 Vice President and Chief Operating Officer
Gary A. Schwartz.......... 45 Vice President of Finance, Chief Financial
Officer, Secretary and Director
Keith C. Gossett, Jr. .... 39 Vice President of Operations
Linda C. Hickey........... 33 Vice President of Administration
Peter G. Hanelt(1)........ 52 Director
David H. Folkman(1)....... 63 Director
</TABLE>
- ---------------------
(1) Member of Audit and Compensation Committee.
Dmitry Beinus has served as Chairman of the Board, President and Chief
Executive Officer of the Company and has been its sole stockholder since
founding the Company in 1979. From 1976 to 1978, Mr. Beinus was employed in
the shoe department of Nordstrom, Inc. Mr. Beinus' current responsibilities
include overseeing the growth of the operations, maintaining its competitive
position within the marketplace, and facilitating the acquisition of
inventory.
Robert R. Hall has served as Vice President and Chief Operating Officer of
the Company since January 1997. Mr. Hall joined the Company as a Regional
Manager in 1990, and has held various positions within the Company including
Operations Manager and Vice President of Merchandising. Mr. Hall's current
responsibilities are to oversee the Regional Managers as well as the Company's
centralized warehouse operations. From 1976 to 1990, Mr. Hall held various
positions with Nordstrom, Inc., most recently as Merchandising Manager for the
shoe departments within the San Francisco Bay Area stores.
Gary A. Schwartz has served as Vice President of Finance and Chief Financial
Officer of the Company since September 1997 and as a director since November
1997. From January 1997 until April 1997, Mr. Schwartz served as Vice
President, Retail and Licensing of Jessica McClintock, Inc., a women's apparel
and fragrance company. From 1979 to 1996, Mr. Schwartz served as Vice
President and Chief Financial Officer of Byer California, an apparel
manufacturer and commercial real estate company. Mr. Schwartz is a Certified
Public Accountant.
Keith C. Gossett, Jr., has served as Vice President of Operations since
April 1997. From 1994 to April 1997, Mr. Gossett was President of Easy Street
Shoe Co., a division of Colby Footwear. From 1990 to 1994, Mr. Gossett served
as Vice President of Sales and Marketing for Mark Lemp Footwear, and from 1986
to 1990, he was the National Sales Manager for the Women's Division of
Florsheim.
Linda C. Hickey has served as Vice President of Administration since January
1997. Ms. Hickey joined the Company in 1984 as a Sales Associate and has held
various positions during her 13 years with the Company. From 1985 to 1992, Ms.
Hickey held various positions that included inventory control, accounting,
payroll, and personnel, and from 1992 to 1996, she served as Director of
Administration. Ms. Hickey's current responsibilities include overseeing
internal administrative functions as well as assisting Mr. Beinus with lease
and vendor negotiations.
29
<PAGE>
Peter G. Hanelt has served as a director of the Company since November 1997.
Mr. Hanelt is a Principal with Regent Pacific Management Corporation, a
management consulting firm. From 1993 to February 1997, Mr. Hanelt served as
Chief Operating Officer and Chief Financial Officer of Espirit De Corp, an
apparel manufacturer, wholesaler and retailer, and as President, Retail
Division from 1995 to 1996. Mr. Hanelt served as Vice President, Finance and
Operations of Saint Francis Memorial Hospital, a private teaching hospital
from 1992 to 1993, and, from 1990 to 1992, he served as acting Chief Operating
Officer and Chief Financial Officer of Post Tool, Inc., a retailer of power
and hand tools. Mr. Hanelt is a director of Natural Wonders, Inc. and 3 Day
Blinds, Inc.
David H. Folkman has served as a director of the Company since November
1997. Mr. Folkman has been a Principal with Regent Pacific Management
Corporation, a management consulting firm, since 1995, a position he also held
from 1991 to 1993. From 1993 to 1995, Mr. Folkman served as President and
Chief Executive Officer of Espirit De Corp, an apparel manufacturer,
wholesaler and retailer. From 1982 to 1987, Mr. Folkman served as the
President and Chief Executive Officer of Emporium, a 22-store division of
Carter Hawley Hale Stores, Inc. (now owned by Federated Department Stores,
Inc.).
BOARD COMMITTEES AND COMPENSATION
In November 1997, the Company's Board of Directors established an Audit and
Compensation Committee. The Audit and Compensation Committee will (i)
recommend the annual employment of the Company's auditors and review the scope
of audit and non-audit assignments, related fees, the accounting principles
used by the Company in financial reporting, internal financial auditing
procedures and adequacy of the Company's internal control procedures, (ii)
determine officers' salaries and bonuses and (iii) administer the Company's
1998 Plan. The Audit and Compensation Committee consists of the Company's
two independent outside directors, Mr. Hanelt and Mr. Folkman. Officers are
appointed by, and serve at the discretion of, the Board of Directors. There
are no family relationships among any directors or executive officers of the
Company.
Each director who is not an employee of the Company will receive an annual
fee of $8,000. Directors are also reimbursed for out-of-pocket expenses
incurred in attending meetings. The Company's Directors' Plan provides that,
at the time of his or her initial election or appointment to the Board of
Directors or upon completion of this offering, each director who is not an
employee of the Company will automatically be granted an option to purchase
7,500 shares of Common Stock. In addition, each outside director will
automatically be granted an option to purchase 2,500 shares of Common Stock on
the date of each annual meeting. The exercise price of all options granted
under the Directors' Plan must be equal to the fair market value of the Common
Stock at the time the option is granted.
AUDIT AND COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The Audit and Compensation Committee consists of the Company's two
independent outside directors. In 1996 and 1997, all compensation was
determined by the Board of Directors, which consisted solely of Mr. Beinus.
See "--Executive Officers and Directors."
EXECUTIVE COMPENSATION
The following table sets forth information with respect to the compensation
of the Company's Chief Executive Officer. None of the Company's other
executive officers' annual salaries and bonuses exceeded $100,000 during the
fiscal year ended December 31, 1996:
<TABLE>
<CAPTION>
ANNUAL COMPENSATION
-----------------------
SALARY BONUS OTHER
-------- ----- --------
<S> <C> <C> <C>
Dmitry Beinus, President and Chief Executive
Officer......................................... $250,000 -- $264,000(1)
</TABLE>
- ---------------------
(1) In December 1996, the Company paid Mr. Beinus, the Company's sole
stockholder, $264,000 to fund income taxes, which was treated as
compensation. The Company does not expect to make similar payments in the
future.
30
<PAGE>
STOCK PLANS
1998 Equity Incentive Plan. Prior to the completion of this offering, the
Company will adopt the 1998 Equity Incentive Plan (the "1998 Plan"), pursuant
to which an aggregate of 1,000,000 shares of Common Stock will be reserved for
issuance to key employees and consultants of the Company. The 1998 Plan will
provide for awards of both nonqualified stock options and incentive stock
options within the meaning of Section 422A of the Code, stock appreciation
rights, restricted stock subject to forfeiture and restrictions on transfer,
and performance awards entitling the recipient to receive cash or Common Stock
in the future following the attainment of performance goals determined by the
Board of Directors.
The 1998 Plan will be administered by the Audit and Compensation Committee
of the Board of Directors (the "Committee"), which will have the sole
discretion to select the persons to whom awards will be made, to determine the
nature and amounts of such awards and to interpret, construe and implement the
1998 Plan. Members of the Committee are not eligible to receive awards under
the 1998 Plan.
Upon completion of this offering, the Company intends to grant options to
purchase an aggregate of shares of Common Stock under the 1998 Plan, at an
exercise price equal to the initial public offering price, to certain of its
executive officers and key personnel in the amounts set forth below:
<TABLE>
<CAPTION>
NUMBER
OF
NAME OPTIONS
---- -------
<S> <C>
...........................................................
...........................................................
...........................................................
</TABLE>
Directors' Stock Option Plan. Prior to the completion of this offering, the
Company will adopt the Directors' Stock Option Plan (the "Directors' Plan"),
pursuant to which an aggregate of 100,000 shares of Common Stock will be
reserved for issuance to non-employee directors of the Company. The Directors'
Plan is intended to further the interests of the Company by providing
recognition and compensation to its outside directors for their time, effort
and participation in the growth and protection of the Company's business. The
Directors' Plan provides that, at the time of his or her initial election or
appointment to the Board of Directors or upon completion of this offering,
each director who is not an employee of the Company will automatically be
granted an option to purchase 7,500 shares of Common Stock. In addition, each
outside director will automatically be granted an option to purchase 2,500
shares of Common Stock on the date of each annual meeting. The exercise price
of all options granted under the Directors' Plan must be equal to the fair
market value of the Common Stock at the time the option is granted. The
Directors' Plan will be administered by a committee consisting of at least two
members of the Board of Directors.
CERTAIN TRANSACTIONS
The Company and its sole stockholder intend to enter into a tax
indemnification agreement that provides for income taxes attributable to the
periods prior to the Termination Date to be borne by the stockholder and for
income taxes attributable to periods after the Termination Date to be borne by
the Company. See "Prior S Corporation Status."
The Company's sole stockholder is a guarantor of the Company's credit
facility. The Company expects to renegotiate the terms of the existing credit
facility so that the stockholder is no longer a guarantor upon the completion
of this offering.
31
<PAGE>
PRINCIPAL STOCKHOLDER
The following table sets forth, as of December 1, 1997, certain information
regarding the beneficial ownership of the Company's Common Stock as of the
date of this Prospectus and as adjusted to reflect the sale of the shares of
Common Stock offered hereby for (i) each person known by the Company to be the
beneficial owner of more than five percent of the outstanding shares of Common
Stock, (ii) each director of the Company, (iii) each executive officer of the
Company and (iv) all directors and executive officers of the Company as a
group. Unless otherwise indicated, the address of each person listed is 3200-F
Regatta Boulevard, Richmond, California 94804, and the persons listed have
sole voting and investment power with respect to their shares of Common Stock,
except to the extent authority is shared by spouses under applicable law.
<TABLE>
<CAPTION>
PERCENTAGE OF
SHARES
OUTSTANDING
-----------------
NUMBER OF SHARES BEFORE AFTER
BENEFICIAL OWNERS BENEFICIALLY OWNED OFFERING OFFERING
----------------- ------------------ -------- --------
<S> <C> <C> <C>
Dmitry Beinus.......................... 4,500,000 100% 71.4%
Robert R. Hall......................... -- -- --
Gary A. Schwartz....................... -- -- --
Peter G. Hanelt........................ -- -- --
David H. Folkman....................... -- -- --
All directors and executive officers as
a group............................... 4,500,000 100% 71.4%
</TABLE>
32
<PAGE>
DESCRIPTION OF CAPITAL STOCK
Upon completion of this offering, the authorized capital stock of the
Company will consist of 15,000,000 shares of common stock, par value $0.001
per share ("Common Stock"), and 1,000,000 shares of preferred stock, par value
$0.001 per share ("Preferred Stock").
COMMON STOCK
As of December 1, 1997 and after giving effect to the reorganization, there
were 4,500,000 shares of Common Stock outstanding held of record by one
stockholder. Holders of Common Stock are entitled to one vote for each share
held of record on all matters submitted to a vote of the stockholders. Subject
to preferences that may be applicable to any outstanding shares of the
Preferred Stock, holders of Common Stock are entitled to receive ratably such
dividends as may be declared by the Board of Directors in its discretion from
funds legally available therefor. In the event of a liquidation, dissolution
or winding up of the Company, holders of Common Stock are entitled to share
ratably in all assets remaining after payment of liabilities and the
liquidation preference of any outstanding Preferred Stock. Holders of Common
Stock have no preemptive or redemption rights and have no right to convert
their Common Stock into any other securities. The outstanding shares of Common
Stock are, and the Common Stock to be outstanding upon completion of the
offering will be, validly issued, fully paid and nonassessable.
PREFERRED STOCK
Upon the completion of this offering, 1,000,000 shares of Preferred Stock
will be authorized and no shares will be outstanding. The Board of Directors
will have the authority, without any further vote or action by the
stockholders, to cause the Company to issue up to 1,000,000 shares of
Preferred Stock in one or more series and to fix the rights, preferences,
privileges and restrictions thereof, including dividend rights, conversion
rights, voting rights, terms of redemption, liquidation preferences and the
number of shares constituting any series or the designation of such series.
The issuance of Preferred Stock may have the effect of delaying, deferring or
preventing a change in control of the Company without further action by the
stockholders. The issuance of Preferred Stock with voting and conversion
rights may adversely affect the voting power of the holders of Common Stock,
including the loss of voting control to others. The Company currently has no
plans to issue any shares of Preferred Stock.
SECTION 203 OF THE DELAWARE GENERAL CORPORATION LAW
The Company is subject to the provisions of Section 203 of the Delaware
General Corporation Law. This statute generally prohibits, under certain
circumstances, a Delaware corporation whose stock is publicly traded from
engaging in a "business combination" with an "interested stockholder" for a
period of three years after the date of the transaction in which the person
became an interested stockholder, unless (i) prior to the time the stockholder
became an interested stockholder, the board of directors approved either the
business combination or the transaction which resulted in the person becoming
an interested stockholder, (ii) the stockholder owned at least 85% of the
outstanding voting stock of the corporation (excluding shares held by
directors who were also officers or held in certain employee stock plans) upon
consummation of the transaction which resulted in the stockholder becoming an
interested stockholder or (iii) the business combination was approved by the
board of directors and by two-thirds of the outstanding voting stock of the
corporation (excluding shares held by the interested stockholder). The
restrictions contained in Section 203 do not apply if a corporation has
elected in its certificate of incorporation or bylaws not to be governed by
this Delaware law (the Company has not made such an election). An "interested
stockholder" is a person who, together with affiliates and associates, owns
(or any time within the prior three years did own) 15% or more of the
corporation's outstanding voting stock. The term "business combination" is
defined generally to include mergers, consolidations, stock sales, asset-based
transactions, and other transactions resulting in a financial benefit to the
interested stockholder.
33
<PAGE>
ANTI-TAKEOVER PROVISIONS
Certain provisions of the Certificate of Incorporation and By-laws of the
Company may be deemed to have anti-takeover effects and may delay, deter or
prevent a change in control of the Company that a stockholder might consider
in his/her best interest. Among other things, these provisions (i) provide
that only the Board of Directors or certain members thereof or officers of the
Company may call special meetings of the stockholders; (ii) eliminate the
ability of the stockholders to take action without a meeting; and (iii)
authorize the issuance of "blank check" preferred stock having such
designations, rights and preferences as may be determined from time to time by
the Board of Directors.
LIMITATION OF LIABILITY AND INDEMNIFICATION MATTERS
The Company's Certificate of Incorporation provides that its directors will
not be liable to the Company or its stockholders for monetary damages for
breaches of fiduciary duty, to the fullest extent permitted by law. This
provision is intended to allow the Company's directors the benefit of the
Delaware General Corporation Law which provides that directors of Delaware
corporations may be relieved of monetary liability for breaches of their
fiduciary duty of care except under certain circumstances, including breach of
the duty of loyalty, acts or omissions not in good faith or involving
intentional misconduct or known violation of law or any transaction from which
the director derived an improper personal benefit.
The Company has entered into separate indemnification agreements with each
of the directors and executive officers, whereby the Company agrees, among
other things, to indemnify them against certain liabilities that may arise by
reason of their status or service as directors or officers, to advance their
expenses incurred as a result of any proceeding against them as to which they
could be indemnified, and to obtain directors' and officers' insurance, if
available at reasonable terms. There is no pending litigation or proceeding
involving a director, officer, employee or other agent of the Company as to
which indemnification is being sought, nor is the Company aware of any pending
or threatened litigation that may result in claims for indemnification by any
director, officer, employee or other agent.
TRANSFER AGENT AND REGISTRAR
has been appointed as the transfer agent and registrar for the
Company's Common Stock.
34
<PAGE>
SHARES ELIGIBLE FOR FUTURE SALE
Prior to this offering, there has been no public market for the Common
Stock, and no prediction can be made as to the effect, if any, the sale of
shares or the availability of shares for sale will have on the market price
for the Common Stock prevailing from time to time. Sales of substantial
amounts of the Common Stock in the public market could aversely affect
prevailing market prices and the future ability of the Company to raise equity
capital and complete any acquisitions for Common Stock.
Upon completion of this offering, the Company will have outstanding an
aggregate of 6,300,000 shares of Common Stock. All of the shares of Common
Stock sold in this offering will be freely tradeable without restrictions
under the Securities Act of 1933, as amended (the "Securities Act"), unless
acquired by affiliates of the Company. All of the remaining outstanding shares
of Common Stock are "restricted shares" as that term is defined in Rule 144
under the Securities Act (the "Restricted Shares") and are subject to a lock-
up agreement under which the Company's sole stockholder has agreed not to sell
or otherwise dispose of any of his shares for a period of one year after the
date of this Prospectus without the prior written consent of Van Kasper &
Company. Van Kasper & Company may release all or any portion of the shares
subject to the lock-up agreement, in its discretion, at any time without
public announcement. All of the Restricted Shares may become available for
sale in the public market immediately following expiration of the one-year
lock-up period, subject to the volume and other limitations of Rule 144.
In general, under Rule 144, if a period of at least one year has elapsed
between the later of the date on which restricted securities were acquired
from the Company or the date on which they were acquired from an affiliate,
the holder of such restricted securities (including an affiliate) is entitled
to sell a number of shares within any three-month period that does not exceed
the greater of (i) 1% of the then-outstanding shares of the Common Stock
(approximately 63,000 shares upon completion of this offering) or (ii) the
average weekly reported volume of trading of the Common Stock on the Nasdaq
National Market during the four calendar weeks preceding the date on which
notice of the sale is filed with the Securities and Exchange Commission. Sales
under Rule 144 are also subject to certain requirements pertaining to the
manner of sales, notice and availability of current public information
concerning the Company. Affiliates may sell shares not constituting restricted
securities in accordance with the foregoing volume limitations and other
requirements but without regard to the one-year holding period. Under Rule
144(k), if a period of at least two years has elapsed between the later of the
date on which restricted securities were acquired from the Company and the
date on which they were acquired from an affiliate, a holder of such
restricted securities who is not an affiliate at the time of the sale and has
not been an affiliate for at least three months prior to the sale is entitled
to sell the shares immediately without regard to volume limitations and other
conditions described above.
The Company and the sole stockholder of the Company have agreed not to sell
or otherwise dispose of any shares of Common Stock for a period of one year
after the date of this Prospectus without the prior written consent of Van
Kasper & Company, except that the Company may issue the shares of Common Stock
offered hereby and may grant options under the Company's stock option plans,
so long as none of such options become exercisable during said one-year
period. See "Underwriting."
The Company intends to file registration statements covering the sale of
1,000,000 and 100,000 shares of Common Stock reserved for issuance under its
1998 Plan and Directors' Plan, respectively, shortly after the completion of
this offering.
35
<PAGE>
UNDERWRITING
Subject to the terms and conditions of the Underwriting Agreement, the
underwriters named below (the "Underwriters"), through their representative,
Van Kasper & Company (the "Representative") have severally agreed to purchase
from the Company, the number of shares of Common Stock set forth opposite
their respective names below:
<TABLE>
<CAPTION>
NUMBER OF
UNDERWRITERS SHARES
------------ ---------
<S> <C>
Van Kasper & Company...............................................
---------
Total............................................................ 1,800,000
=========
</TABLE>
The Underwriting Agreement provides that the obligations of the Underwriters
are subject to certain conditions precedent and that the Underwriters will
purchase all of the shares of Common Stock offered hereby (other than those
subject to the Underwriters' over-allotment option described below) if any are
purchased.
The Representative has advised the Company that the Underwriters propose to
offer the shares of Common Stock directly to the public at the initial public
offering price and to certain dealers at this price less a discount not in
excess of $ per share. The Underwriters may allow, and these dealers may
reallow, a discount not in excess of per share to certain other dealers.
After the initial public offering of the shares, the offering price and other
selling terms may be changed by the Representative.
The Company has granted to the Underwriters an option, exercisable no later
than 45 days after the date of this Prospectus, to purchase up to 270,000
additional shares of Common Stock at the initial public offering price, less
the underwriting discounts set forth on the cover page of this Prospectus,
solely to cover over-allotments. To the extent that the Underwriters exercise
this option, each of the Underwriters will have a firm commitment to purchase
such additional shares in approximately the same proportion as set forth in
the table above. If purchased, such additional shares will be sold by the
Underwriters on the same terms as those on which the 1,800,000 shares are
being sold.
The Underwriting Agreement contains covenants of indemnity among the
Underwriters and the Company against certain civil liabilities, including
liabilities under the Securities Act.
The Company has agreed to pay the Representative a non-accountable expense
allowance equal to one percent (1%) of the gross proceeds of the offering.
Pursuant to the terms of a lock-up agreement, the Company's sole stockholder
has agreed with the Underwriters that, for a period of one year after the date
of this Prospectus, he will not offer, directly or indirectly, sell, contract
to sell, pledge, grant any option to purchase, or otherwise dispose of or
grant any rights with respect to any shares of Common Stock (or any securities
convertible into, exchange for or exercisable for Common Stock), now owned or
hereafter acquired directly or indirectly by such holder, without the prior
written consent of the Representative. The Company also has agreed not to
offer, sell, contract to sell or otherwise dispose of any shares of Common
Stock or any securities convertible into or exercisable or exchangeable for
Common Stock, or any options or warrants to purchase Common Stock for a period
of one year after the date of this Prospectus without the prior written
consent of the Representative, except that the Company may issue the Shares of
Common Stock offered hereby and may grant options under the Company's stock
option plans, so long as none of such options become exercisable during said
one-year period.
The Representative has advised the Company that, pursuant to Regulation M
under the Securities Act, certain persons participating in this offering may
engage in transactions, including stabilizing bids, syndicate covering
transactions or the imposition of penalty bids, which may have the effect of
stabilizing or maintaining the market price of the Common Stock at a level
above that which might otherwise prevail in the open market. A "stabilizing
bid" is a bid for or the purchase of the Common Stock on behalf of the
Underwriters for the purpose of fixing or maintaining the price of the Common
Stock. A "syndicate covering transaction" is the bid
36
<PAGE>
for or the purchase of the Common Stock on behalf of the Underwriters to
reduce a short position incurred by the Underwriters in connection with this
offering. A "penalty bid" is an arrangement permitting the Representative to
reclaim the selling concession otherwise accruing to an Underwriter or
syndicate member in connection with this offering if the Common Stock
originally sold by such Underwriter or syndicate member is purchased by the
Representative in a syndicate covering transaction and has therefore not been
effectively placed by such Underwriter or syndicate member. The Representative
has advised the Company that such transactions may be affected on the Nasdaq
National Market or otherwise and, if commenced, may be discontinued at any
time.
Prior to this offering, there has been no public market for the Common Stock
of the Company. Consequently, the initial public offering price will be
determined through negotiations between the Company and the Representative.
Among the factors to be considered in such negotiations are prevailing market
conditions, certain financial information of the Company, market valuations of
other companies that the Company and the Representative believe to be
comparable to the Company, estimates of the business potential of the Company,
the current state of the economy as a whole and other factors deemed relevant.
LEGAL MATTERS
The validity of the Common Stock offered hereby will be passed upon for the
Company by Orrick, Herrington & Sutcliffe LLP, San Francisco, California.
Certain legal matters related to this offering will be passed upon for the
Underwriters by Cooley Godward LLP, San Francisco, California.
EXPERTS
The consolidated financial statements as of September 30, 1997 and December
31, 1996 and 1995 and for the nine-month period ended September 30, 1997 and
each of the three years in the period ended December 31, 1996 included in this
Prospectus have been audited by Deloitte & Touche LLP, independent auditors,
as stated in their report included herein and have been so included in
reliance upon the report of such firm given upon their authority as experts in
accounting and auditing.
ADDITIONAL INFORMATION
The Company has filed with the Commission a registration statement (which
term shall encompass any and all amendments thereto) on Form S-1 (the
"Registration Statement") under the Securities Act with respect to the shares
of Common Stock offered by this Prospectus. This Prospectus, which is part of
the Registration Statement, does not contain all of the information set forth
in the Registration Statement and the exhibits and schedules thereto, certain
items of which are omitted in accordance with the rules and regulations of the
Securities and Exchange Commission ("SEC"). Statements made in this Prospectus
as to the contents of any contract, agreement or other document referred to
are not necessarily complete. With respect to each such contract, agreement or
other document filed as an exhibit to the Registration Statement, reference is
hereby made to the exhibit for a more complete description of the matter
involved, and each such statement shall be deemed qualified in its entirety by
such reference. For further information with respect to the Company, reference
is hereby made to the Registration Statement and such exhibits and schedules
filed as a part thereof, which may be inspected, without charge, at the Public
Reference Section of the SEC at Room 1024, Judiciary Plaza, 450 Fifth Street,
N.W., Washington, D.C. 20549 and at the regional offices of the SEC located at
Seven World Trade Center, 13th Floor, New York, New York 10048 and at
Northwestern Atrium Center, 500 West Madison Street, Suite 1400, Chicago,
Illinois 60661. The SEC maintains a web site that contains reports, proxy and
information statements regarding registrants that file electronically with the
SEC. The address of this web site is (http://www.sec.gov). Copies of all or
any portion of the Registration Statement may be obtained from the Public
Reference Section of the SEC, upon payment of the prescribed fees.
37
<PAGE>
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Consolidated Financial Statements
Independent Auditors' Report............................................. F-2
Consolidated Balance Sheets.............................................. F-3
Consolidated Statements of Operations.................................... F-4
Consolidated Statements of Stockholder's Equity.......................... F-5
Consolidated Statements of Cash Flows.................................... F-6
Notes to Consolidated Financial Statements............................... F-7
</TABLE>
F-1
<PAGE>
The accompanying consolidated financial statements have been adjusted to
give effect to the reorganization of Shoe Pavilion, Inc. and Shoe Inn, Inc. as
described in Note 1 to the consolidated financial statements. The
reorganization will be completed prior to the commencement of the Company's
initial public offering. The following report is in the form that will be
furnished by Deloitte & Touche LLP upon the effectiveness of the
reorganization assuming that from November 7, 1997 to the effective date of
the reorganization, no other events shall have occurred that would materially
affect the accompanying consolidated financial statements or notes thereto.
"INDEPENDENT AUDITORS' REPORT
Board of Directors
Shoe Pavilion, Inc.
We have audited the accompanying consolidated balance sheets of Shoe
Pavilion, Inc. and subsidiary as of September 30, 1997 and December 31, 1996
and 1995, and the related consolidated statements of operations, stockholder's
equity, and cash flows for the nine-month period ended September 30, 1997 and
the three years in the period ended December 31, 1996. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, such consolidated financial statements present fairly, in
all material respects, the financial position of Shoe Pavilion, Inc. and
subsidiary as of September 30, 1997 and December 31, 1996 and 1995, and the
results of their operations and their cash flows for the nine-month period
ended September 30, 1997 and the three years in the period ended December 31,
1996 in conformity with generally accepted accounting principles.
San Francisco, California
November 7, 1997 (January , 1998 as to
the reorganization discussed in Note 1)"
Deloitte & Touche LLP
San Francisco, California
December 9, 1997
F-2
<PAGE>
SHOE PAVILION, INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
SEPTEMBER
30, 1997
SEPTEMBER PRO FORMA
DECEMBER 31, 30, 1997 (NOTE 3)
---------------------- ----------- -----------
1995 1996
---------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C>
ASSETS
CURRENT ASSETS:
Cash........................... $ 112,003 $ 201,797 $ 251,103 $ 251,103
Inventories.................... 8,182,717 13,485,726 20,219,125 20,219,125
Prepaid expenses............... 62,663 61,121 103,326 103,326
Other current assets........... -- 4,139 193,707 193,707
---------- ----------- ----------- -----------
Total current assets.......... 8,357,383 13,752,783 20,767,261 20,767,261
FIXED ASSETS:
Store fixtures and equipment... 1,374,014 1,759,524 2,188,651 2,188,651
Leasehold improvements......... 539,168 656,682 1,335,916 1,335,916
---------- ----------- ----------- -----------
Total......................... 1,913,182 2,416,206 3,524,567 3,524,567
Less accumulated depreciation.. 813,966 1,039,842 1,507,500 1,507,500
---------- ----------- ----------- -----------
Net fixed assets............... 1,099,216 1,376,364 2,017,067 2,017,067
DEFERRED INCOME TAXES........... -- -- -- 443,000
OTHER ASSETS.................... 16,806 16,806 56,006 56,006
---------- ----------- ----------- -----------
TOTAL......................... $9,473,405 $15,145,953 $22,840,334 $23,283,334
========== =========== =========== ===========
LIABILITIES AND STOCKHOLDER'S EQUITY
CURRENT LIABILITIES:
Accounts payable............... $1,914,319 $ 5,694,569 $ 7,572,845 $ 7,572,845
Accrued expenses............... 509,509 772,822 1,028,688 1,028,688
Distributions payable to
stockholder................... -- -- -- 6,333,000
Short-term borrowings.......... 2,940,423 3,400,000 7,087,125 7,087,125
Current portion of long-term
obligations................... 116,667 102,805 74,005 74,005
---------- ----------- ----------- -----------
Total current liabilities..... 5,480,918 9,970,196 15,762,663 22,095,663
DEFERRED RENT................... 482,236 438,425 861,591 861,591
LONG-TERM OBLIGATIONS, less
current portion................ 33,333 170,663 122,607 122,607
NOTE PAYABLE TO STOCKHOLDER..... 781,533 -- -- --
COMMITMENTS AND CONTINGENCIES
(Notes 4 and 5)................
STOCKHOLDER'S EQUITY:
Common stock--$.001 par value;
15,000,000 shares authorized;
4,500,000 shares issued and
outstanding................... 4,500 4,500 4,500 4,500
Preferred stock--$.001 par
value; 1,000,000 shares
authorized; no shares issued
or outstanding ............... -- -- -- --
Additional capital............. 30,500 812,033 812,033 198,973
Retained earnings.............. 2,660,385 3,750,136 5,276,940 --
---------- ----------- ----------- -----------
Total stockholder's equity.... 2,695,385 4,566,669 6,093,473 203,473
---------- ----------- ----------- -----------
TOTAL......................... $9,473,405 $15,145,953 $22,840,334 $23,283,334
========== =========== =========== ===========
</TABLE>
See notes to consolidated financial statements.
F-3
<PAGE>
SHOE PAVILION, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
------------------------------------- ------------------------
1994 1995 1996 1996 1997
----------- ----------- ----------- ----------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
NET SALES............... $21,515,524 $25,538,939 $30,315,326 $21,936,257 $32,184,536
COST OF SALES AND
RELATED OCCUPANCY
EXPENSES............... 15,007,293 17,722,690 20,317,844 14,853,103 21,089,617
----------- ----------- ----------- ----------- -----------
Gross profit.......... 6,508,231 7,816,249 9,997,482 7,083,154 11,094,919
SELLING EXPENSES........ 4,976,064 4,835,104 5,592,472 4,008,936 5,883,942
GENERAL AND
ADMINISTRATIVE
EXPENSES............... 1,638,066 1,809,487 2,630,044 1,765,217 2,473,300
----------- ----------- ----------- ----------- -----------
Income (loss) from
operations........... (105,899) 1,171,658 1,774,966 1,309,001 2,737,677
OTHER INCOME (EXPENSE):
Interest............... (379,261) (487,502) (259,281) (199,972) (392,710)
Other--net............. (24,479) (36,378) (27,934) (8,867) 53,580
----------- ----------- ----------- ----------- -----------
Total other expense--
net.................. (403,740) (523,880) (287,215) (208,839) (339,130)
----------- ----------- ----------- ----------- -----------
Income (loss) before
income taxes........... (509,639) 647,778 1,487,751 1,100,162 2,398,547
PROVISION FOR INCOME
TAXES.................. -- (35,000) (98,000) (77,000) (168,200)
----------- ----------- ----------- ----------- -----------
NET INCOME (LOSS)....... $ (509,639) $ 612,778 $ 1,389,751 $ 1,023,162 $ 2,230,347
=========== =========== =========== =========== ===========
PRO FORMA (Unaudited--
Note 3):
Historical income
(loss) before taxes on
income................ $ (509,639) $ 647,778 $ 1,487,751 $ 1,100,162 $ 2,398,547
Pro forma (provision)
benefit for income
taxes................. 182,451 (246,156) (565,345) (418,061) (904,252)
----------- ----------- ----------- ----------- -----------
Pro forma net income
(loss)................ $ (327,188) $ 401,622 $ 922,406 $ 682,101 $ 1,494,295
=========== =========== =========== =========== ===========
Pro forma net income
per share.............. $ 0.18 $ 0.29
=========== ===========
Weighted average shares
outstanding............ 5,215,099 5,215,099
=========== ===========
</TABLE>
See notes to consolidated financial statements
F-4
<PAGE>
SHOE PAVILION, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDER'S EQUITY
<TABLE>
<CAPTION>
COMMON STOCK
----------------
NUMBER ADDITIONAL RETAINED
OF SHARES AMOUNT CAPITAL EARNINGS TOTAL
--------- ------ ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
BALANCE AT JANUARY 1, 1994. 4,500,000 $4,500 $ 30,500 $2,705,246 $2,740,246
Net loss.................. (509,639) (509,639)
Distributions to stock-
holder................... (148,000) (148,000)
--------- ------ -------- ---------- ----------
Balance at December 31,
1994..................... 4,500,000 4,500 30,500 2,047,607 2,082,607
Net income................ 612,778 612,778
--------- ------ -------- ---------- ----------
Balance at December 31,
1995..................... 4,500,000 4,500 30,500 2,660,385 2,695,385
Net income................ 1,389,751 1,389,751
Conversion of note payable
to equity (Note 4)....... 781,533 781,533
Distributions to stock-
holder................... (300,000) (300,000)
--------- ------ -------- ---------- ----------
Balance at December 31,
1996..................... 4,500,000 4,500 812,033 3,750,136 4,566,669
Net income................ 2,230,347 2,230,347
Distributions to stock-
holder................... (703,543) (703,543)
--------- ------ -------- ---------- ----------
BALANCE AT SEPTEMBER 30,
1997...................... 4,500,000 $4,500 $812,033 $5,276,940 $6,093,473
========= ====== ======== ========== ==========
</TABLE>
See notes to consolidated financial statements
F-5
<PAGE>
SHOE PAVILION, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
------------------------------------- ------------------------
1994 1995 1996 1996 1997
----------- ----------- ----------- ----------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
OPERATING ACTIVITIES:
Net income (loss)...... $ (509,639) $ 612,778 $ 1,389,751 $ 1,023,162 $ 2,230,347
Adjustments to
reconcile net income
(loss) to net cash
provided (used) by
operating activities:
Depreciation.......... 346,713 412,464 449,864 319,353 441,771
Other................. 20,395 68,097 32,134 8,867 701
Cash provided (used)
by changes in:
Inventories.......... (1,296,161) 92,972 (5,303,009) (3,427,972) (6,733,399)
Prepaid expenses..... 103 10,737 1,542 23,241 (42,205)
Other assets......... (71,130) 78,523 (4,139) -- (228,768)
Accounts payable..... 1,043,326 (204,251) 3,780,250 3,688,769 1,878,276
Accrued expenses and
deferred rent....... 96,506 26,258 219,501 141,744 679,032
----------- ----------- ----------- ----------- -----------
Net cash provided
(used) by operating
activities......... (369,887) 1,097,578 565,894 1,777,164 (1,774,245)
----------- ----------- ----------- ----------- -----------
INVESTING ACTIVITIES--
Purchase of fixed
assets................ (905,354) (336,177) (569,228) (359,210) (1,083,175)
----------- ----------- ----------- ----------- -----------
FINANCING ACTIVITIES:
Proceeds (payments) on
short-term borrowings,
net................... 1,354,549 (1,163,722) 459,577 (1,005,423) 3,687,125
Proceeds from long-term
debt.................. 252,132 208,659 23,129 4,116 --
Principal payments on
capital leases........ -- -- (21,067) -- (23,917)
Principal payments on
long-term debt........ (975) (50,000) (68,511) (27,783) (52,939)
Distributions paid to
stockholder........... (148,000) -- (300,000) (300,000) (703,543)
----------- ----------- ----------- ----------- -----------
Net cash provided
(used) by financing
activities......... 1,457,706 (1,005,063) 93,128 (1,329,090) 2,906,726
----------- ----------- ----------- ----------- -----------
NET INCREASE (DECREASE)
IN CASH................ 182,465 (243,662) 89,794 88,864 49,306
CASH, BEGINNING OF
PERIOD................. 173,200 355,665 112,003 112,003 201,797
----------- ----------- ----------- ----------- -----------
CASH, END OF PERIOD..... $ 355,665 $ 112,003 $ 201,797 $ 200,867 $ 251,103
=========== =========== =========== =========== ===========
INTEREST PAID........... $ 379,261 $ 487,502 $ 259,281 $ 388,917
INCOME TAXES PAID....... $ -- $ 35,000 $ 28,031 $ 332,262
SUPPLEMENTAL DISCLOSURE
OF NONCASH INVESTING
AND FINANCING ACTIVITY:
Note payable to
stockholder converted
to equity (Note 4).... $ 781,533
Capital lease
obligations for store
equipment............. 189,918
</TABLE>
See notes to consolidated financial statements
F-6
<PAGE>
SHOE PAVILION, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION AND OPERATIONS
Shoe Pavilion, Inc. (the "Company"), a Delaware corporation, is the
successor to Shoe Inn, Inc. ("Shoe Inn"), which was incorporated in the State
of Washington in 1983. The Company is preparing for an initial public offering
and, in connection with this offering, the sole stockholder of Shoe Inn has
entered into an agreement providing for a reorganization prior to the
offering. Under the terms of this agreement all of the common stock of Shoe
Inn will be exchanged for common stock of the Company and Shoe Inn will become
a wholly owned subsidiary. The Company was incorporated in November 1997 for
this purpose. The terms of the reorganization will provide for the issuance of
9,000 shares of the Company's common stock for every one share of Shoe Inn
common stock. In anticipation of the consummation of the reorganization, the
accompanying financial statements reflect the reorganization as if Shoe Inn
had always been a wholly owned subsidiary of the Company. However, the
accompanying financial statements do not reflect the termination of Shoe Inn's
S corporation status. All shares and per share information have been
retroactively restated to reflect the reorganization.
Operations--The Company operates off-price shoe stores located in
California, Washington, Oregon and Nevada, under the names Shoe Pavilion and
Shoe Pavilion's Designer Shoe Warehouse. In March 1997, the Company moved its
corporate headquarters and distribution center to Richmond, California, from
Bellevue, Washington. The Company had 38, 41, and 56 stores open as of
December 31, 1995, 1996 and September 30, 1997, respectively. The Company
purchases inventory from international and domestic vendors. For the nine-
month period ended September 30, 1997, the Company's top ten suppliers
accounted for 45.3% of inventory purchases, and Nine West Group, Inc.
accounted for 10.5% of inventory purchases.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Use of Estimates--The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Consolidation Policy--The consolidated financial statements include the
Company and its wholly-owned subsidiary, Shoe Inn. All significant
intercompany balances and transactions have been eliminated.
Cash represents cash on hand and cash held in banks.
Inventories are stated at the lower of average cost (determined on a first-
in, first-out basis) or market.
Fixed assets are stated at cost and depreciation and amortization are
provided on the straight-line method over the estimated useful lives of the
assets ranging from three to five years. Leasehold improvements are amortized
on the straight-line method over the shorter of the useful lives of the assets
or lease term, generally five years.
Income Taxes--The Company has elected to be taxed as an S corporation for
federal income tax reporting purposes, which provides that taxable income or
loss of the Company is generally passed through to the individual
stockholders. Accordingly, no provision for federal income taxes has been
recorded in the accompanying financial statements. The Company has elected to
be a C corporation in the states of California and Oregon. Accordingly, taxes
are provided for income attributable to the Company's operations in these
states.
Deferred Rent--Certain of the Company's store leases provide for free or
reduced rent during an initial portion of the lease term. Deferred rent
consists of the aggregate obligation for lease payments under these leases
amortized on a straight-line basis over the lease term, in excess of amounts
paid. In addition, deferred rent includes construction allowances received
from landlords, which are amortized on a straight-line basis over the initial
lease term.
F-7
<PAGE>
SHOE PAVILION INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Preopening Costs--Store preopening costs are charged to expense as incurred.
Long-lived Assets--The Company periodically reviews long-lived assets for
impairment to determine whether any events or circumstances indicate that the
carrying amount of the assets may not be recoverable. Such review includes
estimating expected future cash flows. No impairment loss provisions have been
required to date.
Interim Results--The accompanying statement of operations and cash flows for
the nine-month period ended September 30, 1996 are unaudited. In the opinion
of management, the interim financial statements as of and for the nine-month
period ended September 30, 1997 and the statement of operations and cash flows
for the nine-month period ended September 30, 1996 have been prepared on the
same basis as the annual financial statements and include all adjustments,
consisting of only normal recurring adjustments, necessary for the fair
presentation of the results of the interim periods. The results of operations
for the nine-month period ended September 30, 1997 may not be indicative of
the results to be expected for the full year.
Stockholder Distributions--The Company has historically distributed a
portion of its earnings to the stockholder, as necessary, to satisfy the
stockholder's income tax requirements as well as for other purposes.
New Accounting Pronouncements--In February 1997, The Financial Accounting
Standards Board ("FASB") issued Statement of Financial Accounting Standards
(SFAS) No. 128, Earnings Per Share ("EPS"). SFAS No. 128 requires dual
presentation of basic EPS and diluted EPS on the face of all income statements
issued after December 15, 1997 for all entities with complex capital
structures. Basic EPS is computed as net income divided by the weighted
average number of common shares outstanding for the period. Diluted EPS
reflects the potential dilution that could occur from common shares issuable
through stock options, warrants and other convertible securities. As the
Company does not have any stock options, warrants or other convertible
securities outstanding, basic and diluted EPS are the same as primary EPS.
In June 1997, the FASB issued SFAS No. 130, Reporting Comprehensive Income,
and SFAS No. 131, Disclosures about Segments of an Enterprise and Related
Information. SFAS No. 130 requires that an enterprise report, by major
components and as a single total, the change in its net assets during the
period from nonowner sources; and SFAS No. 131 establishes annual and interim
reporting standards for an enterprise's operating segments and related
disclosures about its products, services, geographic areas and major
customers. Adoption of these statements will not impact the Company's
financial position, results of operations or cash flows and any effect will be
limited to the form and content of its disclosures. Both statements are
effective for fiscal years beginning after December 15, 1997, with earlier
application permitted.
3. PRO FORMA INFORMATION (UNAUDITED)
Since August 1988, the Company has been treated as an S corporation for
federal and most state income tax purposes. The objective of the pro forma
financial information is to show what the significant effects on the
historical financial information might have been had the Company not been
treated as an S corporation for income tax purposes since that time. The
following pro forma adjustments have been made.
Pro Forma Balance Sheet Information
. Distributions--The Company intends to make an S corporation distribution
to its current stockholder equal to all of the previously undistributed
S corporation earnings through the termination date of the Company's
status as an S corporation. The pro forma adjustments reflect an
estimated distribution of $6,333,000 as of September 30, 1997.
F-8
<PAGE>
SHOE PAVILION INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
. Deferred Income Taxes--The Company will record an estimated $443,000
deferred income tax asset upon termination of the Company's S
corporation status. The pro forma adjustments reflect this asset as of
September 30, 1997.
The condensed balance sheet of the Company as of September 30, 1997
(unaudited) reflecting these pro forma adjustments is as follows:
<TABLE>
<CAPTION>
SEPTEMBER SEPTEMBER
30, 1997 PRO FORMA 30, 1997
ACTUAL ADJUSTMENTS PRO FORMA
----------- ----------- -----------
<S> <C> <C> <C>
Current assets............................ $20,767,261 $20,767,261
Long-term assets.......................... 2,073,073 $ 443,000 2,516,073
----------- ----------- -----------
Total assets............................. $22,840,334 $ 443,000 $23,283,334
=========== =========== ===========
Current liabilities....................... $15,762,663 $ 6,333,000 $22,095,663
Long-term liabilities..................... 984,198 984,198
----------- ----------- -----------
Total liabilities........................ 16,746,861 6,333,000 23,079,861
----------- ----------- -----------
Common stock and additional paid-in
capital ................................. 816,533 (613,060) 203,473
Retained earnings......................... 5,276,940 (5,276,940)
----------- ----------- -----------
Total stockholder's equity............... 6,093,473 (5,890,000) 203,473
----------- ----------- -----------
Total liabilities and stockholder's
equity.................................. $22,840,334 $ 443,000 $23,283,334
=========== =========== ===========
</TABLE>
Pro Forma Income Statement Information
. Income Taxes--Since August 1988, the Company has not been subject to
federal and most state income taxes. Prior to the closing of the
proposed public offering, the Company will terminate its status as an S
corporation. The pro forma information presented on the statements of
operations reflect a provision (benefit) for income taxes at an
effective rate of 35.8%, 38.0%, 38.0%, 38.0% and 37.7% for the years
ended December 31, 1994, 1995, 1996 and the nine-month periods ended
September 30, 1996 and 1997, respectively.
. Pro Forma Net Income Per Share is based on the weighted average number
of shares of common stock outstanding during the period plus the
estimated number of the shares being offered by the Company (715,099
shares) which would be necessary to fund the distribution of
substantially all undistributed taxable S corporation earnings,
estimated to be $6,333,000 as of September 30, 1997.
4. FINANCING AGREEMENTS
Short-term borrowings represent amounts drawn under the Company's $8,000,000
revolving line of credit expiring June 30, 1998, interest at 0.75% over the
bank's prime rate (9.25% at September 30, 1997), secured by inventory and the
stockholder's personal guarantee.
Terms of the revolving line of credit agreements require, among other
things, that the Company maintain working capital of at least $2,500,000,
tangible net worth of at least $3,500,000, and that total indebtedness may not
exceed 2.75 times tangible net worth. The line of credit prohibits the payment
of cash dividends, other than payments to the stockholder, as necessary, to
satisfy the stockholder's income tax requirements. The Company was in
compliance with all covenants for the nine-month period ended September 30,
1997.
F-9
<PAGE>
SHOE PAVILION INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
In October 1997, the line of credit was increased to $10,000,000, and the
Company obtained a $500,000 term line available for the purchase or lease of
equipment. This line of credit expires on April 30, 1999, and the Company pays
interest on outstanding amounts at a rate of 0.25% over the bank's prime rate
or LIBOR plus 300 basis points. This line of credit is also available for
issuance of commercial and standby letters of credit of up to $3,000,000 and
$100,000, respectively. Borrowings are secured by inventory and the
stockholder's guarantee. The agreement contains restrictive covenants that
require, among other things, that the Company maintain working capital of at
least $4,000,000, tangible net worth of at least $5,500,000 and that total
indebtedness may not exceed 3.0 times tangible net worth.
<TABLE>
<CAPTION>
DECEMBER 31,
----------------- SEPTEMBER 30,
1995 1996 1997
-------- -------- -------------
<S> <C> <C> <C>
Long-term debt:
Unsecured note payable to stockholder due on
demand, interest at 9%. Note payable
converted to stockholder's equity in 1996.... $781,533
Note payable to bank, interest at 0.75% over
the bank's prime rate (8.5% at September 30,
1997), secured by equipment, due in equal
monthly installments through January 30,
1998......................................... 150,000 $ 83,333 $33,333
Note payable, interest at 9.67%, secured by
vehicle, due in equal monthly installments
through May 30, 2001......................... 21,284 18,345
-------- -------- -------
Total........................................ 931,533 104,617 51,678
Less current portion........................... 116,667 70,633 39,185
-------- -------- -------
Total long-term portion........................ $814,866 $ 33,984 $12,493
======== ======== =======
</TABLE>
During the year ended December 31, 1996, the note payable to the stockholder
was converted to capital in lieu of repayment. At the time of conversion, the
note payable had an unpaid balance of $781,533. Interest on the note payable
to the stockholder was $52,133 and $61,458 for the years ended December 31,
1994 and 1995, respectively.
The bank debt and notes payable are at currently available rates for such
debt instruments with similar terms and maturities. The fair value of bank
debt and notes payable approximates carrying value.
Principal repayment requirements on the long-term debt are:
<TABLE>
<S> <C>
Year ending September 30:
1998............................................................... $39,185
1999............................................................... 5,852
2000............................................................... 5,852
2001............................................................... 789
-------
Total............................................................. $51,678
=======
</TABLE>
5. COMMITMENTS AND CONTINGENCIES
Leases--The Company is obligated under operating leases for store and
warehouse locations and equipment. While most of the agreements provide for
minimum lease payments, certain of the store leases
F-10
<PAGE>
SHOE PAVILION INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
provide for additional rentals contingent upon prescribed sales volumes.
Additionally, the Company is required to pay common area maintenance ("CAM")
and other costs associated with the centers in which the stores operate. Most
of the leases provide for renewal at the option of the Company and certain
leases include rent escalation clauses.
During 1996, the Company entered into capital leases for certain store
equipment. The Company's assets under capital leases as of December 31, 1996
and September 30, 1997 are as follows:
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
1996 1997
------------ -------------
<S> <C> <C>
Total assets under capital leases.................... $189,918 $189,918
Less accumulated amortization........................ 29,190 57,677
-------- --------
Total............................................... $160,728 $132,241
======== ========
</TABLE>
Future minimum lease payments required under these leases are:
<TABLE>
<CAPTION>
CAPITAL OPERATING
LEASES LEASES
-------- -----------
<S> <C> <C>
Year ending September 30:
1998..................................................... $ 48,998 $ 4,850,272
1999..................................................... 48,998 4,347,042
2000..................................................... 48,998 3,256,495
2001..................................................... 12,696 2,627,020
2002..................................................... 1,330,098
Thereafter.............................................. 2,584,446
-------- -----------
Total minimum lease commitments........................... 159,690 $18,995,373
===========
Less amounts representing interest........................ 14,756
--------
Present value of capital lease obligations................ 144,934
Less current portion...................................... 34,820
--------
Total long-term portion................................... $110,114
========
</TABLE>
Rental expense for the years ended December 31, 1994, 1995, 1996 and the
nine-month period ended September 30, 1997 was $2,978,708, $3,580,770,
$3,768,318 and $4,089,060, respectively, including contingent rentals of
$60,067, $80,584, $204,587, and $139,558, respectively.
Letters of Credit--The Company has obtained letters of credit in connection
with overseas purchase arrangements. The total amount outstanding was
$490,363, $1,463,424 and $399,143 as of December 31, 1995, 1996 and September
30, 1997, respectively. The Company also has standby letters of credit
relating to rental agreements of $14,667, $33,236 and $53,236 as of December
31, 1995, 1996 and September 30, 1997, respectively.
Contingencies--The Company is party to various legal proceedings arising
from normal business activities. Management believes that the resolution of
these matters will not have an adverse material affect on the Company's
financial statements.
* * * * * *
F-11
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
NO DEALER, SALESPERSON OR ANY PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMA-
TION OR TO MAKE ANY REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS PROSPEC-
TUS, AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RE-
LIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY OR THE UNDERWRITERS. THIS
PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF AN OFFER
TO BUY ANY SECURITY OTHER THAN THE SECURITIES OFFERED BY THIS PROSPECTUS OR AN
OFFER TO SELL OR A SOLICITATION OF AN OFFER TO BUY THE SECURITIES IN ANY JURIS-
DICTION TO ANY PERSON TO WHOM IT IS UNLAWFUL TO MAKE SUCH OFFER OR SOLICITATION
IN SUCH JURISDICTION. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE
HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT INFORMA-
TION CONTAINED HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO THE DATE HEREOF.
----------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary........................................................ 3
Risk Factors.............................................................. 6
Forward-Looking Statements................................................ 11
Prior S Corporation Status................................................ 11
Use of Proceeds........................................................... 12
Dividend Policy........................................................... 12
Dilution.................................................................. 13
Capitalization............................................................ 14
Selected Consolidated Financial and Operating Data........................ 15
Management's Discussion and Analysis of Financial Condition and Results of
Operations............................................................... 16
Business.................................................................. 22
Management................................................................ 29
Certain Transactions...................................................... 31
Principal Stockholder..................................................... 32
Description of Capital Stock.............................................. 33
Shares Eligible For Future Sale........................................... 35
Underwriting.............................................................. 36
Legal Matters............................................................. 37
Experts................................................................... 37
Additional Information.................................................... 37
Index to Consolidated Financial Statements................................ F-1
</TABLE>
UNTIL , 1998 (25 DAYS AFTER THE DATE OF THIS PROSPECTUS), ALL DEALERS
EFFECTING TRANSACTIONS IN THE REGISTERED SECURITIES, WHETHER OR NOT PARTICIPAT-
ING IN THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS. THIS DELIV-
ERY REQUIREMENT IS IN ADDITION TO THE OBLIGATION OF DEALERS TO DELIVER A PRO-
SPECTUS WHEN ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS
OR SUBSCRIPTIONS.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
1,800,000 SHARES
LOGO
COMMON STOCK
----------------
PROSPECTUS
----------------
VAN KASPER & COMPANY
, 1998
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The following table sets forth the costs and expenses, other than
underwriting discounts and commissions, payable by the registrant in
connection with the distribution of the Common Stock being registered. All
amounts are estimated, except the SEC registration fee, the NASD filing fee
and the Nasdaq National Market application fee:
<TABLE>
<S> <C>
SEC registration fee............................................... $ 6,718
NASD filing fee.................................................... 2,777
Nasdaq National Market application fee............................. 33,250
Blue sky fees and expenses......................................... 5,000
Accounting fees.................................................... 150,000
Legal fees and expenses............................................ 240,000
Transfer agent and registrar fees.................................. 5,000
Printing and engraving expenses.................................... 125,000
Non-accountable expense allowance.................................. 180,000
Miscellaneous...................................................... 52,255
--------
Total............................................................ $800,000
========
</TABLE>
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS
The FIFTH Section of the Company's Certificate of Incorporation provides
that directors of the Company shall not be personally liable to the Company or
its stockholders for monetary damages for breach of fiduciary duty as a
director, to the fullest extent permitted by the General Corporation Law of
the State of Delaware. Article V of the Company's By-Laws provides for
indemnification of officers and directors to the full extent and in the manner
permitted by Delaware law. Section 145 of the Delaware General Corporation Law
makes provision for such indemnification in terms sufficiently broad to cover
officers and directors under certain circumstances for liabilities arising
under the Securities Act of 1933, as amended (the "Securities Act").
The Company intends to enter into indemnification agreements with each
director which will provide indemnification under certain circumstances for
acts and omissions which may not be covered by any directors' and officers'
liability insurance. The Company intends to obtain directors' and officers'
liability insurance.
The form of Underwriting Agreement, filed as Exhibit 1.1 to the Registration
Statement, provides for indemnification of the Registrant and its controlling
persons against certain liabilities under the Securities Act.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES
Effective as of the date of this offering, the Company's sole stockholder
will exchange all of the issued and outstanding capital stock of Shoe Inn, Inc
for 4,500,000 shares of Common Stock of the Company. The foregoing transaction
will be completed without registration under the Securities Act in reliance
upon Section 4(2) of the Securities Act for transactions not involving a
public offering, among others, on the basis that such transaction did not
involve any public offering and the purchaser was an accredited investor with
access to the kind of information registration would provide. During the past
three years, the Company has not sold any other securities that were not
registered under the Securities Act.
II-1
<PAGE>
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(A) EXHIBITS
<TABLE>
<C> <S>
1.1 Form of Underwriting Agreement.*
2.1 Form of Exchange Agreement dated February , 1998 by and among Shoe
Pavilion, Inc., Shoe Inn, Inc. and Dmitry Beinus.*
3.1 Certificate of Incorporation of the Registrant (Delaware).
3.2 Bylaws of the Registrant (Delaware).
4.1 Specimen Common Stock Certificate.*
5.1 Opinion of Orrick, Herrington & Sutcliffe LLP as to legality of the
Common Stock.*
10.1 Lease between Lincoln-Whitehall Pacific, LLC and Shoe Inn, Inc. dated
October 28, 1996.
10.2 1998 Equity Incentive Plan.*
10.3 Directors' Stock Option Plan.*
10.4 Loan Agreement between Shoe Inn, Inc. and U.S. Bank National
Association dated October 24, 1997.*
10.5 Form of Tax Allocation Agreement dated February , 1998 between Shoe
Pavilion, Inc. and Dmitry Beinus.*
10.6 Agreement of Purchase and Sale dated as of April 14, 1997 among
Standard Shoe Company and Shoe Inn, Inc.
10.7 Form of Indemnification Agreement between the Registrant and certain of
its officers and directors.
23.1 Consent of Orrick, Herrington & Sutcliffe LLP (included in Exhibit
5.1).*
23.2 Consent of Deloitte & Touche LLP.*
24.1 Powers of Attorney (see Page II-4).
</TABLE>
- ---------------------
*To be filed by amendment
(B) FINANCIAL STATEMENT SCHEDULES
All schedules are omitted because they are not applicable, or because the
information is included in the Consolidated Financial Statements or the Notes
thereto.
ITEM 17. UNDERTAKINGS.
The undersigned registrant hereby undertakes to provide to the underwriter
at the closing specified in the underwriting agreement certificates in such
denominations and registered in such names as required by the underwriters to
permit prompt delivery to each purchaser.
Insofar as indemnification for liabilities arising under the Securities Act
of 1933, as amended, may be permitted to directors, officers, and controlling
persons of the registrant pursuant to the provisions described on Item 14
above, or otherwise, the registrant has been advised that in the opinion of
the Securities and Exchange Commission such indemnification is against public
policy as expressed in the Act and is, therefore, unenforceable. In the event
that a claim for indemnification against such liabilities (other than the
payment by the registrant of expenses incurred or paid by a director, officer
or controlling person of the registrant in the successful defense of any
action, suit or proceeding) is asserted by such director, officer or
controlling person in connection with the securities being registered, the
registrant will, unless in the opinion of its counsel the matter has been
settled by controlling precedent, submit to a court of appropriate
jurisdiction the question of whether such indemnification by it is against
public policy as expressed in the Act and will be governed by the final
adjudication of such issue.
The undersigned registrant hereby undertakes that:
(1) For purposes of determining any liability under the Securities Act of
1933, as amended, the information omitted from the form of prospectus filed
as part of this registration statement in reliance upon Rule 430A and
contained in a form of prospectus filed by the Registrant pursuant to Rule
424(b)(1) or (4) or 497(h) under the Securities Act of 1933 shall be deemed
to be part of this registration statement as of the time it was declared
effective.
(2) For purposes of determining any liability under the Securities Act of
1933, each post-effective amendment that contains a form of prospectus
shall be deemed to be a new registration statement relating to the
securities offered therein, and the offering of such securities at that
time shall be deemed to be the initial bona fide offering thereof.
II-2
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, Shoe Pavilion,
Inc. has duly caused this Registration Statement to be signed on its behalf by
the undersigned, thereunto duly authorized, in the City of Richmond, State of
California, on December 10, 1997.
SHOE PAVILION, INC.
/s/ Dmitry Beinus
By: _________________________________
Dmitry Beinus
(Chairman of the Board of
Directors, Chief Executive
Officer and President)
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears
below constitutes and appoints Dmitry Beinus and Gary A. Schwartz, or either
of them, each with the power of substitution, his or her attorney-in-fact, to
sign any amendments to this Registration Statement (including post-effective
amendments), and to file the same and any related registration statement that
is to be effective upon filing pursuant to Rule 462(b) under the Securities
Act of 1933, with exhibits thereto and other documents in connection
therewith, with the Securities and Exchange Commission, hereby ratifying and
confirming all that each of said attorneys-in-fact, or his or her substitute
or substitutes, may do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed by the following persons in the
capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE CAPACITY DATE
--------- -------- ----
<S> <C> <C>
/s/ Dmitry Beinus Chairman of the Board of December 10, 1997
____________________________________ Directors and Chief
Dmitry Beinus Executive Officer and
President (Principal
Executive Officer)
/s/ Gary A. Schwartz Director, Vice President of December 10, 1997
____________________________________ Finance and Chief Financial
Gary A. Schwartz Officer (Principal
Financial Officer and
Principal Accounting
Officer)
/s/ Peter G. Hanelt Director December 10, 1997
____________________________________
Peter G. Hanelt
/s/ David H. Folkman Director December 10, 1997
____________________________________
David H. Folkman
</TABLE>
II-3
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT PAGE
NUMBER NAME NUMBER
------- ---- ------
<C> <S> <C>
1.1 Form of Underwriting Agreement.*
2.1 Form of Exchange Agreement dated February , 1998 by and
among Shoe Pavilion, Inc., Shoe Inn, Inc. and Dmitry Beinus.*
3.1 Certificate of Incorporation of the Registrant (Delaware).
3.2 Bylaws of the Registrant (Delaware).
4.1 Specimen Common Stock Certificate.*
5.1 Opinion of Orrick, Herrington & Sutcliffe LLP as to legality
of the Common Stock.*
10.1 Lease between Lincoln-Whitehall Pacific, LLC and Shoe Inn,
Inc. dated October 28, 1996.
10.2 1998 Equity Incentive Plan.*
10.3 Directors' Stock Option Plan.*
10.4 Loan Agreement between Shoe Inn, Inc. and U.S. Bank National
Association dated October 24, 1997.*
10.5 Form of Tax Allocation Agreement dated February , 1998
between Shoe Pavilion, Inc. and Dmitry Beinus.*
10.6 Agreement of Purchase and Sale dated as of April 14, 1997
among Standard Shoe Company and Shoe Inn, Inc.
10.7 Form of Indemnification Agreement between the Registrant and
certain of its officers and directors.
23.1 Consent of Orrick, Herrington & Sutcliffe LLP (included in
Exhibit 5.1).*
23.2 Consent of Deloitte & Touche LLP.*
24.1 Powers of Attorney (see Page II-4).
</TABLE>
- ---------------------
*To be filed by amendment
<PAGE>
CERTIFICATE OF INCORPORATION
SHOE PAVILION, INC.
FIRST: The name of this corporation is SHOE PAVILION, INC.
SECOND: The address of the registered office of the corporation in the
State of Delaware is Corporation Trust Center, 1209 Orange Street, in the City
of Wilmington, County of New Castle. The name of its registered agent at that
address is The Corporation Trust Company.
THIRD: The purpose of the corporation is to engage in any lawful act
or activity for which corporations may be organized under the General
Corporation Law of Delaware.
FOURTH: The total number of shares of all classes of stock which this
corporation shall have authority to issue is 16,000,000 shares which will
consist of Common Stock and Preferred Stock. The classes and the aggregate
number of shares of stock of each class which this corporation shall have
authority to issue are as follows:
(i) 15,000,000 shares of Common Stock, $0.001 par value per
share; and
(ii) 1,000,000 shares of Preferred Stock, $0.001 par value per
share, with such rights, privileges, restrictions and preferences as the Board
of Directors may authorize from time to time.
FIFTH: To the fullest extent permitted by the General Corporation Law
of the State of Delaware (as such law currently exists or may hereafter be
amended so long as any such amendment authorizes action further eliminating or
limiting the personal liabilities of directors), a director of the corporation
shall not be personally liable to the corporation or its stockholders for
monetary damages for breach of fiduciary duty as a director. Any repeal or
modification of this paragraph by the stockholders of the corporation shall be
prospective only, and shall not adversely affect any limitation on the personal
liability of a director of the corporation with respect to any act or omission
occurring prior to the time of such repeal or modification.
SIXTH: Meetings of stockholders may be held within or without the
State of Delaware as the by-laws may provide. The books of the corporation may
be kept, subject to any provision contained in the statutes, outside the State
of Delaware at such place or places as may be designated from time to time by
the Board of Directors or in the by-laws of the corporation. Stockholders shall
not be entitled to request the election of directors by written ballot unless a
by-law of the corporation shall authorize such a vote by written ballot. Any
action required or permitted to be taken by the stockholders of the corporation
must be effected at a duly called annual or special meeting of such holders and
may not be effected by any consent in writing by such holders. Stockholders of
the corporation shall not have the right to request or call a special meeting of
the stockholders.
<PAGE>
SEVENTH: The corporation reserves the right to amend, alter, change or
repeal any provision contained in this Certificate of Incorporation, in the
manner now or hereafter prescribed by statute, and all rights conferred on
stockholders herein are granted subject to this reservation. In furtherance and
not in limitation of the powers conferred by statute, the Board of Directors is
expressly authorized to make, repeal, alter, amend and rescind from time to time
any or all of the by-laws of the corporation; including by-law amendments
increasing or reducing the authorized number of directors.
EIGHTH: The corporation shall have the power to indemnify any person
who was or is a party or is threatened to be made a party to any threatened,
pending or completed action, suit or proceeding, whether civil, criminal,
administrative or investigative, by reason of the fact that he is or was a
director, officer, employee, agent or affiliate of the corporation, or is or was
serving at the request of the corporation as a director, officer, employee or
agent of another corporation, partnership, joint venture, trust or other
enterprise, against expenses (including attorneys fees), judgments, fines and
amounts in connection with such action, suit or proceeding, in accordance with
the laws of the State of Delaware, and to the full extent permitted by said
laws, except as the by-laws of the corporation may otherwise provide. Such
indemnification shall not be deemed exclusive of any other rights to which those
seeking indemnification may be entitled under any by-law, agreement, vote of
stockholders or disinterested directors or otherwise, including insurance
purchased and maintained by the corporation, both as to action in his official
capacity and as to action in another capacity while holding such office, and
shall continue as to a person who has ceased to be a director, officer,
employee, agent or affiliate and shall inure to the benefit of the heirs,
executors and administrators of such a person.
NINTH: The name and mailing address of the sole incorporator of the
corporation is:
Brett Cooper
Orrick, Herrington & Sutcliffe LLP
Old Federal Reserve Bank Building
400 Sansome Street
San Francisco, CA 94111
The undersigned, being the sole incorporator hereinbefore named, for
the purpose of forming a corporation pursuant to the General Corporation Law of
the State of Delaware does make this certificate, hereby declaring and
certifying that this is his act and deed and the facts herein stated are true,
and accordingly has hereunto set forth his hand this 26th day of November, 1997.
/s/ Brett E. Cooper
______________________________
Brett E. Cooper
2
<PAGE>
BY-LAWS
OF
SHOE PAVILION, INC.
<PAGE>
TABLE OF CONTENTS
ARTICLE I
OFFICES
<TABLE>
<CAPTION>
Page
<S> <C> <C>
Section 1. Registered Office...................................... 1
Section 2. Other Offices.......................................... 1
ARTICLE II
STOCKHOLDERS
Section 1. Stockholder Meetings................................... 1
Section 2. Determination of Stockholders Entitled to Notice and to
Vote................................................... 2
Section 3. Voting................................................. 2
Section 4. List of Stockholders................................... 3
Section 5. Action By Stockholders................................. 3
ARTICLE III
BOARD OF DIRECTORS
Section 1. General Powers......................................... 4
Section 2. Election of Directors.................................. 4
Section 3. Meetings of the Board of Directors..................... 5
Section 4. Action without Meeting................................. 6
Section 5. Compensation of Directors.............................. 6
Section 6. Committees of the Board................................ 6
ARTICLE IV
OFFICERS
Section 1. Officers............................................... 7
Section 2. Chairman of the Board of Directors..................... 8
Section 3. President.............................................. 8
Section 4. Vice Presidents........................................ 8
Section 5. Secretary and Assistant Secretaries.................... 8
Section 6. Treasurer and Assistant Treasurers..................... 9
ARTICLE V
INDEMNIFICATION AND INSURANCE
Section 1. Actions Against Directors and Officers................. 9
Section 2. Contract............................................... 10
Section 3. Nonexclusivity......................................... 10
Section 4. Indemnification of Employee and Agents................. 10
Section 5. Insurance.............................................. 10
</TABLE>
i
<PAGE>
TABLE OF CONTENTS
(continued)
ARTICLE VI
CERTIFICATES FOR SHARES AND THEIR TRANSFER
<TABLE>
<CAPTION>
Page
<S> <C> <C>
Section 1. Certificates for Shares................................ 10
Section 2. Transfer............................................... 11
Section 3. Record Owner........................................... 11
Section 4. Lost Certificates...................................... 11
ARTICLE VII
MISCELLANEOUS
Section 1. Record Date............................................ 11
Section 2. Execution of Instruments............................... 12
Section 3. Voting of Securities Owned by the Corporation.......... 12
Section 4. Corporate Seal......................................... 12
Section 5. Construction and Definitions........................... 12
Section 6. Amendments............................................. 12
</TABLE>
ii
<PAGE>
BY-LAWS
OF
SHOW PAVILION, INC.
ARTICLE I
OFFICES
Section 1. Registered Office.
-----------------
The registered office of the Corporation in the State of Delaware
shall be Corporation Trust Center, 1209 Orange Street, City of Wilmington,
County of New Castle, State of Delaware. The name of the registered agent is The
Corporation Trust Company. Such registered agent has a business office identical
with such registered office.
Section 2. Other Offices.
-------------
The Corporation also may have offices at such other places both within
and without the State of Delaware as the Board of Directors may from time to
time determine or the business of the Corporation may require.
ARTICLE II
STOCKHOLDERS
Section 1. Stockholder Meetings.
--------------------
(a) Time and Place of Meetings. Meetings of the stockholders shall be
held at such times and places, either within or without the State of Delaware,
as may from time to time be fixed by the Board of Directors and stated in the
notices or waivers of notice of such meetings.
(b) Annual Meeting. The annual meeting of the stockholders shall be
held on such date and at such time as may be designated by the Board of
Directors, for the election of directors and the transaction of such other
business properly brought before such annual meeting of the stockholders and
within the powers of the stockholders.
(c) Special Meetings. Special meetings of the stockholders of the
Corporation, for any purpose or purposes, may be called at any time by the
Chairman of the Board of Directors, the President of the Corporation, or the
Board of Directors. Business transacted at any special meeting of the
stockholders shall be limited to the purposes stated in the notice of such
meeting. Stockholders of the Corporation shall not have the right to request or
call a special meeting of the stockholders.
(d) Notice of Meetings. Except as otherwise provided by law, the
Certificate of Incorporation or these By-laws, written notice of each meeting of
the stockholders shall be
1
<PAGE>
given not less than ten (10) days nor more than sixty (60) calendar days before
the date of such meeting to each stockholder entitled to vote thereat, directed
to such stockholder's address as it appears upon the books of the Corporation,
such notice to specify the place, date, hour and, in the case of a special
meeting, the purpose or purposes of such meeting. When a meeting of the
stockholders is adjourned to another time and/or place, notice need not be given
of such adjourned meeting if the time and place thereof are announced at the
meeting of the stockholders at which the adjournment is taken, unless the
adjournment is for more than thirty (30) days or unless after the adjournment a
new record date is fixed for such adjourned meeting, in which event a notice of
such adjourned meeting shall be given to each stockholder of record entitled to
vote thereat. Notice of the time, place and purpose of any meeting of the
stockholders may be waived in writing either before or after such meeting and
will be waived by any stockholder by such stockholder's attendance thereat in
person or by proxy. Any stockholder so waiving notice of such a meeting shall be
bound by the proceedings of any such meeting in all respects as if due notice
thereof had been given.
(e) Quorum. Except as otherwise required by law, the Certificate of
Incorporation or these By-laws, the holders of not less than a majority of the
shares entitled to vote at any meeting of the stockholders, present in person or
by proxy, shall constitute a quorum and the affirmative vote of the majority of
such quorum shall be deemed the act of the stockholders. If a quorum shall fail
to attend any meeting of the stockholders, the presiding officer of such meeting
may adjourn such meeting from time to time to another place, date or time,
without notice other than announcement at such meeting, until a quorum is
present or represented. At such adjourned meeting at which a quorum is present
or represented, any business may be transacted that might have been transacted
at the meeting of the stockholders as originally noticed. The foregoing
notwithstanding, if a notice of any adjourned special meeting of the
stockholders is sent to all stockholders entitled to vote thereat which states
that such adjourned special meeting will be held with those present in person or
by proxy constituting a quorum, then, except as otherwise required by law, those
present at such adjourned special meeting of the stockholders shall constitute a
quorum and all matters shall be determined by a majority of the votes cast at
such special meeting.
Section 2. Determination of Stockholders Entitled to Notice and to
----------------------------------------------------------
Vote.
----
To determine the stockholders entitled to notice of any meeting of the
stockholders or to vote thereat, the Board of Directors may fix in advance a
record date as provided in Article VII, Section 1 of these By-laws, or if no
record date is fixed by the Board of Directors, a record date shall be
determined as provided by law.
Section 3. Voting.
------
(a) Except as otherwise required by law, the Certificate of
Incorporation or these By-laws, each stockholder present in person or by proxy
at a meeting of the stockholders shall be entitled to one vote for each full
share of stock registered in the name of such stockholder at the time fixed by
the Board of Directors or by law as the record date for the determination of
stockholders entitled to vote at such meeting.
2
<PAGE>
(b) Every stockholder entitled to vote at a meeting of the
stockholders may do so either in person or by one or more agents authorized by a
written proxy executed by the person or such stockholder's duly authorized agent
whether by manual signature, typewriting, telegraphic transmission or otherwise.
(c) Voting may be by voice or by ballot as the presiding officer of
the meeting of the stockholders shall determine. On a vote by ballot, each
ballot shall be signed by the stockholder voting, or by such stockholder's
proxy, and shall state the number of shares voted.
(d) In advance of any meeting of the stockholders, the Board of
Directors may appoint one or more persons as inspectors of election
("Inspectors") to act at such meeting. If Inspectors are not so appointed, or if
an appointed Inspector fails to appear or fails or refuses to act at a meeting
of the stockholders, the presiding officer of any such meeting may, and at the
request of any stockholder or such stockholder's proxy shall, appoint Inspectors
at such meeting. Such Inspectors shall take charge of the ballots at such
meeting. After the balloting thereat on any question, the Inspectors shall count
the ballots cast thereon and make a written report to the secretary of such
meeting of the results thereof. An Inspector need not be a stockholder of the
Corporation and any officer of the Corporation may be an Inspector on any
question other than a vote for or against such officer's election to any
position with the Corporation or of any other questions in which such officer
may be directly interested. If there are three Inspectors, the determination
report or certificate of two such Inspectors shall be effective as if
unanimously made by all Inspectors.
Section 4. List of Stockholders.
--------------------
The officer who has charge of the stock ledger of the Corporation
shall prepare and make available, at least ten (10) days before every meeting of
stockholders, a complete list of the stockholders entitled to vote thereat,
arranged in alphabetical order, showing the address of and the number of shares
registered in the name of each such stockholder. Such list shall be open to the
examination of any stockholder, for any purpose germane to such meeting, during
ordinary business hours, for a period of at least ten (10) days prior to such
meeting, either at a place within the city where such meeting is to be held and
which place shall be specified in the notice of such meeting, or, if not so
specified, at the place where such meeting is to be held. The list also shall be
produced and kept at the time and place of the meeting of the stockholders
during the whole time thereof, and may be inspected by any stockholder who is
present.
Section 5. Action By Stockholders.
----------------------
Any action required or permitted to be taken by the stockholders must
be effected at a duly called annual or special meeting of such holders and may
not be effected by any consent in writing by such holders.
ARTICLE III
BOARD OF DIRECTORS
3
<PAGE>
Section 1. General Powers.
--------------
Unless otherwise provided by law, the Certificate of Incorporation or
these By-laws, all corporate powers shall be exercised by or under the authority
of, and the business and affairs of the Corporation shall be managed by, the
Board of Directors.
Section 2. Election of Directors.
---------------------
(a) Number, Qualification and Term of Office. The authorized number of
directors of the Corporation shall be fixed from time to time by the Board of
Directors, but shall not be less than three (3). The exact number of directors
shall be determined from time to time, either by a resolution or By-law
provision duly adopted by the Board of Directors. Except as otherwise required
by law, the Certificate of Incorporation or these By-laws, each of the directors
of the Corporation shall be elected at the annual meeting of the stockholders
and each director so elected shall hold office until such director's successor
is elected or until such director's death, resignation or removal. Directors
need not be stockholders.
(b) Vacancies. No decrease in the number of directors constituting the
Board of Directors shall shorten the term of any incumbent director. Unless
otherwise restricted by law or by the certificate of Incorporation, newly
created directorships resulting from any increase in the number of directors and
any vacancies on the Board of Directors resulting from death, resignation
removal or other cause may be filled by the affirmative vote of a majority of
the remaining directors then in office, even though less than a quorum of the
Board of Directors, or by the stockholders. Any director elected in accordance
with the preceding sentence shall hold office until the next annual meeting of
the stockholders and until such director's successor shall have been elected, or
until such director's death, resignation or removal.
(c) Resignation. Any director may resign from the Board of Directors
at any time by giving written notice thereof to the Chairman of the Board, the
President or the Secretary of the Corporation. Any such resignation shall take
effect at the time specified therein, or, if the time when such resignation
shall become effective shall not be so specified, then such resignation shall
take effect immediately upon its receipt by the Secretary; and, unless otherwise
specified therein, the acceptance of such resignation shall not be necessary to
make it effective.
(d) Removal. Except as provided in the Certificate of Incorporation,
any director of the Corporation may be removed from office with or without
cause, but only by the affirmative vote of the holders of not less than a
majority of the outstanding capital stock of the Corporation entitled to vote
generally in the election of directors, voting together as a single class.
4
<PAGE>
Section 3. Meetings of the Board of Directors.
----------------------------------
(a) Regular Meetings. Regular meetings of the Board of Directors shall
be held without call at the following times:
(i) at such times as the Board of Directors shall from time to
time by resolution determine; and
(ii) immediately following the adjournment of any annual or
special meeting of the stockholders.
Notice of all such regular meetings hereby is dispensed with.
(b) Special Meetings. Special meetings of the Board of Directors may
be called by the Chairman of the Board of Directors, by the President, by any
Vice President, by the Board of Directors or by any two (2) directors. Notice of
the time and place of special meetings of the Board of Directors shall be given
by the Secretary or an Assistant Secretary of the Corporation, or by any other
officer authorized by the Board of Directors. Such notice shall be given to each
director personally or by mail, messenger, telephone, telecopy, telegraph or any
other form of recorded communication at such director's business or residence
address. Notice by mail shall be deposited in the United States mail postage
prepaid, not later than the third day prior to the date filed for such special
meeting. Notice by telephone, telecopy or telegraph shall be sent, and notice
given personally or by messenger or any other form of recorded communication
shall be delivered, at least twenty-four (24) hours prior to the time set for
such special meeting. Notice of a special meeting of the Board of Directors need
not contain a statement of the purpose of such special meeting.
(c) Adjourned Meetings. A majority of directors present at any regular
or special meeting of the Board of Directors or any committee thereof, whether
or not constituting a quorum, may adjourn any meeting from time to time until a
quorum is present or otherwise. Notice of the time and place of holding any
adjourned meeting shall not be required if the time and place are fixed at the
meeting adjourned.
(d) Place of Meetings. Meetings of the Board of Directors, both
regular and special, may be held at any place within or without the state of
Delaware which has been designated in the notice of the meeting or, if not
stated in the notice or if there is no notice, designated by resolution of the
Board of Directors. In the absence of any such designation, meetings of the
Board of Directors shall be held at the Corporation's principal executive
office.
(e) Participation by Telephone. Members of the Board of Directors or
any committee thereof may participate in any meeting of the Board of Directors
or committee through the use of conference telephone or similar communications
equipment, so long as all members participating in such meeting can hear one
another, and such participation shall constitute presence in person at such
meeting.
5
<PAGE>
(f) Quorum. At all meetings of the Board of Directors or any committee
thereof, a majority of the total number of directors then in office or such
committee, shall constitute a quorum for the transaction of business and the act
of a majority of the directors present at any such meeting at which there is a
quorum shall be the act of the Board of Directors or any committee thereof,
except as may be otherwise specifically provided by law, the Certificate of
Incorporation or these By-laws. A meeting of the Board of Directors or any
committee thereof at which a quorum initially is present may continue to
transact business notwithstanding the withdrawal of directors so long as any
action is approved by at least a majority of the required quorum for such
meeting.
(g) Waiver of Notice. The transactions of any meeting of the Board of
Directors or any committee thereof, however called and noticed or wherever held,
shall be as valid as though had at a meeting duly held after regular call and
notice, if a quorum be present and if, either before or after the meeting, each
of the directors not present signs a written waiver of notice, or a consent to
hold such meeting, or an approval of the minutes thereof. All such waivers,
consents or approvals shall be filed with the corporate records or made a part
of the minutes of the meeting. Notice of a special meeting will be automatically
waived by any director's attendance or participation at such meeting.
Section 4. Action without Meeting.
----------------------
Any action required or permitted to be taken by the Board of Directors
at any meeting thereof or at any meeting of a committee thereof may be taken
without a meeting if all members of the Board of Directors or such committee
thereof consent thereto in writing and the writing or writings are filed with
the minutes of the proceedings of the Board of Directors or such committee
thereof.
Section 5. Compensation of Directors.
-------------------------
Unless otherwise restricted by law, the Certificate of Incorporation
or these By-laws, the Board of Directors shall have the authority to fix the
compensation of directors. The directors may be paid their expenses, if any, of
attendance at each meeting of the Board of Directors and may be paid a fixed sum
for attendance at each meeting of the Board of Directors or a stated salary as
director. No such payment shall preclude any director from serving the
Corporation in any other capacity and receiving compensation therefor. Members
of committees of the Board of Directors may be allowed like compensation for
attending committee meetings.
Section 6. Committees of the Board.
-----------------------
(a) Committees. The Board of Directors may, by resolution adopted by a
majority of the Board of Directors, designate one or more committees of the
Board of Directors, each committee to consist of one or more directors. Each
such committee, to the extent permitted by law, the Certificate of Incorporation
and these By-laws, shall have and may exercise such of the powers of the Board
of Directors in the management and affairs of the Corporation as may be
prescribed by the resolutions creating such committee. Such committee or
committees shall have such name or names as may be determined from time to time
by resolution adopted by the Board of Directors. The Board of Directors may
designate one or more directors as alternate members
6
<PAGE>
of any committee, who may replace any absent or disqualified member at any
meeting of the committee. In the absence or disqualification of a member of a
committee, the member or members thereof present at any meeting and not
disqualified from voting, whether or not he or they constitute a quorum, may
unanimously appoint another member of the Board of Directors to act at the
meeting in the place of any such absent or disqualified member. The Board of
Directors shall have the power, at any time for any such reason, to change the
members of any such committee, to fill vacancies, and to discontinue any such
committee.
(b) Minutes of Meetings. Each committee shall keep regular minutes of
its meetings and report the same to the Board of Directors when required.
(c) Limits on Authority of Committees. No committee shall have the
power or authority in reference to amending the certificate of Incorporation
(except that a committee may, to the extent authorized in the resolution or
resolutions providing for the issuance of shares of stock adopted by the Board
of Directors as provided in Section 151(a) of the General Corporation Law of the
State of Delaware, fix the designations and any of the preferences or rights of
such shares relating to dividends, redemption, dissolution, any distribution of
assets of the Corporation, or the conversion into, or the exchange of such
shares for, shares of any other class or classes or any other series of stock or
authorize the increase or decrease of the shares of any series), adopting an
agreement of merger or consolidation, recommending to the stockholders the sale,
lease or exchange of all or substantially all of the Corporation's property and
assets, recommending to the stockholders a dissolution of the Corporation or a
revocation of a dissolution, or amending any provision of these By-laws; nor,
unless the resolutions establishing such committee or the Certificate of
Incorporation expressly so provide, shall have the power or authority to declare
a dividend, to authorize the issuance of stock, to adopt a certificate of
ownership and merger, or to fill vacancies in the Board of Directors.
ARTICLE IV
OFFICERS
Section 1. Officers.
--------
(a) Number. The officers of the Corporation shall be chosen by the
Board of Directors and shall include a Chairman of the Board of Directors, a
President, Vice Presidents (including any Executive, Senior and/or First Vice
President as the Board of Directors may determine from time to time), a
Secretary and a Treasurer. The Board of Directors also may appoint one or more
Assistant Secretaries or Assistant Treasurers and such other officers and agents
with such powers and duties as it shall deem necessary. Any Vice President may
be given such specific designation as may be determined from time to time by the
Board of Directors. Any number of offices may be held by the same person, unless
otherwise required by law, the Certificate of Incorporation or these By-laws.
(b) Election and Term Office. The officers shall be elected annually
by the Board of Directors at its regular meeting following the annual meeting of
the stockholders and each officer shall hold office until the next annual
election of officers and until such officer's successor is elected, or until
such Officer's death, resignation or removal. Any officer may be
7
<PAGE>
removed at any time, with or without cause, by a vote of the majority of the
Board of Directors. Any vacancy occurring in any office may be filled by the
Board of Directors.
(c) Delegation of Authority. The Board of Directors may from time to
time delegate the powers or duties of any officer to any other officers or
agents, notwithstanding any provision hereof.
Section 2. Chairman of the Board of Directors.
----------------------------------
The Chairman of the Board of Directors shall preside at meetings of
the stockholders and the Board of Directors. Unless otherwise designated by the
Board of Directors, the Chairman of the Board shall be the chief executive
officer of the Corporation. Subject to the provisions of these By-laws and to
the direction of the Board of Directors, he or she shall have the responsibility
for the general management and control of the business and affairs of the
Corporation and shall perform all duties and have all powers that are commonly
incident to the office of chief executive or that are delegated to him or her by
the Board of Directors. He or she shall have power to sign all stock
certificates, contracts and other instruments of the Corporation that are
authorized and shall have general supervision and direction of all of the
duties, employees and agents of the Corporation.
Section 3. President.
---------
In the absence of the Chairman of the Board, or if there is none, the
President shall preside at meetings of the stockholders and the Board of
Directors. The President shall assume and perform the duties of the Chairman of
the Board in the absence or disability of the Chairman of the Board or whenever
the office of the Chairman of the Board is vacant. Subject to the provisions of
these By-laws and to the direction of the Board of Directors and the Chairman of
the Board, he or she shall have responsibility for the day-to-day operations of
the Corporation and shall perform all duties and have all powers that are
commonly incident to the office of chief operating officer or that are delegated
to him or her by the Board of Directors or the Chairman of the Board.
Section 4. Vice Presidents.
---------------
The Vice Presidents shall have such powers and perform such duties as
from time to time may be prescribed for them, respectively, by the Board of
Directors or by the President.
Section 5. Secretary and Assistant Secretaries.
-----------------------------------
The Secretary shall record or cause to be recorded, in books provided
for the purpose, minutes of the meetings of the stockholders, the Board of
Directors and all committees of the Board of Directors; see that all notices are
duly given in accordance with the provisions of these By-laws as required by
law; be custodian of all corporate records (other than financial) and of the
seal of the Corporation, and have authority to affix the seal to all documents
requiring it and attest to the same; give, or cause to be given, notice of all
meetings of the stockholders and special meetings of the Board of Directors;
and, in general, shall perform all duties incident to the office of Secretary
and such other duties as may, from time to time, be assigned to him by the
8
<PAGE>
Board of Directors or by the President. At the request of the Secretary, or in
the Secretary's absence or disability, any Assistant Secretary shall perform any
of the duties of the Secretary and, when so acting, shall have all the powers
of, and be subject to all the restrictions upon, the Secretary.
Section 6. Treasurer and Assistant Treasurers.
----------------------------------
The Treasurer shall keep or cause to be kept the books of account of
the Corporation and shall render statements of the financial affairs of the
Corporation in such form and as often as required by the Board of Directors or
the President. The Treasurer shall perform all other duties commonly incident to
his office and shall perform such other duties and have such other powers as the
Board of Directors or the President shall designate from time to time. At the
request of the Treasurer, or in the Treasurer's absence or disability, any
Assistant Treasurer may perform any of the duties of the Treasurer and, when so
acting, shall have all the powers of, and be subject to all the restrictions
upon, the Treasurer. Except where by law the signature of the Treasurer is
required, each of the Assistant Treasurers shall possess the same power as the
Treasurer to sign all certificates, contracts, obligations and other instruments
of the Corporation.
ARTICLE V
INDEMNIFICATION AND INSURANCE
Section 1. Actions Against Directors and Officers.
--------------------------------------
The Corporation shall indemnify to the fullest extent permitted by,
and in the manner permissible under, the laws of the State of Delaware any
person made, or threatened to be made, a party to an action or proceeding,
whether criminal, civil, administrative or investigative (a "Proceeding"), by
reason of the fact that such person or such person's testator or intestate is or
was a director or officer of the Corporation or any predecessor of the
Corporation, or served any other enterprise as a director or officer at the
request of the Corporation or any predecessor of the Corporation (the
"Indemnitee"), including without limitation, all expenses (including attorneys'
fees), judgments, fines and amounts paid in settlement actually and reasonably
incurred by the Indemnitee in connection with such Proceeding.
In furtherance and not in limitation of the foregoing provisions, all
reasonable expenses incurred by or on behalf of the Indemnitee in connection
with any Proceeding shall be advanced to the Indemnitee by the Corporation
within 20 calendar days after the receipt by the Corporation of a statement or
statements from the Indemnitee requesting such advance or advances from time to
time, whether prior to or after final disposition of such Proceeding. Such
statement or statements shall reasonably evidence the expenses incurred by the
Indemnitee and, if required by law at the time of such advance, shall include or
be accompanied by an undertaking by or on behalf of the Indemnitee to repay the
amounts advanced if it should ultimately be determined that the Indemnitee is
not entitled to be indemnified against such expenses pursuant to this Article V.
Section 2. Contract.
--------
9
<PAGE>
The provisions of Section 1 of this Article V shall be deemed to be a
contract between the Corporation and each director and officer who serves in
such capacity at any time while such By-law is in effect, and any repeal or
modification thereof shall not affect any rights or obligations then existing
with respect to any state of facts then or theretofore existing or any action,
suit or proceeding theretofore or thereafter brought based in whole or in part
upon any such state of facts.
Section 3. Nonexclusivity.
--------------
The rights of indemnification provided by this Article V shall not be
deemed exclusive of any other rights to which any director or officer of the
Corporation may be entitled apart from the provisions of this Article V.
Section 4. Indemnification of Employee and Agents.
--------------------------------------
The Board of Directors in its discretion shall have the power on
behalf of the Corporation to indemnify any person, other than a director or
officer, made a party to any action, suit or proceeding-by reason of the fact
that such person or such person's testator or intestate, is or was an employee
or agent of the Corporation.
Section 5. Insurance.
---------
Upon a resolution or resolutions duly adopted by the Board of
Directors of the Corporation, the Corporation may purchase and maintain
insurance on behalf of any person who is or was a director, officer, employee or
agent of the Corporation against any liability asserted against such person and
incurred by him in any capacity, or arising out of his capacity as such, whether
or not the Corporation would have the power to indemnify such person against
such liability under the provisions of applicable law, the Certificate of
Incorporation or these By-laws.
ARTICLE VI
CERTIFICATES FOR SHARES AND THEIR TRANSFER
Section 1. Certificates for Shares.
-----------------------
Unless otherwise provided by a resolution of the Board of Directors,
the shares of the Corporation shall be represented by a certificate. The
certificates of stock of the Corporation shall be numbered and shall be entered
in the books of the Corporation as they are issued. They shall exhibit the
holder's name and number of shares and shall be signed by or in the name of the
Corporation by (a) the Chairman of the Board of Directors, the President or any
Vice President and (b) the Treasurer, any Assistant Treasurer, the Secretary or
any Assistant Secretary. Any or all of the signatures on a certificate may be
facsimile. In case any officer of the Corporation, transfer agent or registrar
who has signed, or whose facsimile signature has been placed upon such
certificate, shall have ceased to be such officer, transfer agent or registrar
before such certificate is issued, such certificate may nevertheless be issued
by the Corporation with the same effect as if he were such officer, transfer
agent or registrar at the date of issuance.
10
<PAGE>
Section 2. Transfer.
--------
Upon surrender to the Corporation or the transfer agent of the
Corporation of a certificate for shares duly endorsed or accompanied by proper
evidence of succession, assignation or authority to transfer, it shall be the
duty of the Corporation to issue a new certificate to the person entitled
thereto, cancel the old certificate and record the transaction upon its books.
Section 3. Record Owner.
------------
The Corporation shall be entitled to treat the holder of record of any
share or shares of stock as the holder in fact thereof, and, accordingly, shall
not be bound to recognize any equitable or other claim to or interest in such
share on the part of any other person, whether or not it shall have express or
other notice thereof, save as expressly provided by the laws of the State of
Delaware.
Section 4. Lost Certificates.
-----------------
The Board of Directors may direct a new certificate or certificates to
be issued in place of any certificate or certificates theretofore issued by the
Corporation alleged to have been lost, stolen or destroyed, upon the making of
an affidavit of that fact by the person claiming the certificate of stock to be
lost, stolen or destroyed. When authorizing such issue of a new certificate or
certificates, the Board of Directors may, in its discretion and as a condition
precedent to the issuance thereof, require the owner of such lost, stolen or
destroyed certificate or certificates, or his legal representative, to give the
Corporation a bond in such sum as it may direct as indemnity against any claim
that may be made against the Corporation with respect to the certificate alleged
to have been lost, stolen or destroyed.
ARTICLE VII
MISCELLANEOUS
Section 1. Record Date.
-----------
(a) In order that the Corporation may determine the stockholders
entitled to notice of or to vote at any meeting of the stockholders or any
adjournment thereof, or entitled to receive payment of any dividend or other
distribution or allotment of any rights or entitled to exercise any rights in
respect of any change, conversion or exchange of stock or for the purpose of any
other lawful action, the Board of Directors may fix, in advance, a record date,
which shall not be more than sixty (60) nor less than ten (10) days prior to the
date of such meeting nor more than sixty (60) days prior to any other action. If
not fixed by the Board of Directors, the record date shall be determined as
provided by law.
(b) A determination of stockholders of record entitled to notice of or
to vote at a meeting of the stockholders shall apply to any adjournments of the
meeting, unless the Board of Directors fixes a new record date for the adjourned
meeting.
11
<PAGE>
(c) Holders of stock on the record date are entitled to notice and to
vote or to receive the dividend, distribution or allotment of rights or to
exercise the rights, as the case may be, notwithstanding any transfer of any
shares on the books of the Corporation after the record date, except as
otherwise provided by agreement or by law, the Certificate of Incorporation or
these By-laws.
Section 2. Execution of Instruments.
------------------------
The Board of Directors may, in its discretion, determine the method
and designate the signatory officer of officers, or other persons, to execute
any corporate instrument or document or to sign the corporate name without
limitation, except where otherwise provided by law, the Certificate of
Incorporation or these By-laws. Such designation may be general or confined to
specific instances.
Section 3. Voting of Securities Owned by the Corporation.
---------------------------------------------
All stock and other securities of other corporations held by the
Corporation shall be voted, and all proxies with respect thereto shall be
executed, by the person so authorized by resolution of the Board of Directors,
or, in the absence of such authorization, by the President.
Section 4. Corporate Seal.
--------------
The Corporation shall have a corporate seal in such form as shall be
prescribed and adopted by the Board of Directors.
Section 5. Construction and Definitions.
----------------------------
Unless the context requires otherwise, the general provisions, rules
of construction and definitions in the General Corporation Law of the State of
Delaware shall govern the construction of these By-laws.
Section 6. Amendments.
----------
These By-laws may be altered, amended or repealed or new By-laws may
be adopted by the stockholders at any meeting or by the Board of Directors.
12
<PAGE>
EXHIBIT 10.1
LEASE AGREEMENT
(NNN)
BASIC LEASE INFORMATION
LEASE DATE: October 28, 1996
LANDLORD: Lincoln-Whitehall Pacific, LLC,
A Delaware limited liability company
LANDLORD'S ADDRESS:c/o Lincoln Property Company Management Services, Inc.
101 Lincoln Centre Drive, Fourth Floor
Foster City, California 94404-1167
TENANT: Shoe Inn, Inc., dba Shoe Pavilion,
A Washington corporation
TENANT'S ADDRESS: 13405 SE 30th Street
Bellevue, Washington, 98005
PREMISES: Approximately 58,028 rentable square feet as shown on Exhibit
-------
A
- -
PREMISES ADDRESS: 3200 Regatta Boulevard, Unit F
Richmond, California 94804
BUILDING: Approximately 382,451 rentable square feet
LOT: APN 560-100-008-5
PARK: LINCOLN REGATTA CENTER Approximately 411,751
rentable square feet
TERM: March 1, 1997 ("Commencement Date"), through
February 28, 2002 ("Expiration Date")
DELIVERY DATE: The earlier to occur of (i) November 1, 1996 or (ii) the full
execution of this Lease, including, without limitation, the
delivery to Landlord of the Letter of Credit
BASE RENT ((P)3): See Addendum 1
SECURITY DEPOSIT
((P)4.1): Eighteen thousand five hundred sixty-eight and 96/100 Dollars
($18,568.96) subject to Section 4
*TENANT'S SHARE OF OPERATING EXPENSES ((P)6.1): 14.09% of the Park
*TENANT'S SHARE OF TAX EXPENSES ((P)6.2): 14.09% of the Park
*TENANT'S SHARE OF COMMON AREA UTILITY COSTS ((P)7): 14.09% of the Park
*TENANT'S SHARE OF UTILITY EXPENSES ((P)7): 14.09% of the Park
*The amount of Tenant's Share of the expenses as
referenced above shall be subject to modification
as set forth in this Lease.
PERMITTED USES ((P)9): Warehouse and distribution of shoes and related
merchandise which is sold by Tenant in its retail stores
and general office use but only to the extent permitted
by the City of Richmond and any and all entities having
jurisdiction, and all agencies and governmental
authorities having jurisdiction thereof.
UNRESERVED
PARKING SPACES: Fifty-eight (58) nonexclusive and undesignated spaces.
BROKER ((P)38): James A. Sobel - Colliers Damner Pike for Tenant
Tom Beatty and Mel Harrison - BT Commercial for Landlord
EXHIBITS: Exhibit A - Premises, Building, Lot and/or Park
Exhibit B - Tenant Improvements
Exhibit C - Rules and Regulations
Exhibit D - Covenants, Conditions and Restrictions
(Intentionally Omitted)
Exhibit E - Hazardous Materials Disclosure Certificate -
Example
Exhibit F - Change of Commencement Date - Example
(Intentionally Omitted)
Exhibit G - Tenant's Initial Hazardous Materials
Disclosure Certificate
Exhibit H - Sign Criteria (Intentionally Omitted)
Exhibit I - Subordination, Non-Disturbance and
Attornment Agreement
ADDENDA: Addendum 1: Adjustment to Base Rent
Addendum 2: Option to Extend Lease
Addendum 3: Right of First Offer
<PAGE>
TABLE OF CONTENTS
-----------------
<TABLE>
<CAPTION>
SECTION PAGE
- ------- ----
<S> <C>
1. PREMISES......................................................... 3
2. COMMENCEMENT DATE; CONDITION OF THE PREMISES..................... 3
3. RENT............................................................. 3
4. SECURITY DEPOSIT................................................. 4, 5
5. TENANT IMPROVEMENTS.............................................. 5
6. ADDITIONAL RENT.................................................. 5
7. UTILITIES........................................................ 7
8. LATE CHARGES..................................................... 7
9. USE OF PREMISES.................................................. 8
10. ALTERATIONS AND ADDITIONS; AND SURRENDER OF PREMISES............. 8
11. REPAIRS AND MAINTENANCE.......................................... 9
12. INSURANCE........................................................ 10
13. WAIVER OF SUBROGATION............................................ 11
14. LIMITATION OF LIABILITY AND INDEMNITY............................ 11
15. ASSIGNMENT AND SUBLEASING........................................ 12
16. AD VALOREM TAXES................................................. 13
17. SUBORDINATION.................................................... 13
18. RIGHT OF ENTRY................................................... 14
19. ESTOPPEL CERTIFICATE............................................. 14
20. TENANT'S DEFAULT................................................. 14
21. REMEDIES FOR TENANT'S DEFAULT.................................... 15
22. HOLDING OVER..................................................... 16
23. LANDLORD'S DEFAULT............................................... 16
24. PARKING.......................................................... 16
25. SALE OF PREMISES................................................. 16
26. WAIVER........................................................... 16
27. CASUALTY DAMAGE.................................................. 17
28. CONDEMNATION..................................................... 17
29. ENVIRONMENTAL MATTERS/HAZARDOUS MATERIALS........................ 17
30. FINANCIAL STATEMENTS............................................. 19
31. GENERAL PROVISIONS............................................... 19
32. SIGNS............................................................ 21
33. MORTGAGEE PROTECTION............................................. 21
34. QUITCLAIM........................................................ 21
35. MODIFICATIONS FOR LENDER......................................... 21
36. WARRANTIES OF TENANT............................................. 21
37. COMPLIANCE WITH AMERICANS WITH DISABILITIES ACT.................. 22
38. BROKERAGE COMMISSION............................................. 22
39. QUIET ENJOYMENT.................................................. 22
40. LANDLORD'S ABILITY TO PERFORM TENANT'S UNPERFORMED OBLIGATIONS... 22
41. TENANT'S ABILITY TO PERFORM TENANT'S UNPERFORMED OBLIGATIONS..... 23
</TABLE>
2
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LEASE AGREEMENT
DATE: This Lease is made and entered into as of the Lease Date set forth on
Page 1. The Basic Lease Information set forth on Page 1 and this
Lease are and shall be construed as a single instrument.
1. PREMISES: Landlord hereby leases the Premises to Tenant upon the terms and
--------
conditions contained herein. Landlord hereby grants to Tenant a license for the
right to use, on a non-exclusive basis, parking areas and ancillary facilities
located within the Common Areas of the Park, subject to the terms of this Lease.
Landlord and Tenant hereby agree that for purposes of this Lease, as of the
Lease Date, the rentable square footage area of the Premises, the Building, the
Lot and the Park shall be deemed to be the number of rentable square feet as set
forth in the Basic Lease Information on Page 1. Tenant hereby acknowledges that
the rentable square footage of the Premises may include a proportionate share of
any and all utility rooms. Tenant further agrees that the number of rentable
square feet of the Building, the Lot and the Park may subsequently change after
the Lease Date commensurate with any actual physical modifications to any of the
foregoing by Landlord, and Tenant's Share shall accordingly change.
2. COMMENCEMENT DATE; CONDITION OF THE PREMISES:
--------------------------------------------
2.1 The Term of this Lease shall commence on the Commencement Date and
expire on the Expiration Date. From and after the Delivery Date, Tenant shall
perform all obligations of Tenant hereunder, other than those requiring the
payment of Base Rent and Additional Rent. From and after the Commencement Date,
Tenant shall perform all obligations of Tenant hereunder, except the payment of
Base Rent. The date on which such Base Rent is due and payable is set forth in
Addendum 1 to this Lease. The word "Term" whenever used herein refers to the
initial term of this Lease and any extension thereof. By taking possession of
the Premises, Tenant shall be deemed to have accepted the Premises in good
condition and state of repair provided, Tenant shall have the right to provide
Landlord with a written punchlist of repairs or modifications Tenant desires to
be made by Landlord at Landlord's sole expense. The punchlist shall be
delivered not later than twenty (20) days after the Tenant Improvements are
Substantially Complete. Tenant hereby acknowledges and agrees that neither
Landlord nor Landlord's agents or representatives has made any representations
or warranties as to the suitability, safety or fitness of the Premises for the
conduct of Tenant's business, Tenant's intended use of the Premises or for any
other purpose.
2.2 In the event Landlord permits Tenant to occupy the Premises prior to
the Delivery Date, such occupancy shall be at Tenant's sole risk and subject to
all the provisions of this Lease, including, but not limited to, the requirement
to pay the Security Deposit, and to obtain the insurance required pursuant to
this Lease and to deliver insurance certificates as required herein. If, at any
time, Tenant is in default of otherwise breaches any term, condition or
provision of this Lease, any such waiver by Landlord of Tenant's requirement to
pay rental payments shall be null and void and Tenant shall immediately pay to
Landlord all rental payments so waived by Landlord.
3. RENT: On the date that Tenant executes this Lease, Tenant shall deliver to
----
Landlord the original executed Lease, the Base Rent (which shall be applied
against the Rent payable for the first month Tenant is required to pay Base
Rent), the Security Deposit, and all insurance certificates evidencing the
insurance required to be obtained by Tenant under Section 12 of this Lease.
Tenant agrees to pay Landlord, without prior notice or demand, or abatement,
offset, deduction or claim, the Base Rent described on Page 1, payable in
advance at Landlord's address shown on Page 1 on the first day of each month
throughout the Term of the Lease. In addition to the Base Rent set forth on
Page 1, Tenant shall pay Landlord in advance and on the first (1st) day of each
month throughout the Term of this Lease, as Additional Rent, Tenant's Share of
Operating Expenses, Tax Expenses, Common Area Utility Costs, and Utility
Expenses, as well as the Administrative Expenses. The term "Rent" whenever used
herein refers to the aggregate of all these amounts. If Landlord permits Tenant
to occupy the Premises without requiring Tenant to pay rental payments for a
period of time, the waiver of the requirement to pay rental payments shall only
apply to waiver of the Base Rent and Tenant shall otherwise perform all other
obligations of Tenant required hereunder. The Rent for any fractional part of a
calendar month at the commencement or termination of the Lease term shall be a
prorated amount of the Rent for a full calendar month based upon a thirty (30)
day month. The prorated Rent shall be paid on the Commencement Date and the
first day of the calendar month in which the date of termination occurs, as the
case may be.
4. SECURITY DEPOSIT: Simultaneously with Tenant's delivery to Landlord of this
Lease and the first month's Base Rent in accordance with the provisions of
Section 3 above, Tenant shall deliver to Landlord, as a security deposit in lieu
of a cash security deposit (the "Security Deposit"), for the full and faithful
performance by Tenant of all of its obligations under this Lease, an irrevocable
and unconditional negotiable letter of credit, in the form and containing the
terms required herein, payable in the City of Foster City, California running in
favor of Landlord issued by a solvent bank under the
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<PAGE>
supervision of the Superintendent of Banks of the State of California, or a
National Banking Association, in the amount of eighteen thousand five hundred
sixty-eight and 96/100 dollars ($18,568.96) (the "Letter of Credit"). The Letter
of Credit shall be (a) at sight and irrevocable (b) maintained in effect,
whether through replacement, renewal or extension, for the entire Lease Term
(the "Letter of Credit Expiration Date") and Tenant shall deliver a new Letter
of Credit or certificate of renewal or extension to Landlord at least thirty
(30) days prior to the expiration of the Letter of Credit, without any action
whatsoever on the part of Landlord, (c) subject to the Uniform Customs and
Practices for Documentary Credits (1993-Rev) International Chamber of Commerce
Publication #400, and (d) acceptable to Landlord in its sole discretion. In
addition to the foregoing, the form and terms of the Letter of Credit (and the
bank issuing the same) shall be acceptable to Landlord, in Landlord's sole
discretion, and shall provide, among other things, in effect that: (1) Landlord,
or its then managing agent, shall have the right to draw down an amount up to
the face amount of the Letter of Credit upon the presentation to the issuing
bank of Landlord's (or Landlord's then managing agent's) statement that such
amount is due to Landlord under the terms and conditions of this Lease, it being
understood that if Landlord or its managing agent be a corporation, partnership
or other entity, then such statement shall be signed by an officer (if a
corporation), a general partner (if a partnership), or any authorized party (if
another entity); (2) the Letter of Credit will be honored by the issuing bank
without inquiry as to the accuracy thereof and regardless of whether the Tenant
disputes the content of such statement; (3) in the event of a transfer of
Landlord's interest in any of the Buildings of which the Premises are a part,
Landlord shall transfer the Letter of Credit, in whole or in part (or cause a
substitute letter of credit to be delivered, as applicable), to the transferee
and thereupon the Landlord shall, without any further agreement between the
parties, be released by Tenant from all liability therefor, and it is agreed
that the provisions hereof shall apply to every transfer or assignment of the
whole or any portion of said Letter of Credit to a new Landlord. If, as a result
of any such application of all or any part of such security, the amount secured
by the Letter of Credit shall be less than eighteen thousand five hundred sixty-
eight and 96/100 dollars ($18,568.96), Tenant shall forthwith provide Landlord
with additional letter(s) of credit or cash in an amount equal to the deficiency
and each such additional letter of credit shall comply with all of the
provisions of this Section 4. Tenant further covenants and warrants that it will
not assign nor encumber the Letter of Credit or any part thereof and that
neither Landlord nor its successors or assigns will be bound by any such
assignment, encumbrance, attempted assignment or attempted encumbrance. Without
limiting the generality of the foregoing, if the Letter of Credit expires
earlier than the Letter of Credit Expiration Date, Landlord will accept a
renewal thereof or substitute letter of credit (such renewal or substitute
letter of credit to be in effect not later than thirty (30) days prior to the
expiration thereof), irrevocable and automatically renewable as above provided
through the Letter of Credit Expiration Date upon the same terms as the expiring
letter of credit or such other terms as may be acceptable to Landlord. However,
if the Letter of Credit is not timely renewed or a substitute letter of credit
or cash is not timely received, or if Tenant fails to maintain the Letter of
Credit in the amount and terms set forth in this Section 4, Tenant, at least
thirty (30) days prior to the expiration of the Letter of Credit, or immediately
upon its failure to comply with each and every term of this Section 4, must
deposit with Landlord cash security in the amounts required by, and to be held
subject to and in accordance with, all of the terms and conditions set forth
this Section 4 and all other applicable provisions of this Lease, failing which
the Landlord may present such Letter of Credit to the bank in accordance with
the terms of this Section 4, and the entire sum secured thereby shall be paid to
Landlord, to be held by Landlord as provided in this Section 4. If Tenant is in
default, Landlord may, but without obligation to do so, use the Security
Deposit, or any portion thereof, to cure the default or to compensate Landlord
for all damages sustained by Landlord resulting from Tenant's default. Tenant
shall, immediately on demand, pay to Landlord a sum equal to the portion of the
Security Deposit so applied or used so as to replenish the amount of the
Security Deposit held to increase such deposit to the amount initially deposited
with Landlord.
Effective on the date which is twenty (24) months after the commencement date of
the initial Term of the Lease, if Tenant has not at anytime been, or is
currently not, in default in the performance of any of its obligations under
this Lease and contingent upon review and approval of Tenant's then current
financial condition by Landlord, Landlord shall release Tenant's Letter of
Credit ("Release Letter of Credit"). Landlord shall grant Tenant such a release,
provided that, in Landlord's sole discretion each and every one of the following
terms and conditions have been fully satisfied: (1) Tenant's financial net worth
is at least $2,600,000 for the six (6) months immediately preceding such release
as evidenced by the then current audited financial statement, and the previous
year's audited financial statements (including interim periods following the end
of the last fiscal year to which annual statements are available) which
statements shall be prepared by a certified public accountant and shall present
fairly the financial condition of Tenant at such dates and the result of its
operations and changes in its financial position for the periods ended on such
dates (the "Financial Statements"); (2) Tenant has paid its payment of Rent,
Additional Rent, and Utilities and Administrative Expenses pursuant to Section 3
hereof when due to Landlord as of the Commencement Date, and through the 24th
month of the Term; (3) Tenant has not been in default at any time during the
Term of the Lease, or is currently in default of any provision of the Lease;
and/or (4) Tenant has not assigned its rights and obligations under all or part
of the Lease and Tenant shall not have subleased all or part of the Premises;
and/or (5) Tenant has possession of all of the Premises under the Lease, and
Tenant's possession has not been terminated earlier pursuant to the terms of the
Lease. Within fifteen (15) business days of receipt of Tenant's financial
statements, Landlord shall notify Tenant of its agreement or denial to release
the Letter of Credit. In the event Tenant's request for the Release of Letter of
Credit is denied by Landlord, Tenant shall maintain or renew the Letter of
Credit, for the
4
<PAGE>
balance of the Term of the Lease, in the form and containing the terms required
hereinabove in this Section 4, and Tenant shall have no further rights to
request Landlord for Release of Letter of Credit.
5. TENANT IMPROVEMENTS: Tenant hereby accepts the Premises in its current "AS
-------------------
IS" condition except as otherwise specified in Exhibit B attached hereto. If so
---------
specified in Exhibit B hereto, Landlord or Tenant, as the case may be, shall
---------
install the improvements ("Tenant Improvements") in the Premises in accordance
with the terms, conditions, criteria and provisions set forth in Exhibit B
---------
hereto. Tenant acknowledges that neither Landlord nor any of Landlord's agents,
representatives or employees has made any representations as to the suitability
or fitness of the Premises for the conduct of Tenant's business, including
without limitation, any storage incidental thereto, or for any other purpose,
and that neither Landlord nor any of Landlord's agents, representatives or
employees has agreed to undertake any alterations or construct any Tenant
Improvements to the Premises except as expressly provided in Exhibit B to this
---------
Lease.
6. ADDITIONAL RENT : It is intended by Landlord and Tenant that this Lease be
----------------
a "triple net lease". The costs and expenses described in this Section 6 and
all other sums, charges, costs and expenses specified in this Lease other than
Base Rent are to be paid by Tenant to Landlord as additional rent (collectively,
"Additional Rent").
6.1 OPERATING EXPENSES: In addition to the Base Rent set forth in Section
3, Tenant shall pay Tenant's Share, which is defined on Page 1, of all Operating
Expenses as Additional Rent. The term "Operating Expenses" as used herein,
except as otherwise provided in this Lease, shall mean the total amounts paid or
payable by Landlord in connection with the ownership, maintenance, repair and
operation of the Premises, the Building and the Lot, and where applicable, of
the Park referred to on Page 1. To Landlord's actual knowledge, the prior owner
replaced substantial portions of the roof of the Building. Landlord has
repaired and paved all parking areas in the Park. These Operating Expenses may
include, but are not limited to:
6.1.1 Landlord's cost of repairs to, and maintenance of, the roof,
the roof membrane and the exterior walls of the Building;
6.1.2 Landlord's cost of maintaining the outside paved area,
landscaping and other common areas for the Park. The term "Common Areas"
shall mean all areas and facilities within the Park exclusive of the
Premises and the other portions of the Park leased exclusively to other
tenants. The Common Areas include, but are not limited to, interior
lobbies, mezzanines, parking areas, access and perimeter roads, sidewalks,
landscaped areas and similar areas and facilities;
6.1.3 Landlord's annual cost of insurance insuring against fire and
extended coverage (including, if Landlord elects, "special form" coverage)
and all other insurance, including, but not limited to, earthquake, flood
and/or surface water endorsements for the Building, the Lot and the Park
(including the Common Areas), rental value insurance against loss of Rent in
an amount equal to the amount of Rent for a period of at least six (6)
months commencing on the date of loss, and subject to the provisions of
Section 27 below, any deductible;
6.1.4 Landlord's cost of: (i) modifications and/or new improvements
to the Building, the Common Areas and/or the Park occasioned by any rules,
laws or regulations effective subsequent to the date on which the Building
was originally constructed; (ii) reasonably necessary replacement
improvements to the Building, the Common Areas and the Park after the Lease
Date; and (iii) new improvements to the Building, the Common Areas and/or
the Park that reduce operating costs or improve life/safety conditions, all
as reasonably determined by Landlord, in its sole discretion; provided,
however, if any of the foregoing are in the nature of capital improvements,
then the cost of such capital improvements shall be amortized over a
reasonable period, which shall not be less than the lesser of fifteen (15)
years or the reasonably estimated useful life of such modifications, new
improvements or replacement improvements in question (at an interest rate as
reasonably determined by Landlord), and Tenant shall pay Tenant's Share of
the monthly amortized portion of such costs (including interest charges) as
part of the Operating Expenses herein;
6.1.5 If Landlord elects to so procure, Landlord's cost of
preventative maintenance, and repair contracts including, but not limited
to, contracts for elevator systems and heating, ventilation and air
conditioning systems, lifts for disabled persons, and trash or refuse
collection;
6.1.6 Landlord's cost of security and fire protection services for
the Building and/or the Park, as the case may be, if in Landlord's sole
discretion such services are provided;
6.1.7 Landlord's establishment of reasonable reserves for
replacements and/or repairs of Common Area improvements, equipment and
supplies;
5
<PAGE>
6.1.8 Landlord's cost for the maintenance and repair of any rail spur
and rail crossing, and for the creation and negotiation of, and pursuant to,
any rail spur or track agreements, licenses, easements or other similar
undertakings;
6.1.9 Landlord's cost of supplies, equipment, rental equipment and
other similar items used in the operation and/or maintenance of the Park;
and
6.1.10 Landlord's cost for the repairs and maintenance items set
forth in Section 11.2 below.
6.2 TAX EXPENSES: In addition to the Base Rent set forth in Section 3,
Tenant shall pay its share, which is defined on Page 1, of all real property
taxes applicable to the land and improvements included within the Lot on which
the Premises are situated and one hundred percent (100%) of all personal
property taxes now or hereafter assessed or levied against the Premises or
Tenant's personal property. The amount of Tenant's Share of Tax Expenses shall
be reviewed from time to time by Landlord and shall be subject to modification
by Landlord if there is a change in the rentable square footage of the Premises,
the Building and/or the Park. Tenant shall also pay one hundred percent (100%)
of any increase in real property taxes exclusively attributable, in Landlord's
sole discretion, to any and all alterations, Tenant Improvements or other
improvements of any kind, which are above standard improvements customarily
installed for similar buildings located within the Building or the Park (as
applicable), whatsoever placed in, on or about the Premises for the benefit of,
at the request of, or by Tenant. The term "Tax Expenses" shall mean and
include, without limitation, any form of tax and assessment (general, special,
supplemental, ordinary or extraordinary), commercial rental tax, payments under
any improvement bond or bonds, license fees, license tax, business license fee,
rental tax, transaction tax, levy, or penalty imposed by authority having the
direct or indirect power of tax (including any city, county, state or federal
government, or any school, agricultural, lighting, drainage or other improvement
district thereof) as against any legal or equitable interest of Landlord in the
Premises, the Building, the Lot or the Park, as against Landlord's right to
rent, or as against Landlord's business of leasing the Premises or the occupancy
of Tenant or any other tax, fee, or excise, however described, including, but
not limited to, any value added tax, or any tax imposed in substitution
(partially or totally) of any tax previously included within the definition of
real property taxes, or any additional tax the nature of which was previously
included within the definition of real property taxes. The term "Tax Expenses"
shall not include any franchise, estate, inheritance, net income, or excess
profits tax imposed upon Landlord.
6.3 ADMINISTRATIVE EXPENSES: In addition to the Base Rent set forth in
Section 3 hereof, Tenant shall pay Landlord, without prior notice or demand, on
the Commencement Date and thereafter on the first (1st) day of each month
throughout the balance of the Term of this Lease, as compensation to Landlord
for accounting and management services rendered on behalf of the Building and/or
the Park, one-twelfth (1/12th) of an amount equal to ten percent (10%) of the
estimated amount of the aggregate of the Tenant's Share of (i) the total
Operating Expenses and Tax Expenses as described in Sections 6.1 and 6.2 above,
respectively, and (ii) all Common Area Utility Costs for the Park and the
Utility Expenses for the Premises as described in Section 7 below (collectively,
the "Administrative Expenses"). Tenant's obligations to pay such Administrative
Expenses shall survive the expiration or earlier termination of this Lease.
6.4 PAYMENT OF EXPENSES: Landlord shall estimate Tenant's Share of the
Operating Expenses and Tax Expenses for the calendar year in which the Lease
commences. Commencing on the Commencement Date, one-twelfth (1/12th) of this
estimated amount shall be paid by Tenant to Landlord, as Additional Rent, on the
first (1st) day of each month and throughout the remaining months of such
calendar year. Thereafter, Landlord may estimate such expenses as of the
beginning of each calendar year and Tenant shall pay one-twelfth (1/12th) of
such estimated amount as Additional Rent hereunder on the first day of each
month during such calendar year and for each ensuing calendar year throughout
the Term of this Lease; provided, during any one calendar year, Tenant shall not
be obligated to pay to Landlord for Tenant's Share of Operating Expenses any
amounts in excess of one hundred ten percent (110%) of the amount paid by Tenant
for Tenant's Share of Operating Expenses during the immediately preceding
calendar year. Tenant's obligation to pay Tenant's Share of Operating Expenses
and Tax Expenses shall survive the expiration or earlier termination of this
Lease.
6.5 ANNUAL RECONCILIATION: By April 30th of each calendar year, or as
soon thereafter as reasonably possible Landlord shall endeavor to furnish Tenant
with an accounting of actual Operating Expenses, Tax Expenses and Administrative
Expenses incurred by Landlord during the preceding calendar year. Within thirty
(30) days of Landlord's delivery of such accounting, Tenant shall pay to
Landlord the amount of any underpayment (subject to the one hundred ten percent
(110%) limitation set forth in Section 6.4 above). Notwithstanding the
foregoing, failure by Landlord to give such accounting by such date shall not
constitute a waiver by Landlord of its right to collect any of Tenant's
underpayment by Tenant for a two (2) year period after the calendar year in
which such underpayment occurred. Landlord shall credit the amount of any
overpayment by Tenant toward the next estimated monthly installment(s) falling
due, or where the Term of the Lease has expired, refund the amount of
overpayment to Tenant. If the Term of the Lease expires prior to the annual
reconciliation of expenses Landlord shall have the right to reasonably estimate
Tenant's Share of such expenses, and if Landlord determines that an
6
<PAGE>
underpayment is due, Tenant hereby agrees to pay Landlord such underpayment
within thirty (30) days. If Landlord reasonably determines that an overpayment
has been made by Tenant, Landlord shall refund said overpayment to Tenant as
soon as practicable thereafter. Notwithstanding the foregoing, subject to the
foregoing two (2) year period failure of Landlord to accurately estimate
Tenant's Share of such expenses or to otherwise perform such reconciliation of
expenses, shall not constitute a waiver of Landlord's right to collect any of
Tenant's underpayment at any time during the Term of the Lease or at any time
after the expiration or earlier termination of this Lease.
6.6 AUDIT: After delivery to Landlord of at least thirty (30) days prior
written notice, Tenant, at its sole cost and expense, except as provided below,
through any accountant designated by it, shall have the right to examine and/or
audit the books and records evidencing such costs and expenses for the previous
one (1) calendar year, during Landlord's reasonable business hours but not more
frequently than once during any calendar year. Any such accounting firm
designated by Tenant may not be compensated on a contingency fee basis. The
results of any such audit (and any negotiations between the parties related
thereto) shall be maintained strictly confidential by Tenant and its accounting
firm and shall not be disclosed, published or otherwise disseminated to any
other party other than to Landlord and its authorized agents. Landlord and
Tenant shall use its best efforts to cooperate in such negotiations and to
promptly resolve any discrepancies between Landlord and Tenant in the accounting
of such costs and expenses. In the event Tenant's audit discloses that the
amount of such costs and expenses previously billed to Tenant by Landlord
exceeds five percent (5%) of the actual amount of such costs and expenses,
Landlord shall reimburse Tenant for all actual out-of-pocket expenses of such
audit. Landlord shall retain its records regarding Operating Expenses, Tax
Expenses and Administrative Expenses for a period of at least twelve (12) months
following the final billing for the calendar year in question.
6.7 EXCLUSIONS FROM OPERATING EXPENSES: As used herein, the term
"Operating Expenses" shall not include the following described costs and
expenses:
A. Any cost or expense to the extent to which Landlord is paid or
reimbursed and/or is unequivocally and lawfully entitled to repayment or
reimbursement from any person (other than as a payment for Operating
Expenses) including but not necessarily limited to the following:
(1) work or service performed for any tenant (including Tenant)
at such tenant's cost,
(2) the cost of any item for which Landlord is actually paid or
reimbursed by insurance proceeds, warranties, service contracts,
condemnation proceeds or otherwise, and
(3) charges (including applicable taxes) for electricity, water
and other utilities to the extent Landlord is unequivocally and
lawfully entitled to reimbursement from any tenant and which are not
included in the Operating Expenses as defined herein and in Section 11
hereof.
B. Salaries and bonuses of officers and executives of Landlord.
C. Any fees, costs and commissions incurred in procuring or
attempting to procure other tenants including, but not necessarily limited
to, brokerage commissions, finders fees, attorneys fees, entertainment cost
and travel expenses.
D. Any cost included in Operating Expenses representing an amount
paid to a person, firm, corporation or other entity related to Landlord
which is in excess of the amount which would have been paid in the absence
of such relationship.
E. Landlord's general overhead (except as it relates to the specific
management of the Premises), including Landlord's corporate office.
F. Attorneys fees, costs and other expenditures incurred in
connection with negotiations, disputes and claims with other tenants or
occupants of Premises or with other third persons except (i) as specifically
otherwise provided in this Lease, and (ii) those attorney fees, cost and
other expenditures incurred in connection with negotiations, disputes, and
claims relating to items of Operating Expenses, and/or enforcement of the
Rules and Regulations applicable to the Premises as required by Landlord.
G. The cost of advertising or promotion for the Premises.
H. The cost to the repair or replace any construction defect in the
Building to the extent actually (not constructively) known to Landlord prior
to the Commencement Date.
I. Cost incurred by Landlord in complying with its repair and
maintenance obligations under the provisions of Section 11.3 hereof or
Landlord's obligations arising as a result of the gross negligence or
willful misconduct of Landlord, its employees or contractors.
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<PAGE>
J. Interest and principal payments for mortgages or deeds of trust obtained
by Landlord the liens of which encumber the Premises or any part thereof.
7. UTILITIES: Utility Expenses, Common Area Utility Costs and all other sums
---------
or charges set forth in this Section 7 are considered part of Additional Rent.
Tenant shall pay prior to delinquency the cost of all water, sewer use, sewer
discharge fees and sewer connection fees, gas, heat, electricity, refuse pickup,
janitorial service, telephone and other utilities billed or metered separately
to the Premises and/or Tenant. Tenant shall also pay its share of any
assessments or charges for utility or similar purposes included within any tax
bill for the Lot on which the Premises are situated, including, without
limitation, entitlement fees, allocation unit fees, and/or any similar fees or
charges and any penalties related thereto; in the event Tenant shall not have
caused such penalties, Tenant shall not be required to pay any such penalties.
For any such utility fees or use charges that are not billed or metered
separately to Tenant, Tenant shall pay to Landlord, as Additional Rent, the
amount which is attributable to Tenant's use of the utilities or similar
services, as reasonably estimated and determined by Landlord based upon factors
such as size of the Premises and intensity of use of such utilities by Tenant
such that Tenant shall pay the portion of such charges reasonably consistent
with Tenant's use of such utilities and similar services ("Utility Expenses").
If Tenant disputes any such estimate or determination, then Tenant shall either
pay the estimated amount or cause the Premises to be separately metered at
Tenant's sole expense. In addition, Tenant shall pay to Landlord Tenant's
Share, which is set forth on Page 1, as Additional Rent, without prior notice or
demand, on the first (1st) day of each month throughout the Term of this Lease,
of any costs, fees, charges or expenses attributable to utilities used in
lighting, cleaning and maintaining the Common Areas ("Common Area Utility
Costs"). Tenant shall pay to Landlord one-twelfth (1/12th) of the estimated
amount of Tenant's Share of the Common Area Utility Costs in the same manner and
time periods as specified in Section 6.4 above and any reconciliation thereof
shall also be in the same manner as specified in Sections 6.4 and 6.5 above.
The amount of Tenant's Share of Common Area Utility Costs shall be reviewed from
time to time by Landlord and shall be subject to modification by Landlord if
there is a change in the rentable square footage of the Premises, the Building
and/or the Park. Tenant acknowledges that the Premises may become subject to
the rationing of utility services or restrictions on utility use as required by
a public utility company, governmental agency or other similar entity having
jurisdiction thereof. Notwithstanding any such rationing or restrictions on use
of any such utility services, Tenant acknowledges and agrees that its tenancy
and occupancy hereunder shall be subject to such rationing restrictions as may
be imposed upon Landlord, Tenant, the Premises, the Building or the Park, and
Tenant shall in no event be excused or relieved from any covenant or obligation
to be kept or performed by Tenant by reason of any such rationing or
restrictions. Tenant further agrees to timely and faithfully pay, prior to
delinquency, any amount, tax, charge, surcharge, assessment or imposition
levied, assessed or imposed upon the Premises, or Tenant's use and occupancy
thereof.
8. LATE CHARGES: Any and all sums or charges set forth in this Section 8 are
------------
considered part of Additional Rent. Tenant acknowledges that late payment (the
fifth (5) day of each month or any time thereafter) by Tenant to Landlord of
Base Rent, Tenant's Share of Operating Expenses, Tax Expenses, Common Area
Utility Costs, and Utility Expenses, Administrative Expenses or other sums due
hereunder, will cause Landlord to incur costs not contemplated by this Lease,
the exact amount of such costs being extremely difficult and impracticable to
fix. Such costs include, without limitation, processing and accounting charges,
and late charges that may be imposed on Landlord by the terms of any note
secured by any encumbrance against the Premises, and late charges and penalties
due to the late payment of real property taxes on the Premises. Therefore, if
any installment of Rent or any other sum due from Tenant is not received by
Landlord when due, for a period of more than five (5) days, Tenant shall
promptly pay to Landlord all of the following, as applicable: (a) an additional
sum equal to five percent (5%) of such delinquent amount plus interest on such
delinquent amount at the rate equal to the prime rate plus three percent (3%)
for the time period such payments are delinquent as a late charge for every
month or portion thereof that such sums remain unpaid, (b) the amount of
seventy-five dollars ($75) for each three-day notice prepared for, or served on,
Tenant, (c) the amount of fifty dollars ($50) relating to checks for which there
are not sufficient funds. If Tenant delivers to Landlord a check for which
there are not sufficient funds, Landlord may, at its sole option, require Tenant
to replace such check with a cashier's check for the amount of such check and
all other charges payable hereunder. The parties agree that this late charge
and the other charges referenced above represent a fair and reasonable estimate
of the costs that Landlord will incur by reason of late payment by Tenant.
Acceptance of any late charge or other charges shall not constitute a waiver by
Landlord of Tenant's default with respect to the delinquent amount, nor prevent
Landlord from exercising any of the other rights and remedies available to
Landlord for any other breach of Tenant under this Lease. If a late charge or
other charge becomes payable for any three (3) installments of Rent within any
twelve (12) month period, then Landlord, at Landlord's sole option, can either
require the Rent be paid quarterly in advance, or be paid monthly in advance by
cashier's check or by electronic funds transfer.
9. USE OF PREMISES:
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9.1 COMPLIANCE WITH LAWS, RECORDED MATTERS, AND RULES AND REGULATIONS:
The Premises are to be used solely for the uses stated on Page 1 and for no
other uses or purposes without Landlord's
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prior written consent, which consent shall not be unreasonably withheld so long
as the proposed use (i) does not in any manner involve the use of Hazardous
Materials other than as expressly permitted under the provisions of Section 29
below, (ii) does not require any additional parking in excess of the parking
spaces already licensed to Tenant pursuant to the provisions of Section 24 of
this Lease, and (iii) is compatible and consistent with the other uses then
being made in the Park, as reasonably determined by Landlord. The use of the
Premises by Tenant and its employees, representatives, agents, invitees,
licensees, subtenants, customers or contractors (collectively, "Tenant's
Representatives") shall be subject to, and at all times in compliance with, (a)
any and all applicable laws, ordinances, statutes, orders and regulations as
same exist from time to time (collectively, the "Laws"), (b) any and all
documents, matters or instruments, including without limitation, any
declarations of covenants, conditions and restrictions, and any supplements
thereto, each of which has been or hereafter is recorded in any official or
public records with respect to the Premises, the Building, the Lot and/or the
Park, or any portion thereof (collectively, the "Recorded Matters"), and (c) any
and all rules and regulations set forth in Exhibit C, attached to and made a
---------
part of this Lease, and any other reasonable rules and regulations promulgated
by Landlord now or hereafter enacted relating to parking and the operation of
the Premises, the Building and the Park (collectively, the "Rules and
Regulations"). Tenant agrees to, and does hereby, assume full and complete
responsibility to ensure that the Premises are adequate to fully meet the needs
and requirements of Tenant's intended operations of its business within the
Premises, and Tenant's use of the Premises and that same are in compliance with
all applicable Laws throughout the Term of this Lease. Additionally, Tenant
shall be solely responsible for the payment of all costs, fees and expenses
associated with any alterations, modifications or improvements to the Premises,
the Building, the Common Areas and/or the Park occasioned by the enactment of,
or changes to, any Laws arising from Tenant's particular use of the Premises or
alterations made to the Premises regardless of when such Laws became effective.
Notwithstanding any of the foregoing provisions of this Section 9.1 or Section
9.2 to the contrary, Landlord and Tenant's respective obligations regarding
compliance with Environmental Laws and the ADA (as such terms are defined in
Sections 29 and 37 of this Lease, respectively) shall be governed by the
specific provisions regarding Environmental Laws and ADA as set forth in
Sections 29 and 37, respectively, and not by this Section 9.1 or Section 9.2.
Tenant shall have the right, at its sole cost and expense, to reasonably and in
good faith contest, with the appropriate governmental authority, any obligation
of Tenant to comply with Laws pursuant to this Section 9.1 or Sections 9.2, 29
and 37 of this Lease, but only to the extent such contest is expressly permitted
by applicable Laws (including, if applicable, the requirement that Tenant
perform or pay for such compliance obligations under protest), and only if such
contest would not result in any damage to or diminution of value of the
Premises, any death or injury to persons, or the imposition of any fines,
penalties or other liabilities upon Landlord. If Tenant contests any
obligations to comply with Laws, such obligations shall be deemed satisfied if
complied with to the satisfaction of the authorities having jurisdiction
thereof. Neither this Section 9.1, Section 9.2 nor any other provisions of this
Lease shall apply to Laws pertaining to employment/labor practices except to the
extent pertaining to the physical condition of the Premises.
9.2 PROHIBITION ON USE: Tenant shall not use the Premises or permit
anything to be done in or about the Premises nor keep or bring anything therein
which will in any way conflict with any of the requirements of the Board of Fire
Underwriters or similar body now or hereafter constituted or in any way increase
the existing rate of or affect any policy of fire or other insurance upon the
Building or any of its contents, or cause a cancellation of any insurance
policy. No auctions may be held or otherwise conducted in, on or about the
Premises, the Building, the Lot or the Park without Landlord's written consent
thereto, which consent may be given or withheld in Landlord's sole discretion.
Tenant shall not do or permit anything to be done in or about the Premises which
will in any way obstruct or interfere with the rights of Landlord, other tenants
or occupants of the Building, other buildings in the Park, or other persons or
businesses in the area, or injure or annoy other tenants or use or allow the
Premises to be used for any unlawful or objectionable purpose, as determined by
Landlord, in its reasonable discretion, for the benefit, quiet enjoyment and use
by Landlord and all other tenants or occupants of the Building or other
buildings in the Park; nor shall Tenant cause, maintain or permit any private or
public nuisance in, on or about the Premises, Building, Park and/or the Common
Areas, including, but not limited to, any offensive odors, noises, fumes or
vibrations. Tenant shall not damage or deface or otherwise commit or suffer to
be committed any waste in, upon or about the Premises. Tenant shall not place
or store, nor permit any other person or entity to place or store, any property,
equipment, materials, supplies, personal property or any other items or goods
outside of the Premises for any period of time. Tenant shall not permit any
animals, including, but not limited to, any household pets, to be brought or
kept in or about the Premises. Tenant shall place no loads upon the floors,
walls, or ceilings in excess of the maximum designed load permitted by the
applicable Uniform Building Code or which may damage the Building or outside
areas; nor place any harmful liquids in the drainage systems; nor dump or store
waste materials, refuse or other such materials, or allow such to remain outside
the Building area. The refuse dumpsters and enclosed trash areas provided shall
not be used for such harmful liquids or waste materials, except in compliance
with Environmental Laws. Tenant shall honor the terms of all Recorded Matters
relating to the Premises, the Building, the Lot and/or the Park. Tenant shall
honor the Rules and Regulations. If Tenant fails to comply with such Laws,
Recorded Matters, Rules and Regulations or the provisions of this Lease,
Landlord shall have the right to collect from Tenant Landlord's reasonable costs
and expenses, if any, to cure any of such failures of Tenant, if Landlord, at
its sole option, elects to undertake such cure after not less than ten (10) days
written notice to Tenant of Landlord's intent to cure such failures.
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10. ALTERATIONS AND ADDITIONS; AND SURRENDER OF PREMISES:
----------------------------------------------------
10.1 ALTERATIONS AND ADDITIONS: Tenant shall not install any signs, fixtures
(except trade fixtures and equipment), improvements, nor make or permit any
other alterations or additions to the Premises without the prior written consent
of Landlord. If any such alteration or addition is expressly permitted by
Landlord, Tenant shall deliver at least twenty (20) days prior notice to
Landlord, from the date Tenant intends to commence construction, sufficient to
enable Landlord to post a Notice of Non-Responsibility. In all events, Tenant
shall obtain all permits or other governmental approvals prior to commencing any
of such work and deliver a copy of same to Landlord. All alterations and
additions shall be installed by a licensed contractor reasonably approved by
Landlord, at Tenant's sole expense in compliance with all applicable Laws
(including, but not limited to, the ADA as defined herein), Recorded Matters,
and Rules and Regulations. Tenant shall keep the Premises and the property on
which the Premises are situated free from any liens arising out of any work
performed, materials furnished or obligations incurred by or on behalf of
Tenant. As a condition to Landlord's consent to the installation of any
fixtures, additions or other improvements, Landlord may require Tenant to post
and obtain a completion and indemnity bond for up to one hundred ten percent
(110%) of the cost of the work.
10.2 SURRENDER OF PREMISES: Upon the termination of this Lease, whether by
forfeiture, lapse of time or otherwise, or upon the termination of Tenant's
right to possession of the Premises, Tenant will at once surrender and deliver
up the Premises to Landlord, together with the fixtures (other than trade
fixtures), all then existing additions and improvements which Landlord has
notified Tenant, in writing, that Landlord will require Tenant not to remove, to
Landlord in good condition and repair including, but not limited to, replacing
all light bulbs and ballasts not in good working condition, excepting for
reasonable wear and tear and damage by casualty. Reasonable wear and tear shall
not include any damage or deterioration to the floors of the Premises arising
from the use of forklifts in, on or about the Premises (including, without
limitation, any marks or stains of any portion of the floors), and any damage or
deterioration that would have been prevented by proper maintenance by Tenant or
Tenant otherwise performing all of its obligations under this Lease. Upon such
termination of this Lease, Tenant shall remove all tenant signage, trade
fixtures, furniture, furnishings, personal property, additions, and other
improvements (excluding the initial tenant improvements) unless Landlord
requests, in writing, that Tenant not remove some or all of such trade fixtures,
furniture, furnishings, additions or improvements installed by, or on behalf of
Tenant or situated in or about the Premises. By the date which is twenty (20)
days prior to such termination of this Lease, Landlord shall notify Tenant in
writing of those fixtures, alterations, furniture, furnishings, trade fixtures,
additions and other improvements (excluding the initial tenant improvements)
which Landlord shall require Tenant not to remove from the Premises. Tenant
shall repair any damage caused by the installation or removal of such signs,
trade fixtures, furniture, furnishings, fixtures, additions and improvements
which are to be removed from the Premises by Tenant hereunder. If Landlord fails
to so notify Tenant at least twenty (20) days prior to such termination of this
Lease, then Tenant shall remove all tenant signage, fixtures, alterations,
furniture, furnishings, trade fixtures, additions and other improvements
installed in or about the Premises by, or on behalf of Tenant. Tenant shall
ensure that the removal of such items and the repair of the Premises will be
completed prior to such termination of this Lease.
11. REPAIRS AND MAINTENANCE:
-----------------------
11.1 TENANT'S REPAIRS AND MAINTENANCE OBLIGATIONS: Except for those portions
of the Building to be maintained by Landlord, as provided in Sections 11.2 and
11.3 below, Tenant shall, at Tenant's sole cost and expense, keep and maintain
the Premises and the adjacent dock and staging areas (including, without
limitation, any portion of the Common Areas used exclusively by Tenant or
Tenant's Representatives) in good, clean and safe condition and repair to the
reasonable satisfaction of Landlord including, but not limited to, repairing any
damage caused by Tenant or Tenant's Representatives and replacing any property
so damaged by Tenant or Tenant's Representatives. Without limiting the
generality of the foregoing, Tenant shall be solely responsible for maintaining,
repairing and replacing (a) all mechanical systems, heating, ventilation and air
conditioning systems exclusively serving the Premises, (b) all plumbing,
electrical wiring and equipment exclusively serving the Premises, (c) all
interior lighting (including, without limitation, light bulbs and/or ballasts)
and exterior lighting exclusively serving the Premises, (d) all interior glass,
windows, window frames, window casements, skylights, interior and exterior
doors, door frames and door closers, (e) all roll-up doors, ramps and dock
equipment, including without limitation, dock bumpers, dock plates, dock seals,
dock levelers and dock lights, (f) all tenant signage, (g) lifts for disabled
persons serving the Premises, (h) sprinkler systems, fire protection systems and
security systems, (i) all partitions, fixtures, equipment, interior painting,
and interior walls and floors of the Premises and every part thereof (including,
without limitation, any demising walls contiguous to any portion of the
Premises); provided, Tenant shall not be obligated to maintain, repair or
replace any systems outside the Premises unless caused by Tenant's negligence or
willful misconduct.
11.2 REIMBURSABLE REPAIRS AND MAINTENANCE OBLIGATIONS: Subject to the
provisions of Sections 6 and 9 of this Lease and except for (i) the obligations
of Tenant set forth in Section 11.1 above, and (ii) the repairs rendered
necessary by the intentional or negligent acts or omissions of Tenant or
Tenant's Representatives, Landlord agrees, at Landlord's expense, subject to
reimbursement pursuant to Section 6 above, to keep in good repair the plumbing
and mechanical systems exterior to, or serving
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premises in addition to, the Premises, the roof, roof membranes, exterior walls
of the Building, signage (exclusive of tenant signage), and exterior electrical
wiring and equipment, exterior lighting, exterior glass, exterior
doors/entrances and door closers, exterior window casements, exterior painting
of the Building (exclusive of the Premises), and underground utility and sewer
pipes outside the exterior walls of the Building. For purposes of this Section
11.2, the term "exterior" shall mean exterior to the Premises. Unless otherwise
notified by Landlord, in writing, that Landlord has elected to procure and
maintain the following described contract(s), Tenant shall procure and maintain
(a) the heating, ventilation and air conditioning systems preventative
maintenance and repair contract(s); such contract(s) to be on a bi-monthly or
quarterly basis, as reasonably determined by Landlord, and (b) the fire and
sprinkler protection services and preventative maintenance and repair
contract(s) (including, without limitation, monitoring services); such
contract(s) to be on a bi-monthly or quarterly basis, as reasonably determined
by Landlord. Landlord reserves the right, but without the obligation to do so,
to procure and maintain (i) the heating, ventilation and air conditioning
systems preventative maintenance and repair contract(s), and/or (ii) the fire
and sprinkler protection services and preventative maintenance and repair
contract(s) (including, without limitation, monitoring services). If Landlord so
elects to procure and maintain any such contract(s), Tenant will reimburse
Landlord for the reasonable cost thereof in accordance with the provisions of
Section 6 above. If Tenant procures and maintains any of such contract(s),
Tenant will promptly deliver to Landlord a true and complete copy of each such
contract and any and all renewals or extensions thereof, and each service report
or other summary received by Tenant pursuant to or in connection with such
contract(s).
11.3 LANDLORD'S REPAIRS AND MAINTENANCE OBLIGATIONS: Except for repairs
rendered necessary by the intentional or negligent acts or omissions of Tenant
or Tenant's Representatives, Landlord agrees, at Landlord's sole cost and
expense, to (a) keep in good repair the structural portions of the floors,
foundations and exterior perimeter walls of the Building (exclusive of glass and
exterior doors), and (b) replace the structural portions of the roof of the
Building (excluding the roof membrane) as, and when, Landlord determines such
replacement to be necessary in Landlord's reasonable discretion.
11.4 TENANT'S FAILURE TO PERFORM REPAIRS AND MAINTENANCE OBLIGATIONS:
Except for normal maintenance and repair of the items described above, Tenant
shall have no right of access to or right to install any device on the roof of
the Building nor make any penetrations of the roof of the Building without the
express prior written consent of Landlord. If Tenant refuses or neglects to
repair and maintain the Premises and the adjacent areas properly as required
herein and to the reasonable satisfaction of Landlord, Landlord may, but without
obligation to do so, upon not less than ten (10) days' advance written notice to
Tenant, make such repairs and/or maintenance without Landlord having any
liability to Tenant for any loss or damage that may accrue to Tenant's
merchandise, fixtures or other property, or to Tenant's business by reason
thereof, except to the extent any damage is caused by the willful misconduct or
gross negligence of Landlord or its authorized agents and representatives. In
the event Landlord makes such repairs and/or maintenance, upon completion
thereof Tenant shall pay to Landlord, as additional rent, the Landlord's costs
for making such repairs and/or maintenance, plus ten percent (10%) for overhead,
upon presentation of a bill therefor, plus any Enforcement Expenses. The
obligations of Tenant hereunder shall survive the expiration of the Term of this
Lease or the earlier termination thereof. Tenant hereby waives any right to
repair at the expense of Landlord under any applicable Laws now or hereafter in
effect respecting the Premises.
12. INSURANCE:
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12.1 TENANT'S INSURANCE: Tenant shall maintain in full force and effect
at all times during the Term of this Lease, at Tenant's sole cost and expense,
for the protection of Tenant and Landlord, as their interests may appear,
policies of insurance issued by a carrier or carriers acceptable to Landlord and
its lender(s) which afford the following coverages: (i) worker's compensation:
statutory limits; (ii) employer's liability, as required by law, with a minimum
limit of $100,000 per employee and $500,000 per occurrence; (iii) primary
commercial general liability insurance (occurrence form) providing coverage
against any and all claims for bodily injury and property damage occurring in,
on or about the Premises arising out of Tenant's and Tenant's Representatives'
use and/or occupancy of the Premises. Such insurance shall include coverage for
blanket contractual liability, fire damage, premises, personal injury, completed
operations, products liability, personal and advertising, and a plate-glass
rider to provide coverage for all glass in, on or about the Premises including,
without limitation, skylights, with deletion of the exclusion for operations
within fifty (50) feet of a railroad track (railroad protective liability), if
applicable. Such insurance shall have a combined single limit of not less than
One Million Dollars ($1,000,000) per occurrence with a Two Million Dollar
($2,000,000) aggregate limit and excess umbrella insurance in the amount of Two
Million Dollars ($2,000,000). If Tenant has other locations which it owns or
leases, the policy shall include an aggregate limit per location endorsement.
If necessary, as reasonably determined by Landlord, Tenant shall provide for
restoration of the aggregate limit; (iv) comprehensive automobile liability
insurance: a combined single limit of not less than $2,000,000 per occurrence
and insuring Tenant against liability for claims arising out of the ownership,
maintenance, or use of any owned, hired or non-owned automobiles; (v) "special
form" property insurance, including without limitation, sprinkler leakage,
boiler and machinery comprehensive form, if applicable, covering damage to or
loss of any personal property, trade fixtures, inventory, fixtures and equipment
located in, on or about the Premises, and in addition, coverage for business
interruption of Tenant, together with,
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if the property of Tenant's invitees is to be kept in the Premises, warehouser's
legal liability or bailee customers insurance for the full replacement cost of
the property belonging to invitees and located in the Premises. Such insurance
shall be written on a replacement cost basis (without deduction for
depreciation) in an amount equal to one hundred percent (100%) of the full
replacement value of the aggregate of the items referred to in this subparagraph
(v); and (vi) such other insurance as Landlord deems necessary and prudent or as
may otherwise be required by any of Landlord's lenders or joint venture
partners.
12.2 INSURANCE POLICIES: Insurance required to be maintained by Tenant
shall be written by companies (i) licensed to do business in the State of
California, (ii) domiciled in the United States of America, and (iii) having a
"General Policyholders Rating" of at least A:X (or such higher rating as may be
required by a lender having a lien on the Premises) as set forth in the most
current issue of "Best's Insurance Reports." Any deductible amounts under any
of the insurance policies required hereunder shall not exceed Five Thousand
Dollars ($5,000). Tenant shall deliver to Landlord certificates of insurance
and true and complete copies of any and all endorsements required herein for all
insurance required to be maintained by Tenant hereunder at the time of execution
of this Lease by Tenant. Tenant shall, at least thirty (30) days prior to
expiration of each policy, furnish Landlord with certificates of renewal or
"binders" thereof. Each certificate shall expressly provide that such policies
shall not be cancelable or otherwise subject to modification except after thirty
(30) days prior written notice to the parties named as additional insureds as
required in this Lease (except for cancellation for nonpayment of premium, in
which event cancellation shall not take effect until at least ten (10) days'
notice has been given to Landlord). Tenant shall have the right to provide
insurance coverage which it is obligated to carry pursuant to the terms of this
Lease under a blanket insurance policy, provided such blanket policy expressly
affords coverage for the Premises and for Landlord as required by this Lease.
12.3 ADDITIONAL INSUREDS AND COVERAGE: Landlord, any property management
company and/or agent of Landlord for the Premises, the Building, the Lot or the
Park, any lender(s) of Landlord having a lien against the Premises, the
Building, the Lot or the Park, and any joint venture partners of Landlord shall
be named as additional insureds under all of the policies required in Section
12.1(iii) above; provided, however, Tenant shall not be obligated to name as
additional insureds any person other than Landlord unless and until Landlord
shall have given Tenant written notice of the name and address of such
additional parties. Additionally, such policies shall provide for severability
of interest. All insurance to be maintained by Tenant shall, except for
workers' compensation and employer's liability insurance, be primary, without
right of contribution from insurance maintained by Landlord. Any umbrella
liability policy or excess liability policy (which shall be in "following form")
shall provide that if the underlying aggregate is exhausted, the excess coverage
will drop down as primary insurance. The limits of insurance maintained by
Tenant shall not limit Tenant's liability under this Lease. It is the parties'
intention that the insurance to be procured and maintained by Tenant as required
herein shall provide coverage for any and all damage or injury arising from or
related to Tenant's operations of its business and/or Tenant's or Tenant's
Representatives' use of the Premises and/or any of the areas within the Park,
whether such events occur within the Premises (as described in Exhibit A hereto)
---------
or in any other areas of the Park. It is not contemplated or anticipated by the
parties that the aforementioned risks of loss be borne by Landlord's insurance
carriers, rather it is contemplated and anticipated by Landlord and Tenant that
such risks of loss be borne by Tenant's insurance carriers pursuant to the
insurance policies procured and maintained by Tenant as required herein.
12.4 FAILURE OF TENANT TO PURCHASE AND MAINTAIN INSURANCE: In the event
Tenant does not purchase the insurance required in this Lease or keep the same
in full force and effect throughout the Term of this Lease (including any
renewals or extensions), Landlord may, but without obligation to do so, upon not
less than ten (10) days prior written notice to Tenant, purchase the necessary
insurance and pay the premiums therefor. If Landlord so elects to purchase such
insurance, Tenant shall promptly pay to Landlord as Additional Rent, the amount
so paid by Landlord, within ten (10) days after Landlord's demand therefor. In
addition, Landlord may recover from Tenant and Tenant agrees to pay, as
Additional Rent, any and all damages which Landlord may sustain by reason of
Tenant's failure to obtain and maintain such insurance. If Tenant fails to
maintain any insurance required in this Lease, Tenant shall be liable for all
losses, damages and costs resulting from such failure.
12.5 LANDLORD'S INSURANCE: Landlord shall maintain in full force and
effect during the Term of this Lease, subject to reimbursement as provided in
Section 6, policies of insurance which afford the following coverages: (i)
primary commercial general liability insurance (occurrence form) providing
coverage against claims for bodily injury and property damage occurring in, on
or about the Common Areas, and (ii) special form coverage property insurance
(which may also include flood and/or earthquake coverage) to the extent of at
least ninety percent (90%) of the full replacement value of the Building and all
other improvements now located within the Park.
13. WAIVER OF SUBROGATION: Landlord and Tenant hereby mutually waive their
---------------------
respective rights of recovery against each other for any loss of, or damage to,
either parties' property to the extent that such loss or damage is insured by
special form fire and extended coverage insurance policy required to be in
effect at the time of such loss or damage. Each party shall obtain any special
endorsements, if required by its insurer whereby the insurer waives its rights
of subrogation against the other party. This provision
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is intended to waive fully, and for the benefit of the parties hereto, any
rights and/or claims which might give rise to a right of subrogation in favor of
any insurance carrier. The coverage obtained by Tenant pursuant to Section 12
of this Lease shall include, without limitation, a waiver of subrogation
endorsement attached to the certificate of insurance. The provisions of this
Section 13 shall not apply in those instances in which such waiver of
subrogation would invalidate such insurance coverage or would cause either
party's insurance coverage to be voided or otherwise uncollectible.
14. LIMITATION OF LIABILITY AND INDEMNITY: Except to the extent of damage
-------------------------------------
resulting from the gross negligence or willful misconduct of Landlord or its
authorized representatives, Tenant agrees to protect, defend (with counsel
acceptable to Landlord) and hold Landlord and Landlord's lender(s), partners,
employees, representatives, legal representatives, successors and assigns
(collectively, the "Indemnitees") harmless and indemnify the Indemnitees from
and against all liabilities, damages, claims, losses, judgments, charges and
expenses (including reasonable attorneys' fees, costs of court and expenses
necessary in the prosecution or defense of any litigation including the
enforcement of this provision) arising from or in any way related to, directly
or indirectly, Tenant's or Tenant's Representatives' use of the Premises,
Building and/or the Park, or the conduct of Tenant's business, or from any
activity, work or thing done, permitted or suffered by Tenant in or about the
Premises, or in any way connected with the Premises or with the improvements or
personal property therein, including, but not limited to, any liability for
injury to person or property of Tenant, Tenant's Representatives, or third party
persons. Tenant agrees that the obligations of Tenant herein shall survive the
expiration or earlier termination of this Lease.
Except to the extent of damage resulting from the gross negligence or
willful misconduct of Landlord or Landlord's authorized representatives, to the
fullest extent permitted by Law, Tenant agrees that neither Landlord nor any of
Landlord's lender(s), partners, members, trustees, employees, representatives,
legal representatives, successors or assigns shall at any time or to any extent
whatsoever be liable, responsible or in any way accountable for any loss,
liability, injury, death or damage to persons or property which at any time may
be suffered or sustained by Tenant or by any person(s) whomsoever who may at any
time be using, occupying or visiting the Premises, Building or Park. Tenant
shall not, in any event or circumstances, be permitted to offset or otherwise
credit against any payments of Rent required herein for matters for which
Landlord may be liable hereunder. Landlord and its authorized representatives
shall not be liable for any interference with light or air, or for damages
arising by reason of any latent defect in the Premises or Building; provided,
such non-liability shall not relieve Landlord of its obligation to maintain,
repair and replace those items specifically described in Sections 11.2 and 11.3.
15. ASSIGNMENT AND SUBLEASING:
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15.1 PROHIBITION: Tenant shall not assign, mortgage, hypothecate,
encumber, grant any license or concession, pledge or otherwise transfer this
Lease (collectively, "assignment"), in whole or in part, whether voluntarily or
involuntarily or by operation of law, nor sublet or permit occupancy by any
person other than Tenant of all or any portion of the Premises (collectively
"sublease") without first obtaining the prior written consent of Landlord, which
consent shall not be unreasonably withheld. Tenant hereby agrees that Landlord
may withhold its consent to any proposed sublease or assignment if the proposed
sublessee or assignee or its business is subject to compliance with additional
requirements of the ADA (defined below) beyond those requirements which are
applicable to Tenant, unless the proposed sublessee or assignee shall (a) first
deliver plans and specifications for complying with such additional requirements
and obtain Landlord's written consent thereto, and (b) comply with all
Landlord's conditions for or contained in such consent, including without
limitation, requirements for security to assure the lien-free completion of such
improvements. If Tenant seeks to sublet or assign all or any portion of the
Premises, Tenant shall deliver to Landlord at least thirty (30) days prior to
the proposed commencement of the sublease or assignment (the "Proposed Effective
Date") the following: (i) the name of the proposed assignee or sublessee; (ii)
such information as to such assignee's or sublessee's financial responsibility
and standing as Landlord may reasonably require; and (iii) the aforementioned
plans and specifications, if any. Within ten (10) days after Landlord's receipt
of a written request from Tenant that Tenant seeks to sublet or assign all or
any portion of the Premises, Landlord shall deliver to Tenant a copy of
Landlord's standard form of sublease or assignment agreement (as applicable),
which instrument shall be utilized for each proposed sublease or assignment (as
applicable), and such instrument shall include a provision whereby the assignee
or sublessee assumes all of Tenant's obligations hereunder and agrees to be
bound by the terms hereof. As Additional Rent hereunder, Tenant shall
reimburse Landlord for actual legal and other expenses incurred by Landlord in
connection with any actual or proposed assignment or subletting to a maximum of
five thousand dollars ($5,000.00). In the event the sublease (1) by itself or
taken together with prior sublease(s) covers or totals, as the case may be, more
than twenty-five percent (25%) of the rentable square feet of the Premises or
(2) is for a term which by itself or taken together with prior or other
subleases is greater than fifty percent (50%) of the period remaining in the
term of this Lease as of the time of the Proposed Effective Date, then Landlord
shall have the right, to be exercised by giving written notice to Tenant within
fifteen (15) business days after Landlord's receipt of Tenant's written request,
to recapture the space described in the sublease. If such recapture notice is
given, it shall serve to terminate this Lease with respect to the proposed
sublease space, or, if
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the proposed sublease space covers all the Premises, it shall serve to terminate
the entire term of this Lease in either case, as of the Proposed Effective Date.
However, no termination of this Lease with respect to part or all of the
Premises shall become effective without the prior written consent, where
necessary, of the holder of each deed of trust encumbering the Premises or any
part thereof. If this Lease is terminated pursuant to the foregoing with
respect to less than the entire Premises, the Rent shall be adjusted on the
basis of the proportion of square feet retained by Tenant to the square feet
originally demised and this Lease as so amended shall continue thereafter in
full force and effect. Each permitted assignee or sublessee shall assume and be
deemed to assume this Lease and shall be and remain liable jointly and severally
with Tenant for payment of Rent and for the due performance of, and compliance
with all the terms, covenants, conditions and agreements herein contained on
Tenant's part to be performed or complied with, for the term of this Lease. No
assignment or subletting shall affect the continuing primary liability of Tenant
(which, following assignment, shall be joint and several with the assignee), and
Tenant shall not be released from performing any of the terms, covenants and
conditions of this Lease. Tenant hereby acknowledges and agrees that it
understands that Landlord's accounting department may process and accept Rent
payments without verifying that such payments are being made by Tenant, a
permitted sublessee or a permitted assignee in accordance with the provisions of
this Lease. Although such payments may be processed and accepted by such
accounting department personnel, any and all actions or omissions by the
personnel of Landlord's accounting department shall not be considered as
acceptance by Landlord of any proposed assignee or sublessee nor shall such
actions or omissions be deemed to be a substitute for the requirement that
Tenant obtain Landlord's prior written consent to any such subletting or
assignment, and any such actions or omissions by the personnel of Landlord's
accounting department shall not be considered as a voluntary relinquishment by
Landlord of any of its rights hereunder nor shall any voluntary relinquishment
of such rights be inferred therefrom. For purposes hereof, in the event Tenant
is a corporation, partnership, joint venture, trust or other entity other than a
natural person except as provided in Section 15.4, any change in the direct or
indirect ownership of Tenant (whether pursuant to one or more transfers) which
results in a change of more than fifty percent (50%) in the direct or indirect
ownership of Tenant shall be deemed to be an assignment within the meaning of
this Section 15 and shall be subject to all the provisions hereof. Any and all
options, first rights of refusal, tenant improvement allowances and other
similar rights granted to Tenant in this Lease, if any, shall not be assignable
by Tenant unless expressly authorized in writing by Landlord.
15.2 EXCESS SUBLEASE RENTAL OR ASSIGNMENT CONSIDERATION: In the event of
any sublease or assignment of all or any portion of the Premises where the rent
or other consideration provided for in the sublease or assignment either
initially or over the term of the sublease or assignment exceeds the Rent or pro
rata portion of the Rent, as the case may be, for such space reserved in the
Lease, Tenant shall pay the Landlord monthly, as Additional Rent, at the same
time as the monthly installments of Rent are payable hereunder, fifty percent
(50%) of the excess of each such payment of rent or other consideration in
excess of the Rent called for hereunder.
15.3 WAIVER: Notwithstanding any assignment or sublease, or any
indulgences, waivers or extensions of time granted by Landlord to any assignee
or sublessee, or failure by Landlord to take action against any assignee or
sublessee, Tenant waives notice of any default of any assignee or sublessee and
agrees that Landlord may, at its option, proceed against Tenant without having
taken action against or joined such assignee or sublessee, except that Tenant
shall have the benefit of any indulgences, waivers and extensions of time
granted to any such assignee or sublessee.
15.4 RELATED ENTITIES: Notwithstanding anything to the contrary contained
in this Section 15, so long as Tenant delivers to Landlord (1) at least fifteen
(15) business days prior written notice of its intention to assign or sublease
the Premises to any Related Entity, which notice shall set forth the name of the
Related Entity, (2) a copy of the proposed agreement pursuant to which such
assignment or sublease shall be effectuated, and (3) such other information
concerning the Related Entity as Landlord may reasonably require, including
without limitation, information regarding any change in the proposed use of any
portion of the Premises and any financial information with respect to such
Related Entity, and so long as Landlord approves, in writing, of any change in
the proposed use of the subject portion of the Premises, then Tenant may assign
this Lease or sublease any portion of the Premises (X) to any Related Entity, or
(Y) in connection with any merger, consolidation or sale of substantially all of
the assets of Tenant, without having to obtain the prior written consent of
Landlord thereto. For purposes of this Lease the term "Related Entity" shall
mean and refer to any corporation or entity which controls, is controlled by or
is under common control with Tenant, as all of such terms are customarily used
in the industry, and with an equal or greater net worth as Tenant has as of the
proposed transfer date.
16. AD VALOREM TAXES: Prior to delinquency, Tenant shall pay all taxes and
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assessments levied upon trade fixtures, alterations, additions, improvements,
inventories and personal property located and/or installed on or in the Premises
by, or on behalf of, Tenant; and if requested by Landlord, Tenant shall promptly
deliver to Landlord copies of receipts for payment of all such taxes and
assessments. To the extent any such taxes are not separately assessed or billed
to Tenant, Tenant shall pay the amount of such taxes described in the
immediately preceding sentence as invoiced by Landlord.
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17. SUBORDINATION: Except as set forth in that certain Subordination, Non-
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Disturbance and Attornment Agreement to be executed by Landlord, Landlord's
lender and Tenant, a copy of which is attached hereto and incorporated herein as
Exhibit I, without the necessity of any additional document being executed by
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Tenant for the purpose of effecting a subordination, and at the election of
Landlord or any bona fide mortgagee or deed of trust beneficiary with a lien on
all or any portion of the Premises or any ground lessor with respect to the land
of which the Premises are a part, the rights of Tenant under this Lease and this
Lease shall be subject and subordinate at all times to: (i) all ground leases or
underlying leases which may now exist or hereafter be executed affecting the
Building or the land upon which the Building is situated or both, and (ii) the
lien of any mortgage or deed of trust which may now exist or hereafter be
executed in any amount for which the Building, the Lot, ground leases or
underlying leases, or Landlord's interest or estate in any of said items is
specified as security. Notwithstanding the foregoing and except as set forth in
the Non-Disturbance, Landlord or any such ground lessor, mortgagee, or any
beneficiary shall have the right to subordinate or cause to be subordinated any
such ground leases or underlying leases or any such liens to this Lease. If any
ground lease or underlying lease terminates for any reason or any mortgage or
deed of trust is foreclosed or a conveyance in lieu of foreclosure is made for
any reason, Tenant shall, as set forth in the Non-Disturbance, attorn to and
become the Tenant of the successor in interest to Landlord, provided such
successor in interest will not disturb Tenant's use, occupancy or quiet
enjoyment of the Premises so long as Tenant is not in default of the terms and
provisions of this Lease. The successor in interest to Landlord following
foreclosure, sale or deed in lieu thereof shall not be (a) liable for any act or
omission of any prior lessor or with respect to events occurring prior to
acquisition of ownership; (b) subject to any offsets or defenses which Tenant
might have against any prior lessor; (c) bound by prepayment of more than one
(1) month's Rent; or (d) liable to Tenant for any Security Deposit not actually
received by such successor in interest to the extent any portion or all of such
Security Deposit has not already been forfeited by, or refunded to, Tenant.
Landlord shall be liable to Tenant for all or any portion of the Security
Deposit not forfeited by, or refunded to Tenant, until and unless Landlord
transfers such Security Deposit to the successor in interest. Tenant covenants
and agrees to execute (and acknowledge if required by Landlord, any lender or
ground lessor) and deliver, within ten (10) business days of a demand or request
by Landlord and in the form requested by Landlord, ground lessor, mortgagee or
beneficiary, any additional documents evidencing the priority or subordination
of this Lease with respect to any such ground leases or underlying leases or the
lien of any such mortgage or deed of trust. Tenant's failure to timely execute
and deliver such additional documents shall, at Landlord's option, constitute a
material default hereunder. It is further agreed that Tenant shall be liable to
Landlord, and shall indemnify Landlord from and against any loss, cost, damage
or expense, incidental, consequential, or otherwise, arising or accruing
directly or indirectly, from any failure of Tenant to execute or deliver to
Landlord any such additional documents. Tenant's agreement to subordinate this
Lease to any future ground or underlying lease or any future deed of trust or
mortgage pursuant to the foregoing provisions of the Section 17 is conditioned
upon Landlord delivering to Tenant from the lessor under such future ground or
underlying lease or the holder of any such mortgage or deed of trust, a non-
disturbance agreement agreeing, among other things, that Tenant's right to
possession of the Premises pursuant to the terms and conditions of this Lease
shall not be disturbed provided Tenant is not in default under this Lease beyond
the applicable notice and cure periods hereunder.
18. RIGHT OF ENTRY: Tenant grants Landlord or its agents the right to enter the
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Premises at all reasonable times upon reasonable advance notice (of not less
than twenty-four (24) hours except in case of emergencies) for purposes of
inspection, exhibition, posting of notices, repair or alteration. At Landlord's
option, Landlord shall at all times have and retain a key with which to unlock
all the doors in, upon and about the Premises, excluding Tenant's vaults and
safes. It is further agreed that Landlord shall have the right to use any and
all means Landlord deems necessary to enter the Premises in an emergency.
Landlord shall also have the right to place "for rent" signs during the last
twelve (12) months of the Term or earlier if the Term expires prior to the
Expiration Date and/or "for sale" signs anytime on the outside of the Premises.
Tenant hereby waives any claim from damages or for any injury or inconvenience
to or interference with Tenant's business, or any other loss occasioned thereby
except for any claim for any of the foregoing arising out of the gross
negligence or willful misconduct of Landlord or its authorized representatives.
19. ESTOPPEL CERTIFICATE: Tenant shall execute (and acknowledge if required by
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any lender or ground lessor) and deliver to Landlord, within not less than ten
(10) days after Landlord provides such to Tenant, a statement in writing
certifying that this Lease is unmodified and in full force and effect (or, if
modified, stating the nature of such modification), the date to which the Rent
and other charges are paid in advance, if any, acknowledging that there are not,
to Tenant's knowledge, any uncured defaults on the part of Landlord hereunder or
specifying such defaults as are claimed, and such other matters as Landlord may
reasonably require. Any such statement may be conclusively relied upon by
Landlord and any prospective purchaser or encumbrancer of the Premises. Tenant's
failure to deliver such statement within such time shall be conclusive upon the
Tenant that (a) this Lease is in full force and effect, without modification
except as may be represented by Landlord; (b) there are no uncured defaults in
Landlord's performance; and (c) not more than one month's Rent has been paid in
advance, except in those instances when Tenant pays Rent quarterly in advance
pursuant to Section 8 hereof, then not more than three month's Rent has been
paid in advance. Failure by Tenant to so deliver such certified estoppel
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certificate, at Landlord's option, shall be a default of the provisions of this
Lease. Tenant shall be liable to Landlord, and shall indemnify Landlord from
and against any loss, cost, damage or expense, incidental, consequential, or
otherwise, arising or accruing directly or indirectly, from any failure of
Tenant to execute or deliver to Landlord any such certified estoppel
certificate.
20. TENANT'S DEFAULT: The occurrence of any one or more of the following events
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shall, at Landlord's option, constitute a default and breach of this Lease by
Tenant:
20.1 The abandonment of the Premises by Tenant or the vacation of the
Premises by Tenant which would cause any insurance policy to be invalidated or
otherwise lapse; provided, however, notwithstanding the foregoing Tenant may
leave the Premises vacant so long as (i) Tenant fully insures or otherwise pays
for any loss or damage thereto and (ii) all insurance policies carried by
Landlord with respect to the Building are not invalidated, in whole or in part,
nor would such insurance policies be caused to otherwise lapse. Tenant agrees
to notice and service of notice as provided for in this Lease and waives any
right to any other or further notice or service of notice which Tenant may have
under any statute or law now or hereafter in effect;
20.2 The failure by Tenant to make any payment of Rent, Additional Rent or
any other payment required hereunder within three (3) days after the receipt of
written notice from Landlord that said payment is due; provided, Landlord shall
only be required to give Tenant such written notice twice during any twelve (12)
month period and, after the giving of such notices to Tenant, the failure by
Tenant to make any payment of Rent, Additional Rent or any other payment
required hereunder on the date said payment is due shall constitute a default
and breach of this Lease by Tenant. Tenant agrees to notice and service of
notice as provided for in this Lease and waives any right to any other or
further notice or service of notice which Tenant may have under any statute or
law now or hereafter in effect;
20.3 The failure by Tenant to observe, perform or comply with any of the
conditions, covenants or provisions of this Lease (except failure to make any
payment of Rent and/or Additional Rent) and such failure is not cured within (i)
thirty (30) days of the date on which Landlord delivers written notice of such
failure to Tenant, complying with the notice requirements of Section 31.10
hereof, for all failures other than with respect to Hazardous Materials, and
(ii) ten (10) days of the date on which Landlord delivers written notice of such
failure to Tenant for all failures in any way related to Hazardous Materials.
However, Tenant shall not be in default of its obligations hereunder if such
failure cannot reasonably be cured within such thirty (30) or ten (10) day
period, as applicable, and Tenant promptly commences, and thereafter diligently
proceeds with same to completion, all actions necessary to cure such failure as
soon as is reasonably possible, but in no event shall the completion of such
cure be later than sixty (60) days after the date on which Landlord delivers to
Tenant written notice of such failure, unless Landlord, acting reasonably and in
good faith, otherwise expressly agrees in writing to a longer period of time
based upon the circumstances relating to such failure as well as the nature of
the failure and the nature of the actions necessary to cure such failure;
20.4 The making of a general assignment by Tenant for the benefit of
creditors, the filing of a voluntary petition by Tenant or the filing of an
involuntary petition by any of Tenant's creditors seeking the rehabilitation,
liquidation, or reorganization of Tenant under any law relating to bankruptcy,
insolvency or other relief of debtors and, in the case of an involuntary action,
the failure to remove or discharge the same within sixty (60) days of such
filing, the appointment of a receiver or other custodian to take possession of
substantially all of Tenant's assets or this leasehold, Tenant's insolvency ,
any court entering a decree or order directing the winding up or liquidation of
Tenant or of substantially all of Tenant's assets, Tenant taking any action
toward the dissolution or winding up of Tenant's affairs, or the attachment,
execution or other judicial seizure of substantially all of Tenant's assets or
this leasehold;
20.5 Tenant's use or storage of Hazardous Materials in, on or about the
Premises, the Building, the Lot and/or the Park other than as expressly
permitted by the provisions of Section 29 below; or
20.6 The intentional making of any material misrepresentation or omission
by Tenant in any financial information or materials delivered by or on behalf of
Tenant to Landlord pursuant to this Lease.
21. REMEDIES FOR TENANT'S DEFAULT:
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21.1 LANDLORD'S RIGHTS: In the event of Tenant's default or breach of the
Lease, Landlord may terminate Tenant's right to possession of the Premises by
any lawful means in which case upon delivery of written notice by Landlord this
Lease shall terminate on the date specified by Landlord in such notice and
Tenant shall immediately surrender possession of the Premises to Landlord. In
addition, the Landlord shall have the immediate right of re-entry whether or not
this Lease is terminated, and if this right of re-entry is exercised following
abandonment of the Premises by Tenant, Landlord may consider any personal
property belonging to Tenant and left on the Premises to also have been
abandoned. No re-entry or taking possession of the Premises by Landlord
pursuant to this Section 21 shall be construed as an election to terminate this
Lease unless a written notice of such intention is given to Tenant. If
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Landlord relets the Premises or any portion thereof, (i) Tenant shall be liable
immediately to Landlord for all costs Landlord incurs in reletting the Premises
or any part thereof, including, without limitation, broker's commissions,
expenses of cleaning, redecorating, and further improving the Premises and other
similar costs (collectively, the "Reletting Costs"), and (ii) the rent received
by Landlord from such reletting shall be applied to the payment of, first, any
indebtedness from Tenant to Landlord other than Base Rent, Operating Expenses,
Tax Expenses, Administrative Expenses, Common Area Utility Costs, and Utility
Expenses; second, all costs including maintenance, incurred by Landlord in
reletting; and, third, Base Rent, Operating Expenses, Tax Expenses,
Administrative Expenses, Common Area Utility Costs, Utility Expenses, and all
other sums due under this Lease. Any and all of the Reletting Costs shall be
fully chargeable to Tenant and shall not be prorated or otherwise amortized in
relation to any new lease for the Premises or any portion thereof. After
deducting the payments referred to above, any sum remaining from the rental
Landlord receives from reletting shall be held by Landlord and applied in
payment of future Rent as Rent becomes due under this Lease. In no event shall
Tenant be entitled to any excess rent received by Landlord. Reletting may be
for a period shorter or longer than the remaining term of this Lease. No act by
Landlord other than giving written notice to Tenant shall terminate this Lease.
Acts of maintenance, efforts to relet the Premises or the appointment of a
receiver on Landlord's initiative to protect Landlord's interest under this
Lease shall not constitute a termination of Tenant's right to possession. So
long as this Lease is not terminated, Landlord shall have the right to remedy
any default of Tenant, to maintain or improve the Premises, to cause a receiver
to be appointed to administer the Premises and new or existing subleases and to
add to the Rent payable hereunder all of Landlord's reasonable costs in so
doing, with interest at the maximum rate permitted by law from the date of such
expenditure.
21.2 DAMAGES RECOVERABLE: If Tenant breaches this Lease and abandons the
Premises before the end of the Term, or if Tenant's right to possession is
terminated by Landlord because of a breach or default of the Lease, then in
either such case, Landlord may recover from Tenant all damages suffered by
Landlord as a result of Tenant's failure to perform its obligations hereunder,
including, but not limited to, up to one-half of the cost of the Tenant
Improvement Allowance set forth in Exhibit B hereto (which amount is One Hundred
---------
Twenty Eight Thousand Three Hundred Ten Dollars ($128,310.00), to the extent
such costs have not been paid by Tenant to Landlord as part of the Base Rent,
the portion of any broker's or leasing agent's commission incurred with respect
to the leasing of the Premises to Tenant for the balance of the Term of the
Lease remaining after the date on which Tenant is in default of its obligations
hereunder, and all Reletting Costs, and the worth at the time of the award
(computed in accordance with paragraph (3) of Subdivision (a) of Section 1951.2
of the California Civil Code) of the amount by which the Rent then unpaid
hereunder for the balance of the Lease Term exceeds the amount of such loss of
Rent for the same period which Tenant proves could be reasonably avoided by
Landlord and in such case, Landlord prior to the award, may relet the Premises
for the purpose of mitigating damages suffered by Landlord because of Tenant's
failure to perform its obligations hereunder; provided, however, that even
though Tenant has abandoned the Premises following such breach, this Lease shall
nevertheless continue in full force and effect for as long as Landlord does not
terminate Tenant's right of possession, and until such termination, Landlord
shall have the remedy described in Section 1951.4 of the California Civil Code
(Landlord may continue this Lease in effect after Tenant's breach and
abandonment and recover Rent as it becomes due, if Tenant has the right to
sublet or assign, subject only to reasonable limitations) and may enforce all
its rights and remedies under this Lease, including the right to recover the
Rent from Tenant as it becomes due hereunder. The "worth at the time of the
award" within the meaning of Subparagraphs (a)(1) and (a)(2) of Section 1951.2
of the California Civil Code shall be computed by allowing interest at the rate
of ten percent (10%) per annum. Tenant waives redemption or relief from
forfeiture under California Code of Civil Procedure Sections 1174 and 1179, or
under any other present or future law, in the event Tenant is evicted or
Landlord takes possession of the Premises by reason of any default of Tenant
hereunder.
21.3 RIGHTS AND REMEDIES CUMULATIVE: The foregoing rights and remedies of
Landlord are not exclusive; they are cumulative in addition to any rights and
remedies now or hereafter existing at law, in equity by statute or otherwise, or
to any equitable remedies Landlord may have, and to any remedies Landlord may
have under bankruptcy laws or laws affecting creditor's rights generally.
21.4 WAIVER OF A DEFAULT: The waiver by Landlord of any default or breach
of any provision of this Lease shall not be deemed or construed a waiver of any
other breach or default by Tenant hereunder or of any subsequent breach or
default of this Lease, except for the default specified in the waiver.
22. HOLDING OVER: If Tenant holds possession of the Premises after the
------------
expiration of the Term of this Lease with Landlord's consent, Tenant shall
become a tenant from month-to-month upon the terms and provisions of this Lease,
provided the monthly Base Rent during such hold over period shall be 125% of the
Base Rent due on the last month of the Lease Term for the first (1st) three (3)
months of holdover and thereafter, at 150% of Base Rent due on the last month of
the Lease Term, each payable in advance on or before the first day of each
month. Acceptance by Landlord of the monthly Base Rent without the additional
applicable increase of Base Rent shall not be deemed or construed as a waiver by
Landlord of any of its rights to collect the increased amount of the Base Rent
as provided herein at any time. Such month-to-month tenancy shall not
constitute a renewal or extension for any further term. All options,
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if any, granted under the terms of this Lease shall be deemed automatically
terminated and be of no force or effect during said month-to-month tenancy.
Tenant shall continue in possession until such tenancy shall be terminated by
either Landlord or Tenant giving written notice of termination to the other
party at least thirty (30) days prior to the effective date of termination.
This paragraph shall not be construed as Landlord's permission for Tenant to
hold over. Acceptance of Base Rent by Landlord following expiration or
termination of this Lease shall not constitute a renewal of this Lease.
23. LANDLORD'S DEFAULT: Landlord shall not be deemed in breach or default of
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this Lease unless Landlord fails within a reasonable time to perform an
obligation required to be performed by Landlord hereunder. For purposes of this
provision, a reasonable time shall not be less than thirty (30) days after
receipt by Landlord of written notice specifying the nature of the obligation
Landlord has not performed; provided, however, that if the nature of Landlord's
obligation is such that more than thirty (30) days, after receipt of written
notice, is reasonably necessary for its performance, then Landlord shall not be
in breach or default of this Lease if performance of such obligation is
commenced within such thirty (30) day period and thereafter diligently pursued
to completion.
24. PARKING: Tenant shall have a license to use the number of undesignated and
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nonexclusive parking spaces set forth on Page 1. Landlord shall exercise
reasonable efforts to insure that such spaces are available to Tenant for its
use, but Landlord shall not be required to enforce Tenant's right to use the
same.
25. SALE OF PREMISES: In the event of any sale of the Premises by Landlord or
----------------
the cessation otherwise of Landlord's interest therein, Landlord shall be and is
hereby entirely released from any and all of its obligations to perform or
further perform under this Lease and from all liability hereunder as of the date
of such sale; and the purchaser, at such sale or any subsequent sale of the
Premises shall be deemed, without any further agreement between the parties or
their successors in interest or between the parties and any such purchaser, to
have assumed and agreed to carry out any and all of the covenants and
obligations of the Landlord under this Lease. For purposes of this Section 25,
the term "Landlord" means only the owner and/or agent of the owner as such
parties exist as of the date on which Tenant executes this Lease. A ground
lease or similar long term lease by Landlord of the entire Building, of which
the Premises are a part, shall be deemed a sale within the meaning of this
Section 25. Tenant agrees to attorn to such new owner provided such new owner
does not disturb Tenant's use, occupancy or quiet enjoyment of the Premises so
long as Tenant is not in default of any of the provisions of this Lease.
26. WAIVER: No delay or omission in the exercise of any right or remedy of
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either party on any default by the other party shall impair such a right or
remedy or be construed as a waiver. The subsequent acceptance of Rent by
Landlord after breach by Tenant of any covenant or term of this Lease shall not
be deemed a waiver of such breach, other than a waiver of timely payment for the
particular Rent payment involved, and shall not prevent Landlord from
maintaining an unlawful detainer or other action based on such breach. No
payment by Tenant or receipt by Landlord of a lesser amount than the monthly
Rent and other sums due hereunder shall be deemed to be other than on account of
the earliest Rent or other sums due, nor shall any endorsement or statement on
any check or accompanying any check or payment be deemed an accord and
satisfaction; and Landlord may accept such check or payment without prejudice to
Landlord's right to recover the balance of such Rent or other sum or pursue any
other remedy provided in this Lease. No failure, partial exercise or delay on
the part of either party in exercising any right, power or privilege hereunder
shall operate as a waiver thereof.
27. CASUALTY DAMAGE: If the Premises or any part thereof shall be damaged by
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fire or other casualty, Tenant shall give prompt written notice thereof to
Landlord. In case the Building shall be so damaged by fire or other casualty
that substantial alteration or reconstruction of the Building (i.e., the
proposed cost of alteration or construction exceeds fifty percent (50%) of the
then-existing replacement cost of the Building) shall, in Landlord's reasonable
opinion, be required (whether or not the Premises shall have been damaged by
such fire or other casualty), Landlord may, at its option, terminate this Lease
by notifying Tenant in writing of such termination within sixty (60) days after
the date of such damage, in which event the Rent shall be abated as of the date
of such damage. If Landlord does not elect to terminate this Lease, and
provided insurance proceeds are available to fully repair the damage, Landlord
shall within ninety (90) days after the date of such damage commence to repair
and restore the Building and shall proceed with reasonable diligence to restore
the Building (except that Landlord shall not be responsible for delays outside
its control) to substantially the same condition in which it was immediately
prior to the happening of the casualty; provided, Landlord shall not be required
to rebuild, repair, or replace any part of Tenant's furniture, furnishings or
fixtures and equipment removable by Tenant or any improvements, alterations or
additions installed by or for the benefit of Tenant under the provisions of this
Lease. If Landlord's repair or restoration work is not completed within two
hundred seventy (270) days after the date of damage, Tenant shall have the
right, upon written notice to Landlord, to terminate this Lease. Landlord shall
not be liable for any inconvenience or annoyance to Tenant, injury to the
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business of Tenant, loss of use of any part of the Premises by the Tenant or
loss of Tenant's personal property resulting in any way from such damage or the
repair thereof, except that, subject to the provisions of the next sentence,
Landlord shall allow Tenant a fair diminution of Rent during the time and to the
extent the Premises are unfit for occupancy. If the Premises or any other
portion of the Building be damaged by fire or other casualty resulting from the
intentional or negligent acts or omissions of Tenant or any of Tenant's
Representatives, the Rent shall not be diminished during the repair of such
damage and Tenant shall be liable to Landlord for the cost and expense of the
repair and restoration of all or any portion of the Building caused thereby
(including, without limitation, any deductible) to the extent such cost and
expense is not covered by insurance proceeds. In the event the holder of any
indebtedness secured by the Premises requires that the insurance proceeds be
applied to such indebtedness, then Landlord shall have the right to terminate
this Lease by delivering written notice of termination to Tenant within thirty
(30) days after the date of notice to Tenant of any such event, whereupon all
rights and obligations shall cease and terminate hereunder. Except as otherwise
provided in this Section 27, Tenant hereby waives the provisions of Sections
1932(2.), 1933(4.), 1941 and 1942 of the California Civil Code.
28. CONDEMNATION: If ten percent (10%) or more of the Premises or ten percent
------------
(10%) or more of the parking area is condemned by eminent domain, inversely
condemned or sold in lieu of condemnation for any public or quasi-public use or
purpose ("Condemned"), then Tenant or Landlord may terminate this Lease as of
the date when physical possession of the Premises is taken and title vests in
such condemning authority, and Rent shall be adjusted to the date of
termination. Tenant shall not because of such condemnation assert any claim
against Landlord for any compensation because of such condemnation, and
Landlord shall be entitled to receive the entire amount of any award without
deduction for any estate of interest or other interest of Tenant; provided,
Tenant shall be entitled to make a separate claim for Tenant's moving and other
relocation costs. If a substantial portion of the Premises, Building or the Lot
is so Condemned, Landlord at its option may terminate this Lease. If Landlord
does not elect to terminate this Lease, Landlord shall, if necessary, promptly
proceed to restore the Premises, the Building or the Common Areas to
substantially its same condition prior to such partial condemnation, allowing
for the reasonable effects of such partial condemnation, and a proportionate
allowance shall be made to Tenant, as reasonably determined by Landlord, for the
Rent corresponding to the time during which, and to the part of the Premises of
which, Tenant is deprived on account of such partial condemnation and
restoration. Landlord shall not be required to spend funds for restoration in
excess of the amount received by Landlord as compensation awarded.
29. ENVIRONMENTAL MATTERS/HAZARDOUS MATERIALS:
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29.1 HAZARDOUS MATERIALS DISCLOSURE CERTIFICATE: Prior to executing this
Lease, Tenant has completed, executed and delivered to Landlord Tenant's initial
Hazardous Materials Disclosure Certificate (the "Initial HazMat Certificate"), a
copy of which is attached hereto as Exhibit G and incorporated herein by this
---------
reference. Tenant covenants, represents and warrants to Landlord that the
information on the Initial HazMat Certificate is true and correct, to the best
of Tenant's knowledge, and accurately describes the use(s) of Hazardous
Materials which will be made and/or used on the Premises by Tenant. Commencing
with the date which is one year from the Commencement Date and continuing every
year thereafter, Tenant shall complete, execute, and deliver to Landlord, a
Hazardous Materials Disclosure Certificate ("the "HazMat Certificate")
describing Tenant's present use of Hazardous Materials on the Premises, and any
other reasonably necessary documents as requested by Landlord. The HazMat
Certificate required hereunder shall be in substantially the form as that which
is attached hereto as Exhibit E. Landlord hereby acknowledges and agrees that
---------
as of the date on which both parties execute and deliver this Lease, Landlord
has approved the Initial HazMat Certificate; however, any such approval by
Landlord shall not be construed to relieve Tenant from its obligations and/or
any liabilities under the provisions of this Section 29..
29.2 DEFINITION OF HAZARDOUS MATERIALS: As used in this Lease, the term
Hazardous Materials shall mean and include (a) any hazardous or toxic wastes,
materials or substances, and other pollutants or contaminants, which are or
become regulated by any Environmental Laws; (b) petroleum, petroleum by
products, gasoline, diesel fuel, crude oil or any fraction thereof; (c) asbestos
and asbestos containing material, in any form, whether friable or non-friable;
(d) polychlorinated biphenyls; (e) radioactive materials; (f) lead and lead-
containing materials; (g) any other material, waste or substance displaying
toxic, reactive, ignitable or corrosive characteristics, as all such terms are
used in their broadest sense, and are defined or become defined by any
Environmental Law (defined below); or (h) any materials which cause or threatens
to cause a nuisance upon or waste to any portion of the Premises, the Building,
the Lot, the Park or any surrounding property; or poses or threatens to pose a
hazard to the health and safety of persons on the Premises or any surrounding
property.
29.3 PROHIBITION; ENVIRONMENTAL LAWS: Except for and to the extent of the
type and quantities of Hazardous Materials specified in the Initial HazMat
Certificate, Tenant shall not be entitled to use nor store any Hazardous
Materials on, in, or about the Premises, the Building, the Lot and the Park, or
any portion of the foregoing, without, in each instance, obtaining Landlord's
prior written consent thereto. If Landlord consents to any such usage or
storage, then Tenant shall be permitted to use
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and/or store only those Hazardous Materials that are necessary for Tenant's
business and to the extent disclosed in the HazMat Certificate and as expressly
approved by Landlord in writing, provided that such usage and storage is only to
the extent of the quantities of Hazardous Materials as specified in the then
applicable HazMat Certificate as expressly approved by Landlord and provided
further that such usage and storage is in full compliance with any and all
local, state and federal environmental, health and/or safety-related laws,
statutes, orders, standards, courts' decisions, ordinances, rules and
regulations (as interpreted by judicial and administrative decisions), decrees,
directives, guidelines, permits or permit conditions, currently existing and as
amended, enacted, issued or adopted in the future which are or become applicable
to Tenant or all or any portion of the Premises (collectively, the
"Environmental Laws"). Tenant agrees that any changes to the type and/or
quantities of Hazardous Materials specified in the most recent HazMat
Certificate may be implemented only with the prior written consent of Landlord,
which consent may be given or withheld in Landlord's sole discretion. Tenant
shall not be entitled nor permitted to install any tanks under, on or about the
Premises for the storage of Hazardous Materials without the express written
consent of Landlord, which may be given or withheld in Landlord's sole
discretion. Landlord shall have the right at all times during the Term of this
Lease, upon reasonable advance notice to Tenant, to (i) inspect the Premises,
(ii) conduct tests and investigations to determine whether Tenant is in
compliance with the provisions of this Section 29, and (iii) request lists of
all Hazardous Materials used, stored or otherwise located on, under or about the
Premises, the Common Areas and/or the parking lots (to the extent the Common
Areas and/or the parking lots are not considered part of the Premises). The cost
of all such inspections, tests and investigations shall be borne solely by
Tenant, if Landlord reasonably determines that Tenant or any of Tenant's
Representatives are directly or indirectly responsible in any manner for any
contamination revealed by such inspections, tests and investigations. The
aforementioned rights granted herein to Landlord and its representatives shall
not create (a) a duty on Landlord's part to inspect, test, investigate, monitor
or otherwise observe the Premises or the activities of Tenant and Tenant's
Representatives with respect to Hazardous Materials, including without
limitation, Tenant's operation, use and any remediation related thereto, or (b)
liability on the part of Landlord and its representatives for Tenant's use,
storage, disposal or remediation of Hazardous Materials, it being understood
that Tenant shall be solely responsible for all liability in connection
therewith.
29.4 TENANT'S ENVIRONMENTAL OBLIGATIONS: Tenant shall give to Landlord
immediate verbal and follow-up written notice of any spills, releases,
discharges, disposals, emissions, migrations, removals or transportation of
Hazardous Materials by Tenant, Tenant's Representatives or by any other party in
the event Tenant or Tenant's Representatives has actual knowledge thereof, on,
under or about the Premises, or in any Common Areas or parking lots (to the
extent such areas are not considered part of the Premises). Tenant, at its sole
cost and expense, covenants and warrants to promptly investigate, clean up,
remove, restore and otherwise remediate (including, without limitation,
preparation of any feasibility studies or reports and the performance of any and
all closures) any spill, release, discharge, disposal, emission, migration or
transportation of Hazardous Materials arising from or related to the intentional
or negligent acts or omissions of Tenant or Tenant's Representatives such that
the affected portions of the Park and any adjacent property are returned to the
condition existing prior to the appearance of such Hazardous Materials. Any
such investigation, clean up, removal, restoration and other remediation shall
only be performed after Tenant has obtained Landlord's prior written consent,
which consent shall not be unreasonably withheld so long as such actions would
not potentially have a material adverse long-term or short-term effect on the
Premises, the Building, the Lot or the Park, or any portion of any of the
foregoing. Notwithstanding the foregoing, Tenant shall be entitled to respond
immediately to an emergency without first obtaining Landlord's prior written
consent. Tenant, at its sole cost and expense, shall conduct and perform, or
cause to be conducted and performed, all closures as required by any
Environmental Laws or any agencies or other governmental authorities having
jurisdiction thereof. If Tenant fails to so promptly investigate, clean up,
remove, restore, provide closure or otherwise so remediate, Landlord may, but
without obligation to do so, take any and all steps necessary to rectify the
same and Tenant shall promptly reimburse Landlord, upon demand, for all costs
and expenses to Landlord of performing investigation, clean up, removal,
restoration, closure and remediation work. All such work undertaken by Tenant,
as required herein, shall be performed in such a manner so as to enable Landlord
to make full economic use of the Premises, the Building, the Lot and the Park
after the satisfactory completion of such work.
29.5 ENVIRONMENTAL INDEMNITY: In addition to Tenant's obligations as set
forth hereinabove, Tenant agree to, and shall, protect, indemnify, defend (with
counsel acceptable to Landlord) and hold Landlord and Landlord's lenders,
partners, property management company (if other than Landlord), agents,
directors, officers, employees, representatives, contractors, shareholders,
successors and assigns and each of their respective partners, directors,
employees, representatives, agents, contractors, shareholders, successors and
assigns harmless from and against any and all claims, judgments, damages,
penalties, fines, liabilities, losses (including, without limitation, diminution
in value of the Premises, the Building, the Lot, the Park, or any portion of any
of the foregoing, damages for the loss of or restriction on the use of rentable
or usable space, and from any adverse impact of Landlord's marketing of any
space within the Building and/or Park), suits, administrative proceedings and
costs (including, but not limited to, attorneys' and consultant fees and court
costs) arising at any time during or after the Term of this Lease in connection
with or related to, directly or indirectly, the use, presence, transportation,
storage, disposal, migration, removal, spill, release or discharge of Hazardous
Materials on, in or about the Premises, or in any Common Areas or parking lots
(to the extent such areas are not considered part of
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the Premises) as a result (directly or indirectly) of the intentional or
negligent acts or omissions of Tenant or Tenant's Representatives. Neither the
written consent of Landlord to the presence, use or storage of Hazardous
Materials in, on, under or about any portion of the Premises, the Building, the
Lot and the Park, nor the strict compliance by Tenant with all Environmental
Laws shall excuse Tenant from its obligations of indemnification pursuant
hereto. Tenant shall not be relieved of its indemnification obligations under
the provisions of this Section 29.5 as a result of Landlord's status as either
an "owner" or "operator" under any Environmental Laws.
29.6 DISCLOSURE: Pursuant to the provisions of California Health & Safety
Code (S)25359.7, Landlord hereby discloses to Tenant that as of the Lease Date
the Lot contains certain Hazardous Materials as such Hazardous Materials are
more particularly described and set forth in (i) that certain report prepared by
Erler & Kalinowski, Inc., regarding the results of a preliminary site assessment
and soil and groundwater sampling at the Lot, dated May 24, 1995, (ii) that
certain report prepared by Ogden Environmental and Energy Services Co., Inc
("Ogden"), entitled "Subsurface Investigation Report, 3200 Regatta Boulevard,
Richmond, California", dated January, 1996, (iii) that certain report prepared
by Ogden, entitled "Ground-water Monitoring Report, 3200 Regatta Boulevard,
Richmond, California", dated April, 1996, (iv) that certain letter from the
Contra Costa County Health Services Department, Environmental Health Division
(the "CCCHSD"), dated January 29, 1996, addressed to Price Enterprises, Inc.
("Price"), (v) that certain letter from the CCCHSD, dated April 30, 1996,
addressed to Price granting to Price permission for closure of certain
monitoring wells in and about portions of the Lot, and (vi) that certain letter,
dated August 29, 1996, from Ogden to Price (collectively, the "Environmental
Reports"). Landlord acknowledges and agrees that none of the environmental
conditions or presence of Hazardous Materials on, in or under the Lot as
described in the Environmental Reports (the "Existing Hazardous Materials") have
been in any way caused by Tenant or any of Tenant's Representatives. Tenant
hereby acknowledges and agrees that Landlord has delivered to Tenant a copy of
the Environmental Reports prior to Tenant entering into this Lease.
29.7 SURVIVAL: Tenant's obligations and liabilities pursuant to the
provisions of this Section 29 shall survive the expiration or earlier
termination of this Lease. If it is determined by Landlord that the condition
of all or any portion of the Premises, the Building, the Lot and/or the Park is
not in compliance with the provisions of this Lease with respect to Hazardous
Materials, including without limitation all Environmental Laws at the expiration
or earlier termination of this Lease, then at Landlord's sole option, Landlord
may require Tenant to hold over possession of the Premises until Tenant can
surrender the Premises to Landlord in the condition in which the Premises
existed as of the Commencement Date and prior to the appearance of such
Hazardous Materials except for reasonable wear and tear, including without
limitation, the conduct or performance of any closures as required by any
Environmental Laws. For purposes hereof, the term "reasonable wear and tear"
shall not include any deterioration in the condition or diminution of the value
of any portion of the Premises, the Building, the Lot and/or the Park in any
manner whatsoever related to directly, or indirectly, Hazardous Materials. Any
such holdover by Tenant will be with Landlord's consent, will not be terminable
by Tenant in any event or circumstance and will otherwise be subject to the
provisions of Section 22 of this Lease.
29.8 EXCULPATION OF TENANT AND LANDLORD'S ENVIRONMENTAL INDEMNITY: Tenant
shall not be liable to Landlord for nor otherwise obligated to Landlord under
any provision of this Lease with respect to the following: (i) any claim,
remediation, obligation, investigation, liability, cause of action, attorney's
fees, consultants' cost, expense or damage resulting from any of the Existing
Hazardous Materials or any other Hazardous Materials present in, on or about the
Premises or Building to the extent not caused nor otherwise permitted by Tenant
or Tenant's Representatives or (ii) the removal, investigation, monitoring or
remediation of any of the Existing Hazardous Materials or any other Hazardous
Materials present in, on or about the Premises or Building to the extent not
caused nor otherwise permitted by Tenant or Tenant's Representatives; provided,
however, Tenant shall be fully liable for and otherwise obligated to Landlord
under the provisions of this Lease for all liabilities, costs, damages,
penalties, claims, judgments, expenses (including without limitation, attorneys'
and experts fees and costs) and losses to the extent (a) Tenant or any of
Tenant's Representatives contributes to the presence of such Hazardous
Materials, or Tenant or any of Tenant's Representatives exacerbates the
conditions caused by such Hazardous Materials or Existing Hazardous Materials,
or (b) Tenant and/or Tenant's Representatives allows or permits persons over
which Tenant or any of Tenant's Representatives has control, and/or for which
Tenant or any of Tenant's Representatives are legally responsible for, to cause
Hazardous Materials to be present in, on, under, through or about any portion of
the Premises, the Common Areas, the Building or the Park, or (c) Tenant and/or
any of Tenant's Representatives does not take all reasonably appropriate actions
to prevent such persons over which Tenant or any of Tenant's Representatives has
control and/or for which Tenant or any of Tenant's Representatives are legally
responsible from causing the presence of Hazardous Materials in, on, under,
through or about any portion of the Premises, the Common Areas, the Building or
the Park. Except as otherwise expressly set forth in this Section 29, Landlord
agrees to, and shall, protect, indemnify, defend (with counsel reasonably
acceptable to Tenant) and hold Tenant and Tenant's directors, officers,
employees, successors and assigns harmless from and against any and all claims,
judgments, damages, penalties, fines, liabilities, losses, suits, administrative
proceedings and costs (including, but not limited to, attorneys' and consultant
fees and court costs), arising at any time during or after the Term of this
Lease, to the extent arising from (1) any of the Existing Hazardous Materials or
any other Hazardous Materials present in, on or about the Premises or Building
to the extent not caused nor otherwise permitted by Tenant or Tenant's
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Representatives and (2) the removal, investigation, monitoring or remediation of
any of the Existing Hazardous Materials or any other Hazardous Materials present
in, on or about the Premises or Building to the extent not caused nor otherwise
permitted by Tenant or Tenant's Representatives.
30. FINANCIAL STATEMENTS: Tenant, for the reliance of Landlord, any lender
--------------------
holding or anticipated to acquire a lien upon the Premises, the Building or the
Park or any portion thereof, or any prospective purchaser of the Building or the
Park or any portion thereof, within ten (10) days after Landlord's request
therefor, but not more often than once annually so long as Tenant is not in
default of this Lease, shall deliver to Landlord the then current audited
financial statements of Tenant (including interim periods following the end of
the last fiscal year for which annual statements are available), if Tenant's
financial statements are audited (and if not audited, Tenant shall furnish
financial statements which are compiled), which statements shall be prepared or
compiled by a certified public accountant and shall present fairly the financial
condition of Tenant at such dates and the result of its operations and changes
in its financial positions for the periods ended on such dates. If an audited
financial statement has not been prepared, Tenant shall provide Landlord with an
unaudited financial statement and/or such other information, the type and form
of which are acceptable to Landlord in Landlord's reasonable discretion, which
reflects the financial condition of Tenant. If Landlord so requests, Tenant
shall deliver to Landlord a balance sheet and profit and loss statement for the
most recent prior year, all prepared in accordance with generally accepted
accounting principles consistently applied. Landlord shall keep such financial
statements confidential, except Landlord may disclose such financial statements
to Landlord's lenders, attorneys, accountants, financial advisors and as except
as required by law or court order.
31. GENERAL PROVISIONS:
------------------
31.1 TIME. Time is of the essence in this Lease and with respect to each
and all of its provisions in which performance is a factor.
31.2 SUCCESSORS AND ASSIGNS. The covenants and conditions herein
contained, subject to the provisions as to assignment, apply to and bind the
heirs, successors, executors, officers, directors, administrators and assigns of
the parties hereto.
31.3 RECORDATION. Tenant shall not record this Lease or a short form
memorandum hereof without the prior written consent of the Landlord.
31.4 LANDLORD'S PERSONAL LIABILITY. The liability of Landlord (which, for
purposes of this Lease, shall include Landlord and the owner of the Building if
other than Landlord) to Tenant for any default by Landlord under the terms of
this Lease shall be limited to the actual interest of Landlord and its present
or future partners in the Premises, the Building or the Park, and Tenant agrees
to look solely to the Premises for satisfaction of any liability and shall not
look to other assets of Landlord nor seek any recourse against the assets of the
individual partners, directors, officers, shareholders, agents or employees of
Landlord; it being intended that Landlord and the individual partners,
directors, officers, shareholders, agents or employees of Landlord shall not be
personally liable in any manner whatsoever for any judgment or deficiency. The
liability of Landlord under this Lease is limited to its actual period of
ownership of title to the Building, and Landlord shall be automatically released
from further performance under this Lease and from liabilities and expenses
first arising after transfer of Landlord's interest in the Premises or the
Building.
31.5 SEPARABILITY. Any provisions of this Lease which shall prove to be
invalid, void or illegal shall in no way affect, impair or invalidate any other
provisions hereof and such other provision shall remain in full force and
effect.
31.6 CHOICE OF LAW. This Lease shall be governed by the laws of the State
of California.
31.7 ATTORNEYS' FEES. In the event any dispute between the parties results
in litigation or other proceeding, the prevailing party shall be reimbursed by
the party not prevailing for all reasonable costs and expenses, including,
without limitation, reasonable attorneys' and experts' fees and costs incurred
by the prevailing party in connection with such litigation or other proceeding,
and any appeal thereof. Such costs, expenses and fees shall be included in and
made a part of the judgment recovered by the prevailing party, if any.
31.8 ENTIRE AGREEMENT. This Lease supersedes any prior agreements,
representations, negotiations or correspondence between the parties, and
contains the entire agreement of the parties on matters covered. No other
agreement, statement or promise made by any party, that is not in writing and
signed by all parties to this Lease, shall be binding.
31.9 WARRANTY OF AUTHORITY. On the date that Tenant executes this Lease,
Tenant shall deliver to Landlord an original certificate of status for Tenant
issued by the California Secretary of State or statement of partnership for
Tenant recorded in the county in which the Premises are located, as applicable,
and such other documents as Landlord may reasonably request with regard to the
lawful
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existence of Tenant. Each person executing this Lease on behalf of a party
represents and warrants that (1) such person is duly and validly authorized to
do so on behalf of the entity it purports to so bind, and (2) if such party is a
partnership, corporation or trustee, that such partnership, corporation or
trustee has full right and authority to enter into this Lease and perform all of
its obligations hereunder.
31.10 NOTICES. Any and all notices and demands required or permitted to be
given hereunder to Landlord shall be in writing and shall be sent: (a) by
United States mail, certified and postage prepaid; or (b) by personal delivery;
or (c) by overnight courier, addressed to Landlord at 101 Lincoln Centre Drive,
Fourth Floor, Foster City, California 94404-1167. Any and all notices and
demands required or permitted to be given hereunder to Tenant shall be in
writing and shall be sent: (i) by United States mail, certified and postage
prepaid; or (ii) by personal delivery to agent for service of process for Tenant
to the address in the Basic Lease Information or such other address as Tenant
may specify by written notice to Landlord; or (iii) by overnight courier, all of
which shall be addressed to Tenant at the Premises. Notice and/or demand shall
be deemed given upon the earlier of actual receipt or the third day following
deposit in the United States mail. Any notice or requirement of service
required by any statute or law now or hereafter in effect, including, but not
limited to, California Code of Civil Procedure Sections 1161, 1161.1, and 1162,
is hereby waived by Tenant.
31.11 JOINT AND SEVERAL. If Tenant consists of more than one person or
entity, the obligations of all such persons or entities shall be joint and
several.
31.12 COVENANTS AND CONDITIONS. Each provision to be performed by Tenant
hereunder shall be deemed to be both a covenant and a condition.
31.13 WAIVER OF JURY TRIAL. The parties hereto shall and they hereby do
waive trial by jury in any action, proceeding or counterclaim brought by either
of the parties hereto against the other on any matters whatsoever arising out of
or in any way related to this Lease, the relationship of Landlord and Tenant,
Tenant's use or occupancy of the Premises, the Building or the Park, and/or any
claim of injury, loss or damage.
31.14 Intentionally Omitted.
31.15 UNDERLINING. The use of underlining within the Lease is for
Landlord's reference purposes only and no other meaning or emphasis is intended
by this use, nor should any be inferred.
32. SIGNS: All signs and graphics of every kind visible in or from public view
-----
or corridors or the exterior of the Premises shall be subject to Landlord's
prior written approval, which approval shall not be unreasonably withheld or
delayed, and shall be subject to any applicable governmental laws, ordinances,
and regulations and in compliance with Landlord's sign criteria as same may
exist from time to time or as set forth in Exhibit H hereto and made a part
---------
hereof. Tenant shall remove all such signs and graphics prior to the
termination of this Lease. Such installations and removals shall be made in a
manner as to avoid damage or defacement of the Premises; and Tenant shall repair
any damage or defacement, including without limitation, discoloration caused by
such installation or removal. Landlord shall have the right, at its option, to
deduct from the Security Deposit such sums as are reasonably necessary to remove
such signs, including, but not limited to, the costs and expenses associated
with any repairs necessitated by such removal. Notwithstanding the foregoing,
in no event shall any: (a) neon, flashing or moving sign(s) or (b) sign(s) which
shall interfere with the visibility of any sign, awning, canopy, advertising
matter, or decoration of any kind of any other business or occupant of the
Building or the Park be permitted hereunder. Tenant further agrees to maintain
any such sign, awning, canopy, advertising matter, lettering, decoration or
other thing as may be approved in good condition and repair at all times.
33. MORTGAGEE PROTECTION: Upon any breach or default on the part of Landlord,
--------------------
Tenant will give written notice by registered or certified mail to any
beneficiary of a deed of trust or mortgagee of a mortgage covering the Premises
who has provided Tenant with notice of their interest together with an address
for receiving notice, and shall offer such beneficiary or mortgagee a reasonable
opportunity to cure the default (which, in no event shall be less than sixty
(60) days), including sufficient time to obtain possession of the Premises by
power of sale or a judicial foreclosure, if such should prove reasonably
necessary to effect a cure. If such breach or default cannot be cured within
such time period, then such additional time as may be necessary will be given to
such beneficiary or mortgagee to effect such cure so long as such beneficiary or
mortgagee has commenced the cure within the original time period and thereafter
diligently pursues such cure to completion, in which event this Lease shall not
be terminated while such cure is being diligently pursued. Tenant agrees that
each lender to whom this Lease has been assigned by Landlord is an express third
party beneficiary hereof. Tenant shall not make any prepayment of Rent more
than one (1) month in advance without the prior written consent of each such
lender, except if Tenant is required to make quarterly payments of Rent in
advance pursuant to the provisions of Section 8 above. Tenant waives the
collection of any deposit from such lender(s) or any purchaser at a foreclosure
sale of such lender(s)' deed of trust unless the lender(s) or such purchaser
shall have actually received and not refunded the deposit. Tenant agrees to
make all payments under this Lease to the lender with the most senior
encumbrance upon receiving a direction, in writing, to pay said amounts to such
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lender. Tenant shall comply with such written direction to pay without
determining whether an event of default exists under such lender's loan to
Landlord.
34. QUITCLAIM: Upon any termination of this Lease, Tenant shall, at Landlord's
---------
request, execute, have acknowledged and deliver to Landlord a quitclaim deed of
Tenant's interest in and to the Premises. If Tenant fails to so deliver to
Landlord such a quitclaim deed, Tenant hereby agrees that Landlord shall have
the full authority and right to record such a quitclaim deed signed only by
Landlord and such quitclaim deed shall be deemed conclusive and binding upon
Tenant.
35. Intentionally Omitted.
36. WARRANTIES OF TENANT: Tenant hereby warrants and represents to Landlord,
--------------------
for the express benefit of Landlord, that Tenant has undertaken a complete and
independent evaluation of the risks inherent in the execution of this Lease and
the operation of the Premises for the use permitted hereby, and that, based upon
said independent evaluation, Tenant has elected to enter into this Lease and
hereby assumes all risks with respect thereto. Tenant hereby further warrants
and represents to Landlord, for the express benefit of Landlord, that in
entering into this Lease, Tenant has not relied upon any statement, fact,
promise or representation (whether express or implied, written or oral) not
specifically set forth herein in writing and that any statement, fact, promise
or representation (whether express or implied, written or oral) made at any time
to Tenant, which is not expressly incorporated herein in writing, is hereby
waived by Tenant.
37. COMPLIANCE WITH AMERICANS WITH DISABILITIES ACT: Landlord and Tenant hereby
-----------------------------------------------
agree and acknowledge that the Premises, the Building and/or the Park may be
subject to the requirements of the Americans with Disabilities Act, a federal
law codified at 42 U.S.C. 12101 et seq, including, but not limited to Title III
thereof, all regulations and guidelines related thereto, together with any and
all laws, rules, regulations, ordinances, codes and statutes now or hereafter
enacted by local or state agencies having jurisdiction thereof, including all
requirements of Title 24 of the State of California, as the same may be in
effect on the date of this Lease and may be hereafter modified, amended or
supplemented (collectively, the "ADA"). Any Tenant Improvements to be
constructed hereunder shall be in compliance with the requirements of the ADA,
and all costs incurred for purposes of compliance therewith shall be a part of
and included in the costs of the Tenant Improvements. Tenant shall be solely
responsible for conducting its own independent investigation of this matter and
for ensuring that the design of all Tenant Improvements strictly comply with all
requirements of the ADA. Subject to reimbursement pursuant to Section 6 of the
Lease, if any barrier removal work or other work is required to the Building,
the Common Areas or the Park under the ADA, then such work shall be the
responsibility of Landlord; provided, if such work is required under the ADA as
a result of Tenant's particular use of the Premises or any work or alteration
made to the Premises by or on behalf of Tenant, then such work shall be
performed by Landlord at the sole cost and expense of Tenant. Except as
otherwise expressly provided in this provision, Tenant shall be responsible at
its sole cost and expense for fully and faithfully complying with all
requirements of the ADA, applicable to its operations in the Premises, including
without limitation, not discriminating against any disabled persons in the
operation of Tenant's business in or about the Premises, and offering or
otherwise providing auxiliary aids and services as, and when, required by the
ADA. Within ten (10) days after receipt, Landlord and Tenant shall advise the
other party in writing, and provide the other with copies of (as applicable),
any notices alleging violation of the ADA relating to any portion of the
Premises or the Building; any claims made or threatened in writing regarding
noncompliance with the ADA and relating to any portion of the Premises or the
Building; or any governmental or regulatory actions or investigations instituted
or threatened regarding noncompliance with the ADA and relating to any portion
of the Premises or the Building. Tenant shall and hereby agrees to protect,
defend (with counsel acceptable to Landlord) and hold Landlord and Landlord's
lender(s), partners, employees, representatives, legal representatives,
successors and assigns (collectively, the "Indemnitees") harmless and indemnify
the Indemnitees from and against all liabilities, damages, claims, losses,
penalties, judgments, charges and expenses (including reasonable attorneys'
fees, costs of court and expenses necessary in the prosecution or defense of any
litigation including the enforcement of this provision) arising from or in any
way related to Tenant's or Tenant's Representatives' violation or alleged
violation of the ADA. Tenant agrees that the obligations of Tenant herein shall
survive the expiration or earlier termination of this Lease.
38. BROKERAGE COMMISSION: Landlord and Tenant each represents and warrants for
--------------------
the benefit of the other that it has had no dealings with any real estate
broker, agent or finder in connection with the Premises and/or the negotiation
of this Lease, except for the Broker(s) (as set forth on Page 1), and that it
knows of no other real estate broker, agent or finder who is or might be
entitled to a real estate brokerage commission or finder's fee in connection
with this Lease or otherwise based upon contacts between the claimant and
Tenant. Each party shall indemnify and hold harmless the other from and against
any and all liabilities or expenses arising out of claims made for a fee or
commission by any real estate broker, agent or finder in connection with the
Premises and this Lease other than Broker(s), if any, resulting from the actions
of the indemnifying party. Any real estate brokerage commission or finder's fee
payable to the Broker(s) in connection with this Lease shall only be payable and
applicable to the extent of the initial Term of the Lease and to the extent of
the Premises as same exist as of the date on which Tenant executes this Lease.
Unless expressly agreed to in writing by Landlord and Broker(s), no real estate
brokerage commission or finder's fee shall be owed to, or otherwise payable to,
the Broker(s)
24
<PAGE>
for any renewals or other extensions of the initial Term of this Lease or for
any additional space leased by Tenant other than the Premises as same exists as
of the date on which Tenant executes this Lease. Tenant further represents and
warrants to Landlord that Tenant will not receive (i) any portion of any
brokerage commission or finder's fee payable to the Broker(s) in connection with
this Lease or (ii) any other form of compensation or incentive from the
Broker(s) with respect to this Lease.
39. QUIET ENJOYMENT: Landlord covenants with Tenant, upon the paying of Rent
---------------
and observing and keeping the covenants, agreements and conditions of this Lease
on its part to be kept, and during the periods that Tenant is not otherwise in
default of any of the terms or provisions of this Lease, and subject to the
rights of any of Landlord's lenders, (i) that Tenant shall and may peaceably and
quietly hold, occupy and enjoy the Premises and the Common Areas during the Term
of this Lease, and (ii) neither Landlord, nor any successor or assign of
Landlord, shall disturb Tenant's occupancy or enjoyment of the Premises and the
Common Areas.
40. LANDLORD'S ABILITY TO PERFORM TENANT'S UNPERFORMED OBLIGATIONS:
--------------------------------------------------------------
Notwithstanding anything to the contrary contained in this Lease, if Tenant
shall fail to perform any of the terms, provisions, covenants or conditions to
be performed or complied with by Tenant pursuant to this Lease, and/or if the
failure of Tenant relates to a matter which in Landlord's judgment reasonably
exercised is of an emergency nature and such failure shall remain uncured for a
period of time commensurate with such emergency, then Landlord may, at
Landlord's option without any obligation to do so, upon prior written notice to
Tenant (except in the event of an emergency in which case no notice is
required), and in its sole discretion as to the necessity therefor, perform any
such term, provision, covenant, or condition, or make any such payment and
Landlord by reason of so doing shall not be liable or responsible for any loss
or damage thereby sustained by Tenant or anyone holding under or through Tenant,
except to the extent that such loss or damage results from the gross negligence
or willful misconduct of Landlord or its agents. If Landlord so performs any of
Tenant's obligations hereunder, the full amount of the cost and expense entailed
or the payment so made or the amount of the loss so sustained shall immediately
be owing by Tenant to Landlord, and Tenant shall promptly pay to Landlord upon
demand, as Additional Rent, the full amount thereof with interest thereon at
twelve percent (12%) per annum.
41. TENANT'S ABILITY TO PERFORM LANDLORD'S UNPERFORMED OBLIGATIONS:
--------------------------------------------------------------
Notwithstanding anything to the contrary contained in this Lease, if Landlord
shall fail to perform any of the terms, provisions, covenants or conditions to
be performed or complied with by Landlord pursuant to this Lease after
expiration of all applicable notice and cure periods for Landlord's and any
mortgagee's benefit as set forth in Sections 23 and 33, respectively and/or if
the failure of Landlord relates to a matter which in Tenant's judgment
reasonably exercised is of an emergency nature and such failure shall remain
uncured for a period of time commensurate with such emergency, then Tenant may,
at Tenant's option without any obligation to do so, after delivery of prior
written notice to Landlord, perform any such term, provision, covenant, or
condition. If Tenant so performs any of Landlord's obligations hereunder, the
full amount of the reasonable costs and expenses incurred shall immediately be
owing by Landlord to Tenant, and Landlord shall pay to Tenant the full amount
thereof within ninety (90) days of Landlord's receipt of Tenant's written demand
therefor. If Landlord fails to pay such sums within said 90-day period, and
provided there does not then exist a good faith dispute thereof on the part of
Landlord, Tenant may deduct such sums so demanded from the next installment of
Base Rent then due from Tenant hereunder.
IN WITNESS WHEREOF, this Lease is executed by the parties as of the Lease
Date referenced on page 1 of this Lease.
TENANT:
Shoe Inn, Inc., dba Shoe Pavilion
a Washington corporation
By:
------------------------------
Its:
------------------------------
Date:
-----------------------------
LANDLORD:
LINCOLN-WHITEHALL PACIFIC, LLC,
a Delaware limited liability company
By: Lincoln Property Company Management Services, Inc.,
as manager and agent for LINCOLN-WHITEHALL PACIFIC, LLC
By:
--------------------------
Vice President
25
<PAGE>
ADDENDUM 1
ADJUSTMENT TO RENT
MONTHLY BASE RENT SCHEDULE
<TABLE>
<CAPTION>
=========================================================================
Base Monthly
Months Rate/SF NNN Base Monthly Rent
- -------------------------------------------------------------------------
<S> <C> <C>
01-02 -0- -0-
- -------------------------------------------------------------------------
03-12 $0.32 $18,568.96
- -------------------------------------------------------------------------
13-24 $0.33 $19,149.24
- -------------------------------------------------------------------------
25-36 $0.34 $19,729.52
- -------------------------------------------------------------------------
37-48 $0.35 $20,309.80
- -------------------------------------------------------------------------
49-60 $0.36 $20,890.08
=========================================================================
</TABLE>
Tenant and Landlord hereby agree that as of the Commencement Date of the Lease,
Tenant shall pay Landlord Tenant's proportionate share of Additional Rent, as
set forth in the Basic Lease Information and Paragraph 6 of the Lease.
Notwithstanding the foregoing, in the event of Tenant's default of any of its
obligations under the Lease (beyond any applicable cure periods) the entire
monthly Base Rent, waived during the first two (2) month period, shall be due
and payable to Landlord at the rental rate of $18,568.96 per month.
1
INITIALS:
- --------
TENANT: _____
LANDLORD: _____
<PAGE>
ADDENDUM 2
OPTION TO EXTEND THE LEASE
This Addendum 2 ("Addendum") is incorporated as a part of that certain Lease
Agreement dated October 28, 1996 (the "Lease"), by and between Shoe Inn, Inc.,
dba Shoe Pavilion, a Washington corporation ("Tenant"), and Lincoln-Whitehall
Pacific, LLC, a Delaware limited liability company ("Landlord"), of the
premises located at 3200 Regatta Blvd., Unit F, Richmond, California (the
"Premises"). Any capitalized terms used herein and not otherwise defined herein
shall have the meaning ascribed to such terms as set forth in the Lease.
1. GRANT OF EXTENSION OPTION. So long as Tenant has not been (more than twice
-------------------------
during the twelve (12) month period immediately preceding Tenant's exercise of
this Option) in default in the performance of any of its obligations under the
Lease beyond any applicable cure periods specified in this Lease, or at the time
of Tenant's exercise of this Option, is currently not, in default in the
performance of any of its obligations under the Lease beyond any applicable cure
periods specified in the Lease, and contingent upon review and approval of
Tenant's then current financial condition by Landlord (Tenant's financial
condition shall be deemed acceptable to Landlord if Tenant's financial net worth
shall have been at least $2,600,000 for the six (6) months immediately preceding
the exercise of the Option as evidenced by the then current audited financial
statement of Tenant), Tenant shall have the right, at its option, to extend the
term of the Lease for five (5) years (the "Extended Term").
2. TENANT'S OPTION NOTICE. If Landlord does not receive written notice from
----------------------
Tenant of its exercise of this option on a date which is not more than three
hundred sixty (360) days nor less than one hundred eighty (180) days prior to
the end of the initial term of the Lease (the "Option Notice"), all rights under
this option shall automatically lapse and terminate and shall be of no further
force and effect. Time is of the essence herein.
3. ESTABLISHING THE MONTHLY BASE RENT FOR THE EXTENDED TERM. The monthly Base
--------------------------------------------------------
Rent for the Extended Term shall be the Fair Rental Value (defined below) agreed
upon solely by and between Landlord and Tenant and their agents appointed for
this purpose. Neither Landlord nor Tenant shall have the right to have a court
establish the Fair Rental Value. If Landlord and Tenant are unable to agree on
the Fair Rental Value for the Extended Term within ten (10) days after receipt
by Landlord of the Option Notice, Landlord and Tenant being obligated only to
act in good faith, Landlord and Tenant each, at its cost and by giving notice to
the other party, shall appoint a competent, disinterested and impartial
qualified real estate broker with at least ten (10) years' full-time commercial
leasing brokerage experience in the geographical area of the Premises to
evaluate and set the Fair Rental Value for the Extended Term. If either
Landlord or Tenant does not appoint such a qualified broker within ten (10) days
after the other party has given notice of the name of its qualified broker, the
single qualified broker appointed shall be the sole qualified broker and shall
set the Fair Rental Value for the Extended Term. If two (2) qualified brokers
are appointed by Landlord and Tenant as stated in this paragraph, they shall
meet promptly and attempt to set the Fair Rental Value. If the two (2)
qualified brokers are unable to agree within ten (10) days after the second
qualified broker has been appointed, they shall attempt to select a third broker
who meets the qualifications stated in this paragraph within ten (10) days after
the last day the two (2) brokers are given to set the Fair Rental Value. If
they are unable to agree on the third broker, either Landlord or Tenant by
giving ten (10) days' notice to the other party, can apply to the Presiding
Judge of the Superior Court of the county in which the Premises is located for
the selection of a third broker who meets the qualifications stated in this
paragraph. Landlord and Tenant each shall bear one-half (1/2) of the cost of
appointing the third broker and of paying the third broker's fee. The third
broker, however selected, shall be a person who has not previously acted in any
capacity for either Landlord or Tenant. Within fifteen (15) days after the
selection of the third broker, the third broker shall select one of the two Fair
Rental Values submitted by the first two brokers as the Fair Rental Value for
the Extended Term. If either of the first two brokers fails to submit their
opinion of the Fair Rental Value, then the single Fair Rental Value submitted
shall automatically be the initial monthly Base Rent for the Extended Term.
Notwithstanding any provision to the contrary contained herein, in no event
shall the monthly Base Rent for the Extended Term as determined pursuant to this
Addendum be less than the highest monthly Base Rent charged during the initial
term of the Lease. The "Fair Rental Value" of the Premises shall be defined to
mean the fair market rental value of the Premises as of the commencement of the
Extended Term, taking into consideration all relevant factors, including length
of term, the uses permitted under the Lease, the quality, size, design and
location of the Premises, including the condition and value of existing tenant
improvements, the monthly base rent paid by tenants for premises comparable to
the Premises, and located in Richmond, California.
4. ADDITIONAL LEASE PROVISIONS FOR EXTENDED TERM. Upon determination of the
---------------------------------------------
monthly Base Rent for the Extended Term, in accordance with the terms outlined
above, the parties shall immediately execute an amendment to this Lease. Such
amendment shall set forth among other things, the minimum monthly Base Rent for
the Extended Term and the actual commencement date and expiration date of the
Extended Term. Tenant shall have no other right to extend the term of the Lease
under this Addendum 2 unless Landlord and Tenant otherwise agree in writing. If
Tenant duly exercises this option, in accordance with the terms contained
herein: (1) Tenant shall accept the Premises in its then "As-Is" condition and,
accordingly, Landlord shall not be required to perform any additional
improvements to the Premises; and
<PAGE>
(2) Tenant hereby agrees that it will solely be responsible for any and all
brokerage commissions and finder's fees payable to any broker in connection with
the option described herein, except for commissions or fees payable to the
Broker(s) specified in the Basic Lease Information, which shall be Landlord's
obligation, and Tenant hereby further agrees that Landlord shall in no event or
circumstance be responsible for the payment of any such commissions and fees.
5. LIMITATIONS ON, AND CONDITIONS TO, EXTENSIONS OPTIONS. This option is
-----------------------------------------------------
personal to Tenant and may not be assigned, voluntarily or involuntarily,
separate from or as part of the Lease. At Landlord's option, all rights of
Tenant under this option shall terminate and be of no force and effect if any of
the following individual events occur or any combination thereof occur: (1)
Tenant has been (more than twice during the twelve (12) month period immediately
preceding Tenant's exercise of this Option), in default, or, at the time of
Tenant's exercise of this Option, is currently in default of any provision of
the Lease beyond any applicable cure periods specified in the Lease; and/or (2)
Tenant has assigned its rights and obligations under all or part of the Lease or
Tenant has subleased all or part of the Premises; and/or (3) Tenant's financial
condition is unacceptable to Landlord at the time the Option Notice is delivered
to Landlord (Tenant's financial condition shall be deemed acceptable to Landlord
if Tenant's financial net worth shall have been at least $2,600,000 for the six
(6) months immediately preceding the exercise of the Option as evidenced by the
then current audited financial statement of Tenant); and/or (4) Tenant has
failed to exercise this option in a timely manner in accordance with the
provisions of this Addendum 2; and/or (5) Tenant no longer has possession of all
or any part of the Premises under the Lease, or if Lease has been terminated
earlier, pursuant to the terms of the Lease.
INITIALS:
- --------
TENANT: _____
LANDLORD: _____
<PAGE>
ADDENDUM 3
RIGHT OF SECOND REFUSAL
This Addendum 3 is incorporated as a part of that certain Lease Agreement dated
October 28, 1996, by and between Shoe Inn, Inc., dba Shoe Pavilion, a Washington
corporation ("Tenant"), and Lincoln-Whitehall Pacific, LLC, a Delaware limited
liability company ("Landlord"), for the Premises located at 3200 Regatta Blvd.,
Unit F, Richmond, California (the "Premises"). Any capitalized terms used
herein and not otherwise defined herein shall have the meaning ascribed to such
terms as set forth in the Lease.
During the initial term of the Lease only, Tenant shall have a one time right of
second refusal ("Right of Second Refusal") to lease the contiguous space
currently leased by International Microcomputer Systems, Inc., ("IMSI")
consisting of approximately 34,000 rentable square feet and located at 3200
Regatta Blvd., Unit B, Richmond, California, as outlined on Exhibit A attached
hereto and made a part hereof (the "Expansion Space"). Tenant's Right of Second
Refusal, as granted herein, is subject to the following conditions:
i. Tenant's Right of Second Refusal shall be void if Tenant has been
(more than twice during the twelve (12) month period immediately
preceding the date of Landlord's Availability Notice (defined below)),
or, on the date of Landlord's Availability Notice is currently in
default in the performance of any of its obligations under the Lease;
and
ii. Tenant's Right of Second Refusal shall be subject to Landlord's review
and approval of Tenant's then current financial condition (Tenant's
financial condition shall be deemed acceptable to Landlord, for the
purposes of this Right of Second Refusal, if Tenant's financial net
worth shall have been at least $2,600,000 for the six (6) months
immediately preceding the date of Landlord's Availability Notice as
evidenced by the then current audited financial statement of Tenant).
iii. Tenant's Right of Second Refusal shall be subject and subordinate
to Landlord's right to negotiate, for a period of ninety (90) days,
with the adjacent existing tenant - Bio-Rad Laboratories.
Provided the above conditions are satisfied, if any portion of the Expansion
Space becomes vacant, and Landlord desires to lease the Expansion Space,
Landlord shall give Bio-Rad Laboratories written notice of such availability and
Bio-Rad Laboratories shall have the right of first refusal on any such Expansion
Space. If Bio-Rad Laboratories informs Landlord that they are not interested in
any such Expansion Space, Landlord shall give Tenant written notice, by
facsimile and by mail, describing the location and size of such space, the
estimated date upon which Landlord can deliver such space to Tenant, and the
terms and conditions upon which Landlord is willing to lease the Expansion Space
("Landlord's Availability Notice"). Tenant shall notify Landlord within seven
(7) days following receipt of Landlord's Availability Notice of Tenant's
election to lease all the Expansion Space upon those terms by written acceptance
delivered to Landlord ("Election Notice"). If Tenant fails to notify Landlord of
Tenant's election to lease the Expansion Space within the time specified herein,
it shall be deemed that (i) Tenant has elected not to lease said Expansion
Space; (ii) Landlord may thereafter enter into a Lease Agreement with a third
party; and (iii) all rights under this Right of Second Refusal shall terminate
and be of no further force and effect. Time is of the essence herein.
In the event Tenant exercises this Right of Second Refusal as herein provided,
Tenant shall provide Landlord a non-refundable deposit, equivalent to the last
month's rent for the Expansion Space and the parties shall have ten (10) working
days after Landlord receives the Election Notice and deposit from Tenant in
which to execute an amendment to the Lease setting forth the agreed-upon terms.
Upon full execution of an amendment for the Expansion Space, the non-refundable
deposit shall be credited toward Base Rent for the Expansion Space, as agreed
between the parties.
This Right of Second Refusal shall terminate and be of no force and effect if
Tenant is, on the date of Landlord's Availability Notice, or has been (more than
twice during the twelve (12) month period immediately preceding the date of
Landlord's Availability Notice) in default of the performance of any of the
covenants, conditions or agreements to be performed under this Lease; or the
Premises are being subleased at the time of this Right of Second Refusal is
offered.
This Right of Second Refusal is personal to Tenant and may not be assigned,
voluntarily or involuntarily, separate from or as a part of the Lease.
Should Tenant exercise this Right of Second Refusal, Landlord and Tenant shall
execute an amendment to this Lease, adding the Expansion Space to the Premises
and adjusting the Base Rent and Tenant's proportionate share of the items set
forth in Sections 6, 7, and 8 of this Lease. If Tenant does not elect to
exercise the Right of Second Refusal granted herein, based upon the material
terms proposed by Landlord, all rights under this Right of Second Refusal shall
terminate and be of no further force and effect.
<PAGE>
EXHIBIT 10.6
4/11/97
- --------------------------------------------------------------------------------
AGREEMENT OF PURCHASE AND SALE
Dated as of April 14, 1997
among
STANDARD SHOE COMPANY
and
STANDARD SHOE OF SOUTHERN CALIFORNIA
and
THE SHAREHOLDERS OF
STANDARD SHOE COMPANY
and
STANDARD SHOE OF SOUTHERN CALIFORNIA
and
SHOE INN, INC.
- --------------------------------------------------------------------------------
<PAGE>
TABLE OF CONTENTS
-----------------
<TABLE>
<CAPTION>
Section Page
- ------- ----
ARTICLE I
Sale of Assets and Assumption of Liabilities
<S> <C> <C>
1.01. Sale of Assets.................................................. 1
(a) Purchased Assets..................................... 1
(b) Excluded Assets...................................... 2
1.02. No Assumption of Liabilities.................................... 2
1.03. Closing......................................................... 2
(a) Seller Deliveries.................................... 3
(b) Buyer Deliveries..................................... 3
1.04. The Purchase Price.............................................. 4
(a) Base Purchase Price.................................. 4
(b) Returns.............................................. 5
(c) Torrance Lease....................................... 5
(d) Security Deposits.................................... 5
1.05. Allocation of Purchase Price.................................... 5
1.06. Physical Inventory.............................................. 5
1.07. Further Cooperation............................................. 6
</TABLE>
ARTICLE II
Representations and Warranties
<TABLE>
<CAPTION>
<S> <C> <C>
2.01. Representations and Warranties of Seller and the
Shareholders....................................................
(a) Organization......................................... 6
(b) Binding Obligation................................... 6
(c) Real Property........................................ 7
(d) Inventory............................................ 7
(e) Litigation........................................... 7
(f) Licenses............................................. 8
(g) Employee and Related Matters......................... 8
(h) Ordinary Course...................................... 8
(i) No Broker's or Finder's Fees......................... 8
(j) Employee Benefit Plans............................... 8
(k) Environmental Matters................................ 9
(l) Taxes................................................ 9
2.02. Representations and Warranties of Buyer......................... 10
(a) Organization......................................... 10
(b) Binding Obligation................................... 10
(c) No Broker's or Finder's Fees......................... 11
(d) Taxes................................................ 11
(e) Purchase for Resale.................................. 11
</TABLE>
ARTICLE III
Covenants Relating to Conduct of business
<TABLE>
<CAPTION>
<S> <C> <C>
3.01. Covenants of Seller............................................. 11
(a) Ordinary Course...................................... 11
(b) No Other Bids........................................ 12
</TABLE>
i
<PAGE>
<TABLE>
<CAPTION>
Section Page
- ------- ----
ARTICLE IV
Additional Agreements
<S> <C> <C>
4.01. Access to Information........................................... 12
4.02. Expenses........................................................ 13
4.03. Press Releases.................................................. 13
4.04. Use of Name..................................................... 13
4.05. Release of Seller............................................... 14
4.06. Pro-rations..................................................... 14
4.07. Transitional Arrangements....................................... 14
</TABLE>
ARTICLE V
Conditions Precedent
<TABLE>
<CAPTION>
<S> <C> <C>
5.01. Conditions to Each Party's Obligation........................... 14
(a) Approvals.............................................. 14
(b) Legal Action........................................... 14
(c) Statutes............................................... 15
(d) Consents of Landlords Under Assumed Leases............. 15
5.02. Conditions of Obligations of Buyer.............................. 15
(a) Representations and Warranties......................... 15
(b) Performance of Obligations of Seller................... 15
(c) Testing................................................ 15
(d) Consents and Actions................................... 16
(e) Lease Assignments...................................... 16
(f) New Leases............................................. 16
(g) Release of Security Interests.......................... 16
(h) Agreement as to Real Estate Matters.................... 16
5.03. Conditions of Obligation of Seller.............................. 16
(a) Representations and Warranties......................... 16
(b) Performance of Obligations of Buyer.................... 17
(c) Consents and Actions................................... 17
(d) New Leases............................................. 17
(e) Assumption Agreement................................... 17
(f) Agreement as to Real Estate Matters.................... 17
</TABLE>
ARTICLE VI
Indemnification
<TABLE>
<CAPTION>
<S> <C> <C>
6.01. Buyer Claims.................................................... 17
6.02. Seller Claims................................................... 18
6.03. Notice of Claim................................................. 18
6.04. Defense of Third Party Claims................................... 19
</TABLE>
ARTICLE VII
Termination, Amendment and Waiver
<TABLE>
<CAPTION>
<S> <C> <C>
7.01. Termination..................................................... 19
7.02. Effect of Termination........................................... 20
7.03. Amendment....................................................... 20
</TABLE>
ARTICLE VIII
ii
<PAGE>
<TABLE>
<CAPTION>
Section Page
- ------- ----
Labor and Employment Matters
<S> <C> <C>
8.01. Buyer's Employment Decisions................................ 20
8.02. Employment and Benefit Contracts............................ 21
8.03. Collective Bargaining Agreements............................ 21
8.04. Employee Notification....................................... 22
</TABLE>
ARTICLE IX
General Provisions
<TABLE>
<CAPTION>
<S> <C> <C>
9.01. Survival of Representations and Warranties and
Agreements.................................................. 22
9.02. Sales Taxes................................................. 23
9.03. Bulk Sales Compliance....................................... 23
9.04. Notices..................................................... 23
9.05. Counterparts................................................ 24
9.06. Miscellaneous............................................... 24
9.07. Governing Law............................................... 25
</TABLE>
iii
<PAGE>
THIS AGREEMENT OF PURCHASE AND SALE as of April 14, 1997, by and among
SHOE INN, INC., a Washington corporation ("Buyer"), and STANDARD SHOE COMPANY, a
California corporation, and STANDARD SHOE OF SOUTHERN CALIFORNIA, a California
corporation (collectively hereinafter referred to as "Seller"), and Ann
Schwartz, Allan B. Cutrow and Marvin Matlin as trustees under the Survivor's
Trust, the Non-Exempt Marital Trust and the Exempt Marital Trust of The Schwartz
Family Trust u/d/t dated March 26, 1992, as amended under amendment dated May 4,
1992, and Lawrence Schwartz (the "Shareholders"), who own all of the stock of
Standard Shoe of Southern California and 90% of the stock of Standard Shoe
Company.
WHEREAS, the Shareholders and the Boards of Directors of Seller have
approved the sale of the inventory and certain other assets of Seller to Buyer
on the terms and conditions hereinafter set forth.
WHEREAS, the Board of Directors of Buyer has approved the acquisition
of such assets by Buyer on the terms and conditions hereinafter set forth.
NOW, THEREFORE, in consideration of the premises and the
representations, warranties and agreements herein contained, the parties agree
as follows:
ARTICLE I
Sale of Assets and Assumption of Liabilities
--------------------------------------------
SECTION 1.01. Sale of Assets.
--------------
(a) Purchased Assets. At the Closing (as defined below), Seller shall
----------------
sell, assign, transfer, convey and deliver to
<PAGE>
Buyer and Buyer shall accept and purchase all of Seller's right, title and
interest in and to all assets and rights reflected in the Schedule of Purchased
Assets attached hereto and labelled Schedule 1.01(a).
(b) Excluded Assets. The foregoing notwithstanding, Buyer shall not
---------------
purchase, and Seller shall not sell those assets which are listed in the
Schedule of Excluded Assets attached hereto and labeled Schedule 1.01(b)(the
"Excluded Assets"). At Seller's option, any of Seller's assets presently
located at Seller's locations which are not listed on Schedule 1.01(a) (e.g.,
----
shelving) may be left at the premises and shall become the property of Buyer
without increasing or decreasing the Purchase Price.
SECTION 1.02. No Assumption of Liabilities. Buyer shall not assume,
----------------------------
nor does Buyer agree to pay any liabilities of Seller whatsoever other than the
Assumed Leases (as defined below). Any and all such liabilities shall continue
to be the responsibility of Seller, and Seller agrees to indemnify and hold
Buyer harmless against any such liabilities, all as more fully provided in
Section 6.01 hereinafter set forth.
SECTION 1.03. Closing. The closing of the purchase and sale of the
-------
Purchased Assets (the "Closing") will take place when the conditions precedent
set forth in Article V hereof have been satisfied or waived, but in no event
later than April 30, 1997 (the "Closing Date"), at the offices of Mitchell,
Silberberg & Knupp LLP, Los Angeles, California, unless another date or place is
agreed to in writing by the parties hereto.
2
<PAGE>
(a) Seller Deliveries. Seller shall deliver to Buyer at the Closing:
-----------------
(i) Properly executed Bills of Sale or other instruments of
conveyance of title, in form reasonably acceptable to Buyer, sufficient to
pass title to all personal property to be conveyed hereunder, free and
clear of all liens or encumbrances of any type or nature.
(ii) Consents executed by all necessary parties to permit Buyer
to assume Seller's interest in any leases or other contracts acquired among
the Purchased Assets. Such consents are described in Schedule 1.03(a)(ii)
hereto.
(iii) New Leases in the form attached to this Agreement (the
"New Leases") with respect to the existing retail space at the following
stores, all of which are owned by Seller: Inglewood, North Hollywood,
Pasadena and Costa Mesa (the "Owned Stores").
(iv) Such other resolutions, certificates, consents or other
documents of authority as provided for herein, or as may be otherwise
necessary to convey and transfer, and all other instruments or documents
that counsel for Buyer may reasonably request in order to assure sufficient
transfer of, the Purchased Assets to Buyer, or compliance with the terms
and conditions of this Agreement.
(b) Buyer Deliveries. Buyer shall deliver at the Closing:
----------------
(i) The Purchase Price to Seller as adjusted to reflect any net
debit or credit to Seller pursuant to Section
3
<PAGE>
1.04 of this Agreement, by wire transfer of immediately available funds.
(ii) The first month's rent under the New Leases for each of the
Owned Stores to the Seller.
(iii) The New Leases.
(iv) An assumption of the existing leases described on Schedule
1.03(b) (the "Assumed Leases").
(v) Any pro-rations payable to Seller under this Agreement or the
New Leases.
(vi) The resale certificate required by Section 2.02(e) hereof.
SECTION 1.04. The Purchase Price.
------------------
(a) Base Purchase Price. For purposes hereof the Purchase Price shall
-------------------
be an amount equal to sixty percent (60%) of the cost (with "cost" deemed to be
the invoice price plus freight, insurance, duties and commissions less all
discounts taken, promotional allowances and/or other buying allowances, all as
shown on Seller's computer-generated inventory report No. SS354, hereinafter
referred to as "the Inventory Report") of Seller's inventory at the Closing;
provided, however, that the purchase price for Seller's inventory invoiced after
February 3, 1997 ("New Inventory") shall be an amount equal to one hundred
percent (100%) of cost, subject to a maximum purchase price of $200,000 for New
Inventory. Buyer may hold back from the Purchase Price to be paid at Closing up
to $7,500 to cover customer returns with respect to shoes sold by Seller prior
to Closing.
4
<PAGE>
(b) Returns. Buyer shall receive a credit against the Purchase Price
-------
in an amount equal to 50% of each dollar of customer returns of shoes sold by
Seller prior to the Closing which are accepted by Buyer in accordance with
Seller's return policy (as reflected on "Standard Shoes Refund and Exchange
Policy"). Not later than 90 days after the Closing, Buyer shall pay to Seller
any portion of the hold back referred to in clause (a) of this Section 1.04 in
excess of such credit and shall provide Seller with sufficient documentation to
support the amount and appropriateness of such credit.
(c) Torrance Lease. Buyer shall receive a credit in the amount of
--------------
$7,000 in satisfaction of any and all disputes between Buyer and Seller
regarding the landlord's 90-day termination provision under the Torrance lease.
(d) Security Deposits. Seller shall receive a credit for all Seller's
-----------------
security deposits now held by any lessor under the Assumed Leases, as set forth
in Schedule 1.04(d) hereto. Seller's right to any such security deposits shall
be assigned by Seller to Buyer pursuant to a separate assignment agreement.
SECTION 1.05. Allocation of Purchase Price. The Purchase Price shall
----------------------------
be allocated pursuant to Schedule 1.05 attached hereto.
SECTION 1.06. Physical Inventory. For purposes of determining the
------------------
Purchase Price, representatives of Buyer and Seller shall jointly take a
physical inventory of Seller's inventory immediately after the close of business
on the business day immediately preceding the Closing Date. In preparation for
such
5
<PAGE>
physical inventory, Seller shall remove from inventory defectives, singles,
misfits and layaway merchandise (all of which are Excluded Assets).
SECTION 1.07. Further Cooperation. From time to time after the
-------------------
Closing, the parties agree to execute and deliver or to cause to be executed and
delivered such other instruments of transfer or assumption as may reasonably be
necessary or appropriate in order to effectuate the transactions contemplated by
this Agreement.
ARTICLE II
Representations and Warranties
------------------------------
SECTION 2.01. Representations and Warranties of Seller and the
------------------------------------------------
Shareholders. Seller and each of the Shareholders each jointly and severally
- ------------
represents and warrants to, and agrees with, Buyer as follows:
(a) Organization. Seller is a corporation duly organized, validly
------------
existing and in good standing under the laws of the state of incorporation.
(b) Binding Obligation. Seller has all requisite corporate power and
------------------
authority to enter into and perform its obligations under this Agreement and to
carry out the transactions contemplated hereby. The Boards of Directors and
shareholders of Seller have duly authorized the execution and delivery of this
Agreement and the other transactions contemplated hereby and, no other corporate
proceedings on the part of Seller are necessary to authorize this Agreement and
the transactions contemplated hereby.
6
<PAGE>
This Agreement has been duly executed and delivered by Seller and constitutes a
valid and binding obligation of Seller enforceable against Seller in accordance
with its terms. Other than the consents described in Schedule 1.03(a)(ii)
hereto, the execution, delivery and performance by Seller of this Agreement does
not and will not conflict with, or result in any violation of or default under,
any provision of the Articles of Incorporation or By-laws of Seller or
ordinance, rule, regulation, judgment, order, decree, agreement, instrument or
license applicable to Seller or to any of its respective properties or assets.
No consent, approval, order or authorization of, or registration, declaration or
filing with, any court, administrative agency or commission or other
governmental authority or instrumentality, domestic or foreign, is required by
or with respect to Seller in connection with its execution, delivery or
performance of this Agreement.
(c) Real Property. Schedule 2.01(c) includes a complete list of the
-------------
only real property leased by Seller ("Leased Real Property"). Except as set
forth on Schedule 2.01(c), Seller has a valid leasehold interest in the Leased
Real Property.
(d) Inventory. Except as described in Schedule 2.01(d), Seller has,
---------
and Buyer will receive at the Closing, good and marketable title to all of the
inventory and other items included in the Purchased Assets, in each case free
and clear of all mortgages, liens, security interests, pledges, charges or
encumbrances of any nature whatsoever. Seller's Inventory Report fairly and
accurately reflects the cost of Seller's inventory.
7
<PAGE>
(e) Litigation. Except as set forth in Schedule 2.01(e), there are no
----------
lawsuits, claims, proceedings or investigations pending or, to the best
knowledge of Seller, threatened against Seller which could adversely affect the
transactions contemplated by this Agreement or Buyer's right to utilize the
Purchased Assets.
(f) Licenses. Schedule 2.01(f) contains a true and correct listing of
--------
each license, permit or other governmental authorization (collectively
hereinafter referred to as "Licenses") held by Seller which affect the Purchased
Assets. Except as set forth on Schedule 2.01(i), Seller holds all Licenses
which are required for the operation of the Purchased Assets and, all such
Licenses are in full force and effect.
(g) Employee and Related Matters. To the best knowledge of Seller,
----------------------------
there are no employment-related claims, actions, proceedings or investigations
pending or threatened against Seller before any court, governmental, regulatory
or administrative authority or body, or arbitrator or arbitration panel.
(h) Ordinary Course. Since January 1, 1997, the business of Seller
---------------
has been conducted in the ordinary course consistent with past practice.
(i) No Broker's or Finder's Fees. No agent, broker, investment
----------------------------
banker, person or firm acting on behalf of Seller is or will be entitled to any
broker's or finder's fee or any other commission or similar fee in connection
with any of the transactions contemplated herein, except for John F. Taylor &
Associates whose fees and expenses will be paid by Seller.
8
<PAGE>
(j) Employee Benefit Plans. There are no plans of Seller in effect
----------------------
for pension, profit sharing, deferred compensation, severance pay, bonuses,
stock options, stock purchases, or any other form of retirement or deferred
benefit, or for any health, accident or other welfare plan, as to which Buyer
will become liable as a result of the transactions contemplated hereby.
(k) Environmental Matters. There have been no private or governmental
---------------------
claims, citations, complaints, notices of violation or letters made or issued to
or threatened against Seller by any governmental entity or private or other
party for the impairment or diminution of, or damage, injury or other adverse
effects to, the environment or public health resulting, in whole or in part,
from the ownership, use or operation of Seller's facilities which will be
occupied or operated by Buyer as a result of the transactions contemplated
hereby ("the Property").
Seller has duly complied with, and to the best of Seller's knowledge,
the Property is in material compliance with, the provisions of all federal,
state and local environmental laws.
Seller has been issued, and will maintain until the date of Closing,
all required federal, state and local permits, licenses, certificates and
approvals with respect to the Property relating to environmental, health or
safety matters.
(l) Taxes. There are no taxes on or measured by income or gross
-----
receipts or franchise, real and personal property, employment, excise, sales and
use or other taxes of any kind properly attributable to periods up to and
including the Closing
9
<PAGE>
for which Buyer could be held liable which have not been or will not be paid by
Seller as they fall due.
SECTION 2.02. Representations and Warranties of Buyer. Buyer
---------------------------------------
represents and warrants to, and agrees with, Seller as follows:
(a) Organization. Buyer is a corporation duly organized, validly
------------
existing and in good standing under the laws of the State of Washington and is
duly qualified to do business as a foreign corporation in good standing in
California.
(b) Binding Obligation. Buyer has all requisite corporate power and
------------------
authority to enter into and perform its obligations under this Agreement and to
carry out the transactions contemplated hereby. All corporate acts and other
proceedings required to be taken by Buyer to authorize the execution, delivery
and performance by Buyer of this Agreement and the transactions contemplated
hereby, have been duly and properly taken. This Agreement has been duly
executed and delivered by Buyer and constitutes the legal, valid and binding
obligation of Buyer, enforceable against Buyer in accordance with its terms.
The execution, delivery and performance by Buyer of this Agreement does not and
will not conflict with, or result in any violation of, any provision of the
Articles of Incorporation or By-laws of Buyer, or any provision of any law,
ordinance, rule, regulation, judgment, order, decree, agreement, instrument or
license applicable to Buyer or to its property or assets. No consent, approval,
order or authorization of, or registration, declaration or filing with, any
court, administrative agency or commission or other governmental
10
<PAGE>
authority or instrumentality, domestic or foreign, is required by or with
respect to Buyer in connection with its execution, delivery or performance of
this Agreement.
(c) No Broker's or Finder's Fees. No agent, broker, investment
----------------------------
banker, person or firm acting on behalf of Buyer is or will be entitled to any
broker's or finder's fee or any other commission or similar fee in connection
with any of the transactions contemplated herein.
(d) Taxes. Buyer shall be responsible for all taxes on the Purchased
-----
Assets for all periods on and after the Closing Date.
(e) Purchase for Resale. Buyer is purchasing inventory for resale in
-------------------
the regular course of its business and Buyer will deliver a valid resale
certificate on a form approved by the State Board of Equalization to Seller at
the Closing, which certificate will contain the seller's permit number held by
the Buyer.
ARTICLE III
Covenants Relating to Conduct of business
-----------------------------------------
SECTION 3.01. Covenants of Seller. During the period from the date
-------------------
of this Agreement and continuing until the Closing or earlier termination of
this Agreement, Seller agrees (except as expressly contemplated by this
Agreement or to the extent that Buyer shall otherwise consent in writing) that:
(a) Ordinary Course. It shall carry on its business in the usual,
---------------
regular and ordinary course in substantially the same manner as heretofore
conducted and, to the extent consistent with such business, use all reasonable
efforts consistent with past
11
<PAGE>
practice and policies to preserve intact its present business organization, keep
available the services of its present officers and key employees and preserve
its relationships with customers, suppliers and others having business dealings
with it to the end that its goodwill and ongoing business shall be unimpaired as
a result of the transactions contemplated hereby.
(b) No Other Bids. Neither Seller nor any of its affiliates shall,
-------------
nor shall they authorize any officer, director or employee of or any investment
banker, attorney, accountant or other representative retained by any of them to,
solicit or encourage (including by way of furnishing information or entering
into discussions or negotiations of any kind) any inquiries or the making of any
proposal which may reasonably be expected to lead to any takeover proposal. As
used in this paragraph, "takeover proposal" shall mean any proposal for a merger
or other business combination involving Seller or for the acquisition of a
substantial equity interest in Seller or all or a substantial portion of the
Purchased Assets other than the transactions contemplated by this Agreement.
ARTICLE IV
Additional Agreements
---------------------
SECTION 4.01. Access to Information. Seller shall afford to Buyer
---------------------
and to Buyer's accountants, counsel and other representatives, reasonable access
during normal business hours during the period prior to the Closing to the books
and records relating to its business, and, during such period, Seller shall
12
<PAGE>
furnish promptly to Buyer all information concerning the operations, properties
and personnel of the business as Buyer may reasonably request. Buyer will hold
such information in confidence and not use it for any purpose other than to
evaluate the transaction contemplated hereby, and in the event of termination of
this Agreement for any reason Buyer shall promptly return, or cause to be
returned, to Seller all nonpublic documents obtained from Seller.
SECTION 4.02. Expenses. Whether or not the transactions contemplated
--------
hereby are consummated, all costs and expenses incurred by Buyer or Seller in
connection with this Agreement and the transactions contemplated hereby shall be
paid by the party incurring such costs.
SECTION 4.03. Press Releases. None of the parties hereto shall issue
--------------
a press release or other publicity announcing the sale of the Purchased Assets
or any other aspect of the transactions contemplated hereby without the prior
written approval of the other party, which approval will not be unreasonably
withheld, unless such disclosure is required by applicable law.
SECTION 4.04. Use of Name. Immediately following the Closing, Seller
-----------
will cease using the name "Standard Shoes" or any other name similar thereto as
a tradename or business name or transacting business under any such name, but
Seller shall not be required to change its corporate name in order to comply
with this requirement. Since such name is included in the Purchased Assets,
Buyer will provide Seller with a license to use such name for such limited
purpose if requested to do so by Seller.
13
<PAGE>
SECTION 4.05. Release of Seller. Buyer shall use all reasonable
-----------------
efforts to procure the release of Seller from its obligations under the Assumed
Leases.
SECTION 4.06. Pro-rations. Taxes, utilities and other similar
-----------
expenses will be pro-rated for each Assumed Lease.
SECTION 4.07. Transitional Arrangements. Prior to Closing Seller
-------------------------
shall have made arrangements satisfactory to Buyer (i) to prepare for the
physical inventory in the manner contemplated by Section 1.06 hereof; and (ii)
to terminate the Standard Shoes credit card and provide appropriate advance
notice to credit card customers by mailings and other means so that there will
be no customer confusion after Closing.
ARTICLE V
Conditions Precedent
--------------------
SECTION 5.01. Conditions to Each Party's Obligation. The respective
-------------------------------------
obligation of each party hereunder shall be subject to the satisfaction prior to
the Closing Date of the following conditions:
(a) Approvals. All authorizations, consents, orders or approvals of,
---------
or declarations or filings with, or expiration of waiting periods imposed by,
any Governmental Entity necessary for the consummation of the transactions
contemplated by this Agreement shall have been filed, occurred or been obtained.
(b) Legal Action. No action, suit or proceeding shall have been
------------
instituted or threatened before any court or governmental
14
<PAGE>
body seeking to challenge or restrain the transactions contemplated hereby.
(c) Statutes. No statute, rule or regulation shall have been enacted
--------
by the government of the United States or any state or agency thereof which
would make the consummation of the transactions contemplated hereby illegal.
(d) Consents of Landlords Under Assumed Leases. Seller shall have
------------------------------------------
obtained any consents of any Landlord required under the Assumed Leases.
SECTION 5.02. Conditions of Obligations of Buyer. The obligations of
----------------------------------
Buyer to effect the transactions contemplated hereby are subject to the
satisfaction of the following conditions unless waived by Buyer:
(a) Representations and Warranties. The representations and
------------------------------
warranties of Seller set forth in this Agreement shall be true and correct in
all material respects as of the date of this Agreement and as of the Closing
Date as though made on and as of the Closing Date, except as otherwise
contemplated by this Agreement, and Buyer shall have received a certificate
signed by the chief executive officer of Seller to such effect.
(b) Performance of Obligations of Seller. Seller shall have performed
------------------------------------
all obligations required to be performed by it under this Agreement prior to the
Closing Date, and Buyer shall have received a certificate signed by the chief
executive officer of Seller to such effect.
(c) Testing. Buyer shall have completed such testing as it deems
-------
appropriate of Seller's computer-generated inventory
15
<PAGE>
system and shall be reasonably satisfied that the Inventory Report fairly and
accurately presents the cost of Seller's inventory.
(d) Consents and Actions. All material consents of any third parties
--------------------
to the transactions contemplated by this Agreement shall have been obtained.
(e) Lease Assignments. Seller shall have obtained and delivered to
-----------------
Buyer assignments of all leases from third parties included in the Purchased
Assets in the form attached.
(f) New Leases. Seller shall have entered into the New Leases with
----------
respect to the Owned Stores in the form attached.
(g) Release of Security Interests. Provision satisfactory to Buyer
-----------------------------
shall have been made for the release of any security interests which encumber
any of the Purchased Assets.
(h) Agreement as to Real Estate Matters. Seller shall have executed a
-----------------------------------
management agreement (the "Management Agreement") with respect to the retail
store located at 11055 Pico Blvd., Los Angeles, California, which Management
Agreement shall cover only that period from the Closing Date through June 30,
1997, and shall provide for Buyer to indemnify Seller for any damages incurred
by Seller, as a result of Buyer's failure to vacate said retail store prior to
June 30, 1997.
SECTION 5.03. Conditions of Obligation of Seller. The obligations of
----------------------------------
Seller to effect the transactions contemplated hereby are subject to the
satisfaction of the following conditions unless waived by Seller:
(a) Representations and Warranties. The representations and
------------------------------
warranties of Buyer set forth in this Agreement shall be true
16
<PAGE>
and correct in all material respects as of the date of this Agreement and as of
the Closing Date as though made on and as of the Closing Date, except as
otherwise contemplated by this Agreement, and Seller shall have received a
certificate signed by the chief executive officer of Buyer to such effect.
(b) Performance of Obligations of Buyer. Buyer shall have performed
-----------------------------------
all obligations required to be performed by it under this Agreement prior to the
Closing Date, and Seller shall have received a certificate signed by the chief
executive officer of Buyer to such effect.
(c) Consents and Actions. All material consents of any third parties
--------------------
or governmental agencies to the transactions contemplated hereby shall have been
obtained.
(d) New Leases. Buyer shall have entered into the New Leases.
----------
(e) Assumption Agreement. Buyer shall have entered into an Assumption
--------------------
Agreement on terms reasonably satisfactory to Seller with respect to the Assumed
Leases.
(f) Agreement as to Real Estate Matters. Buyer shall have executed
-----------------------------------
the Management Agreement (as defined in Section 5.02(h)).
ARTICLE VI
Indemnification
---------------
SECTION 6.01. Buyer Claims. Except as hereinafter set forth, Seller
------------
and the Shareholders shall jointly and severally indemnify and hold harmless
Buyer and its successors and assigns
17
<PAGE>
and its and their respective officers, directors, shareholders, employees and
agents, against, and in respect of, any and all damages, claims, losses,
liabilities and expenses, including, without limitation, reasonable legal,
accounting and other expenses, which may arise out of any misrepresentation or
other breach or violation of this Agreement by Seller or the Shareholders;
provided however, that Buyer shall be entitled to indemnification hereunder only
when the aggregate of all such claims (excluding for this purpose legal,
accounting and other expenses) exceeds $25,000, and only with respect to amounts
by which the aggregate of all such claims exceeds $25,000.
SECTION 6.02. Seller Claims. Except as hereinafter set forth, Buyer
-------------
shall indemnify and hold harmless Seller and the Shareholders and their
successors and assigns and their respective officers, directors, shareholders,
employees and agents, against, and in respect of, any and all damages, claims,
losses, liabilities and expenses, including, without limitation, reasonable
legal, accounting and other expenses, which may arise out of any
misrepresentation or other breach or violation of this Agreement by Buyer;
provided however, that Seller and the Shareholders shall be entitled to
indemnification hereunder only when, and only with respect to amounts by which,
the aggregate of all such claims (excluding for this purpose legal, accounting
and other expenses) exceeds $25,000, and only with respect to amounts by which
the aggregate of all such claims exceeds $25,000.
SECTION 6.03. Notice of Claim. Upon obtaining knowledge thereof, the
---------------
party to be indemnified (the "Indemnified Party")
18
<PAGE>
shall promptly notify the party which is required to provide indemnification
(the "Indemnifying Party") in writing of any damage, claim, loss, liability or
expense which the Indemnified Party has determined has given rise or could give
rise to a claim under this Article VI (such written notice being hereinafter
referred to as a "Notice of Claim"). A Notice of Claim shall contain a brief
description of the nature and estimated amount of any such claim giving rise to
a right of indemnification.
SECTION 6.04. Defense of Third Party Claims. With respect to any
-----------------------------
claim or demand set forth in a Notice of Claim relating to a third party claim,
the Indemnifying Party may defend, in good faith and at its expense, any such
claim or demand, and the Indemnified Party, at its expense, shall have the right
to participate in the defense of any such third party claim. So long as the
Indemnifying Party is defending in good faith any such third party claim, the
Indemnified Party shall not settle or compromise such third party claim. If the
Indemnifying Party does not so elect to defend any such third party claim, the
Indemnified Party shall have no obligation to do so.
ARTICLE VII
Termination, Amendment and Waiver
---------------------------------
SECTION 7.01. Termination. This Agreement may be terminated at any
-----------
time prior to the Closing:
(a) by mutual consent of Buyer and Seller;
(b) by either Buyer or Seller if there has been a material
misrepresentation or breach of covenant or agreement
19
<PAGE>
contained in this Agreement on the part of the other and such breach of a
covenant or agreement has not been promptly cured;
(c) by Buyer if any of the conditions set forth in Sections 5.01 and
5.02 shall not have been satisfied before April 30, 1997 or such later date as
Buyer and Seller shall mutually agree in writing;
(d) by Seller if any of the conditions set forth in Sections 5.01 and
5.03 or shall not have been satisfied before April 30, 1997 or such later date
as Buyer and Seller shall mutually agree in writing.
SECTION 7.02. Effect of Termination. In the event of termination of
---------------------
this Agreement by either Seller or Buyer as provided in Section 7.01, this
Agreement shall forthwith become void and there shall be no liability or
obligation on the part of Buyer, or Seller or their respective officers or
directors or shareholders except as set forth in Sections 4.01 and 4.02 and
except to the extent that such termination results from the wilful breach by a
party hereto of any of its representations, warranties, covenants or agreements
set forth in this Agreement.
SECTION 7.03. Amendment. This Agreement may not be amended except by
---------
an instrument in writing signed on behalf of each of the parties hereto.
ARTICLE VIII
Labor and Employment Matters
----------------------------
SECTION 8.01. Buyer's Employment Decisions. Buyer shall have total
----------------------------
and absolute discretion with respect to any and all
20
<PAGE>
employment decisions after the Closing. Without limiting the generality of the
foregoing, Buyer shall be under no obligation to hire or employ any supervisory
or non-supervisory employees currently employed by Seller.
SECTION 8.02. Employment and Benefit Contracts. Buyer shall not
--------------------------------
assume any employment contracts of whatever nature or any obligations arising
out of any employment contracts, express or implied, oral or written, individual
or collective, between Seller and any of Seller's employees. Nor shall Buyer
assume any obligations arising out of any pension benefit, employee welfare
benefit, bonus, deferred compensation, stock purchase, stock option, severance,
fringe benefit, medical insurance, life insurance or similar plan, policy or
program of Seller, whether or not covered or excluded from coverage under the
Employee Retirement Security Act of 1974, as amended (ERISA). Seller shall be
solely responsible for complying with all of its obligations, if any, to its
employees, including compliance with the provisions of ERISA, the Multi-Employer
Pension Plan Amendments Act of 1980 (MPPAA), the Consolidated Omnibus Budget
Reconciliation Act (COBRA), and the Worker Adjustment and Retraining
Notification Act (WARN).
SECTION 8.03. Collective Bargaining Agreements. Buyer shall not be
--------------------------------
bound by any labor agreements between Seller and any labor organizations, nor
shall Buyer assume any obligations or liabilities whatsoever resulting from any
such labor agreements. Buyer shall have no obligation to arbitrate any disputes
that may have arisen or may arise in the future under such labor agreements.
Buyer shall have no duty to continue or maintain in effect any of
21
<PAGE>
the pension, health and welfare or other fringe benefit plans or agreements to
which Seller may be a party with any labor organizations. Seller shall assume
any and all withdrawal liability under the Multi-Purpose Employer Pension Plan
Amendments Act of 1980.
SECTION 8.04. Employee Notification. Seller shall give appropriate
---------------------
and sufficient notification, as may be required by both law and contract, to all
of its employees and any of their bargaining representatives of this transaction
and of the termination of their employment. Prior to the Closing Date, Seller
shall make no promises, representations or guarantees to its employees or their
bargaining representatives about the possibility of their being hired or
employed by Buyer or Buyer's agents or subcontractors.
ARTICLE IX
General Provisions
------------------
SECTION 9.01. Survival of Representations and Warranties and
----------------------------------------------
Agreements. All representations and warranties in this Agreement or in any
- ----------
instrument delivered pursuant to this Agreement and the indemnity obligations
pursuant to Sections 6.01 and 6.02 hereof shall survive the Closing until the
expiration of 18 months from the Closing Date, and, thereafter, to the extent a
claim is made in writing prior to such expiration with respect to any breach of
such representation, warranty or agreement, until such claim is finally
determined or settled.
22
<PAGE>
SECTION 9.02. Sales Taxes. All sales and use taxes, if any, due
-----------
under the laws of any state, any local government authority, or the federal
government of the United States, in connection with the purchase and sale of the
Purchased Assets shall be paid by Seller.
SECTION 9.03. Bulk Sales Compliance. Without regard to the
---------------------
limitations set forth in Section 6.01 hereof, Seller and the Shareholders will
jointly and severally indemnify and hold Buyer and its successors and assigns
harmless on an after-tax basis against any and all damages, claims, losses,
liabilities and expenses, including, without limitation, reasonable legal,
accounting and other expenses, arising from the failure by Seller to make any
required payments to Seller's creditors.
SECTION 9.04. Notices. All notices and other communications
-------
hereunder shall be in writing and shall be deemed given if delivered personally
or mailed by registered or certified mail (return receipt requested) to the
parties at the following addresses (or at such other address for a party as
shall be specified by like notice):
(a) if to Buyer to
SHOE INN, INC.
3200 Regatta Boulevard
Richmond, California 94804
Attention: Dimitri Beinus
with a copy to: John F. Seegal, Esq.
ORRICK, HERRINGTON & SUTCLIFFE LLP
The Old Federal Reserve Bank Building
400 Sansome Street
San Francisco, California 94111
23
<PAGE>
(b) if to Seller or the Shareholders, to
STANDARD SHOE COMPANY
1000 S. LaBrea Ave.
Inglewood, California 90301
Attention: Lawrence Schwartz
with a copy to: Joe Ciasulli, Esq.
MITCHELL, SILBERBERG & KNUPP LLP
11377 West Olympia Boulevard
Los Angeles, California 90064
All notices given thereunder shall be deemed given at the time of
personal delivery or, if mailed, on the earlier of actual receipt as shown on
the registry receipt or three business days after the date of such mailing.
SECTION 9.05. Counterparts. This Agreement may be executed in one or
------------
more counterparts, all of which shall be considered one and the same agreement
and shall become effective when one or more counterparts have been signed by
each of the parties and delivered to the other party, it being understood that
all parties need not sign the same counterpart.
SECTION 9.06. Miscellaneous. This Agreement and the documents and
-------------
instruments and other agreements between the parties hereto (a) constitute the
entire agreement among the parties with respect to the subject matter hereof and
supersede all prior agreements and understandings, both written and oral, among
the parties with respect to the subject matter hereof, other than the
confidentiality agreement described on Schedule 9.06 hereto, (b) is not intended
to confer upon any other person any rights or remedies hereunder and (c) shall
not be assigned by operation of law or otherwise except as otherwise
specifically provided.
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<PAGE>
SECTION 9.07. Governing Law. This Agreement shall be governed in all
-------------
respects, including validity, interpretation and effect, by the internal laws of
the State of California.
IN WITNESS WHEREOF, Buyer, the Shareholders and Seller have executed
this Agreement, all as of the date first written above.
STANDARD SHOE COMPANY
By
-----------------------------------------
STANDARD SHOE OF SOUTHERN CALIFORNIA
By
-----------------------------------------
SHAREHOLDERS
Ann Schwartz, Allen B. Cutrow and Marvin Matlin as
Trustees under the Survivor's Trust, the Non-
Exempt Marital Trust and the Exempt Marital Trust
of the Schwartz Family Trust u/d/t dated March 26,
1992, as amended under amendment dated May 4, 1992
By
-----------------------------------------
Ann Schwartz as Trustee
By
-----------------------------------------
Allan B. Cutrow as Trustee
By
-----------------------------------------
Marvin Matlin as Trustee
-------------------------------------------
Lawrence Schwartz
SHOE INN, INC.
By
-----------------------------------------
25
<PAGE>
INDEMNIFICATION AGREEMENT
This Indemnification Agreement (the "Agreement") is made as of
the ____ day of December, 1997, by and between Shoe Pavilion, Inc., a Delaware
corporation (the "Company") and _____________________________ ("Indemnitee").
W I T N E S S E T H:
WHEREAS, the Company has been advised that there can be no
assurance that directors' and officers' liability insurance will continue to be
available to the Company and Indemnitee, and believes that it is possible that
the cost of such insurance, if obtainable, may not be acceptable to the Company;
and
WHEREAS, the Company and the Indemnitee recognize the
substantial increase in corporate litigation in general, subjecting officers and
directors to expensive litigation risks; and
WHEREAS, Indemnitee is unwilling to serve, or continue to
serve, the Company or any of its wholly owned subsidiaries as an officer and/or
director without assurances that adequate liability insurance, indemnification
or a combination thereof is, and will continue to be, provided; and
WHEREAS, the Company, in order to induce Indemnitee to serve
or to continue to serve the Company or any of its wholly owned subsidiaries, has
agreed to provide Indemnitee with the benefits contemplated by this Agreement;
and
WHEREAS, as a result of the provision of such benefits,
Indemnitee has agreed to serve or to continue to serve as an officer and/or
director of the Company or any of its wholly owned subsidiaries.
NOW, THEREFORE, in consideration of the promises, conditions,
representations and warranties set forth herein, the Company and Indemnitee
hereby agree as follows:
1. Definitions. The following terms, as used herein, shall
-----------
have the following respective meanings:
"Covered Amount" means Losses and Expenses which, in type or amount,
are not insured under any directors' and officers' liability insurance
maintained by the Company from time to time.
"Covered Act" means any past, present or future breach of duty,
neglect, error, misstatement, misleading statement, omission or other
act done or wrongfully attempted
<PAGE>
by Indemnitee or any of the foregoing alleged by any claimant or any
claim against Indemnitee by reason of him at any time being a director
or officer or other agent of the Company or any of its wholly owned
subsidiaries or a director, officer, employee or agent of another
corporation, partnership, joint venture, trust or other enterprise at
the request of the Company.
"Determination" means a determination, based on the facts known at the time,
made by:
(i) An award of a neutral arbitrator selected by the
parties; or
(ii) A final adjudication by a court of competent
jurisdiction.
"Determined" shall have a correlative meaning.
"Excluded Claim" means any payment for Losses or Expenses in connection with any
claim:
(i) Based upon or attributable to Indemnitee gaining in fact
any personal profit or advantage to which Indemnitee is
not entitled; or
(ii) For an accounting of profits in fact made from the
purchase or sale by Indemnitee of securities of the
Company within the meaning of Section 16 of the
Securities Exchange Act of 1934 as amended, or similar
provisions of any state law; or
(iii) Resulting from Indemnitee's knowingly fraudulent,
deliberately dishonest or willful misconduct unless
Indemnitee acted in good faith and in a manner
Indemnitee reasonably believed to be in or not opposed
to the best interests of the Company as determined by
(i) the Board of Directors of the Company by majority
vote of a quorum consisting of directors who were not
parties to the proceeding for which indemnification is
sought, (ii) if a quorum of disinterested directors so
directs or if such quorum is not obtainable, by
independent legal counsel in a written opinion, or (iii)
by a vote of the holders of a majority of the Company's
common stock, excluding the shares held by Indemnitee;
or
(iv) The payment of which by the Company under this Agreement
is not permitted by applicable law; or
2
<PAGE>
(v) Which are not within the Covered Amount, i.e., which are
insured in type and amount under any directors' and
officers' liability insurance maintained by the Company
from time to time.
"Expenses" means any reasonable expenses incurred by Indemnitee as a
result of a claim or claims made or threatened against him for Covered
Acts including, without limitation, counsel fees and costs of
investigative, judicial or administrative proceedings (including an
action by or in the right of the Company), whether civil or criminal,
or appeals and costs of attachment or similar bonds.
"Loss" means any amount which Indemnitee is legally obligated to pay
as a result of a claim or claims made against him for Covered Acts
including, without limitation, damages, judgments, fines and other
sums paid in settlement of a claim or claims.
2. Indemnification. The Company shall indemnify, defend
---------------
Indemnitee and hold him harmless from the Covered Amount of any and all Losses
and Expenses subject, in each case, to the further provisions of this Agreement.
3. Excluded Coverage. The Company shall have no obligation to
-----------------
indemnify Indemnitee for and defend and hold him harmless from any Loss or
Expense which has been Determined to constitute an Excluded Claim.
4. Indemnification Procedures.
--------------------------
(a) Promptly after receipt by Indemnitee of notice of the
commencement of or the threat of commencement of any action, suit or proceeding,
Indemnitee shall, if indemnification with respect thereto may be sought from the
Company under this Agreement, notify the Company of the commencement thereof.
(b) If, at the time of the receipt of such notice, the
Company has directors' and officers' liability insurance in effect, the Company
shall give prompt notice of the commencement of such action, suit or proceeding
to the insurers in accordance with the procedures set forth in the respective
policies in favor of Indemnitee. The Company shall thereafter take all necessary
or desirable action to cause such insurers to pay, on behalf of Indemnitee, all
Losses and Expenses payable as a result of such action, suit or proceeding in
accordance with the terms of such policies.
(c) To the extent the Company does not, at the time of the
commencement of or the threat of commencement of such action, suit or
proceeding, have applicable directors' and officers' liability insurance, or if
a Determination is made that any Expenses arising out of such action, suit or
proceeding will not be payable under the directors' and officers' liability
insurance then in effect, the Company shall be obligated to pay the Expenses of
any such action, suit or proceeding in advance of the final disposition thereof;
and
3
<PAGE>
the Company, if appropriate, shall be entitled to assume the defense of such
action, suit or proceeding with counsel satisfactory to Indemnitee, upon the
delivery to Indemnitee of written notice of its election so to do. After
delivery of such notice, the Company will not be liable to Indemnitee under this
Agreement for any legal or other Expenses subsequently incurred by Indemnitee in
connection with such defense other than reasonable Expenses of investigation,
provided that Indemnitee shall have the right to employ its counsel in any such
action, suit or proceeding, but the fees and expenses of such counsel incurred
after delivery of notice from the Company of its assumption of such defense
shall be at Indemnitee's expense, provided further that if (i) the employment of
counsel by Indemnitee has been previously authorized by the Company, (ii)
Indemnitee shall have reasonably concluded, based upon a written opinion of
independent legal counsel, that there may be a conflict of interest between the
Company and Indemnitee in the conduct of any such defense, (iii) the Company
shall not, in fact, have employed counsel to assume the defense of such action,
or (iv) Indemnitee necessarily had to consult with counsel or counsel had to act
on Indemnitee's behalf prior to the time that Company-retained outside counsel
was able to act, in each of which cases the fees and expenses of counsel shall
be at the expense of the Company. The Company will not be entitled to assume the
defense of any such action, suit or proceedings brought by or on behalf of the
Company or as to which Indemnitee shall have made the conclusion described in
(ii) above.
(d) All payments on account of the Company's
indemnification obligations under this Agreement shall be made within thirty
(30) days of Indemnitee's written request therefor unless a Determination is
made that the claims giving rise to Indemnitee's request are Excluded Claims or
otherwise not payable under this Agreement, provided that all payments on
account of the Company's obligations to pay Expenses under Paragraph 4(c) of
this Agreement prior to the final disposition of an action, suit or proceeding
shall be made within ten (10) days of Indemnitee's written request therefor and
such obligation shall not be subject to any such Determination but shall be
subject to Paragraph 4(e) of this Agreement.
(e) Indemnitee agrees that he will reimburse the Company
for all Losses and Expenses paid by the Company in connection with any action,
suit or proceeding against Indemnitee in the event and only to the extent that a
Determination shall have been made by a court in a final adjudication or by
final and binding arbitration from which there is no further right of appeal
that the Indemnitee is not entitled to be indemnified by the Company for such
Expenses because the claim is an Excluded Claim or because Indemnitee is
otherwise not entitled to payment under this Agreement pursuant to the Company's
bylaws or otherwise, including the Delaware Corporations Code.
5. Settlement. The Company shall have no obligation to
----------
indemnify Indemnitee under this Agreement for any amounts paid in settlement of
any action, suit or proceeding effected without the Company's prior written
consent. The Company shall not settle any claim in any manner which would impose
any obligation on Indemnitee without Indemnitee's written consent. Neither the
Company nor Indemnitee shall unreasonably withhold or delay their consent to any
proposed settlement.
4
<PAGE>
6. Rights Not Exclusive. The rights provided hereunder
--------------------
shall not be deemed exclusive of any other rights to which the Indemnitee may be
entitled under any bylaw, agreement, vote of stockholders or of disinterested
directors or otherwise, both as to action in his official capacity and as to
action in any other capacity by holding such office, and shall continue after
the Indemnitee ceases to serve the Company as an officer and/or director.
7. Enforcement.
-----------
(a) In any action for indemnification, the burden of
proving that indemnification is not required under this Agreement shall be on
the Company.
(b) In the event that any action is instituted by
Indemnitee under this Agreement, or to enforce or interpret any of the terms of
this Agreement, Indemnitee shall be entitled to be paid all court and
arbitrator's costs and expenses, including reasonable counsel fees, incurred by
Indemnitee with respect to such action, unless the court or an arbitrator
determines that each of the material assertions made by Indemnitee as a basis
for such action were not made in good faith or were frivolous.
(c) Indemnitee may elect to submit any action under this
Agreement to final and binding arbitration. Any reference to arbitration herein
shall include the rights of the parties to move to vacate or confirm an
arbitrator's award under California law.
8. Severability. In the event that any provision of this
------------
Agreement is determined by a court to require the Company to do or to fail to do
any act which is in violation of applicable law, such provision shall be limited
or modified in its application to the minimum extent necessary to avoid a
violation of law, and, as so limited or modified, such provision and the balance
of this Agreement shall be enforceable in accordance with their terms.
9. Choice of Law. This Agreement shall be governed by
-------------
and construed and enforced in accordance with the laws of the State of Delaware.
10. Continuation of Indemnification. All agreements and
-------------------------------
obligations of the Company contained herein shall continue during the period
that Indemnitee is an officer, and/or director or other Agent of the Company (or
is or was serving at the request of the Company as a director, officer, employee
or agent of another corporation, partnership, joint venture, trust or other
enterprise) and shall continue thereafter so long as Indemnitee shall be subject
to any possible Loss or Expense by reason of the fact that Indemnitee was an
officer and/or director of the Company or serving in any other capacity referred
to above.
11. Subrogation. In the event of payment under this
-----------
Agreement, the Company shall be subrogated to the extent of such payment to all
of the rights of recovery of Indemnitee, who shall execute all documents and
take all actions reasonably requested by the Company to implement such right of
subrogation.
5
<PAGE>
12. Successor and Assigns. This Agreement shall be (i)
---------------------
binding upon all successors and assigns of the Company (including any transferee
of all or substantially all of its assets and any successor by merger or
otherwise by operation of law), and (ii) shall be binding on and inure to the
benefit of the heirs, personal representatives and estate of Indemnitee. In the
event that the Company or any of its assets are sold or in the event that
Company is merged with any other entity, the Company shall insure that a term
and condition of the sale or merger shall be that all of Company's obligations
under this Agreement shall be assumed by the buyer or successor.
13. Amendment. No amendment, modification, termination or
---------
cancellation of this Agreement shall be effective unless made in writing signed
by each of the parties hereto.
14. Authorization and Approval. The Company confirms and
----------------------------
agrees that it has entered into this Agreement and assumed the obligations
imposed on it under this Agreement to induce Indemnitee to continue as a
director and/or officer of the Company, and acknowledges that Indemnitee is
relying upon the full enforcement and binding nature of this Agreement in
continuing in such capacity. The Company represents and warrants to Indemnitee
that all requisite corporate action has or will be taken promptly to authorize
and approve this Agreement, including obtaining Board and/or shareholder
approval of this Agreement.
IN WITNESS WHEREOF, the Company and Indemnitee have executed
this Agreement as of the day and year first above written.
SHOE PAVILION, INC.
By: _______________________________
Name: Dmitry Beinus
Title: Chairman of the Board, President
and Chief Executive Officer
INDEMNITEE
Name:______________________________
6
