<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JANUARY 26, 1998
REGISTRATION NO. 333-41877
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------------
AMENDMENT NO. 1
TO
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
----------------
SHOE PAVILION, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
----------------
<TABLE>
<CAPTION>
DELAWARE 5661 94-3289691
<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>
<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>
----------------
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. [_]
----------------
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, JANUARY 26, 1998
1,800,000 SHARES
[LOGO OF SHOE PAVILION]
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. The
Common Stock has been approved for quotation on the Nasdaq National Market
under the symbol "SHOE."
Following completion of this 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). The Company will use $7.8 million
of the proceeds of this offering to fund a distribution to Mr. Beinus.
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>
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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)........................................ $ $ $
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</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>
Inside Cover:
SHOE PAVILION
[Photographs showing the exterior and interior of certain of the Company's
stores.]
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.
CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN TRANSACTIONS THAT
STABILIZE, MAINTAIN, OR OTHERWISE AFFECT THE PRICE OF THE COMMON STOCK,
INCLUDING BY ENTERING STABILIZING BIDS, EFFECTING SYNDICATE COVERING
TRANSACTIONS OR IMPOSING PENALTY BIDS. FOR A DESCRIPTION OF THESE ACTIVITIES,
SEE "UNDERWRITING."
2
<PAGE>
Gatefold Left:
IF YOU DIDN'T BUY YOUR SHOES AT SHOE PAVILION YOU PAID TOO MUCH!
[Photographs of selected brands of shoes offered by the Company.]
Shoe Pavilion stores offer a bright, clean, low maintenance and functional
shopping environment to customers interested in purchasing men's and women's
value priced footwear.
[Photographs showing the interiors of certain of the COmpany's stores.]
The Company offers a broad selection of quality footwear from over 75 brand
names such as Amalfi, Clarks, Dexter, Fila, Florsheim, Naturalizer and Rockport.
<PAGE>
Gatefold Right:
[Photograph showing an interior of one of the Company's stores.]
<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 January 26, 1998, the
Company operated 55 retail stores in California, Washington, Oregon and Nevada
under the trade names Shoe Pavilion and Shoe Pavilion's Designer Shoe
Warehouse. From 1993 through 1997, net sales and income before income taxes
increased at compound annual growth rates of 23.0% and 99.3%, respectively. In
1997, net sales increased 48.7% to $45.1 million and income before income taxes
increased 150.4% to $3.7 million compared to 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 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 60%, 27% and 13%,
respectively, of net sales for 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 14 stores 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 351,000 shares of Common Stock issuable upon exercise of stock
options to be granted upon the completion of this offering. Also excludes
664,000 shares and 85,000 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>
YEAR ENDED DECEMBER 31,
----------------------------------------------
1993 1994 1995 1996 1997
------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Net sales...................... $19,687 $21,515 $25,539 $30,315 $45,074
Gross profit................... 6,486 6,508 7,816 9,997 15,738
Income (loss) from operations.. 461 (106) 1,172 1,775 4,246
Income (loss) before income
taxes......................... 236 (510) 648 1,488 3,726
Pro forma (provision) benefit
for income taxes(1)........... (85) 183 (246) (566) (1,435)
------- ------- ------- ------- -------
Pro forma net income (loss)(1). $ 151 $ (327) $ 402 $ 922 $ 2,291
======= ======= ======= ======= =======
Pro forma net income per
share(1)...................... $ 0.43
=======
Weighted average shares
outstanding................... 5,381
=======
SELECTED OPERATING DATA:
Number of stores:
Opened during period.......... 7 9 6 9 16
Closed during period.......... 0 0 4 6 2
Open at end of period......... 27 36 38 41 55
Comparable store sales increase
(decrease)(2)................. (9.1)% (12.4)% (1.0)% 8.0% 4.6%
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31, 1997
----------------------
ACTUAL AS ADJUSTED(3)
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<S> <C> <C>
BALANCE SHEET DATA:
Working capital ......................................... $ 6,045 $14,185
Total assets ............................................ 22,646 23,884
Total indebtedness (including current portion) .......... 7,658 271
Stockholders' equity..................................... 7,328 15,953
</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 (880,803 shares) which would be necessary to fund the $7.8 million
distribution of estimated undistributed taxable S corporation earnings. 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 $7.8 million to the
Company's current stockholder and (ii) a nonrecurring tax benefit, which
would have been $485,000 had the termination of the Company's S corporation
status occurred as of December 31, 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
two 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. In 1997, the Company's top ten suppliers
accounted for 44.5%
6
<PAGE>
of inventory purchases, of which purchases from Nine West Group, Inc. and The
Rockport Company, Inc. accounted for 9.7% and 7.5% 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 obtained 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 4.6% in 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. The Company does not have any current plans to
acquire any other companies, and 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, 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,
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. 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 15.7% of net sales in 1996 and 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 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. Prior to the Termination Date (as defined below), the Company
will make a distribution in the amount of $7.8 million to its sole
stockholder, which approximately equals the amount of the Company's estimated
earned and previously undistributed taxable S Corporation income through the
day preceding the date of termination of the Company's S corporation status
(the "Termination Date"). The distribution will be made in the form of a note
payable to the sole stockholder and will be due and payable by the Company
shortly after the completion of this offering. The $7.8 million note
9
<PAGE>
previously distributed to this stockholder 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."
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 this offering, 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 $7.8 million of the net proceeds from the offering
to fund a distribution to the existing stockholder, which is intended as a
distribution of previously undistributed S corporation earnings. 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." 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." 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 held by the sole
stockholder will 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
completion 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. 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 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. Prior to the Termination Date,
the Company will make an additional S corporation distribution of $7.8 million
to the Company's current stockholder, which approximately equals the estimated
earned and previously undistributed taxable S corporation income of the
Company through the day preceding the Termination Date. The distribution will
be made in the form of a note payable to the Company's current stockholder and
will be due and payable by the Company shortly after the completion of this
offering. Payment of the note will be funded from the net proceeds of this
offering. See "Use of Proceeds" and Note 3 of Notes to Consolidated Financial
Statements. As of 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. Prior to the Termination Date, the Company and its current
stockholder will enter into an agreement (the "Tax Indemnification Agreement")
providing that the Company will be indemnified by the Company's current
stockholder with respect to any federal, state or local corporate income taxes
the Company is required to pay as a result of the Company's failure to qualify
as an S corporation with respect to tax returns in which the Company reported
its income as an S corporation. The Tax
11
<PAGE>
Indemnification Agreement will further provide that the Company will indemnify
the Company's current stockholder on an after-tax basis with respect to any
federal, state or local income taxes (plus interest and penalties) paid or
required to be paid by such stockholder, and such stockholder will pay to the
Company any refunds of federal, state or local income taxes (including
interest received thereon) received by (or credited to) such stockholder, as a
result of a subsequent adjustment in income of the Company with respect to any
tax return in which the Company reported its income as an S corporation.
In connection with Shoe Pavilion's conversion to C corporation status, the
Company will record a nonrecurring tax benefit, which would have been $485,000
had the conversion occurred as of December 31, 1997. See "Risk Factors--Prior
S Corporation Status and Other Tax Matters."
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 ($18.5
million if the Underwriters' over-allotment option is exercised in full). The
Company will use $7.8 million of such proceeds to fund the payment of the
distribution that will be made prior to the Termination Date to its sole
stockholder of certain previously undistributed taxable income of the Company
as a result of the Company's S corporation status. See "Prior S Corporation
Status." In addition, approximately $7.4 million will be used to repay the
outstanding balance on the revolving line of credit portion of the Company's
credit facility. At December 31, 1997, the revolving line of credit had
aggregate principal outstanding of approximately $7.4 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. 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 December 31, 1997, the net tangible book value of the Company was
approximately $7.3 million, or approximately $1.63 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 $485,000 had the termination of the Company's S corporation status
occurred as of December 31, 1997, the pro forma tangible book value of the
Company as of December 31, 1997 would have been $16.0 million, or $2.53 per
share. This represents an immediate increase in net tangible book value of
$0.90 per share to the existing sole stockholder and an immediate dilution in
net tangible book value of $7.47 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 December 31, 1997...... $1.63
Increase per share attributable to the offering................ 0.90
-----
Pro forma net tangible book value per share after the offering.. 2.53
------
Dilution per share to new investors............................. $ 7.47
======
</TABLE>
The following table summarizes, on a pro forma basis as of December 31,
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% $ 817,000 4.3% $ 0.18
New investors............... 1,800,000 28.6 18,000,000 95.7 10.00
--------- ----- ----------- -----
Total...................... 6,300,000 100.0% $18,817,000 100.0%
========= ===== =========== =====
</TABLE>
The foregoing tables exclude options to purchase 351,000 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. See "Risk Factors--Dilution and
Benefits to Existing Stockholder."
13
<PAGE>
CAPITALIZATION
The following table sets forth the capitalization of the Company as of
December 31, 1997, (i) on an actual basis, (ii) on a pro forma basis to
reflect termination of the Company's S corporation status, including the $7.8
million distribution of undistributed taxable S corporation earnings to the
Company's current stockholder and a nonrecurring tax benefit, which would have
been $485,000 had the termination of the Company's S corporation status
occurred as of December 31, 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>
DECEMBER 31, 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)............................ $7,455 $7,455 $ 68
====== ====== =======
Long-term debt, net of current portion(1)......... 203 203 203
------ ------ -------
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
and pro forma; 6,300,000 shares outstanding, pro
forma as adjusted(2)............................ 4 4 6
Additional paid-in capital....................... 812 9 15,947
Retained earnings................................ 6,512 -- --
------ ------ -------
Total stockholders' equity...................... 7,328 13 15,953
------ ------ -------
Total capitalization........................... $7,531 $ 216 $16,156
====== ====== =======
</TABLE>
- ---------------------
(1) For a description of the Company's debt, see Notes 4 and 5 of Notes to
Consolidated Financial Statements.
(2) Excludes 351,000 shares of Common Stock issuable upon exercise of stock
options to be granted upon the completion of this offering. Also excludes
664,000 shares and 85,000 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, 1997 are derived from the Company's audited
consolidated financial statements. Such consolidated financial statements as
of December 31, 1996 and 1997 and for each of the three fiscal years in the
period ended December 31, 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 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>
YEAR ENDED DECEMBER 31,
----------------------------------------------
1993 1994 1995 1996 1997
------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Net sales...................... $19,687 $21,515 $25,539 $30,315 $45,074
Cost of sales and related
occupancy expenses............ 13,201 15,007 17,723 20,318 29,336
------- ------- ------- ------- -------
Gross profit................... 6,486 6,508 7,816 9,997 15,738
------- ------- ------- ------- -------
Selling expenses............... 4,525 4,976 4,835 5,592 8,242
General and administrative
expenses...................... 1,500 1,638 1,809 2,630 3,250
------- ------- ------- ------- -------
Income (loss) from operations.. 461 (106) 1,172 1,775 4,246
Interest and other expense,
net........................... (225) (404) (524) (287) (520)
------- ------- ------- ------- -------
Income (loss) before income
taxes......................... 236 (510) 648 1,488 3,726
Pro forma (provision) benefit
for income taxes(1)........... (85) 183 (246) (566) (1,435)
------- ------- ------- ------- -------
Pro forma net income (loss)(1). $ 151 $ (327) $ 402 $ 922 $ 2,291
======= ======= ======= ======= =======
Pro forma net income per
share(1)...................... $ 0.43
=======
Weighted average common shares
outstanding................... 5,381
=======
SELECTED OPERATING DATA:
Number of stores:
Opened during period.......... 7 9 6 9 16
Closed during period.......... 0 0 4 6 2
Open at end of period......... 27 36 38 41 55
Comparable store sales increase
(decrease)(2)................. (9.1)% (12.4)% (1.0)% 8.0% 4.6%
<CAPTION>
DECEMBER 31,
----------------------------------------------
1993 1994 1995 1996 1997(3)
------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Working capital................ $ 3,020 $ 1,964 $ 2,876 $ 3,783 $ 6,045
Total assets................... 7,956 10,079 9,473 15,146 22,646
Total indebtedness (including
current portion).............. 3,306 4,912 3,872 3,673 7,658
Stockholder's equity........... 2,740 2,083 2,695 4,567 7,328
</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 (880,803 shares) which would be necessary to fund the $7.8 million
distribution of estimated undistributed taxable S corporation earnings .
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) See Note 3 of Notes to Consolidated Financial Statements.
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 January 26, 1998, the
Company operated 55 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 14 stores 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 ten 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 4.6% in 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 "Risk Factors--Uncertainty of Future Operating Results;
Fluctuations in Comparable Store Sales."
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. The Company's inventory levels
have increased from $13.5 million to $19.8 million at December 31, 1996 and
1997, respectively. This increase is due in part to the substantial increase
in the number
16
<PAGE>
of the Company's stores. To the extent that the Company's current or future
inventory is comprised of older or obsolescent shoes, the Company will be
required to mark-down the sale price of those shoes, which could have a
material adverse effect on operating margins in affected periods. See "Risk
Factors--Inventory and Servicing Risk."
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 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. The pro forma adjustments reflect federal and
state income taxes as if the Company had not elected S corporation status for
income tax purposes. See "Prior S Corporation Status" and Note 3 of Notes to
Consolidated Financial Statements.
In connection with its conversion to C corporation status, the Company will
record a nonrecurring tax benefit, which would have been $485,000 had the
conversion occurred as of December 31, 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>
YEAR ENDED
DECEMBER 31,
-------------------
1995 1996 1997
----- ----- -----
<S> <C> <C> <C>
Net sales............................................... 100.0% 100.0% 100.0%
Gross profit............................................ 30.6 33.0 34.9
Selling expenses........................................ 18.9 18.4 18.3
General and administrative expenses..................... 7.1 8.7 7.2
----- ----- -----
Income from operations.................................. 4.6 5.9 9.4
Interest and other expense, net......................... (2.0) (1.0) (1.1)
----- ----- -----
Income before income taxes.............................. 2.6 4.9 8.3
Pro forma provision for income taxes.................... (1.0) (1.9) (3.2)
----- ----- -----
Pro forma net income.................................... 1.6% 3.0% 5.1%
===== ===== =====
</TABLE>
COMPARISON OF YEARS ENDED DECEMBER 31, 1997 AND 1996
Net Sales. Net sales increased 48.7% to $45.1 million for 1997 from $30.3
million for 1996. This increase in net sales was primarily attributable to new
store sales, including sales from 16 stores opened during 1997, which
contributed $15.0 million and a 4.6% increase in comparable store sales of
$1.2 million. Stores closed during 1996 and 1997 had contributed an additional
$1.4 million to net sales during 1996.
Gross Profit. Gross profit increased 57.4% to $15.7 million for 1997 from
$10.0 million for 1996, and increased as a percentage of net sales to 34.9%
from 33.0%. 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 1997 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 47.4% to $8.2
million for 1997 from $5.6 million for 1996, and decreased slightly as a
percentage of net sales to 18.3% from 18.4%. 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.
17
<PAGE>
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 23.6% to $3.2 million for 1997 from $2.6 million for 1996, and
decreased as a percentage of net sales to 7.2% from 8.7%, 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
81.0% to $520,000 for 1997 from $287,000 for 1996. The increase was
attributable to higher borrowings outstanding on the Company's revolving line
of credit to support increased inventory levels, including inventory purchased
from Standard Shoes.
Pro Forma Taxes. The pro forma taxes on income for 1997 were $1.4 million
compared to $566,000 for 1996. The pro forma effective tax rate for 1997 was
38.5% compared to 38.0% for 1996.
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%.
18
<PAGE>
QUARTERLY OPERATING RESULTS
The following table presents certain unaudited actual and pro forma
financial data for each of the Company's last eight 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. See "Prior S Corporation Status"
and Note 3 of Notes to Consolidated Financial Statements.
<TABLE>
<CAPTION>
THREE MONTHS ENDED
----------------------------------------------------------------------
SEPT.
MARCH 31 JUNE 30 SEPT. 30 DEC. 31 MARCH 31 JUNE 30 30 DEC. 31
1996 1996 1996 1996 1997 1997 1997 1997
-------- ------- -------- ------- -------- ------- ------- -------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net sales............... $6,073 $7,980 $7,883 $8,379 $8,155 $12,174 $11,856 $12,889
Gross profit............ 1,763 2,759 2,561 2,914 2,680 4,509 3,906 4,643
Income from operations.. 134 671 504 466 646 1,393 699 1,508
Income before income
taxes.................. 40 607 453 388 533 1,266 600 1,327
Pro forma provision for
income taxes........... (15) (230) (173) (148) (201) (478) (226) (530)
------ ------ ------ ------ ------ ------- ------- -------
Pro forma net income.... $ 25 $ 377 $ 280 $ 240 $ 332 $ 788 $ 374 $ 797
====== ====== ====== ====== ====== ======= ======= =======
Net sales............... 100.0% 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 36.0
Income from operations.. 2.2 8.4 6.4 5.6 7.9 11.4 5.9 11.7
Income before income
taxes.................. 0.7 7.6 5.7 4.6 6.5 10.4 5.1 10.3
Pro forma provision for
income taxes........... (0.3) (2.9) (2.1) (1.7) (2.4) (3.9) (1.9) (4.1)
------ ------ ------ ------ ------ ------- ------- -------
Pro forma net income.... 0.4% 4.7% 3.6% 2.9% 4.1% 6.5% 3.2% 6.2%
====== ====== ====== ====== ====== ======= ======= =======
</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 net sales of $2.8 million and an
increase in gross profit as a percentage of net sales of 3.3 percentage
points.
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 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.
19
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
The Company had $6.0 million in working capital as of December 31, 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 was $1.1 million, $566,000 and
($1.8) million for 1995, 1996 and 1997, respectively. Net cash provided by
(used in) operating activities historically has been driven primarily by net
income 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 $336,000, $569,000 and $1.2 million in 1995, 1996
and 1997, respectively. Expenditures for 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 1996 were primarily for the build-out of
nine 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. Since the Company
does not communicate electronically with its suppliers, the Company does not
need to upgrade legacy operating systems to address many of the more complex
Year 2000 issues. While the Company's software used internally is not fully
Year 2000 compliant, the Company believes that software that is fully
compliant is currently available for purchase on reasonable terms and that
such software can be implemented without undue expense.
Financing activities provided (used) cash of ($1.0) million, $93,000 and
$3.2 million in 1995, 1996 and 1997, respectively. The increase in cash
provided by financing activities for 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
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 1995, 1996 and 1997, the Company made distributions
to its sole stockholder of $0, $300,000 and $704,000, respectively. Prior to
the Termination Date, the Company will make an S corporation distribution in
the amount of $7.8 million to its sole stockholder, which approximately equals
the estimated earned and previously undistributed taxable S corporation income
of the Company through the day preceding the Termination Date. 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 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
December 31, 1997, the unused and available portion of the credit facility was
approximately $2.6 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
20
<PAGE>
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 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. 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.
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 January 26, 1998, the
Company operated 55 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 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
60%, 27% and 13%, respectively, of net sales for 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 58,000 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 55 stores as of January 26, 1998. 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 in 1997 and closed four stores in 1995, six stores in
1996 and two stores 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 operating and growth 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 60%, 27% and 13%, respectively, of net sales
for 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. See "Risk Factors--Inventory Shrinkage."
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 January 26, 1998, 21 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
two stores 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. See "Risk
Factors--Risks Associated with Expansion."
STORE LOCATIONS
As of January 26, 1998, the Company operated 55 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
-----------------------------
LOCATION 1992 1993 1994 1995 1996 1997
-------- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
Northern California............................ 9 16 22 22 22 24
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 55
=== === === === === ===
</TABLE>
SOURCING AND PURCHASING
Vendors. During 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. In 1997, the
Company's top ten suppliers accounted for 44.5% of inventory purchases, of
which purchases from Nine West Group, Inc. and The Rockport Company, Inc.
accounted for 9.7% and 7.5% 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 15.7% of the Company's net sales in 1996 and 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 1997, the Company spent approximately 4.2% of net sales, or
$1.3 million, and 4.5% of net sales, or $2.0 million, respectively, on
television advertising. The Company believes that television advertising
benefits all stores in a common viewing market. The Company believes that
advertising costs for a particular market will be more effectively and
economically leveraged as the number of stores increases in that market.
26
<PAGE>
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. See "Risk Factors--Dependence on Consumer
Spending Preferences."
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 58,000 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
1.1% for 1997. See "Risk Factors--Inventory Shrinkage."
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 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),
27
<PAGE>
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
58,000 square foot facility in Richmond, California, which the Company
occupies under a lease expiring in 2002. As of January 26, 1998, the Company's
55 stores occupied an aggregate of approximately 350,000 square feet of space.
The Company leases all of its stores, with leases expiring between 1998 and
2002. The Company has options to renew most of its leases. See "--Store
Locations" and "Risk Factors--Risks Associated with Expansion."
EMPLOYEES
As of December 31, 1997, the Company had approximately 222 full-time
employees and 142 part-time employees. The number of part-time employees
fluctuates depending upon seasonal needs. The Company's 13 warehouse employees
are represented by Local 315, International Brotherhood of Teamsters. The
Company is in the process of meeting with Local 315 to negotiate a collective
bargaining agreement. The Company generally considers its relationship with
its employees to be good. See "Risk Factors--Reliance on Key Personnel."
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.......... 46 Vice President of Finance, Chief Financial
Officer, Secretary and Director
Keith C. Gossett, Jr. .... 40 Vice President of Operations
Linda C. Hickey........... 34 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. See "Risk Factors--Reliance on Key Personnel."
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
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, 1997:
<TABLE>
<CAPTION>
ANNUAL COMPENSATION
------------------------------
SALARY BONUS OTHER
-------- ------- ----------
<S> <C> <C> <C>
Dmitry Beinus, President and Chief Executive
Officer..................................... $250,000 -- $27,666(2)
Robert R. Hall, Vice President and Chief
Operating Officer........................... 95,000 $10,738 34,963(2)
Gary A. Schwartz, Vice President of Finance
and Chief Financial Officer................. 31,437(1) -- --
</TABLE>
- ---------------------
(1)Represents salary received from September 22, 1997. Mr. Schwartz's annual
salary is currently $125,000.
(2)Represents primarily moving and relocation expenses.
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 336,000 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>
Robert R. Hall....................................................... 50,000
Gary A. Schwartz..................................................... 50,000
Keith C. Gossett, Jr................................................. 30,000
Linda C. Hickey...................................................... 25,000
All Others........................................................... 181,000
</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
Prior to the Termination Date, the Company and its current stockholder will
enter into an agreement (the "Tax Indemnification Agreement") providing that
the Company will be indemnified by the Company's current stockholder with
respect to any federal, state or local corporate income taxes the Company is
required to pay as a result of the Company's failure to qualify as an S
corporation with respect to tax returns in which the Company reported its
income as an S corporation. The Tax Indemnification Agreement will further
provide that the Company will indemnify the Company's current stockholder on
an after-tax basis with respect to any federal, state or local income taxes
(plus interest and penalties) paid or required to be paid by such stockholder,
and such stockholder will pay to the Company any refunds of federal, state or
local income taxes (including interest received thereon) received by (or
credited to) such stockholder, as a result of a subsequent adjustment in
income of the Company with respect to any tax return in which the Company
reported its income as an S corporation.
31
<PAGE>
The Company's sole stockholder is a guarantor of the Company's credit
facility. The Company intends to renegotiate the terms of the existing credit
facility so that the stockholder is no longer a guarantor.
PRINCIPAL STOCKHOLDER
The following table sets forth, as of December 31, 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 reorganization of the
Company's capital structure and 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 (1)..................... -- -- --
Gary A. Schwartz (1)................... -- -- --
Peter G. Hanelt (2).................... -- -- --
David H. Folkman (2)................... -- -- --
All directors and executive officers as
a group............................... 4,500,000 100% 71.4%
</TABLE>
- ---------------------
(1)Excludes options to purchase 50,000 shares of Common Stock, which will be
granted upon completion of this offering.
(2)Excludes options to purchase 7,500 shares of Common Stock, which will be
granted upon completion of this offering.
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 31, 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
ChaseMellon Shareholder Services, L.L.C. 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"). 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."
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 held by the sole stockholder will
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 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, the Company and the Company's sole stockholder 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.
36
<PAGE>
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 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.
See "Risk Factors--No Prior Market; Possible Volatility of Stock Price."
37
<PAGE>
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 December 31, 1997 and 1996 and
for each of the three years in the period ended December 31, 1997 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.
38
<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 Income........................................ 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 January 16, 1998 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 (the "Company") as of December 31, 1997 and
1996, and the related consolidated statements of income, stockholder's equity,
and cash flows for each of the three years in the period ended December 31,
1997. 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 December 31, 1997 and 1996, and the results of their
operations and their cash flows for each of the three years in the period
ended December 31, 1997 in conformity with generally accepted accounting
principles.
San Francisco, California
January 16, 1998 (February , 1998 as to
the reorganization discussed in Note 1 and the
last sentence of the first paragraph of Note 4)"
Deloitte & Touche LLP
San Francisco, California
January 23, 1998
F-2
<PAGE>
SHOE PAVILION, INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31, 1997
PRO FORMA
DECEMBER 31, (NOTE 3)
------------------------ -----------------
1996 1997
----------- ------------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
CURRENT ASSETS:
Cash............................... $ 201,797 $ 394,660 $ 394,660
Inventories........................ 13,485,726 19,795,599 19,795,599
Prepaid expenses................... 61,121 32,795 32,795
Other current assets............... 4,139 40,160 40,160
----------- ------------ -----------
Total current assets.............. 13,752,783 20,263,214 20,263,214
FIXED ASSETS:
Store fixtures and equipment....... 1,759,524 2,258,480 2,258,480
Leasehold improvements............. 656,682 1,499,813 1,499,813
----------- ------------ -----------
Total............................. 2,416,206 3,758,293 3,758,293
Less accumulated depreciation...... 1,039,842 1,683,604 1,683,604
----------- ------------ -----------
Net fixed assets................... 1,376,364 2,074,689 2,074,689
DEFERRED INCOME TAXES............... -- -- 485,000
OTHER ASSETS........................ 16,806 307,955 307,955
----------- ------------ -----------
TOTAL............................. $15,145,953 $ 22,645,858 $23,130,858
=========== ============ ===========
LIABILITIES AND STOCKHOLDER'S EQUITY
CURRENT LIABILITIES:
Accounts payable................... $ 5,694,569 $ 5,920,980 $ 5,920,980
Accrued expenses................... 772,822 842,812 842,812
Distributions payable to
stockholder....................... -- -- 7,800,000
Short-term borrowings.............. 3,400,000 7,387,125 7,387,125
Current portion of long-term
obligations....................... 102,805 67,542 67,542
----------- ------------ -----------
Total current liabilities......... 9,970,196 14,218,459 22,018,459
DEFERRED RENT....................... 438,425 896,277 896,277
LONG-TERM OBLIGATIONS, less current
portion............................ 170,663 203,066 203,066
COMMITMENTS AND CONTINGENCIES (Notes
4 and 5)........................... -- -- --
STOCKHOLDER'S EQUITY:
Common stock--$.001 par value;
15,000,000 shares authorized;
4,500,000 shares issued and
outstanding....................... 4,500 4,500 4,500
Preferred stock--$.001 par value;
1,000,000 shares authorized; no
shares issued or outstanding ..... -- -- --
Additional capital................. 812,033 812,033 8,556
Retained earnings.................. 3,750,136 6,511,523 --
----------- ------------ -----------
Total stockholder's equity........ 4,566,669 7,328,056 13,056
----------- ------------ -----------
TOTAL............................. $15,145,953 $ 22,645,858 $23,130,858
=========== ============ ===========
</TABLE>
See notes to consolidated financial statements.
F-3
<PAGE>
SHOE PAVILION, INC.
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------------------
1995 1996 1997
----------- ----------- -----------
<S> <C> <C> <C>
NET SALES............................... $25,538,939 $30,315,326 $45,074,041
COST OF SALES AND RELATED OCCUPANCY
EXPENSES............................... 17,722,690 20,317,844 29,336,485
----------- ----------- -----------
Gross profit.......................... 7,816,249 9,997,482 15,737,556
SELLING EXPENSES........................ 4,835,104 5,592,472 8,242,269
GENERAL AND ADMINISTRATIVE EXPENSES..... 1,809,487 2,630,044 3,249,687
----------- ----------- -----------
Income from operations................ 1,171,658 1,774,966 4,245,600
OTHER INCOME (EXPENSE):
Interest............................... (487,502) (259,281) (575,471)
Other--net............................. (36,378) (27,934) 55,601
----------- ----------- -----------
Total other expense--net.............. (523,880) (287,215) (519,870)
----------- ----------- -----------
Income before income taxes.............. 647,778 1,487,751 3,725,730
PROVISION FOR INCOME TAXES.............. (35,000) (98,000) (260,800)
----------- ----------- -----------
NET INCOME.............................. $ 612,778 $ 1,389,751 $ 3,464,930
=========== =========== ===========
PRO FORMA (Unaudited--Note 3):
Historical income before taxes on
income................................ $ 647,778 $ 1,487,751 $ 3,725,730
Pro forma provision for income taxes... (246,156) (565,345) (1,434,406)
----------- ----------- -----------
Pro forma net income................... $ 401,622 $ 922,406 $ 2,291,324
=========== =========== ===========
Pro forma net income per share......... $ 0.43
===========
Weighted average shares outstanding.... 5,380,803
===========
</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, 1995. 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................ 3,464,930 3,464,930
Distributions to stock-
holder................... (703,543) (703,543)
--------- ------ -------- ---------- ----------
BALANCE AT DECEMBER 31,
1997...................... 4,500,000 $4,500 $812,033 $6,511,523 $7,328,056
========= ====== ======== ========== ==========
</TABLE>
See notes to consolidated financial statements
F-5
<PAGE>
SHOE PAVILION, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------------------
1995 1996 1997
----------- ----------- -----------
<S> <C> <C> <C>
OPERATING ACTIVITIES:
Net income............................. $ 612,778 $ 1,389,751 $ 3,464,930
Adjustments to reconcile net income to
net cash provided (used) by operating
activities:
Depreciation.......................... 412,464 449,864 617,878
Other................................. 68,097 32,134 701
Cash provided (used) by changes in:
Inventories.......................... 92,972 (5,303,009) (6,309,873)
Prepaid expenses..................... 10,737 1,542 28,326
Other assets......................... 78,523 (4,139) (327,170)
Accounts payable..................... (204,251) 3,780,250 226,411
Accrued expenses and deferred rent... 26,258 219,501 527,842
----------- ----------- -----------
Net cash provided (used) by
operating activities............... 1,097,578 565,894 (1,770,955)
----------- ----------- -----------
INVESTING ACTIVITIES--
Purchase of fixed assets............... (336,177) (569,228) (1,210,911)
----------- ----------- -----------
FINANCING ACTIVITIES:
(Payments) proceeds on short-term
borrowings, net....................... (1,163,722) 459,577 3,987,125
Proceeds from long-term debt........... 208,659 23,129 --
Principal payments on capital leases... -- (21,067) (38,220)
Principal payments on long-term debt... (50,000) (68,511) (70,633)
Distributions paid to stockholder...... -- (300,000) (703,543)
----------- ----------- -----------
Net cash (used) provided by
financing activities............... (1,005,063) 93,128 3,174,729
----------- ----------- -----------
NET (DECREASE) INCREASE IN CASH......... (243,662) 89,794 192,863
CASH, BEGINNING OF PERIOD............... 355,665 112,003 201,797
----------- ----------- -----------
CASH, END OF PERIOD..................... $ 112,003 $ 201,797 $ 394,660
=========== =========== ===========
INTEREST PAID........................... $ 487,502 $ 259,281 $ 571,764
INCOME TAXES PAID....................... $ 35,000 $ 28,031 $ 332,262
SUPPLEMENTAL DISCLOSURE OF NONCASH
INVESTING AND FINANCING ACTIVITIES:
Note payable to stockholder converted
to equity (Note 4).................... $ 781,533
Capital lease obligations for store
equipment............................. 189,918 $ 105,993
</TABLE>
See notes to consolidated financial statements
F-6
<PAGE>
SHOE PAVILION, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION AND OPERATIONS
General--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 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 55 stores open as of
December 31, 1995, 1996 and 1997, respectively. The Company purchases
inventory from international and domestic vendors. For 1997, the Company's top
ten suppliers accounted for 44.5% of inventory purchases of which purchases
from Nine West Group and the Rockport Company, Inc. accounted for 9.7% and
7.5%, respectively, 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.
Other assets at December 31, 1997 primarily represent costs incurred in
connection with an initial public offering anticipated to occur in February
1998 and will be netted against the proceeds from the offering.
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 state of California. Accordingly, taxes are provided
for income attributable to the Company's operations in these states.
F-7
<PAGE>
SHOE PAVILION INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
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.
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.
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.
Earnings Per Share--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, and only basic EPS is presented.
New Accounting Pronouncements--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 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
in the amount of $7,800,000 to its current stockholder which
approximately equals the estimated earned and previously undistributed S
corporation earnings through the termination date of the Company's
status as an S corporation. The pro forma adjustments reflect a
distribution of $7,800,000.
. Deferred Income Taxes--The Company will record a deferred income tax
asset upon termination of the Company's S corporation status. The pro
forma adjustments reflect this asset of $485,000 as of December 31,
1997.
F-8
<PAGE>
SHOE PAVILION INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The condensed balance sheet of the Company as of December 31, 1997
(unaudited) reflecting these pro forma adjustments is as follows:
<TABLE>
<CAPTION>
DECEMBER DECEMBER 31,
31, 1997 PRO FORMA 1997
ACTUAL ADJUSTMENTS PRO FORMA
----------- ----------- ------------
<S> <C> <C> <C>
Current assets........................... $20,263,214 $20,263,214
Long-term assets......................... 2,382,644 $ 485,000 2,867,644
----------- ----------- -----------
Total assets............................ $22,645,858 $ 485,000 $23,130,858
=========== =========== ===========
Current liabilities...................... $14,218,459 $ 7,800,000 $22,018,459
Long-term liabilities.................... 1,099,343 -- 1,099,343
----------- ----------- -----------
Total liabilities....................... 15,317,802 7,800,000 23,117,802
----------- ----------- -----------
Common stock and additional capital ..... 816,533 (803,477) 13,056
Retained earnings........................ 6,511,523 (6,511,523) --
----------- ----------- -----------
Total stockholder's equity.............. 7,328,056 (7,315,000) 13,056
----------- ----------- -----------
Total liabilities and stockholder's
equity................................. $22,645,858 $ 485,000 $23,130,858
=========== =========== ===========
</TABLE>
Pro Forma Income Statement Information
. Income Taxes--Since August 1988, the Company has not been subject to
federal 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 for income taxes at an effective rate of 38.0%, 38.0% and
38.5% for the years ended December 31, 1995, 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 (880,803
shares) which would be necessary to fund the $7,800,000 distribution to
the Company's current stockholder.
4. FINANCING AGREEMENTS
Short-term borrowings represent amounts drawn under the Company's line of
credit. 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 (8.75% at December 31, 1997) 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. As of December 31, 1997,
$2,612,875 was available on the line of credit. 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. 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 period
ended December 31, 1997. With respect to the distribution of previously
undistributed S corporation earnings discussed in Note 3, the Company intends
to obtain a waiver from the lender for the restriction prohibiting payment of
cash dividends.
F-9
<PAGE>
SHOE PAVILION INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------
1996 1997
-------- --------
<S> <C> <C>
Long-term debt:
Note payable to bank, interest at 0.25% over the bank's
prime rate (8.75% at December 31, 1997), secured by
equipment, due in equal monthly installments through
January 30, 1998........................................... $ 83,333 $ 16,667
Note payable, interest at 9.67%, secured by vehicle, due in
equal monthly installments through May 30, 2001............ 21,284 17,317
-------- --------
Total...................................................... 104,617 33,984
Less current portion......................................... 70,633 21,035
-------- --------
Total long-term portion...................................... $ 33,984 $ 12,949
======== ========
</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 $61,458 and $0 for the years ended December 31, 1995
and 1996, 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 December 31:
1998................................................................ $21,035
1999................................................................ 4,809
2000................................................................ 5,295
2001................................................................ 2,845
-------
Total.............................................................. $33,984
=======
</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 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 and 1997, the Company entered into capital leases for certain
store and other equipment. The Company's assets under capital leases as of
December 31, 1996 and 1997 are as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------
1996 1997
-------- --------
<S> <C> <C>
Total assets under capital leases............................ $189,918 $295,911
Less accumulated amortization................................ 29,190 74,160
-------- --------
Total....................................................... $160,728 $221,751
======== ========
</TABLE>
F-10
<PAGE>
SHOE PAVILION INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Future minimum lease payments required under these leases are:
<TABLE>
<CAPTION>
CAPITAL OPERATING
LEASES LEASES
-------- -----------
<S> <C> <C>
Year ending December 31:
1998..................................................... $ 69,831 $ 4,871,626
1999..................................................... 69,831 4,364,657
2000..................................................... 69,831 3,270,937
2001..................................................... 33,529 2,606,115
2002..................................................... 47,613 1,309,193
Thereafter.............................................. 2,580,707
-------- -----------
Total minimum lease commitments........................... 290,635 $19,003,235
===========
Less amounts representing interest........................ 54,011
--------
Present value of capital lease obligations................ 236,624
Less current portion...................................... 46,507
--------
Total long-term portion................................... $190,117
========
</TABLE>
Rental expense for the years ended December 31, 1995, 1996 and 1997 was
$3,580,770, $3,768,318 and $5,438,395, respectively, including contingent
rentals of $80,584, $204,587 and $278,740, respectively.
Letters of Credit--The Company has obtained letters of credit in connection
with overseas purchase arrangements. The total amount outstanding was
$1,463,424 and $317,645 as of December 31, 1996 and 1997, respectively. The
Company also has standby letters of credit relating to rental agreements of
$33,236 and $53,236 as of December 31, 1996 and 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>
Inside Back:
SHOE PAVILION
[Map illustrating the location of the Company's stores and corporate
headquarters.]
Shoe Pavilion 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. As of December 31, 1997, the Company operated 55 stores.
<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............................................................. 38
Experts................................................................... 38
Additional Information.................................................... 38
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 OF SHOE PAVILION]
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 and NASD 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 with forms of non-qualified and incentive
stock option agreements.
10.3 Directors' Stock Option Plan with form of stock option agreement.
10.4 Loan Agreement between Shoe Inn, Inc. and U.S. Bank National
Association dated October 24, 1997 and Alternative Rate Options
Promissory Note 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>
- ---------------------
*Previously filed.
**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 Amendment No. 1 to the Registration Statement to be
signed on its behalf by the undersigned, thereunto duly authorized, in the
City of Richmond, State of California, on January 26, 1998.
SHOE PAVILION, INC.
/s/ Dmitry Beinus
By: _________________________________
Dmitry Beinus
(Chairman of the Board of
Directors, Chief Executive
Officer and President)
Pursuant to the requirements of the Securities Act of 1933, this Amendment
No. 1 to the 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 January 26, 1998
____________________________________ Directors and Chief
Dmitry Beinus Executive Officer and
President (Principal
Executive Officer)
/s/ Gary A. Schwartz Director, Vice President of January 26, 1998
____________________________________ Finance and Chief Financial
Gary A. Schwartz Officer (Principal
Financial Officer and
Principal Accounting
Officer)
* Director January 26, 1998
____________________________________
Peter G. Hanelt
* Director January 26, 1998
____________________________________
David H. Folkman
*By: /s/ Dmitry Beinus January 26, 1998
____________________________________
Dmitry Beinus
Attorney-in-fact
</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 with forms of non-qualified and
incentive stock option agreements.
10.3 Directors' Stock Option Plan with form of stock option
agreement.
10.4 Loan Agreement between Shoe Inn, Inc. and U.S. Bank National
Association dated October 24, 1997 and Alternative Rate
Options Promissory Note 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>
- ---------------------
*Previously filed.
**To be filed by amendment.
<PAGE>
SHOE PAVILION, INC.
UNDERWRITING AGREEMENT
February , 1998
----
VAN KASPER & COMPANY
As Representative of the
Several Underwriters
600 California Street, Suite 1700
San Francisco, California 94111
Ladies and Gentlemen:
Shoe Pavilion, Inc., a Delaware corporation (the "Company"), proposes to issue
and sell to the several Underwriters named in Schedule I hereto (the
"Underwriters") an aggregate of 1,800,000 shares (the "Firm Shares") of its
authorized but unissued Common Stock, par value $0.001 per share (the "Common
Stock"). The Company also proposes to grant to the Underwriters an option to
purchase up to 270,000 additional shares of Common Stock (the "Option Shares")
for the sole purpose of covering over-allotments, if any, in connection with the
sale of the Firm Shares. The Firm Shares and any Option Shares purchased
pursuant to this Agreement are referred to below as the "Shares." Van Kasper &
Company is acting as representative of the several Underwriters and in that
capacity is referred to in this Agreement as the "Representative."
Each of the Company and its sole stockholder, Dmitry Beinus (the "Sole
Stockholder"), hereby confirms its and his agreement with the several
Underwriters as follows:
1. REPRESENTATIONS AND WARRANTIES OF THE COMPANY AND SOLE
STOCKHOLDER. The Company and Sole Stockholder hereby represents and warrants to
and agrees with each Underwriter as follows:
(a) A registration statement (Registration No. 333-41877) on
Form S-1 under the Securities Act of 1933, as amended (the "Securities Act")
relating to the Shares, including a prospectus subject to completion, and such
amendments to such registration statement as may have been required to the date
of this Agreement, has been prepared by the Company under and in conformity with
the provisions of the Securities Act and the applicable rules and regulations
(the "Rules and Regulations") of the Securities and Exchange Commission (the
"Commission") under the Securities Act and has been filed with the Commission.
(b) After the execution of this Agreement, the Company will
file with the Commission either (i) if such registration statement, as it may
have been amended, has been declared by the Commission to be effective under the
Securities Act, a prospectus in the form most recently included in an amendment
to such registration statement (or, if no such amendment has been filed, in such
registration statement), with such changes or insertions as are required by
1
<PAGE>
Rule 430A of the Rules and Regulations or permitted by Rule 424(b) of the Rules
and Regulations, and as has been provided to and approved by the Representative
prior to the execution of this Agreement, or (ii) if such registration
statement, as it may have been amended, has not been declared by the Commission
to be effective under the Securities Act, an amendment to such registration
statement, including a form of prospectus, a copy of which amendment has been
furnished to and approved by the Representative prior to the execution of this
Agreement. As used in this Agreement, the term "Registration Statement" means
such registration statement, as amended at the time when it was or is declared
effective, including all financial statements and exhibits thereto, any
information omitted therefrom pursuant to Rule 430A(a) of the Rules and
Regulations and included in the Prospectus (defined below) as well as any such
abbreviated registration statements pursuant to Rule 462(b) of the Rules and
Regulations as may be filed in connection with the offering of the Shares; the
term "Preliminary Prospectus" means each prospectus subject to completion filed
with such registration statement or any amendment thereto (including the
prospectus subject to completion, if any, included in the Registration Statement
or any amendment thereto at the time it was or is declared effective); and the
term "Prospectus" means the following:
(A) the prospectus first filed with the Commission pursuant to
Rule 424(b) under the Securities Act, including, if the
Company omitted information from the Registration Statement
pursuant to Rule 430A(a) of the Rules and Regulations, the
information deemed to be a part of the Registration
Statement at the time it became effective pursuant to Rule
430A(b) of the Rules and Regulations; or
(B) if no prospectus is required to be filed pursuant to Rule
424(b) under the Securities Act, the prospectus included in
the Registration Statement;
provided that if any revised prospectus that is provided to the Underwriters by
the Company for use in connection with the offering of the Shares differs from
the prospectus on file with the Commission at the time the Registration
Statement became or becomes, as the case may be, effective, whether or not the
revised prospectus is required to be filed with the Commission pursuant to Rule
424(b)(3) of the Rules and Regulations, the term "Prospectus" shall mean such
revised prospectus from and after the time it is first provided to the
Underwriters for such use.
(c) No order suspending the effectiveness of the
Registration Statement or preventing or suspending the use of any Preliminary
Prospectus or the Prospectus has been issued and no proceedings for that purpose
are pending or, to the best knowledge of the Company and the Sole Stockholder,
threatened or contemplated by the Commission; no stop order suspending the sale
of the Shares in any jurisdiction has been issued and no proceedings for that
purpose are pending or, to the best knowledge of the Company and the Sole
Stockholder, threatened or contemplated, and any request of the Commission for
additional information (to be included in the Registration Statement, any
Preliminary Prospectus or the Prospectus or otherwise) has been complied with.
2
<PAGE>
(d) Each Preliminary Prospectus when filed with the
Commission (i) contained all statements required to be contained therein and
complied in all material respects with the requirements of the Securities Act
and the Rules and Regulations (ii) did not include any untrue statement of a
material fact or omit to state any material fact necessary in order to make the
statements therein, in the light of the circumstances under which they were
made, not misleading and (iii) if filed by electronic transmission pursuant to
Electronic Data Gathering, Analysis and Retrieval System ("EDGAR") (except as
may be permitted by Regulation S-T under the Securities Act), was identical to
the copy thereof delivered to the Underwriters for use in connection with the
offer and sale of the Shares. When the Registration Statement or any amendment
thereto was or is declared effective (the "Effective Date"), it (i) contained or
will contain all statements required to be contained therein and complied or
will comply in all material respects with the requirements of the Securities Act
and the Rules and Regulations and (ii) did not or will not include any untrue
statement of a material fact or omit to state any material fact necessary to
make the statements therein not misleading. When the Prospectus or any amendment
or supplement to the Prospectus is filed with the Commission pursuant to Rule
424(b) (or, if the Prospectus or part thereof or such amendment or supplement is
not required to be so filed, when the Registration Statement or the amendment
thereto containing such amendment or supplement to the Prospectus was or is
declared effective) and on the Closing Date (defined below) and any date on
which Option Shares are to be purchased, the Prospectus, as amended or
supplemented at any such time, (i) contained or will contain all statements
required to be contained therein and complied or will comply in all material
respects with the requirements of the Securities Act and the Rules and
Regulations and (ii) did not or will not include any untrue statement of a
material fact or omit to state any material fact necessary in order to make the
statements therein, in the light of the circumstances under which they were
made, not misleading. The foregoing provisions of this paragraph (d) do not
apply to statements or omissions made in any Preliminary Prospectus, the
Registration Statement or any amendment thereto or the Prospectus or any
amendment or supplement thereto in reliance upon and in conformity with written
information furnished to the Company by any Underwriter through the
Representative specifically for use therein.
(e) Each of the Company and its wholly-owned subsidiary,
Shoe Inn, Inc., a Washington corporation (the "Subsidiary"), has been duly
incorporated and is validly existing as a corporation in good standing under the
laws of the jurisdiction of its incorporation, has full corporate power and
authority to own or lease its properties and conduct its business as described
in the Registration Statement and Prospectus and as is currently being conducted
by it. All of the outstanding capital stock of the Subsidiary is owned by the
Company free and clear of any pledge, lien, security interest, encumbrance,
claim or equitable interest. Each of the Company and the Subsidiary is duly
qualified as a foreign corporation to transact business and is in good standing
in each jurisdiction in which such qualification is required, whether by reason
of the ownership or leasing of property or the conduct of business, except for
such jurisdictions where the failure to so qualify or to be in good standing
would not have a material adverse effect on the business, properties, condition
(financial or otherwise), results of operations or prospects of the Company and
the Subsidiary considered as one enterprise. No proceeding has been instituted
in any such jurisdiction, revoking, limiting or curtailing, or seeking to
revoke, limit or curtail, such power and authority or qualification. Each of the
Company and the Subsidiary is in possession
3
<PAGE>
of and operating in compliance with all authorizations, licenses, certificates,
consents, orders and permits from federal, state, local and other governmental
or regulatory authorities that are material to the conduct of its business, all
of which are valid and in full force and effect. Except for the Subsidiary, the
Company has no subsidiaries (defined below) and does not own any equity
securities of any other Entity (defined below). As used in this Agreement, the
word "subsidiary" means any corporation, partnership, limited liability company
or other entity (each an "Entity") that the Company directly or indirectly
controls.
(f) Subsequent to the respective dates as of which
information is given in the Registration Statement and Prospectus, there has not
been any material loss or interference with the business of the Company or the
Subsidiary from fire, explosion, flood or other calamity, whether or not covered
by insurance, or from any court or governmental action, order or decree, or any
changes in the capital stock or long-term debt of the Company or the Subsidiary,
or any dividend or distribution of any kind declared, paid or made on the
capital stock of the Company or the Subsidiary, or any material change, or a
development known to the Company or the Sole Stockholder that might cause or
result in a material change, in or affecting the business, properties, condition
(financial or otherwise), results of operations or prospects of the Company or
the Subsidiary, whether or not arising from transactions in the ordinary course
of business, in each case other than as may be set forth in the Registration
Statement and the Prospectus, and since such dates, except in the ordinary
course of business, neither the Company nor the Subsidiary has entered into any
material transaction not described in the Registration Statement and the
Prospectus. Except as set forth in the Prospectus, neither the Company nor the
Subsidiary has made any distributions to its existing stockholder within the
three most recent fiscal years, and neither the Company nor the Subsidiary will
make any future distributions to its existing stockholder other than the S
corporation distribution to be paid to the Sole Stockholder immediately
following the Closing Date (the "Distribution"), which Distribution shall not
exceed $7.8 million.
(g) There is no agreement, contract, license, lease or other
document required to be described in the Registration Statement or the
Prospectus or to be filed as an exhibit to the Registration Statement which is
not described or filed as required. All contracts described in the Prospectus,
if any, are in full force and effect on the date hereof, and none of the
Company, the Subsidiary or, to the best knowledge of the Company and the Sole
Stockholder, any other party thereto, is in material breach of or default under
any such contract.
(h) The authorized and outstanding capital stock of the
Company as of the date set forth therein and the date hereof is set forth in the
Prospectus under the caption "Capitalization", and the description of the Common
Stock set forth in the Prospectus under the caption "Description of Capital
Stock" conforms with and accurately describes the rights set forth in the
instruments defining the Common Stock. The Shares are duly authorized and, when
issued in accordance with the terms of this Agreement and against payment
therefor, will be validly issued, fully paid and nonassessable, and the issuance
of the Shares is not subject to any preemptive or similar rights.
4
<PAGE>
(i) All of the outstanding shares of capital stock of the
Company have been duly authorized and validly issued and are fully paid and
nonassessable, have been issued in compliance with all applicable federal and
state securities laws and were not issued in violation of or subject to any
preemptive rights or other rights to subscribe for or purchase securities. The
description of the Company's stock option, stock bonus and other stock plans or
arrangements, and the options or other rights granted or exercised thereunder,
set forth in the Prospectus, accurately and fairly present the information
required to be shown with respect to such plans, arrangements, options and
rights. Other than this Agreement and the options and warrants to purchase
Common Stock described in the Prospectus, there are no options, warrants or
other rights outstanding to subscribe for or purchase any shares of the
Company's or the Subsidiary's capital stock. There are no preemptive rights
applicable to any shares of capital stock of the Company or the Subsidiary.
There are no restrictions upon the voting or transfer of any of the Firm Shares
or Option Shares pursuant to the Company's or the Subsidiary's charter, bylaws
or other governing documents or any agreement to which the Company or the
Subsidiary is a party or by which either of them may be bound. Neither the
filing of the Registration Statement nor the offering or sale of the Shares as
contemplated by this Agreement gives rise to any rights for or relating to the
registration of any securities (other than the Shares) of or issued by the
Company.
(j) The Company has full right, power and authority to enter
into and perform its obligations under this Agreement and to issue, sell and
deliver the Shares and perform any other transactions contemplated hereby. This
Agreement has been duly authorized, executed and delivered by the Company and
the Sole Stockholder, constitutes a valid and binding agreement of the Company
and the Sole Stockholder, and is enforceable against the Company and the Sole
Stockholder in accordance with its terms except insofar as enforceability may be
affected by bankruptcy, insolvency, reorganization, moratorium or similar laws
affecting creditors' rights generally and except insofar as the indemnification
and contribution provisions of Section 7 hereof may be affected by public policy
concerns.
(k) Neither the Company nor the Subsidiary is, nor with the
giving of notice or lapse of time or both would it be, in violation of or in
default under, nor will the execution or delivery of this Agreement or the
consummation of the transactions contemplated by this Agreement result in a
material violation of or constitute a material breach of or a default
(including, without limitation, with the giving of notice, the passage of time
or otherwise) under the certificate of incorporation, bylaws or other governing
documents of the Company or the Subsidiary or any obligation, agreement,
covenant or condition contained in any bond, debenture, note or other evidence
of indebtedness or in any contract, indenture, mortgage, deed of trust, loan
agreement, lease, license, joint venture or other agreement or instrument to
which the Company or the Subsidiary is a party or by which any of their
respective properties may be bound or affected. Neither the Company nor the
Subsidiary has incurred any liability, direct or indirect, for any finders' or
similar fees payable on behalf of the Company, the Subsidiary or the
Underwriters in connection with the transactions contemplated by this Agreement.
The performance by the Company of its obligations under this Agreement will not
result in a material violation of any law, ordinance, rule or regulation
(provided that no representation or warranty is made hereby with respect to the
effect, if any, of public policy concerns on the indemnification
5
<PAGE>
and contribution provisions of Section 7 hereof), or any order, writ,
injunction, judgment or decree of any governmental agency or body or of any
court having jurisdiction over the Company or the Subsidiary or any of their
respective properties, or result in the creation or imposition of any lien,
charge, claim or encumbrance upon any property of the Company or the Subsidiary.
No consent, approval, authorization or order of qualification with any court,
government or governmental agency or body, domestic or foreign, having
jurisdiction over the Company or the Subsidiary or over their respective
properties is required for the execution and delivery of this Agreement and the
consummation by the Company of the transactions contemplated by this Agreement,
except such as may be required under the Securities Act or under state or other
securities laws, all of which requirements have been satisfied in all material
respects (except for any filings under Rule 424 of the Rules and Regulations,
which filings have been or will be made under Section 3(a) of this Agreement) or
Blue Sky laws.
(l) Each of the Company and the Subsidiary owns, or has
valid rights to use, all items of real and personal property that are material
to their respective business, free and clear, except as described in the
Registration Statement and the Prospectus, of all liens, encumbrances and claims
that might materially interfere with the business, properties, condition
(financial or otherwise), results of operations or prospects of the Company and
the Subsidiary considered as one enterprise.
(m) Each of the Company and the Subsidiary owns or possesses
adequate rights to use all patents, patent rights, inventions, trade secrets,
know-how, trademarks, service marks, tradenames and copyrights described or
referred to in the Registration Statement and the Prospectus (or, if the
Prospectus is not in existence, the most recent Preliminary Prospectus) as owned
by or used by it, or which are necessary for the conduct of their respective
business as described in the Registration Statement and the Prospectus; and none
of the Company, the Subsidiary or the Sole Stockholder has received any notice
of infringement of or conflict with asserted rights of others with respect to
any patents, patent rights, inventions, trade secrets, know-how, trademarks,
service marks, tradenames or copyrights which, singly or in the aggregate, if
the subject of an unfavorable decision, ruling or finding, might have a material
adverse effect on the business, properties, condition (financial or otherwise),
results of operations or prospects of the Company and the Subsidiary considered
as one enterprise.
(n) There is no litigation or governmental proceeding to
which the Company or the Subsidiary is a party or to which any property of the
Company or the Subsidiary is subject which is pending or, to the best knowledge
of the Company and the Sole Stockholder, is threatened or contemplated against
the Company, the Subsidiary or any of their respective officers or any of their
respective properties, assets or rights before any court, government or
governmental agency or body, domestic or foreign, having jurisdiction over the
Company or the Subsidiary or over their respective officers or properties or
otherwise that (i) might have a material effect on, or might result in any
material adverse change in the business, properties, condition (financial or
otherwise), results of operations or prospects of the Company and the Subsidiary
considered as one enterprise or might materially and adversely affect their
respective properties, assets or rights, (ii) might prevent consummation of the
transactions contemplated
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hereby or (iii) is required to be disclosed in the Registration Statement or
Prospectus and is not so disclosed.
(o) Neither the Company nor the Subsidiary is in violation
of any law, order, ordinance, rule or regulation, or any order, writ,
injunction, judgment or decree of any governmental agency or body or of any
court, to which it or its respective properties (whether owned or leased) may be
subject, which violation might have a material adverse effect on the business,
properties, condition (financial or otherwise), results of operations or
prospects of the Company and the Subsidiary considered as one enterprise.
(p) Neither the Company nor the Subsidiary has taken and
neither shall take, directly or indirectly, any action designed to cause or
result in, or which has constituted or which might reasonably be expected to
cause or result in, under the Securities Exchange Act of 1934, as amended (the
"Exchange Act"), the rules and regulations of the Commission thereunder or
otherwise, the stabilization or manipulation of the price of any security of the
Company to facilitate the sale or resale of the Shares. No bid or purchase by
the Company for or of the Common Stock, any securities of the same class or
series as the Common Stock or any securities convertible into or exchangeable
for or that represent any right to acquire the Common Stock is now pending or in
progress or will have commenced at any time prior to the completion of the
distribution of the Shares.
(q) Deloitte & Touche LLP, whose report appears in the
Registration Statement and the Prospectus are, and during the periods covered by
its report in the Registration Statement were, independent accountants as
required by the Securities Act and the Rules and Regulations. The financial
statements included in the Registration Statement, each Preliminary Prospectus
and the Prospectus present fairly the financial condition, results of
operations, cash flow and changes in stockholders' equity of the Company at the
dates and for the periods indicated, and the financial statements included in
the Registration Statement present fairly the information required to be stated
therein. Such financial statements have been prepared in accordance with
generally accepted accounting principles applied on a consistent basis
throughout the periods presented, except as may be stated therein. The selected
and summary financial and statistical data included in the Registration
Statement and the Prospectus present fairly the information shown therein and
have been compiled on a basis consistent with the audited financial statements
presented therein. No other financial statements or schedules are required to be
included in the Registration Statement.
(r) The pro forma financial or other information and related
notes included in the Registration Statement, each Preliminary Prospectus and
the Prospectus comply in all material respects with the requirements of the
Securities Act and the Rules and Regulations and present fairly the pro forma
information shown, as of the dates and for the periods covered by such pro forma
information. Such pro forma information, including any related notes, has been
prepared on a basis consistent with the historical financial statements and
other historical information, as applicable, included in the Registration
Statement, the Preliminary Prospectus and the Prospectus, except for the pro
forma adjustments specified therein, and give effect to assumptions made on a
reasonable basis to give effect to historical and, if applicable, proposed
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transactions described in the Registration Statement, each Preliminary
Prospectus and the Prospectus. The information set forth under "Selected
Operating Data" included in the Registration Statement, each Preliminary
Prospectus and the Prospectus has been derived from the books and records of the
Company and fairly and accurately presents the information shown as of the dates
and for the periods covered by such data.
(s) The books, records and accounts of the Company and the
Subsidiary accurately and fairly reflect, in reasonable detail, the transactions
in and dispositions of the assets of the Company and the Subsidiary. The systems
of internal accounting controls maintained by each of the Company and the
Subsidiary are sufficient to provide reasonable assurances that: (i)
transactions are executed in accordance with management's general or specific
authorization; (ii) transactions are recorded as necessary to permit preparation
of financial statements in conformity with generally accepted accounting
principles and to maintain accountability for assets; (iii) access to assets is
permitted only in accordance with management's general or specific
authorization; and (iv) the recorded accountability for assets is compared with
the existing assets at reasonable intervals and appropriate action is taken with
respect to any differences.
(t) The Company has delivered to the Representative the
written agreement of the Sole Stockholder, to the effect that the Sole
Stockholder will not, for a period of one year following the date of this
Agreement, without the prior written consent of the Representative, offer, sell
or contract to sell, or otherwise dispose of, or announce the offer of, any
Common Stock or options or convertible securities exercisable or exchangeable
for, or convertible into, Common Stock.
(u) Except as set forth in the Prospectus, no labor
disturbance by the employees of the Company or the Subsidiary exists, is
imminent or, to the knowledge of the Company and the Sole Stockholder, is
contemplated or threatened; and neither the Company nor the Sole Stockholder is
aware of an existing, imminent or threatened labor disturbance by the employees
of any principal suppliers, manufacturers, contractors or others that might be
expected to result in any material change in the business, properties, condition
(financial or otherwise), results of operations or prospects of the Company and
the Subsidiary considered as one enterprise. Except as set forth in the
Prospectus, no collective bargaining agreement exists with any employees of the
Company or the Subsidiary and, to the best knowledge of the Company and the Sole
Stockholder, no such agreement is imminent other than as set forth in the
Prospectus.
(v) Each of the Company and the Subsidiary has filed all
federal, state, local and foreign tax returns which are required to be filed or
have requested extensions thereof and have paid all taxes, including withholding
taxes, penalties and interest, assessments, fees and other charges to the extent
that the same have become due and payable. No tax assessment or deficiency has
been made or proposed against the Company or the Subsidiary nor has the Company
or the Subsidiary received any notice of any proposed tax assessment or
deficiency. All tax liabilities are adequately provided for on the books of the
Company and the Subsidiary.
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(w) Except as set forth in the Prospectus, there are no
outstanding agreements with or loans, advances or guaranties of indebtedness by
the Company or the Subsidiary to or for the benefit of any of (i) the Company's
or the Subsidiary's "affiliates," as such term is defined in the Rules and
Regulations or (ii) any of the members of the families of any of them.
(x) Neither the Company nor the Subsidiary has, directly or
indirectly, at any time: (i) made any contributions to any candidate for
political office, or failed to disclose fully any such contribution, in
violation of law; (ii) made any payment to any local, state, federal or foreign
governmental officer or official, or other person charged with similar public or
quasi-public duties, other than payments required or allowed by all applicable
laws; or (iii) violated any provision of the Foreign Corrupt Practices Act of
1977, as amended.
(y) To the best knowledge of each of the Company and the
Sole Stockholder, neither the Company nor the Subsidiary has any liability,
absolute or contingent, relating to: (i) public health or safety; (ii) worker
health or safety; (iii) product defect or warranty or (iv) pollution, damage to
or protection of the environment, including, without limitation, relating to
damage to natural resources, emissions, discharges, releases or threatened
releases of hazardous materials into the environment (including further, without
limitation, ambient air, surface water, groundwater, land surface or subsurface
strata) or otherwise relating to the manufacture, processing, use, treatment,
storage, generation, disposal, transport or handling of any hazardous materials.
As used herein, "hazardous material" includes chemical substances, wastes,
pollutants, contaminants, hazardous or toxic substances, constituents, materials
or wastes, whether solid, gaseous or liquid in nature.
(z) The Company has not distributed and will not distribute
prior to the Closing Date or on or prior to any date on which the Option Shares
are to be purchased, as the case may be, any prospectus or other offering
material in connection with the offering and sale of the Shares other than the
Preliminary Prospectus(es), the Prospectus, the Registration Statement and any
other material permitted by the Securities Act and the Rules and Regulations.
(aa) The Common Stock has been approved for quotation on the
Nasdaq National Market, subject to official notice of issuance.
(bb) The Company has been advised concerning the Investment
Company Act of 1940, as amended (the "1940 Act"), and the rules and regulations
thereunder, and has in the past conducted, and intends in the future to use its
best efforts to conduct, its affairs in such a manner as to ensure that it will
not become an "investment company" or a company "controlled" by an "investment
company" within the meaning of the 1940 Act and such rules and regulations.
(cc) The execution and delivery of the Exchange Agreement
dated as of February __, 1998 (the "Exchange Agreement") between the Subsidiary
and the Company, which effected the transfer of the stock of the Subsidiary to
the Company on the date hereof, was duly authorized by all necessary corporate
action on the part of each of the Subsidiary and the Company. Each of the
Subsidiary and the Company had all necessary corporate power and authority to
execute and deliver the Exchange Agreement and to consummate the transfer
contemplated by the Exchange Agreement, and the Exchange Agreement constitutes a
valid and
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binding obligation of each of the Subsidiary and the Company,
enforceable in accordance with its terms, except as enforceability may by
limited by general equitable principles, bankruptcy, insolvency,
reorganization,. moratorium or other laws affecting creditors.
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2. PURCHASE, SALE AND DELIVERY OF SHARES.
(a) On the basis of the representations, warranties,
covenants and agreements of the Company and the Sole Stockholder contained in
this Agreement, and subject to the terms and conditions set forth in this
Agreement, the Company agrees to sell to the several Underwriters, and each of
the Underwriters agrees, severally and not jointly, to purchase from the
Company, at a purchase price of $___ per share, the respective number of Firm
Shares set forth opposite the name of such Underwriter on Schedule I to this
Agreement (subject to adjustment as provided in Section 8 of this Agreement).
(b) On the basis of the several (and not joint) covenants
and agreements of the Underwriters contained in this Agreement, and subject to
the terms and conditions set forth in this Agreement, the Company grants an
option to the several Underwriters to purchase from the Company, severally and
not jointly, all or any portion of the Option Shares at the same price per share
as the Underwriters are to pay for the Firm Shares. This option may be exercised
only to cover over-allotments in the sale of the Firm Shares by the Underwriters
and may be exercised in whole or in part at any time (but not more than once) on
or before the 45th day after the date of the Prospectus upon written, telecopied
or telegraphic notice by the Representative to the Company setting forth the
aggregate number of Option Shares as to which the several Underwriters are
exercising the option and the settlement date. The Option Shares shall be
purchased severally, and not jointly, by each Underwriter, if purchased at all,
in the same proportion that the number of Firm Shares set forth opposite the
name of the Underwriter in Schedule I to this Agreement bears to the total
number of Firm Shares to be purchased by the Underwriters under Section 2(a)
above, subject to such adjustments as the Representative in its absolute
discretion shall make to eliminate any fractional shares. Delivery of
certificates for the Option Shares, and payment therefor, shall be made as
provided in Section 2(c) and Section 2(d) below.
(c) Delivery of the Firm Shares and the Option Shares (if
the option granted by the Company in Section 2(b) above has been exercised not
later than 6:30 a.m., San Francisco time, on the date two business days
preceding the Closing Date), and payment therefor, less the non-accountable
expense allowance provided for in Section 4(a)(ii) of this Agreement, shall be
made at the offices of Orrick, Herrington & Sutcliffe LLP, 400 Sansome Street,
San Francisco, California 94111, at 6:30 a.m., San Francisco time, on February
__, 1998, or at such time on such other day, not later than seven full business
days after such date, as shall be agreed upon in writing by the Company and the
Representative, or as provided in Section 8 of this Agreement. The date and hour
of delivery and payment for the Firm Shares are referred to in this Agreement as
the "Closing Date." As used in this Agreement, "business day" means a day on
which the Nasdaq National Market is open for trading and on which banks in New
York and California are open for business and not permitted by law or executive
order to be closed.
(d) If the option granted by the Company in Section 2(b)
above is exercised after 6:30 a.m., San Francisco time, on the date two business
days preceding the Closing Date, delivery of the Option Shares and payment
therefor, less the applicable portion, if any, of the non-accountable expense
allowance provided for in Section 4(a)(ii) of this Agreement, shall be
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made at the offices of Orrick, Herrington & Sutcliffe LLP, 400 Sansome Street,
San Francisco, California 94111, at 6:30 a.m., San Francisco time, on the date
specified by the Representative (which shall be three or four, or fewer,
business days after the exercise of the option, but not in excess of the period
of time specified in the Rules and Regulations).
(e) Payment of the purchase price for the Shares by the
several Underwriters shall be made by certified or official bank check, checks
drawn in same-day funds or wire transfer, payable to the order of the Company.
Such payment shall be made upon delivery of certificates for the Shares to you
for the respective accounts of the several Underwriters. Certificates for the
Shares to be delivered to you shall be registered in such name or names and
shall be in such denominations as the Representative may request at least two
business days before the Closing Date, in the case of Firm Shares, and at least
one business day prior to the purchase of the Option Shares, in the case of the
Option Shares. Such certificates will be made available to the Underwriters for
inspection, checking and packaging at a location in San Francisco, California as
the Representative may designate, not less than one full business day prior to
the Closing Date or, in the case of the Option Shares, by 12:00 p.m., San
Francisco time, on the first business day preceding the date of purchase. If the
Representative so elects, delivery of the Shares may be made by credit through
full fast transfer to the accounts at The Depository Trust Company designated by
the Representative.
(f) It is understood that the several Underwriters propose
to offer the Shares for sale to the public as soon as the Representative deems
it advisable to do so. The Firm Shares are to be initially offered to the public
at the public offering price set forth (or to be set forth) in the Prospectus.
The Representative may from time to time thereafter change the public offering
price and other selling terms.
(g) The information set forth in the last paragraph on the
front cover page (insofar as such information relates to the Underwriters), the
legend respecting stabilization set forth on the inside front cover page and the
statements in the third and eighth paragraphs set forth under the caption
"Underwriting" in any Preliminary Prospectus and in the final form of Prospectus
filed pursuant to Rule 424(b) constitute the only information furnished by the
Underwriters to the Company for inclusion in any Preliminary Prospectus, the
Prospectus or the Registration Statement.
3. FURTHER AGREEMENTS OF THE COMPANY. The Company covenants and
agrees with the several Underwriters as follows:
(a) The Company will use its best efforts to cause the
Registration Statement, and any amendment thereof, if not effective at the time
and date this Agreement is executed and delivered by the parties hereto, to
become effective as promptly as possible. If the Registration Statement has
become or becomes effective pursuant to Rule 430A, or filing of the Prospectus
is otherwise required under Rule 424(b), the Company will file the Prospectus,
properly completed (and in form and substance reasonably satisfactory to the
Underwriters) pursuant to Rule 424(b) within the time period prescribed and will
provide evidence satisfactory to the Representative of such timely filing. The
Company will not file the Prospectus, any amended Prospectus, any
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<PAGE>
amendment (including post-effective amendments) to the Registration Statement or
any supplement to the Prospectus without (i) advising the Representative of and,
a reasonable time prior to the proposed filing of such amendment or supplement,
furnishing the Representative with copies thereof and (ii) obtaining the prior
consent of the Representative to such filing. The Company will prepare and file
with the Commission, promptly upon the request of the Representative, any
amendment to the Registration Statement or supplement to the Prospectus that may
be necessary or advisable in connection with the distribution of the Shares by
you and use its best efforts to cause the same to become effective as promptly
as possible.
(b) The Company will promptly advise the Representative (i)
when the Registration Statement becomes effective, (ii) when any amendment
thereto becomes effective, (iii) of any request by the Commission for any
amendment to or supplement to the Registration Statement or the Prospectus or
for any additional information, (iv) of the issuance by the Commission of any
stop order suspending the effectiveness of the Registration Statement or the
institution or threatening of any proceeding for that purpose and (v) of the
receipt by the Company of any notification with respect to the suspension of the
registration, qualification or exemption from registration or qualification of
the Shares for sale in any jurisdiction or the initiation or threatening of any
proceeding for such purpose. The Company will use its best efforts to prevent
the issuance of any such stop order or suspension and, if issued, to obtain as
soon as possible the withdrawal thereof.
(c) The Company will (i) on or before the Closing Date,
deliver to you and your counsel a signed copy of the Registration Statement as
originally filed and of each amendment thereto filed prior to the time the
Registration Statement becomes effective and, promptly upon the filing thereof,
a signed copy of each post-effective amendment, if any, to the Registration
Statement (together with, in each case, all exhibits thereto unless and to the
extent previously furnished to you) and will also deliver to you, for
distribution to the several Underwriters, a sufficient number of additional
conformed copies of each of the foregoing (excluding exhibits) so that one copy
of each may be distributed to each Underwriter, (ii) as promptly as possible
deliver to each of you and send to the several Underwriters, at such office or
offices as you may designate, as many copies of the Prospectus as you may
reasonably request and (iii) thereafter from time to time during the period in
which a prospectus is required by law to be delivered by an Underwriter or a
dealer, likewise send to the Underwriters as many additional copies of the
Prospectus and as many copies of any supplement to the Prospectus and of any
amended Prospectus, filed by the Company with the Commission, as you may
reasonably request for the purposes contemplated by the Securities Act. In
addition, no later than ninety (90) days following the Closing Date, the Company
shall provide the Representative and its counsel, at the Company's cost, such
number of bound volumes as may be reasonably requested by the Representative and
its counsel, each volume to contain all of the documents relating to the
offering of the Shares.
(d) If at any time during the period in which a prospectus
is required by law to be delivered by an Underwriter or a dealer any event shall
occur as a result of which it is necessary to supplement or amend the Prospectus
in order to make the Prospectus not misleading or so that the Prospectus will
not omit to state a material fact necessary to be stated therein, in
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each case at the time the Prospectus is delivered to a purchaser of the Shares,
or if it shall be necessary to amend or to supplement the Prospectus to comply
with the Securities Act or the Rules and Regulations, the Company will forthwith
prepare and file with the Commission a supplement to the Prospectus or an
amended Prospectus so that the Prospectus as so supplemented or amended will not
contain any untrue statement of a material fact or omit to state any material
fact necessary in order to make the statements therein not misleading and so
that it then will otherwise comply with the Securities Act and the Rules and
Regulations. If, after the public offering of the Shares by the Underwriters and
during such period, the Underwriters propose to vary the terms of the offering
thereof by reason of changes in general market conditions or otherwise, you will
advise the Company in writing of the proposed variation and if, in the opinion
either of counsel for the Company or counsel for the Underwriters, such proposed
variation requires that the Prospectus be supplemented or amended, the Company
will forthwith prepare and file with the Commission a supplement to the
Prospectus or an amended Prospectus setting forth such variation. The Company
authorizes the Underwriters and all dealers to whom any of the Shares may be
sold by the Underwriters to use the Prospectus, as from time to time so amended
or supplemented, in connection with the sale of the Shares in accordance with
the applicable provisions of the Securities Act and the Rules and Regulations
for such period.
(e) The Company will cooperate with you and your counsel in
the qualification or registration of the Shares for offer and sale under the
securities or Blue Sky laws of such jurisdictions as you may designate and, if
applicable, in connection with exemptions from such qualification or
registration and, during the period in which a Prospectus is required by law to
be delivered by an Underwriter or a dealer, in keeping such qualifications,
registrations and exemptions in effect; provided, however, that the Company
shall not be obligated to file any general consent to service of process or to
qualify to do business as a foreign corporation in any jurisdiction in which it
is not so qualified. The Company will, from time to time, prepare and file such
statements, reports and other documents as are or may be required to continue
such qualifications, registrations and exemptions in effect for so long a period
as you may reasonably request for the distribution of the Shares.
(f) During a period of five years commencing with the date
of this Agreement, the Company will promptly furnish to you and to each
Underwriter who may so request in writing copies of (i) all periodic and special
reports furnished by it to stockholders of the Company, (ii) all information,
documents and reports filed by it with the Commission, the Nasdaq National
Market, any securities exchange or the National Association of Securities
Dealers, Inc., (iii) every material press release and every material news item
or article in respect of the Company or its affairs delivered to stockholders or
prepared by the Company or any of its subsidiaries and (iv) any additional
information concerning the Company or its business that the Representative may
reasonably request.
(g) As soon as practicable, but not later than the 45th day
following the end of the fiscal quarter first ending after the first anniversary
of the Effective Date, the Company will make generally available to its
securities holders and furnish to the Representative an earnings statement or
statements in accordance with Section 11(a) of the Securities Act and Rule 158
thereunder.
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(h) The Company agrees that it will not and it will cause
the Sole Stockholder to enter into an agreement with the Representative to the
effect that he will not without your prior written consent, in each case
directly or indirectly, sell, offer, contract to sell, grant any option to
purchase or otherwise dispose of any shares of Common Stock, or any securities
convertible into, exchangeable for or exercisable for Common Stock, or any
rights to purchase or acquire Common Stock, for a period of one year following
the date of this Agreement, excluding only (i) the sale of the Shares to be sold
to the Underwriters pursuant to this Agreement and (ii) the grant of options to
purchase Common Stock under the Company's presently authorized employee plans
that are described in the Prospectus, in accordance with the provisions of such
plans as so authorized, so long as none of such options become exercisable
within one year from the date of this Agreement.
(i) The Company will apply the net proceeds from the
offering received by it in the manner set forth under the caption "Use of
Proceeds" in the Prospectus.
(j) The Company will, and at all times for a period of at
least five years after the date of this Agreement, unless such securities are
then listed on a national securities exchange, use its best efforts to cause the
Common Stock (including the Shares) to be included for quotation on the Nasdaq
National Market, and the Company will comply with all registration, filing,
reporting and other requirements of the Exchange Act and the Nasdaq National
Market that may from time to time be applicable to the Company.
(k) The Company will use its best efforts to maintain
insurance of the types and in the amounts which it deems adequate for its
business consistent with insurance coverage maintained by companies of similar
size and engaged in similar businesses including, but not limited to, general
liability insurance covering all real and personal property owned or leased by
the Company against theft, damage, destruction, acts of vandalism and all other
risks customarily insured against.
(l) The Company will maintain a transfer agent and, if
necessary under the jurisdiction of incorporation of the Company, a registrar
(which may be the same entity as the transfer agent) for its Common Stock.
(m) If at any time during the twenty-five (25) day period
after the Registration Statement becomes effective, any rumor, publication or
event relating to or affecting the Company shall occur as a result of which, in
your opinion, the market price of the Common Stock has been or is likely to be
materially affected (regardless of whether such rumor, publication or event
necessitates a supplement to or amendment of the Prospectus), the Company will,
after written notice from you advising the Company to the effect set forth
above, forthwith prepare, consult with you concerning the substance of and
disseminate a press release or other public statement, reasonably satisfactory
to you, responding to or commenting on such rumor, publication or event.
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4. FEES AND EXPENSES.
(a) The Company agrees with each Underwriter that:
(i) The Company will pay and bear all costs and
expenses in connection with: the preparation, printing and filing of the
Registration Statement (including financial statements and exhibits),
Preliminary Prospectuses and the Prospectus, any drafts of each of them and any
amendments or supplements to any of them; the duplication or, if applicable,
printing (including all drafts thereof) of this Agreement, the Agreement Among
Underwriters, any Selected Dealer Agreements, the Blue Sky Survey, the
Underwriters' Questionnaire and the Power of Attorney and the duplication and
printing (including of drafts thereof) of any other underwriting documents and
material (including but not limited to marketing memoranda and other marketing
material) in connection with the offering, purchase, sale and delivery of the
Shares; the issuance and delivery of the Shares under this Agreement to the
several Underwriters, including all expenses, taxes, duties, fees and
commissions on the purchase and sale of the Shares and Nasdaq National Market
brokerage and transaction levies with respect to the purchase and, if
applicable, the sale of the Shares (x) incident to the sale and delivery of the
shares by the Company to the Underwriters and (y) incident to the sale and
delivery of the Shares by the Underwriters to the initial purchasers thereof;
the cost of printing all stock certificates; the Transfer Agents' and
Registrars' fees; the fees and disbursements of counsel for the Company; all
fees and other charges of the Company's independent public accountants and any
other experts named in the Prospectus; the cost of furnishing to the several
Underwriters copies of the Registration Statement (including appropriate
exhibits), Preliminary Prospectus(es) and the Prospectus, the agreements and
other documents and instruments referred to above and any amendments or
supplements to any of the foregoing; NASD filing fees and the cost of qualifying
or registering the Shares (or obtaining exemptions from qualification or
registration) under the laws of such jurisdictions as you may designate
(including filing fees and fees and disbursements of Underwriters' counsel in
connection with such NASD, state securities or Blue Sky qualifications,
registrations and exemptions, provided that such reimburseable expenses of
Underwriters' counsel shall not exceed $5,000); all fees and expenses in
connection with qualification of the Shares for inclusion for quotation on the
Nasdaq National Market; the Company's portion of all roadshow expenses; and all
other expenses incurred by the Company in connection with the performance of its
obligations hereunder.
(ii) In addition to its obligations under Section 4(a)(i)
above, the Company agrees to pay the Representative a non-accountable expense
allowance equal to 1% of the public offering price of the Shares. Such allowance
shall be paid to the Representative as provided in Sections 2(c) and 2(d) of
this Agreement.
(iii) In addition to its obligations under Section 7(a) of
this Agreement, the Company agrees that, as an interim measure during the
pendency of any claim, action, investigation, inquiry or other proceeding
arising out of or based upon any loss, claim, damage or liability described in
Section 7(a) of this Agreement, it will reimburse or advance to or for the
benefit of the Underwriters, and each of them, on a quarterly basis (or more
often, if requested) for all legal and other expenses incurred in connection
with investigating or defending any such
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claim, action, investigation, inquiry or other proceeding, notwithstanding the
absence of a judicial determination as to the propriety and enforceability of
the Company's obligation to reimburse or advance for the benefit of the
Underwriters for such expenses or the possibility that such payments might later
be held to have been improper by a court of competent jurisdiction. To the
extent that any portion, or all, of any such interim reimbursement payments or
advances are so held to have been improper, the Underwriters receiving the same
shall promptly return such amounts to the Company together with interest,
compounded daily, at the prime rate (or other commercial lending rate for
borrowers of the highest credit standing) announced from time to time by Bank of
America, NT&SA, San Francisco, California (the "Prime Rate"), but not in excess
of the maximum rate permitted by applicable law, from the date of such request
until the date paid.
(b) In addition to their obligations under Section 7(b) of
this Agreement, the Underwriters severally and in proportion to their obligation
to purchase Firm Shares as set forth on Schedule 1 hereto, agree that, as an
interim measure during the pendency of any claim, action, investigation, inquiry
or other proceeding arising out of or based upon any loss, claim, damage or
liability described in Section 7(b) of this Agreement, they will reimburse or
advance to or for the benefit of the Company on a quarterly basis (or more
often, if requested) for all legal and other expenses incurred by the Company in
connection with investigating or defending any such claim, action,
investigation, inquiry or other proceeding, notwithstanding the absence of a
judicial determination as to the proprietary or enforceability of the
Underwriters' obligation to reimburse or advance for the benefit of the Company
for such expenses and the possibility that such payments or advances might later
be held to have been improper by a court of competent jurisdiction. To the
extent that any portion, or all, of any such interim reimbursement payments or
advances are so held to have been improper, the Company shall promptly return
such amounts to the Underwriters together with interest, compounded daily, at
the Prime Rate, but not in excess of the maximum rate permitted by applicable
law. Any such interim reimbursement payments or advances that are not made to
the Company within 30 days of a request for reimbursement or for an advance
shall bear interest at the Prime Rate, but not in excess of the maximum rate
permitted by applicable law, from the date of such request until the date paid.
(c) It is agreed that any controversy arising out of the
operation of the interim reimbursement and advance arrangements set forth in
Sections 4(a)(iii) and 4(b) above, including the amounts of any requested
reimbursement payments or advance, the method of determining such amounts and
the basis on which such amounts shall be apportioned among the indemnifying
parties, shall be settled by arbitration conducted under the provisions of the
Constitution and Rules of the Board of Governors of the New York Stock Exchange,
Inc. or pursuant to the Code of Arbitration Procedure of the NASD. Any such
arbitration must be commenced by service of a written demand for arbitration or
a written notice of intention to arbitrate, therein electing the arbitration
tribunal. If the party demanding arbitration does not make such designation of
an arbitration tribunal in such demand or notice, then the party responding to
the demand or notice is authorized to do so. Any such arbitration will be
limited to the interpretation and obligations of the parties under the interim
reimbursement and advance provisions contained in Sections 4(a)(iii) and 4(b)
above and will not resolve the ultimate propriety or enforceability of the
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obligation to indemnify for or contribute to expenses that is created by the
provisions of Section 7 of this Agreement.
(d) If the sale of the Shares provided for herein is not
consummated because any condition to the obligations of the Underwriters set
forth in Section 5 of this Agreement is not satisfied, or because of any
termination pursuant to Section 9(b) of this Agreement, or because of any
refusal, inability or failure on the part of the Company to perform any covenant
or agreement set forth in this Agreement or to comply with any provision of this
Agreement other than by reason of a default by any of the Underwriters, the
Company agrees to reimburse the Representative upon demand for its reasonable
out-of-pocket expenses (including fees and disbursements of counsel) that shall
have been incurred by it in connection with investigating, preparing to market
or marketing the Shares or otherwise in connection with this Agreement;
provided, however, that in no event shall the total amount of the out-of-pocket
expenses payable to the Representative exceed $80,000.
5. CONDITIONS OF UNDERWRITERS' OBLIGATIONS. The obligations
of the several Underwriters to purchase and pay for the Shares shall be subject,
in the sole discretion of the Representative, to the accuracy as of the date of
execution of this Agreement, the Closing Date and the date on which the Option
Shares are to be purchased, as the case may be, of the representations and
warranties of the Company and the Sole Stockholder set forth in this Agreement,
to the accuracy of the statements of the Company and its officers made in any
certificate delivered pursuant to this Agreement, to the performance by the
Company of all of its obligations to be performed under this Agreement at or
prior to the Closing Date or any later date on which Option Shares are to be
purchased, as the case may be, to the satisfaction of all conditions to be
satisfied or performed by the Company at or prior to that date and to the
following additional conditions:
(a) The Registration Statement shall have become effective
(or, if a post-effective amendment is required to be filed pursuant to Rule 430A
under the Securities Act, such post-effective amendment shall become effective
and the Company shall have provided evidence satisfactory to the Representative
of such filing and effectiveness) not later than 2:00 p.m., San Francisco time,
on the date of this Agreement or at such later date and time as you may approve
in writing and, at the Closing Date or, with respect to the Option Shares, the
date on which such Option Shares are to be purchased; no stop order suspending
the effectiveness of the Registration Statement or any qualification,
registration or exemption from qualification or registration for the sale of the
Shares in any jurisdiction shall have been issued and no proceedings for that
purpose shall have been instituted or threatened; any request for additional
information on the part of the Commission shall have been complied with to the
reasonable satisfaction of the Representative and their counsel; and the NASD
shall have raised no objection to the fairness and reasonableness of the
underwriting terms and arrangements.
(b) The Representative shall have received from Cooley
Godward LLP, counsel for the Underwriters, an opinion, dated the Closing Date,
with respect to the issuance and sale of the Shares and such other related
matters as the Representative may reasonably require,
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<PAGE>
and the Company shall have furnished such counsel with all documents which they
may reasonably request for the purpose of enabling them to pass upon such
matters.
(c) You shall have received on the Closing Date and on any
later date on which Option Shares are purchased, as the case may be, the opinion
of Orrick, Herrington & Sutcliffe LLP, counsel for the Company, addressed to the
Underwriters and dated the Closing Date or such later date, with reproduced
copies or signed counterparts thereof for each of the Underwriters, covering the
matters set forth in Annex A to this Agreement and in form and substance
reasonably satisfactory to you.
(d) You shall be satisfied that there has not been any
material change in the market for securities in general or in political,
financial or economic conditions as to render it impracticable, in your sole
judgment, to make a public offering of the Shares, or a material adverse change
in market levels for securities in general (or those of companies in particular)
or financial or economic conditions which render it inadvisable to proceed.
(e) You shall have received on the Closing Date and on any
later date on which Option Shares are purchased a certificate, dated the Closing
Date or such later date, as the case may be, and signed by the President and the
Chief Financial Officer of the Company stating that:
(i) The representations and warranties of the
Company set forth in Section 1 of this Agreement are true and correct with the
same force and effect as if expressly made at and as of the Closing Date or such
later date, and the Company has complied with all the agreements and satisfied
all the conditions on its part to be performed or satisfied at or prior to the
Closing Date or such later date;
(ii) No stop order suspending the effectiveness of
the Registration Statement has been issued, and no proceedings for that purpose
have been instituted or are pending or are threatened under the Securities Act;
and
(iii) (A) the respective signers of the certificate
have carefully examined the Registration Statement in the form in which it
originally became effective and the Prospectus and any supplements or amendments
to any of them and, as of the Effective Date, the statements made in the
Registration Statement and the Prospectus were true and correct in all material
respects and neither the Registration Statement nor the Prospectus omitted to
state any material fact required to be stated therein or necessary in order to
make the statements therein not misleading, (B) since the Effective Date, no
event has occurred that should have been set forth in an amendment to the
Registration Statement or a supplement or amendment to the Prospectus that has
not been set forth in such an amendment or supplement, (C) since the respective
dates as of which information is given in the Registration Statement in the form
in which it originally became effective and the Prospectus contained therein,
there has not been any material change or any development involving a
prospective material change in or affecting the business, properties, condition
(financial or otherwise), results of operations or prospects of the Company and
the Subsidiary considered as one enterprise, whether or not arising from
transactions in the ordinary course of business, and, since such dates, except
in the ordinary course of business, neither the
19
<PAGE>
Company nor the Subsidiary has entered into any material transaction not
referred to in the Registration Statement in the form in which it originally
became effective and the Prospectus contained therein, (D) there are not any
pending or known threatened legal proceedings to which the Company or the
Subsidiary is a party or of which any property of the Company or the Subsidiary
is the subject which are material and which are not disclosed in the
Registration Statement and the Prospectus and (E) there are not any contracts,
leases or other documents that are required to be filed as exhibits to the
Registration Statement that have not been filed as required.
(f) You shall have received on the Closing Date and on any
later date on which Option Shares are purchased a certificate, dated the Closing
Date or such later date, as the case may be, and signed by the Sole Stockholder
stating that:
(i) The representations and warranties of the Sole
Stockholder set forth in Section 1 of this Agreement are true and correct with
the same force and effect as if expressly made at and as of the Closing Date or
such later date, and the Sole Stockholder has complied with all the agreements
and satisfied all the conditions on its part to be performed or satisfied at or
prior to the Closing Date or such later date;
(ii) No stop order suspending the effectiveness of
the Registration Statement has been issued, and no proceedings for that purpose
have been instituted or are pending or are threatened under the Securities Act;
and
(iii) (A) the Sole Stockholder has carefully examined
the Registration Statement in the form in which it originally became effective
and the Prospectus and any supplements or amendments to any of them and, as of
the Effective Date, the statements made in the Registration Statement and the
Prospectus were true and correct in all material respects and neither the
Registration Statement nor the Prospectus omitted to state any material fact
required to be stated therein or necessary in order to make the statements
therein not misleading, (B) since the Effective Date, no event has occurred that
should have been set forth in an amendment to the Registration Statement or a
supplement or amendment to the Prospectus that has not been set forth in such an
amendment or supplement, (C) since the respective dates as of which information
is given in the Registration Statement in the form in which it originally became
effective and the Prospectus contained therein, there has not been any material
change or any development involving a prospective material change in or
affecting the business, properties, condition (financial or otherwise), results
of operations or prospects of the Company and the Subsidiary considered as one
enterprise, whether or not arising from transactions in the ordinary course of
business, and, since such dates, except in the ordinary course of business,
neither the Company nor the Subsidiary has entered into any material transaction
not referred to in the Registration Statement in the form in which it originally
became effective and the Prospectus contained therein, (D) there are not any
pending or known threatened legal proceedings to which the Company or the
Subsidiary is a party or of which any property of the Company or the Subsidiary
is the subject which are material and which are not disclosed in the
Registration Statement and the Prospectus and (E) there are not any contracts,
leases or other documents that
20
<PAGE>
are required to be filed as exhibits to the Registration Statement that have not
been filed as required.
(g) You shall have received from Deloitte & Touche LLP a
letter or letters, addressed to the Underwriters and dated the Closing Date and
any later date on which Option Shares are purchased, confirming that they are
independent accountants with respect to the Company within the meaning of the
Securities Act and the applicable published Rules and Regulations thereunder
and, based upon the procedures described in their letter, referred to below,
delivered to you concurrently with the execution of this Agreement (the
"Original Letter"), but carried out to a date not more than five business days
prior to the Closing Date or such later date on which Option Shares are
purchased, (i) confirming, to the extent true, that the statements and
conclusions set forth in the Original Letter are accurate as of the Closing Date
or such later date, as the case may be, and (ii) setting forth any revisions and
additions to the statements and conclusions set forth in the Original Letter
that are necessary to reflect any changes in the facts described in the Original
Letter since the date of the Original Letter or to reflect the availability of
more recent financial statements, data or information. Such letters shall not
disclose any change, or any development involving a prospective change, in or
affecting the business, properties or condition (financial or otherwise),
results of operations or prospects of the Company or the Subsidiary which, in
your sole judgment, makes it impractical or inadvisable to proceed with the
public offering of the Shares or the purchase of the Option Shares as
contemplated by the Prospectus (or, if the Prospectus is not in existence, the
most recent Preliminary Prospectus). The Original Letter from Deloitte & Touche
LLP shall be addressed to or for the use of the Underwriters in form and
substance reasonably satisfactory to the Underwriters and shall (i) represent,
to the extent true, that they are independent public accountants with respect to
the Company within the meaning of the Securities Act and the applicable
published Rules and Regulations; (ii) represent that the consolidated balance
sheets of the Company as of December 31, 1997 and 1996 and related consolidated
statements of income, stockholder's equity, and cash flows for the each of the
three years in the period ended December 31, 1997 comply as to form in all
material respects with the applicable accounting requirements of the Securities
Act and the rules and regulations thereunder; (iii) state that Deloitte & Touche
LLP has performed the procedures set out in Statement on Auditing Standards No.
71 ("SAS 71") for a review of interim financial information and providing the
report of Deloitte & Touche LLP as described in SAS 71 on the financial
statements for each of the quarters in the eight-quarter period ended December
31, 1997 (the "Quarterly Financial Statements"); (iv) state that in the course
of such review, nothing came to their attention that leads them to believe that
any material modifications need to be made to any of the Quarterly Financial
Statements in order for them to be in compliance with generally accepted
accounting principles consistently applied across the periods presented and (v)
address other matters agreed upon by Deloitte & Touche LLP and the
Representative. In addition, you shall have received from Deloitte & Touche LLP,
on or prior to the Closing Date, a letter addressed to the Company and made
available to you for the use of the Underwriters stating that their review of
the Company's system of internal controls, to the extent they deemed necessary
in establishing the scope of their examination of the Company's financial
statements as of December 31, 1997 or in delivering their Original Letter, did
not disclose any weaknesses in internal controls that they considered to be a
material weaknesses.
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<PAGE>
(h) Prior to the Closing Date, the Shares shall have been
designated national market system securities, duly authorized for quotation on
the Nasdaq National Market upon official notice of issuance.
(i) On or prior to the Closing Date, you shall have received
from the Sole Stockholder an executed agreement covering the matters described
in Section 3(h) of this Agreement.
(j) The Company shall have furnished to you such further
certificates and documents as you shall reasonably request (including
certificates of officers of the Company), as to the accuracy of the
representations and warranties of the Company and the Sole Stockholder set forth
in this Agreement, the performance by the Company of its obligations under this
Agreement and the other conditions concurrent and precedent to the obligations
of the Underwriters under this Agreement.
(k) All the agreements, opinions, certificates and letters
mentioned above or elsewhere in this Agreement will be in compliance with the
provisions of this Agreement only if they are reasonably satisfactory to the
Representative and its counsel. The Company will furnish you with such number of
conformed copies of such opinions, certificates, letters and documents as you
shall reasonably request.
(l) If any of the conditions specified in this Section 5
shall not have been fulfilled in all material respects when and as provided in
this Agreement, time being of the essence, or if any of the opinions and
certificates mentioned above or elsewhere in this Agreement shall not be in all
material respects reasonably satisfactory in form and substance to the
Representative and its counsel, this Agreement and all obligations of the
Underwriters hereunder may be canceled by the Representative at, or at any time
prior to, the Closing Date or (with respect to the Option Shares) prior to the
date upon which the Option Shares are to be purchased, as the case may be.
Notice of such cancellation shall be given to the Company in writing or by
telephone, telecopy or telegraph confirmed in writing. Any such termination
shall be without liability of the Company to the Underwriters (except as
provided in Section 4 or Section 7 of this Agreement) and without liability of
the Underwriters to the Company (except to the extent provided in Section 7 of
this Agreement).
6. CONDITION OF THE OBLIGATION OF THE COMPANY. The obligation of
the Company to sell and deliver the Shares required to be delivered as and when
specified in this Agreement shall be subject to the condition that, at the
Closing Date or, (with respect to the Option Shares,) the date upon which the
Option Shares are to be purchased, no stop order suspending the effectiveness of
the Registration Statement shall be in effect and no proceedings therefor shall
be pending or threatened by the Commission.
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<PAGE>
7. INDEMNIFICATION AND CONTRIBUTION.
(a) The Company agrees to indemnify and hold harmless each
Underwriter and each person (including each partner or officer thereof) who
controls any Underwriter within the meaning of Section 15 of the Securities Act
from and against any and all losses, claims, damages or liabilities, joint or
several, to which such indemnified parties or any of them may become subject
under the Securities Act, the Exchange Act or other federal or state statute,
law or regulation, at common law or otherwise, specifically including but not
limited to losses, claims, damages or liabilities (or actions in respect
thereof) related to negligence on the part of any Underwriter, and the Company
agrees to reimburse each such Underwriter and controlling person for any legal
or other expenses (including, except as otherwise provided below, settlement
expenses and fees and disbursements of counsel) incurred by the respective
indemnified parties in connection with defending against any such losses,
claims, damages or liabilities or in connection with any investigation or
inquiry of, or other proceeding that may be brought against, the respective
indemnified parties, in each case insofar as such losses, claims, damages or
liabilities (or actions in respect thereof) arise out of or are based upon, in
whole or in part, (i) any breach of any representation, warranty, covenant or
agreement of the Company in this Agreement, (ii) any untrue statement or alleged
untrue statement of a material fact contained in the Registration Statement in
the form originally filed or in any amendment thereto (including the Prospectus
as part thereof) or any post-effective amendment thereto, or the omission or
alleged omission to state therein a material fact required to be stated therein
or necessary to make the statements therein, in light of the circumstances under
which they were made, not misleading or (iii) any untrue statement or alleged
untrue statement of a material fact contained in any Preliminary Prospectus or
the Prospectus (as amended or as supplemented if the Company shall have filed
with the Commission any amendment thereof or supplement thereto) or the omission
or alleged omission to state therein a material fact required to be stated
therein or necessary in order to make the statements therein, in the light of
the circumstances under which they were made, not misleading or (iv) any untrue
statement or alleged untrue statement of a material fact contained in any
application or other document, or any amendment or supplement thereto, executed
by the Company or based upon written information furnished by or on behalf of
the Company filed in any jurisdiction in order to qualify or register the Shares
under the securities or Blue Sky laws thereof or to obtain an exemption from
such qualification or registration or filed with the Commission or any
securities association, the Nasdaq National Market, or any securities exchange,
or the omission or alleged omission to state therein a material fact required to
be stated therein or necessary to make the statements therein, in light of the
circumstances under which they were made, not misleading; provided, however,
that (1) the indemnity agreements of the Company contained in this Section 7(a)
shall not apply to any such losses, claims, damages, liabilities or expenses if
such statement or omission was made in reliance upon and in conformity with
information furnished in writing to the Company by or on behalf of any
Underwriter through the Representative specifically for use in the Registration
Statement, any Preliminary Prospectus or the Prospectus or any such amendment
thereof or supplement thereto and (2) the indemnity agreement contained in this
Section 7(a) with respect to any Preliminary Prospectus shall not inure to the
benefit of any Underwriter from whom the person asserting any such losses,
claims, damages, liabilities or expenses purchased the Shares that are the
subject thereof (or to the benefit of any person controlling such Underwriter)
if the Company can demonstrate that at
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<PAGE>
or prior to the written confirmation of the sale of such Shares a copy of the
Prospectus (or the Prospectus as amended or supplemented) (excluding the
documents incorporated therein by reference) was not sent or delivered to such
person and the untrue statement or omission of a material fact contained in such
Preliminary Prospectus was corrected in the Prospectus (or the Prospectus as
amended or supplemented), unless the failure is the result of noncompliance by
the Company with Section 3 of this Agreement.
The indemnity agreement of the Company contained in this Section 7(a)
and the representations and warranties of the Company contained in Section 1 of
this Agreement shall remain operative and in full force and effect regardless of
any investigation made by or on behalf of any indemnified party and shall
survive the delivery of and payment for the Shares. This indemnity agreement
shall not function as an exclusive remedy hereunder and shall be in addition to
any liabilities that the Company may have pursuant to this Agreement or
otherwise.
(b) The Sole Stockholder agrees to indemnify and hold
harmless each Underwriter and each person (including each partner or officer
thereof) who controls any Underwriter within the meaning of Section 15 of the
Securities Act from and against any and all losses, claims, damages or
liabilities, joint or several, to which such indemnified parties or any of them
may become subject under the Securities Act, the Exchange Act or other federal
or state statute, law or regulation, at common law or otherwise, specifically
including but not limited to losses, claims, damages or liabilities (or actions
in respect thereof) related to negligence on the part of any Underwriter, and
the Sole Stockholder agrees to reimburse each such Underwriter and controlling
person for any legal or other expenses (including, except as otherwise provided
below, settlement expenses and fees and disbursements of counsel) incurred by
the respective indemnified parties in connection with defending against any such
losses, claims, damages or liabilities or in connection with any investigation
or inquiry of, or other proceeding that may be brought against, the respective
indemnified parties, in each case insofar as such losses, claims, damages or
liabilities (or actions in respect thereof) arise out of or are based upon, in
whole or in part, (i) any breach of any representation, warranty, covenant or
agreement of the Sole Stockholder in this Agreement, (ii) any untrue statement
or alleged untrue statement of a material fact contained in the Registration
Statement in the form originally filed or in any amendment thereto (including
the Prospectus as part thereof) or any post-effective amendment thereto, or the
omission or alleged omission to state therein a material fact required to be
stated therein or necessary to make the statements therein, in light of the
circumstances under which they were made, not misleading or (iii) any untrue
statement or alleged untrue statement of a material fact contained in any
Preliminary Prospectus or the Prospectus (as amended or as supplemented if the
Company shall have filed with the Commission any amendment thereof or supplement
thereto) or the omission or alleged omission to state therein a material fact
required to be stated therein or necessary in order to make the statements
therein, in the light of the circumstances under which they were made, not
misleading or (iv) any untrue statement or alleged untrue statement of a
material fact contained in any application or other document, or any amendment
or supplement thereto, executed by the Company or based upon written information
furnished by or on behalf of the Company filed in any jurisdiction in order to
qualify or register the Shares under the securities or Blue Sky laws thereof or
to obtain an exemption from such qualification or registration or filed with the
Commission or any securities association, the Nasdaq National
24
<PAGE>
Market, or any securities exchange, or the omission or alleged omission to state
therein a material fact required to be stated therein or necessary to make the
statements therein, in light of the circumstances under which they were made,
not misleading; provided, however, that (1) the indemnity agreements of the Sole
Stockholder contained in this Section 7(b) shall not apply to any such losses,
claims, damages, liabilities or expenses if such statement or omission was made
in reliance upon and in conformity with information furnished in writing to the
Company or the Sole Stockholder by or on behalf of any Underwriter through the
Representative specifically for use in the Registration Statement, any
Preliminary Prospectus or the Prospectus or any such amendment thereof or
supplement thereto and (2) the indemnity agreement contained in this Section
7(b) with respect to any Preliminary Prospectus shall not inure to the benefit
of any Underwriter from whom the person asserting any such losses, claims,
damages, liabilities or expenses purchased the Shares that are the subject
thereof (or to the benefit of any person controlling such Underwriter) if the
Company or the Sole Stockholder can demonstrate that at or prior to the written
confirmation of the sale of such Shares a copy of the Prospectus (or the
Prospectus as amended or supplemented) (excluding the documents incorporated
therein by reference) was not sent or delivered to such person and the untrue
statement or omission of a material fact contained in such Preliminary
Prospectus was corrected in the Prospectus (or the Prospectus as amended or
supplemented), unless the failure is the result of noncompliance by the Company
with Section 3 of this Agreement; provided, further, however, that the liability
of the Sole Stockholder for indemnification under this Section 7(b), in the
absence of fraud, shall not exceed the proceeds received by the Sole Stockholder
from the payment of the Distribution to be made to the Sole Stockholder
immediately following the Closing Date as set forth in the Prospectus.
The indemnity agreement of the Sole Stockholder contained in this
Section 7(b) and the representations and warranties of the Sole Stockholder
contained in Section 1 of this Agreement shall remain operative and in full
force and effect regardless of any investigation made by or on behalf of any
indemnified party and shall survive the delivery of and payment for the Shares.
This indemnity agreement shall not function as an exclusive remedy hereunder and
shall be in addition to any liabilities that the Sole Stockholder may otherwise
have pursuant to this Agreement or otherwise.
(c) Each Underwriter, severally and not jointly, agrees to
indemnify and hold harmless the Company, each of its officers who signs the
Registration Statement, each of its directors, each other Underwriter and each
person (including each partner or officer thereof) who controls the Company or
any such other Underwriter within the meaning of Section 15 of the Securities
Act from and against any and all losses, claims, damages or liabilities, joint
or several, to which such indemnified parties or any of them may become subject
under the Securities Act, the Exchange Act, or other federal or state statute,
law or regulation or at common law or otherwise and to reimburse each of them
for any legal or other expenses (including, except as otherwise hereinafter
provided, settlement expenses and fees and disbursements of counsel) incurred by
the respective indemnified parties in connection with defending against any such
losses, claims, damages or liabilities or in connection with any investigation
or inquiry of, or other proceeding that may be brought against, the respective
indemnified parties, in each case arising out of or based upon (i) any breach of
any representation, warranty, covenant or
25
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agreement of the indemnifying Underwriter in this Agreement, (ii) any untrue
statement or alleged untrue statement of a material fact contained in the
Registration Statement (including the Prospectus as part thereof) or any post-
effective amendment thereto, or the omission or alleged omission to state
therein a material fact required to be stated therein or necessary to make the
statements therein, in the light of the circumstances under which they were
made, not misleading or (iii) any untrue statement or alleged untrue statement
of a material fact contained in any Preliminary Prospectus or the Prospectus (as
amended or as supplemented if the Company shall have filed with the Commission
any amendment thereof or supplement thereto) or the omission or alleged omission
to state therein a material fact required to be stated therein or necessary in
order to make the statements therein, in the light of the circumstances under
which they were made, not misleading, but in each case under clauses (i), (ii)
and (iii) above, as the case may be, only if such statement or omission was made
in reliance upon and in conformity with information furnished in writing to the
Company by or on behalf of such indemnifying Underwriter through the
Representative specifically for use in the Registration Statement, in any
Preliminary Prospectus or the Prospectus or any such amendment thereof or
supplement thereto. The Company acknowledges and agrees that the matters
described in Section 2(h) of this Agreement constitute the only information
furnished in writing by or on behalf of the several Underwriters for inclusion
in the Registration Statement, any Preliminary Prospectus or the Prospectus.
The indemnity agreement of each Underwriter contained in this Section
7(c) shall remain operative and in full force and effect regardless of any
investigation made by or on behalf of any indemnified party and shall survive
the delivery of and payment for the Shares. This indemnity agreement shall not
function as an exclusive remedy hereunder and shall be in addition to any
liabilities that each Underwriter may have pursuant to this Agreement or
otherwise.
(d) Each person or entity indemnified under the provisions
of Sections 7(a), 7(b) and 7(c) above agrees that, upon the service of a summons
or other initial legal process upon it in any action or suit instituted against
it or upon its receipt of written notification of the commencement of any
investigation or inquiry of, or proceeding against, it in respect of which
indemnity may be sought on account of any indemnity agreement contained in such
Sections, it will, if a claim in respect thereunder is to be made against the
indemnifying party or parties under this Section 7, promptly give written notice
(the "Notice") of such service or notification to the party or parties from whom
indemnification may be sought hereunder. No indemnification provided for in
Sections 7(a), 7(b) or 7(c) above shall be available to any person who fails to
so give the Notice if the party to whom such Notice was not given was unaware of
the action, suit, investigation, inquiry or proceeding to which the Notice would
have related, but only to the extent such party was materially prejudiced by the
failure to receive the Notice, and the omission so to notify such indemnifying
party or parties shall not relieve such indemnifying party or parties from any
liability which it or they may have to the indemnified party for contribution or
otherwise than on account of Sections 7(a), 7(b) and 7(c). Any indemnifying
party shall be entitled at its own expense to participate in the defense of any
action, suit or proceeding against, or investigation or inquiry of, an
indemnified party. Any indemnifying party shall be entitled, if it so elects
within a reasonable time after receipt of the Notice by giving written notice
(the "Notice of Defense") to the indemnified party, to assume (alone or in
conjunction with any other
26
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indemnifying party or parties) the entire defense of such action, suit,
investigation, inquiry or proceeding, in which event such defense shall be
conducted, at the expense of the indemnifying party or parties, by counsel
chosen by such indemnifying party or parties and reasonably satisfactory to the
indemnified party or parties; provided, however, that (i) if the indemnified
party or parties reasonably determine that there may be a conflict between the
positions of the indemnifying party or parties and of the indemnified party or
parties in conducting the defense of such action, suit, investigation, inquiry
or proceeding or that there may be legal defenses or rights available to such
indemnified party or parties different from or in addition to those available to
the indemnifying party or parties, then separate counsel for and selected by the
indemnified party or parties shall be entitled to conduct the defense of the
indemnified parties to the extent determined by such counsel to be necessary to
protect the interests of the indemnified party or parties, and (ii) provided,
further, that the indemnifying party shall not be liable for the fees and
expenses of more than one separate counsel, reasonably approved by the
indemnifying party, for all of the indemnified parties, plus, if applicable,
local counsel in each jurisdiction. In addition, in any event, the indemnified
party or parties shall be entitled to have counsel selected by such indemnified
party or parties participate in, but not conduct, the defense. If, within a
reasonable time after receipt of the Notice, an indemnifying party gives a
Notice of Defense and, unless separate counsel is to be chosen by the
indemnified party or parties as provided above, the counsel chosen by the
indemnifying party or parties is reasonably satisfactory to the indemnified
party or parties, the indemnifying party or parties will not be liable under
Sections 7(a) through 7(d) for any legal expenses subsequently incurred by the
indemnified party or parties in connection with the defense of the action, suit,
investigation, inquiry or proceeding, except that (A) the indemnifying party or
parties shall bear and pay the legal and other expenses incurred in connection
with the conduct of the defense as referred to in clause (i) of the proviso to
the preceding sentence and (B) the indemnifying party or parties shall bear and
pay such other expenses as it or they have authorized to be incurred by the
indemnified party or parties. If, within a reasonable time after receipt of the
Notice, no Notice of Defense has been given, the indemnifying party or parties
shall be responsible for any legal or other expenses incurred by the indemnified
party or parties in connection with the defense of the action, suit,
investigation, inquiry or proceeding.
(e) In order to provide for just and equitable contribution
in any action in which a claim for indemnification is made pursuant to this
Section 7 but is judicially determined (by the entry of a final judgment or
decree by a court of competent jurisdiction and the expiration of time to appeal
or the denial of the last right to appeal) that such indemnification may not be
enforced in such case notwithstanding the fact that this Section 7 provides for
indemnification in such case, each indemnifying party shall contribute to the
amount paid or payable by such indemnified party as a result of the losses,
claims, damages, liabilities and expenses referred to in Section 7(a), 7(b) or
7(c) above (i) in such proportion as is appropriate to reflect the relative
benefits received by each indemnifying party from the offering of the Shares or
(ii) if the allocation provided by clause (i) above is not permitted by
applicable law, in such proportion as is appropriate to reflect not only the
relative benefits referred to in clause (i) above but also the relative fault of
each party in connection with the statements or omissions that resulted in such
losses, claims, damages or liabilities, or actions in respect thereof, as well
as any other relevant equitable considerations. The relative benefits received
by the Company, the Sole Stockholder
27
<PAGE>
and the Underwriters shall be deemed to be in the same respective proportions as
the total proceeds from the offering of the Shares received by the Company (net
of the underwriting discounts and the Distribution), the Distribution made to
the Sole Stockholder, and the total underwriting discount retained by the
Underwriters bear to the aggregate public offering price of the Shares. Relative
fault shall be determined by reference to, among other things, whether the
untrue or alleged untrue statement of a material fact or the omission or alleged
omission to state a material fact relates to information supplied by a party and
the party's relative intent, knowledge, access to information and opportunity to
correct or prevent such untrue statement or omission.
(f) The parties agree that it would not be just and
equitable if contribution pursuant to Section 7(e) were to be determined by pro
rata allocation (even if the Underwriters were treated as one entity for such
purpose) or by any other method of allocation which does not take into account
the equitable considerations referred to in the first sentence of Section 7(e)
and to the considerations referred to in the third sentence of the first
paragraph of Section 7(e). The amount paid by an indemnified party as a result
of the losses, claims, damages or liabilities, or actions in respect thereof,
referred to in the first sentence of Section 7(e) shall be deemed to include any
legal or other expenses reasonably incurred by such indemnified party in
connection with investigating, preparing to defend or defending against any
action or claim which is the subject of Section 7(e). Notwithstanding the
provisions of Section 7(e), (i) no Underwriter shall be required to contribute
any amount in excess of the underwriting discount applicable to the Shares
purchased by that Underwriter and (ii) the Sole Stockholder, in the absence of
fraud, shall not be required to contribute any amount in excess of the proceeds
received by the Sole Stockholder from the payment of the Distribution. For
purposes of Section 7(e), each person who controls an Underwriter within the
meaning of the Securities Act shall have the same rights to contribution as such
Underwriter, and each person who controls the Company within the meaning of the
Securities Act, each officer of the Company who signed the Registration
Statement and each director of the Company shall have the same rights to
contribution as the Company, subject in each case to the immediately preceding
and immediately following sentences. No person guilty of fraudulent
misrepresentation (within the meaning of Section 11(f) of the Securities Act)
shall be entitled to contribution from any person who was not guilty of such
fraudulent misrepresentation. The Underwriters' obligations to contribute
pursuant to Section 7(e) are several in proportion to their respective
underwriting obligations and not joint.
(g) Each party or other entity entitled to contribution
agrees that upon the service of a summons or other initial legal process upon it
in any action instituted against it in respect of which contribution may be
sought, it will promptly give written notice of such service to the party or
parties from whom contribution may be sought, but the omission so to notify such
party or parties of any such service shall not relieve the party from whom
contribution may be sought from any obligation it may have hereunder or
otherwise (except as specifically provided in Section 7(d) above). Section 7(e)
shall not be operative as to any Underwriter to the extent that the Company is
entitled to receive or has received indemnity under this Section 7.
(h) Neither the Company nor the Sole Stockholder shall,
without the prior written consent of each Underwriter, settle or compromise or
consent to the entry of any judgment in any pending or threatened claim, action,
suit or proceeding in respect of which
28
<PAGE>
indemnification or contribution may be sought hereunder (whether or not such
Underwriter or any person who controls such Underwriter within the meaning of
Section 15 of the Securities Act is a party to such claim, action, suit or
proceeding) unless such settlement, compromise or consent includes an
unconditional release of each such Underwriter and each such controlling person
from all liability arising out of such claim, action, suit or proceeding.
(i) The parties to this Agreement hereby acknowledge that
they are sophisticated business persons who were represented by counsel during
the negotiations regarding the provisions of this Agreement, including, without
limitation, the provisions of Sections 4(a)(iii), 4(b) and 4(c) and this Section
7 of this Agreement and that they are fully informed regarding all such
provisions. They further acknowledge that the provisions of Sections 4(a)(iii),
4(b) and 4(c) and this Section 7 of this Agreement fairly allocate the risks in
light of the ability of the parties to investigate the Company and its business
in order to assure that adequate disclosure is made in the Registration
Statement, each Preliminary Prospectus and the Prospectus as required by the
Securities Act, the Rules and Regulations, the Exchange Act and the rules and
regulations of the Commission under the Exchange Act.
8. SUBSTITUTION OF UNDERWRITERS. If for any reason one or more of
the Underwriters fails or refuses (otherwise than for a reason sufficient to
justify the termination of this Agreement under the provisions of Section 5 or
Section 9 of this Agreement) to purchase and pay for the number of Firm Shares
agreed to be purchased by such Underwriter or Underwriters, the Company shall
immediately give notice thereof to the Representative and the non-defaulting
Underwriters shall have the right within 24 hours after the receipt by the
Representative of such notice to purchase, or procure one or more other
Underwriters to purchase, in such proportions as may be agreed upon among the
Representative and such purchasing Underwriter or Underwriters and upon the
terms set forth herein, all or any part of the Firm Shares that such defaulting
Underwriter or Underwriters agreed to purchase. If the non-defaulting
Underwriters fail to make such arrangements with respect to all such Shares, the
number of Firm Shares that each non-defaulting Underwriter is otherwise
obligated to purchase under this Agreement shall be automatically increased on a
pro rata basis to absorb the remaining Shares that the defaulting Underwriter or
Underwriters agreed to purchase; provided, however, that the non-defaulting
Underwriters shall not be obligated to purchase the Shares that the defaulting
Underwriter or Underwriters agreed to purchase if the aggregate number of such
Shares exceeds 10% of the total number of Firm Shares that all Underwriters
agreed to purchase under this Agreement. If the total number of Firm Shares that
the defaulting Underwriter or Underwriters agreed to purchase shall not be
purchased or absorbed in accordance with the two preceding sentences, the
Company shall have the right, within 24 hours next succeeding the first 24-hour
period above referred to, to make arrangements with other underwriters or
purchasers satisfactory to you for purchase of such Shares on the terms set
forth in this Agreement. In any such case, either you or the Company shall have
the right to postpone the Closing Date determined as provided in Section 2(c) of
this Agreement for not more than seven business days after the date originally
fixed as the Closing Date pursuant to said Section 2(c) in order that any
necessary changes in the Registration Statement, the Prospectus or any other
documents or arrangements may be made.
29
<PAGE>
If neither the non-defaulting Underwriters nor the Company makes
arrangements within the time periods provided in the first three sentences of
the first paragraph of this Section 8 for the purchase of all the Firm Shares
that the defaulting Underwriter or Underwriters agreed to purchase hereunder,
this Agreement shall be terminated without further act or deed and without any
liability on the part of the Company to any non-defaulting Underwriter (except
as provided in Section 4 or Section 7 of this Agreement) and without any
liability on the part of any non-defaulting Underwriter to the Company (except
to the extent provided in Section 7 of this Agreement). Nothing in this Section
8, and no action taken hereunder, shall relieve any defaulting Underwriter from
liability, if any, to the Company, the Sole Stockholder or any non-defaulting
Underwriter for damages occasioned by its default under this Agreement. The term
"Underwriter" in this Agreement shall include any persons substituted for an
Underwriter under this Section 8.
9. EFFECTIVE DATE OF AGREEMENT AND TERMINATION.
(a) If the Registration Statement has not been declared
effective prior to the date of this Agreement, this Agreement shall become
effective at such time, after notification of the effectiveness of the
Registration Statement has been released by the Commission, as you and the
Company shall agree upon the public offering price and the purchase price of the
Shares. If the public offering price and the purchase price of the Shares shall
not have been determined prior to 2:00 p.m., San Francisco time, on the fifth
full business day after the Registration Statement has become effective, this
Agreement shall thereupon terminate without liability on the part of the Company
to the Underwriters (except as provided in Section 4 or Section 7 of this
Agreement) or the Underwriters to the Company (except as set forth in Section 7
of this Agreement). By giving notice before the time this Agreement becomes
effective, you, as Representative of the several Underwriters, may prevent this
Agreement from becoming effective without liability of any party to the other
party, except that the Company shall remain obligated to pay costs and expenses
to the extent provided in Section 4 and Section 7 of this Agreement. If the
Registration Statement has been declared effective prior to the date of this
Agreement, this Agreement shall become effective upon execution and delivery by
you and the Company.
(b) This Agreement may be terminated by you in your absolute
discretion by giving written notice to the Company at any time on or prior to
the Closing Date or, with respect to the purchase of the Option Shares, on or
prior to any later date on which the Option Shares are to be purchased, as the
case may be, if prior to such time any of the following has occurred: (i) the
Company shall have failed, refused or been unable to perform any agreement on
its part to be performed, or because any other condition of the Underwriters'
obligations hereunder required to be fulfilled is not fulfilled, including,
without limitation, after the respective dates as of which information is given
in the Registration Statement and the Prospectus, any material adverse change or
development involving a prospective adverse change in or affecting particularly
the business, properties, condition (financial or otherwise), results of
operations or prospects of the Company and the Subsidiary considered as one
enterprise, whether or not arising in the ordinary course of business, occurs
which would, in your reasonable judgment, make the offering or the delivery of
the Shares impracticable or inadvisable; or (ii) there shall have been the
engagement
30
<PAGE>
in hostilities or an escalation of major hostilities by the United States or the
declaration of war or a national emergency by the United States on or after the
date hereof, or any outbreak of hostilities or other national or international
calamity or crisis or change in economic or political conditions, if the effect
of such outbreak, calamity, crisis or change in economic or political conditions
on the financial markets of the United States would, in your reasonable
judgment, make the offering or delivery of the Shares impracticable or
inadvisable; or (iii) there shall have been suspension of trading in securities
generally or a material adverse decline in value of securities generally on the
New York Stock Exchange, the American Stock Exchange, the Nasdaq National Market
or limitations on prices (other than limitations on hours or numbers of days of
trading) for securities on either such exchange or system; or (iv) there shall
have been the enactment, publication, decree or other promulgation of any
federal or state statute, regulation, rule or order of, or commencement of any
proceeding or investigation by, any court, legislative body, agency or other
governmental authority which in your reasonable judgment materially and
adversely affects or may materially and adversely affect the business,
properties, condition (financial or other otherwise), results of operations or
prospects of the Company; or (v) there shall have been the declaration of a
banking moratorium by federal, New York or California state authorities; or (vi)
there shall have been the taking of any action by any federal, state or local
government or agency in respect of its monetary or fiscal affairs which, in your
reasonable judgment, has or is likely to have a material adverse effect on the
securities markets in the United States; or (vii) the Company shall have
sustained a loss by strike, fire, flood, earthquake, accident or other calamity
of such character as to interfere materially with the conduct of the business
and operations of the Company regardless of whether or not such loss shall have
been insured. In the event of termination pursuant to subparagraph (i) above
because of any intentional or willful failure, refusal or inability on the party
of the Company or the Sole Stockholder to perform any agreement herein or to
comply with any provisions herein, other than by reason of a default by any of
the Underwriters, the Company shall remain obligated to pay costs and expenses
pursuant to Sections 4 and 7. If this Agreement shall be
terminated pursuant to this Section 9, there shall be no liability of the
Company to the Underwriters (except pursuant to Section 4 and Section 7 of this
Agreement) and no liability of the Underwriters to the Company (except to the
extent provided in Section 7 of this Agreement).
10. NOTICES. Except as otherwise provided herein, all communications
hereunder shall be in writing and, if to the Underwriters, shall be mailed,
telecopied or telegraphed or delivered to Van Kasper & Company, 600 California
Street, Suite 1700, San Francisco, California 91111, Attention: Syndicate
Manager (telecopier: (415) 397-2744), with a copy to Cooley Godward LLP, One
Maritime Plaza, 20th Floor, San Francisco, California 94111, Attention: Gregory
C. Smith (telecopier: (415) 951-3699); and if to the Company, shall be mailed,
telecopied or delivered to it at its office at 3200-F Regatta Boulevard,
Richmond, California 94804, Attention: President (telecopier: (510) 970-9784),
Attention: President, with a copy to Orrick Herrington & Sutcliffe LLP, 400
Sansome Street, San Francisco, California 94111, Attention: John F. Seegal, Esq.
(telecopier: (415) 773-5759). All notices given by telecopy or telegraph shall
be promptly confirmed by letter.
11. PERSONS ENTITLED TO THE BENEFIT OF THIS AGREEMENT. This
Agreement shall inure to the benefit of the Company, the Sole Stockholder and
the several Underwriters and, with
31
<PAGE>
respect to the provisions of Section 4 and Section 7 of this Agreement, the
several parties (in addition to the Company, the Sole Stockholder and the
several Underwriters) indemnified under the provisions of Section 4 and Section
7, and their respective personal representatives, successors and assigns.
Nothing in this Agreement is intended or shall be construed to give to any other
person, firm or corporation any legal or equitable remedy or claim under or in
respect of this Agreement or any provision contained herein. The term
"successors and assigns" as herein used shall not include any purchaser, as such
purchaser, of any of the Shares from the several Underwriters.
12. GENERAL. Notwithstanding any provision of this Agreement to the
contrary, the reimbursement, indemnification and contribution agreements
contained in this Agreement and the representations, warranties, covenants and
agreements in this Agreement shall remain in full force and effect regardless of
(a) any termination of this Agreement, (b) any investigation made by or on
behalf of any Underwriter or controlling person thereof or by or on behalf of
the Company or their respective directors or officers and (c) delivery and
payment for the Shares under this Agreement; provided, however, that if this
Agreement is terminated prior to the Closing Date, the provisions of Sections
3(f), 3(g), 3(h), 3(i), 3(j), 3(k), 3(l) and 3(m) of this Agreement shall be of
no further force or effect.
This Agreement may be executed in two or more counterparts, each of which shall
constitute an original, but all of which together shall constitute one and the
same instrument, and may be delivered by facsimile transmission.
13. APPLICABLE LAWS. This Agreement shall be governed by, and
construed in accordance with, the laws of the state of California.
14. AUTHORITY OF THE REPRESENTATIVE. In connection with this
Agreement, the Representative will act for and on behalf of the several
Underwriters, and any action taken under this Agreement by the Representative,
as representative of the several Underwriters, will be binding on all the
Underwriters.
32
<PAGE>
If the foregoing correctly sets forth your understanding, please so indicate by
signing in the space provided below for that purpose, whereupon this letter
shall constitute a binding agreement among the Company, the Sole Stockholder and
the several Underwriters.
Very truly yours,
SHOE PAVILION, INC.
_________________________________
Dmitry Beinus
Chairman, President and
Chief Executive Officer
SOLE STOCKHOLDER
---------------------------------
Dmitry Beinus
The foregoing Agreement is hereby confirmed and accepted as of the date first
above written.
On their behalf and on behalf of each of the
several Underwriters named in Schedule I
hereto:
VAN KASPER & COMPANY
By:
-----------------------------------------
Authorized Signatory
33
<PAGE>
SCHEDULE I
UNDERWRITERS
<TABLE>
<CAPTION>
Number of
Firm Shares to
Underwriters be Purchased
- ------------ --------------
<S> <C>
Van Kasper & Company...........................
Total.................................. 1,800,000
</TABLE>
I-1
<PAGE>
ANNEX A
Matters to be Covered in the Opinion of Counsel for the Company
(i) Each of the Company and the Subsidiary has been duly incorporated and is
validly existing as a corporation in good standing under the laws of the
jurisdiction of its incorporation;
(ii) Each of the Company and the Subsidiary has the corporate power and
authority to own, lease and operate its properties and to conduct its
business as described in the Prospectus;
(iii) The Company is duly qualified to do business as a foreign corporation
and is in good standing in the State of California and the Subsidiary is
duly qualified to do business as a foreign corporation and is in good
standing in the States of California, Nevada and Oregon;
(iv) The execution and delivery of the Exchange Agreement dated as of
February __, 1998 (the "Exchange Agreement") between the Subsidiary and
the Company, which effected the transfer of the stock of the Subsidiary
to the Company on the date hereof, was duly authorized by all necessary
corporate action on the part of each of the Subsidiary and the Company;
each of the Subsidiary and the Company had all necessary corporate power
and authority to execute and deliver the Exchange Agreement and to
consummate the transfer contemplated by the Exchange Agreement, and the
Exchange Agreement constitutes a valid and binding obligation of each of
the Subsidiary and the Company, enforceable in accordance with its
terms, except as enforceability may be limited by general equitable
principles, bankruptcy, insolvency, reorganization, moratorium or other
laws affecting creditors' rights generally;
(v) The authorized, issued and outstanding capital stock of the Company as
of date therein and the date hereof is as set forth in the Prospectus
under the caption "Capitalization"; the issued and outstanding shares of
capital stock of the Company and the Subsidiary have been duly and
validly authorized and issued, are fully paid and nonassessable and, to
the best knowledge of such counsel, have not been issued in violation of
any preemptive right or other rights to subscribe for or purchase
securities or in violation of any applicable federal or state securities
laws to the best knowledge of such counsel; to the best knowledge of
such counsel, the Company owns all of the outstanding shares of the
Subsidiary; to the best knowledge of such counsel, other than the rights
granted pursuant to the Underwriting Agreement and except as set forth
in the Prospectus, there are no options, warrants or other rights
outstanding to subscribe for or purchase any shares of capital stock of
the Company or the Subsidiary
(vi) The Shares will, upon issuance and delivery against payment therefor in
accordance with the terms of the Underwriting Agreement, be duly
authorized, validly issued, fully paid and nonassessable and, to the
best knowledge of such counsel, will not have been issued in violation
of any preemptive right or other rights to subscribe for or purchase
securities;
A-1
<PAGE>
(vii) The Company has the corporate power and authority to enter into the
Underwriting Agreement and to issue, sell and deliver to the
Underwriters the Shares to be issued and sold by it thereunder;
(viii) The Underwriting Agreement has been duly authorized by all necessary
corporate action on the part of the Company and has been duly executed
and delivered by the Company and the Sole Stockholder and, assuming its
due authorization, execution and delivery by you, is the valid and
binding agreement of the Company and the Sole Stockholder, enforceable
against the Company and the Sole Stockholder in accordance with its
terms, except insofar as the indemnification and contribution provisions
thereof may be limited by public policy concerns and except as
enforceability may be limited by bankruptcy, insolvency, reorganization,
moratorium or similar laws affecting creditors' rights generally or by
general equitable principles;
(ix) The Registration Statement has become effective under the Securities Act
and, to the best knowledge of such counsel, no stop order suspending the
effectiveness of the Registration Statement has been issued and no
proceedings for that purpose have been instituted or are pending or
threatened under the Securities Act;
(x) The Registration Statement and the Prospectus, and each amendment or
supplement thereto (other than the financial statements and financial
data included therein, as to which such counsel need express no
opinion), as of the effective date of the Registration Statement,
complied as to form in all material respects with the requirements of
the Securities Act and the applicable Rules and Regulations;
(xi) The terms and provisions of the capital stock of the Company conform in
all material respects to the description thereof contained in the
Registration Statement and Prospectus, and the information in the
Prospectus under the caption "Description of Capital Stock," to the
extent it constitutes matters of law or legal conclusions, has been
reviewed by such counsel and is correct, and the forms of certificates
evidencing the Common Stock comply with Delaware law;
(xii) The description in the Registration Statement and the Prospectus of the
charter and bylaws of the Company and of statutes are accurate in all
material respects and fairly present in all material respects the
information required to be presented by the Securities Act and the Rules
and Regulations;
(xiii) To the best knowledge of such counsel, there are no agreements,
contracts, licenses, leases or documents of a character required to be
described or referred to in the Registration Statement or Prospectus or
to be filed as an exhibit to the Registration Statement that are not
described or referred to therein and filed as required;
(xiv) The performance of the Underwriting Agreement and the consummation of
the transactions contemplated therein do not conflict with or result in
a breach or violation of any terms or provisions of, or constitute a
default under (a) the terms of the Company's Certificate of
Incorporation or Bylaws, (b) any agreement or instrument of the Company
A-2
<PAGE>
or the Subsidiary that is filed as an exhibit to the Registration
Statement, (c) to the best knowledge of such counsel, any material law,
ordinance, rule or regulation of any regulatory body or administrative
agency or other governmental agency or body having jurisdiction over the
Company or the Subsidiary or over any of their properties or operations
or (d) to the best knowledge of such counsel, any order, writ,
injunction, judgment or decree of any governmental agency or body or of
any court having jurisdiction over the Company or the Subsidiary or over
any of their properties or operations;
(xv) No authorization, approval or consent of any governmental authority or
agency is necessary in connection with the consummation of the
transactions contemplated by the Underwriting Agreement, except such as
have been obtained under the Securities Act, are necessary under the
Securities Act or as may be required under state securities or Blue Sky
laws in connection with the purchase and the distribution of the Shares
by the Underwriters;
(xvi) To the best knowledge of such counsel, there are no legal or
governmental proceedings pending or threatened against the Company, the
Subsidiary or the Sole Stockholder of a character which are required to
be disclosed in the Registration Statement or the Prospectus by the
Securities Act or the applicable Rules and Regulations, other than those
described therein;
(xvii) To the best knowledge of such counsel, neither the Company nor the
Subsidiary is presently (a) in material violation of its respective
charter or bylaws or (b) in material breach of any applicable statute,
rule or regulation known to such counsel or, to such counsel's
knowledge, any order, writ or decree of any court or governmental agency
or body having jurisdiction over the Company or the Subsidiary or over
any of their properties or operations;
(xviii) To the best knowledge of such counsel, except as set forth in the
Registration Statement and Prospectus, no holders of Common Stock or,
other securities of the Company have registration rights with respect to
any securities of the Company.
In addition, such counsel shall state that such counsel has participated in
conferences with officers and other representatives of the Company, the
independent public accountants of the Company, the Representative and counsel to
the Underwriters, at which conferences the contents of the Registration
Statement and the Prospectus and related matters were discussed and, although
such counsel has not independently verified the accuracy, completeness or
fairness of the statements contained in the Registration Statement or the
Prospectus, nothing has come to the attention of such counsel that caused such
counsel to believe that, at the time the Registration Statement became
effective, the Registration Statement (except as to financial statements and
financial data derived therefrom, as to which such counsel need express no
opinion) contained any untrue statement of a material fact or omitted to state a
material fact required to be stated therein or necessary to make the statements
therein not misleading, or at the Closing Date or any later date on which the
Option Shares are to be purchased, as the case may be, the Prospectus
A-3
<PAGE>
(except as to financial statements and financial data derived therefrom)
contained any untrue statement of a material fact or omitted to state a material
fact required to be stated therein or necessary to make the statements therein,
in light of the circumstances under which they were made, not misleading.
A-4
<PAGE>
EXHIBIT 2.1
SHOE PAVILION, INC.
EXCHANGE AGREEMENT
THIS EXCHANGE AGREEMENT is made as of February ___, 1998, by and among
Shoe Pavilion, Inc., a Delaware corporation (the "Company"), Shoe Inn, Inc., a
Washington corporation ("Shoe Inn"), and Dmitry Beinus the sole holder of common
stock of Shoe Inn (the "Shareholder").
R E C I T A L S
A. The Shareholder holds of record all of the outstanding shares of
the common stock of Shoe Inn (the "Shoe Inn Shares"), such common stock being
the only outstanding class of shares of Shoe Inn.
B. The Company is a new corporation formed to exchange or substitute
its common stock (the "Company Shares") for Shoe Inn Shares (the "Exchange"),
which the Shareholder and the Company will treat as a transaction pursuant to
Section 351 of the Internal Revenue Code of 1986, as amended.
C. In order to take advantage of various provisions of Delaware
corporate law, the Board of Directors of the Company has approved the Exchange.
The Board of Directors of Shoe Inn also has approved the Exchange, determined
that the Exchange is in the best interests of the Shareholder and has
recommended that the Shareholder exchange the Shareholder's Shoe Inn Shares for
the Company Shares in accordance with the terms of this Agreement.
D. The Company has filed with the Securities and Exchange Commission
(the "Commission") a Registration Statement on Form S-1, File No. 333-41877 (the
"Registration Statement") pursuant to which the Company intends to register
Company Shares under the Securities Act of 1933, as amended (the "Act").
E. The Company, Shoe Inn and the Shareholder desire to effect the
Exchange as of the date that the Commission declares the Registration Statement
effective under the Act (the "Effective Date").
AGREEMENT
---------
The parties hereby agree as follows:
1. Exchange
--------
1.1 Exchange of the Shares. Subject to the terms and conditions
----------------------
hereof, the Company will issue to the Shareholder 4,500,000 Company Shares for
all of the outstanding Shoe Inn Shares.
<PAGE>
1.2 Concurrent with the execution of this Agreement, the
Shareholder is delivering to the Company the certificate(s) representing all of
the outstanding Shoe Inn Shares, together with duly executed stock power(s) for
such certificates.
2. Closing Date; Delivery.
-----------------------
2.1 Closing Date.
------------
(a) The closing of the Exchange shall be held at the offices
of Orrick, Herrington & Sutcliffe LLP, 400 Sansome Street, San Francisco,
California, at 10:00 a.m. on the Effective Date. If the Effective Date does not
occur, this Agreement shall be null and void and the Exchange shall not be
consummated.
(b) The closing referred to in subsection (a) above is
hereinafter referred to as the "Closing" and the date of the Closing is
hereinafter referred to as the "Closing Date".
2.2 Delivery.
--------
(a) Subject to the terms of this Agreement, at the Closing
the Company will deliver to the Shareholder the certificates representing the
Company Shares to be received by the Shareholder in the Exchange.
(b) Despite anything in this Agreement to the contrary, the
rights and obligations of the parties to this Agreement are conditional upon the
occurrence of the Closing and are and will be of no force and effect until the
occurrence of the Closing. The parties hereto agree that this Agreement may be
terminated unilaterally by the Company at any time prior to the Closing on
written notice to the other parties hereto.
2
<PAGE>
IN WITNESS WHEREOF, the parties have executed this Agreement as of the
date first set forth above.
SHOE PAVILION, INC.
a Delaware corporation
By:______________________________
Name: Dmitry Beinus
Title: Chairman, President, and
Chief Executive Officer
SHOE INN, INC.
a Washington corporation
By:______________________________
Name: Dmitry Beinus
Title: Chairman, President and
Chief Executive Officer
SHAREHOLDER OF SHOE INN, INC.
_________________________________
Dmitry Beinus
3
<PAGE>
===============================================================================
COMMON STOCK COMMON STOCK
[NUMBER] [SHARES]
SP
INCORPORATED UNDER THE LAWS SEE REVERSE FOR
OF THE STATE OF DELAWARE CERTAIN DEFINITIONS
CUSIP 824894 10 9
------------------------------------------------------------------------
THIS CERTIFIES THAT
IS THE RECORD HOLDER OF
-----------------------------------------------------------------------
FULLY PAID AND NON-ASSESSABLE SHARES OF THE COMMON STOCK,
$0.001 PAR VALUE PER SHARE, OF
SHOE PAVILION, INC.
transferable on the books of the Corporation by the holder hereof in
person or by duly authorized attorney upon surrender of this
Certificate properly endorsed. This Certificate is not valid until
countersigned by the Transfer Agent and registered by the Registrar.
WITNESS the facsimile seal of the Corporation and the facsimile
signatures of its duly authorized officers.
Dated:
[SHOE PAVILION, INC
INCORPORATED
NOVEMBER 26, 1997
DELAWARE]
/s/ Gary Schwartz /s/ Dmitry Beinus
VICE PRESIDENT, CHIEF PRESIDENT AND CHIEF
FINANCIAL OFFICER AND EXECUTIVE OFFICER
SECRETARY
COUNTERSIGNED AND REGISTERED
CHASEMELLON SHAREHOLDER SERVICES, L.L.C.
TRANSFER AGENT AND REGISTRAR
BY
AUTHORIZED SIGNATURE
================================================================================
<PAGE>
A statement of the powers, designations, preferences and relative,
participating, optional or other special rights of each class of stock or series
thereof and the qualifications, limitations or restrictions of such preferences
and/or rights as established, from time to time, by the Certificate of
Incorporation of the Corporation and by any certificate of determination, the
number of shares constituting each class and series, and the designations
thereof, may be obtained by the holder hereof upon request and without charge
from the Secretary of the Corporation at the principal office of the
Corporation.
The following abbreviations, when used in the inscription on the face of this
certificate, shall be construed as though they were written out in full
according to applicable laws or regulations:
TEN COM - as tenants in UNIF GIFT MIN ACT - ........Custodian.........
common (Cust) (Minor)
TEN ENT - as tenants by the under Uniform Gifts to
entireties Minors Act................
JT TEN - as joint tenants (State)
with rights of UNIF TREF MIN ACT - ....Custodian (until age..
survivorship and (Cust)
not as tenants ..under Uniform Transfers
in common (Minor)
COMP PROP - as community to Minors Act............
property (State)
Additional abbreviations may also be used though not in the above list.
FOR VALUE RECEIVED,_______________ hereby sell, assign and transfer unto
PLEASE INSERT SOCIAL SECURITY OR OTHER
IDENTIFYING NUMBER OF ASSIGNEE
____________________________________
| |
|____________________________________|
_______________________________________________________________________________
(PLEASE PRINT OR TYPEWRITE NAME AND ADDRESS, INCLUDING ZIP CODE OF ASSIGNEE)
_______________________________________________________________________________
_______________________________________________________________________________
__________________________________________________________________________Shares
of the common stock represented by the within Certificate, and do hereby
irrevocably constitute and appoint
________________________________________________________________________Attorney
to transfer the said stock on the books of the within named Corporation with
full power of substitution in the premises.
Dated__________________________________
X____________________________________
X____________________________________
THE SIGNATURES(S) TO THIS ASSIGNMENT
MUST CORRESPOND WITH THE NAMES(S) AS
NOTICE: WRITTEN UPON THE FACE OF THE CERTIF-
ICATE IN EVERY PARTICULAR, WITHOUT
ALTERATION OR ENLARGEMENT OR ANY
CHANGE WHATEVER.
Signature(s) Guaranteed
By___________________________________________
THE SIGNATURE(S) MUST BE GUARANTEED BY AN
ELIGIBLE GUARANTOR INSTITUTION (BANKS,
STOCKBROKERS, SAVINGS AND LOAN ASSOCIATIONS AND
CREDIT UNIONS WITH MEMBERSHIP IN AN APPROVED
SIGNATURE GUARANTEE MEDALLION PROGRAM), PURSUANT
TO S.E.C RULE 17Ad-15.
<PAGE>
--------------------
ORRICK, HERRINGTON
& SUTCLIFFE LLP
January 28, 1998
Shoe Pavilion, Inc.
3200-F Regatta Boulevard
Richmond, California 94804
Re: Shoe Pavilion, Inc.
Registration Statement on Form S-1
----------------------------------
Ladies and Gentlemen:
At your request, we are rendering this opinion in connection with a
proposed sale by Shoe Pavilion, Inc., a Delaware corporation (the Company") of
up to 2,070,000 shares of common stock, $.001 par value (the "Common Stock").
We have examined instruments, documents, and records which we deemed
relevant and necessary for the basis of our opinion hereinafter expressed. In
such examination, we have assumed the following: (a) the authenticity of
original documents and the genuineness of all signatures; (b) the conformity to
the originals of all documents submitted to us as copies; and (c) the truth,
accuracy, and completeness of the information, representations, and warranties
contained in the records, documents, instruments, and certificates we have
reviewed.
Based on such examination, we are of the opinion that the 2,070,000 shares
of Common Stock to be issued and sold by the Company (of which up to 270,000
shares are to be issued to cover over-allotments, if any) are validly authorized
shares of Common Stock, and, when issued against payment of the purchase price
therefor, will be legally issued, fully paid and nonassessable.
We hereby consent to the filing of this opinion as Exhibit 5.1 to the above
referenced Registration Statement and to the use of our name wherever it appears
in the Registration Statement and in the Prospectus included therein, and any
amendment or supplement thereto. In giving such consent, we do not consider
that we are "experts" within the meaning of such term as used in the Securities
Act of 1933, as amended, or the rules and regulations of the Securities and
Exchange Commission issued thereunder, with respect to any part of the
Registration Statement, including this opinion as an exhibit or otherwise.
Very truly yours,
Orrick, Herrington & Sutcliffe llp
--------------------
Old Federal Reserve Bank Building - 400 Sansome Street
San Francisco, California - 94111-3143
Telephone 415 392 1122 - Facsimile 415 773 5759
Los Angeles - New York - Sacrament - Silicon Valley
Singapore - Tokyo - Washington, D.C.
<PAGE>
SHOE PAVILION, INC.
1998 EQUITY INCENTIVE PLAN
<PAGE>
<TABLE>
TABLE OF CONTENTS
PAGE
<C> <S> <C>
SECTION 1 ESTABLISHMENT, PURPOSE AND DURATION.................. 1
1.1 Establishment of the Plan............................ 1
1.2 Purpose of the Plan.................................. 1
1.3 Duration of the Plan................................. 1
SECTION 2 DEFINITIONS.......................................... 1
2.1 Affiliated SAR....................................... 1
2.2 Award................................................ 1
2.3 Award Agreement...................................... 1
2.4 Board................................................ 2
2.5 Code................................................. 2
2.6 Committee............................................ 2
2.7 Company.............................................. 2
2.8 Consultant........................................... 2
2.9 Director............................................. 2
2.10 Disability........................................... 2
2.11 Employee............................................. 2
2.12 Exchange Act......................................... 2
2.13 Fair Market Value.................................... 2
2.14 Fiscal Year.......................................... 2
2.15 Freestanding SAR..................................... 2
2.16 Incentive Stock Option............................... 2
2.17 Insider.............................................. 3
2.18 Nonqualified Stock Option............................ 3
2.19 Option............................................... 3
2.20 Option Price......................................... 3
2.21 Participant.......................................... 3
2.22 Performance Unit..................................... 3
2.23 Performance Share.................................... 3
2.24 Period of Restriction................................ 3
2.25 Restricted Stock..................................... 3
2.26 Retirement........................................... 3
2.27 Shares............................................... 3
2.28 Stock Appreciation Right............................. 3
2.29 Subsidiary........................................... 3
2.30 Tandem SAR........................................... 3
2.31 Termination of Service............................... 4
SECTION 3 ADMINISTRATION....................................... 4
3.1 The Committee........................................ 4
3.2 Authority of the Committee........................... 4
3.3 Decisions Binding.................................... 4
SECTION 4 SHARES SUBJECT TO THE PLAN........................... 4
4.1 Number of Shares..................................... 5
</TABLE>
-i-
<PAGE>
<TABLE>
TABLE OF CONTENTS
(CONTINUED)
PAGE
<C> <S> <C>
4.2 Lapsed Awards............................................... 5
4.3 Adjustments in Authorized Shares............................ 6
SECTION 5 ELIGIBILITY AND PARTICIPATION............................... 6
5.1 Eligibility................................................. 6
5.2 Actual Participation........................................ 6
SECTION 6 STOCK OPTIONS............................................... 6
6.1 Grant of Options............................................ 6
6.2 Award Agreement............................................. 6
6.3 Option Price................................................ 6
6.3.1 Nonqualified Stock Options.................................. 6
6.3.2 Incentive Stock Options..................................... 7
6.3.3 Substitute Options.......................................... 7
6.4 Duration of Options......................................... 7
6.5 Exercise of Options......................................... 7
6.6 Payment..................................................... 7
6.7 Restrictions on Share Transferability....................... 8
6.8 Certain Additional Provisions for Incentive Stock Options... 8
6.8.1 Exercisability.............................................. 8
6.8.2 Termination of Service...................................... 8
6.8.3 Death of Participant........................................ 8
6.8.4 Employees Only.............................................. 8
6.9 Nontransferability of Options............................... 8
SECTION 7 STOCK APPRECIATION RIGHTS................................... 8
7.1 Grant of SARs............................................... 8
7.2 Exercise of Tandem SARs..................................... 9
7.3 Exercise of Affiliated SARs................................. 9
7.4 Exercise of Freestanding SARs............................... 9
7.5 SAR Agreement............................................... 9
7.6 Term of SARs................................................ 9
7.7 Payment of SAR Amount....................................... 10
7.8 Rule 16b-3 Requirements..................................... 10
7.9 Nontransferability of SARs.................................. 10
SECTION 8 RESTRICTED STOCK............................................ 10
8.1 Grant of Restricted Stock................................... 10
8.2 Restricted Stock Agreement.................................. 10
8.3 Transferability............................................. 10
8.4 Other Restrictions.......................................... 10
8.5 Certificate Legend.......................................... 11
8.6 Removal of Restrictions..................................... 11
8.7 Voting Rights............................................... 11
8.8 Dividends and Other Distributions........................... 11
</TABLE>
-ii-
<PAGE>
<TABLE>
TABLE OF CONTENTS
(CONTINUED)
PAGE
<S> <C> <C>
8.9 Return of Restricted Stock to Company....................... 11
SECTION 9 PERFORMANCE UNITS AND PERFORMANCE SHARES.................... 11
9.1 Grant of Performance Units/Shares........................... 11
9.2 Value of Performance Units/Shares........................... 12
9.3 Earning of Performance Units/Shares......................... 12
9.4 Form and Timing of Payment of Performance Units/Shares...... 12
9.5 Cancellation of Performance Units/Shares.................... 12
9.6 Nontransferability.......................................... 12
SECTION 10 BENEFICIARY DESIGNATION..................................... 13
SECTION 11 DEFERRALS................................................... 13
SECTION 12 RIGHTS OF EMPLOYEES......................................... 13
12.1 No Effect on Employment or Service.......................... 13
12.2 Participation............................................... 13
SECTION 13 AMENDMENT, SUSPENSION, OR TERMINATION....................... 13
13.1 Amendment, Suspension, or Termination....................... 13
SECTION 14 WITHHOLDING................................................. 14
14.1 Tax Withholding............................................. 14
14.2 Shares Withholding.......................................... 14
SECTION 15 INDEMNIFICATION............................................. 14
SECTION 16 SUCCESSORS.................................................. 14
SECTION 17 LEGAL CONSTRUCTION.......................................... 15
17.1 Gender and Number........................................... 15
17.2 Severability................................................ 15
17.3 Requirements of Law......................................... 15
17.4 Securities Law Compliance................................... 15
17.5 Governing Law............................................... 15
17.6 Captions.................................................... 15
</TABLE>
-iii-
<PAGE>
SHOE PAVILION, INC.
1998 EQUITY INCENTIVE PLAN
(Effective February __, 1998)
SECTION 1
ESTABLISHMENT, PURPOSE AND DURATION
1.1 Establishment of the Plan. Shoe Pavilion, Inc., a Delaware
-------------------------
corporation (the "Company"), hereby establishes an incentive compensation plan
to be known as the "Shoe Pavilion, Inc. 1998 Equity Incentive Plan" (the
"Plan"). The Plan permits the grant of Nonqualified Stock Options, Incentive
Stock Options, SARs, Restricted Stock, Performance Units, and Performance
Shares. The Plan is effective immediately preceding the date that the
Company's Registration Statement on Form S-1 covering the sale of its Common
Stock is declared effective by the Securities and Exchange Commission.
1.2 Purpose of the Plan. The purpose of the Plan is to promote the
-------------------
success, and enhance the value, of the Company by linking the personal
interests of Participants to those of Company shareholders, and by providing
Participants with an incentive for outstanding performance.
The Plan is further intended to provide flexibility to the Company in
its ability to motivate, attract, and retain the services of Participants upon
whose judgment, interest, and special effort the successful conduct of its
operation largely is dependent.
1.3 Duration of the Plan. The Plan shall commence on the date
--------------------
specified in Section 1.1, and shall remain in effect until all Shares subject
to the Plan have been purchased or acquired pursuant to the provisions of the
Plan, subject to the right of the Board of Directors to terminate the Plan at
any time pursuant to Section 13. However, without further stockholder
approval, no Incentive Stock Option may be granted under the Plan on or after
January 28, 2005.
SECTION 2
DEFINITIONS
The following terms shall have the meanings set forth below, unless
plainly required by the context:
2.1 Affiliated SAR means a SAR that is granted in connection with a
--------------
related Option, and which will be deemed to automatically be exercised
simultaneous with the exercise of the related Option.
2.2 Award means, individually or collectively, a grant under the Plan of
-----
Nonqualified Stock Options, Incentive Stock Options, SARs, Restricted Stock,
Performance Units, or Performance Shares.
2.3 Award Agreement means an agreement entered into by each
---------------
Participant and the Company, setting forth the terms and provisions applicable
to Awards granted to Participants under this Plan.
<PAGE>
2.4 Board or Board of Directors means the Board of Directors of the
---------------------------
Company.
2.5 Code means the Internal Revenue Code of 1986, as amended.
----
Reference to a specific section of the Code shall include such section, any
valid regulation promulgated thereunder, and any comparable provision of any
future legislation amending, supplementing or superseding such section.
2.6 Committee means the committee, as specified in Section 3,
---------
appointed by the Board to administer the Plan with respect to grants of
Awards.
2.7 Company means Shoe Pavilion, Inc., a Delaware corporation, or
-------
any successor thereto.
2.8 Consultant means any consultant, independent contractor, or other
----------
person who provides significant services to the Company or its Subsidiaries,
but who is neither an employee of the Company or its Subsidiaries, nor a
Director of the Company.
2.9 Director means any individual who is a member of the Board of
--------
Directors of the Company.
2.10 Disability means a permanent and total disability within the
----------
meaning of Code Section 22(e)(3).
2.11 Employee means any employee of the Company or of the Company's
--------
Subsidiaries, whether such employee is so employed at the time the Plan is
adopted or becomes so employed subsequent to the adoption of the Plan.
Directors who are not otherwise employed by the Company shall not be considered
Employees.
2.12 Exchange Act means the Securities Exchange Act of 1934, as
------------
amended from time to time, or any successor Act thereto. Reference to a
specific section or regulation of the Exchange Act shall include such section
or regulation, any valid regulation promulgated thereunder, and any comparable
provision of any future legislation amending, supplementing or superseding
such section or regulation.
2.13 Fair Market Value means the average of the highest and lowest
-----------------
quoted selling prices for Shares on the relevant date, or if there were no
sales on such date, the weighted average of the means between the highest and
lowest quoted selling prices on the nearest day before and the nearest day
after the relevant date, as determined by the Committee.
2.14 Fiscal Year means the fiscal year of the Company.
-----------
2.15 Freestanding SAR means a SAR that is granted independently of any
----------------
Options.
2.16 Incentive Stock Option or "ISO" means an option to purchase
----------------------
Shares, which is designated as an Incentive Stock Option and is intended to
meet the requirements of Section 422 of the Code.
2
<PAGE>
2.17 Insider shall mean an Employee who, on the relevant date, is a
-------------
Company director, Company officer (within the meaning of Rule 16a-1
promulgated under the Exchange Act), or beneficial owner of 10% or more of the
Shares.
2.18 Nonqualified Stock Option or "NQSO" means an option to purchase
-------------------------
Shares which is not intended to be an Incentive Stock Option.
2.19 Option means an Incentive Stock Option or a Nonqualified Stock
------
Option.
2.20 Option Price means the price at which a Share may be purchased by a
------------
Participant pursuant to an Option, as determined by the Committee.
2.21 Participant means an Employee of the Company who has outstanding
-----------
an Award granted under the Plan.
2.22 Performance Unit means an Award granted to an Employee pursuant
----------------
to Section 9.
2.23 Performance Share means an Award granted to an Employee pursuant to
-----------------
Section 9.
2.24 Period of Restriction means the period during which the transfer
---------------------
of Shares of Restricted Stock is limited in some way (based on the passage of
time, the achievement of performance goals, or upon the occurrence of other
events as determined by the Committee, in its discretion), and the Shares are
subject to a substantial risk of forfeiture, as provided in Section 8.
2.25 Restricted Stock means an Award granted to a Participant pursuant
----------------
to Section 8.
2.26 Retirement shall have the meaning for each respective individual
----------
Participant ascribed to it in the pension plan of the Company applicable to each
such respective Participant.
2.27 Shares means the shares of common stock of the Company.
------
2.28 Stock Appreciation Right or "SAR" means an Award, granted alone
--------------------------------
or in connection with a related Option, designated as a SAR, pursuant to the
terms of Section 7.
2.29 Subsidiary means any corporation in which the Company owns
----------
directly, or indirectly through subsidiaries, at least fifty percent (50%) of
the total combined voting power of all classes of stock, or any other entity
(including, but not limited to, partnerships and joint ventures) in which the
Company owns at least fifty percent (50%) of the combined equity thereof.
2.30 Tandem SAR means a SAR that is granted in connection with a related
----------
Option, the exercise of which shall require forfeiture of the right to purchase
a Share under the related Option (and when a Share is purchased under the
Option, a SAR shall similarly be cancelled).
3
<PAGE>
2.31 Termination of Service means (a) in the case of an Employee, a
----------------------
cessation of the employee-employer relationship between an Employee and the
Company or a Subsidiary for an reason, including, but not by way of
limitation, a termination by resignation, discharge, death, Disability,
Retirement, or the disaffiliation of a Subsidiary, but excluding any such
termination where there is a simultaneous reemployment by the Company or a
Subsidiary; and (b) in the case of a Consultant, a cessation of the service
relationship between a Consultant and the Company or a Subsidiary for any
reason, including, but not by way of limitation, a termination by resignation,
discharge, death, Disability, or the disaffiliation of a Subsidiary, but
excluding any such termination where there is a simultaneous reengagement of
the Consultant by the Company or a Subsidiary.
SECTION 3
ADMINISTRATION
3.1 The Committee. The Plan shall be administered by the Committee. The
-------------
Committee shall consist of not less than two (2) Directors. The members of the
Committee shall be appointed from time to time by, and shall serve at the
pleasure of, the Board of Directors. The Committee shall be comprised solely of
Directors who both are (a) nonemployee directors under Rule 16b-3 under the
Exchange Act, and (b) "outside directors" under Section 162(m) of the Code.
Notwithstanding any contrary provision of the Plan, during the period prior to
the time when the Shares first are registered under Section 12 of the Exchange
Act, the Board (a) shall have all of the authority granted under the Plan to the
Committee, and (b) may exercise all of the powers of the Committee.
3.2 Authority of the Committee. The Committee shall have full power,
--------------------------
except as limited by law or by the Certificate of Incorporation or Bylaws of
the Company, and subject to the provisions herein, to determine the size and
types of Awards; to determine the terms and conditions of such Awards in a
manner consistent with the Plan; to construe and interpret the Plan and any
Award Agreement or instrument entered into under the Plan; to establish,
amend, or waive rules and regulations for the Plan's administration; and
(subject to the provisions of Section 13 herein) to amend the terms and
conditions of any outstanding Award to the extent such terms and conditions
are within the discretion of the Committee as provided in the Plan. Further,
the Committee shall make all other determinations which may be necessary or
advisable for the administration of the Plan. As permitted by law, the
Committee may delegate its powers; provided, however, that the Committee may
not delegate its authority and powers (a) with respect to Insiders, or (b) in
any way which would jeopardize the Plan's qualification under Section 162(m)
of the Code or Rule 16b-3.
3.3 Decisions Binding. All determinations and decisions made by the
-----------------
Committee pursuant to the provisions of the Plan and all related orders or
resolutions of the Board of Directors shall be final, conclusive, and binding
on all persons, including the Company, its shareholders, Employees,
Participants, and their estates and beneficiaries, and shall be given the
maximum deference permitted by law.
4
<PAGE>
SECTION 4
SHARES SUBJECT TO THE PLAN
4.1 Number of Shares. Subject to adjustment as provided in Section
----------------
4.3, the total number of Shares available for grant under the Plan shall not
exceed 1,000,000. These 1,000,000 Shares may be either authorized but unissued
or reacquired Shares.
The following rules will apply for purposes of the determination of
the number of Shares available for grant under the Plan:
(a) While an Award is outstanding, it shall be counted against the
authorized pool of Shares, regardless of its vested status.
(b) The grant of an Option or Restricted Stock shall reduce the Shares
available for grant under the Plan by the number of Shares subject to such
Award.
(c) The grant of a Tandem SAR shall reduce the number of Shares
available for grant by the number of Shares subject to the related Option
(i.e., there is no double counting of Options and their related Tandem SARs);
provided, however, that, upon the exercise of such Tandem SAR, the authorized
Share pool shall be credited with the appropriate number of Shares
representing the number of shares reserved for such Tandem SAR less the number
of Shares actually delivered upon exercise thereof or the number of Shares
having a Fair Market Value equal to the cash payment made upon such exercise.
(d) The grant of an Affiliated SAR shall reduce the number of Shares
available for grant by the number of Shares subject to the SAR, in addition to
the number of Shares subject to the related Option; provided, however, that,
upon the exercise of such Affiliated SAR, the authorized Share pool shall be
credited with the appropriate number of Shares representing the number of
shares reserved for such Affiliated SAR less the number of Shares actually
delivered upon exercise thereof or the number of Shares having a Fair Market
Value equal to the cash payment made upon such exercise.
(e) The grant of a Freestanding SAR shall reduce the number of Shares
available for grant by the number of Freestanding SARs granted; provided,
however, that, upon the exercise of such Freestanding SAR, the authorized
Share pool shall be credited with the appropriate number of Shares
representing the number of shares reserved for such Freestanding SAR less the
number of Shares actually delivered upon exercise thereof or the number of
Shares having a Fair Market Value equal to the cash payment made upon such
exercise.
(f) The Committee shall in each case determine the appropriate number
of Shares to deduct from the authorized pool in connection with the grant of
Performance Units and/or Performance Shares.
(g) To the extent that an Award is settled in cash rather than in
Shares, the authorized Share pool shall be credited with the appropriate
number of Shares having a Fair Market Value equal to the cash settlement of
the Award, provided that the number of shares credited is a whole number.
5
<PAGE>
4.2 Lapsed Awards. If any Award granted under this Plan is cancelled,
-------------
terminates, expires, or lapses for any reason (with the exception of the
termination of a Tandem SAR upon exercise of the related Option, or the
termination of a related Option upon exercise of the corresponding Tandem SAR),
any Shares subject to such Award again shall be available for the grant of an
Award under the Plan.
4.3 Adjustments in Authorized Shares. In the event of any merger,
---------------------------------
reorganization, consolidation, recapitalization, separation, liquidation,
stock dividend, split-up, Share combination, or other change in the corporate
structure of the Company affecting the Shares, such adjustment shall be made
in the number and class of Shares which may be delivered under the Plan, and
in the number and class of and/or price of Shares subject to outstanding
Options, SARs, and Restricted Stock granted under the Plan, as may be
determined to be appropriate and equitable by the Committee, in its sole
discretion, to prevent dilution or diminishment of Awards; and provided that
the number of Shares subject to any Award shall always be a whole number.
SECTION 5
ELIGIBILITY AND PARTICIPATION
5.1 Eligibility. Persons eligible to participate in this Plan include
-----------
all Employees and Consultants of the Company and its Subsidiaries, as determined
by the Committee, including Employees who are members of the Board, but
excluding Directors who are not Employees.
5.2 Actual Participation. Subject to the provisions of the Plan, the
--------------------
Committee in its sole discretion, shall select from all eligible Employees and
Consultants, those to whom Awards shall be granted, and the Committee, in its
sole discretion, shall determine the nature and amount of each Award.
SECTION 6
STOCK OPTIONS
6.1 Grant of Options. Subject to the terms and provisions of the Plan,
----------------
Options may be granted to Employees and Consultants at any time and from time to
time as shall be determined by the Committee. The Committee shall have
discretion in determining the number of Shares subject to Options granted to
each Participant, provided that during any Fiscal Year, no Participant shall be
granted Options covering more than 200,000 shares. The Committee may grant
ISOs, NQSOs, or a combination thereof.
6.2 Award Agreement. Each Option grant shall be evidenced by an Award
---------------
Agreement that shall specify the Option Price, the duration of the Option, the
number of Shares to which the Option pertains, the conditions of exercise of the
Options, and such other provisions as the Committee shall determine. The Award
Agreement also shall specify whether the Option is intended to be an ISO or a
NQSO.
6.3 Option Price. The Option Price for each grant of an Option shall be
------------
determined by the Committee in its sole discretion.
6
<PAGE>
6.3.1 Nonqualified Stock Options. In the case of a Nonqualified Stock
--------------------------
Option, the Option Price shall be not less than fifty percent (50%) of the
Fair Market Value of a Share on the date that the Option is granted.
6.3.2 Incentive Stock Options. In the case of an Incentive Stock
-----------------------
Option, the Option Price shall be not less than one-hundred percent (100%) of
the Fair Market Value of a Share on the date that the Option is granted;
provided, however, that if at the time the Option is granted, the Employee
(together with persons whose stock ownership is attributed to the Employee
pursuant to Section 424(d) of the Code) owns stock possessing more than 10% of
the total combined voting power of all classes of stock of the Company or any
of its Subsidiaries, the Option Price shall be not less than one-hundred and
ten percent (110%) of the Fair Market Value of a Share on the date that the
Option is granted.
6.3.3 Substitute Options. Notwithstanding the provisions of 6.3.1 and
------------------
6.3.2, in the event that the Company or a Subsidiary consummates a transaction
described in Section 424(a) of the Code (e.g., the acquisition of property or
stock from an unrelated corporation), persons who become Employees on account
of such transaction may be granted Options in substitution for options granted
by their former employer. If such substitute Options are granted, the
Committee, in its sole discretion and consistent with Section 424(a) of the
Code, shall determine the exercise price of such substitute Options.
6.4 Duration of Options. Each Option shall expire at such time as the
-------------------
Committee, in its sole discretion, shall determine; provided, however, that no
Incentive Stock Option may be exercised after the expiration of 10 years from
the date the Option was granted; provided, further, no Incentive Stock Option
granted to an Employee who, together with persons whose stock ownership is
attributed to the Employee pursuant to Section 424(d) of the Code, owns stock
possessing more than 10% of the total combined voting power of all classes of
the stock of the Company or any of its Subsidiaries, may be exercised after
the expiration of 5 years from the date the Option was granted. Subject to the
preceding sentence, after the Option is granted, the Committee, in its sole
discretion, may extend the maximum term of such Option.
6.5 Exercise of Options. Options granted under the Plan shall be
-------------------
exercisable at such times and be subject to such restrictions and conditions
as the Committee, in its sole discretion, shall determine. After an Option is
granted, the Committee, in its sole discretion, may accelerate the
exercisability of the Option.
6.6 Payment. Options shall be exercised by the Participant's delivery of a
-------
written notice of exercise to the Secretary of the Company, setting forth the
number of Shares with respect to which the Option is to be exercised,
accompanied by full payment for the Shares.
The Option Price upon exercise of any Option shall be payable to the
Company in full in cash or its equivalent. The Committee, in its sole
discretion, also may permit exercise (a) by tendering previously acquired
Shares having an aggregate Fair Market Value at the time of exercise equal to
the total Option Price (provided that the Shares which are tendered must have
been held by the Participant for at least six (6) months prior to their tender
to satisfy the Option Price), or (b) by any other means which the Committee, in
its sole discretion, determines to provide legal consideration for the Shares,
and to be consistent with the Plan's purpose and
7
<PAGE>
applicable law.
As soon as practicable after receipt of a written notification of
exercise and full payment, the Company shall deliver to the Participant, in
the Participant's name, Share certificates in an appropriate amount based upon
the number of Shares purchased under the Option(s).
6.7 Restrictions on Share Transferability. The Committee may impose such
-------------------------------------
restrictions on any Shares acquired pursuant to the exercise of an Option under
the Plan, as it may deem advisable, including, without limitation, restrictions
under applicable Federal securities laws, under the requirements of any national
securities exchange or system upon which such Shares are then listed and/or
traded, and under any blue sky or state securities laws applicable to such
Shares.
6.8 Certain Additional Provisions for Incentive Stock Options.
---------------------------------------------------------
6.8.1 Exercisability. The aggregate Fair Market Value (determined at
--------------
the time the Option is granted) of the Shares with respect to which Incentive
Stock Options are exercisable for the first time by any Employee during any
calendar year (under all plans of the Company and its Subsidiaries) shall not
exceed $100,000.
6.8.2 Termination of Service. No Incentive Stock Option may be
----------------------
exercised more than three months after the Participant's Termination of
Service for any reason other than Disability or death, unless (a) the
Participant dies during such three-month period, and (b) the Award Agreement
permits later exercise. No Incentive Stock Option may be exercised more than
one year after the Participant's Termination of Service on account of
Disability, unless (a) the Participant dies during such one-year period, and
(b) the Award Agreement permits later exercise.
6.8.3 Death of Participant. Notwithstanding Section 6.5, if a
--------------------
Participant dies prior to the expiration of his or her Incentive Stock Option,
the Committee, in its discretion, may provide that his or her Incentive Stock
Option shall be exercisable for up to three (3) months after the date of
death.
6.8.4 Employees Only. Incentive Stock Options may be granted only to
--------------
persons who are Employees of the Company or a Subsidiary at the time of grant.
Consultants shall not be eligible to receive Incentive Stock Options.
6.9 Nontransferability of Options. No Option granted under the Plan may be
-----------------------------
sold, transferred, pledged, assigned, or otherwise alienated or hypothecated,
other than by will, the laws of descent and distribution, or as allowed under
Section 10. All Options granted to a Participant under the Plan shall be
exercisable during his or her lifetime only by such Participant.
SECTION 7
STOCK APPRECIATION RIGHTS
7.1 Grant of SARs. Subject to the terms and conditions of the Plan, a SAR
-------------
may be granted to an Employee or Consultant at any time and from time to time
as shall be
8
<PAGE>
determined by the Committee, in its sole discretion. The Committee may grant
Affiliated SARs, Freestanding SARs, Tandem SARs, or any combination thereof.
The Committee shall have complete discretion to determine the number
of SARs granted to any Participant, and consistent with the provisions of the
Plan, the terms and conditions pertaining to such SARs, provided that during
any Fiscal Year, no Participant shall be granted SARs covering more than
200,000 shares. However, the grant price of a Freestanding SAR shall be at
least equal to the Fair Market Value of a Share on the date of grant of the
SAR. The grant price of Tandem or Affiliated SARs shall equal the Option Price
of the related Option
7.2 Exercise of Tandem SARs. Tandem SARs may be exercised for all or
-----------------------
part of the Shares subject to the related Option upon the surrender of the
right to exercise the equivalent portion of the related Option. A Tandem SAR
may be exercised only with respect to the Shares for which its related Option
is then exercisable.
Notwithstanding any other provision of this Plan to the contrary, with
respect to a Tandem SAR granted in connection with an ISO: (i) the Tandem SAR
will expire no later than the expiration of the underlying ISO; (ii) the value
of the payout with respect to the Tandem SAR may be for no more than one
hundred percent (100%) of the difference between the Option Price of the
underlying ISO and the Fair Market Value of the Shares subject to the
underlying ISO at the time the Tandem SAR is exercised; and (iii) the Tandem
SAR may be exercised only when the Fair Market Value of the Shares subject to
the ISO exceeds the Option Price of the ISO.
7.3 Exercise of Affiliated SARs. Affiliated SARs shall be deemed to be
---------------------------
exercised upon the exercise of the related Options. The deemed exercise of
Affiliated SARs shall not necessitate a reduction in the number of related
Options.
7.4 Exercise of Freestanding SARs. Freestanding SARs shall be
-----------------------------
exercisable on such terms and conditions as shall be determined by the
Committee, in its sole discretion.
7.5 SAR Agreement. Each SAR grant shall be evidenced by an Award
-------------
Agreement that shall specify the grant price, the term of the SAR, the
conditions of exercise and such other provisions as the Committee, in its sole
discretion, shall determine.
7.6 Term of SARs. The term of a SAR granted under the Plan shall be
------------
determined by the Committee, in its sole discretion.
9
<PAGE>
7.7 Payment of SAR Amount. Upon exercise of a SAR, a Participant shall
---------------------
be entitled to receive payment from the Company in an amount determined by
multiplying:
(a) The difference between the Fair Market Value of a Share on the
date of exercise over the grant price; times
(b) The number of Shares with respect to which the SAR is exercised.
At the discretion of the Committee, the payment upon SAR exercise
may be in cash, in Shares of equivalent value, or in some combination thereof.
7.8 Rule 16b-3 Requirements. Notwithstanding any other provision of
-----------------------
the Plan, the Committee may impose such conditions on exercise of a SAR
(including, without limitation, the right of the Committee to limit the time
of exercise to specified periods) as may be required to satisfy the
requirements of Rule 16b-3 promulgated under the Exchange Act.
7.9 Nontransferability of SARs. No SAR granted under the Plan may be
--------------------------
sold, transferred, pledged, assigned, or otherwise alienated or hypothecated,
other than by will, the laws of descent and distribution, or as permitted
under Section 10. Further, all SARs granted to a Participant under the Plan
shall be exercisable during his or her lifetime only by such Participant.
SECTION 8
RESTRICTED STOCK
8.1 Grant of Restricted Stock. Subject to the terms and provisions of
-------------------------
the Plan, the Committee, at any time and from time to time, may grant Shares
of Restricted Stock to eligible Employees and Consultants in such amounts as
the Committee, in its sole discretion, shall determine.
8.2 Restricted Stock Agreement. Each Restricted Stock grant shall be
--------------------------
evidenced by an Award Agreement that shall specify the Period (or Periods) of
Restriction, the number of Restricted Stock Shares granted, and such other terms
and conditions as the Committee, in its sole discretion, shall determine.
8.3 Transferability. Except as provided in this Section 8, Shares of
---------------
Restricted Stock may not be sold, transferred, pledged, assigned, or otherwise
alienated or hypothecated until the end of the applicable Period of Restriction
established by the Committee and specified in the Award Agreement, or upon
earlier satisfaction of any other conditions, as specified by the Committee in
its sole discretion and set forth in the Award Agreement. All rights with
respect to the Restricted Stock granted to a Participant under the Plan shall be
available during his or her lifetime only to such Participant.
8.4 Other Restrictions. The Committee, in its sole discretion, may
------------------
impose such other restrictions on any Shares of Restricted Stock as it may
deem advisable including, without limitation, restrictions based upon the
achievement of specific performance goals (Company-wide, divisional, and/or
individual), and/or restrictions under applicable Federal or
10
<PAGE>
state securities laws; and may legend the certificates representing Restricted
Stock to give appropriate notice of such restrictions.
8.5 Certificate Legend. In addition to any legends placed on
------------------
certificates pursuant to Section 8.4, each certificate representing Shares of
Restricted Stock shall bear the following legend:
"The sale or other transfer of the shares of stock represented by this
certificate, whether voluntary, involuntary, or by operation of law,
is subject to certain restrictions on transfer as set forth in the
Shoe Pavilion, Inc. 1998 Equity Incentive Plan, and in a Restricted
Stock Agreement. A copy of the Plan and such Restricted Stock
Agreement may be obtained from the Secretary of Shoe Pavilion, Inc."
8.6 Removal of Restrictions. Except as otherwise provided in this
-----------------------
Section 8, Shares of Restricted Stock covered by each Restricted Stock grant
made under the Plan shall become freely transferable by the Participant after
the last day of the Period of Restriction. The Committee, in its discretion,
may accelerate the time at which any restrictions shall lapse, and/or remove
any restrictions. After the Shares are released from restrictions, the
Participant shall be entitled to have the legend or legends required by
Section 8.4 and 8.5 removed from his or her Share certificate.
8.7 Voting Rights. During the Period of Restriction, Participants
-------------
holding Shares of Restricted Stock granted hereunder may exercise full voting
rights with respect to those Shares unless otherwise provided in the Award
Agreement.
8.8 Dividends and Other Distributions. During the Period of
---------------------------------
Restriction, Participants holding Shares of Restricted Stock granted hereunder
shall be entitled to receive all dividends and other distributions paid with
respect to those Shares while they are so held, unless otherwise provided in
the Award Agreement. If any such dividends or distributions are paid in
Shares, the Shares shall be subject to the same restrictions on
transferability and forfeitability as the Shares of Restricted Stock with
respect to which they were paid.
8.9 Return of Restricted Stock to Company. Subject to the applicable
-------------------------------------
Award Agreement and Section 8.6, upon the earlier of (a) the Participant's
Termination of Service, or (b) the date set forth in the Award Agreement, the
Restricted Stock for which restrictions have not lapsed shall revert to the
Company and, subject to Section 4.2, again shall become available for grant
under the Plan.
SECTION 9
PERFORMANCE UNITS AND PERFORMANCE SHARES
9.1 Grant of Performance Units/Shares. Subject to the terms of the
---------------------------------
Plan, Performance Units and Performance Shares may be granted to eligible
Employees and Consultants at any time and from time to time, as shall be
determined by the Committee, in its
11
<PAGE>
sole discretion. The Committee shall have complete discretion in determining
the number of Performance Units and Performance Shares granted to each
Participant.
9.2 Value of Performance Units/Shares. Each Performance Unit shall
---------------------------------
have an initial value that is established by the Committee at the time of
grant. Each Performance Share shall have an initial value equal to the Fair
Market Value of a Share on the date of grant. The Committee shall set
performance goals in its discretion which, depending on the extent to which
they are met, will determine the number and/or value of Performance
Units/Shares that will be paid out to the Participants. The time period during
which the performance goals must be met shall be called a "Performance
Period." Each Award of Performance Units/Shares shall be evidenced by an Award
Agreement that shall specify the Performance Period, and such other terms and
conditions as the Committee, in its sole discretion, shall determine.
9.3 Earning of Performance Units/Shares. After the applicable
-----------------------------------
Performance Period has ended, the holder of Performance Units/Shares shall be
entitled to receive a payout of the number of Performance Units/Shares earned
by the Participant over the Performance Period, to be determined as a function
of the extent to which the corresponding performance goals have been achieved.
Notwithstanding the preceding sentence, after the grant of a Performance
Unit/Share, the Committee, in its sole discretion, may waive the achievement
of any performance goals for such Performance Unit/Share.
9.4 Form and Timing of Payment of Performance Units/Shares. Payment
------------------------------------------------------
of earned Performance Units/Shares shall be made in a single lump sum, within
forty-five (45) calendar days following the close of the applicable
Performance Period. The Committee, in its sole discretion, may pay earned
Performance Units/Shares in the form of cash, in Shares (which have an
aggregate Fair Market Value equal to the value of the earned Performance
Units/Shares at the close of the applicable Performance Period) or in a
combination thereof.
Prior to the beginning of each Performance Period, Participants may,
in the discretion of the Committee, elect to defer the receipt of any
Performance Unit/Share payout upon such terms as the Committee shall
determine.
9.5 Cancellation of Performance Units/Shares. Subject to the
----------------------------------------
applicable Award Agreement, upon the earlier of (a) the Participant's
Termination of Service, or (b) the date set forth in the Award Agreement, all
remaining Performance Units/Shares shall be forfeited by the Participant to
the Company, and subject to Section 4.2, the Shares subject thereto shall
again be available for grant under the Plan.
9.6 Nontransferability. Performance Units/Shares may not be sold,
------------------
transferred, pledged, assigned, or otherwise alienated or hypothecated, other
than by will or by the laws of descent and distribution. Further a
Participant's rights under the Plan shall be exercisable during the
Participant's lifetime only by the Participant or the Participant's legal
representative.
12
<PAGE>
SECTION 10
BENEFICIARY DESIGNATION
As provided in this Section 10, each Participant under the Plan may
name a beneficiary or beneficiaries (who may be named contingently or
successively) to whom any benefit under the Plan is to be paid in case of the
Participant's death before he or she receives any or all of such benefit
and/or who may exercise any vested Award under the Plan following the
Participant's death. Each such designation shall revoke all prior designations
by the same Participant and must be in a form and manner acceptable to the
Committee. In the absence of any such designation, benefits remaining unpaid
at the Participant's death shall be paid to the Participant's estate and,
subject to the terms of the Plan, any unexercised vested Award may be
exercised by the administrator or executor of the Participant's estate.
SECTION 11
DEFERRALS
The Committee, in its sole discretion, may permit a Participant to
defer such Participant's receipt of the payment of cash or the delivery of
Shares that would otherwise be due to such Participant by virtue of the
exercise of an Option or SAR, the lapse or waiver of restrictions with respect
to Restricted Stock, or the satisfaction of any requirements or goals with
respect to Performance Units/Shares. Any such deferral elections shall be
subject to such rules and procedures as shall be determined by the Committee
from time to time.
SECTION 12
RIGHTS OF EMPLOYEES
12.1 No Effect on Employment or Service. Nothing in the Plan shall
----------------------------------
interfere with or limit in any way the right of the Company to terminate any
Participant's employment or service at any time, with or without cause. For
purposes of the Plan, transfer of employment of a Participant between the
Company and any one of its Subsidiaries (or between Subsidiaries) shall not be
deemed a Termination of Service.
12.2 Participation. No Employee or Consultant shall have the right to
-------------
be selected to receive an Award under this Plan, or, having been so selected,
to be selected to receive a future Award.
SECTION 13
AMENDMENT, SUSPENSION, OR TERMINATION
13.1 Amendment, Suspension, or Termination. The Board, in its sole
-------------------------------------
discretion, may alter, amend or terminate the Plan, or any part thereof, at
any time and for any reason. Neither the amendment, suspension, nor
termination of the Plan shall, without the consent of the Participant, alter
or impair any rights or obligations under any Award theretofore granted. No
Award may be granted during any period of suspension nor after termination of
the Plan.
13
<PAGE>
SECTION 14
WITHHOLDING
14.1 Tax Withholding. Prior to the delivery of any Shares or cash
---------------
pursuant to the Plan, the Company shall have the power and the right to deduct
or withhold, or require a Participant to remit to the Company, an amount
sufficient to satisfy Federal, state, and local taxes (including the
Participant's FICA obligation) required by law to be withheld with respect to
any Awards.
14.2 Shares Withholding. The Committee may, in its absolute
------------------
discretion, permit a Participant to satisfy such tax withholding obligation,
in whole or in part, by electing to have the Company withhold Shares having a
value equal to the amount required to be withheld or by delivering to the
Company already-owned shares to satisfy the withholding requirement. The
amount of the withholding requirement shall be deemed to include any amount
which the Committee agrees may be withheld at the time the election is made,
not to exceed the amount determined by using the maximum federal, state or
local marginal income tax rates applicable to the Participant with respect to
the Award on the date that the amount of tax to be withheld is to be
determined (the "Tax Date"). The value of the Shares to be withheld or
delivered will be based on their Fair Market Value on the Tax Date. Such
elections will be subject to the following restrictions: (1) the election must
be made on or before the Tax Date; (2) the election will be irrevocable; and
(3) the election will be subject to the disapproval of the Committee.
SECTION 15
INDEMNIFICATION
Each person who is or shall have been a member of the Committee, or of
the Board, shall be indemnified and held harmless by the Company against and
from any loss, cost, liability, or expense that may be imposed upon or
reasonably incurred by him or her in connection with or resulting from any
claim, notion, suit, or proceeding to which he or she may be a party or in
which he or she may be involved by reason of any action taken or failure to
act under the Plan or any Award Agreement and against and from any and all
amounts paid by him or her in settlement thereof, with the Company's approval,
or paid by him or her in settlement thereof, with the Company's approval, or
paid by him or her in satisfaction of any judgment in any such action, suit,
or proceeding against him or her, provided he or she shall give the Company an
opportunity, at its own expense, to handle and defend the same before he or
she undertakes to handle and defend it on his or her own behalf. The foregoing
right of indemnification shall not be exclusive of any other rights of
indemnification to which such persons may be entitled under the Company's
Articles of Incorporation or Bylaws, as a matter of law, or otherwise, or any
power that the Company may have to indemnify them or hold them harmless.
SECTION 16
SUCCESSORS
All obligations of the Company under the Plan, with respect to Awards
granted hereunder, shall be binding on any successor to the Company, whether
the existence of such
14
<PAGE>
successor is the result of a direct or indirect purchase, merger,
consolidation, or otherwise, of all or substantially all of the business
and/or assets of the Company.
SECTION 17
LEGAL CONSTRUCTION
17.1 Gender and Number. Except where otherwise indicated by the
-----------------
context, any masculine term used herein also shall include the feminine; the
plural shall include the singular and the singular shall include the plural.
17.2 Severability. In the event any provision of the Plan shall be held
------------
illegal or invalid for any reason, the illegality or invalidity shall not affect
the remaining parts of the Plan, and the Plan shall be construed and enforced as
if the illegal or invalid provision had not been included.
17.3 Requirements of Law. The granting of Awards and the issuance of
-------------------
Shares under the Plan shall be subject to all applicable laws, rules, and
regulations, and to such approvals by any governmental agencies or national
securities exchanges as may be required.
17.4 Securities Law Compliance. With respect to Insiders,
-------------------------
transactions under this Plan are intended to comply with all applicable
conditions of Rule 16b-3 or its successors under the Exchange Act. To the
extent any provision of the Plan, Award Agreement or action by the Committee
fails to so comply, it shall be deemed null and void, to the extent permitted
by law and deemed advisable by the Committee.
17.5 Governing Law. The Plan and all Award Agreements hereunder, shall
-------------
be construed in accordance with and governed by the laws of the State of
California.
17.6 Captions. Captions are provided herein for convenience only, and
--------
are not to serve as a basis for interpretation or construction of the Plan.
15
<PAGE>
EXECUTION
IN WITNESS WHEREOF, Shoe Pavilion, Inc., by its duly authorized
officer, has executed the Plan on the date indicated below.
SHOE PAVILION, INC.
Dated: January 28, 1998 By
_________________________
Name: Dmitry Beinus
Title: Chairman, President
and Chief Executive Officer
16
<PAGE>
[FORM OF NONQUALIFIED
STOCK OPTION AGREEMENT]
SHOE PAVILION, INC.
1998 EQUITY INCENTIVE PLAN
NONQUALIFIED STOCK OPTION AGREEMENT
Shoe Pavilion, Inc. (the "Company") hereby grants you, [NAME OF EMPLOYEE]
(the "Employee"), a nonqualified stock option under the Company's 1998 Equity
Incentive Plan (the "Plan"), to purchase shares of common stock of the Company
("Shares"). The date of this Agreement is [DATE] (the "Grant Date"). In
general, the latest date this option will expire is [DATE 10 YEARS AFTER GRANT
DATE] (the "Expiration Date"). However, as provided in Appendix A (attached
hereto), this option may expire earlier than the Expiration Date. Subject to
the provisions of Appendix A and of the Plan, the principal features of this
option are as follows:
Maximum Number of Shares
Purchasable with this Option:[NUMBER A] Purchase Price per Share:$[NUMBER B]
---------------------------- ------------------------
Scheduled Vesting Dates: Number of Shares:
----------------------- ----------------
[DATE 1 YEAR FROM GRANT DATE] [25% OF NUMBER A]
[DATE 2 YEARS FROM GRANT DATE] [25% OF NUMBER A]
[DATE 3 YEARS FROM GRANT DATE] [25% OF NUMBER A]
[DATE 4 YEARS FROM GRANT DATE] [25% OF NUMBER A]
Event Triggering Maximum Time to Exercise
Termination of Option: After Triggering Event*:
--------------------- -----------------------
Termination of Service within None
[1 year] of Grant Date
Conduct harmful to the Company None
All other Terminations of Service 3 months
* However, in no event may this option be exercised after the Expiration
Date (except in certain cases of the death of the Employee).
Your signature below indicates your agreement and understanding that this
option is subject to all of the terms and conditions contained in Appendix A
and the Plan. For example, important additional information on vesting and
termination of this option is contained in Paragraphs 4 through 8 of Appendix
A. ACCORDINGLY, PLEASE BE SURE TO READ ALL OF APPENDIX A, WHICH CONTAINS THE
SPECIFIC TERMS AND CONDITIONS OF THIS OPTION.
SHOE PAVILION, INC. EMPLOYEE
By
______________________ ______________________
Title: [NAME]
<PAGE>
APPENDIX A
TERMS AND CONDITIONS OF NONQUALIFIED STOCK OPTION
1. Grant of Option. The Company hereby grants to the Employee under
---------------
the Plan, as a separate incentive in connection with his or her employment and
not in lieu of any salary or other compensation for his or her services, a
nonqualified stock option to purchase, on the terms and conditions set forth
in this Agreement and the Plan, all or any part of an aggregate of [NUMBER A]
Shares.
2. Exercise Price. The purchase price per Share for this option (the
--------------
"Exercise Price") shall be $[NUMBER B].
3. Number of Shares. The number and class of Shares specified in
----------------
Paragraph 1 above, and/or the Exercise Price, are subject to adjustment by the
Committee in the event of any merger, reorganization, consolidation,
recapitalization, separation, liquidation, stock dividend, split-up, Share
combination, distribution or other change in the corporate structure of the
Company affecting the Shares (an "Event"). Any such adjustment shall be made
by the Committee as constituted immediately prior to the applicable Event (the
"Applicable Committee") and shall be designed so that if the Employee (or any
beneficiary) exercises this option after an Event, he or she shall receive
(upon payment of the Exercise Price for each Share exercised) the securities
and any other property (other than regular cash dividends) which the Employee
(or beneficiary) would have been entitled to had he or she instead acquired
the Shares on the Grant Date and held them through the date of exercise.
Notwithstanding the preceding, (a) the number of Shares subject to this option
always shall be a whole number, and (b) if the Applicable Committee determines
that the delivery of securities or other property (other than Shares) from any
such adjustment would create an undue burden or expense, the Employee (or
beneficiary) instead shall receive a lump sum cash payment equal to the fair
market value (as determined by the Applicable Committee) of such securities or
other property.
4. Consideration. Subject to the provisions of Paragraph 13 below,
-------------
the Employee agrees to remain in the employ of the Company and/or an Affiliate
for at least one (1) year after the Grant Date. This option may not be
exercised as to any Shares subject thereto unless and until the expiration of
such one (1) year period. In the event of the Employee's Termination of
Service for any reason during such one (1) year period, this option shall
terminate and all rights hereunder shall cease.
5. Vesting Schedule. Except as provided in Paragraph 6, the right to
----------------
exercise this option will vest as to twenty-five percent (25)% of the Shares
specified in Paragraph 1 above on the first anniversary date of the Grant
Date, and as to an additional twenty-five percent (25%) on each succeeding
anniversary date, until the right to exercise this option shall have vested
with respect to one hundred percent (100%) of such Shares. Shares scheduled to
vest on any such anniversary date actually will vest only if the Employee has
not incurred a Termination of Service prior to such date.
6. Effect of Conduct Detrimental to the Company. If the Employee
--------------------------------------------
engages in any conduct which the Committee (in its sole discretion) determines
to be contrary or harmful to the interests of the Company, then this option
shall immediately terminate and any "Option Gain" realized by the Employee
from exercising this option shall be immediately paid by the Employee to the
Company. "Option Gain" means the amount equal to (a) minus (b), times (c),
where (a) equals the Fair Market Value of a Share on the date of exercise, (b)
equals the Exercise Price, and (c) equals the number of Shares exercised.
Examples of conduct which is contrary or harmful to the interests of the
Company include (but are not limited to): (1) conviction for any felony, (2)
violation of any Company insider trading policy, (3) service as an employee,
consultant, advisor or in any other capacity to any entity that is in
competition with or acting against the interests of the Company, (4)
disclosure of any confidential information or material concerning the Company
(except as may be required in the course of the Employee's employment with the
Company), (5) misappropriation of trade secrets or (6) breach of fiduciary
duties. The provisions of this Paragraph 6 shall not apply to any Shares
issued in respect of Options exercised by the Employee more than one (1) year
prior to the date on which the Committee determines that the Employee first
engaged in conduct which otherwise would cause the provisions of this
Paragraph 6 to be applicable.
A-1
<PAGE>
7. Termination of Option. Except as provided in Paragraph 6, in the
---------------------
event of the Employee's Termination of Service for any reason other than
death, the Employee may, within three (3) months after the date of such
Termination, or prior to the Expiration Date, whichever shall first occur,
exercise any vested but unexercised portion of this option.
8. Death of Employee. In the event that the Employee dies while in
-----------------
the employ of the Company and/or an Subsidiary or during the three (3) month
period referred to in Paragraph 7 above, the Employee's designated
beneficiary, or if no beneficiary survives the Employee, the administrator or
executor of the Employee's estate, may, within three (3) months after the date
of death, exercise any vested but unexercised portion of the option. Any such
transferee must furnish the Company (a) written notice of his or her status as
a transferee, (b) evidence satisfactory to the Company to establish the
validity of the transfer of this option and compliance with any laws or
regulations pertaining to such transfer, and (c) written acceptance of the
terms and conditions of this option as set forth in this Agreement.
9. Persons Eligible to Exercise Option. This option shall be
-----------------------------------
exercisable during the Employee's lifetime only by the Employee. The option
shall not be transferable by the Employee, except by (a) a valid beneficiary
designation made in a form and manner acceptable to the Committee, or (b) will
or the applicable laws of descent and distribution.
10. Exercise of Option. This option may be exercised by the person
------------------
then entitled to do so as to any Shares which may then be purchased (a) by
giving written notice of exercise to the Secretary of the Company (or his or
her designee), specifying the number of full Shares to be purchased and
accompanied by full payment of the Exercise Price (and the amount of any
income tax the Company determines is required to be withheld by reason of such
exercise), and (b) by giving satisfactory assurances in writing if requested
by the Company, signed by the person exercising the option, that the Shares to
be purchased upon such exercise are being purchased for investment and not
with a view to the distribution thereof. No partial exercise of this option
may be for less than ten (10) Share lots or multiples thereof.
11. Suspension of Exercisability. If at any time the Company shall
----------------------------
determine, in its discretion, that the listing, registration or qualification
of the Shares upon any securities exchange or under any state or federal law,
or the consent or approval of any governmental regulatory authority, is
necessary or desirable as a condition of the purchase of Shares hereunder,
this option may not be exercised, in whole or in part, unless and until such
listing, registration, qualification, consent or approval shall have been
effected or obtained free of any conditions not acceptable to the Company. The
Company shall make reasonable efforts to meet the requirements of any such
state or federal law or securities exchange and to obtain any such consent or
approval of any such governmental authority.
12. No Rights of Stockholder. Neither the Employee (nor any
------------------------
beneficiary) shall be or have any of the rights or privileges of a stockholder
of the Company in respect of any of the Shares issuable pursuant to the
exercise of this option, unless and until certificates representing such
Shares shall have been issued, recorded on the records of the Company or its
transfer agents or registrars, and delivered to the Employee (or beneficiary).
13. No Effect on Employment. The Employee's employment with the
-----------------------
Company and its Subsidiaries is on an at-will basis only. Accordingly, subject
to any written, express employment contract with the Employee, nothing in this
Agreement or the Plan shall confer upon the Employee any right to continue to
be employed by the Company or any Subsidiary or shall interfere with or
restrict in any way the rights of the Company or the Subsidiary, which are
hereby expressly reserved, to terminate the employment of the Employee at any
time for any reason whatsoever, with or without good cause. Such reservation
of rights can be modified only in an express written contract executed by a
duly authorized officer of the Company or the Subsidiary employing the
Employee. For purposes of this Agreement, the transfer of employment of the
Employee between the Company and any one of its Subsidiaries (or between
Subsidiaries) shall not be deemed a Termination of Service.
14. Address for Notices. Any notice to be given to the Company under
-------------------
the terms of this Agreement shall be addressed to the Company, in care of its
[TITLE], at [ADDRESS], or at such other address as the Company may hereafter
designate in writing.
A-2
<PAGE>
15. Option is Not Transferable. Except as otherwise expressly
--------------------------
provided herein, this option and the rights and privileges conferred hereby
may not be transferred, pledged, assigned or otherwise hypothecated in any way
(whether by operation of law or otherwise) and shall not be subject to sale
under execution, attachment or similar process. Upon any attempt to transfer,
pledge, assign, hypothecate or otherwise dispose of this option, or of any
right or privilege conferred hereby, or upon any attempted sale under any
execution, attachment or similar process, this option and the rights and
privileges conferred hereby immediately shall become null and void.
16. Other Benefits. Except as provided below, nothing contained in
--------------
this Agreement shall affect the Employee's right to participate in and receive
benefits under and in accordance with the then current provisions of any
pension, insurance or other employee welfare plan or program of the Company or
any Subsidiary. Notwithstanding any contrary provision of this Agreement, in
the event that the Employee receives a hardship withdrawal from his or her pre-
tax account under any tax-qualified retirement plan sponsored by the Company
(the "401(k) Plan"), this option may not be exercised during the twelve (12)
month period following the receipt of such withdrawal, unless the Committee
determines that such exercise (or a particular manner of exercise) would not
adversely affect the continued tax qualification of the 401(k) Plan.
17. Maximum Term of Option. Notwithstanding any other provision of
----------------------
this Agreement except Paragraph 8 above relating to the death of the Employee
(in which case this option is exercisable to the extent set forth therein),
this option is not exercisable after the Expiration Date.
18. Binding Agreement. Subject to the limitation on the
-----------------
transferability of this option contained herein, this Agreement shall be
binding upon and inure to the benefit of the heirs, legatees, legal
representatives, successors and assigns of the parties hereto.
19. Conditions to Exercise. The Exercise Price for this option must
----------------------
be paid in the legal tender of the United States or, in the Committee's sole
discretion, in Shares of equivalent value that (a) were previously issued to
the Employee upon the exercise of this option and (b) have been held by the
Employee for at least six (6) months prior thereto. Exercise of this option
will not be permitted until satisfactory arrangements have been made for the
payment of the appropriate amount of withholding taxes (as determined by the
Company).
20. Plan Governs. This Agreement is subject to all of the terms and
------------
provisions of the Plan. In the event of a conflict between one or more
provisions of this Agreement and one or more provisions of the Plan, the
provisions of the Plan shall govern. Capitalized terms and phrases used and
not defined in this Agreement shall have the meaning set forth in the Plan.
21. Committee Authority. The Committee shall have all discretion,
-------------------
power, and authority to interpret the Plan and this Agreement and to adopt
such rules for the administration, interpretation and application of the Plan
as are consistent therewith. All actions taken and all interpretations and
determinations made by the Committee in good faith shall be final and binding
upon the Employee, the Company and all other interested persons, and shall be
given the maximum deference permitted by law. No member of the Committee shall
be personally liable for any action, determination or interpretation made in
good faith with respect to the Plan or this Agreement.
22. Captions. The captions provided herein are for convenience only
--------
and are not to serve as a basis for the interpretation or construction of this
Agreement.
23. Agreement Severable. In the event that any provision in this
-------------------
Agreement shall be held invalid or unenforceable, such provision shall be
severable from, and such invalidity or unenforceability shall not be construed
to have any effect on, the remaining provisions of this Agreement.
24. Modifications to the Agreement. This Agreement constitutes the
------------------------------
entire understanding of the parties on the subjects covered. The Employee
expressly warrants that he or she is not executing this Agreement in reliance
on any promises, representations, or inducements other than those contained
herein. Modifications to this Agreement or the Plan can be made only in an
express written contract executed by a duly authorized officer of the Company.
A-3
<PAGE>
[FORM OF INCENTIVE
STOCK OPTION AGREEMENT]
SHOE PAVILION, INC.
1998 EQUITY INCENTIVE PLAN
INCENTIVE STOCK OPTION AGREEMENT
Shoe Pavilion, Inc. (the "Company") hereby grants you, [NAME OF EMPLOYEE]
(the "Employee"), an incentive stock option under the Company's 1998 Equity
Incentive Plan (the "Plan"), to purchase shares of common stock of the Company
("Shares"). The date of this Agreement is [DATE] (the "Grant Date"). In
general, the latest date this option will expire is [DATE 10 YEARS AFTER GRANT
DATE] (the "Expiration Date"). However, as provided in Appendix A (attached
hereto), this option may expire earlier than the Expiration Date. Subject to
the provisions of Appendix A and of the Plan, the principal features of this
option are as follows:
Maximum Number of Shares
Purchasable with this Option:[NUMBER A] Purchase Price per Share:$[NUMBER B]
---------------------------- ------------------------
Scheduled Vesting Dates: Number of Shares:
----------------------- ----------------
[DATE 1 YEAR FROM GRANT DATE] [25% OF NUMBER A]
[DATE 2 YEARS FROM GRANT DATE] [25% OF NUMBER A]
[DATE 3 YEARS FROM GRANT DATE] [25% OF NUMBER A]
[DATE 4 YEARS FROM GRANT DATE] [25% OF NUMBER A]
Event Triggering Maximum Time to Exercise
Termination of Option: After Triggering Event*:
--------------------- -----------------------
Termination of Service within
[1 year] of Grant Date None
All other Terminations of Service 3 months
* However, in no event may this option be exercised after the Expiration
Date (except in certain cases of the death of the Employee).
Your signature below indicates your agreement and understanding that this
option is subject to all of the terms and conditions contained in Appendix A
and the Plan. For example, important additional information on vesting and
termination of this option is contained in Paragraphs 4 through 7 of Appendix
A. ACCORDINGLY, PLEASE BE SURE TO READ ALL OF APPENDIX A, WHICH CONTAINS THE
SPECIFIC TERMS AND CONDITIONS OF THIS OPTION.
SHOE PAVILION, INC. EMPLOYEE
By
_________________________ _________________________
Title: [NAME]
<PAGE>
APPENDIX A
TERMS AND CONDITIONS OF INCENTIVE STOCK OPTION
1. Grant of Option. The Company hereby grants to the Employee under
---------------
the Plan, as a separate incentive in connection with his or her employment and
not in lieu of any salary or other compensation for his or her services, an
incentive stock option to purchase, on the terms and conditions set forth in
this Agreement and the Plan, all or any part of an aggregate of [NUMBER A]
Shares. Such stock option is intended to qualify as an "incentive stock
option" under Section 422 of the Internal Revenue Code of 1986, as amended.
2. Exercise Price. The purchase price per Share for this option (the
--------------
"Exercise Price") shall be $[NUMBER B], which is the Fair Market Value of a
Share on the Grant Date.
3. Number of Shares. The number and class of Shares specified in
----------------
Paragraph 1, above, and/or the Exercise Price, are subject to adjustment by
the Committee in the event of any merger, reorganization, consolidation,
recapitalization, separation, liquidation, stock dividend, split-up, Share
combination, distribution or other change in the corporate structure of the
Company affecting the Shares (an "Event"). Any such adjustment shall be made
by the Committee as constituted immediately prior to the applicable Event (the
"Applicable Committee") and shall be designed so that if the Employee (or any
beneficiary) exercises this option after an Event, he or she shall receive
(upon payment of the Exercise Price for each Share exercised) the securities
and any other property (other than regular cash dividends) which the Employee
(or beneficiary) would have been entitled to had he or she instead acquired
the Shares on the Grant Date and held them through the date of exercise.
Notwithstanding the preceding, (a) the number of Shares subject to this option
always shall be a whole number, and (b) if the Applicable Committee determines
that the delivery of securities or other property (other than Shares) from any
such adjustment would create an undue burden or expense, the Employee (or
beneficiary) instead shall receive a lump sum cash payment equal to the fair
market value (as determined by the Applicable Committee) of such securities or
other property.
4. Consideration. Subject to the provisions of Paragraph 12 below,
-------------
the Employee agrees to remain in the employ of the Company and/or an Affiliate
for at least one (1) year after the Grant Date. This option may not be
exercised as to any Shares subject thereto unless and until the expiration of
such one (1) year period. In the event of the Employee's Termination of
Service for any reason during such one (1) year period, this option shall
terminate and all rights hereunder shall cease.
5. Vesting Schedule. The right to exercise this option will vest as
----------------
to twenty-five percent (25)% of the Shares specified in Paragraph 1 above on
the first anniversary date of the Grant Date, and as to an additional twenty-
five percent (25%) on each succeeding anniversary date, until the right to
exercise this option shall have vested with respect to one hundred percent
(100%) of such Shares. Shares scheduled to vest on any such anniversary date
actually will vest only if the Employee has not incurred a Termination of
Service prior to such date.
6. Termination of Option. In the event of the Employee's Termination
---------------------
of Service for any reason other than death, the Employee may, within three (3)
months after the date of such Termination, or prior to the Expiration Date,
whichever shall first occur, exercise any vested but unexercised portion of
this option.
7. Death of Employee. In the event that the Employee dies while in
-----------------
the employ of the Company and/or an Subsidiary or during the three (3) month
period referred to in Paragraph 6 above, the Employee's designated
beneficiary, or if no beneficiary survives the Employee, the administrator or
executor of the Employee's estate, may, within three (3) months after the date
of death, exercise any vested but unexercised portion of the option. Any such
transferee must furnish the Company (a) written notice of his or her status as
a transferee, (b) evidence satisfactory to the Company to establish the
validity of the transfer of this option and compliance with any laws or
regulations pertaining to such transfer, and (c) written acceptance of the
terms and conditions of this option as set forth in this Agreement.
A-1
<PAGE>
8. Persons Eligible to Exercise Option. This option shall be
-----------------------------------
exercisable during the Employee's lifetime only by the Employee. The option
shall not be transferable by the Employee, except by (a) a valid beneficiary
designation made in a form and manner acceptable to the Committee, or (b) will
or the applicable laws of descent and distribution.
9. Exercise of Option. This option may be exercised by the person
------------------
then entitled to do so as to any Shares which may then be purchased (a) by
giving written notice of exercise to the Secretary of the Company (or his or
her designee), specifying the number of full Shares to be purchased and
accompanied by full payment of the Exercise Price (and the amount of any
income tax the Company determines is required to be withheld by reason of such
exercise), and (b) by giving satisfactory assurances in writing if requested
by the Company, signed by the person exercising the option, that the Shares to
be purchased upon such exercise are being purchased for investment and not
with a view to the distribution thereof. No partial exercise of this option
may be for less than ten (10) Share lots or multiples thereof.
10. Suspension of Exercisability. If at any time the Company shall
----------------------------
determine, in its discretion, that the listing, registration or qualification
of the Shares upon any securities exchange or under any state or federal law,
or the consent or approval of any governmental regulatory authority, is
necessary or desirable as a condition of the purchase of Shares hereunder,
this option may not be exercised, in whole or in part, unless and until such
listing, registration, qualification, consent or approval shall have been
effected or obtained free of any conditions not acceptable to the Company. The
Company shall make reasonable efforts to meet the requirements of any such
state or federal law or securities exchange and to obtain any such consent or
approval of any such governmental authority.
11. No Rights of Stockholder. Neither the Employee (nor any
------------------------
beneficiary) shall be or have any of the rights or privileges of a stockholder
of the Company in respect of any of the Shares issuable pursuant to the
exercise of this option, unless and until certificates representing such
Shares shall have been issued, recorded on the records of the Company or its
transfer agents or registrars, and delivered to the Employee (or beneficiary).
12. No Effect on Employment. The Employee's employment with the
-----------------------
Company and its Subsidiaries is on an at-will basis only. Accordingly, subject
to any written, express employment contract with the Employee, nothing in this
Agreement or the Plan shall confer upon the Employee any right to continue to
be employed by the Company or any Subsidiary or shall interfere with or
restrict in any way the rights of the Company or the Subsidiary, which are
hereby expressly reserved, to terminate the employment of the Employee at any
time for any reason whatsoever, with or without good cause. Such reservation
of rights can be modified only in an express written contract executed by a
duly authorized officer of the Company or the Subsidiary employing the
Employee. For purposes of this Agreement, the transfer of employment of the
Employee between the Company and any one of its Subsidiaries (or between
Subsidiaries) shall not be deemed a Termination of Service.
13. Address for Notices. Any notice to be given to the Company under
-------------------
the terms of this Agreement shall be addressed to the Company, in care of its
[TITLE], at [ADDRESS], or at such other address as the Company may hereafter
designate in writing.
14. Option is Not Transferable. Except as otherwise expressly
--------------------------
provided herein, this option and the rights and privileges conferred hereby
may not be transferred, pledged, assigned or otherwise hypothecated in any way
(whether by operation of law or otherwise) and shall not be subject to sale
under execution, attachment or similar process. Upon any attempt to transfer,
pledge, assign, hypothecate or otherwise dispose of this option, or of any
right or privilege conferred hereby, or upon any attempted sale under any
execution, attachment or similar process, this option and the rights and
privileges conferred hereby immediately shall become null and void.
15. Other Benefits. Except as provided below, nothing contained in
--------------
this Agreement shall affect the Employee's right to participate in and receive
benefits under and in accordance with the then current provisions of any
pension, insurance or other employee welfare plan or program of the Company or
any Subsidiary. Notwithstanding any contrary provision of this Agreement, in
the event that the Employee receives a hardship withdrawal from his or her pre-
tax account under any tax-qualified retirement plan sponsored by the Company
(the "401(k) Plan"), this option may not be exercised during the twelve (12)
month period following the receipt of such
A-2
<PAGE>
withdrawal, unless the Committee determines that such exercise (or a
particular manner of exercise) would not adversely affect the continued tax
qualification of the 401(k) Plan.
16. Maximum Term of Option. Notwithstanding any other provision of
----------------------
this Agreement except Paragraph 8 above relating to the death of the Employee
(in which case this option is exercisable to the extent set forth therein),
this option is not exercisable after the Expiration Date.
17. Binding Agreement. Subject to the limitation on the
-----------------
transferability of this option contained herein, this Agreement shall be
binding upon and inure to the benefit of the heirs, legatees, legal
representatives, successors and assigns of the parties hereto.
18. Conditions to Exercise. The Exercise Price for this option must
----------------------
be paid in the legal tender of the United States or, in the Committee's sole
discretion, in Shares of equivalent value that (a) were previously issued to
the Employee upon the exercise of this option and (b) have been held by the
Employee for at least six (6) months prior thereto. Exercise of this option
will not be permitted until satisfactory arrangements have been made for the
payment of the appropriate amount of withholding taxes (as determined by the
Company).
19. Plan Governs. This Agreement is subject to all of the terms and
------------
provisions of the Plan. In the event of a conflict between one or more
provisions of this Agreement and one or more provisions of the Plan, the
provisions of the Plan shall govern. Capitalized terms and phrases used and
not defined in this Agreement shall have the meaning set forth in the Plan.
20. Committee Authority. The Committee shall have all discretion,
-------------------
power, and authority to interpret the Plan and this Agreement and to adopt
such rules for the administration, interpretation and application of the Plan
as are consistent therewith. All actions taken and all interpretations and
determinations made by the Committee in good faith shall be final and binding
upon the Employee, the Company and all other interested persons, and shall be
given the maximum deference permitted by law. No member of the Committee shall
be personally liable for any action, determination or interpretation made in
good faith with respect to the Plan or this Agreement.
21. Captions. The captions provided herein are for convenience only
--------
and are not to serve as a basis for the interpretation or construction of this
Agreement.
22. Agreement Severable. In the event that any provision in this
-------------------
Agreement shall be held invalid or unenforceable, such provision shall be
severable from, and such invalidity or unenforceability shall not be construed
to have any effect on, the remaining provisions of this Agreement.
23. Modifications to the Agreement. This Agreement constitutes the
------------------------------
entire understanding of the parties on the subjects covered. The Employee
expressly warrants that he or she is not executing this Agreement in reliance
on any promises, representations, or inducements other than those contained
herein. Modifications to this Agreement or the Plan can be made only in an
express written contract executed by a duly authorized officer of the Company.
A-3
<PAGE>
SHOE PAVILION, INC.
NONEMPLOYEE DIRECTOR STOCK OPTION PLAN
<PAGE>
<TABLE>
TABLE OF CONTENTS
PAGE
<C> <S> <C>
SECTION 1 ESTABLISHMENT, PURPOSE AND DURATION......................... 1
1.1 Establishment............................................... 1
1.2 Purpose of the Plan......................................... 1
1.3 Effective Date.............................................. 1
1.4 Duration of the Plan........................................ 1
SECTION 2 DEFINITIONS................................................. 1
2.1 Board or Board of Directors................................. 1
2.2 Code........................................................ 1
2.3 Company..................................................... 2
2.4 Director.................................................... 2
2.5 Exchange Act................................................ 2
2.6 Exercise Price.............................................. 2
2.7 Fair Market Value........................................... 2
2.8 Nonemployee Director........................................ 2
2.9 Option...................................................... 2
2.10 Participant................................................. 2
2.11 Plan........................................................ 2
2.12 Shares...................................................... 2
2.13 Subsidiary.................................................. 2
2.14 Termination of Service...................................... 2
SECTION 3 ADMINISTRATION OF THE PLAN.................................. 3
3.1 The Board of Directors...................................... 3
3.2 Authority of the Board of Directors......................... 3
3.3 Decisions Binding........................................... 3
3.4 Administrative Expenses..................................... 3
3.5 Indemnification............................................. 3
SECTION 4 SHARES SUBJECT TO THE PLAN.................................. 4
4.1 Number of Shares............................................ 4
4.2 Effect of Lapsed Options.................................... 4
4.3 Adjustments in Authorized Shares............................ 4
SECTION 5 ELIGIBILITY................................................. 4
5.1 Eligibility................................................. 4
5.2 Consideration for Grant of Option........................... 4
SECTION 6 OPTIONS..................................................... 4
6.1 Grant of Options............................................ 4
6.1.1 Initial Grants.............................................. 4
6.1.2 Ongoing Grants.............................................. 4
6.2 Terms of Options............................................ 5
6.2.1 Option Agreement............................................ 5
</TABLE>
-i-
<PAGE>
<TABLE>
TABLE OF CONTENTS
(CONTINUED)
PAGE
<C> <S> <C>
6.2.2 Exercise Price.............................................. 5
6.2.3 Exercisability of Options................................... 5
6.2.4 Expiration of Options....................................... 5
6.2.5 Payment..................................................... 5
6.2.6 Restrictions on Share Transferability....................... 5
6.2.7 Nontransferability of Options............................... 5
SECTION 7 MISCELLANEOUS............................................... 6
7.1 Amendment or Termination of the Plan........................ 6
7.2 Beneficiary Designation..................................... 6
7.3 No Effect Upon Other Compensation Plans..................... 6
7.4 No Effect on Service........................................ 6
7.5 Requirements of Law......................................... 6
7.6 Successors.................................................. 6
7.7 Rule 16b-3 Compliance....................................... 6
7.8 Captions.................................................... 7
7.9 Governing Law............................................... 7
7.10 Applicable Law; Severability................................ 7
EXECUTION.............................................................. 7
</TABLE>
-ii-
<PAGE>
SHOE PAVILION, INC.
NONEMPLOYEE DIRECTOR STOCK OPTION PLAN
(Effective February___, 1998)
SECTION 1
ESTABLISHMENT, PURPOSE AND DURATION
1.1 Establishment. Shoe Pavilion, Inc., a Delaware corporation (the
-------------
"Company"), hereby establishes the "Shoe Pavilion, Inc. Nonemployee Director
Stock Option Plan" (the "Plan"), for the benefit of certain nonemployee members
of the Board of Directors of the Company ("Nonemployee Directors"), in order to
compensate such Nonemployee Directors for their past services by awarding them
stock options under the Plan ("Options").
1.2 Purpose of the Plan. The purpose of the Plan is to promote the
-------------------
success, and enhance the value, of the Company, by attracting, retaining and
motivating Nonemployee Directors of outstanding competence. The Plan also is
designed to align the interests of Nonemployee Directors with the interests of
the stockholders of the Company.
1.3 Effective Date. The Plan is effective immediately preceding the date
--------------
that the Company's Registration Statement on Form S-1 covering the sale of its
Common Stock is declared effective by the Securities and Exchange Commission.
1.4 Duration of the Plan. The Plan shall commence on the date specified
--------------------
in Section 1.3, and subject to the right of the Board of Directors of the
Company to terminate the Plan at any time and for any reason pursuant to Section
7, shall remain in effect thereafter. Notwithstanding the preceding sentence,
each Option shall remain in effect until such Option has been satisfied by the
issuance of Shares or terminated in accordance with its terms and the terms of
the Plan. In the event that on any date of grant the number of Shares to be
subject to Options granted to all Nonemployee Directors exceeds the number of
Shares then available for grant under the Plan, each Nonemployee Director shall
share pro rata in the number of Shares that remain available for grant on such
date.
SECTION 2
DEFINITIONS
For purposes of this Plan, the following terms shall have the meanings
indicated unless a different meaning is plainly required by the context:
2.1 Board or Board of Directors means the Board of Directors of the
---------------------------
Company.
2.2 Code means the Internal Revenue Code of 1986, as amended. Reference
----
to a specific section of the Code shall include such section, any valid
regulation promulgated thereunder, and any comparable provision of any future
legislation amending, supplementing or superseding such section.
<PAGE>
2.3 Company means Shoe Pavilion, Inc., a Delaware corporation, or any
-------
successor thereto.
2.4 Director means an individual who is a member of the Board.
--------
2.5 Exchange Act means the Securities Exchange Act of 1934, as amended
------------
from time to time, or any successor Act thereto. Reference to a specific
section of the Exchange Act shall include such section, any valid regulation
promulgated thereunder, and any comparable provision of any future legislation
amending, supplementing or superseding such section.
2.6 Exercise Price means the price at which a Share may be purchased
--------------
pursuant to an Option.
2.7 Fair Market Value means the average of the highest and lowest quoted
-----------------
selling prices for Shares on the relevant date, or if there were no sales on
such date, the weighted average of the means between the highest and lowest
quoted selling prices on the nearest day before and the nearest day after the
relevant date, as determined by the Board of Directors.
2.8 Nonemployee Director means a Director who is an employee of neither
--------------------
the Company nor of any Subsidiary.
2.9 Option means an option to purchase Shares which has been granted
------
under the provisions of the Plan. Options are not intended to be incentive
stock options under section 422 of the Code.
2.10 Participant means a Nonemployee Director to whom an Option has been
-----------
granted under the provisions of the Plan.
2.11 Plan means the Shoe Pavilion, Inc. Nonemployee Director Stock Option
----
Plan, as set forth in this instrument and as hereafter amended from time to
time.
2.12 Shares means the shares of common stock of the Company.
------
2.13 Subsidiary means any corporation in which the Company owns directly,
----------
or indirectly through subsidiaries, at least fifty percent (50%) of the total
combined voting power of all classes of stock, or any other entity (including,
but not limited to, partnerships and joint ventures) in which the Company owns
at least fifty percent (50%) of the combined equity thereof.
2.14 Termination of Service means a cessation of the Nonemployee Director's
----------------------
service on the Board for any reason.
2
<PAGE>
SECTION 3
ADMINISTRATION OF THE PLAN
3.1 The Board of Directors. The Plan shall be administered by the
----------------------
Board of Directors. It shall be the duty of the Board of Directors to conduct
the general administration of the Plan in accordance with its provisions.
3.2 Authority of the Board of Directors. The Board of Directors shall
-----------------------------------
have all powers and discretion necessary or appropriate to administer the Plan
and to control its operation in accordance with its terms, including, but not
limited to, the following powers:
(a) To interpret the provisions of the Plan and to determine, in
its sole discretion, any question arising under, or in connection with the
administration or operation of, the Plan;
(b) To employ such counsel, agents and advisers, and to obtain
such legal, clerical and other services, as it may deem necessary or
appropriate in carrying out the provisions of the Plan; and
(c) To prescribe, amend and rescind rules and regulations relating
to the Plan, and to make all other determinations which may be necessary or
advisable for the administration of the Plan.
3.3 Decisions Binding. All actions, interpretations and decisions of the
-----------------
Board of Directors shall be final, conclusive and binding on all persons, and
shall be given the maximum deference permitted by law.
3.4 Administrative Expenses. All expenses incurred in the
-----------------------
administration of the Plan by the Board of Directors, or otherwise, including
legal fees and expenses, shall be paid and borne by the Company.
3.5 Indemnification. Each person who is or shall have been a member of
---------------
the Board shall be indemnified and held harmless by the Company against and
from any loss, cost, liability, or expense that may be imposed upon or
reasonably incurred by him or her in connection with or resulting from any
claim, notion, suit, or proceeding to which he or she may be a party or in
which he or she may be involved by reason of any action taken or failure to
act under the Plan and against and from any and all amounts paid by him or her
in settlement thereof, with the Company's approval, or paid by him or her in
satisfaction of any judgment in any such action, suit, or proceeding against
him or her, provided he or she shall give the Company an opportunity, at its
own expense, to handle and defend the same before he or she undertakes to
handle and defend it on his or her own behalf. The foregoing right of
indemnification shall not be exclusive of any other rights of indemnification
to which such persons may be entitled under the Company's Certificate of
Incorporation or Bylaws, as a matter of law, or otherwise, or any power that
the Company may have to indemnify them or hold them harmless.
3
<PAGE>
SECTION 4
SHARES SUBJECT TO THE PLAN
4.1 Number of Shares. Subject to adjustment as provided in Section
----------------
4.3, the maximum number of Shares available for grant under the Plan may not
exceed 100,000. Such Shares may be either authorized but unissued Shares or
treasury Shares.
4.2 Effect of Lapsed Options. If an Option is cancelled, terminates,
------------------------
expires or lapses for any reason, any Shares subject to such Option again
shall be made available for grant under the Plan (to the same Participant or
to a different person).
4.3 Adjustments in Authorized Shares. In the event of any merger,
--------------------------------
reorganization, consolidation, recapitalization, separation, liquidation, stock
dividend, split-up, Share combination, or other change in the corporate
structure of the Company affecting the Shares, such adjustment shall be made in
the number and class of Shares which may be delivered under the Plan, and in the
number and class of and/or the Exercise Price of Shares subject to outstanding
Options, as may be determined to be appropriate and equitable by the Board, in
its sole discretion, to prevent the dilution or diminishment of Options.
Notwithstanding the preceding sentence, the number of Shares subject to any
Option always shall be a whole number.
SECTION 5
ELIGIBILITY
5.1 Eligibility. All Nonemployee Directors shall be eligible to
-----------
participate in the Plan.
5.2 Consideration for Grant of Option. Any Option under the Plan shall
---------------------------------
be granted in consideration of the past services of the Participant.
SECTION 6
OPTIONS
6.1 Grant of Options.
----------------
6.1.1 Initial Grants. Each Nonemployee Director automatically will
--------------
receive on the date he or she is initially appointed by the Board of Directors
to serve as a member thereof an Option to purchase 7,500 Shares.
6.1.2 Ongoing Grants. Each Participant who has been granted an
--------------
Option to purchase 7,500 Shares pursuant to Section 6.1.1, automatically will
receive, on the date of each subsequent annual meeting of the stockholders of
the Company, an Option to purchase an additional 2,500 Shares, provided that
the Participant is a Nonemployee Director on each such date of grant.
4
<PAGE>
6.2 Terms of Options.
----------------
6.2.1 Option Agreement. Each Option shall be evidenced by a
----------------
written stock option agreement which shall be executed by the Participant and
the Company.
6.2.2 Exercise Price. The Exercise Price for the Shares subject to
--------------
each Option shall be one hundred percent (100%) of the Fair Market Value of
such Shares on the date of grant.
6.2.3 Exercisability of Options. Each Option shall become
-------------------------
exercisable in full on the first anniversary of the date of grant of the
Option.
6.2.4 Expiration of Options. Each Option shall terminate upon the
---------------------
earlier of (a) the expiration of six (6) years from the date of grant of the
Option, or (b) the expiration of nine (9) months from the date of the
Participant's Termination of Service as a Director for any reason.
Notwithstanding the preceding sentence, if a Participant incurs a Termination
of Service prior to the date that an Option held by him or her has become
exercisable pursuant to Section 6.2.3, such Option shall terminate on the date
of the Participant's Termination of Service as a Director.
6.2.5 Payment. Options shall be exercised by the Participant's
-------
delivery of a written notice of exercise to the Secretary of the Company,
setting forth the number of Shares with respect to which the Option is to be
exercised, accompanied by full payment for the Shares. The Exercise Price for
any such Shares shall be payable to the Company in full in cash or its
equivalent.
As soon as practicable after receipt of a written notification of
exercise and full payment for the Shares purchased, the Company shall deliver
to the Participant Share certificates (in the Participant's name) representing
such Shares.
6.2.6 Restrictions on Share Transferability. The Board of
-------------------------------------
Directors may impose such restrictions on any Shares acquired pursuant to the
exercise of an Option, as it may deem advisable, including, but not limited
to, restrictions under applicable Federal securities laws, under the
requirements of any national securities exchange or system upon which Shares
are then listed and/or traded, and/or under any blue sky or state securities
laws applicable to such Shares.
6.2.7 Nontransferability of Options. No Option granted under the
-----------------------------
Plan may be sold, transferred, pledged, assigned, or otherwise alienated or
hypothecated, other than by will, the laws of descent and distribution, or as
permitted in Section 7.2. All Options granted to a Participant under the Plan
shall be exercisable during his or her lifetime only by such Participant.
5
<PAGE>
SECTION 7
MISCELLANEOUS
7.1 Amendment or Termination of the Plan. The Board, in its sole
------------------------------------
discretion, may amend, alter, modify or terminate the Plan, in whole or in
part, at any time and for any reason. However, only if and to the extent
required to maintain the Plan's qualification under Rule 16b-3 promulgated
under the Exchange Act, any such amendment shall be subject to stockholder
approval. Neither the amendment, suspension, termination, nor scheduled
expiration of the Plan shall, without the consent of the Participant, alter or
impair any rights or obligations under any Option theretofore granted. No
Option may be granted during any period of suspension nor after termination of
the Plan.
7.2 Beneficiary Designation. If permitted by the Board of Directors, a
-----------------------
Participant may name a beneficiary or beneficiaries to whom any benefit under
the Plan is to be paid in case of the Participant's death before he or she
receives any or all of such benefit. Each such designation shall revoke all
prior designations by the same Participant and must be in a form and manner
acceptable to the Board of Directors. In the absence of any such designation,
or if no beneficiary survives the Participant, benefits remaining unpaid at the
Participant's death shall be paid to the person or persons entitled to such
benefits under the Participant's will or, if the Participant shall fail to make
testamentary disposition of such benefits, his or her legal representative. Any
transferee must furnish the Company with (a) written notice of his or her status
as a transferee, and (b) evidence satisfactory to the Company to establish the
validity of the transfer and compliance with any laws or regulations pertaining
to said transfer.
7.3 No Effect Upon Other Compensation Plans. The adoption of this Plan
---------------------------------------
shall not affect any other stock option, compensation or incentive plans in
effect for the Company or any Subsidiary, and this Plan shall not preclude the
Board from establishing any other forms of incentive or compensation for
Nonemployee Directors.
7.4 No Effect on Service. Nothing in the Plan shall interfere with or
--------------------
limit in any way the right of the Company to terminate any Participant's service
on the Board at any time, with or without cause.
7.5 Requirements of Law. The granting of Options and the issuance of
-------------------
Shares under the Plan shall be subject to all applicable laws, rules, and
regulations, and to such approvals by any governmental agencies or national
securities exchanges as may be required.
7.6 Successors. All obligations of the Company under the Plan, with respect
----------
to Options granted hereunder, shall be binding on any successor to the Company,
whether the existence of such successor is the result of a direct or indirect
purchase, merger, consolidation, or otherwise, of all or substantially all of
the business and/or assets of the Company.
7.7 Rule 16b-3 Compliance. Transactions under this Plan are intended to
---------------------
comply with all applicable conditions of Rule 16b-3 or its successors under the
Exchange Act. To the extent that any provision of the Plan, an Option or any
action by the Board of Directors fails to so comply, it shall be deemed null and
void, to the extent permitted by law and deemed
6
<PAGE>
advisable by the Board of Directors. Notwithstanding any contrary provision of
the Plan, if the Board of Directors specifically determines that compliance
with Rule 16b-3 no longer is required, all references in the Plan to Rule 16b-
3 shall be of no force or effect.
7.8 Captions. The captions contained herein and in the table of contents
--------
are provided as a matter of convenience only, and in no way define, limit,
enlarge or describe the scope or intent of the Plan. Such captions shall not
affect in any way the construction of any provision of the Plan.
7.9 Governing Law. The Plan and all Options Agreements hereunder, shall be
-------------
construed in accordance with and governed by the laws of the State of
California.
7.10 Applicable Law; Severability. The Plan hereby created shall be
----------------------------
construed, administered and governed in all respects in accordance with the
laws of the State of California (with the exception of its conflict of laws
provisions). If any provision of this instrument shall be held invalid or
unenforceable by a court of competent jurisdiction, the remaining provisions
hereof shall continue to be fully effective.
EXECUTION
IN WITNESS WHEREOF, the Company, by its duly authorized officer, has
executed this Plan on the date indicated below.
SHOE PAVILION, INC.
Dated: January ____, 1998 By
________________________
Name: Dmitry Beinus
Title: Chairman, President and
Chief Executive Officer
7
<PAGE>
SHOE PAVILION, INC
NONEMPLOYEE DIRECTOR STOCK OPTION PLAN
NONQUALIFIED STOCK OPTION AGREEMENT
1. Grant of Option. Shoe Pavilion, Inc. (the "Company") hereby
---------------
grants to _________ (the "Director") under the Shoe Pavilion, Inc. Nonemployee
Director Stock Option Plan (the "Plan"), as a separate incentive in connection
with his or her service on the Board of Directors of the Company and not in
lieu of any fees or other compensation for his or her services, a nonqualified
stock option to purchase, on the terms and conditions set forth in this
Agreement and the Plan, all or any part of an aggregate of [ ] shares of
authorized but unissued or treasury shares of common stock of the Company
("Shares"), at the purchase price set forth in paragraph 2 of this Agreement.
The option granted hereby is not intended to be an incentive stock option
within the meaning of section 422 of the Internal Revenue Code of 1986, as
amended.
2. Exercise Price. The purchase price per Share for this option (the
--------------
"Exercise Price") shall be $ , which is the Fair Market Value per Share on
, 199___, the effective date of this Agreement (the "Grant Date"). The Exercise
Price shall be payable in the legal tender of the United States.
3. Number of Shares. The number and class of Shares specified in
----------------
paragraph 1 of this Agreement, and/or the Exercise Price, are subject to
appropriate adjustment by the Board in the event of any merger,
reorganization, consolidation, recapitalization, separation, liquidation,
stock dividend, split-up, Share combination or other change in the corporate
structure of the Company affecting the Shares; provided, however, that the
number of Shares subject to this option shall always be a whole number.
Subject to any required action of the stockholders of the Company, if the
Company is the surviving corporation in any merger or consolidation, this
option (to the extent that it is still outstanding) shall pertain to and apply
to the securities to which a holder of the same number of Shares that are then
subject to the option would have been entitled.
4. Commencement of Exercisability. Subject to paragraph 5 of this
------------------------------
Agreement, the right to exercise this option shall accrue as to [100%] of the
Shares subject thereto on the first anniversary date of the Grant Date.
5. Termination of Option. This option shall terminate upon the
---------------------
earlier of (a) the expiration of six (6) years from the Grant Date or (b) the
expiration of nine (9) months from the date of the Director's termination of
service on the Board for any reason; provided, however, that if the Director
ceases to be a member of the Board prior to the date that the option has
become exercisable, the option shall terminate on the date of the Director's
Termination of Service on the Board.
6. Persons Eligible to Exercise. The option shall be exercisable
----------------------------
during the Director's lifetime only by the Director. This option is not
transferable, except that the Director may transfer this option (a) by a valid
beneficiary designation made in a form and manner acceptable to the Board, or
(b) by will or the applicable laws of descent and distribution.
Page 1 of 4
<PAGE>
7. Death of the Director. To the extent exercisable after the
---------------------
Director's death, this option shall be exercised only by the Director's
designated beneficiary or beneficiaries, or if no beneficiary survives the
Director, by the person or persons entitled to the option under the Director's
will, or if the Director fails to make a testamentary disposition of the
option, his or her legal representative. Any such transferee must furnish the
Company (a) written notice of his or her status as a transferee, (b) evidence
satisfactory to the Company to establish the validity of the transfer of this
option and compliance with any laws or regulations pertaining to such
transfer, and (c) written acceptance of the terms and conditions of this
option as set forth in this Agreement.
8. Exercise of Option. This option may be exercised by the person
------------------
then entitled to do so as to any Shares which may then be purchased (a) by
giving written notice of exercise to the Secretary of the Company (or his or
her designee), specifying the number of full Shares to be purchased and
accompanied by full payment of the Exercise Price thereof (and the amount of
any income tax the Company is required by law to withhold by reason of such
exercise), and (b) by giving satisfactory assurances in writing if requested
by the Company, signed by the person exercising the option, that the Shares to
be purchased upon such exercise are being purchased for investment and not
with a view to the distribution thereof.
9. Suspension of Exercisability. If at any time the Company shall
----------------------------
determine, in its discretion, that the listing, registration or qualification
of the Shares upon any securities exchange or under any state or federal law,
or the consent or approval of any governmental regulatory authority, is
necessary or desirable as a condition of the purchase of Shares hereunder,
this option may not be exercised, in whole or in part, unless and until such
listing, registration, qualification, consent or approval shall have been
effected or obtained free of any conditions not acceptable to the Company. The
Company shall make reasonable efforts to meet the requirements of any such
state or federal law or securities exchange and to obtain any such consent or
approval of any such governmental authority.
10. No Rights of Stockholder. Neither the Director nor any person
------------------------
claiming under or through the Director shall be or have any of the rights or
privileges of a stockholder of the Company in respect of any of the Shares
issuable pursuant to the exercise of this option, unless and until
certificates representing such Shares shall have been issued, recorded on the
records of the Company or its transfer agents or registrars, and delivered to
the Director (or such other person).
11. No Effect on Service. Nothing in this Agreement or the Plan shall
--------------------
interfere with or limit in any way the right of the Company to terminate the
Director's service on the Board at any time, with or without cause.
12. Addresses for Notices. Any notice to be given to the Company
---------------------
under the terms of this Agreement shall be addressed to the Company, in care
of its Secretary, at Shoe Pavilion, Inc., 3200-F Regatta Boulevard, Richmond,
CA 94804, or at such other address as the Company may hereafter designate in
writing. Any notice to be given to the Director shall be addressed to the
Director at the address set forth beneath the Director's signature hereto, or
at such other address as the Director may hereafter designate in writing. Any
such notice shall be deemed to have been duly given if and when enclosed in a
properly sealed envelope, addressed as aforesaid, registered or certified and
deposited, postage and registry fee prepaid, in a United States post office.
Page 2 of 4
<PAGE>
13. Option is Not Transferable. Except as otherwise provided herein,
--------------------------
this option and the rights and privileges conferred hereby shall not be
transferred, assigned, pledged or hypothecated in any way (whether by
operation of law or otherwise) and shall not be subject to sale under
execution, attachment or similar process. Upon any attempt to transfer,
assign, pledge, hypothecate or otherwise dispose of this option, or of any
right or privilege conferred hereby, or upon any attempted sale under any
execution, attachment or similar process, this option and the rights and
privileges conferred hereby immediately shall become null and void.
14. Binding Agreement. Subject to the limitation on the
-----------------
transferability of this option contained herein, this Agreement shall be
binding upon and inure to the benefit of the heirs, legatees, legal
representatives, successors and assigns of the parties hereto.
15. Plan Governs. This Agreement is subject to all of the terms and
------------
provisions of the Plan. In the event of a conflict between one or more
provisions of this Agreement and one or more provisions of the Plan, the
provisions of the Plan shall govern. Capitalized terms and phrases used and
not defined in this Agreement shall have the meaning set forth in the Plan.
16. Board Authority. The Board shall have the power to interpret the
---------------
Plan and this Agreement and to adopt such rules for the administration,
interpretation and application of the Plan as are consistent therewith. All
actions taken and all interpretations and determinations made by the Board in
such connection shall be final and binding upon the Director, the Company and
all other interested persons, and shall be given the maximum deference
permitted by law. No member of the Board shall be personally liable for any
action, determination or interpretation made in good faith with respect to the
Plan or this Agreement.
17. Captions. The captions provided herein are for convenience only
--------
and are not to serve as a basis for interpretation or construction of this
Agreement.
18. Agreement Severable. In the event that any provision in this
-------------------
Agreement shall be held invalid or unenforceable, such provision shall be
severable from, and such invalidity or unenforceability shall not be construed
to have any effect on, the remaining provisions of this Agreement.
19. Modifications to the Agreement. This Agreement constitutes the
------------------------------
entire understanding of the parties on the subjects covered. The Director
expressly warrants that he or she is not executing this Agreement in reliance
on any promises, representations, or inducements other than those contained
herein. Modifications to this Agreement or the Plan can be made only in an
express written contract executed by a duly authorized officer of the Company.
Page 3 of 4
<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed this Agreement, in
duplicate, effective as of the Grant Date.
SHOE PAVILION, INC.
By
______________________________
Title:
____________________________
Director Signature
____________________________
____________________________
Address
____________________________
Social Security Number
Page 4 of 4
<PAGE>
EXHIBIT 10.4
[LOGO OF U.S. BANK APPEARS HERE]
LOAN AGREEMENT
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------
PRINCIPAL LOAN DATE MATURITY LOAN NO. CALL COLLATERAL ACCOUNT OFFICER INITIALS
<S> <C> <C> <C> <C> <C> <C> <C>
$10,000,000.00 10-24-1997 04-30-1999 513-59 38832 365 8069263785 38661
- -----------------------------------------------------------------------------------------------------------
References in the shaded area are for Lender's use only and do not limit the applicability of this document
to any particular loan or item.
- -----------------------------------------------------------------------------------------------------------
</TABLE>
BORROWER: SHOE INN, INC. dba SHOE PAVILION LENDER: U.S BANK NATIONAL
3200 REGATTA BOULEVARD ASSOCIATION
RICHMOND, CA 94804 BELLEVUE METRO CORPORATE
BKG.
10800 NE 8TH ST.
SUITE 1000
BELLEVUE, WA 98004
- --------------------------------------------------------------------------------
THIS LOAN AGREEMENT BETWEEN SHOE INN, INC. dba SHOE PAVILION ("BORROWER") AND
U.S. BANK NATIONAL ASSOCIATION ("LENDER") IS MADE AND EXECUTED ON THE FOLLOWING
TERMS AND CONDITIONS. BORROWER HAS RECEIVED PRIOR COMMERCIAL LOANS FROM LENDER
OR HAS APPLIED TO LENDER FOR A COMMERCIAL LOAN OR LOANS AND OTHER FINANCIAL
ACCOMMODATIONS, INCLUDING THOSE WHICH MAY BE DESCRIBED ON ANY EXHIBIT OR
SCHEDULE ATTACHED TO THIS AGREEMENT. ALL SUCH LOANS AND FINANCIAL
ACCOMMODATIONS, TOGETHER WITH ALL FUTURE LOANS AND FINANCIAL ACCOMMODATIONS FROM
LENDER TO BORROWER, ARE REFERRED TO IN THIS AGREEMENT INDIVIDUALLY AS THE "LOAN"
AND COLLECTIVELY AS THE "LOANS." BORROWER UNDERSTANDS AND AGREES THAT: (a) IN
GRANTING, RENEWING, OR EXTENDING ANY LOAN, LENDER IS RELYING UPON BORROWER'S
REPRESENTATIONS, WARRANTIES, AND AGREEMENTS, AS SET FORTH IN THIS AGREEMENT; (b)
THE GRANTING, RENEWING, OR EXTENDING OF ANY LOAN BY LENDER AT ALL TIMES SHALL BE
SUBJECT TO LENDER'S SOLE JUDGMENT AND DISCRETION; AND (c) ALL SUCH LOANS SHALL
BE AND SHALL REMAIN SUBJECT TO THE FOLLOWING TERMS AND CONDITIONS OF THIS
AGREEMENT.
TERM: This Agreement shall be effective as of OCTOBER 24, 1997, and shall
continue thereafter until all Indebtedness of Borrower to Lender has been
performed in full and the parties terminate this Agreement in writing.
DEFINITIONS. The following words shall have the following meanings when used in
this Agreement. Terms not otherwise defined in this Agreement shall have the
meanings attributed to such terms in the Uniform Commercial Code. All references
to dollar amounts shall mean amounts in lawful money of the United States of
America.
AGREEMENT. The word "Agreement" means this Loan Agreement, as this Loan
Agreement may be amended or modified from time to time, together with all
exhibits and schedules attached to this Loan Agreement from time to time.
ADVANCE. The word "Advance" means a disbursement of Loan funds under this
Agreement.
BORROWER. The word "Borrower" means SHOE INN, INC. dba SHOE PAVILION. The
word "Borrower" also includes, as applicable, all subsidiaries and affiliates
of Borrower as provided below in the paragraph titled "Subsidiaries and
Affiliates."
BORROWING BASE. The words "Borrowing Base" mean, as determined by
Lender from time to time, the lesser of (a)$10,000,000.00 or (b) 50.000% of
the aggregate amount of Eligible Inventory.
BUSINESS DAY. The words "Business Day" mean a day on which commercial banks
are open for business in the State of Washington.
CERCLA. The word "CERCLA" means the Comprehensive Environmental Response,
Compensation, and Liability Act of 1980, as amended.
CASH FLOW. The words "Cash Flow" mean net income after taxes, and exclusive
of extraordinary gains and income, plus depreciation and amortization.
COLLATERAL. The word "Collateral" means and includes without limitation all
property and assets granted as collateral security for a Loan, whether real
or personal property, whether granted directly or indirectly, whether granted
now or in the future, and whether granted in the form of a security interest,
mortgage, deed of trust, assignment, pledge, chattel mortgage, chattel trust,
factor's lien, equipment trust, conditional sale, trust receipt, lien,
charge, lien or title retention contract, lease or consignment intended as a
security device, or any other security or lien interest whatsoever, whether
created by law, contract, or otherwise. The word "Collateral" includes
without limitation all collateral described below in the section titled
"COLLATERAL."
DEBT. The word "Debt" means all of Borrower's liabilities excluding
Subordinated Debt.
ELIGIBLE INVENTORY. The words "Eligible Inventory" mean, at any time, all
of Borrower's Inventory as defined below except:
(a) Inventory which is not owned by Borrower free and clear of all security
interests, liens, encumbrances, and claims of third parties.
(b) Inventory which Lender, in its sole discretion, deems to be obsolete,
unsalable, damaged, defective, or unfit for further processing.
(c) Non-retail inventory.
ERISA. The word "ERISA" means the Employee Retirement Income Security Act of
1974, as amended.
EVENT OF DEFAULT. The words "Event of Default" mean and include without
limitation any of the Events of Default set forth below in the section titled
"EVENTS OF DEFAULT."
EXPIRATION DATE. The words "Expiration Date" mean the date of termination of
Lender's commitment to lend under this Agreement.
GRANTOR. The word "Grantor" means and includes without limitation each and
all of the persons or entities granting a Security Interest in any Collateral
for the Indebtedness, including without limitation all Borrowers granting
such a Security Interest.
GUARANTOR. The word "Guarantor" means and includes without limitation each
and all of the guarantors, sureties, and accommodation parties in connection
with any Indebtedness.
INDEBTEDNESS. The word "Indebtedness" means and includes without limitation
all Loans, together with all other obligations, debts and liabilities of
Borrower to Lender, or any one or more of them, as well as all claims by
Lender against Borrower, or any one or more of them; whether now or hereafter
existing, voluntary or involuntary, due or not due, absolute or contingent,
liquidated or unliquidated; whether Borrower may be liable individually or
jointly with others; whether Borrower may be obligated as a guarantor, surety
or otherwise; whether recovery upon such Indebtedness may be or hereafter may
become barred by any statute of limitations; and whether such Indebtedness
may be or hereafter may become otherwise unenforceable.
INVENTORY. The word "Inventory" means all of Borrower's raw materials, work
in process, finished goods, merchandise, parts and supplies, of every kind
and description, and goods held for sale or lease or furnished under
contracts of service in which Borrower now has or hereafter acquires any
right, whether held by Borrower or others, and all documents of title,
warehouse receipts, bills of lading, and all other documents or every type
covering all or any part of the foregoing. Inventory includes inventory
temporarily out of Borrower's custody of possession and all returns on
Accounts.
LENDER. The word "Lender" means U.S. BANK NATIONAL ASSOCIATION, its
successors and assigns.
LINE OF CREDIT. The words "Line of Credit" mean the credit facility described
in the Section titled "LINE OF CREDIT" below.
LIQUID ASSETS. The words "Liquid Assets" mean Borrower's cash on hand plus
Borrower's readily marketable securities.
LOAN. The word "Loan" or "Loans" means and includes without limitation any
and all commercial loans and financial accommodations from Lender to
Borrower, whether now or hereafter existing, and however evidenced, including
without limitation those loans and financial accommodations described herein
or described on any exhibit or schedule attached to this Agreement from time
to time.
NOTE. The word "Note" means and includes without limitation Borrower's
promissory note or notes, if any, evidencing Borrower's Loan obligations in
favor of Lender, as well as any substitute, replacement or refinancing note
or notes therefor.
PERMITTED LIENS. The words "Permitted Liens" mean: (a) liens and security
interests securing indebtedness owed by Borrower to Lender; (b) liens for
taxes, assessments, or similar charges either not yet due or being contested
in good faith; (c) liens of materialmen, mechanics, warehousemen, or
carriers, or other like liens arising in the ordinary course of business and
securing obligations which are not yet delinquent; (d) purchase money liens
or purchase money security interests upon or in any property acquired
or held by Borrower in the ordinary course of business to secure indebtedness
outstanding on the date of this Agreement or permitted to be incurred under
the paragraph of this Agreement titled "Indebtedness and Liens"; (e) liens
and security interests which, as of the date of this Agreement, have been
disclosed to and approved by the Lender in writing; and (f) those liens and
security interests which in the aggregate constitute an immaterial and
insignificant monetary amount with respect to the net value of Borrower's
assets.
RELATED DOCUMENTS. The words "Related Documents" mean and include without
limitation all promissory notes, credit agreements, loan agreements,
environmental agreements, guaranties, security agreements, mortgages, deeds
of trust, and all other instruments, agreements and
<PAGE>
10-24-1997 LOAN AGREEMENT PAGE 2
LOAN NO 513-59 (Continued)
================================================================================
documents, whether now or hereafter existing, executed in connection with
the Indebtedness.
SECURITY AGREEMENT. The words "Security Agreement" mean and include without
limitation any agreements, promises, covenants, arrangements, understandings
or other agreements, whether created by law, contract, or otherwise,
evidencing, governing, representing, or creating a Security Interest.
SECURITY INTEREST. The words "Security Interest" mean and include without
limitation any type of collateral security, whether in the form of a lien,
charge, mortgage, deed of trust, assignment, pledge, chattel mortgage,
chattel trust, factor's lien, equipment trust, conditional sale, trust
receipt, lien or title retention contract, lease or consignment intended as
a security device, or any other security or lien interest whatsoever,
whether created by law, contract, or otherwise.
SARA. The word "SARA" means the Superfund Amendments and Reauthorization
Act of 1986 as now or hereafter amended.
SUBORDINATED DEBT. The words "Subordinated Debt" mean indebtedness and
liabilities of Borrower which have been subordinated by written agreement to
indebtedness owed by Borrower to Lender in form and substance acceptable to
Lender.
TANGIBLE NET WORTH. The words "Tangible Net Worth" mean Borrower's total
assets excluding all intangible assets (i.e., goodwill, trademarks, patents,
copyrights, organizational expenses, and similar intangible items, but
including leaseholds and leasehold improvements) less total Debt.
WORKING CAPITAL. The words "Working Capital" mean Borrower's current
assets, excluding prepaid expenses, less Borrower's current liabilities.
LINE OF CREDIT. Lender agrees to make Advances to Borrower from time to time
from the date of this Agreement to the Expiration Date, provided the aggregate
amount of such Advances outstanding at any time does not exceed the Borrowing
Base. Within the foregoing limits, Borrower may borrow, partially or wholly
prepay, and reborrow under this Agreement as follows.
CONDITIONS PRECEDENT TO EACH ADVANCE. Lender's obligation to make any
Advance to or for the account of Borrower under this Agreement is subject to
the following conditions precedent, with all documents, instruments,
opinions, reports and other items required under this Agreement to be in
form and substance satisfactory to Lender:
(a) Lender shall have received evidence that this Agreement and all
Related Documents have been duly authorized, executed, and delivered by
Borrower to Lender.
(b) Lender shall have received such opinions of counsel, supplemental
opinions, and documents as Lender may request.
(c) The security interests in the Collateral shall have been duly
authorized, created, and perfected with first lien priority and shall be
in full force and effect.
(d) All guaranties required by Lender for the Line of Credit shall have
been executed by each Guarantor, delivered to Lender, and be in full
force and effect.
(e) Lender, at its option and for its sole benefit, shall have conducted
an audit of Borrower's Inventory, books, records, and operations, and
Lender shall be satisfied as to their condition.
(f) Borrower shall have paid to Lender all fees, costs, and expenses
specified in this Agreement and the Related Documents as are then due and
payable.
(g) There shall not exist at the time of any Advance a condition which
would constitute an Event of Default under this Agreement, and Borrower
shall have delivered to Lender the compliance certificate called for in
the paragraph below titled "Compliance Certificate."
MAKING LOAN ADVANCES. Advances under the Line of Credit may be requested
either orally or in writing by authorized persons. Lender may, but need not,
require that all oral requests be confirmed in writing. Each Advance shall
be conclusively deemed to have been made ar the request of and for the
benefit of Borrower (a) when credited to any deposit account of Borrower
maintained with Lender or (b) when advanced in accordance with the
instructions of an authorized person. Lender, at its option, may set a
cutoff time, after which all requests for Advances will be treated as having
been requested on the next succeeding Business Day. Under no circumstances
shall Lender be required to make any Advance in an amount less than
$10,000,000.00.
MANDATORY LOAN REPAYMENTS. If at any time the aggregate principal amount of
the outstanding Advances shall exceed the applicable Borrowing Base,
Borrower, immediately upon written or oral notice from Lender, shall pay to
Lender an amount equal to the difference between the outstanding principal
balance of the Advances and the Borrowing Base. On the Expiration Date,
Borrower shall pay to Lender in full the aggregate unpaid principal amount
of all Advances then outstanding and all accrued unpaid interest, together
with all applicable fees, costs and charges, if any, not yet paid.
LOAN ACCOUNT. Lender shall maintain on its books a record of account in
which Lender shall make entries for each Advance and such other debits and
credits as shall be appropriate in connection with the credit facility.
Lender shall provide Borrower with periodic statements of Borrower's
account, which statements shall be considered to be correct and conclusively
binding on Borrower unless Borrower notifies Lender to the contrary within
thirty (30) days after Borrower's receipt of any such statement which
Borrower deems to be incorrect.
COLLATERAL. To secure payment of the Line of Credit and performance of all
other Loans, obligations and duties owed by Borrower to Lender, Borrower (and
others, if required) shall grant to Lender Security Interests in such property
and assets as Lender may require (the "Collateral"), including without
limitation Borrower's present and future Inventory. Lender's Security Interests
in the Collateral shall be continuing liens and shall include the proceeds and
products of the Collateral, including without limitation the proceeds of any
insurance. With respect to the Collateral, Borrower agrees and represents and
warrants to Lender:
PERFECTION OF SECURITY INTERESTS. Borrower agrees to execute such financing
statements and to take whatever other actions are requested by Lender to
perfect and continue Lender's Security Interests in the Collateral. Upon
request of Lender, Borrower will deliver to Lender any and all of the
documents evidencing or constituting the Collateral, and Borrower will note
Lender's interest upon any and all chattel paper if not delivered to Lender
for possession by Lender. Contemporaneous with the execution of this
Agreement, Borrower will execute one or more UCC financing statements and
any similar statements as may be required by applicable law, and will file
such financing statements and all such similar statements in the appropriate
location or locations. Borrower hereby appoints Lender as its irrevocable
attorney-in-fact for the purpose of executing any documents necessary to
perfect or to continue any Security Interest. Lender may at any time, and
without further authorization from Borrower, file a carbon, photograph,
facsimile, or other reproduction of any financing statement for use as a
financing statement. Borrower will reimburse Lender for all expenses for the
perfection, termination, and the continuation of the perfection of Lender's
security interest in the Collateral. Borrower promptly will notify Lender of
any change in Borrower's name including any change to the assumed business
names of Borrower. Borrower also promptly will notify Lender of any change
in Borrower's Social Security Number or Employer Identification Number.
Borrower further agrees to notify Lender in writing prior to any change in
address or location of Borrower's principal governance office or should
Borrower merge or consolidate with any other entity.
COLLATERAL RECORDS. Borrower does now, and at all times hereafter shall,
keep correct and accurate records of the Collateral, all of which records
shall be available to Lender or Lender's representative upon demand for
inspection and copying at any reasonable time. With respect to the
Inventory, Borrower agrees to keep and maintain such records as Lender may
require, including without limitation information concerning Eligible
Inventory and records itemizing and describing the kind, type, quality, and
quantity of inventory, Borrower's Inventory costs and selling prices and the
daily withdrawals and additions to inventory. The following is an accurate
and complete list of all locations at which Borrower keeps or maintains
business records concerning Borrower's Inventory: WASHINGTON, NEVADA, AND
CALIFORNIA LOCATIONS.
COLLATERAL SCHEDULES. Concurrently with the execution and delivery of this
Agreement, Borrower shall execute and deliver to Lender a schedule of
Inventory and Eligible Inventory, in form and substance satisfactory to the
Lender. Thereafter Borrower shall execute and deliver to Lender such
supplemental schedules of Eligible Inventory specifying the value thereof,
and such other matters and information relating to Borrower's Inventory as
Lender may request. Supplemental schedules shall be delivered according to
the following schedule: BORROWER AGREES TO SUBMIT TO LENDER ACCOUNTS PAYABLE
AGING WITHIN TWENTY-FIVE (25) DAYS AFTER THE END OF EACH MONTH. BORROWER
AGREES TO UPDATE THE VALUE OF ELIGIBLE INVENTORY MONTHLY, BASED ON LOWER OF
COST OR MARKET, SUBMITTED TO LENDER ON MONTHLY FINANCIALS SUPPORTED BY
ANNUAL AUDITED FINANCIAL STATEMENTS. IN ADDITION, BORROWER SHALL SUBMIT A
BORROWER'S CERTIFICATE WITHIN TWENTY-FIVE (25) DAYS OF MONTH-END.
REPRESENTATIONS AND WARRANTIES CONCERNING INVENTORY. With respect to the
Inventory, Borrower represents and warrants to Lender: (a) All Inventory
represented by Borrower to be Eligible Inventory for purposes of this
Agreement conforms to the requirements of the definition of Eligible
Inventory; (b) All Inventory values listed on schedules delivered to Lender
will be true and correct, subject to immaterial variance; (c) The value of
the Inventory will be determined on a consistent accounting basis; (d)
Except as agreed to the contrary by Lender in writing, all Eligible
Inventory is now and at all times hereafter will be in Borrower's physical
possession and shall not be held by others on consignment, sale on approval,
or sale or return; (e) Except as reflected in the Inventory schedules
delivered to Lender, all Eligible Inventory is now and at all times
hereafter will be of good and merchantable quality, free from defects; (f)
Eligible Inventory is not now and will not at any time hereafter be stored
with a bailee, warehouseman, or similar party without Lender's prior written
consent, and, in such event, Borrower will concurrently at the time of
bailment cause any such bailee, warehouseman, or similar party to issue an
deliver to Lender, in form acceptable to Lender, warehouse receipts in
Lender's name evidencing the storage of Inventory; and (g) Lender, its
assigns, or agents shall have the right at any time and at Borrower's
expense to inspect and examine the Inventory and to check and test the same
as to quality, quantity, value, and condition.
REPRESENTATIONS AND WARRANTIES. Borrower represents and warrants to Lender, as
of the date of this Agreement, as of the date of each
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10-24-1997 LOAN AGREEMENT PAGE 3
LOAN NO 513-59 (Continued)
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disbursement of Loan proceeds, as of the date of any renewal, extension or
modification of any Loan, and at all times any Indebtedness exists:
ORGANIZATION. Borrower is a corporation which is duly organized, validly
existing, and in good standing under the laws of the state of Borrower's
incorporation and is validly existing and in good standing in all states in
which Borrower is doing business. Borrower has the full power and authority
to own its properties and to transact the businesses in which it is presently
engaged or presently proposes to engage. Borrower also is duly qualified as a
foreign corporation and is in good standing in all states in which the
failure to so qualify would have a material adverse effect on
its businesses or financial condition.
AUTHORIZATION. The execution, delivery, and performance of this Agreement and
all Related Documents by Borrower, to the extent to be executed, delivered or
performed by Borrower, have been duly authorized by all necessary action by
Borrower; do not require the consent or approval of any other person,
regulatory or governmental body; and do not conflict with, result in a
violation of, or constitute a default under (a) any provision of its articles
of incorporation or organization, or bylaws, or any agreement or other
instrument binding upon Borrower or (b) any law, governmental regulation,
court decree, or order applicable to Borrower.
FINANCIAL INFORMATION. Each financial statement of Borrower supplied to
Lender truly and completely disclosed Borrower's financial condition as of
the date of the statement, and there has been no material adverse change in
Borrower's financial condition subsequent to the date of the most recent
financial statement supplied to Lender. Borrower has no material contingent
obligations except as disclosed in such financial statements.
LEGAL EFFECT. This Agreement constitutes, and any instrument or agreement
required hereunder to be given by Borrower when delivered will constitute,
legal, valid and binding obligations of Borrower enforceable against Borrower
in accordance with their respective terms.
PROPERTIES. Except for Permitted Liens, Borrower owns and has good title to
all of Borrower's properties free and clear of all Security Interests, and
has not executed any security documents or financing statements relating to
such properties. All of Borrower's properties are titled in Borrower's legal
name, and Borrower has not used, or filed a financing statement under, any
other name for at least the last five (5) years.
HAZARDOUS SUBSTANCES. The terms "hazardous waste," "hazardous substance,"
"disposal," "release," and "threatened release," as used in this Agreement,
shall have the same meanings as set forth in the "CERCLA," "SARA," the
Hazardous Materials Transportation Act, 49 U.S.C. Section 1801, et seq., the
Resource Conservation and Recovery Act, 42 U.S.C. Section 6901, et seq., or
other applicable state of Federal laws, rules, or regulations adopted
pursuant to any of the foregoing. Except as disclosed to and acknowledged by
Lender in writing, Borrower represents and warrants that: (a) During the
period of Borrower's ownership of the properties, there has been no use,
generation, manufacture, storage, treatment, disposal, release or
threatened release of any hazardous waste or substance by any person on,
under, about or from any of the properties, (b) Borrower has no knowledge
of, or reason to believe that there has been (i) any use, generation,
manufacture, storage, treatment, disposal, release, or threatened release of
any hazardous waste or substance on, under, about or from the properties by
any prior owners or occupants of any of the properties, or (ii) any actual
or threatened litigation or claims of any kind by any person relating to
such matters. (c) Neither Borrower nor any tenant, contractor, agent or
other authorized user of any of the properties shall use, generate,
manufacture, store, treat, dispose of, or release any hazardous waste or
substance on, under, about or from any of the properties; and any such
activity shall be conducted in compliance with all applicable federal,
state, and local laws, regulations, and ordinances, including without
limitation those laws, regulations and ordinances described above. Borrower
authorizes Lender and its agents to enter upon the properties to make such
inspections and tests as Lender may deem appropriate to determine compliance
of the properties with this section of the Agreement. Any inspections or
tests made by Lender shall be at Borrower's expense and for Lender's
purposes only and shall not be construed to create any responsibility or
liability on the part of Lender to Borrower or to any other person. The
representations and warranties contained herein are based on Borrower's due
diligence in investigating the properties for hazardous waste and hazardous
substances. Borrower hereby (a) releases and waives any future claims
against Lender for indemnity or contribution in the event Borrower becomes
liable for cleanup or other costs under any such laws, and (b) agrees to
indemnify and hold harmless Lender against any and all claims, losses,
liabilities, damages, penalties, and expenses which Lender may directly or
indirectly sustain or suffer resulting from a breach of this section of the
Agreement or as a consequence of any use, generation, manufacture, storage,
disposal, release or threatened release occurring prior to Borrower's
ownership or interest in the properties, whether or not the same was or
should have been known to Borrower. The provisions of this section of the
Agreement, including the obligation to idemnify, shall survive the payment
of the Indebtedness and the termination or expiration of this Agreement and
shall not be affected by Lender's acquisition of any interest in any of the
properties, whether by foreclosure or otherwise.
LITIGATION AND CLAIMS. No litigation, claim, investigation, administrative
proceeding or similar action (including those for unpaid taxes) against
Borrower is pending or threatened, and no other event has occurred which may
materially adversely affect Borrower's financial condition or properties,
other than litigation, claims, or other events, if any, that have been
disclosed to and acknowledged by Lender in writing.
TAXES. To the best of Borrower's knowledge, all tax returns and reports of
Borrower that are or were required to be filed, have been filed, and all
taxes, assessments and other governmental charges have been paid in full,
except those presently being or to be contested by Borrower in good faith
in the ordinary course of business and for which adequate reserves have been
provided.
LIEN PRIORITY. Unless otherwise previously disclosed to Lender in writing,
Borrower has not entered into or granted any Security Agreements, or
permitted the filing or attachment of any Security Interests on or affecting
any of the Collateral directly or indirectly securing repayment of
Borrower's Loan and Note, that would be prior or that may in any way be
superior to Lender's Security Interests and rights in and to such
Collateral.
BINDING EFFECT. This Agreement, the Note, all Security Agreements directly
or indirectly securing repayment of Borrower's Loan and Note and all of the
Related Documents are binding upon Borrower as well as upon Borrower's
successors, representatives and assigns, and are legally enforceable in
accordance with their respective terms.
COMMERCIAL PURPOSES. Borrower intends to use the Loan proceeds solely for
business or commercial related purposes.
EMPLOYEE BENEFIT PLANS. Each employee benefit plan as to which Borrower may
have any liability complies in all material respects with all applicable
requirements of law and regulations, and (i) no Reportable Event nor
Prohibited Transaction (as defined in ERISA) has occurred with respect to
any such plan, (ii) Borrower has not withdrawn from any such plan or
initiated steps to do so, (iii) no steps have been taken to terminate any
such plan, and (iv) there are no unfunded liabilities other than those
previously disclosed to Lender in writing.
LOCATION OF BORROWER'S OFFICES AND RECORDS. Borrower's place of business, or
Borrower's Chief executive office, if Borrower has more than one place of
business, is located at 3200 REGATTA BOULEVARD, RICHMOND, CA 94804. Unless
Borrower has designated otherwise in writing this location is also the
office or offices where Borrower keeps its records concerning the
Collateral.
INFORMATION. All information heretofore or contemporaneously herewith
furnished by Borrower to Lender for the purposes of or in connection with
this Agreement or any transaction contemplated hereby is, and all
information hereafter furnished by or on behalf of Borrower to Lender will
be, true and accurate in every material respect on the date as of which such
information is dated or certified; and none of such information is or will
be incomplete by omitting to state any material fact necessary to make such
information not misleading.
SURVIVAL OF REPRESENTATIONS AND WARRANTIES. Borrower understands and agrees
that Lender, without independent investigation, is relying upon the above
representations and warranties in extending Loan Advances to Borrower.
Borrower further agrees that the foregoing representations and warranties
shall be continuing in nature and shall remain in full force and effect
until such time as Borrower's Indebtedness shall be paid in full, or until
this Agreement shall be terminated in the manner provided above, whichever
is the last to occur.
AFFIRMATIVE COVENANTS. Borrower covenants and agrees with Lender that, while
this Agreement is in effect, Borrower will:
LITIGATION. Promptly inform Lender in writing of (a) all material adverse
changes in Borrower's financial condition, and (b) all existing and all
threatened litigation, claims, investigations, administrative proceedings or
similar actions affecting Borrower or any Guarantor which could materially
affect the financial condition of Borrower or the financial condition of any
Guarantor.
FINANCIAL RECORDS. Maintain its books and records in accordance with
generally accepted accounting principles, applied on a consistent basis, and
permit Lender to examine and audit Borrower's books and records at all
reasonable times.
FINANCIAL STATEMENTS. Furnish Lender with, as soon as available, but in no
event later than ninety (90) days after the end of each fiscal year,
Borrower's balance sheet and income statement for the year ended, audited
by a certified public accountant satisfactory to Lender, and, as soon as
available, but in no event later than forty-five (45) days after the end of
each fiscal quarter, Borrower's balance sheet and profit and loss statement
for the period ended, prepared and certified as correct to the best
knowledge and belief by Borrower's chief financial officer or other officer
or person acceptable to Lender. All financial reports required to be
provided under this Agreement shall be prepared in accordance with
generally accepted accounting principles, applied on a consistent basis,
and certified by Borrower as being true and correct.
ADDITIONAL INFORMATION. Furnish such additional information and statements,
lists of assets and liabilities, agings of receivables and payables,
inventory schedules, budgets, forecasts, tax returns, and other reports with
respect to Borrower's financial condition and business operations as Lender
may request from time to time.
FINANCIAL COVENANTS AND RATIOS. Comply with the following covenants and
ratios:
TANGIBLE NET WORTH. Maintain a minimum Tangible Net Worth of not less
than $5,500,000.00.
NET WORTH RATIO. Maintain a ratio of Total Liabilities to Tangible Net
Worth of less than 3.00 to 1.00.
WORKING CAPITAL. Maintain Working Capital in excess of $4,000,000.00.
<PAGE>
10-24-1997 LOAN AGREEMENT PAGE 4
LOAN NO 513-59 (CONTINUED)
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The following provisions shall apply for purposes of determining compliance
with the foregoing financial covenants and ratios: BORROWER UNDERSTANDS AND
AGREES THAT ALL COVENANTS AND RATIOS IN THIS LOAN AGREEMENT SHALL BE TESTED
QUARTERLY FOR COMPLIANCE. Except as provided above, all computations made to
determine compliance with the requirements contained in this paragraph shall
be made in accordance with generally accepted accounting principles, applied
on a consistent basis, and certified by Borrower as being true and correct.
INSURANCE. Maintain fire and other risk insurance, public liability
insurance, and such other insurance as Lender may require with respect to
Borrower's properties and operations, in form, amounts, coverages and with
insurance companies reasonably acceptable to Lender. Borrower, upon request
of Lender, will deliver to Lender from time to time the policies or
certificates of insurance in form satisfactory to Lender, including
stipulations that coverages will not be cancelled or diminished without at
least ten (10) days' prior written notice to Lender. Each insurance policy
also shall include an endorsement providing that coverage in favor of Lender
will not be impaired in any way by any act, omission or default of Borrower
or any other person. In connection with all policies covering assets in which
Lender holds or is offered a security interest for the Loans, Borrower will
provided Lender with such loss payable or other endorsements as Lender may
require.
INSURANCE REPORTS. Furnish to Lender, upon request of Lender, reports on each
existing insurance policy showing such information as Lender may reasonably
request, including without limitation the following: (a) the name of the
insurer; (b) the risks insured; (c) the amount of the policy; (d) the
properties insured; (e) the then current property values on the basis of
which insurance has been obtained, and the manner of determining those
values; and (f) the expiration date of the policy. In addition, upon request
of Lender (however not more often than annually), Borrower will have an
independent appraiser satisfactory to Lender determine, as applicable, the
actual cash value or replacement cost of any Collateral. The cost of such
appraisal shall be paid by Borrower.
GUARANTIES. Prior to disbursement of any Loan proceeds, furnish executed
guaranties of the Loans in favor of Lender, executed by the guarantor named
below, on Lender's forms, and in the amount and under the conditions spelled
out in those guaranties.
GUARANTOR AMOUNT
--------- ------
DMITRY BEINUS UNLIMITED
OTHER AGREEMENTS. Comply with all terms and conditions of all other
agreements, whether now or hereafter existing, between Borrower and any other
party and notify Lender immediately in writing of any default in connection
with any other such agreements.
LOAN PROCEEDS. Use all Loan proceeds solely for Borrower's business
operations, unless specifically consented to the contrary by Lender in
writing.
TAXES, CHARGES AND LIENS. Pay and discharge when due all of its indebtedness
and obligations, including without limitation all assessments, taxes,
governmental charges, levies and liens, of every kind and nature, imposed
upon Borrower or its properties, income, or profits, prior to the date on
which penalties would attach, and all lawful claims that, if unpaid, might
become a lien or charge upon any of Borrower's properties, income, or
profits. Provided however, Borrower will not be required to pay and discharge
any such assessment, tax, charge, levy, lien or claim so long as (a) the
legality of the same shall be contested in good faith by appropriate
proceedings, and (b) Borrower shall have established on its books adequate
reserves with respect to such contested assessment, tax, charge, levy, lien,
or claim in accordance with generally accepted accounting practices.
Borrower, upon demand of Lender, will furnish to Lender evidence of payment
of the assessments, taxes, charges, levies, liens and claims and will
authorize the appropriate governmental official to deliver to Lender at any
time a written statement of any assessments, taxes, charges, levies, liens
and claims against Borrower's properties, income, or profits.
PERFORMANCE. Perform and comply with all terms, conditions, and provisions
set forth in this Agreement and in the Related Documents in a timely manner,
and promptly notify Lender if Borrower learns of the occurrence of any event
which constitutes an Event of Default under this Agreement or under any of
the Related Documents.
OPERATIONS. Maintain executive and management personnel with substantially
the same qualifications and experience as the present executive and
management personnel; provide written notice to Lender of any change in
executive and management personnel; conduct its business affairs in a
reasonable and prudent manner and in compliance with all applicable federal,
state and municipal laws, ordinances, rules and regulations respecting its
properties, charters, businesses and operations, including without
limitation, compliance with the Americans With Disabilities Act and with all
minimum funding standards and other requirements of ERISA and other laws
applicable to Borrower's employee benefit plans.
INSPECTION. Permit employees or agents of Lender at any reasonable time to
inspect any and all Collateral for the Loan or Loans and Borrower's other
properties and to examine or audit Borrower's books, accounts, and records
and to make copies and memoranda of Borrower's books, accounts, and records.
If Borrower now or at any time hereafter maintains any records (including
without limitation computer generated records and computer software programs
for the generation of such records) in the possession of a third party,
Borrower, upon request of Lender, shall notify such party to permit Lender
free access to such records at all reasonable times and to provide Lender
with copies of any records it may request, all at Borrower's expense.
COMPLIANCE CERTIFICATE. Unless waived in writing by Lender, provide Lender
MONTHLY and at the time of each disbursement of Loan proceeds with a
certificate executed by Borrower's chief financial officer, or other officer
or person acceptable to Lender, certifying that the representations and
warranties set forth in this Agreement are true and correct as of the date of
the certificate and further certifying that, as of the date of the
certificate, no Event of Default exists under this Agreement.
ENVIRONMENTAL COMPLIANCE AND REPORTS. Borrower shall comply in all respects
with all environmental protection federal, state and local laws, statutes,
regulations and ordinances; not cause or permit to exist, as a result of an
intentional or unintentional action or omission on its part or on the part of
any third party, on property owned and/or occupied by Borrower, any
environmental activity where damage may result to the environment, unless
such environmental activity is pursuant to and in compliance with the
conditions of a permit issued by the appropriate federal, state or local
governmental authorities; shall furnish to Lender promptly and in any event
within thirty (30) days after receipt thereof a copy of any notice, summons,
lien, citation, directive, letter or other communication from any
governmental agency or instrumentality concerning any intentional or
unintentional action or omission on Borrower's part in connection with any
environmental activity whether or not there is damage to the environment
and/or other natural resources.
ADDITIONAL ASSURANCES. Make, execute and deliver to Lender such promissory
notes, mortgages, deeds of trust, security agreements, financing statements,
instruments, documents and other agreements as Lender or its attorneys may
reasonably request to evidence and secure the Loans and to perfect all
Security Interests.
RECOVERY OF ADDITIONAL COSTS. If the imposition of or any change in any law,
rule, regulation or guideline, or the interpretation or application of any
thereof by any court or administrative or governmental authority (including any
request or policy not having the force of law) shall impose, modify or make
applicable any taxes (except U.S. federal, state or local income or franchise
taxes imposed on Lender), reserve requirements, capital adequacy requirements
or other obligations which would (a) increase the cost to Lender for extending
or maintaining the credit facilities to which this Agreement relates, (b) reduce
the amounts payable to Lender under this Agreement or the Related Documents, or
(c) reduce the rate of return on Lender's capital as a consequence of Lender's
obligations with respect to the credit facilities to which this Agreement
relates, then Borrower agrees to pay Lender such additional amounts as will
compensate Lender therefor, within five (5) days after Lender's written demand
for such payment, which demand shall be accompanied by an explanation of such
imposition or charge and a calculation in reasonable detail of the additional
amounts payable by Borrower, which explanation and calculations shall be
conclusive in the absence of manifest error.
NEGATIVE COVENANTS. Borrower covenants and agrees with Lender that while this
Agreement is in effect, Borrower shall not, without the prior written consent of
Lender:
INDEBTEDNESS AND LIENS. (a) Except for trade debt incurred in the normal
course of business and indebtedness to Lender contemplated by this Agreement,
create, incur or assume indebtedness for borrowed money, including capital
leases, (b) except as allowed as a Permitted Lien, sell, transfer, mortgage,
assign, pledge, lease, grant a security interest in, or encumber any of
Borrower's assets, or (c) sell with recourse any of Borrower's accounts,
except to Lender.
CONTINUITY OF OPERATIONS. (a) Engage in any business activities substantially
different than those in which Borrower is presently engaged, (b) cease
operations, liquidate, merge, transfer, acquire or consolidate with any
other entity, change ownership, change its name, dissolve or transfer or sell
Collateral out of the ordinary course of business, (c) pay any dividends on
Borrower's stock (other than dividends payable in its stock), provided,
however that notwithstanding the foregoing, but only so long as no Event of
Default has occurred and is continuing or would result from the payment of
dividends, if Borrower is a "Subchapter S Corporation" (as defined in the
Internal Revenue Code of 1986, as amended), Borrower may pay cash dividends
on its stock to its shareholders from time to time in amounts necessary to
enable the shareholders to pay income taxes and make estimated income tax
payments to satisfy their liabilities under federal and state law which arise
solely from their status as Shareholders of a Subchapter S Corporation
because of their ownership of shares of stock of Borrower, or (d) purchase or
retire any of Borrower's outstanding shares or alter or amend Borrower's
capital structure.
LOANS, ACQUISITIONS AND GUARANTIES. (a) Loan, invest in or advance money or
assets, (b) purchase, create or acquire any interest in any other enterprise
or entity, or (c) incur any obligation as surety or guarantor other than in
the ordinary course of business.
CESSATION OF ADVANCES. If Lender has made any commitment to make any Loan to
Borrower, whether under this Agreement or under any other agreement, Lender
shall have no obligation to make Loan Advances or to disburse Loan proceeds if:
(a) Borrower or any Guarantor is in default under the terms of this Agreement or
any of the Related Documents or any other agreement that Borrower or any
Guarantor has with Lender; (b) Borrower or any Guarantor becomes insolvent,
files a petition in bankruptcy or similar proceedings, or is adjudged a
bankrupt; (c) there occurs a material adverse
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10-24-1997 LOAN AGREEMENT Page 5
Loan No 513-59 (Continued)
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change in Borrower's financial condition, in the financial condition of any
Guarantor, or in the value of any Collateral securing any Loan; (d) any
Guarantor seeks, claims or otherwise attempts to limit, modify or revoke such
Guarantor's guaranty of the Loan or any other loan with Lender; or (e) Lender in
good faith deems itself insecure, even though no Event of Default shall have
occurred.
ACCESS LAWS. Without limiting the generality of any provision of this agreement
requiring Borrower to comply with applicable laws, rules, and regulations,
Borrower agrees that it will at all times comply with applicable laws relating
to disabled access including, but not limited to, all applicable titles of the
Americans with Disabilities Act of 1990.
STATUTE OF FRAUDS DISCLOSURE. ORAL AGREEMENTS OR ORAL COMMITMENTS TO LOAN MONEY,
EXTEND CREDIT, OR TO FORBEAR FROM ENFORCING REPAYMENT OF A DEBT ARE NOT
ENFORCEABLE UNDER WASHINGTON LAW.
RIGHT OF SETOFF. Borrower grants to Lender a contractual possessory security
interest in, and hereby assigns, conveys, delivers, pledges, and transfers to
Lender all Borrower's right, title and interest in and to, Borrower's accounts
with Lender (whether checking, savings, or some other account), including
without limitation all accounts held jointly with someone else and all accounts
Borrower may open in the future, excluding however all IRA and Keogh accounts,
and all trust accounts for which the grant of a security interest would be
prohibited by law. Borrower authorizes Lender, to the extent permitted by
applicable law, to charge or setoff all sums owing on the Indebtedness against
any and all such accounts.
EVENTS OF DEFAULT. Each of the following shall constitute an Event of Default
under this Agreement:
DEFAULT ON INDEBTEDNESS. Failure of Borrower to make any payment when due on
the Loans.
OTHER DEFAULTS. Failure of Borrower or any Grantor to comply with or to
perform when due any other term, obligation, covenant or condition contained
in this Agreement or in any of the Related Documents, or failure of Borrower
to comply with or to perform any other term, obligation, covenant or
condition contained in any other agreement between Lender and Borrower.
DEFAULT IN FAVOR OF THIRD PARTIES. Should Borrower or any Grantor default
under any loan, extension of credit, security agreement, purchase or sales
agreement, or any other agreement, in favor of any other creditor or person
that may materially affect any of Borrower's property or Borrower's or any
Grantor's ability to repay the Loans or perform their respective obligations
under this Agreement or any of the Related Documents.
FALSE STATEMENTS. Any warranty, representation or statement made or furnished
to Lender by or on behalf of Borrower or any Grantor under this Agreement or
the Related Documents is false or misleading in any material respect at the
time made or furnished, or becomes false or misleading at any time
thereafter.
DEFECTIVE COLLATERALIZATION. This Agreement or any of the Related Documents
ceases to be in full force and effect (including failure of any Security
Agreement to create a valid and perfected Security Interest) at any time and
for any reason.
INSOLVENCY. The dissolution or termination of Borrower's existence as a going
business, the insolvency of Borrower, the appointment of a receiver for any
part of Borrower's property, any assignment for the benefit of creditors, any
type of creditor workout, or the commencement of any proceeding under any
bankruptcy or insolvency laws by or against Borrower.
CREDITOR OR FORFEITURE PROCEEDINGS. Commencement of foreclosure of forfeiture
proceedings, whether by judicial proceeding, self-help, repossession or any
other method, by any creditor of Borrower, any creditor of any Grantor
against any collateral securing the Indebtedness, or by any governmental
agency. This includes a garnishment, attachment, or levy on or of any of
Borrower's deposit accounts with Lender.
EVENTS AFFECTING GUARANTOR. Any of the preceding events occurs with respect
to any Guarantor or any of the Indebtedness or any Guarantor dies or becomes
incompetent, or revokes or disputes the validity of, or liability under, any
Guaranty of the Indebtedness.
CHANGE IN OWNERSHIP. Any change in ownership of twenty-five percent (25%) or
more of the common stock of Borrower.
ADVERSE CHANGE. A material adverse change occurs in Borrower's financial
condition, or Lender believes the prospect of payment or performance of the
Indebtedness is impaired.
INSECURITY. Lender, in good faith, deems itself insecure.
EFFECT OF AN EVENT OF DEFAULT. If any Event of Default shall occur, except where
otherwise provided in this Agreement or the Related Documents, all commitments
and obligations of Lender under this Agreement or the Related Documents or any
other agreement immediately will terminate (including any obligation to make
Loan Advances or disbursements), and, at Lender's option, all Indebtedness
immediately will become due and payable, all without notice of any kind to
Borrower, except that in the case of an Event of Default of the type described
in the "Insolvency" subsection above, such acceleration shall be automatic and
not optional. In addition, Lender shall have all the rights and remedies
provided in the Related Documents or available at law, in equity, or otherwise.
Except as may be prohibited by applicable law, all of Lender's rights and
remedies shall be cumulative and may be exercised singularly or concurrently.
Election by Lender to pursue any remedy shall not exclude pursuit of any other
remedy, and an election to make expenditures or to take action to perform an
obligation of Borrower or of any Grantor shall not affect Lender's right to
declare a default and to exercise its rights and remedies.
MISCELLANEOUS PROVISIONS. The following miscellaneous provisions are a part of
this Agreement:
AMENDMENTS. This Agreement, together with any Related Documents, constitutes
the entire understanding and agreement of the parties as to the matters set
forth in this Agreement. No alteration of or amendment to this Agreement
shall be effective unless given in writing and signed by the party or parties
sought to be charged or bound by the alteration or amendment.
APPLICABLE LAW. THIS AGREEMENT HAS BEEN DELIVERED TO LENDER AND ACCEPTED BY
LENDER IN THE STATE OF WASHINGTON. IF THERE IS A LAWSUIT, BORROWER AGREES
UPON LENDER'S REQUEST TO SUBMIT TO THE JURISDICTION OF THE COURTS OF KING
COUNTY, THE STATE OF WASHINGTON. SUBJECT TO THE PROVISIONS ON ARBITRATION,
THIS AGREEMENT SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE LAWS
OF THE STATE OF WASHINGTON.
ARBITRATION. LENDER AND BORROWER AGREE THAT ALL DISPUTES, CLAIMS AND
CONTROVERSIES BETWEEN THEM, WHETHER INDIVIDUAL, JOINT, OR CLASS IN NATURE,
ARISING FROM THIS AGREEMENT OR OTHERWISE, INCLUDING WITHOUT LIMITATION
CONTRACT AND TORT DISPUTES, SHALL BE ARBITRATED PURSUANT TO THE RULES OF THE
AMERICAN ARBITRATION ASSOCIATION, UPON REQUEST OF EITHER PARTY. No act to
take or dispose of any Collateral shall constitute a waiver of this
arbitration agreement or be prohibited by this arbitration agreement. This
includes, without limitation, obtaining injunctive relief or a temporary
restraining order; invoking a power of sale under any deed of trust or
mortgage; obtaining a writ of attachment or imposition of a receiver; or
exercising any rights relating to personal property, including taking or
disposing of such property with or without judicial process pursuant to
Article 9 of the Uniform Commercial Code. Any disputes, claims, or
controversies concerning the lawfulness or reasonableness of any act, or
exercise of any right, concerning any Collateral, including any claim to
rescind, reform, or otherwise modify any agreement relating to the Judgment
upon any award rendered by any arbitrator may be entered in any court having
jurisdiction. Nothing in this Agreement shall preclude any party from seeking
equitable relief from a court of competent jurisdiction. The statute of
limitations, estoppel, waiver, laches, and similar doctrines which would
otherwise be applicable in an action brought by a party shall be applicable
in any arbitration proceeding, and the commencement of an arbitration
proceeding shall be deemed the commencement of an action for these purposes.
The Federal Arbitration Act shall apply to the construction, interpretation,
and enforcement of this arbitration provision.
CAPTION HEADINGS. Caption headings in this Agreement are for convenience
purposes only and are not to be used to interpret or define the provisions of
this Agreement.
CONSENT TO LOAN PARTICIPATION. Borrower agrees and consents to Lender's sale
or transfer, whether now or later, of one or more participation interests in
the Loans to one or more purchasers, whether related or unrelated to Lender.
Lender may provide, without any limitation whatsoever, to any one or more
purchasers, or potential purchasers, any information or knowledge Lender may
have about Borrower or about any other matter relating to the Loan, and
Borrower hereby waives any rights to privacy it may have with respect to such
matters. Borrower additionally waives any and all notices of sale of
participation interests, as well as all notices of any repurchase of such
participation interests. Borrower also agrees that the purchasers of any such
participation interests will be considered as the absolute owners of such
interests in the Loans and will have all the rights granted under the
participation agreement or agreements governing the sale of such
participation interests. Borrower further waives all rights of offset or
counterclaim that it may have now or later against Lender or against any
purchaser of such a participation interest and unconditionally agrees that
either Lender or such purchaser may enforce Borrower's obligation under the
Loans irrespective of the failure or insolvency of any holder of any interest
in the Loans. Borrower further agrees that the purchaser of any such
participation interests may enforce its interests irrespective of any
personal claims or defenses that Borrower may have against Lender.
COSTS AND EXPENSES. Borrower agrees to pay upon demand all of Lender's
expenses, including without limitation attorneys' fees, incurred in
connection with the preparation, execution, enforcement, modification and
collection of this Agreement or in connection with the Loans made pursuant to
this Agreement. Lender may pay someone else to help collect the Loans and to
enforce this Agreement, and Borrower will pay that amount. This includes,
subject to any limits under applicable law, Lender's attorneys' fees and
Lender's legal expenses, whether or not there is a lawsuit, including
attorneys' fees for bankruptcy proceedings (including efforts to modify or
vacate any automatic stay or injunction), appeals, and any anticipated post-
judgment collection services. Borrower also will pay any court costs, in
addition to all other sums provided by law.
NOTICES. All notices required to be given under this Agreement shall be given
in writing, may be sent by telefacsimile (unless otherwise required by law),
and shall be effective when actually delivered or when deposited or when
deposited with a nationally recognized overnight courier or deposited in the
United
<PAGE>
10-24-1997 LOAN AGREEMENT PAGE 6
LOAN NO 513-59 (CONTINUED)
- --------------------------------------------------------------------------------
States mail, first class, postage prepaid, addressed to the party to whom the
notice is to be given at the address shown above. Any party may change its
address for notices under this Agreement by giving formal written notice to
the other parties, specifying that the purpose of the notice is to change the
party's address. To the extent permitted by applicable law, if there is more
than one Borrower, notice to any Borrower will constitute notice to all
Borrowers. For notice purposes, Borrower will keep Lender informed at all
times of Borrower's current address(es).
SEVERABILITY. If a court of competent jurisdiction finds any provision of
this Agreement to be invalid or unenforceable as to any person or
circumstance, such finding shall not render that provision invalid or
unenforceable as to any other persons or circumstances. If feasible, any
such offending provision shall be deemed to be modified to be within the
limits of enforceability or validity; however, if the offending provision
cannot be so modified, it shall be stricken and all other provisions of this
Agreement in all other respects shall remain valid and enforceable.
SUBSIDIARIES AND AFFILIATES OF BORROWER. To the extent the context of any
provisions of this Agreement makes it appropriate, including without
limitation any representation, warranty or covenant, the word "Borrower" as
used herein shall include all subsidiaries and affiliates of Borrower.
Notwithstanding the foregoing however, under no circumstances shall this
Agreement be construed to require Lender to make any Loan or other financial
accommodation to any subsidiary or affiliate of Borrower.
SUCCESSORS AND ASSIGNS. All covenants and agreements contained by or on
behalf of Borrower shall bind its successors and assigns and shall inure to
the benefit of Lender, its successors and assigns. Borrower shall not,
however, have the right to assign its rights under this Agreement or any
interest therein, without the prior written consent of Lender.
SURVIVAL. All warranties, representations, and covenants made by Borrower in
this Agreement or in any certificate or other instrument delivered by
Borrower to Lender under this Agreement shall be considered to have been
relied upon by Lender and will survive the making of the Loan and delivery to
Lender of the Related Documents, regardless of any investigation made by
Lender or on Lender's behalf.
WAIVER. Lender shall not be deemed to have waived any rights under this
Agreement unless such waiver is given in writing and signed by Lender. No
delay or omission on the part of Lender in exercising any right shall
operate as a waiver of such right or any other right. A waiver by Lender of a
provision of this Agreement shall not prejudice or constitute a waiver of
Lender's right otherwise to demand strict compliance with that provision or
any other provision of this Agreement. No prior waiver by Lender, nor any
course of dealing between Lender and Borrower, or between Lender and any
Grantor, shall constitute a waiver of any of Lender's rights or of any
obligations of Borrower or of any Grantor as to any future transactions.
Whenever the consent of Lender is required under this Agreement, the granting
of such consent by Lender in any instance shall not constitute continuing
consent in subsequent instances where such consent is required, and in all
cases such consent may be granted or withheld in the sole discretion of
Lender.
BORROWER ACKNOWLEDGES HAVING READ ALL THE PROVISIONS OF THIS LOAN AGREEMENT, AND
BORROWER AGREES TO ITS TERMS. THIS AGREEMENT IS DATED AS OF OCTOBER 24, 1997.
BORROWER:
SHOE INN, INC. dba SHOE PAVILION
By: /s/ Dmitry Beinus
----------------------------------
DMITRY BEINUS, President
LENDER:
U.S. BANK NATIONAL ASSOCIATION
By: /s/
-----------------------------------
Authorized Officer
================================================================================
<PAGE>
ALTERNATIVE RATE OPTIONS
PROMISSORY NOTE
(PRIME RATE, LIBOR)
$10,000,000.00 Dated as of: October 24, 1997
SHOE INN, INC. dba SHOE PAVILION ("Borrower")
U.S. BANK NATIONAL ASSOCIATION ("Lender")
1. TYPE OF CREDIT. This note is given to evidence Borrower's obligation to
repay all sums which Lender may from time to time advance to Borrower
("Advances") under a:
[ ] single disbursement loan. Amounts loaned to Borrower hereunder will be
disbursed in a single Advance in the amount shown in Section 2.
[X] revolving line of credit. No Advances shall be made which create a
maximum amount outstanding at any one time which exceeds the maximum
amount shown in Section 2. However, Advances hereunder may be borrowed,
repaid and reborrowed, and the aggregate Advances loaned hereunder from
time to time may exceed such maximum amount.
[ ] non-revolving line of credit. Each Advance made from time to time
hereunder shall reduce the maximum amount available shown in Section 2
Advances loaned hereunder which are repaid may not be reborrowed.
2. PRINCIPAL BALANCE. The unpaid principal balance of all Advances
outstanding under this note ("Principle Balance") at one time shall not exceed
$10,000,000.00.
3. PROMISE TO PAY. For value received Borrower promises to pay to Lender
or order at 10800 NE 8th Street, Suite 1000, Bellevue, WA 98004 the Principal
Balance of this note, with interest thereon at the rate(s) specified in Sections
4 and 11 below.
4. INTEREST RATE. The interest rate on the Principal Balance outstanding
may vary from time to time pursuant to the provisions of this note. Subject to
the provisions of this note, Borrower shall have the option from time to time of
choosing to pay interest at the rate or rates and for the applicable periods of
time based on the rate options provided herein; provided, however, that once
--------
Borrower notifies Lender of the rate option chosen in accordance with the
provisions of this note, such notice shall be irrevocable. The rate options are
the Prime Borrowing Rate and the LIBOR Borrowing Rate, each as defined herein.
(a) Definitions. The following terms shall have the following meanings:
"Business Day" means any day other than a Saturday, Sunday, or
other day that commercial banks in Seattle, Washington, Portland, Oregon or New
York City are authorized or required by law to close; provided, however that
when used in connection with a LIBOR Rate, LIBOR Amount or LIBOR Interest Period
such term shall also exclude any day on which dealings in U.S. dollar deposits
are not carried on in the London Interbank market.
"LIBOR Amount" means each principal amount for which Borrower
chooses to have the LIBOR Borrowing Rate apply for any specified LIBOR Interest
Period.
"LIBOR Interest Period" means as to any LIBOR Amount, a period
of one, two, or three months commencing on the date the LIBOR Borrowing Rate
becomes applicable thereto; provided, however, that: (i) the first day of each
--------
LIBOR Interest Period must be a Business Day; (ii) no LIBOR Interest Period
shall be selected which would extend beyond April 30, 1999; (iii) no LIBOR
Interest Period shall extend beyond the date of any principal payment required
under Section 6 of this note, unless the sum of the Prime Rate Amount, plus
LIBOR Amounts with LIBOR Interest Periods ending on or before the scheduled date
of such principal payment, plus principal amounts remaining unborrowed under a
line of credit, equals or exceeds the amount of such principal payment; (iv) any
LIBOR Interest Period which would otherwise expire on a day which is not a
Business Day, shall be extended to the next succeeding Business Day, unless the
result of such extension would be to extend such LIBOR Interest Period into
another calendar month, in which event the LIBOR Interest Period shall end on
the immediately preceding Business Day; and (v) any LIBOR Interest Period that
begins on the last Business Day of a calendar month (or on a day for which there
is no numerically corresponding day in the calendar month at the end of such
LIBOR Interest Period) shall end on the last Business Day of a calendar month.
"LIBOR Rate" means, for any LIBOR Interest Period, the rate per
annum (computed on the basis of a 360-day year and the actual number of days
elapsed and rounded upward to the nearest 1/16 of 1%) established by Lender as
its LIBOR Rate, based on Lender's determination, on the basis of such factors as
Lender deems relevant, of the rate of interest at which U.S. dollar deposits
would be offered to U.S. Bank National Association in the London Interbank
market at approximately 11 a.m. London time on the date which is two Business
Days prior to the first day of such LIBOR Interest Period for delivery on the
first day of such LIBOR Interest Period for the number of months therein;
provided, however, that the LIBOR Rate shall be adjusted to take into account
the maximum reserves required to be maintained for Eurocurrency liabilities by
banks during each such LIBOR Interest Period as specified in Regulation D of the
Board of Governors of the Federal Reserve System or any successor regulation.
"Prime Rate" means the rate of interest which Lender from time
to time establishes as its prime rate and is not, for example, the lowest rate
of interest which Lender collects from any borrower or class of borrowers. When
the Prime Rate is applicable under Section 4(b) or 11(b), the interest rate
hereunder shall be adjusted without notice effective on the day the Prime Rate
changes, but in no event shall the rate of interest be higher than allowed by
law.
"Prime Rate Amount" means any portion of the Principal Balance
bearing interest at the Prime Borrowing Rate.
(b) The Prime Borrowing Rate.
(i) The Prime Borrowing Rate is a per annum rate equal to the Prime
Rate plus 0.25 (see PERFORMANCE PRICING)% per annum.
(ii) Whenever Borrower desires to use the Prime Borrowing Rate
option, Borrower shall give Lender notice orally or in writing in accordance
with Section 15 of the note, which notice shall specify the requested effective
date (which must be a Business Day) and principal amount of the Advance or
increase in the Prime Rate Amount, and whether Borrower is requesting a new
Advance under a line of credit or conversion of a LIBOR Amount to the Prime
Borrowing Rate.
(iii) Subject to Section 11 of this note, interest shall accrue on the
unpaid Principal Balance at the Prime Borrowing Rate unless and except to the
extent that the LIBOR Borrowing Rate is in effect.
(c) The LIBOR Borrowing Rate.
(i) The LIBOR Borrowing Rate is the LIBOR Rate plus 3.00 (see
PERFORMANCE PRICING)% per annum.
(ii) Borrower may obtain LIBOR Borrowing Rate quotes from Lender
between 8:00 a.m. and 10:00 a.m. (Portland, Oregon time) on any Business Day.
Borrower may request an Advance, conversion of any portion of the Prime Rate
Amount to a LIBOR Amount or a new LIBOR Interest Period for an existing LIBOR
Amount, at such rate only by giving Lender notice in accordance with Section
4(c)(iii) before 10:00 a.m. (Portland, Oregon time) on such day.
(iii) Whenever Borrower desires to use the LIBOR Borrowing Rate
option, Borrower shall give Lender irrevocable notice (either in writing or
orally and promptly confirmed in writing) between 8:00 a.m. and 10:00 a.m.
(Portland, Oregon time) two (2) Business Days prior to the desired effective
date of such rate. Any oral notice shall be given by, and any written notice or
confirmation of an oral notice shall be signed by, the person(s) authorized in
<PAGE>
Section 15 of this note, and shall specify the requested effective date of the
rate, LIBOR Interest Period and LIBOR Amount, and whether Borrower requesting a
new Advance at the LIBOR Borrowing Rate under a line of credit, conversion of
all or any portion of the Prime Rate Amount to a LIBOR Amount, or a new LIBOR
Interest Period for an outstanding LIBOR Amount. Notwithstanding any other term
of this note, Borrower may elect the LIBOR Borrowing Rate in the minimum
principal amount of $1,000,000.00 and in multiples of $100,000.00 above such
amount; provided, however, that no more than four separate LIBOR Interest
--------
Periods may be in effect at any one time.
(iv) If at any time the LIBOR Rate is unascertainable or unavailable
to Lender or if LIBOR Rate loans become unlawful, the option to select the LIBOR
Borrowing Rate shall terminate immediately. If the LIBOR Borrowing Rate is then
in effect, (A) it shall terminate automatically with respect to LIBOR Amounts
(i) on the last day of each then applicable LIBOR Interest Period, if Lender may
lawfully continue to maintain such loans, or (ii) immediately if Lender may not
lawfully continue to maintain such loans through such day, and (B) subject to
Section 11, the Prime Borrowing Rate automatically shall become effective as to
such amounts upon such termination.
(v) If at any time after the date hereof (A) any revision in or
adoption of any applicable law, rule, or regulation or in the interpretation and
administration thereof (i) shall subject Lender or its Eurodollar lending
office to any tax, duty, or other charge, or change the basis of taxation of
payments by Lender with respect to any loans bearing interest based on the LIBOR
Rate, or (ii) shall impose or modify any reserve, insurance, special deposit, or
similar requirements against assets of, deposits with or for the account of, or
credit extended by Lender or its Eurodollar lending office, or impose on Lender
or Eurodollar lending office any other condition affecting any such loans, and
(B) the result of any of the foregoing is (i) to increase the cost to Lender of
maximum or maintaining any such loans or (ii) to reduce the amount of any sum
receivable under this note by Lender or its Eurodollar lending office. Borrower
shall pay Lender within 15 days after demand by Lender such additional amount as
will compensate Lender for such increased cost or reduction. The determination
hereunder by Lender of such additional amount shall be conclusive in the absence
of manifest error. If Lender demands compensation under this Section 4(c)(v),
Borrower may upon three (3) Business Days' notice to Lender pay the accrued
interest on all LIBOR Amounts, together with any additional amounts payable
under Section 4(c)(vi). Subject to Section 11, upon Borrower's paying such
accrued interest and additional costs, the Prime Borrowing Rate immediately
shall be effective with respect to the unpaid principal balance of such LIBOR
Amounts.
(vi) Borrower shall pay to Lender, on demand, such amount as Lender
reasonably determines (determined as though 100% of the applicable LIBOR Amount
had been funded in the London Interbank market) is necessary to compensate
Lender for any direct or indirect losses, expenses, liabilities, costs, expenses
or reductions in yield to Lender, whether incurred in connection with
liquidation or re-employment of funds or otherwise, incurred or sustained by
Lender as a result of: (A) Any payment or prepayment of a LIBOR Amount,
termination of the LIBOR Borrowing Rate or conversion of LIBOR Amount to the
Prime Borrowing Rate on a day other than the last day of the applicable LIBOR
Interest Period (including as a result of acceleration of a notice pursuant to
Section 4(c)(v)); or (B) Any failure of Borrower to borrow, continue or prepay
any LIBOR Amount or to convert any portion of the Prime Rate Amount to a LIBOR
Amount after Borrower has given a notice thereof to Lender.
(vii) If Borrower chooses the LIBOR Borrowing Rate, Borrower shall pay
interest based on such rate, plus any other applicable taxes or charges
hereunder, even though Lender may have obtained the funds loaned to Borrower
from sources other than the London Interbank market. Lender's determination of
the LIBOR Borrowing Rate and any such taxes or charges shall be conclusive in
the absence of manifest error.
(viii) Notwithstanding any other term of this note, Borrower may not
select the LIBOR Borrowing Rate if an event of default hereunder has occurred
and is continuing.
(ix) Nothing contained in this note, including without limitation the
determination of any LIBOR Interest Period or Lender's quotation of any LIBOR
Borrowing Rate, shall be construed to prejudice Lender's right, if any, to
decline to make any requested Advance or to require payment on demand.
5. COMPUTATION OF INTEREST. All interest under Section 4 and Section 11
will be computed at the applicable rate based on a 360-day year and applied to
the actual number of days elapsed.
6. PAYMENT SCHEDULE.
(a) Principal. Principal shall be paid:
[ ] on demand.
[ ] on demand, or if no demand, on ____________.
[X] on April 30, 1999.
[ ] subject to Section 8, in installments of
[ ] ____ each, plus accrued interest, beginning on ____ and on
the same day of each ____ thereafter until ____ when the
entire Principal Balance plus interest thereon shall be due
and payable.
[ ] ____ each, including accrued interest, beginning on ____
and on the same day of each ____ thereafter until ____ when
the entire Principal Balance plus interest thereon shall be
due and payable.
[ ]
(b) Interest.
(i) Interest on the Prime Rate Amount shall be paid:
[X] on the last day of November, 1997, and on the same day of
each month thereafter prior to maturity and at maturity.
[ ] at maturity.
[ ] at the time each principal installment is due and at
maturity.
[ ]
(ii) Interest on all LIBOR Amounts shall be paid:
[ ] on the last day of the applicable LIBOR Interest Period,
and if such LIBOR Interest Period is longer than three
months, on the last day of each three month period
occurring during such LIBOR Interest Period, and at
maturity.
[X] on the last day of November, 1997, and on the same day of
each month thereafter prior to maturity and at maturity.
[ ] at maturity.
[ ] at the time each principal installment is due and at
maturity.
[ ]
7. PREPAYMENT.
(a) Prepayments of all or any part of the Prime Rate Amount may be made at
any time without penalty.
(b) Except as otherwise specifically set forth herein, Borrower may not
prepay all or any part of any LIBOR Amount or terminate any LIBOR Borrowing
Rate, except on the last day of the applicable LIBOR Interest Period.
(c) Principal prepayments will not postpone the date of or change the amount
of any regularly scheduled payment. At the time of any principal prepayment, all
accrued interest, fees, costs and expenses shall also be paid.
8. CHANGE IN PAYMENT AMOUNT. Each time the interest rate on this note
changes the holder of this note may, from time to time, in holder's sole
discretion, increase or decrease the amount of each of the installments
remaining unpaid at the time of such change in rate to an amount holder in its
sole discretion deems necessary to continue amortizing the Principal Balance at
the same rate established by the installment amounts specified in Section 6(a),
whether or not a "balloon" payment may also be due upon maturity of this note.
Holder shall notify the undersigned of each such change in writing. Whether or
not the installment amount is increased under this Section 8, Borrower
understands that, as a result of increases in the rate of interest the final
<PAGE>
payment due, whether or not a "balloon" payment, shall include the entire
Principal Balance and interest thereon then outstanding, and may be
substantially more than the installment specified in Section 6.
9. ALTERNATE PAYMENT DATE. Notwithstanding any other term of this note, if
in any month there is no day on which a scheduled payment would otherwise be due
(e.g. February 31), such payment shall be paid on the last banking day of that
month.
10. PAYMENT BY AUTOMATIC DEBIT.
[X] Borrower hereby authorizes Lender to automatically deduct the amount of
all principal and interest payments from account number 0747-235018 at
Bellevue Main branch. If there are insufficient funds in the account to pay
the automatic deduction in full, Lender may allow the account to become
overdrawn, or Lender may reverse the automatic deduction. Borrower will pay all
the fees on the account which result from the automatic deductions, including
any overdraft and non-sufficient funds charges. If for any reason Lender does
not charge the account for a payment, or if an automatic payment is reversed,
the payment is still due according to this note. If the account is a Money
Market Account, the number of withdrawals from that account is limited as set
out in the account agreement. Lender may cancel the automatic deduction at any
time in its discretion.
Provided, however, if no account number is entered above, Borrower does not want
to make payments by automatic debit.
11. DEFAULT
(a) Without prejudice to any right of Lender to require payment on demand or
to decline to make any requested Advance, each of the following shall be an
event of default: (i) Borrower fails to make any payment when due, (ii) Borrower
fails to perform or comply with any term, covenant or obligation in this note or
any agreement related to this note, or in any other agreement or loan Borrower
has with Lender, (iii) Borrower defaults under any loan, extension of credit,
security agreement, purchase or sales agreement, or any other agreement, in
favor of any other creditor or person that may materially affect any of
Borrower's property or Borrower's ability to repay this note or perform
Borrower's obligations under this note or any related documents, (iv) Any
representation or statement made or furnished to Lender by Borrower or on
Borrower's behalf is false or misleading in any material respect either now or
at the time made or furnished, (v) Borrower dies, becomes insolvent, liquidates
or dissolves, a receiver is appointed for any part of Borrower's property,
Borrower makes an assignment for the benefit of creditors, or any proceeding is
commenced either by Borrower or against Borrower under any bankruptcy or
insolvency laws, (vi) Any creditor tries to take any of Borrower's property on
or in which Lender has a lien or security interest. This includes a garnishment
of any of Borrower's accounts with Lender, (vii) Any of the events described in
this default section occurs with respect to any general partner in Borrower or
any guarantor of this note, or any guaranty of Borrower's indebtedness to Lender
ceases to be, or is asserted not to be, in full force and effect, (viii) There
is any material adverse change in the financial condition or management of
Borrower or Lender in good faith deems itself insecure with respect to the
payment or performance of Borrower's obligations to Lender. If this note is
payable on demand, the inclusion of specific events of default shall not
prejudice Lender's right to require payment on demand or to decline to make any
requested Advance.
(b) Without prejudice to any right of Lender to require payment on demand,
upon the occurrence of an event of default, Lender may declare the entire unpaid
Principal Balance on this note and all accrued unpaid interest immediately due
and payable without notice. Upon default, including failure to pay upon final
maturity, Lender, at its option, may also, if permitted under applicable law,
increase the interest rate on this note to a rate equal to the Prime Borrowing
Rate plus 5%. The interest rate will not exceed the maximum rate permitted by
applicable law. In addition, if any payment of principal or interest is 15 or
more days past due, Borrower will be charged a late charge of 5% of the
delinquent payment.
12. EVIDENCE OF PRINCIPAL BALANCE; PAYMENT ON DEMAND. Holder's records
shall, at any time, be conclusive evidence of the unpaid Principal Balance and
interest owing on this note. Notwithstanding any other provisions of this note,
in the event holder makes Advances hereunder which result in an unpaid Principal
Balance on this note which at any time exceeds the maximum amount specified in
Section 2, Borrower agrees that all such Advances, with interest, shall be
payable on demand.
13. LINE OF CREDIT PROVISIONS. If the type of credit indicated in Section 1
is a revolving line of credit or a non-revolving line of credit, Borrower agrees
that Lender is under no obligation and has not committed to make any Advances
hereunder. Each Advance hereunder shall be made at the sole option of Lender.
14. DEMAND NOTE. If this note is payable on demand, Borrower acknowledges
and agrees that (a) Lender is entitled to demand Borrower's immediate payment in
full of all amounts owing hereunder and (b) neither anything to the contrary
contained herein or in any other loan documents (including but not limited to,
provisions relating to defaults, rights of cure, default rate of interest,
installment payments, late charges, periodic review of Borrower's financial
condition, and covenants) nor any act of Lender pursuant to any such provisions
shall limit or impair Lender's right or ability to require Borrower's payment in
full of all amounts owing hereunder immediately upon Lender's demand.
15. REQUESTS FOR ADVANCES.
(a) Any Advance may be made or interest rate option selected upon the
request of Borrower, (if an individual), any of the undersigned (if Borrower
consists of more than one individual), any person or persons authorized in
subsection (b) of this Section 15, and any person or persons otherwise
authorized to execute and deliver promissory notes to Lender on behalf of
Borrower.
(b) Borrower hereby authorizes any one of the following individuals to
request Advances and to select interest rate options: Dmitry Beinus unless
Lender is otherwise instructed in writing.
(c) All Advances shall be disbursed by deposit directly to Borrower's
account number 0747-235018 at Bellevue Main branch of Lender, or by cashier's
check issued to Borrower.
(d) Borrower agrees that Lender shall have no obligation to verify the
identity of any person making any request pursuant to this Section 15, and
Borrower assumes all risks of the validity and authorization of such requests.
In consideration of Lender agreeing, at its sole discretion, to make Advances
upon such requests, Borrower promises to pay holder, in accordance with the
provisions of this note, the Principal Balance together with interest thereon
and other sums due hereunder, although any Advances may have been requested by a
person or persons not authorized to do so.
16. PERIODIC REVIEW. Lender will review Borrower's credit accommodations
periodically. At the time of the review, Borrower will furnish Lender with any
additional information regarding Borrower's financial condition and business
operations that Lender requests. This information may include but is not limited
to, financial statements, tax returns, lists of assets and liabilities, agings
of receivables and payables, inventory schedules, budgets and forecasts. If upon
review, Lender, in its sole discretion, determines that there has been a
material adverse change in Borrower's financial condition, Borrower will be in
default. Upon default, Lender shall have all rights specified herein.
17. NOTICES. Any notice hereunder may be given by ordinary mail, postage
paid and addressed to Borrower at the last known address of Borrower as shown on
holder's records. If Borrower consists of more than one person, notification of
any of said persons shall be complete notification of all.
18. ATTORNEY FEES. Whether or not litigation or arbitration is commenced,
Borrower promises to pay all costs of collecting overdue amounts. Without
limiting the foregoing, in the event that holder consults an attorney regarding
the enforcement of any of its rights under this note or any document securing
the same, or if this note is placed in the hands of an attorney for collection
or if suit or litigation is brought to enforce this note or any document
securing the same, Borrower promises to pay all costs thereof including such
additional sums as the court or arbitrator(s) may adjudge reasonable as attorney
fees, including without limitation, costs and attorney fees incurred in any
appellate court, in any proceeding under the bankruptcy code, or in any
receivership and post-judgment attorney fees incurred in enforcing any judgment.
19. WAIVERS; CONSENT. Each party hereto, whether maker, co-maker, guarantor
or otherwise, waives diligence, demand, presentment for payment, notice of
non-payment, protest and notice of protest and waives all defenses based on
suretyship or impairment of collateral. Without notice to Borrower and without
diminishing or affecting Lender's rights or Borrower's obligations hereunder,
Lender may deal in any manner with any person who at any time is liable for, or
provides any real or personal property collateral for, any indebtedness of
Borrower to Lender, including the indebtedness evidenced by this note. Without
limiting the foregoing, Lender may, in its sole discretion: (a) make secured or
unsecured loans to Borrower and agree to any number of waivers, modifications,
extensions and renewals of any length of such loans, including the loan
evidenced by this note; (b) impair, release (with or without substitution of new
collateral), fail to perfect a security interest in, fail to preserve the value
of, fail to dispose of in accordance with applicable law, any collateral
provided by any person; (c) sue, fail to sue, agree not to sue, release, and
settle or compromise with any person.
<PAGE>
20. JOINT AND SEVERAL LIABILITY. All undertakings of the undersigned
Borrowers are joint and several and are binding upon any marital community of
which any of the undersigned are members. Holder's rights and remedies under
this note shall be cumulative.
21. SEVERABILITY. If any term or provision of this note is declared by a
court of competent jurisdiction to be illegal, invalid or unenforceable for any
reason whatsoever, such illegality, invalidity or unenforceability shall not
affect the balance of the terms and provisions hereof, which terms and
provisions shall remain binding and enforceable, and this note shall be
construed as if such illegal, invalid or unenforceable provision had not been
contained herein.
22. ARBITRATION.
(a) Either Lender or Borrower may require that all disputes, claims,
counterclaims and defenses, including those based on or arising from any alleged
tort ("Claims") relating in any way to this note or any transaction of which
this note is a part (the "Loan"), be settled by binding arbitration in
accordance with the Commercial Arbitration Rules of the American Arbitration
Association and Title 9 of the U.S. Code. All Claims will be subject to the
statutes of limitation applicable if they were litigated. This provision is void
if the Loan, at the time of the proposed submission to arbitration, is secured
by real property located outside of Oregon or Washington, or if the effect of
the arbitration procedure (as opposed to any Claims of Borrower) would be to
materially impair Lender's ability to realize on any collateral securing the
Loan.
(b) If arbitration occurs and each party's Claim is less than $100,000, one
neutral arbitrator will decide all issues. If any party's Claim is $100,000 or
more, three neutral arbitrators will decide all issues. All arbitrators will be
active Washington State Bar members in good standing. All arbitration hearings
will be held in Seattle, Washington. In addition to all other powers, the
arbitrator(s) shall have the exclusive right to determine all issues of
arbitrability. Judgment on any arbitration award may be entered in any court
with jurisdiction.
(c) If either party institutes any judicial proceeding relating to the Loan,
such action shall not be a waiver of the right to submit any Claim to
arbitration. In addition, each has the right before, during and after any
arbitration to exercise any number of the following remedies, in any order or
concurrently: (i) setoff; (ii) self-help repossession; (iii) judicial or
non-judicial foreclosure against real or personal property collateral; and (iv)
provisional remedies, including injunction, appointment of receiver, attachment,
claim and delivery and replevin.
23. GOVERNING LAW. This note shall be governed by and construed and
enforced in accordance with the laws of the State of Washington without regard
to conflicts of law principles; provided, however, that to the extent that
--------
Lender has greater rights or remedies under Federal law, this provision shall
not be deemed to deprive Lender of such rights and remedies as may be available
under Federal law.
24. DISCLOSURE.
Oral agreements or oral commitments to loan money, extend credit, or to forbear
- -------------------------------------------------------------------------------
from enforcing repayment of a debt are not enforceable under Washington law.
- ---------------------------------------------------------------------------
EACH OF THE UNDERSIGNED HEREBY ACKNOWLEDGES RECEIPT OF A COMPLETED COPY OF THIS
DOCUMENT.
26. PERFORMANCE PRICING. The interest rate will be adjusted based on the
advance rate against inventory on Borrower's most recent Borrower's Certificate
submitted to Lender. If Advance Rate is 50.00%, a rate of Prime plus 0.25%
and/or LIBOR plus 3.00%; if Advance Rate is 45.00%, a rate of Prime even and/or
LIBOR plus 2.75%; if Advance Rate of 40.00%, a rate of Prime even and/or LIBOR
plus 2.50%; if Advance Rate of 35.00%, a rate of Prime even and/or LIBOR 2.00%.
SHOE INN, INC. dba SHOE PAVILION
Borrower Name (Corporation, Partnership or other Entity)
/s/ DMITRY BEINUS
- -------------------------------
By: DMITRY BEINUS, PRESIDENT
- -------------------------------------------------------------------------------
For valuable consideration, Lender agrees to the terms of the arbitration
provision set forth in this note.
Lender Name: U.S. Bank National Association
By: /s/ Steven L. Haynes
---------------------------------------
Title: Sr. Vice President
------------------------------------
Date: 10/24/97
------------------------------------
<PAGE>
EXHIBIT 10.5
S CORPORATION TERMINATION AND TAX ALLOCATION
AGREEMENT
February ___, 1998
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<C> <S> <C>
ARTICLE I THE TERMINATION: S TERMINATION YEAR............................1
1.1 Termination of S Status.........................................1
1.2 Effective Date..................................................1
1.3 S Termination Year..............................................2
1.4 S Short Year....................................................2
1.5 C Short Year....................................................2
ARTICLE II ALLOCATION OF INCOME............................................2
2.1 Allocation Election.............................................2
ARTICLE III TAXES...........................................................2
3.1 Liability of Stockholder........................................2
ARTICLE IV DISTRIBUTION....................................................2
4.1 Distribution to Stockholder.....................................2
4.2 Subsequent Adjustment to S Corporation Income...................3
ARTICLE V MISCELLANEOUS...................................................3
5.1 Counterparts....................................................3
5.2 Construction of Terms...........................................3
5.3 Governing Law...................................................3
5.4 Amendment and Modification......................................3
5.5 Assignment......................................................4
5.6 Interpretation..................................................4
5.7 Severability....................................................4
5.8 Entire Agreement................................................4
</TABLE>
i
<PAGE>
S CORPORATION TERMINATION AND TAX ALLOCATION
AGREEMENT
This S CORPORATION TERMINATION AND TAX ALLOCATION AGREEMENT (the
"Agreement") is made this __ day of February, 1998, between Shoe Inn, Inc., a
Washington corporation (the "Company") and Dmitry Beinus (the Company and Dmitry
Beinus are hereinafter referred to individually as a "party" and collectively as
the "parties").
WHEREAS, Shoe Pavilion, Inc., a Delaware corporation ("Shoe Pavilion")
was formed in contemplation of a public offering of its stock (the "Public
Offering");
WHEREAS, in connection with the Public Offering, Dmitry Beinus (the
"Stockholder") will exchange all of his common stock in the Company for common
stock of Shoe Pavilion (the "Exchange") pursuant to Section 351 of the Internal
Revenue Code of 1986, as amended (the "Code");
WHEREAS, prior to the Exchange the Company will distribute Seven
Million Eight Hundred Thousand Dollars ($7,800,000) to the Stockholder;
WHEREAS, the Company and the Stockholder have entered into this
Agreement as a condition to the foregoing distribution and the contemplated
Exchange and Public Offering;
WHEREAS, from its incorporation through July 31, 1988 the Company was
a C corporation for federal income tax purposes, and the Company became an S
corporation for federal income tax purposes, effective August 1, 1988, and will
continue to be an S corporation until the Termination Date (as hereinafter
defined), upon which it will again be a C corporation; and
WHEREAS, the Stockholder has been the only shareholder of the Company
from the time it became an S corporation.
NOW, THEREFORE, the parties agree as follows:
ARTICLE I
THE TERMINATION: S TERMINATION YEAR
-----------------------------------
1.1 Termination of S Status. The parties acknowledge and agree that
-----------------------
the Exchange will terminate the Company's status as an S corporation under
Section 1362(d)(2) of the Code. The Company will notify the Internal Revenue
Service ("IRS") of the termination by attaching a statement to its tax return in
accordance with Treasury Regulations Section 1.1362-2(b)(1).
1.2 Effective Date T. Pursuant to Section 1362(d)(2)(B) of the Code,
----------------
the termination of the Company's S corporation status shall be effective on the
date of the Exchange (the "Termination Date").
<PAGE>
1.3 S Termination Year. "S Termination Year" means the taxable year in
------------------
which the S corporation status of the Company is terminated.
1.4 S Short Year. "S Short Year" means that portion of the Company's S
------------
Termination Year ending on the day immediately preceding the Termination Date.
1.5 C Short Year. "C Short Year" means that portion of the Company's S
------------
Termination Year beginning on the Termination Date and ending on the last day of
the calendar year.
ARTICLE II
ALLOCATION OF INCOME
--------------------
2.1 Allocation Election. The Company shall elect to allocate tax items
-------------------
to its S Short Year and C Short Year pursuant to the normal tax accounting
method (rather than the pro rata allocation method) contained in Section
1362(e)(3) of the Code. The Stockholder shall provide to the Company the
necessary consents in order for the Company to make the normal tax accounting
method election.
ARTICLE III
TAXES
-----
3.1 Liability of Stockholder. The Stockholder (i) has duly included,
------------------------
or will duly include, in his own federal, state and local income tax returns all
items of income, gain, loss, deduction, or credit of the Company that were
required to be included in his federal, state and local income tax returns with
respect to the period in which the Company reported its income as an S
corporation and (ii) has paid, or will pay, any and all taxes required to be
paid by him on such income. The Stockholder shall pay or reimburse the Company
for any and all federal, state or local corporate income taxes the Company is
required to pay as a result of the Company's failure to qualify as an S
corporation with respect to tax returns in which the Company reported its income
as an S corporation. Any payments obligated to be made pursuant to this Section
3.1 shall be due and payable within ten (10) business days of the Company's
request.
ARTICLE IV
DISTRIBUTION
------------
4.1 Distribution to Stockholder. Prior to the Exchange, the Company
---------------------------
shall distribute SEVEN MILLION EIGHT HUNDERED THOUSAND DOLLARS ($7,800,000) to
the Stockholder; provided, however that any such distribution shall be subject
-------- -------
to the limitations set forth in Section 23B.06.400 of the Washington Business
Corporation Act and any other similar legal limitations. Instead of the Company
distributing cash to the Stockholder the Company may distribute its promissory
note (the "Note") made payable to the Stockholder with a stated principal amount
equal to the distribution, and the Note shall be due and payable on or before
thirty (30) days after the date of the distribution. The Note shall pay _______
percent (__%) interest on the outstanding principal balance, shall be executed
and delivered by the
2
<PAGE>
Company on the date of the distribution and shall be reflected on the Company's
books and records as a current obligation of the Company. In addition, the
Company shall appropriately reduce the Stockholder's equity account by the
stated principal amount of the Note. The parties shall treat the distribution of
the Note, if any, for all purposes as a current distribution of property thereby
creating a debtor/creditor relationship between the Company and the Stockholder.
4.2 Subsequent Adjustment to S Corporation Income. If items of income,
---------------------------------------------
gain, loss, deduction, or credit of the Company are adjusted (by audit or
otherwise) with respect to any tax return in which the Company reported its
income as an S corporation, then an appropriate payment described in (a) or (b)
of this Section 4.2 shall be made. Any payments obligated to be made pursuant to
this Section 4.2 shall be due and payable within ten (10) business days of the
applicable parties' request.
(a) If the adjustment has the effect of increasing the S corporation
income of the Company subject to taxation by the Stockholder, then the
Company shall pay to the Stockholder an amount of money equal to all
federal, state or local income taxes (plus interest and penalties) paid or
required to be paid by the Stockholder as a result of such adjustment,
increased as necessary to take into account the tax consequences to the
Stockholder from such payment.
(b) If the adjustment has the effect of decreasing the S corporation
income of the Company subject to taxation by the Stockholder, then the
Stockholder shall pay to the Company an amount of money equal to all
refunds of federal, state or local income taxes (including interest
received thereon) received by (or credited to) the Stockholder as a result
of such decrease, net of any taxes imposed upon the Stockholder by reason
of the receipt of such refund or credit.
ARTICLE V
MISCELLANEOUS
-------------
5.1 Counterparts. This Agreement may be executed in several
------------
counterparts, each of which shall be deemed an original, but all of which
counterparts collectively shall constitute an instrument representing the
Agreement between the parties hereto.
5.2 Construction of Terms. Nothing herein expressed or implied is
---------------------
intended, or shall be construed, to confer upon or give any person, firm or
corporation, other than the parties hereto or their respective successors and
assigns, any rights or remedies under or by reason of this Agreement.
5.3 Governing Law. This Agreement and the legal relations between the
-------------
parties hereto shall be governed by and construed in accordance with the
substantive laws of the State of Delaware without regard to Delaware choice of
law rules.
5.4 Amendment and Modification. This Agreement may be amended,
--------------------------
modified or supplemented only by a written agreement executed by the parties at
any time prior to the Termination Date with respect to any of the terms
contained herein.
3
<PAGE>
5.5 Assignment. This Agreement and all of the provisions hereof shall
----------
be binding upon and inure to the benefit of the parties hereto and their
respective successors and permitted assigns, but neither this Agreement nor any
of the rights, interests or obligations hereunder shall be assigned by any of
the parties hereto without the prior written consent of the other parties, nor
is this Agreement intended to confer upon any other person except the parties
any rights or remedies hereunder.
5.6 Interpretation. The title, article and section headings contained
--------------
in this Agreement are solely for the purpose of reference, are not part of the
agreement of the parties and shall not in any way affect the meaning or
interpretation of this Agreement.
5.7 Severability. In the event that any one or more of the provisions
------------
of this Agreement shall be held to be illegal, invalid or unenforceable in any
respect, the same shall not in any respect affect the validity, legality or
enforceability of the remainder of this Agreement, and the parties shall use
their best efforts to replace such illegal, invalid or unenforceable provisions
with an enforceable provision approximating, to the extent possible, the
original intent of the parties.
5.8 Entire Agreement. This Agreement embodies the entire agreement and
----------------
understanding of the parties hereto in respect of the subject matter contained
herein. There are no representations, promises, warranties, covenants, or
undertakings, other than those expressly set forth or referred to herein. This
Agreement supersedes all prior agreements and the understandings between the
parties with respect to such subject matter.
IN WITNESS WHEREOF, the parties have executed this Agreement on the
date set forth above.
SHOE INN, INC.
By:__________________________________
Name: Dmitry Beinus
Title: Chairman, President and Chief
Executive Officer
STOCKHOLDER:
------------------------------------
Dmitry Beinus
4
