<PAGE>
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
_________________
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended July 3, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from __________ to __________
Commission File Number 0-23669
SHOE PAVILION, INC.
(Exact name of Registrant as Specified in its Charter)
<TABLE>
<S> <C>
Delaware 94-3289691
(State or Other Jurisdiction of Incorporation (IRS Employer
or Organization) Identification Number)
</TABLE>
3200-F Regatta Boulevard, Richmond, California 94804
(Address of principal executive offices) (Zip Code)
(510) 970-9775
(Registrant's telephone number, including area code)
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [ X ]. No [ ].
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Common Stock outstanding as of August 5, 1999 was 6,800,000 shares
<PAGE>
FORWARD-LOOKING STATEMENTS
This Quarterly Report on Form 10-Q contains certain "forward-looking"
statements within the meaning of the Private Securities Litigation Reform Act of
1995 which provides a "safe harbor" for these types of statements. These
forward-looking statements are subject to risks and uncertainties that could
cause the Company's actual results to differ materially from management's
current expectations. These factors include, without limitation, expansion into
a new geographic region, competitive pressures in the footwear industry, changes
in the level of consumer spending on or preferences in footwear merchandise, the
Company's ability to purchase attractive name brand merchandise at financially
reasonable discounts and the availability of desirable store locations as well
as management's ability to negotiate acceptable lease terms and open new stores
in a timely manner. Other risk factors are detailed in the Company's filings
with the Securities and Exchange Commission. The Company assumes no obligation
to update forward-looking statements.
SHOE PAVILION, INC.
INDEX TO FORM 10-Q
PART I
FINANCIAL INFORMATION
Item 1 - Condensed Consolidated Financial Statements (Unaudited) Page
----
Condensed Consolidated Balance Sheets........................... 3
Condensed Consolidated Statements of Income..................... 4
Condensed Consolidated Statements of Cash Flows................. 5
Notes to Condensed Consolidated Financial Statements............ 6
Item 2 - Management's Discussion and Analysis of Financial
Condition and Results of Operations............................. 7-9
Item 3 - Quantitative and Qualitative Disclosures About Market Risk...... 9
PART II
OTHER INFORMATION
Item 6 - Exhibits And Reports on Form 8-K................................ 10
2
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PART I
FINANCIAL INFORMATION
Item 1. Condensed Consolidated Financial Statements.
The following financial statements and related financial information are
filed as part of this report:
Shoe Pavilion, Inc.
Condensed Consolidated Balance Sheets
(Unaudited)
<TABLE>
<CAPTION>
(In thousands, except share data) July 3 January 2 June 30
1999 1999 1998
<S> <C> <C> <C>
ASSETS
Current assets
Cash $ 902 $ 1,922 $ 323
Inventories 30,501 26,892 24,888
Prepaid expenses and other 650 257 298
------- ------- -------
Total current assets 32,053 29,071 25,509
Property and equipment, net 4,631 3,835 2,382
Other assets 646 628 573
------- ------- -------
Total assets $37,330 $33,534 $28,464
======= ======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Accounts payable $ 8,927 $ 5,967 $ 8,284
Accrued expenses 514 946 602
Line of credit 8,000 8,407 3,200
Current portion of long-term obligations 13 12 21
------- ------- -------
Total current liabilities 17,454 15,332 12,107
Deferred rent 1,394 1,098 942
Long-term obligations, less current portion 68 75 71
Stockholders' equity
Common stock- $.001 par value: 15,000,000 shares authorized;
issued; 6,800,000 7 7 7
Preferred stock- $.001 par value; 1,000,000 shares authorized;
no shares issued or outstanding - - -
Additional paid-in capital 13,968 13,968 13,968
Retained earnings 4,439 3,054 1,369
------- ------- -------
Total stockholders' equity 18,414 17,029 15,344
------- ------- -------
Total liabilities and stockholders' equity $37,330 $33,534 $28,464
======= ======= =======
</TABLE>
See notes to condensed consolidated financial statements.
3
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Shoe Pavilion, Inc.
Condensed Consolidated Statements of Income
(Unaudited)
(In thousands, except per share and operating data)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
July 3 June 30 July 3 June 30
1999 1998 1999 1998
<S> <C> <C> <C> <C>
Net sales $17,190 $13,386 $31,443 $24,837
Cost of sales and related occupancy expenses 11,167 8,591 20,763 16,232
------- ------- ------- -------
Gross profit 6,023 4,795 10,680 8,605
Selling, general and administrative expenses 4,520 3,628 8,138 6,636
------- ------- ------- -------
Income from operations 1,503 1,167 2,542 1,969
Interest and other, net 137 52 271 169
------- ------- ------- -------
Income before taxes 1,366 1,115 2,271 1,800
Income tax provision 524 429 886 92
------- ------- ------- -------
Net Income $ 842 $ 686 $ 1,385 $ 1,708
======= ======= ======= =======
Earnings per share:
Basic $ 0.12 $ 0.10 $ 0.20 $ 0.28
Diluted $ 0.12 $ 0.10 $ 0.20 $ 0.28
Weighted average shares outstanding:
Basic 6,800 6,800 6,800 6,114
Diluted 6,800 6,845 6,802 6,142
PRO FORMA
Historical income before taxes on income $1,800
Pro forma provision for income taxes 687
------
Pro forma net income $1,113
======
Pro forma earnings per share:
Basic $ 0.17
Diluted $ 0.17
Pro forma weighted average shares outstanding:
Basic 6,493
Diluted 6,521
Stores Open at end of period 76 58
</TABLE>
See notes to condensed consolidated financial statements.
4
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Shoe Pavilion, Inc.
Condensed Consolidated Statements of Cash Flows
(Unaudited)
<TABLE>
<CAPTION>
(In thousands)
Six Months Ended
July 3 June 30
1999 1998
<S> <C> <C>
Operating Activities:
Net income $1,385 $1,708
Adjustments to reconcile net income to net cash
used by operating activities
Depreciation and amortization 549 362
Deferred taxes (23) (485)
Cash provided (used) by changes in:
Inventories (3,609) (5,093)
Prepaid expenses and other current assets (393) (225)
Accounts payable 2,960 2,363
Accrued expenses (432) (241)
Other assets 5 220
Deferred rent 296 46
------ ------
Net cash provided (used) by operating activities 738 (1,345)
------ ------
Investing Activity-
Purchase of property and equipment, net (1,345) (669)
------ ------
Financing Activities:
Net proceeds from initial public offering - 14,108
Payments on line of credit (407) (4,187)
Principal payments on capital leases (6) (179)
Distributions paid to stockholder - (7,800)
------ ------
Net cash provided (used) by financing activities (413) 1,942
------ ------
NET DECREASE IN CASH (1,020) (72)
CASH, BEGINNING OF PERIOD 1,922 395
------ ------
CASH, END OF PERIOD $ 902 $ 323
====== ======
</TABLE>
See notes to condensed consolidated financial statements.
5
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Notes to Condensed Consolidated Financial Statements
1. Basis of Presentation
General - The accompanying unaudited condensed consolidated financial statements
have been prepared from the records of the Company without audit and, in the
opinion of management, include all adjustments necessary to present fairly the
Company's financial position at July 3, 1999 and June 30, 1998 and the interim
results of operations and cash flows for the three and six months then ended.
The balance sheet as of January 2, 1999 presented herein, has been derived from
the audited financial statements of the Company as of January 2, 1999.
Accounting policies followed by the Company are described in Note 2 to the
audited consolidated financial statements for the year ended January 2, 1999.
Certain information and footnote disclosures normally included in financial
statements prepared in accordance with generally accepted accounting principles
have been condensed or omitted for purposes of the condensed consolidated
interim financial statements. The condensed consolidated financial statements
should be read in conjunction with the audited consolidated financial
statements, including the notes thereto, included in the Company's annual report
on Form 10-K for the year ended January 2, 1999.
The results of operations for the three and six-month periods presented herein
are not necessarily indicative of the results to be expected for the full year.
Public Offering - On February 27, 1998 the Company sold 2,300,000 shares of its
common stock for net proceeds of $14,107,651. In connection with the offering,
the Company terminated its status as an S corporation and recorded a deferred
tax benefit of $485,000.
Comprehensive Income and net income are the same.
2. Pro Forma Information
The objective of the pro forma information is to show what the significant
effects on the historical information might have been had the Company not been
treated as an S Corporation for tax purposes prior to the February 23, 1998, the
effective date of the Company's initial public offering.
Income Taxes - The pro forma information presented on the condensed consolidated
statements of income reflects a provision for income taxes at an effective rate
of 38.5% for the six months ended June 30, 1998.
Pro Forma Earnings Per Share - Pro forma basic earnings per share is based on
the weighted average number of shares of common stock outstanding during the
period plus the estimated number of shares offered by the Company (1,271,650
shares) which were necessary to fund the $7,800,000 distribution paid to the
Company's stockholder upon termination of the Company's status as an S
Corporation. Pro forma diluted earnings per share is calculated using the
number of shares used in the basic calculation plus the dilutive effect of stock
options outstanding during the period.
6
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Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations.
Overview
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. The Company operated 76 retail stores in California,
Washington and Oregon as of July 3, 1999 compared to 58 stores as of June 30,
1998.
Results of Operations
Net sales increased 28.4% to $17.2 million for the second quarter ended July
3, 1999 from $13.4 million for the second quarter of 1998. Net sales for the six
months ended July 3, 1999 were $31.4 million, a 26.6% increase from sales of
$24.8 million for the six months ended June 30, 1998. This increase in net sales
was attributable to a 1.1% increase in comparable store sales for the three-
month period ended July 3, 1999 and relatively flat comparable store sales for
the six month period ended July 3, 1999. New stores sales contributed $4.7 and
$7.8 million for the three and six-month periods ended July 3, 1999,
respectively.
Gross profit increased 25.6% to $6.0 million for the second quarter ended July
3, 1999 from $4.8 million for the second quarter of 1998, but decreased as a
percentage of net sales to 35.0% from 35.8% for the comparable period in 1998.
Gross profit for the six months ended July 3, 1999 increased 24.1% to $10.7
million from $8.6 million for the six months ended June 30, 1998, but decreased
as a percentage of net sales to 34.0% from 34.6% for the comparable period in
1998. The decrease in gross profit as a percentage of net sales for the three
and six month periods ended July 3, 1999 was primarily attributable to higher
fixed occupancy costs as a percentage of net sales.
Selling, general and administrative expenses increased 24.6% to $4.5 million
for the second quarter ended July 3, 1999 from $3.6 million for the second
quarter of 1998, but decreased as a percentage of net sales to 26.3% from 27.1%
for the comparable period in 1998. Selling, general and administrative expenses
increased 22.6% to $8.1 million for the six months ended July 3, 1999 from $6.6
million for the six months ended June 30, 1998, but decreased as a percentage of
net sales to 25.9% from 26.7% for the comparable period in 1998. The decrease in
selling, general and administrative expenses as a percentage of net sales for
the three and six month periods ended July 3, 1999 was primarily attributable to
the leveraging of advertising and promotional expenses.
Interest expense and other, net increased 163.5% to $137,000 for the second
quarter ended July 3, 1999 from $52,000 for the second quarter of 1998.
Interest expense and other, net increased 60.4% to $271,000 for the six months
ended July 3, 1999 from $169,000 for the six months ended June 30, 1998. The
increase for the three and six month periods ended July 3, 1999 was attributable
to higher average borrowings on the Company's revolving line to support
increased inventory levels for new stores.
Liquidity and Capital Resources
Historically, the Company has funded its cash requirements primarily through
cash flow from operations, borrowings under its credit facility and in 1998 with
proceeds from its initial public offering. Net cash provided by operating
activities for the six months ended July 3, 1999 was $738,000. Net cash used in
investing activities for the six months ended July 3, 1999 totaled $1.3 million
and was used primarily for the purchase of property and equipment. Net cash used
in connection with financing activities totaled $413,000 for the six months
ended July 3, 1999, of which $407,000 was used for repayments on the Company's
line of credit.
7
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Capital expenditures for the six months ended July 3, 1999 were primarily for
the build-out of ten new stores plus construction-in-progress of one additional
store and the Company's new management information systems. The Company's
primary cash requirements have been related to capital expenditures for new
stores including merchandise inventory for such stores and leasehold
improvements. During the remainder of 1999, the Company anticipates that cash
will be used primarily for merchandise inventory and capital expenditures. The
Company estimates that the cost of capital expenditures for fiscal 1999,
excluding the cost of any possible acquisitions, will total approximately $2.5
million, primarily for the build-out of approximately 15 to 20 new stores and
costs associated with the Company's management information systems.
The Company has a credit facility agreement with a commercial bank, which
includes a revolving line of credit for $15.0 million expiring on December 31,
2000. As of July 3, 1999, the unused and available portion of the credit
facility was approximately $7.0 million. The Company believes that operating
cash flow and borrowings under its credit facility will be sufficient to
complete the Company's 1999 store expansion program and to satisfy the Company's
other capital requirements through the end of fiscal 1999.
Impact of Year 2000
The Company is currently in the process of addressing a problem that is facing
all users of automated information systems. The "Year 2000 Issue" is the result
of computer programs being written using two digits rather than four to define
the applicable year. Computer programs that have time-sensitive software may
recognize a date using "00" as the year 1900 rather than the year 2000. This
situation could result in a system failure or miscalculations causing
disruptions to operations, including, among other things, a temporary inability
to process transactions, send payments, or engage in similar normal business
activities.
State of Readiness. Beginning in early 1998, the Company began an overall
assessment of its computer systems, including Year 2000 readiness. The Company
determined that certain of its software was not Year 2000 compliant. In mid-
1998, the Company, with the guidance of outside consultants, implemented a plan
to replace its existing information systems primarily in response to business
demand and growth. The new systems are designed to replace the Company's
information systems for order processing, warehousing, finance and point-of-sale
on a fully integrated enterprise-wide basis. These systems will replace
existing software that is not Year 2000 compliant.
The Company has used both internal and external resources to replace and test
its information systems software for Year 2000 compliance. An Executive
Oversight Steering Committee, consisting of internal executive management, the
Company's information systems officer and various outside third parties, was
formed to supervise the replacement, implementation and testing process.
Installation of the new systems began in June 1998, and Company personnel have
been trained on the new systems. The Company estimates that the installation of
the new systems will be completed by the end of the third quarter of 1999.
The Company has begun communicating with significant suppliers to determine
the extent to which the Company may be vulnerable to a failure by any of these
third parties to remediate their own Year 2000 issues. The Company's exposure to
supplier-related Year 2000 business disruptions is reduced because it does not
currently communicate electronically with its suppliers. In addition to
suppliers, the Company also relies upon governmental agencies, utility
companies, telecommunication service companies and other service providers
outside of the Company's control. There can be no assurance that the Company's
suppliers, governmental agencies or other third parties will not suffer a Year
2000 business disruption that could have a material adverse effect on the
Company's business, financial condition and operating results. The Company has
not been informed by any supplier of inability to comply with year 2000 issues.
Costs to Address the Year 2000 Issue. The Company has incurred, through July
3, 1999, approximately $1.8 million relating to the implementation of the new
systems and addressing Year 2000 issues. The Company currently estimates that
the total costs for implementing the new systems will be approximately $2
million. Included in the costs of implementing the new systems is the cost of
equipment which the Company presently leases over 36 to 60 months. The Company
will capitalize and depreciate the new systems technology over its estimated
useful life and to the extent that Year 2000 costs do not qualify as capital
investments, the Company will expense such costs as incurred.
The costs of Year 2000 compliance and the date on which the Company believes
it will complete the project are based on management's best estimates, which
were derived utilizing numerous assumptions of future events, including the
continued availability of certain third party resources and other factors.
However, there can be no
8
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guarantee that these estimates will be achieved and actual results could differ
materially from those anticipated. Specific factors that might cause such
material differences include, but are not limited to, the availability and cost
of personnel trained in this area, supplier compliance and contingency actions,
and similar uncertainties. Based on presently available information, the
Company's total Year 2000 project costs do not include any estimated costs and
time associated with anticipated third party Year 2000 issues.
Risks Presented by the Year 2000 Issue. The Company presently believes that
with the implementation of new systems and conversion to new software, the Year
2000 Issue will not pose significant operational problems for its computer
systems. It should be noted, however, that in the event any third parties which
provide goods or services essential to the Company's business activities fail to
address appropriately their Year 2000 issues, such failure could have a material
adverse effect on the Company's business, financial condition and operating
results. For example, a Year 2000 related disruption on the part of the
financial institutions which process the Company's credit card sales would have
a material adverse effect on the Company's business, financial condition and
operating results.
Contingency Plans. The Company's Executive Oversight Steering Committee is
developing contingency plans in the event that the Company has not completed all
of its remediation plans in a timely manner or any third parties who provide
goods or services essential to the Company's business fail to appropriately
address their Year 2000 issues. The committee expects to conclude the
development of these contingency plans by the end of the third quarter of 1999.
Item 3. Quantitative and Qualitative Disclosures About Market Risk.
There have been no material changes from the information reported in the
Company's annual report on Form 10-K for the fiscal year ended January 2, 1999.
9
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PART II
OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits required to be filed by Item 601 of Regulation S-K:
10.1 License Agreement dated July 7, 1999 between Richman Gordman 1/2
Price Stores, Inc. and Shoe Pavilion, Inc.
27.1 Financial Data Schedule
(b) Reports on Form 8-K filed during the quarter ended July 3, 1999:
None.
10
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized on the 5th day of August 1999.
SHOE PAVILION, INC., as Registrant
By /s/ Dmitry Beinus
---------------------------------------
Dmitry Beinus
Chairman and Chief Executive Officer
By /s/ Gary A. Schwartz
---------------------------------------
Gary A. Schwartz
Vice President and Chief Financial Officer
11
<PAGE>
INDEX TO EXHIBITS
Exhibit Number Description
- -------------- -----------
10.1 License Agreement dated July 7, 1999 between Richman Gordman
1/2 Price Stores, Inc. and Shoe Pavilion, Inc.
27.1 Financial Data Schedule
<PAGE>
Exhibit 10.1
LICENSE AGREEMENT
This Agreement is made and entered into as of July 7, 1999 by and between
Richman Gordman 1/2 Price Stores, Inc., a Delaware corporation, having a
principal place of business at 12100 West Center Road, Omaha, Nebraska 68144-
3998 ("Licensor"), and Shoe Pavilion, Inc., a Delaware corporation having an
office at 3200-F Regatta Blvd., Richmond, California 94804 ("Licensee").
Recitals
--------
A. Licensor is engaged in the operation of certain retail stores
described on Exhibit A (each individually a "Store," and collectively the
---------
"Stores").
B. Licensee desires to operate a shoe department (each individually a
"Shoe Department" and collectively, the "Shoe Departments") within the Stores
for the exclusive sale at retail of shoes and footwear, specifically, men's and
women's shoes, boots and slippers ("Footwear").
C. Licensor desires to grant an exclusive license to Licensee to operate
the Shoe Departments and to perform certain merchandising activities within the
Stores upon the terms and conditions stated in this Agreement.
Agreements
----------
In consideration of the foregoing and the mutual obligations stated in this
Agreement, Licensor and Licensee agree as follows:
1. Grant of License And Additional Shoe Departments.
------------------------------------------------
1.1 Licensor hereby grants to Licensee the exclusive right, license
and privilege, for the term of this Agreement, to operate Shoe Departments for
the retail sale of Footwear in the stores (the "Stores") which (a) are specified
initially in Exhibit A attached hereto (the "Initial Stores") or (b) are
---------
hereafter opened by Licensor during the term of this Agreement, which shall be
added automatically to Exhibit A sixty (60) days after notice to Licensee ("New
Stores"). During the term of this Agreement, Licensor shall not sell, and shall
not permit the sale by others of, Footwear in any of the Stores, except slippers
of the types traditionally sold in accessories departments, socks and hosiery.
Licensee shall operate Shoe Departments in all of Licensor's Stores during the
term of this Agreement.
1.2. Shoe Department Size and Location. Licensor will provide Licensee
---------------------------------
with adequate square footage of selling space and storage space to permit
Licensee to operate an effective Shoe Department in each Store. The unit
capacity and square footage assigned to the Shoe Department in each existing
Store will be the same as it is currently, which is detailed in Exhibit B,
except in those instances where existing stores are retrofitted by Licensor.
When the Licensor retrofits an existing Store, the square footage of the Shoe
Department will be reduced in
1
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approximate proportion to the reduction in the overall selling square footage of
the store. Licensor will make reasonable efforts to ensure that unit capacity is
adequate in retrofitted Stores. Both Licensee and Licensor will make reasonable
efforts to accommodate the other's space needs, which may necessitate
adjustments to square footage from time to time. The location ofa Shoe
Department in a particular Store may, after sixty days' prior written notice to
Licensee, be relocated by Licensor to another location in such Store. When such
relocation is not part of a retrofitting of the store, Licensor agrees to
reimburse Licensee for its reasonable, actual costs and expenses incurred in
such relocation (excluding the cost of any moveable fixtures required for such
new area).
1.3 Use & Pricing. Licensee shall maintain and operate continuously
-------------
the Shoe Departments and shall carry in the Shoe Departments a stock of first-
quality, saleable merchandise of such quality and in such quantity as is
necessary to meet the competitive conditions in the trade area of the Store in
which said Shoe Department is located. Licensee shall operate the Shoe
Department in keeping with the high business standards of Licensor and the
policies established by Licensor for the operation of all departments of the
Stores. Licensee shall exercise its reasonable efforts to meet future objectives
established by Licensor with respect to the brands of Footwear carried, the
depth of merchandise assortment, the quantity of merchandise carried, the method
of establishing comparable pricing on the price ticket, and the price
competitiveness of such merchandise in light of local competitive conditions,
provided that Licensee shall at all times retain discretion as to the manner in
which it seeks to satisfy such objectives. Without limiting the generality of
the foregoing, Licensee must substantially satisfy the following criteria at
substantially all times during the term of this License Agreement: (a) at least
70% of the units of dress and casual footwear on the floor in each Store must be
priced at least 50% off comparable department store regular prices and at least
50% of the units of athletic footwear on the floor in each store must be priced
at least 50% off comparable department store regular prices (absent overriding
evidence to the contrary, comparable department store regular prices will be
based on prevailing regular prices at Dillards, Younkers, J.C. Penneys and Kohls
(the "Department Stores")):Licensor acknowledges that exceptions to the above
criteria are allowable from time to time; (b) at least 75% of the units of
merchandise on the floor in each Store must represent brands typically sold in
the Department Stores (such brands include but are not limited to Adidas,
Aerosoles, Airwalk, Asics, Bally, Bass, Born, Bostonian, Candies, Liz Claiborne,
Clarks, Connie, Deer Stags, Dexter, DKNY, Dr. Marten, Dr. Scholls, Eastland,
Easy Spirit, Esprit, Fila, Florsheim, Glacee, Hi-Tec, Hush Puppies, Keds, Life
Stride, Lugz, Steve Madden, Mootsie Tootsies, Naturalizer, New Balance, Nickles,
Nike, the Nine West Group brands, Nunn Bush, Reebok, Rock River, Rockport,
Saucony, Skechers, K Swiss, Timberland, Unlisted, Vans, Via Spiga and Zodiac);
Licensor acknowledges that exceptions to the above criteria are allowable from
time to time;(c) at no time shall non-branded "make-up" inventory exceed 20% of
the inventory units in any Store; and, (d) at least 80% of the inventory units
in each Store must represent current season styles. In addition, Licensee will
maintain an average annual per store inventory of at least 8,500 units of
Footwear. Average annual per store inventory is the average month end total unit
inventory for the previous twelve months (or for the number of months for which
the Agreement has been in existence if that is less than twelve months) divided
by the weighted average number of Stores for those months. This average annual
inventory unit requirement shall be reduced in retrofitted Stores if and when
unit capacity
2
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is reduced due to a retrofit. The reduction from the 8,500 unit requirement will
be in proportion to the reduction in unit capacity of the store resulting from
the retrofit. In order for Licensee to comply with Licensor's everyday low
pricing strategy, Licensee shall not under any circumstances temporarily reduce
the selling price of the any shoe, whether it is clearance or non-clearance
merchandise. Permanent markups and markdowns in the selling price of clearance
merchandise are allowed under this Agreement. Furthermore, without the prior
written consent of Licensor, Licensee shall not conduct a multiple sale
promotion on clearance or non-clearance Footwear inventory, such as "buy one
pair, get the second pair at half price."
2. Term: Commencement of Operation of Shoe Departments: Inventory
--------------------------------------------------------------
Purchase.
- --------
2.1 Term. The initial term of this License Agreement shall commence
----
on July 21, 1999, and shall expire, unless sooner terminated as provided below,
on June 29, 2002 (the "Initial Term"). Upon expiration of the Initial Term, this
Agreement shall automatically renew for an additional term of 3 years, expiring
on July 2, 2005 (the "Renewal Term") unless either the Licensor or Licensee
gives the other party to the Agreement written notice, on or before January 1,
2002, that they do not intend to renew the Agreement for the Renewal Term.
2.2 Commencement of Shoe Department Operations. Licensee shall
------------------------------------------
commence initial operation of the Shoe Departments on July 21, 1999. The
Licensee will achieve 50% of total unit capacity (as defined in each Store in
Exhibit B) within 30 days of commencing initial operation of the Shoe
Departments. Thereafter, Licensee will use its best efforts to achieve 90% of
total unit capacity within 60 days and 100% of total unit capacity within 90
days of commencing initial operations of the Shoe Departments. Upon execution of
this agreement, the Licensor will immediately begin to take steps at each Store
to prepare and make available the Shoe Department site for delivery and set up
of Licensee's Footwear inventory. At each Store, the Licensor will appoint one
management level employee as primary point of contact for Licensee to assist in
the coordination of the process.
2.3 Licensee Managers. Licensee shall appoint a single Regional
-----------------
Manager with responsibility for all of the Stores, at least one District Manager
for each ten (10) Stores, a Department manager for each of the Shoe Departments,
and at least three merchandising professionals dedicated entirely to the
Licensor's Footwear business responsible for merchandise planning, allocation,
distribution and related matters.
3. License Fee: Licensee Responsibilities.
--------------------------------------
3.1 License Fee.
-----------
(a) As consideration for operating the Shoe Departments,
Licensee shall pay to Licensor a license fee (the "License Fee") equal to ten
percent (10%) of Net Sales of all Footwear sold by Licensee in the Stores.
(b) For purposes of this License Agreement, "Net Sales" shall
mean (i) the total (gross) amounts received for or in connection with any and
all sales of merchandise,
3
<PAGE>
whether such sales shall be for cash or credit, all of which sales shall be
accounted for and included as part of the total (gross) amounts; less (ii)
customer returns, allowances and employee discounts, credits or refunds, and
state or local sales tax or any such other sales or excise taxes as are
collected from customers. There shall also be excluded from "Net Sales"
intercompany transfers, sales or exchanges made by Licensee to or with other
Stores it operates at other locations, whether now existing or opened hereafter,
and sales of trade fixtures not in the ordinary course of business. "Footwear
Net Sales" shall mean the Net Sales received for or in connection with any and
all sales of Footwear by reason of the operation of the Shoe Departments.
(c) Licensor will withhold 1.5% of Footwear Net Sales from all
remittances due to the Licensee to pay for Licensee's proportional share of
Financial Transaction Costs associated with its sales. Financial Transaction
Costs will include (i) fees associated with accepting credit and debit card
transactions, (ii) net bad check losses and collection costs, (iii) bank account
fees for Store depository accounts, (iv) armored car service provided for bank
deposits for Stores, (v) shopping bags provided to customers, and (vi) all other
reasonable costs paid to third parties directly related to customer transactions
of a similar nature to (i) through (v) above. All internal costs, including
store payroll, are excluded from the above definition of Financial Transaction
Costs. Within sixty (60) days after the end of Licensor's fiscal year, Licensor
shall provide an accounting of the actual costs and Licensee's proportionate
share and will promptly credit or debit, as the case may be, the amount of
overpayment or underpayment of the actual amounts due as compared to the
estimated payments made. In no event shall Licensee's proportional share of
Financial Transaction Costs exceed 2% of Footwear Net Sales.
(d) Licensee and Licensor shall meet when necessary to plan
advertising. Licensor will provide Licensee with its sales promotion calendar
far enough in advance to allow Licensee to adequately plan its promotions and
advertising. Licensee will coordinate its advertising with Licensor and will be
allowed, from time to time, at the option of Licensor, the option to participate
in planned Licensor advertising, including but not limited to newspaper preprint
circulars. Licensee will be required to invest a minimum of 4.0% of its Footwear
Net Sales in marketing and advertising Footwear for Licensor's Stores (including
television, radio, production and creative costs, but excluding Licensee's costs
of signage) in Licensor's markets. Within sixty (60) days after the end of
Licensee's fiscal year it shall provide the Licensor an accounting of its
expenditures evidencing compliance with this clause (d). For purposes of this
provision, Licensee's investment in advertising will be before all cooperative
advertising allowances and any other third party reimbursements to Licensee for
its advertising within Licensors markets. If Licensee fails to comply with the
provisions of this paragraph (d), Licensee must pay Licensor the difference
between the amount it invested in marketing and advertising and the amount it
was required to invest in marketing and advertising. Licensor may deduct this
amount from the next succeeding remittances due to Licensee if Licensee fails to
make required payment.
(e) Licensee will utilize a signage and graphics package for the
Shoe Departments identical to that used by Licensor for the respective Store. It
is understood that Licensee will need to provide new signing and graphics
packages each time Licensee retrofits a
4
<PAGE>
store and for each New Store. Such signing and graphics package for a new or
retrofitted store is expected to cost less than $2,500. It is further understood
that the signing and graphics packages in existing stores will not change
significantly more than once per year. Licensor will produce such signage for
Licensee at Licensee's cost and expense. Licensee will pay all invoices for such
signage and graphics within ten business days after receipt of the invoice
therefore. Licensor shall be permitted to deduct from the License Fees all
invoices unpaid after such due date.
3.2 Handling of Cash. All monies from sales in or emanating from the
----------------
Shoe Departments shall initially be paid directly to and handled directly by
Licensor's cashiers and shall in no event be handled by any representative or
employee of Licensee. Licensor shall record all transactions pertaining to
Licensee's merchandise as merchandise under a separate department number
assigned only to Licensee. Licensor shall, through its central bar code,
electronic data capture systems, or by other comparable means, capture by Store
each of Licensee's sales transactions including stock number and/or UPC number,
size and net sales amount in each Store and shall make such captured sales data
available and deliver (delivery is at Licensee's expense) in an acceptable
format on a daily basis to Licensee. Licensor shall process all such proceeds
from the operation of the Shoe Departments through the regular channels of the
business of Licensor, and shall retain all such proceeds as the exclusive
property of Licensee, subject to payment as provided in Section 3.3.
3.3 Payment of Proceeds: Retention of License Fee. Within five
---------------------------------------------
calendar days after the end of each full or partial calendar week (Sunday
through Saturday) occurring during the term of this Agreement:
(a) Licensor shall deliver to Licensee a written statement
signed by a duly authorized employee of Licensor, indicating the total of all
Licensee's gross sales of Footwear for such week, the amount of discounts,
credits and other adjustments from gross sales which may be deducted therefrom
in the computation of Footwear Net Sales for such week, the resulting amount of
Footwear Net Sales for such week, any other deductions permitted under this
License Agreement, and the computation of the amount of the License Fee payable
thereunder for such week (the "Weekly Report"); and
(b) Licensor shall promptly pay to Licensee on the same day it
delivers the Weekly Report, by wire transfer of immediately available funds in
accordance with payment instructions provided by Licensee, an amount equal to
Net Sales for such week, after deduction of the License Fee, Licensee's
estimated portion of Financial Transaction Costs specified in Section 3.1 (c)
payable with respect to such Footwear Net Sales, and all other amounts which
Licensor is permitted to deduct under the terms of this License Agreement. Any
payment delayed more than 7 days beyond the due date shall be subject to a late
fee of 5% of the amount due under 3.3(b).
3.4 Licensor shall deliver to Licensee a written statement, annually,
based on the Licensee's fiscal year, signed by a duly authorized officer of
Licensor, indicating the total of all Licensee's gross sales of Footwear for
such year, the amount of discounts, credits and other adjustments from gross
sales which were deducted therefrom in the computation of Footwear Net Sales for
the year, the resulting amount of Footwear Net
5
<PAGE>
Sales for such year, any other deductions permitted under this License
Agreement, and the computation of the amount of the License Fee paid thereunder
for such year.
3.5 Books and Records: Audits. Licensor shall prepare and maintain,
-------------------------
in such manner as will allow its accountants to audit them in accordance with
generally accepted accounting principles, complete and accurate books of account
and records covering all transactions arising out of or relating to this License
Agreement. Licensee or its duly authorized representatives shall have the right,
for the duration of this License Agreement (and any time during the twelve (12)
month period following its termination), during regular business hours and upon
seven days advance notice (unless a shorter period is appropriate in the
circumstances), to audit such books of account and records and examine all other
documents and material in the possession of the Licensor with respect to the
subject matter and the terms of this Agreement. If, as a result of any audit of
Licensor's books and records, it is determined that Licensor's payment in
respect of any calendar week were less than the amount which should have been
paid by an amount equal to three percent or more of the payment actually made,
Licensor shall reimburse Licensee for the cost of such audit and make all
payments required to be made to eliminate any discrepancy revealed by such
audit. In any event, Licensor shall promptly reimburse Licensee the amount of
any discrepancy.
4. Sales in Licensor's Name. All sales and displays of goods, wares and
------------------------
merchandise or services offered in, from or by Licensee shall be in the name of
Licensor only. No disclosure shall be made to the Stores' customers or to the
general public that Licensee has licensed and is operating Shoe Departments in
the Stores except (a) as Licensor and Licensee mutually agree; and (b) as may be
required by federal and state securities law disclosure requirements or any
other applicable law.
5. Fixtures and Alterations.
------------------------
Fixtures. Licensee is responsible for furnishing all moveable fixtures and
- --------
equipment required for the operation of the Shoe Departments. Licensee will
purchase from Licensor all existing Shoe Department fixtures in the amount of
$150,000. Licensor shall have the right to approve all fixturing used by
Licensee. Upon the opening of any new store or the retrofitting of any existing
store, Licensor shall design, select, acquire and install the new fixtures for
the Shoe Department of the store. Licensee will purchase such fixtures from
Licensor for the Licensor's actual cost of such fixtures. In no event will the
Licensee be required to purchase such fixtures from Licensor for more than
$25,000 per store. All such fixtures purchased by Licensee from Licensor shall
become the property of Licensee. In the event the Agreement is terminated or
expires at the end of either the Initial Term or the Renewal Term, or before,
Licensor agrees to purchase and Licensee agrees to sell fixtures in existing
Shoe Departments for an amount equal to net book value of the fixtures (as
determined using a seven year life and straight line depreciation) at the time
the Agreement ceases. Licensee shall keep and maintain all of its fixtures in
the Shoe Departments in good condition and repair.
6
<PAGE>
6. Utilities, Supplies, Services and Maintenance of Stores. Licensor
-------------------------------------------------------
shall, without charge to Licensee, furnish all light, air conditioning,
telephone service, water and heat necessary for the operation of the Shoe
Departments, as well as janitor services (including but not limited to vacuuming
of the carpet in the Shoe Departments consistent with the other areas in the
Stores). Licensor shall keep the Stores in a condition, in terms of cleanliness,
maintenance, upkeep and operation equal to other similar Department Stores, and
shall provide good and sufficient security service for each of the Stores.
7. Licensee's Employees. Licensee shall supervise the operation of the
--------------------
Shoe Departments, and shall maintain a staff of employees (including those in
the stores and those required under Section 2.3 of this agreement) adequate to
attend to Shoe Department customers and operate the Shoe Departments as provided
in this Agreement, all of whom shall be the employees of the Licensee but shall
be subject to the rules, regulations, standards of service and conduct
established by the Licensor for its own employees in the Stores. In no event
shall total payroll costs, including employee benefit costs, in the Shoe
Departments of the Stores be less than 9% of Footwear Net Sales for any Annual
Period. Licensor shall make an annual accounting of compliance with this
provision. Licensor shall have no right or obligation to provide worker's
compensation insurance, payroll taxes or any other employment related
obligations with respect to any such personnel or to employ any employees of
Licensee. Licensee shall be responsible for all payments to be made to
Licensee's employees and for the provision of worker's compensation insurance,
payroll taxes and other obligations incurred in the hiring and use of its
employees. Neither Licensor nor Licensee shall unlawfully discriminate or
violate any employment-related law, rule or regulation in hiring, discharging or
transferring any employee of Licensee.
8. Customer Relations.
------------------
8.1 No Misrepresentation. Licensee shall: (i) never knowingly
--------------------
misrepresent its merchandise; (ii) cause its advertising relating to the Shoe
Departments to be truthful; (iii) conduct its Shoe Departments so as to protect
the business reputation of the Store; and (iv) comply with laws, rules and
regulations applicable to its activities, including but not limited to
advertising conducted by Licensee.
8.2 Settlement of Customer Disputes. Settlements of disputes
-------------------------------
(including but not limited to disputes as to refunds) with customers with regard
to merchandise shall be under the control of Licensor and shall be settled by
Licensor in accordance with Licensor's prevailing policy for the Stores.
Licensor will generally not accept returns (a) where the customer has worn the
shoes, (b) where there is no shoe box accompanying the return, or (c) in similar
situations where it would be difficult for the Licensor to re-sell the shoes.
Licensor shall adjust any such controversy in a reasonable manner, but shall in
no event be required to give an allowance or make a refund in excess of the
original cost to the customer of the merchandise. Licensor agrees to review
with Licensee the level of actual sales returns within the first six (6) months
of the initial operation of the Shoe Departments and thereafter annually, and,
if the level of sales returns of Footwear exceeds that of the other merchandise
sold by Licensor, Licensor agrees to make
7
<PAGE>
reasonable efforts to adjust its return policy for Footwear in an attempt to
lower sales returns for Footwear.
9. Insurance, Taxes and Business Licenses.
--------------------------------------
9.1 Payment of Employees: Certificates of Insurance. Licensee shall
-----------------------------------------------
pay its own employees as required by law and shall, at its own cost, carry its
own Worker's Compensation Insurance covering its employees in the Stores, which
shall not be subject to cancellation without at least thirty (30) days' advance
notice to Licensor. Licensee shall deliver to Licensor certificates of such
insurance coverage at the request of Licensor.
9.2 Insurance Coverage. Licensee shall carry Public Liability
------------------
Insurance in such amounts as may be adequate, in the reasonable opinion of the
Licensee for the operation of the Stores. Such Public Liability Insurance shall
include the Licensor as an additional insured, and shall not be subject to
cancellation without at least thirty days' advance notice to Licensor. Licensee
shall deliver certificates evidencing such insurance policies to Licensor, at
the request of Licensor.
9.3 Payment of Applicable Taxes. Licensee shall pay all state and
---------------------------
Federal unemployment taxes, social security taxes and any and all other taxes,
state and Federal due with respect to its employees, if any, and all property
taxes and assessments which may be levied on or with respect to the inventory in
the Shoe Departments or Licensee's fixtures and equipment. Licensee shall file
any required property tax forms. Licensor shall collect all state and local
sales, gross receipts, occupancy and similar taxes levied or assessed upon
customers of the Shoe Departments or with respect to the operation of or sales
in the Shoe Departments, and shall remit all such taxes to the appropriate
authorities as and when due. Licensor shall hold Licensee harmless from and
against any failure of Licensor to collect and remit such taxes, and shall
provide Licensee with evidence of the payment thereof from time to time upon
Licensee's request.
9.4 Business Licenses. Licensee will be solely responsible for the
-----------------
procurement of all licenses, if any, from any governmental agency that are
necessary to carry on the business of the Shoe Departments as contemplated
herein.
10. Subrogation. Each party hereby waives any and all rights of recovery
-----------
against the other from or arising out of damage to or destruction of the Shoe
Departments, any Store, and of their property from causes then included or
includable under standard fire and extended coverage insurance policies or
endorsements, whether or not the respective party has in fact obtained insurance
coverage as to such causes or covering such property, and if any additional
premium is required to effectuate such waiver, then such additional premiums
shall be paid by the beneficiary of such waiver of subrogation upon written
request submitting appropriate supporting documentation. Licensor shall exercise
its best efforts to include the foregoing waiver of subrogation clause in all
other license or concession agreements which Licensor maintains with third
parties.
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<PAGE>
11. Casualty or Condemnation. Should a Store or any portion thereof
------------------------
(including the portion devoted to a Shoe Department) be destroyed or damaged by
fire, explosion or by any other cause, or be subjected to a taking by eminent
domain, so that Licensor or Licensee cannot conduct its business therein in the
usual manner, then Licensor promptly shall repair or cause to be repaired the
damage to the Store (but not to Licensor's inventory and fixtures) without any
expense to Licensee. If the damage or such taking by eminent domain shall be so
extensive, in the reasonable opinion of Licensee, as to render the Store
unsuitable for the conduct of business in the customary or normal manner for a
period of two months or longer, Licensee shall have the option of terminating
this Agreement with respect to such Store without any penalty. Licensor's
obligations under this Section 12 in respect of any Store are subject to its
rights and obligations under the lease or sublease pursuant to which it occupies
such Store.
12. Damage to Goods. Licensor shall not be liable for any damage to or
---------------
loss of merchandise or other property of Licensee by reason of fire, water,
power failure, accident, plumbing, heating apparatus, gas or steam pipes of any
kind or nature, bursting, leaking or running of any pipe in the Store, or from
any other source unless caused by the grossly negligent or intentional acts or
omissions of Licensor or its employees, agents or contractors or any failure of
Licensor to maintain the Store as provided in this Agreement.
13. Shrinkage. Licensee shall be responsible for shrinkage of Footwear
---------
inventory.
14. Liability and Indemnification.
-----------------------------
14.1 Limitation on Liability. In no event shall Licensor or Licensee
-----------------------
have any liability to the other for incidental, consequential, special or
punitive damages in connection with this License Agreement or any other
activities contemplated by this License Agreement to be performed by them.
14.2 Licensee's Indemnification. Licensee shall indemnify and hold
--------------------------
harmless Licensor from any and all loss, cost, liability, expense or damage
(including reasonable attorneys' fees and costs) resulting from or arising out
of any (i) occurrence in, upon, or at the Shoe Departments, or any part thereof,
caused by any act or omission of Licensee, its agents, servants, employees, or
invitees; (ii) claims for damages arising out of any injury or illness caused by
merchandise sold or services rendered by the Shoe Departments, claims based upon
alleged misrepresentation by Licensee or its employees in the Shoe Departments,
and claims of defective merchandise in the Shoe Departments; (iii) claims of
infringement of patent, trademark or copyright interests or for unfair business
competition or trade practices or violation of import regulations or
restrictions, in the conduct by Licensee of its business in the Shoe
Departments; and (iv) non-compliance by Licensee with applicable governmental
regulations respecting the import, sale or other distribution or transfer of
merchandise or inventory by Licensee under the terms of this Agreement.
14.3 Licensor's Indemnification. Licensor shall indemnify and hold
--------------------------
harmless Licensee from any and all loss, cost, liability, expense or damage
(including reasonable attorneys' fees and costs) resulting from or arising out
of any (i) occurrence in, upon, or at the Shoe Departments, or any part thereof,
occasioned wholly or partially by any act or omission of
9
<PAGE>
Licensor, its agents, servants, employees, or invitees; (ii) claims for damages
arising out of any injury or illness caused by merchandise sold or services
rendered by any department of any of the Stores (other than the Shoe
Departments), claims based upon alleged misrepresentation by Licensor or its
employees in any of the Stores, and claims of defective merchandise in any of
the Stores (other than the Shoe Departments); (iii) claims of infringement of
patent, trademark or copyright interests or for unfair business competition or
trade practices or violation of import regulations or restrictions, in the
conduct by Licensor of its business in the Stores; and (iv) non-compliance by
Licensor with applicable governmental regulations respecting the import, sale or
other distribution or transfer of merchandise or inventory by Licensor in the
Stores.
14.4 Third Party Claim. In the event that any claim is asserted by a
-----------------
third party which may entitle Licensor or Licensee to indemnification under this
Agreement, Licensor or Licensee, as the case may be, shall promptly give notice
thereof to the other party, which notice shall be accompanied by a statement of
the claim. In the case of any claim, the party receiving such claim shall be
allowed to employ attorneys of its own selection, but reasonably acceptable to
the indemnified party, to appear and defend the claim on its behalf. If the
indemnifying party shall fail to timely defend, contest or otherwise protect
itself against any suit, action or other proceeding arising from such claim, the
indemnified party shall have the right, but not the obligation, to defend,
contest or otherwise protect itself. Each party shall cooperate fully with the
other and make available all pertinent information necessary or advisable for
the defense of any such claim.
15. Repairs. Licensor may, at any time, make such repairs and alterations
-------
and maintenance to the Stores, including the Shoe Departments, as may be
necessary or proper for the operation of the Stores as a whole, provided
however, that in undertaking such repairs, alterations, and maintenance,
Licensor shall insofar as is reasonably convenient not interfere with the normal
operation of the Shoe Departments. Licensee shall have the right to elect to
supply and pay for any fixtures, the design and color of which shall coincide
with the decor of the Licensor's stores, and which the Licensor has the right to
approve.
16. Hours of Business. The hours of business of the Stores, including the
-----------------
Shoe Departments, shall be determined and controlled solely by the Licensor. The
control of the keys to the Stores shall exclusively belong to Licensor, but
Licensor shall afford Licensee reasonable opportunity, during non-business
hours, to service the Shoe Departments for, among other things, the taking of
inventory, arranging of displays, and keeping of books.
17. Ownership of Goods and Fixtures. Notwithstanding anything to the
-------------------------------
contrary in this Agreement, the relationship of Licensor and Licensee under this
Agreement shall be that of licensor and licensee, and not that of buyer and
seller or consignee and consignor. Licensee shall be the owner of all goods held
by it for sale in the Shoe Departments with all rights of possession at all
times until such time as title passes to the customer purchasing such goods.
Licensee shall also be the owner of all fixtures maintained by it in the Shoe
Departments with all rights of possession at all times. Licensee shall be deemed
for all purposes to be in possession of all such goods and fixtures located in
the Shoe Departments, which possession shall be effected by its employees
working in the Shoe Departments. Licensor and its employees shall have no right
to
10
<PAGE>
sell or otherwise dispose of any such goods or fixtures, and such employees
shall have access to such goods and departments only for purposes of passage,
security, cleaning and the like. No consignment, sale or return, or similar
arrangement is created by this Agreement with respect to any goods held by
Licensee for sale in the Shoe Departments or any fixtures maintained by Licensee
therein, whether such goods or fixtures are located in the Shoe Departments, in
stockroom space maintained by Licensor or elsewhere. Notwithstanding the fact
that this Agreement is not intended to create a consignment relationship,
Licensor shall, upon request by Licensee, execute any financing statements under
the Uniform Commercial Code or similar documents in such form as is reasonably
acceptable to Licensor, in order to confirm Licensee's rights in and title to
such goods and fixtures. Such UCC filing statements will unequivocally state
that the Licensee is sole owner of Licensee's inventory and that the Licensor is
in no way to be considered a debtor of the Licensee. All proceeds from the sale
of merchandise of Licensee to customers as provided in Section 3 of this
Agreement shall be the property of Licensee from the time of such sale.
18. Use of Licensor's Name. Except as may be necessary for the proper
----------------------
operation of the Shoe Departments within the Stores during the term of this
Agreement, Licensee shall at no time have the right, directly or indirectly, to
use Licensor's trade name in any manner, or in any combination of said words,
either by itself or in connection with any other word or words, or to sell,
offer, advertise for sale, transfer, or dispose of any such merchandise under
such name, or with such name on the merchandise or any container thereof.
Neither at or after the termination or expiration of this Agreement shall
Licensee, directly or indirectly, advertise or in any way, form or manner
whatsoever, convey the impression or knowledge or cause the same to be conveyed
or to be given to the public that Licensor is going or intends to go out of
business or to give up its business or its business in the Shoe Departments, or
that the Shoe Departments will not in the future be operated by Licensee or
Licensor, or that the stock of merchandise withdrawn from or previously offered
or acquired for sale in the Shoe Departments originated from or at any time had
any connection with Licensor or the Store.
19. Licensee Not to Pledge Licensor's Credit. Licensee shall have
----------------------------------------
charge of the purchasing of its merchandise for the Shoe Departments. All
merchandise or supplies offered for sale or used in the conduct of the Shoe
Departments shall be purchased by Licensee in its own name and on its own
credit, and shall be paid for directly by Licensee, and Licensee agrees not to
pledge the credit of Licensor. By virtue of this Agreement, Licensee acquires no
right or authority to make purchases or to enter into any contract whatsoever in
the name of the Licensor, nor to bind Licensor to any contract, nor to impose
upon Licensor any obligation whatsoever to other persons. Licensee shall pay all
freight, express and drayage charges on all merchandise, supplies, equipment and
fixtures shipped to and received for the Shoe Departments.
20. Employee Discount. Licensor shall make its employee discount
-----------------
available to employees of Licensee, and Licensee shall honor such discount for
employees of Licensor, with respect to merchandise carried by Licensee in the
Shoe Departments. Employee discounts are to be established at the discretion of
the Licensor.
11
<PAGE>
21. Other Agreements. Each party hereby represents and warrants to the
----------------
the other party that it has full power and authority to enter into this License
Agreement and that the consummation of the transactions contemplated by this
License Agreement will not result in a default, breach or violation of any other
agreement to which the representing is a party.
22. Termination and Other Remedies.
------------------------------
22.1 Bankruptcy. In the event that a petition is filed by or against
----------
Licensor or Licensee under any Federal or state bankruptcy or insolvency act
(and in the case of an involuntary petition, the same is not discharged within
sixty days after filing), an assignment is made by Licensor or Licensee for the
benefit of creditors, or a receiver is appointed for the business or property of
Licensor or Licensee or the Licensee or Licensor is decalred to be in default on
its primary line of credit financing agreement and such appointment or default
is not vacated or cured within thirty days, then this License Agreement shall be
immediately and automatically terminated.
22.2 Default. Upon the occurrence of an Event of Default, this
-------
Agreement may be terminated at any time thereafter by the nondefaulting party,
by written notice to the other and shall be of no further force and effect. It
shall constitute an "Event of Default":
(a) by Licensor, if it fails to make any payment due under this
Agreement within five days of the date on which it is due;
or
(b) by Licensor or Licensee, if it fails to perform any of the
terms, conditions, agreements or covenants in this
Agreement on its part to be performed by it, and such
failure is not curable, or if such default is curable but
continues uncured for a period of thirty days after notice
thereof has been given to such party in writing by the
other party; or
(c) by Licensee or Licensor if any bank or financier of the
respective party declares an event of default under any
existing material bank or financing arrangement or
agreement; or
(d) by Licensor if it materially fails to meet its obligations
under Section 6, or Licensee if it materially fails to meet
its obligations under Section 1.3; and in either case if
such default is curable but continues uncured for a period
of thirty days after notice thereof has been given to such
party in writing by the other party
22.3 Purchase of Inventory.
---------------------
(a) If this Agreement is terminated by either party for any
reason, and upon termination of the scheduled final term of this License
Agreement, Licensor shall have the option, solely at its discretion to purchase
for cash from Licensee all or a portion of Licensee's
12
<PAGE>
Footwear inventory in the Stores. Such option may be exercised by written notice
given to Licensee within sixty (60) days of such termination. The price for such
purchase shall be the Fair Value as specified below.
(b) "Fair Value" shall mean the fair value thereof to be
determined as follows. If Licensor and Licensee are not able to agree upon fair
value within five days after the effective date of termination, each shall,
within ten days after the effective date of termination (the "Designation
Period") designate in writing an appraiser qualified to determine Fair Value
(each an "Appraiser"), and direct the two Appraisers so designated to appoint a
third Appraiser (the "Third Appraiser") within fifteen days after the effective
date of termination and direct the Third Appraiser to determine Fair Value
within thirty days after the effective date of termination. The determination of
the Third Appraiser shall be conclusive and binding on Licensor and Licensee. If
either Licensor or Licensee fails to appoint an Appraiser within the Designation
Period, the Appraiser appointed by the other shall act as the Third Appraiser,
and shall determine Fair Value within twenty-five days after the effective date
of termination. Licensor each shall bear the fees and costs, if any, of the
Appraiser it appoints, and shall bear equally the fees and costs of the Third
Appraiser. Licensor and Licensee shall consummate the purchase and sale of
Licensee's inventory pursuant to this paragraph within ten days after the date
on which Fair Value is determined or agreed upon.
22.4 Operation Following Termination. Notwithstanding any other
-------------------------------
provision of this License Agreement, if this Agreement is terminated by Licensee
or Licensor prior to the scheduled termination date in accordance with the terms
of this License Agreement, on or prior to the termination date Licensee shall
remove all inventory not being purchased by Licensor at its option as specified
above and all other property belonging to Licensee, and Licensee quietly and
peaceably shall surrender possession of the Shoe Departments in good order,
reasonable wear and tear and damage by fire and other casualty excepted. Prior
to such removal Licensor shall be entitled to its License Fee as specified in
Paragraph 3 for all Footwear sales conducted from the Stores. Without the prior
written consent of Licensor, Licensee shall not conduct a liquidation sale.
22.5 Liquidation of Individual Stores. If Licensor closes any
--------------------------------
individual Store during the term of this License Agreement and elects to conduct
a liquidation of the inventory of such Store, it shall give Licensee written
notice of such determination as early as it is practicable to do so, and
Licensee shall be entitled to participate in such liquidation. If Licensor
conducts the liquidation itself, without employing an independent liquidator,
the License Fee shall be payable in connection with such sales. If Licensor
employees an independent liquidator to conduct such liquidation, Licensee shall
negotiate with such liquidator the amount to be paid by Licensee for its
services, and no License Fee shall be payable with respect to any sales in the
affected Shoe Department during the course of the liquidation.
23. Miscellaneous.
-------------
23.1 Notices. All reports, requests, demands, notices or other
-------
communications required or permitted hereunder to be given to a party shall be
in writing and shall be deemed to
13
<PAGE>
be duly given and received upon delivery in hand, or if sent by facsimile, upon
receipt of confirmation thereof, or if mailed, on the third business day
following the day duly sent by certified or registered mail, postage prepaid,
return receipt requested or on the first business day following the day timely
deposited with Federal Express (or an equivalent national overnight courier
service). All notices to a party shall be sent to the addressee at the address
set forth below (or to such other address as such party may specify by notice to
the other):
(a) If to Licensor, to:
Richman Gordman 1/2 Price Stores, Inc.
12100 West Center Road
Omaha, Nebraska 68144-3998
Attn: Jeff Gordman, Chief Executive Officer
With a copy to:
Betterman & Dixon
Suite 2868 Woodmen Tower
1700 Farnam Street
Omaha, Nebraska 68102
Attn: Joyce Dixon
(b) If to Licensee, to:
Shoe Pavilion, Inc.
3200-F Regatta Blvd.
Richmond, California 94804
Attn: Dmitry Beinus, Chief Executive Officer
With a copy to:
Sheppard, Mullin, Richter & Hampton
Four Embarcadero Center
San Francisco, CA 94111
Attn: A. John Murphy
23.2 Governing Law. This License Agreement shall be construed under
-------------
and governed by the internal laws of the State of Nebraska without giving effect
to the conflict of law provisions thereof.
23.3 Entire Agreement. This License Agreement constitutes the entire
----------------
agreement between the parties hereto with respect to the subject matter hereof,
and supersedes all previous written or oral negotiation, commitments or
writings.
14
<PAGE>
23.4 Waiver and Amendment. This License Agreement may not be amended
--------------------
or modified nor may compliance with any condition or covenant set forth herein
be waived, except by a writing duly and validly executed by each party hereto,
or in the case of a waiver, the party waiving compliance.
23.5 Assignability: Binding Effect. This License Agreement shall not
-----------------------------
be assigned by either Licensor or Licensee without the express written consent
of the other party, except that this License Agreement may be assigned by either
party in connection with any consolidation, merger, reorganization,
recapitalization or sale of all or substantially all of the assets of such
party, provided that after giving consideration to such transaction, no event of
default exists under this License Agreement and the party assuming this
Agreement is financially solvent at the time of the assumption. The term
"Licensee" and "Licensor" wherever used in this Agreement shall include the
successors and assigns of such parties and all of the covenants, terms and
conditions in this License Agreement shall be binding upon and inure to the
benefit of the successors and assigns of such parties in the same manner as if
they were expressly stated in this License Agreement.
23.6 Remedies Not Exclusive. The rights and remedies of Licensor and
----------------------
Licensee in this License Agreement shall not be construed as cumulative and
shall be in addition to every other right or remedy now or hereafter existing at
law, in equity or by statute. The failure to exercise one or more rights or
remedies shall not be taken to exclude or waive the exercise of any other right
or remedy.
23.7 Confidential Information. Any information concerning the other
------------------------
party's business acquired by either party to this License Agreement shall be
held in the strictest of confidence by the other party and shall not be released
to any third party without the other party's prior written approval.
23.8 Waiver of Performance. Any waiver of performance of any of the
---------------------
covenants, agreements, or stipulations hereof by either party shall not be
construed as a waiver of subsequent performances thereof or any other provision
of this License Agreement unless otherwise agreed in writing.
23.9 No Joint Venture. Nothing in this License Agreement shall be
----------------
construed as constituting Licensor and Licensee as joint venturers, partners, or
principal and agent. It is the intention of the parties that the sole
relationship created by the parties hereunder is that of Licensors/Licensee for
exclusive sales and that Licensee is in all respects an "independent
contractor."
23.10 Captions. The captions are inserted only as a matter of
--------
convenience and for information and in no way define, limit or describe the
scope of this License Agreement nor the intent of any provision hereof.
15
<PAGE>
23.11 Counterparts. This Agreement may be signed in original or by
------------
fax in counterparts, each of which shall be deemed to be an original, and the
counterparts shall together constitute one document.
16
<PAGE>
RICHMAN GORDMAN 1/2 PRICE STORES, INC.
By:_______________________________________
Title:____________________________________
SHOE PAVILION, INC.
By:_______________________________________
Title:____________________________________
17
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<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<CURRENCY> U.S. DOLLARS
<S> <C> <C>
<PERIOD-TYPE> 3-MOS 6-MOS
<FISCAL-YEAR-END> JAN-01-2000 JAN-01-2000
<PERIOD-START> APR-04-1999 JAN-03-1999
<PERIOD-END> JUL-03-1999 JUL-03-1999
<EXCHANGE-RATE> 1,000 1,000
<CASH> 902 902
<SECURITIES> 0 0
<RECEIVABLES> 0 0
<ALLOWANCES> 0 0
<INVENTORY> 30,501 30,501
<CURRENT-ASSETS> 32,053 32,053
<PP&E> 7,532 7,532
<DEPRECIATION> 2,901 2,901
<TOTAL-ASSETS> 37,330 37,330
<CURRENT-LIABILITIES> 17,454 17,454
<BONDS> 0 0
0 0
0 0
<COMMON> 7 7
<OTHER-SE> 18,407 18,407
<TOTAL-LIABILITY-AND-EQUITY> 37,330 37,330
<SALES> 17,190 31,443
<TOTAL-REVENUES> 17,190 31,443
<CGS> 11,167 20,763
<TOTAL-COSTS> 11,167 20,763
<OTHER-EXPENSES> 4,520 8,138
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 137 271
<INCOME-PRETAX> 1,366 2,271
<INCOME-TAX> 524 886
<INCOME-CONTINUING> 842 1,385
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> 842 1,385
<EPS-BASIC> .12 .20
<EPS-DILUTED> .12 .20
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