<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 April 1, 2000
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)
3200-F Regatta Boulevard, Richmond, California 94804
(Address of principal executive offices) (Zip Code)
(510) 970-9775
(Registrant's telephone number, including area code)
</TABLE>
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.
As of May 10, 2000 the Registrant had 6,800,000 shares of Common Stock
outstanding.
<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, 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 desirable discounts and the availability of
desirable store locations and 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
<TABLE>
<CAPTION>
Page
----
<S> <C>
Item 1 - Condensed Consolidated Financial Statements (Unaudited):
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.......................................... 7-8
Item 3 - Quantitative And Qualitative Disclosures About Market Risk..... 8
PART II
OTHER INFORMATION
Item 6 - Exhibits And Reports On Form 8-K............................... 9
</TABLE>
2
<PAGE>
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) April 1, January 1, April 3,
2000 2000 1999
------- ---------- --------
<S> <C> <C> <C>
ASSETS
Current assets
Cash $764 $929 $918
Accounts receivable 525 578 510
Inventories 39,012 32,985 29,587
Prepaid expenses and other 860 609 332
------- ------- -------
Total current assets 41,161 35,101 31,347
Property and equipment, net 5,442 5,540 4,204
Other assets 973 972 630
------- ------- -------
Total assets $47,576 $41,613 $36,181
======= ======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Accounts payable $15,096 $11,139 $8,397
Accrued expenses 1,114 1,643 956
Short-term borrowings 10,334 8,000 8,000
Current portion of capital lease obligations 13 13 12
------- ------- -------
Total current liabilities 26,557 20,795 17,365
Deferred rent 1,688 1,712 1,172
Capital lease obligations, less current portion 58 62 72
------- ------- -------
Total liabilities 28,303 22,569 18,609
------- ------- -------
Stockholders' equity
Preferred stock- $.001 par value; 1,000,000 shares authorized;
no shares issued or outstanding - - -
Common stock- $.001 par value: 15,000,000 shares authorized;
6,800,000 issued and outstanding 7 7 7
Additional paid-in capital 13,968 13,968 13,968
Retained earnings 5,298 5,069 3,597
------- ------- -------
Total stockholders' equity 19,273 19,044 17,572
------- ------- -------
Total liabilities and stockholders' equity $47,576 $41,613 $36,181
======= ======= =======
</TABLE>
See notes to condensed consolidated financial statements.
3
<PAGE>
Shoe Pavilion, Inc.
Condensed Consolidated Statements of Income
(Unaudited)
<TABLE>
<CAPTION>
(In thousands, except per share and number of stores)
Thirteen Weeks Ended
April 1, April 3,
2000 1999
-------- --------
<S> <C> <C>
Net sales $19,322 $14,253
Cost of sales and related occupancy expenses 13,235 9,596
------- -------
Gross profit 6,087 4,657
Selling, general and administrative expenses 5,521 3,618
------- -------
Income from operations 566 1,039
Interest expense and other, net 189 134
------- -------
Income before taxes 377 905
Income taxes 148 362
------- -------
Net Income $229 $543
======= =======
Earnings per share:
Basic $0.03 $0.08
Diluted $0.03 $0.08
Weighted average shares outstanding:
Basic 6,800 6,800
Diluted 6,801 6,805
Stores Open at end of period 111 69
</TABLE>
See notes to condensed consolidated financial statements.
4
<PAGE>
Shoe Pavilion, Inc.
Condensed Consolidated Statements of Cash Flows
(Unaudited)
<TABLE>
<CAPTION>
(In thousands)
Thirteen Weeks Ended
April 1, April 3,
2000 1999
-------- --------
<S> <C> <C>
Operating activities:
Net income $229 $543
Adjustments to reconcile net income to net cash
used by operating activities
Depreciation and Amortization 347 237
Cash provided (used) by changes in:
Accounts receivable 53 -
Inventories (6,027) (2,695)
Prepaid expenses and other current assets (251) (585)
Other assets (1) (2)
Accounts payable 3,957 2,430
Accrued expenses (529) 10
Deferred rent (24) 74
-------- --------
Net cash provided (used) by operating activities (2,246) 12
-------- --------
Investing activity-
Purchase of property and equipment, net (249) (606)
-------- --------
Financing activities:
Proceeds (payments) from (to) line of credit 2,334 (407)
Principal payments on capital leases (4) (3)
-------- --------
Net cash provided by financing activities 2,330 (410)
-------- --------
NET DECREASE IN CASH (165) (1,004)
CASH, BEGINNING OF PERIOD 929 1,922
-------- --------
CASH, END OF PERIOD $764 $918
======== ========
</TABLE>
See notes to condensed consolidated financial statements.
5
<PAGE>
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
financial position at April 1, 2000 and April 3, 1999 and the interim results of
operations and cash flows for the three months then ended. The balance sheet
as of January 1, 2000 presented herein has been derived from the audited
financial statements of the Company as of January 1, 2000.
Accounting policies followed by the Company are described in Note 2 to the
audited consolidated financial statements for the year ended January 1, 2000.
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, for the year ended January 1, 2000 on
Form 10-K.
The results of operations for the thirteen-week periods presented herein are not
necessarily indicative of the results to be expected for the full year.
Comprehensive Income and net income are the same.
6
<PAGE>
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 and 35 licensed shoe departments in Colorado, Illinois,
Iowa, Kansas, Missouri, Nebraska, Oklahoma and South Dakota as of April 1, 2000.
The Company operates and manages the 35 shoe departments pursuant to a licensing
agreement with Gordmans, Inc., a midwestern department store. The Company
entered into the Gordmans license agreement in July 1999 and began to operate
and manage the shoe departments shortly thereafter.
Results of Operations
Net sales increased 35.6% to $19.3 million for the thirteen-week period ended
April 1, 2000 from $14.3 million for the comparable period in 1999. This
increase in net sales was primarily attributable to new stores sales of $5.9
million plus a 4.4% increase in comparable store sales.
Gross profit increased 30.7% to $6.1 million for the thirteen-week period ended
April 1, 2000 from $4.7 million for the same period in 1999, but decreased as a
percentage of net sales to 31.5% from 32.7%. The decrease in gross profit as a
percentage of net sales was primarily attributable to lower retail prices and a
greater percentage of markdowns taken during the current period versus the same
period last year.
Selling, general and administrative expenses increased 52.6% to $5.5 million for
the thirteen-week period ended April 1, 2000 from $3.6 million for the
comparable period in 1999 and increased as a percentage of net sales to 28.6%
from 25.4%. The increase in selling, general and administrative expenses as a
percentage of net sales, was primarily attributable to increases in payroll and
related expenses incurred in connection with new store openings and costs
associated with leasing new information systems equipment.
Interest expense and other, net increased 41.0% to $189,000 for the thirteen-
week period ended April 1, 2000 from $134,000 for the comparable period in
1999. The increase was attributable to higher average borrowings and costs on
the Company's revolving line of credit to support increased inventory levels for
new stores.
Liquidity and Capital Resources
The Company has historically funded its cash requirements primarily through cash
flow from operations and borrowings under its credit facility. Net cash used by
operating activities during the thirteen-week period ended April 1, 2000 totaled
$2.2 million and was primarily used to fund increased inventory levels. Net
cash, provided by financing activities, for the thirteen-week period ended April
1, 2000 totaled $2.3 million and was drawn down from the Company's line of
credit.
Capital expenditures for the thirteen-week period ended April 1, 2000 were
$251,000 for the build-out of two new stores. 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 2000,
the Company anticipates that cash will be used primarily for merchandise
inventory and capital expenditures. The
7
<PAGE>
Company estimates that the cost of capital expenditures for fiscal 2000,
excluding the cost of any possible acquisitions, will total approximately $1.3
million, primarily for the build-out of approximately 10 to 15 new stores,
including new Gordman shoe departments.
The Company has a credit facility agreement with a commercial bank, which
includes a revolving line of credit for $20.0 million expiring on May 30, 2001.
As of April 1, 2000, the unused and available portion of the credit facility was
approximately $7.4 million. The Company believes that operating cash flow and
borrowings under its credit facility will be sufficient to complete the
Company's 2000 store expansion program and to satisfy the Company's other
capital requirements through fiscal 2000.
Item 3. Quantitative and Qualitative Disclosures About Market Risk.
There have been no material changes from the information reported in the
Company's Form 10-K for the fiscal year ended January 1, 2000.
8
<PAGE>
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:
10.17 Web Services Agreement dated May 2, 2000 between Shoe
Pavilion Corporation and Shoesite.com dba Zappos.com.
27.1 Financial Data Schedule
(b) Reports on Form 8-K filed during the thirteen-week period ended
April 1, 2000:
None.
9
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized on the 10th day of May 2000.
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
10
<PAGE>
INDEX TO EXHIBITS
Exhibit Number Description
- -------------- -----------
10.17 Web Services Agreement dated May 2, 2000 between
Shoe Pavilion Corporation and Shoesite.com dba
Zappos.com.
27.1 Financial Data Schedule
<PAGE>
EXHIBIT 10.17
WEB SERVICES AGREEMENT
This Web Services Agreement ("Agreement") is made and entered into as of the 2nd
day of May, 2000 (the "Effective Date"), by and between Shoe Pavilion
Corporation, a corporation organized and existing pursuant to the laws of the
state of Washington, with principal offices at 3200-F Regatta Boulevard,
Richmond, California 94804 ("SP"); and Shoesite.com dba Zappos.com, a
corporation organized and existing pursuant to the laws of the State of
California, with principal offices at 1000 Van Ness, Suite 213, San Francisco,
California, 94109 ("Zappos"); with respect to the following facts and
circumstances:
WHEREAS, SP is engaged in the business of marketing and selling shoes at
various store locations throughout the United States and through its electronic
commerce Web site on the Internet at URL: www.ShoePavilion.com (the "SP Web
-------------------- ------
Site");
- ----
WHEREAS, Zappos is engaged in the business of marketing and selling shoes
by designing, developing, hosting and maintaining an electronic commerce Web
site on the Internet at URL: www.Zappos.com (the "Zappos Web Site") and
-------------- ---------------
providing back-end customer order and fulfillment services;
WHEREAS, the parties desire that SP engage Zappos to exclusively design,
develop, host and operate the SP Web Site, which will include providing
electronic commerce capabilities and back-end customer order and fulfillment
services by Zappos personnel at SP warehouse locations; and
NOW, THEREFORE, the parties hereby agree as follows:
1. DEFINITIONS
(a) "Deliverable" means the version of the SP Web Site to be
------------
delivered by Zappos to SP by a specified date in accordance with the
Milestone Delivery Schedule. The Deliverables are set forth in Exhibit A
---------
attached hereto.
(b) "Design Specifications" means the written description of
-----------------------
the SP Web Site's functional and aesthetic aspects, as prepared by Zappos
and mutually agreed by the parties, including without limitation, the
design, functions, interfaces and technical requirements, all as set forth
in Exhibit C attached hereto. The parties agree that the SP Web Site shall
---------
have functionalities similar to the Zappos Web Site.
(c) "Intellectual Property Rights" means any and all now known or
------------------------------
hereafter existing rights associated with works of authorship or inventions
throughout the universe, including but not limited to copyrights, patents,
trademarks, and all other intellectual and industrial property and
proprietary rights (of every kind and nature throughout the universe and
however designated) relating to intangible property.
1
<PAGE>
(d) "Maintenance" means (a) making such corrections to the SP Web
-----------
Site and to related server hardware and network connections
required to ensure that the SP Web Site will be available for use on the
World Wide Web at all times and will conform to the Design Specifications,
(b) tracking and reporting of usage patterns, and (c) establishing a back-
up data protection plan for the SP Web Site.
(e) "Milestone" means any task to be completed by SP by a
---------
specified date in accordance with the Milestone Delivery Schedule.
The Milestones are set forth in Exhibit A attached hereto.
(f) "Milestone Delivery Schedule" means the description attached
---------------------------
Whereto as Exhibit A of the Milestones and Deliverables to be delivered
---------
and the dates by which each Milestone is to be completed and each
Deliverable is to be delivered to SP.
(g) "SP Content" means the existing online content of SP, as
----------
well as information with respect to inventor, product information, samples
to be photographed, design structure, imagery, and any audio and
audiovisual material, photographs, logos, trademarks, service marks, any
materials provided by SP for incorporation in the SP Site and original
elements of audiovisual or visual displays created hereunder specifically
for SP.
(h) "SP Products" means the SP products to be offered for sale
-----------
through the SP Web Site, as described in Exhibit B attached hereto. SP may
modify Exhibit B in its sole discretion
---------
from time to time in writing as necessary to meet-its business
obligations.
(i) "Statement of Work" means the written description attached
-----------------
hereto as Exhibit A of the work to be performed by Zappos in the
---------
development of the ent of the SP Web Site.
(j) "SP Web Site" means the so-called HTML "home page" on the
-----------
World Wide Web for the SP online storefront at URL: www.ShoePavilion.com,
and other linked pages and all portions thereof, capable of running in a
satisfactory manner, including without limitation, all HTML or other
formatted text files, all related graphics files, data files, modules,
routines and objects, and the computer software and all other script or
program files required to exploit such materials and that collectively
control the display of and user interaction with the SP Web Site and have
the features and capabilities described in the Design Specifications,
together with all Maintenance thereto.
2. DEVELOPMENT OF THE SP WEB SITE
2.1 Zappos Obligations. Zappos will develop, and use commercially
reasonable efforts to launch the SP Web Site on or before May 15, 2000.
Specifically, but without limiting the generality of the foregoing, Zappos
will be responsible for :
(a) development, design and implementation of the interfaces and
navigation (information design) for the SP Web Site, and development,
installation and testing of the SP Web Site in accordance with the Design
Specifications and Statement of Work;
2
<PAGE>
(b) providing or obtaining, at its expense, all necessary
programming and other production services and hardware and software to
implement the Design Specifications; and
(c) delivering the Deliverables to SP, in conformity with the
Design Specifications, the Statement of Work, and Milestone Delivery
Schedule.
2.2 SP Obligations. SP shall use commercially reasonable efforts
to assist in Zappos' development of the SP Web Site described in Section 2.1.
Without limiting the generality of the foregoing obligations, SP will be
responsible for:
(a) providing Zappos with initial access to the SP Content
pursuant to the Milestone Delivery Schedule; an d
(b) assisting in the migration of inventory data to the SP Web
Site in the required format for all of the SP Products.
2.3 Revisions. SP shall have ten (10) business days from the
delivery of any Deliverable to review and request in writing from Zappos
revisions to the Deliverable. Upon receipt of such requests, Zappos shall use
commercially reasonable efforts to implement such revision requests that the
Deliverable is within the scope of, and consistent with, the Design
Specifications, and the Statement of Work.
2.4 Exclusivity. The parties agree that Zappos will be the
exclusive provider of web site development services, web site hosting services
and web site operation services and capabilities (the "Exclusive Services") for
the SP Web Site and for any other e-commerce enabled web site selling SP
Products, subject to the right of SP to advertise SP Products on the Internet
pursuant to advertising agreements currently in force between SP and each of
Yahoo! and America Online.
2.5 Delay in Implementation of Service. The parties acknowledge
that the development and launch of the SP Web Site is a cooperative effort
requiring the diligent efforts of both parties. Therefore, in the event the SP
Web Site is not available on or before June 1, 2000, either party may, at any
time thereafter, terminate this Agreement immediately upon written notice. Such
termination will be each party's sole remedy and sole liability with respect to
the failure of the SP Web Site to be available on or prior to such date.
3. OPERATION OF THE SP WEB SITE
3.1 Operation of the SP Web Site. As between the parties, Zappos
will be responsible for the Maintenance and operation of the SP Web Site. Zappos
shall configure, install, house, maintain, upgrade, monitor, modify and operate
the computer equipment, server and other software, network equipment and
components, bandwidth and connectivity necessary to host and to operate the SP
Web Site. Zappos shall operate the SP Web Site on Zappos' computer servers in a
fashion substantially similar to the fashion in which it operates the Zappos Web
Site. However, the parties acknowledge that the SP Web Site may not operate
continuously
3
<PAGE>
or in an error-free fashion. SP will provide updated SP Content on
a routine basis as business dictates, including updated product information
reflecting current SP Products available for sale and providing samples of new
SP Products to be photographed by Zappos.
3.2 SP Web Site Payments and Order Fulfillment.
(a) Zappos personnel will be responsible for credit card
authorizations and processing of payments from customer purchase to Zappos'
account. Zappos will be responsible for the fulfillment of customer purchases of
SP Products on the SP Web Site, including without limitation, picking and
packing shoes from SP's warehouse located at 3200-F Regatta Boulevard, Richmond,
California 94804, shipping orders to customers pursuant to customer
instructions; billing and collecting on customer orders, including authorizing
and processing credit card transactions; and online customer sales support.
Notwithstanding the foregoing, SP will at all times retain title to SP Products
until the SP Products are shipped to the customer from SP's warehouse, at which
time the title will pass to the customer .
(b) SP will be responsible for providing SP Products to fulfill
customer orders on the SP Web Site and agrees to keep Zappos updated of
inventory levels. The SP Products will be sold to customers at sales prices and
terms to be determined by SP, but in no event will such prices and terms differ
from those of SP store locations .
(c) Zappos will calculate, invoice, collect any and all state
and local sales, gross receipts, use, property, license, value added,
withholding, excise or similar tax, federal, state or local, levied or assessed
with respect to the purchase of SP Products and any and all related duties,
tariffs, imposts and similar charges ("Taxes") (other than any taxes arising on
Client's net income) and shall remit all such Taxes to the appropriate
authorities as and when due, and timely file any and all necessary forms and
reports regarding the same. Zappos shall hold SP harmless from and against any
failure of Zappos to collect and remit such Taxes, and shall provide SP with a
quarterly report providing evidence of the payment thereof.
(d) Zappos will provide SP with a daily reconciliation of the SP
Products picked and packed from the SP Warehouse with the SP Products that were
in fact shipped and sold.
3.3 Customer Support. Zappos shall use commercially reasonable
efforts to correct any non-conformity in the SP Web Site that causes the SP Web
Site not to conform with the specifications therefor in Exhibit C. Zappos shall
---------
provide customer support to users of the SP Web Site in the same manner it
provides such support to users of the Zappos Web Site. SP shall not facilitate,
instruct or encourage its walk-in store customers to contact Zappos for customer
support.
3.4 Zappos' Employees. Zappos shall maintain a staff of employees,
including those located in the SP Warehouse, as required to meet Zappos' order
fulfillment obligations and other obligations that require a presence in SP's
physical locations, all of whom shall be the employees of Zappos but shall be
subject to the rules, regulations, standards of service and conduct established
by SP for its own employees. Zappos shall be responsible for all
4
<PAGE>
payments to be made to Zappos' employees and for the provision of worker's
compensation insurance, payroll taxes and other obligations incurred in the
hiring and use of its employees.
3.5 Conduct of Zappos. Zappos shall: (i) never knowingly
misrepresent SP Products; (ii) cause its advertising relating to the SP Products
and the SP Web Site to be truthful; (iii) conduct its services under this
Agreement so as to protect the business reputation of SP; (iv) comply with laws,
rules and regulations applicable to its activities, including but not limited to
advertising conducted by Zappos; and (v) exercise its reasonable efforts to meet
future objectives established by SP with respect to the brands of SP Products
carried and the depth of merchandise assortment.
3.6 Settlement of Customer Disputes. Zappos shall bear all costs
and expenses associated with processing of customer returns of SP Products in
accordance with SP's prevailing policy for SP's store locations. SP will
generally not accept returns (a) where the customer has worn the shoes, (b)
where there is no shoe box accompanying the return, (c) where the customer does
not have an original receipt, or (d) in similar situations where it would be
difficult for SP to re-sell the shoes. Settlements of substantial disputes
(including but not limited to disputes as to SP Product quality or refunds not
meeting SP's prevailing policy for SP's store locations) with customers with
regard to SP Products shall be under the control of SP and shall be settled by
SP. SP 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.
4. MARKETING, ADVERTISING AND RIGHTS TO USER INFORMATION
4.1 Promotion of the SP Web Site. SP shall use reasonable efforts to
promote the SP Web Site, including without limitation promoting the SP Web Site
through marketing and public relations channels available to SP as of the
Effective Date, including on its shopping bags, receipts, advertisements, etc.
4.2 Rights to User Information. The parties acknowledge that in
connection with the operation of the SP Web Site, Zappos will collect certain
user and transactional information about users of and transactions conducted
through the SP Web Site ("SP User Information"). Zappos will provide reports of
the SP User Information to SP to be mutually agreed by the parties. SP shall own
all right, title and interest in all SP User Information. Zappos will protect
and will not disclose any SP User Information and Zappos will: (a) use such SP
User Information only as reasonably required for the performance of its
obligations under this Agreement; (b) not deliver or disclose any SP User
Information to any third party; and (c) not use any SP User Information to
perform any services for any third party.
4.3 Zappos Web Site. Zappos will have exclusive rights to feature
SP products in the "Specials" section of the Zappos Web Site. It is agreed that
the "Specials" section shall feature approximately various SP Products and will
be updated on a daily basis.
5. PUBLICITY. SP and Zappos shall cooperate to develop a mutually
acceptable press release announcing the relationship described herein no later
than 30 days from the
5
<PAGE>
Effective Date. SP and Zappos shall make such press release available on
their respective Web sites and will distribute such press releases to the media.
Under no circumstances may either party reveal the terms of this Agreement other
than to potential investors or acquirors for diligence purposes or pursuant to
the requirement of a governmental agency required by operation of law.
6. COSTS, FEES, AND PAYMENTS
6.1 Costs. As between the parties, Zappos will bear all the costs
associated with deploying the SP Web Site on the World Wide Web, rendering the
Exclusive Services, including updating the SP Content, rendering fulfillment
services for orders placed through the SP Web Site, including the payment of all
packaging, shipping and freight costs, and performing any ongoing corrections,
enhancements or support for the SP Web Site. Zappos will bear the production
costs associated with presentation of SP Products for sale on the SP Web Site,
including photography of sample SP Products provided by SP. SP will bear the
cost associated with supplying SP Content, including updates to such content in
the format required by Zappos, sample SP Products to be used in production, SP
Products for order fulfillment and SP mailing labels. Zappos will bear all costs
associated with supplying personnel to pick and package shoes at the SP
warehouse.
6.2 Payments. Zappos will provide SP with daily sales reports by
sending SP an electronic file in a format previously agreed upon by the parties.
Zappos will provide weekly reports to SP detailing (i) weekly gross sales, (iii)
daily Taxes and duties collected in accordance with Section 3.2(c), using sales
tax identification numbers provided by Zappos, (iii) quantity, product name and
product number for all SP Products sold during the each day of the preceding
week, (iv) the amount of discounts, credits and other adjustments from gross
sales which may be deducted therefrom in the computation of Net Sales for such
week, the resulting amount of Net Sales for such week, any other deductions
permitted under this Agreement, and the computation of the amount of payable to
SP thereunder for such week (the "Weekly Report"). Zappos will wire on a weekly
basis to the commercial bank designated by SP below 80% of Net Sales collected
during the preceding week. For purposes of this Agreement, "Net Sales" shall
mean (i) the total (gross) amounts received for or in connection with any and
all sales of merchandise, 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, credits or refunds, and Taxes
as are collected from customers.
7. WARRANTIES AND INDEMNIFICATIONS.
7.1 Each party represents, warrants and covenants to the other party
that it is a corporation duly organized, and has the power and authority to
enter into this Agreement. Zappos warrants that the software and other materials
created or used by Zappos in fulfilling its obligations under this Agreement
(with the exception of materials provided by SP) will not infringe the
proprietary rights of any third party, including any intellectual property,
trade secrets, patents, trademarks, copyrights or other third right of such
party. EXCEPT AS SET FORTH ABOVE, NEITHER PARTY MAKES ANY WARRANTIES TO THE
OTHER
6
<PAGE>
PARTY, EITHER EXPRESS OR IMPLIED, AND HEREBY DISCLAIMS ANY IMPLIED WARRANTIES OF
MERCHANTABILITY, AND FITNESS FOR A PARTICULAR PURPOSE.
7.2 Zappos agrees to defend, indemnify and hold harmless SP, its
parent, subsidiaries and affiliates and their respective officers, directors,
employees, and agents from and against all claims, actions, suits, demands,
proceedings, obligations, liabilities, damages, losses, judgments and expenses
(including costs of collection, attorneys' fees and other costs of defense)
(collectively "Damages"), arising out of or resulting from claims or allegations
of infringement of the proprietary rights of any third party, including any
intellectual property, trade secrets, patents, trademarks, copyrights or other
third right of such party arising out of Zappos' services under this Agreement.
8. TERM AND TERMINATION.
8.1 Term and Termination. This Agreement will become effective on
the Effective Date and shall remain force for an initial term ending on December
31, 2000. Thereafter, the term of this Agreement will continue until terminated
as described in Section 8.
8.2 Termination at Will. Either party may terminate this Agreement
upon one hundred twenty (120) days' prior written notice at any time after the
end of the initial term described in Section 8.1.
8.3 Events of Default. A party may terminate this Agreement and its
further obligations hereunder upon the occurrence of any of the following events
of default (subject to Section 8.5) :
(a) The other party ceases business in the ordinary course,
makes an assignment for the benefit of its creditors, or lacks adequate
funding to sustain business in the ordinary course for the next thirty (30)
days; or
(b) The other party is in material default of any provision of
this Agreement.
8.4 Cure Period for Event of Default. Upon the occurrence of any
event of default entitling a party to terminate this Agreement, the non-
defaulting party may send notice of termination, specifying the nature of the
default, to the other party. The defaulting party may have 30 calendar days,
following the date of such notice to enable it to cure the default to the non-
defaulting party's satisfaction (assuming that the default is susceptible of
cure). Failure to cure the default will result in termination without further
notice by the non-defaulting party.
8.5 Effect of Termination. Upon expiration or termination of this
Agreement, each party shall return or destroy the Confidential Information (as
defined herein) of the other party. The rights and obligations of the parties
pursuant to Sections 3.2(c), 4.2, 6, 7, 8.5, 9.3, 9.4, 10, 11, 12 and 13 will
survive termination or expiration of this Agreement for any reason.
7
<PAGE>
9. LICENSES AND OWNERSHIP
9.1 Trademark License. Each party ("Licensor") grants to the other
party ("Licensee") a non-exclusive, non-transferable, royalty-free right to
display, the trademarks, domain names and logos adopted by Licensor ("Marks"),
solely to perform Licensee's obligations under this Agreement. In addition,
subject to Sections 5 and 9, Licensee may display the Marks on an appropriate
area of its Web site indicating its business associates and strategic alliances.
9.2 Review. Licensee shall submit to Licensor all representations
of the Marks that Licensee intends to use in connection with the license granted
in Section 9.1, for Licensor's approval of design, color, presentation, quality,
and conformance with the Licensor's trademark and branding policies. Licensee
shall not publish, disseminate, exhibit, or otherwise distribute any such
representation without the Licensor's prior written permission. Once Licensor
grants its approval, Licensor shall not unreasonably withdraw its approval, and
Licensee will not be obligated to seek further approval for substantially
similar uses of the Mark.
9.3 Assignment of Goodwill. If Licensee, in the course of
performing its services hereunder, acquires any goodwill or reputation in any of
the Marks, all such goodwill or reputation will automatically vest in Licensor
when and as, on an on-going basis, such acquisition of goodwill or reputation
occurs, as well as at the expiration or termination of this Agreement, without
any separate payment or other consideration of any kind to Licensee, and
Licensee agrees to take all such actions necessary to effect such vesting.
Licensee shall not contest the validity of any of the Marks or Licensor's
exclusive ownership of them. During the term of this Agreement, Licensee shall
not adopt, use, or register, whether as a corporate name, trademark, service
mark or other indication of origin, any of the Marks, or any word or mark
confusingly similar to them in any jurisdiction.
9.4 Retained Rights. Each party hereby reserves all intellectual
property rights not explicitly granted in this Agreement. For the avoidance of
doubt, the parties agree that: (a) with the exception of the trade dress,
graphical design and general appearance (the "look and feel") of the SP Web
Site, Zappos owns all Intellectual Property Rights associated with the SP Web
Site as delivered, including hardware, software, web design and programming; and
(b) SP owns the domain name www.ShoePavilion.com, the SP Marks and name, the SP
-------------------
Content as it currently exists and as it may be updated from time to time, the
"look and feel" of the SP Web Site prior to, during and upon termination of this
Agreement, and hardware, software, web design and programming currently used on
the SP Web Site prior to any commencement of work by Zappos.
8
<PAGE>
10. LIMITATION OF LIABILITY. EXCEPT FOR ANY LIABILITY ARISING OUT OF A
BREACH OF SECTION 11 ("CONFIDENTIALITY") OR ZAPPOS' THIRD PARTY RIGHTS WARRANTY
UNDER SECTION 7.1, OR ZAPPOS' INDEMNIFICATION OBLIGATIONS UNDER SECTION 7.2,
NEITHER PARTY WILL BE LIABLE TO THE OTHER FOR ANY LOST PROFITS, LOSS OF MARKET
OR OPPORTUNITY AND/OR INCIDENTAL OR CONSEQUENTIAL LOSS OR DAMAGE HOWSOEVER
ARISING (WHETHER OR NOT ARISING OUT OF THE NEGLIGENCE OF ZAPPOS OR SP, OR THEIR
RESPECTIVE EMPLOYEES OR AGENTS) IN CONNECTION WITH THE SUBJECT MATTER OF THIS
AGREEMENT, PURSUANT TO ANY CLAIM IN CONTRACT, NEGLIGENCE, TORT, STRICT
LIABILITY, OR OTHER THEORY.
11. CONFIDENTIALITY
11.1 "Confidential Information" is any information disclosed by
one party to the other in connection with this Agreement and which the receiving
party knows or has reason to know is regarded as confidential information by the
disclosing party. The Confidential Information will include, but will not be
limited to, trade secrets, the structure, sequence and organization of the
source code of computer software, marketing plans, techniques, processes,
procedures and formulae, sales information, sales volume, sales figures,
earnings, business plans, business development plans, and mergers and
acquisitions. For each item of Confidential Information, the party disclosing
the item will be called the "Disclosing Party," and the party receiving the item
will be called the "Receiving Party."
11.2 Non-Use and Non-Disclosure. The Receiving Party shall hold all
Confidential Information of the Disclosing Party in trust and confidence, and
protect it as the Receiving Party would protect its own confidential information
(which, in any event, will not be less than reasonable protection) and shall not
use such Confidential Information for any purpose other than that contemplated
by this Agreement. Unless agreed by the Disclosing Party in writing, the
Receiving Party shall not disclose any Confidential Information of the
Disclosing Party, by publication or otherwise, to any person other than
employees and contractors (such as contract manufacturers or software
developers) who (i) are bound to written confidentiality obligations consistent
with and at least as restrictive as those set forth herein and (ii) have a need
to know such Confidential Information for purposes of enabling a party to
exercise its rights and perform its obligations pursuant to this Agreement. The
foregoing confidentiality obligation will be effective for a period of three
years after first disclosure of the Confidential Information pursuant to the
terms of this Agreement, provided however, that each party will comply with any
obligations of confidentiality as may be imposed pursuant to agreements with
third parties for longer periods if the Disclosing Party discloses to the other
in writing such obligations of confidentiality that may be imposed pursuant to
such agreements with third parties at the time of disclosure.
11.3 Exceptions. The obligations specified in Section 11.2 will not
apply to any Confidential Information to the extent that:
9
<PAGE>
(a) it is already known to the Receiving Party without
restriction prior to the time of disclosure by the Disclosing Party;
(b) it is acquired by the Receiving Party from a third party
without confidentiality restriction;
(c) it is independently developed or acquired by the Receiving
Party by employees or contractors without access to such Confidential
Information ;
(d) it is approved for release by written authorization of the
Disclosing Party;
(e) it is in the public domain at the time it is disclosed or
subsequently falls within the public domain through no wrongful action of
the Receiving Party;
(f) it is furnished to a third party by the Disclosing Party
without a similar restriction on that third party's right of disclosure;
(g) it is disclosed pursuant to the requirement of a
governmental agency or disclosure is permitted or required by operation of
law, provided that the Receiving Party use its best efforts to notify the
Disclosing Party in advance of such disclosure and seeks confidential
treatment for such Confidential Information.
11.4 Confidentiality of Agreement. Each party agrees that the terms
and conditions of this Agreement will be treated as Confidential Information;
provided that each party may disclose the terms and conditions of this
Agreement: (a) to legal counsel; (b) in confidence, to accountants, banks, and
financing sources and their advisors; (c) in connection with promotional and
marketing activities permitted by this Agreement; and (d) in confidence, in
connection with the enforcement of this Agreement or rights under this
Agreement.
11.5 Maintenance of Confidentiality by Zappos Employees. To the
extent that Zappos maintains employees and/or independent contractors at the SP
Warehouse or other SP locations, such Zappos' employees and independent
contractors shall be subject to the same confidentiality obligations and
standards, including obligations and standards with regard to insider trading of
SP Confidential Information, as SP's own employees.
12. JURISDICTION AND APPLICABLE LAW
12.1 Arbitration. Any claim, dispute, or controversy arising out of
or in connection with or relating to this Agreement or the breach or alleged
breach thereof will, if not resolved within 30 days, may be submitted by either
party to binding arbitration by the American Arbitration Association in the
County of Contra Costa, State of California, United States of America under the
commercial rules then in effect for that Association, except as provided herein.
Each party shall choose one arbitrator within thirty (30) days of receipt of the
notice of intent to arbitrate. Within sixty (60) days of receipt of the notice
of intent to arbitrate, the two arbitrators will choose a neutral third
arbitrator who will act as chairman. All chosen arbitrators
10
<PAGE>
must have experience related to the subject of the dispute. If no
arbitrator is appointed within the times herein provided, or any extension of
time that is mutually agreed upon, the Association will make such appointment
within thirty (30) days of such failure. The parties will be entitled to
discovery as provided in Sections 1283.05 and 1283.1 of the Code of Civil
Procedure of the State of California or any successor provision, whether or not
the California Arbitration Act is deemed to apply to the arbitration. The award
rendered by the arbitrators will include costs of arbitration, reasonable
attorneys' fees, and reasonable costs for expert and other witnesses, and
judgment on such award may be entered in any court having jurisdiction thereof.
Nothing in this Agreement will be deemed as preventing either party from seeking
injunctive relief (or any other provisional remedy) from any court having
jurisdiction over the parties and the subject matter of the dispute as necessary
to protect either party's name, proprietary information, trade secrets, know
how, or any other proprietary rights.
12.2 Choice of Forum. The parties hereby submit to the jurisdiction
of, and waive any venue objections against, the United States District Court for
the Northern District of California, San Francisco Branch and the Superior and
Municipal Courts of the State of California, San Francisco County, in any
litigation arising out of the Agreement.
12.3 Governing Law. This Agreement will be governed by and
construed under the laws of the United States and the State of California,
without regard to choice of law provisions.
13. MISCELLANEOUS.
13.1 Event of Force Majeure. If the performance of this Agreement
or any obligations hereunder is prevented, restricted, or interfered with by
reason of acts of God, acts of an governmental authority, riot, revolution,
fires, or war, or other cause beyond the reasonable control of the parties
hereto ("Force Majeure"), the party so effected will be excused from such
performance until such Force Majeure is removed, provided that the party so
affected will use its best efforts to avoid or remove such causes of non-
performance and shall continue performance hereunder with the utmost dispatch
whenever such causes are removed. In no event will this provision apply to
excuse a party from any payment obligations under this Agreement.
13.2 Waiver. Any waiver of breach or default pursuant to this
Agreement will not be a waiver of any other subsequent default. Failure or delay
by either party to enforce any term or condition of this Agreement will not
constitute a waiver of such term or condition.
13.3 Severability. To the extent that any provision of this
Agreement is found by a court of competent jurisdiction to be invalid or
unenforceable, that provision notwithstanding, the remaining provisions of this
Agreement will remain in full force and effect and such invalid or unenforceable
provision will be deleted.
13.4 Assignment. Neither party may assign, voluntarily, by
operation of law, or otherwise, any rights or delegate any duties under this
Agreement (other than third-party technical infrastructure and the right to
receive payments) without the other party's prior written consent, and any
attempt to do so without that consent will be void; provided, however, that
11
<PAGE>
either party may assign any of its rights or obligations under this Agreement in
connection with a sale of substantially all of its assets, merger, public
offering or other reorganization transaction, except to a direct competitor of
the other party. This Agreement will bind and inure to the benefit of the
parties and their respective successors and permitted assigns.
13.5 Notices. Any notice required or permitted pursuant to this
Agreement must be in writing delivered by hand, overnight courier, telecopy,
facsimile, or certified or registered mail to the address listed below and will
be effective (i) upon receipt, (ii) if by overnight courier, two business days
after deposit with DHL, UPS or FedEx for overnight delivery, or (iii) if by
certified or registered mail, five business days after deposit in a U.S.P.S.
mail box addressed as follows:
Shoesite.com dba Zappos.com
1000 Van Ness, Suite 213
San Francisco, California 94109
Attn: Chief Executive Officer
Shoe Pavilion Corporation
3200-F Regatta Blvd.
Richmond, California 94804
Attn: Dmitry Beinus, Chief Executive Officer
13.6 Amendment. No alteration, waiver, cancellation, or any other
change or modification in any term or condition of this Agreement will be valid
or binding on either party unless made in writing and signed by duly authorized
representatives of both parties.
13.7 Counterparts. This Agreement may be executed in one or more
counterparts, including facsimiles, each of which will be deemed to be a
duplicate original, but all of which, taken together, will be deemed to
constitute a single instrument.
13.8 Entire Agreement. The terms and conditions herein contained,
including all Exhibits hereto, constitute the entire agreement between the
parties with respect to the subject matter of this Agreement and supersede any
previous and contemporaneous agreements and understandings, whether oral or
written, between the parties hereto with respect to the subject matter hereof.
There are no other agreements, understandings, representations, or promises
between the parties with respect to the subject matter of this Agreement.
13.9 Construction. This Agreement is the product of negotiation
between the parties and their respective counsel. This Agreement will be
interpreted fairly in accordance with its terms and conditions and without any
strict construction in favor of either party. Any ambiguity will not be
interpreted against the drafting party.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
executed by their respective duly authorized representatives as of the Effective
Date.
12
<PAGE>
<TABLE>
<CAPTION>
Shoesite.com Shoe Pavilion Corporation
dba Zappos.com
<S> <C>
By: By:
Name: Name:
Title: Title:
Date: Date:
</TABLE>
13
<PAGE>
Exhibit A
STATEMENT OF WORK
Milestones/Deliverable Milestone Delivery Schedule
Initial Access to SP Content April 25, 2000
Alpha Version (design & core functionality) May 1, 2000
Beta Version
(full functionality subject to errors
excluding credit card functionality) May 15, 2000
Final Version May 20, 2000
(full functionality & errors corrected
excluding credit card functionality)
Launch Version/Scheduled Launch Date May 20, 2000
(full functionality & errors corrected
including credit card functionality)
14
<PAGE>
Exhibit B
SP Products
The following are the products authorized by SP for ordering by
customers on the SP Web Site and fulfillment by Zappos on behalf of SP through
the SP Web Site :
All products currently being offered by SP for retail sale in SP stores, except
for those products in the sole discretion of SP management, that it deems not
appropriate for sale on the SP and Zappos Web Sites.
15
<PAGE>
Exhibit C
Design Specifications
The SP Web Site to have the exact same functionality and aesthetic aspects in
terms of look and feel of the Zappos Web Site, including but not limited to,
shopping cart functionality, credit card processing and payment, customer
service, etc. all incorporating the SP branding.
16
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-30-2000
<PERIOD-START> JAN-02-2000
<PERIOD-END> APR-01-2000
<CASH> 764
<SECURITIES> 0
<RECEIVABLES> 525
<ALLOWANCES> 0
<INVENTORY> 39,012
<CURRENT-ASSETS> 41,161
<PP&E> 9,185
<DEPRECIATION> 3,743
<TOTAL-ASSETS> 47,576
<CURRENT-LIABILITIES> 26,557
<BONDS> 0
0
0
<COMMON> 7
<OTHER-SE> 19,266
<TOTAL-LIABILITY-AND-EQUITY> 47,576
<SALES> 19,322
<TOTAL-REVENUES> 19,322
<CGS> 13,235
<TOTAL-COSTS> 13,235
<OTHER-EXPENSES> 5,521
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 187
<INCOME-PRETAX> 377
<INCOME-TAX> 148
<INCOME-CONTINUING> 229
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 229
<EPS-BASIC> .03
<EPS-DILUTED> .03
</TABLE>
