<PAGE>
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
_________________
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 or 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended Commission File Number
January 1, 2000 0-23669
SHOE PAVILION, INC.
(Exact name of registrant as specified in its charter)
Delaware 94-3289691
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification Number)
___________________________
3200-F Regatta Boulevard, Richmond, California 94804
(Address of principal executive offices) (Zip Code)
Telephone Number: (510) 970-9775
Securities Registered Pursuant to Section 12(b) of the Act:
Name of each exchange
Title of each class on which registered
------------------- -------------------
None None
Securities Registered Pursuant to Section 12(g) of the Act:
Common Stock
------------
(Title of Class)
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 by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K ((S) 229.405 of this chapter) is not contained herein, and
will not be contained, to the best of registrant's knowledge, in definitive
proxy or information statements incorporated by reference in Part III of this
Form 10-K or any amendment to this Form 10-K. [X]
At March 22, 2000 the aggregate market value of the registrant's Common
Stock held by non-affiliates of the registrant was approximately $5,175,000.
At March 22, 2000 the number of shares outstanding of registrant's Common
Stock was 6,800,000.
DOCUMENTS INCORPORATED BY REFERENCE
Definitive Proxy Statement for the Company's 1999 Annual Meeting of
Stockholders - Part III of this Form 10-K.
<PAGE>
Shoe Pavilion, Inc.
Index to Annual Report on Form 10-K
For the year ended January 1, 2000
<TABLE>
<CAPTION>
Page
----
<S> <C>
PART I
Item 1 Business................................................................................. 3
Item 2 Properties............................................................................... 8
Item 3 Legal Proceedings........................................................................ 9
Item 4 Submission of Matters to a Vote of Security Holders...................................... 9
PART II
Item 5 Market for the Registrant's Common Equity and Related Stockholder Matters................ 10
Item 6 Selected Financial Data.................................................................. 11
Item 7 Management's Discussion and Analysis of Financial Condition and Results of Operations.... 12
Item 7A Quantitative and Qualitative Disclosure About Market Risk................................ 19
Item 8 Financial Statements and Supplementary Data.............................................. 20
Item 9 Changes in and Disagreements with Accountants on Accounting and Financial Disclosure..... 34
PART III
Item 10 Directors and Executive Officers of the Registrant....................................... 34
Item 11 Executive Compensation................................................................... 34
Item 12 Security Ownership of Certain Beneficial Owners and Management........................... 34
Item 13 Certain Relationships and Related Transactions........................................... 34
PART IV
Item 14 Exhibits, Financial Statement Schedules and Reports on Form 8-K.......................... 34
</TABLE>
2
<PAGE>
PART I
Item 1 Business
General
Shoe Pavilion, Inc. is the largest independent off-price footwear retailer
on the West Coast that offers a broad selection of women's and men's designer
label and name brand merchandise. The Company was among the first footwear
retailers on the West Coast to expand the off-price concept into the designer
and name brand footwear market. As of January 1, 2000 the Company operated 78
retail stores under the trade name Shoe Pavilion, in California, Washington and
Oregon and the licensed shoe departments of 33 Gordmans, Inc. (formerly Richman
Gordman 1/2 Price Stores, Inc.) department stores in Colorado, Illinois, Iowa,
Kansas, Missouri, Nebraska, Oklahoma and South Dakota.
The Company offers quality designer and name brand footwear such as,
Clarks, Dexter, Fila, Florsheim, Naturalizer, Nickles and Rockport, typically at
30% to 70% below regular department store prices for the same shoes. Such price
discounts appeal to value-oriented consumers seeking quality brand name footwear
not typically found at other off-price retailers or mass merchandisers. The
Company is able to offer lower prices by (i) selectively purchasing large blocks
of production over-runs, over-orders, mid- and late-season deliveries and last
season's stock from manufacturers and other retailers at significant discounts,
(ii) sourcing in-season name brand and branded design merchandise directly from
factories in Italy, Brazil and China and (iii) negotiating favorable prices with
manufacturers by ordering merchandise during off-peak production periods and
taking delivery at its central warehouse in Richmond, California. During 1999,
the Company purchased footwear merchandise from over 100 domestic and
international vendors, independent resellers, manufacturers and other retailers
that have frequent excess inventory for sale.
The Company's stores utilize a self-service format that allows inventory to
be stored directly under a displayed shoe, thereby eliminating the need for a
stockroom and significantly increasing retail floor space. The functionality and
simplicity of this format enable flexible store layouts that can be easily
reconfigured to accommodate a new mix of merchandise. Moreover, this format
allows customers to locate all available sizes of a particular shoe and to try
them on for comfort and fit without a salesperson's assistance, thereby reducing
in-store staffing needs and allowing customers to make independent, rapid
purchasing decisions.
Shoe Pavilion is a standardized concept that offers a bright, clean, low
maintenance and functional shopping environment to customers interested in
purchasing quality men's and women's value priced footwear. The Company's stores
are strategically located in strip malls, outlet centers and downtown locations,
frequently in close proximity to other off-price apparel retailers that attract
similar customers. Shoe Pavilion stores average approximately 7,100 square feet
and offer between 15,000 and 30,000 pairs of shoes, while the Gordmans licensed
shoe departments average approximately 3,200 square feet and offer between 8,000
and 16,000 pairs of shoes. The Company opened, net of closures, 42 stores in
1999, 14 stores in 1998 and 14 stores in 1997. During 2000, the Company intends
to open 10 to 15 new stores, including licensed shoe departments, primarily in
its existing markets. It also expects to close four to five stores, and relocate
one to two stores in 2000.
The Company was incorporated in Delaware in November 1997 and is the
successor to Shoe Pavilion Corporation (formerly Shoe Inn, Inc.), which was
incorporated in Washington in 1983. The Company's executive offices are located
at 3200-F Regatta Boulevard, Richmond, California 94804, and its telephone
number is (510) 970-9775.
3
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Operating Strategy
The Company's objective is to be the leading off-price retailer of designer
label and name brand footwear in each of the markets it serves. The operating
strategy is designed to allow the Company to offer its customers quality
footwear typically at 30% to 70% below department store prices for the same
shoes. The following summarizes key elements of the Company's operating
strategy:
. Off-Price Concept, Premium Name Brands. The Company differentiates
itself from other off-price retailers and deep discount chains by
focusing on higher price point merchandise, extending the off-price
concept into the designer and name brand footwear market. As such,
the Company generally does not compete with other discount stores
in obtaining the majority of its merchandise. Similarly, while some
department store and brand name retail chains operate discount
outlets, such operations generally obtain merchandise from existing
inventory of their retail affiliates rather than from external
sources. Some of the Company's most successful stores have
benefited from the heightened consumer awareness and preference to
shop at discount malls or outlet centers, both of which typically
include other off-price retailers.
. Broad Selection of Designer Footwear. The Company offers a broad
selection of quality footwear from over 75 name brands such as
Clarks, Dexter, Fila, Florsheim, Naturalizer, Nickles and Rockport.
The availability and wide variety of premium brand names
distinguish Shoe Pavilion and serve to attract first time buyers
and consumers who otherwise might shop at more expensive department
stores. The wide variety of brand names also enables the Company to
tailor its merchandise from store to store to accommodate consumer
preferences that may vary by location.
. Selective Bulk Purchases; Diverse Vendor Network. The Company is
able to offer lower prices by selectively purchasing large blocks
of over-runs, over-orders, mid- and late-season deliveries and last
season's stock from over 100 domestic and international vendors,
independent resellers, manufacturers and other retailers at
significant discounts. The diversity and scope of its vendor
network help to provide a constant source of quality merchandise,
and the purchase of name brand, traditional styles helps to
mitigate the likelihood of inventory writedowns. To augment
available merchandise with the latest in-season styles, the Company
purchases branded design footwear directly from factories in Italy,
Brazil and China.
. Self-Service Stores. The Company believes that the self-service
format reinforces its off-price strategy and appeals to value-
oriented consumers. The Company's format allows inventory to be
stored directly under a displayed shoe, thereby eliminating the
need for a stockroom and significantly increasing retail floor
space. The functionality and simplicity of this format enable
flexible store layouts that can be easily rearranged to complement
the current merchandise. Moreover, this format allows customers to
locate all available sizes of a particular shoe and to try them on
for comfort and fit without a salesperson's assistance, thereby
reducing in-store staffing needs and allowing customers to make
independent, rapid purchasing decisions.
. Internet Commerce. The Company intends to further increase its
effort to sell its products online via its website,
shoepavilion.com. In addition, the Company has formed partnerships
with various internet service providers and multimedia companies to
sell its products on their website or have direct links back to the
Company's website.
Growth Strategy
Since opening its first store in 1979 in Washington, the Company has
expanded to 111 stores, including 33 licensed shoe departments, in eleven
states. The Company intends to continue to expand by opening new stores,
enhancing comparable store sales, pursuing acquisition opportunities, including
licensing and promoting internet commerce.
. Continue New Store Openings. The Company intends to increase its
presence in its current markets and to enter new markets by
selectively opening new stores, which can be served by the
Company's business support and distribution infrastructure. When
entering a new market, the Company prefers to open multiple stores,
thereby creating an immediate market presence and enabling
television advertising costs to be spread economically across a
number of stores. The Company opened 17 stores and 33 licensed shoe
4
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department locations in 1999, 16 stores in 1998 and 16 stores in
1997. It closed eight stores in 1999, two stores in 1998 and two
stores in 1997. During 2000, the Company intends to open 10 to 15
new stores, including licensed shoe departments, primarily in its
existing markets. Management believes that new store openings in
the Company's current markets will further increase name
recognition, which, in turn, will facilitate expansion into new
markets.
. Increase Comparable Store Sales. During 1999, the Company
experienced a 1.2% downturn in comparable store growth after
achieving a 6.1% increase in 1998 and a 4.6% increase in 1997.
Management intends to focus on achieving historical same store
growth rates through a continuing refinement of its store locations
and merchandise selection.
. Pursue Acquisition and License Opportunities. The retail footwear
industry is highly fragmented and includes family and specialty
shoe stores, which represent approximately 20% of total retail
footwear sales. Accordingly, management believes that a number of
opportunities exist to acquire one or more regional or local
footwear retailers. The Company intends to evaluate opportunities
to acquire existing footwear retailers and convert the acquired
stores to the Company's off-price merchandising concept. Further,
the Company intends to examine opportunities in operating licensed
shoe departments for various regional department store retailers.
. Promote Internet Commerce. Management intends to continue to expand
the offerings on it's website, shoepavilion.com, and seek alliances
with other electronic retailers that present synergistic
opportunities. The Company believes that internet commerce will
enhance revenues and further increase name recognition.
The Company's ability to execute its operating and growth strategy is
subject to numerous risks and uncertainties. There can be no assurance that the
Company will be successful in implementing its strategy or that its strategy,
even if implemented, will lead to successful achievement of the Company's
objectives. If the Company were unable to implement its strategy effectively,
the Company's business, financial condition and results of operations would be
materially adversely affected.
Merchandising
Unlike deep-discount retailers, Shoe Pavilion offers high quality
merchandise and a consistent selection of name brand dress and casual shoes for
men and women. List prices generally range between $19.99 and $69.99 for women's
shoes, and between $39.99 and $99.99 for men's shoes. The principal categories
of footwear offered by Shoe Pavilion stores, and selected brands for each, are
summarized in the following table:
<TABLE>
<CAPTION>
Women's Men's Athletic
----------------- --------------- --------------
<S> <C> <C>
BCBG Bass Adidas
Enzo Bostonian Asics
Esprit Clarks Brooks
Easy Spirit Dexter Fila
Hush Puppies Florsheim K.Swiss
Jones of New York Lugz New Balance
Life Stride Nunn Bush Nike
Naturalizer Rockport Puma
Nickles Skechers Reebok
Rockport Timberland Saucony
</TABLE>
5
<PAGE>
Site Selection, Opening Costs and Leases
The Company uses an exclusive broker on the West Coast to identify
potential retail sites as well as possible acquisition candidates. Before
entering a new market, management reviews detailed reports on demographics;
spending, traffic, and consumption patterns; and other site and market related
data. As of January 1, 2000, 44 of the Company's stores were located in strip
malls, 10 were located in outlet centers, 11 were located in free standing
stores and 13 were located in other types of facilities.
In July 1999, the Company entered into a license agreement to operate 33
shoe departments at Gordmans, Inc., a Midwest name brand family apparel,
accessories and home fashions off-price retailer. All of the shoe departments
are located within Gordmans department stores, which are primarily located in
strip centers or free standing locations. Because there are no leasehold
improvement or equipment requirements and licensed shoe departments average
approximately one-half the size of Company stores, opening costs are
substantially less than Shoe Pavilion stores. Opening costs for licensed shoe
departments are for fixtures and inventory, and average $110,000, consisting of
approximately $10,000 for fixtures and $100,000 for inventory.
Opening costs for stores are typically minimal, excluding the initial
stocking of inventory. The Company estimates that its total cash requirements to
open a typical new store average $400,000, consisting of approximately $90,000
for fixtures, equipment and leasehold improvements; $300,000 for inventory; and
the balance for working capital needs. Costs vary from store to store depending
on, among other things, the location, size, property condition, and the tenant
improvement package offered by the landlord. The Company has been able to
renegotiate some of its existing leases to be more heavily revenue-based. The
Company does not own any of its real estate.
The Company actively monitors individual store performance and closes
underperforming stores, including eight stores in 1999, two stores in 1998 and
two stores in 1997. The relatively small investment required to open new stores
affords the Company the flexibility to close stores more quickly than other
retailers. During 2000, the Company expects to close four to five stores and
relocate two to three stores. See "Item 7 -- Management's Discussion and
Analysis of Financial Condition and Results of Operations--Factors Affecting
Financial Performance--Risks Associated with Expansion."
Sourcing And Purchasing
Vendors. During 1999, the Company purchased its inventory from over 100
domestic and international vendors, independent resellers and other retailers
who have over bought merchandise. In 1999, the Company's top ten suppliers
accounted for 44.3% of its inventory purchases, of which purchases from Gen-X
Equipment, LTD. and Brown Shoe Company, Inc. accounted for 11.3% and 4.5% of
total inventory purchases, respectively. The Company purchases from its
suppliers on an order-by-order basis and has no long-term purchase contracts or
other contractual assurances of continued supply or pricing. Since the Company
has locations in a number of markets along the West Coast and the Midwest, Shoe
Pavilion can accommodate and distribute a wide variety of merchandise that meets
the needs of customers in different geographic areas. Management believes that
the strength and variety of its supplier network mitigates much of the Company's
exposure to inventory supply risks. See "Item 7 -- Management's Discussion and
Analysis of Financial Condition and Results of Operations--Factors Affecting
Financial Performance--Inventory and Sourcing Risk."
Direct Sourcing. The Company purchases in-season name brand and branded
design merchandise directly from factories in Italy, Brazil and China. These
purchases include both labeled and non-labeled goods and provide a consistent
source of in-season merchandise. Directly sourced goods accounted for
approximately 10.8% and 12.9% of the Company's net sales in 1999 and 1998,
respectively. The Company purchases from its manufacturing sources on an order-
by-order basis and has no long-term purchase contracts or other contractual
assurances of continued supply or pricing. See "Item 7 -- Management's
Discussion and Analysis of Financial Condition and Results of Operations--
Factors Affecting Financial Performance--International Purchasing."
6
<PAGE>
Marketing
The Company believes that television advertising benefits all stores in a
common viewing market. In 1999, the Company spent approximately 3.3% of net
sales, or $2.4 million, net of vendor contributions. In 1998 the amount was 5.4%
of net sales, or $3.0 million without any vendor contributions. The Company
believes that advertising costs for a particular market will be more effectively
and economically leveraged as the number of stores increases in that market.
The Company occasionally uses print advertising, usually at the time of a new
store opening; however, it has found print advertising to be less effective than
television advertising. Shoe Pavilion's signage is consistent at all of its
locations, with highly visible signage at the front and, when appropriate, rear
of the store.
Merchandise Distribution
The Company operates a 92,000 square foot distribution facility located in
Richmond, California. This distribution facility also houses the Company's
executive and administrative headquarters. Vendors ship all products to this
central distribution center where the merchandise is inspected, verified against
the original purchase order, ticketed and repackaged for shipment to stores. The
Company believes that this facility can accommodate the Company's planned growth
for the foreseeable future.
Information Systems
During 1999, the Company completed an upgrade of its information systems on
an enterprise-wide basis, including all critical areas of corporate office,
network infrastructure and point of sale (POS). This fully integrated upgrade,
uses an IBM AS 400 that is reliable and scalable, allowing simple upgrades of
processing power as the business grows. In addition, the corporate network
infrastructure was upgraded to a Windows NT environment with standardized
workstations and a common set of desktop applications that may be used
throughout the Company. This upgrade has provided a more stable networking
environment as well as a proper foundation for future growth. As of January 1,
2000, the Company had incurred approximately $2.8 million in total costs for
implementing these new systems. These costs include approximately $800,000 for
equipment, which is being leased by the Company over 36 to 60 months. See "Item
7 -- Management's Discussion and Analysis of Financial Condition and Results of
Operation--Impact of Year 2000."
Competition
The retail footwear market is highly competitive, and the Company expects
the level of competition to increase. The Company competes with off-price and
discount retailers (e.g., Nordstrom Rack, Payless ShoeSource, Ross Dress for
Less and Famous Footwear), branded retail outlets (e.g., Nine West), national
retail stores (e.g., Nordstrom, Marshalls, Macy's, Sears, J.C. Penney,
Loehmann's, Robinsons-May and Mervyn's), traditional shoe stores and mass
merchants. Many of these competitors have stores in the markets in which the
Company now operates and in which it plans to expand.
Employees
As of January 1, 2000, the Company had approximately 275 full-time
employees and 442 part-time employees. The number of part-time employees
fluctuates depending upon seasonal needs. The Company's 28 warehouse employees
in Richmond, CA are represented by Local 315, International Brotherhood of
Teamsters. In December 1998, the Company signed a collective bargaining
agreement with Local 315 that terminates on January 31, 2002. The Company
generally considers its relationship with its employees to be good.
7
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Executive Officers
Certain information regarding the executive officers of the Company is set
forth below:
<TABLE>
<CAPTION>
Name Age Position
---- --- --------
<S> <C> <C>
Dmitry Beinus.......................... 47 Chairman of the Board and Chief Executive Officer
Robert R. Hall......................... 47 Vice President and Chief Operating Officer
Gary A. Schwartz....................... 48 Vice President of Finance, Chief Financial Officer,
Secretary and Director
Linda C. Hickey........................ 36 Vice President of Administration
</TABLE>
Dmitry Beinus has served as Chairman of the Board, President and Chief
Executive Officer of the Company since founding the Company in 1979. From 1976
to 1978, Mr. Beinus was employed in the shoe department of Nordstrom, Inc.
Robert R. Hall has served as Vice President and Chief Operating Officer of
the Company since January 1997. Mr. Hall joined the Company as a Regional
Manager in 1990, and has held various positions within the Company including
Operations Manager and Vice President of Merchandising.
Gary A. Schwartz has served as Vice President of Finance and Chief
Financial Officer of the Company since September 1997 and as Secretary and a
Director since November 1997. From January 1997 until April 1997, Mr. Schwartz
served as Vice President, Retail and Licensing of Jessica McClintock, Inc., a
women's apparel and fragrance company. From 1979 to 1996, Mr. Schwartz served as
Vice President and Chief Financial Officer of Byer California, an apparel
manufacturer and commercial real estate company. Mr. Schwartz is a Certified
Public Accountant.
Linda C. Hickey has served as Vice President of Administration since
January 1997. Ms. Hickey joined the Company in 1984 as a Sales Associate. From
1985 to 1992, Ms. Hickey held various positions that included inventory control,
accounting, payroll, and personnel, and from 1992 to 1996, she served as
Director of Administration.
The Company's executive officers serve at the discretion of the Board of
Directors. There is no family relationship between any of the Company's
executive officers or between any executive officer and any of the Company's
directors.
Item 2 -- Properties
The Company's corporate offices and distribution facility are located in a
92,000 square foot facility in Richmond, California, which the Company occupies
under a lease expiring in 2002. As of January 1, 2000 the Company's 78 stores
occupied an aggregate of approximately 555,000 square feet of space. The 33
licensed shoe departments had an aggregate of 104,000 square feet of space as of
January 1, 2000. The Company leases all of its stores, with leases expiring
between 2000 and 2009. The Company has options to renew most of its leases.
8
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Store Locations
As of January 1, 2000, the Company operated 78 retail stores in the states
of California, Washington and Oregon and 33 licensed shoe departments in
Colorado, Illinois, Iowa, Kansas, Missouri, Nebraska, Oklahoma and South Dakota.
The number of stores in each geographic area is set forth below:
<TABLE>
<CAPTION>
Stores at Year End
--------------------------------------------------------
1999 1998 1997 1996 1995
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Location
--------
California................................................. 31 27 24 22 22
Southern California........................................ 30 25 16 4 2
Nevada..................................................... 0 0 1 1 1
Oregon..................................................... 4 4 2 2 0
Washington................................................. 13 13 12 12 13
-- -- -- -- --
Total.................................................... 78 69 55 41 38
== == == == ==
</TABLE>
<TABLE>
<CAPTION>
Licensed Shoe Departments
-------------------------
Location 1999
-------- ----
<S> <C>
Colorado.................................................. 3
Illinois.................................................. 1
Iowa...................................................... 6
Kansas.................................................... 5
Missouri.................................................. 7
Nebraska.................................................. 8
Oklahoma.................................................. 2
South Dakota.............................................. 1
--
Total................................................... 33
==
</TABLE>
Item 3 -- Legal Proceedings
The Company is not a party to any material pending legal proceedings.
Item 4 -- Submission of Matters to a Vote of Security Holders
Inapplicable.
9
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PART II
Item 5 -- Market for the Registrant's Common Equity and Related Stockholder
Matters
The Common Stock of the Company has been traded on the Nasdaq National
Market under the symbol SHOE since the Company's initial public offering on
February 23, 1998. The following table sets forth, for the periods indicated,
the highest and lowest closing sale prices for the Common Stock, as reported by
the Nasdaq National Market.
<TABLE>
<CAPTION>
1999 High Low
---- ---
<S> <C> <C>
First Quarter........................................................ 8.50 5.00
Second Quarter....................................................... 5.50 4.06
Third Quarter........................................................ 6.00 3.53
Fourth Quarter....................................................... 3.75 1.59
1998
First Quarter (since February 23, 1998).............................. 11.25 6.63
Second Quarter....................................................... 10.63 7.88
Third Quarter........................................................ 9.00 5.50
Fourth Quarter....................................................... 9.19 3.56
</TABLE>
As of January 1, 2000, there were approximately 15 holders of record of the
Company's Common Stock.
From August 1988 through February 1998, the Company made distributions to
its sole stockholder primarily to allow the stockholder to pay taxes on earnings
of the Company included or includable in the taxable income of the stockholder
as a result of the Company's S corporation status. Upon completion of its
initial public offering, the Company made an S corporation distribution in the
amount of $7.8 million to its previous sole stockholder, which approximately
equaled the estimated earned and previously undistributed taxable S corporation
income of the Company through the day preceding the termination date of its S
corporation status. Except as mentioned in the previous sentences, the Company
has not paid any cash dividends in the past. The Company currently intends to
retain any earnings for use in its business and does not anticipate paying any
cash dividends on its Common Stock in the foreseeable future. In addition, the
Company's line of credit restricts the Company's ability to pay dividends. See
Note 4 of Notes to Consolidated Financial Statements.
10
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Item 6 -- Selected Financial Data
The selected consolidated financial and operating data set forth below
should be read in conjunction with "Item 8 -- Financial Statements and
Supplementary Data--Consolidated Financial Statements of the Company and related
Notes thereto and Item 7 -- Management's Discussion and Analysis of Financial
Condition and Results of Operations" included herein.
<TABLE>
<CAPTION>
(in thousands, except per share and operating data) Year Ended
---------------------------------------------------------------------------
1999 1998(1) 1997 1996 1995
---------- ---------- ---------- ---------- ---------
<S> <C> <C> <C> <C> <C>
Statement of Operations Data:
Net sales.......................................... $71,611 $55,907 $45,074 $30,315 $25,539
Cost of sales and related occupancy expenses....... 48,076 35,777 28,922 20,318 17,723
------- ------- ------- ------- -------
Gross profit....................................... 23,535 20,130 16,152 9,997 7,816
------- ------- ------- ------- -------
Selling expenses................................... 13,999 11,472 8,800 5,592 4,835
General and administrative expenses................ 5,655 3,664 3,106 2,630 1,809
------- ------- ------- ------- -------
Income from operations............................. 3,881 4,993 4,246 1,775 1,172
Interest and other expense, net.................... (633) (453) (520) (287) (524)
------- ------- ------- ------- -------
Income before income taxes......................... 3,248 4,540 3,726 1,488 648
Provision for income taxes......................... (1,233) (1,147) (261) (98) (35)
------- ------- ------- ------- -------
Net income......................................... $ 2,015 $ 3,393 $ 3,465 $ 1,390 $ 613
======= ======= ======= ======= =======
Net income per share:
Basic............................................ $ 0.30 $ 0.53 $ 0.77 $ 0.31 $ .09
Diluted.......................................... $ 0.30 $ 0.52 $ 0.77 $ 0.31 $ .09
Weighted average shares outstanding:
Basic............................................ 6,800 6,462 4,500 4,500 4,500
Diluted.......................................... 6,801 6,474 4,500 4,500 4,500
Pro Forma:
Historical income before income taxes.............. - $ 4,540 $ 3,726 $ 1,488 $ 648
Pro forma provision for income taxes(2)............ - (1,748) (1,435) (566) (246)
------- ------- ------- -------
Pro forma net income(2)............................ - $ 2,792 $ 2,291 $ 922 $ 402
======= ======= ======= =======
Pro forma net income per share(2).................. - $ 0.42 - - -
Weighted average shares outstanding(2)............. - 6,660 - - -
Selected Operating Data:
Number of stores:
Opened during period(3).......................... 50 16 16 9 6
Closed during period............................. 8 2 2 6 4
Open at end of period............................ 111 69 55 41 38
Comparable store sales increase (decrease)......... (1.2)% 6.1% 4.6% 8.0% (1.0)%
</TABLE>
<TABLE>
<CAPTION>
(in thousands, except per share and operating data) Year Ended
---------------------------------------------------------------------------
1999 1998 1997 1996 1995
---------- ---------- ---------- ---------- ---------
<S> <C> <C> <C> <C> <C>
Balance Sheet Data:
Working capital.................................... $14,305 $13,739 $ 6,045 $ 3,783 $ 2,876
Total assets....................................... 41,613 33,534 22,646 15,146 9,473
Total indebtedness (including current portion)..... 8,075 8,494 7,658 3,673 3,872
Stockholders' equity............................... 19,043 17,028 7,328 4,567 2,695
</TABLE>
_________________
(1) In 1998, the Company changed its year end to a 52-53 week year ending on the
Saturday nearest to December 31. Due to this change, sales for the fourth
quarter and year ended January 2, 1999 include two additional days; had
these days not been included comparable store sales would have increased
5.3% for the year ended January 2, 1999. All references herein to 1998 refer
to the year ended January 2, 1999.
(continued on following page)
11
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(continued from previous page)
(2) Prior to February 1998, the Company operated as an S corporation and was
not subject to federal and certain state income taxes. Upon the completion
of its initial public offering, the Company became subject to federal and
state income taxes. Pro forma net income reflects federal and state
income taxes as if the Company had not elected S corporation status for
income tax purposes. Pro forma net income per share is based on the
weighted average number of shares of common stock outstanding during the
period plus the estimated number of shares offered by the Company
(1,271,722 shares) which were necessary to fund the $7.8 million
distribution paid to the Company's stockholder upon termination of the
Company's status as an S Corporation. See Note 3 of Notes to Consolidated
Financial Statements.
(3) 1999 includes 33 licensed shoe departments through agreement with Gordmans,
Inc.
Item 7 -- Management's Discussion and Analysis of Financial Condition and
Results of Operations
The statements contained in this Form 10-K which are not historical facts
are forward-looking statements that are subject to risks and uncertainties that
could cause actual results to differ materially from those set forth in or
implied by forward-looking statements. Factors that could cause or contribute to
such differences include those discussed in the Company's filings with the
Securities and Exchange Commission, including, without limitation, the factors
discussed in this Form 10-K under the captions--"Factors Affecting Financial
Performance" and "Liquidity and Capital Resources," as well as those discussed
elsewhere in this Form 10-K.
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 was among the first footwear retailers on
the West Coast to expand the off-price concept into the designer and name brand
footwear market. As of January 1, 2000, the Company operated 78 retail stores in
California, Washington and Oregon under the trade name Shoe Pavilion. In
addition, under a licensing agreement entered into in July 1999, the Company
operates the shoe department of 33 Gordmans, Inc. (formerly Richman Gordman 1/2
Price Stores, Inc.) department stores in Colorado, Illinois, Iowa, Kansas,
Missouri, Nebraska, Oklahoma and South Dakota.
The Company opened, net of closures, 42 new stores in 1999, and 14 stores
each in 1998 and 1997. During 2000, the Company intends to open approximately 10
to 15 new stores, including leased shoe departments, primarily in its existing
markets. It also expects to close three to four stores and relocate one to two
stores in 2000.
The Company's growth in net sales historically has resulted primarily from
the opening of new stores. Although, the Company entered into a licensing
agreement in 1999 pursuant to which it opened 33 shoe departments, the Company
expects that the primary source of future sales growth will continue to be new
store openings. Because the Company's comparable store sales have fluctuated
widely, the Company does not expect that comparable store sales will contribute
significantly to future growth in net sales. The Company defines comparable
stores as those stores that have been open for at least 14 consecutive months.
Stores open less than 14 consecutive months are treated as new stores, and
stores closed during the period are excluded from comparable store sales. The
Company's comparable store sales decreased 1.2% in 1999 and increased 6.1% in
1998 and 4.6% in 1997. The Company believes that the decline in 1999 comparable
store sales was due in part to unusual weather patterns causing delays in normal
seasonal sales; the high same store sales comparisons from the prior year; the
rapid expansion into the licensed stores causing delays in replenishments to the
existing stores; and an overall soft footwear environment exacerbated by several
prominent store liquidations which dictated more promotional activity by the
Company.
The Company seeks to acquire footwear merchandise on favorable financing
terms and in quantities large enough to support future growth. This strategy
causes an increase in inventory levels at various times throughout the year. As
a result, similar to other off-price retailers, the Company's inventory turnover
rates are typically less than full-price retailers. Because of the substantial
increase in the number of the Company's stores, inventory levels increased from
$26.9 million at January 2, 1999 to $33.0 million at January 1, 2000.
Prior to its initial public offering in February 1998, Shoe Pavilion was
treated as an S corporation for federal and certain state income tax purposes
since August 1988. As a result, the Company's earnings from August 1988 through
February 22, 1998 were taxed, with certain exceptions, directly to the Company's
sole stockholder rather
12
<PAGE>
than to the Company. The Company's S corporation status terminated on February
22, 1998, and the Company is now subject to state and federal income taxes as a
C corporation. In connection with its conversion to C corporation status, the
Company recorded a nonrecurring tax benefit of $485,000. The pro forma
adjustments reflect federal and state income taxes as if the Company had not
elected S corporation status for income tax purposes. See Note 3 of Notes to
Consolidated Financial Statements.
Results of Operations
The following table sets forth, for the periods indicated, the relative
percentages that certain income and expense items bear to net sales:
<TABLE>
<CAPTION>
Year Ended
--------------------------------------------------
1999 1998 1997
------------ ------------ ------------
<S> <C> <C> <C>
Net sales......................................................... 100.0% 100.0% 100.0%
Gross profit...................................................... 32.9 36.0 35.8
Selling expenses.................................................. 19.6 20.5 19.5
General and administrative expenses............................... 7.9 6.6 6.9
------------ ------------ ------------
Income from operations............................................ 5.4 8.9 9.4
Interest and other expense, net................................... (0.9) (0.8) (1.1)
------------ ------------ ------------
Income before income taxes........................................ 4.5 8.1 8.3
Provision for income taxes........................................ (1.7) - -
------------
Net income........................................................ 2.8% - -
============
Pro forma provision for income taxes.............................. - (3.1) (3.2)
------------ ------------
Pro forma net income.............................................. - 5.0% 5.1%
============ ============
</TABLE>
1999 Compared with 1998
Net Sales. Net sales increased 28.1% to $71.6 million for 1999 from $55.9
million for 1998. This increase in net sales was primarily attributable to new
store sales, including sales from leased shoe departments, of $24.4 million and
was offset by store closures and a 1.2% decrease in comparable store sales.
Gross Profit. Cost of sales includes landed merchandise and occupancy
costs. Gross profit increased 16.9% to $23.5 million for 1999 from $20.1 million
for 1998 but decreased as a percentage of net sales to 32.9% from 36.0%. The
decrease in gross profit percentage was attributable to several factors
including, the deleveraging of net sales as a result of higher fixed occupancy
costs coupled with a decrease in comparable store sales; and generally, a more
highly competitive environment.
Selling Expenses. Selling expenses consist of payroll and related costs,
advertising and promotional expenses. Selling expenses increased 22.0% to $14.0
million for 1999 from $11.5 million for 1998, but decreased as a percentage of
net sales to 19.6% from 20.5%. The increase in selling expenses was primarily
attributable to increases in payroll and related expenses incurred in connection
with new store openings and the costs associated with leasing new information
system equipment, offset by the leveraging of advertising and promotional
expenses.
General and Administrative Expenses. General and administrative expenses
consist primarily of corporate and administrative expenses, including payroll,
employee benefits and warehousing costs. General and administrative expenses
increased 54.3% to $5.7 million for 1999 from $3.6 million for 1998, and
increased as a percentage of net sales to 7.9% from 6.5%. The increase in
general and administrative expenses was primarily attributable to increased
enrollment in new employee benefit programs, new store openings, including
leased shoe departments and amortization of new information systems coupled with
the costs of leasing new information system equipment.
Interest and Other Expense, Net. Interest and other expense, net, increased
39.7% to $633,000 for 1999 from $453,000 for 1998. The increase was attributable
to higher average borrowings on the Company's revolving line of credit to fund
store expansion.
13
<PAGE>
Income Taxes. The effective tax rate for 1999 was 38.0% and the pro forma
tax rate for 1998 was 38.5%.
1998 Compared with 1997
Net Sales. Net sales increased 24.0% to $55.9 million for 1998 from $45.1
million for 1997. This increase in net sales was primarily attributable to new
store sales, including sales from 16 stores opened during 1998, which
contributed $15.3 million and a 6.1% increase in comparable store sales.
Gross Profit. Gross profit increased 24.6% to $20.1 million for 1998 from
$16.2 million for 1997, and increased as a percentage of net sales to 36.0% from
35.8%. The increase in gross profit percentage was primarily attributable to the
Company's ability to purchase merchandise in larger quantities at a lower cost
per unit in 1998 as well as leverage in occupancy costs.
Selling Expenses. Selling expenses increased 30.4% to $11.5 million for
1998 from $8.8 million for 1997, and increased as a percentage of net sales to
20.5% from 19.5%. The increase in selling expenses was primarily attributable to
increases in advertising and payroll and related expenses as a result of the
opening of new stores.
General and Administrative Expenses. General and administrative expenses
increased 18.0% to $3.7 million for 1998 from $3.1 million for 1997, and
decreased slightly as a percentage of net sales to 6.6% from 6.9%, primarily as
a result of improved expense leverage, offset by costs related to being a public
company.
Interest and Other Expense, Net. Interest and other expense, net, decreased
12.8% to $453,000 for 1998 from $520,000 for 1997. The decrease was attributable
to lower average borrowings outstanding on the Company's revolving line of
credit. During the quarter ended March 31, 1998, $6.0 million of the Company's
line of credit was repaid with the proceeds from the Company's initial public
offering.
Pro Forma Taxes. The pro forma effective tax rate for 1998 and 1997 was
38.5%.
Inflation
The Company does not believe that inflation has had a material impact on
its results of operations. There can be no assurance, however, that inflation
will not have such an effect in future periods.
Liquidity and Capital Resources
The Company had $14.3 million in working capital as of January 1, 2000,
compared to $13.7 million at January 2, 1999. The Company's capital requirements
relate primarily to merchandise inventory and leasehold improvements. The
Company's working capital needs are typically higher in the second and third
quarters as a result of increased inventory purchases for the spring and fall
selling seasons.
Historically, the Company has funded its cash requirements primarily
through cash flow from operations and borrowings under its credit facility, and
beginning in February 1998, proceeds from its initial public offering. Net cash
provided by (used in) operating activities was $2.4 million, ($3.0) million and
($1.8) million for 1999, 1998, and 1997, respectively. Net cash from operating
activities historically has been driven primarily by net income and fluctuations
in inventory and accounts payable. Inventory levels have increased throughout
these years due to a net increase in the number of stores. During 1999, the
Company used cash primarily to purchase merchandise inventory and for capital
expenditures.
Capital expenditures were $2.9 million, $2.6 million and $1.2 million in
1999, 1998 and 1997, respectively. Expenditures for 1999 were primarily for the
build-out of 17 new stores, 33 new Gordman shoe departments and the Company's
new information systems. Expenditures for 1998 were primarily for the build out
of 16 new stores plus work-in-progress of the Company's new management
information systems. The Company estimates that capital expenditures for 2000
will total approximately $1.3 million, primarily for the build-out of
approximately 10 to 15 new stores, including new Gordman shoe departments.
14
<PAGE>
Financing activities provided (used) cash of ($419,000), $7.1 million and
$3.2 million in 1999, 1998 and 1997, respectively. The cash use in 1999
primarily related to paying down balances on the Company's revolving line of
credit. The cash provided by financing activities for 1998 primarily reflects
$14.1 million raised in the Company's initial public offering offset by a $7.8
million payment for an S corporation distribution and a $1.0 million increase on
the Company's line of credit. During 1997 the Company made distributions to its
then sole stockholder of $704,000. Upon completion of its initial public
offering, the Company made an S corporation distribution in the amount of $7.8
million to its previous sole stockholder, which approximately equaled the
estimated earned and previously undistributed taxable S corporation income of
the Company through the day preceding the termination date of its S corporation
status. See Note 3 of Notes to Consolidated Financial Statements.
In October 1999, the Company and the financial institution lender amended
the existing credit facility agreement to increase the Company's revolving line
of credit from $15 million to $20 million and extend the expiration date from
December 1, 2000 to May 30, 2001. At the same time, the amount available under
the line of credit for the issuance of commercial and standby letters of credit
was increased from $4 million to $5 million. The Company pays interest on
outstanding amounts at the bank's prime rate or LIBOR plus 130 basis points, at
the Company's option. The weighted average interest rate was 7.5% at January 1,
2000. Borrowings under the credit facility are secured by the Company's accounts
receivable, general intangibles, inventory and other rights to payment. The
agreement contains restrictive covenants, which were amended in March 2000, that
require, among other things, that (a) total liabilities may not exceed 1.5 times
tangible net worth, (b) quarterly net income after taxes and pre-tax profit must
each not be less than one dollar, (c) EBITDA as determined on a rolling four-
quarter basis, not be less than $4.3 million as of the first and second fiscal
quarters and not be less than $5.0 million quarterly thereafter, and (d) the
outstanding balance on the line of credit, including the amount of issued
letters of credit, may not exceed 0.5 times the value of the inventory plus the
amount of issued letters of credit. Although the agreement prohibits the
declaration and payment of cash or stock dividends, the Company may repurchase
shares of its common stock up to a maximum aggregate amount of $2 million. As of
January 1, 2000, the unused and available portion of the credit facility was
approximately $9.8 million.
As part of its growth strategy, the Company plans to pursue opportunities
to acquire complementary businesses, although no such transactions are being
considered as of the date of this Form 10-K. To the extent that cash resources
are insufficient to fund the purchase price of future acquisitions, if any, or
the operations of any acquired business, additional external capital may be
required. There can be no assurance that additional financing will be available
on reasonable terms or at all. The Company expects that anticipated cash flow
from operations and available borrowings under the Company's new credit facility
will satisfy its cash requirements for at least the next 12 months. The
Company's capital requirements may vary significantly from anticipated needs,
depending upon such factors as operating results, the number and timing of new
store openings, and the number and size of any future acquisitions.
Impact of Year 2000
The Company did not experience any significant adverse effects of Year 2000
issues subsequent to December 31, 1999 nor have there been any reported
incidents by any third parties who supply goods or services to the Company of
their inability to perform as a result of the rollover to the year 2000.
Weather and Seasonality
The Company has experienced, and expects to continue to experience,
seasonal fluctuations in its net sales and net income. Historically, net sales
and net income have been weakest during the first quarter. The Company's
quarterly results of operations may also fluctuate significantly as a result of
a variety of factors, including timing of new store openings, the level of net
sales contributed by new stores, merchandise mix, the timing and level of price
markdowns, availability of inventory, store closures, advertising costs,
competitive pressures and changes in the demand for off- price footwear.
15
<PAGE>
Factors Affecting Financial Performance
In addition to the other information in this Form 10-K, the following
factors should be considered carefully in evaluating an investment in the shares
of Common Stock of the Company. The statements contained in this Form 10-K which
are not historical facts are forward-looking statements that are subject to
risks and uncertainties that could cause actual results to differ materially
from those set forth in or implied by forward-looking statements. Factors that
could cause or contribute to such differences include those discussed below, as
well as those discussed elsewhere in this Form 10-K.
Risks Associated With Expansion
The Company has experienced rapid and substantial growth in net sales as
well as in its employee base. The Company's continued growth will depend to a
significant degree on its ability to expand its operations through the opening
of new stores and to operate these stores on a profitable basis. The success of
the Company's planned expansion will be significantly dependent upon the
Company's ability to locate suitable store sites and negotiate acceptable lease
terms. In addition, several other factors could affect the Company's ability to
expand, including the adequacy of the Company's capital resources, the ability
to hire, train and integrate employees and the ability to adapt the Company's
distribution and other operational systems. There can be no assurance that the
Company will achieve its planned expansion or that any such expansion will be
profitable. In addition, there can be no assurance that the Company's expansion
within its existing markets will not adversely affect the individual financial
performance of the Company's existing stores or its overall operating results,
or that new stores will achieve net sales and profitability levels consistent
with existing stores. To manage its planned expansion, the Company regularly
evaluates the adequacy of its existing systems and procedures, including product
distribution facilities, store management, financial controls and management
information systems. However, there can be no assurance that the Company will
anticipate all of the changing demands that expanded operations may impose on
such systems. Failure to adapt its distribution capabilities or other internal
systems or procedures as required could have a material adverse effect on the
Company's business, financial condition and results of operations.
The Company actively monitors individual store performance and has closed
underperforming stores in the past, including eight in 1999 and two each in 1998
and 1997. The Company intends to continue to close underperforming stores in the
future, and if it were to close a number of stores, it could incur significant
closure costs and reductions in net sales. In certain instances, the Company may
be unable to close an underperforming store on a timely basis because of lease
terms. A significant increase in closure costs or the inability to close one or
more underperforming stores on a timely basis could have a material adverse
effect on the Company's business, financial condition and results of operations.
Inventory And Sourcing Risk
The Company's future success will be significantly dependent on its ability
to obtain merchandise that consumers want to buy, particularly name brand
merchandise with long-term retail appeal, and to acquire such merchandise under
favorable terms and conditions. In 1999, the Company's top ten suppliers
accounted for 44.3% of inventory purchases. The deterioration of the Company's
relationship with any key vendor could result in delivery delays, merchandise
shortages or less favorable terms than the Company currently enjoys. The Company
deals with its suppliers on an order-by-order basis and has no long-term
purchase contracts or other contractual assurances of continued supply or
pricing. As the Company's operations expand, its demand for off-price inventory
will continue to increase. The Company's footwear purchases typically involve
manufacturing over-runs, over-orders, mid- or late-season deliveries or last
season's stock. The inability of the Company to obtain a sufficient supply of
readily salable, high margin inventory, to negotiate favorable discount and
payment agreements with its suppliers or to sell large inventory purchases
without markdowns could have a material adverse effect on the Company's
business, financial condition and results of operations. See "Item 1
- --Business--Sourcing and Purchasing."
16
<PAGE>
Reliance on Key Personnel
The Company's future success will be dependent, to a significant extent, on
the efforts and abilities of its executive officers. The loss of the services of
any one of the Company's executive officers could have a material adverse effect
on the Company's operating results. In addition, the Company's continued growth
will depend, in part, on its ability to attract, motivate and retain additional
skilled managerial and merchandising personnel. Competition for such personnel
is intense, and there can be no assurance that the Company will be able to
retain its existing personnel or attract additional qualified personnel in the
future.
Uncertainty Of Future Operating Results; Fluctuations In Comparable Store
Sales
Although the Company has been profitable, there can be no assurance that
the Company will continue to remain profitable. Future operating results will
depend upon many factors, including general economic conditions, the level of
competition and the ability of the Company to acquire sufficient inventory,
achieve its expansion plans and effectively monitor and control costs. There can
be no assurance that the Company's recent gross margin levels will be
sustainable in the future.
Although the Company achieved a substantial portion of its 1999 net sales
growth through the licensing agreement with Gordmans, historically its growth in
net sales has resulted primarily from new store openings. Consequently at the
present time, the Company expects that the primary source of future sales growth
will be from new store openings.
Historically, the Company's comparable store sales have fluctuated widely,
and the Company does not expect that comparable store sales will contribute
significantly to future growth in net sales. The Company defines comparable
stores as those stores that have been open for at least 14 consecutive months.
Stores open less than 14 consecutive months are treated as new stores, and
stores closed during the period are excluded from comparable store sales. The
Company's comparable store sales decreased 1.2% in 1999, and increased 6.1% in
1998 and 4.6% in 1997.
Risks Associated With Possible Acquisitions
The Company may pursue the acquisition of companies and assets that
complement its existing business. Acquisitions involve a number of special
risks, including the diversion of management's attention to the assimilation of
the operations and personnel of the acquired businesses, potential adverse
short-term effects on the Company's operating results and amortization of
acquired intangible assets. The Company has limited experience in identifying,
completing and integrating acquisitions. The Company does not have any current
plans to acquire any other companies, and there can be no assurance that the
Company will identify attractive acquisition candidates, that acquisitions will
be consummated on acceptable terms or that any acquired companies will be
integrated successfully into the Company's operations.
Seasonality And Quarterly Fluctuations
The Company has experienced, and expects to continue to experience,
seasonal fluctuations in its net sales and net income. Historically, net sales
and net income have been weakest during the first quarter. The Company's
quarterly results of operations may also fluctuate significantly as a result of
a variety of factors, including timing of new store openings, the level of net
sales contributed by new stores, merchandise mix the timing and level of price
markdowns, availability of inventory, store closures, advertising costs,
competitive pressures and changes in the demand for off- price footwear. Any
such fluctuations could have a material adverse effect on the market price of
the Company's Common Stock.
Dependence On Consumer Spending And Preferences
The success of the Company's operations depends upon a number of factors
relating to consumer spending, including employment levels, business conditions,
interest rates, inflation and taxation. There can be no assurance that consumer
spending will not decline in response to economic conditions, thereby adversely
affecting the Company's operating results.
17
<PAGE>
All of the Company's products are subject to changing consumer preferences.
Consumer preferences could shift to types of footwear other than those that the
Company currently offers. Any such shift could have a material adverse effect on
the Company's operating results. The Company's future success will depend, in
part, on its ability to anticipate and respond to changes in consumer
preferences, and there can be no assurance that the Company will be able to
anticipate effectively or respond to such changes on a timely basis or at all.
Failure to anticipate and respond to changing consumer preferences could lead
to, among other things, lower net sales, excess inventory and lower gross
margins, any of which could have a material adverse effect on the Company's
business, financial condition and results of operations.
International Purchasing
The Company purchases in-season name brand and branded-design merchandise
directly from factories in Italy, Brazil and China. Directly-sourced goods
accounted for approximately 10.8% and 12.9% of net sales in 1999 and 1998,
respectively. The Company has no long-term contracts with direct manufacturing
sources and competes with other companies for production facilities. All of the
manufacturers with which the Company conducts business are located outside of
the United States, and the Company is subject to the risks generally associated
with an import business, including foreign currency fluctuations, unexpected
changes in foreign regulatory requirements, disruptions or delays in shipments
and the risks associated with United States import laws and regulations,
including quotas, duties, taxes, tariffs and other restrictions. There can be no
assurance that the foregoing factors will not disrupt the Company's supply of
directly-sourced goods or otherwise adversely impact the Company's business,
financial condition and results of operations in the future. See "Item 1 --
Business--Sourcing and Purchasing."
Inventory Shrinkage
The retail industry is subject to theft by customers and employees. Because
the Company uses a self-service format, where shoppers have access to both shoes
of a pair, the Company must maintain substantial store security. Although the
Company has implemented enhanced security procedures, there can be no assurance
that the Company will not suffer from significant inventory shrinkage in the
future, which could have a material adverse effect on the Company's business,
financial condition and results of operations.
Competition
The retail footwear market is highly competitive, and the Company expects
the level of competition to increase. The Company competes with off-price and
discount retailers (e.g., Nordstrom Rack, Payless ShoeSource, Ross, Dress for
Less and Famous Footwear), branded retail outlets (e.g., Nine West), national
retail stores (e.g., Nordstrom, Marshalls, Macy's, Sears, J.C. Penney,
Loehmann's, Robinsons-May and Mervyn's), traditional shoe stores and mass
merchants. Many of these competitors have stores in the markets in which the
Company now operates and in which it plans to expand. Many of the Company's
competitors have significantly greater financial, marketing and other resources
than the Company. In addition, there can be no assurance that in the future new
participants will not enter the off-price segment of the footwear market.
Competitive pressures resulting from competitors' pricing policies could
materially adversely affect the Company's gross margins. There can be no
assurance that the Company will not face greater competition from other
national, regional or local retailers or that the Company will be able to
compete successfully with existing and new competitors. The inability of the
Company to respond to such competition could have a material adverse effect on
the Company's business, financial condition and results of operations.
Future Capital Needs
The Company expects that anticipated cash flow from operations and
available borrowings under the Company's credit facility will satisfy its cash
requirements for at least the next 12 months. However, the Company may incur
significant working capital requirements and capital expenditures in connection
with its growth strategy and otherwise. To the extent that the foregoing cash
resources are insufficient to fund the Company's activities, including new store
openings planned for 2000, additional funds will be required. There can be no
assurance that additional financing will be available on reasonable terms or at
all. Failure to obtain such financing could delay or prevent the Company's
planned expansion, which could adversely affect the Company's business,
financial condition and results of operations. In addition, if additional
capital is raised through the sale of additional equity or convertible
securities, dilution to the Company's stockholders could occur.
18
<PAGE>
Substantial Control by Single Stockholder
Dmitry Beinus, the Company's Chairman of the Board, President and Chief
Executive Officer owns approximately 66.2% of the Company's outstanding Common
Stock. As a result, Mr. Beinus is able to decide all matters requiring
stockholder approval, including the election of directors and approval of
significant corporate transactions. Concentration of stock ownership could also
have the effect of delaying or preventing a change in control of the Company.
Possible Volatility Of Stock Price
The Common Stock is quoted on the Nasdaq National Market, which has
experienced and is likely to experience in the future significant price and
volume fluctuations, either of which could adversely affect the market price of
the Common Stock without regard to the operating performance of the Company. In
addition, the trading price of the Company's Common Stock could be subject to
wide fluctuations in response to quarterly variations in operating results,
fluctuations in the Company's comparable store sales, announcements by other
footwear retailers, the failure of the Company's earnings to meet the
expectations of securities analysts and investors, as well as other events or
factors.
Anti-Takeover Effect Of Certain Charter Provisions
The Board of Directors has the authority to issue up to 1,000,000 shares of
Preferred Stock, and to determine the rights, preferences and restrictions of
such shares, without further stockholder approval. The rights of holders of
Common Stock will be subject to, and may be adversely affected by, the rights of
the holders of any Preferred Stock that may be issued in the future. The
issuance of Preferred Stock may have the effect of delaying or preventing a
change in control of the Company. In addition, certain provisions of the
Company's Certificate of Incorporation and Bylaws and of Delaware law could
discourage potential acquisition proposals and could delay or prevent a change
in control of the Company. Such provisions could diminish the opportunities for
a stockholder to participate in tender offers, including tender offers at a
price above the then-current market value of the Common Stock. Among other
things, these provisions (i) provide that only the Board of Directors or certain
members thereof or officers of the Company may call special meetings of the
stockholders; (ii) eliminate the ability of the stockholders to take action
without a meeting; and (iii) authorize the issuance of "blank check" preferred
stock having such designations, rights and preferences as may be determined from
time to time by the Board of Directors.
Item 7A -- Quantitative and Qualitative Disclosure about Market Risk
The Company is exposed to market risks, which include changes in U.S.
interest rates and foreign exchange rates. The Company does not engage in
financial transactions for trading or speculative purposes.
Interest Rate Risk. The interest payable on the Company's bank line of
credit is based on variable interest rates and therefore affected by changes in
market rates. The Company does not use derivative financial instruments in its
investment portfolio and believes that the market risk is immaterial.
Commodity Prices. The Company is not exposed to fluctuation in market
prices for any commodities.
Foreign Currency Risks. The Company has minimal purchases outside of the
United States that involve foreign currency contracts and, therefore, has only
minimal exposure to foreign currency exchange risks. The Company does not hedge
against foreign currency risks and believes that foreign currency exchange risk
is immaterial.
19
<PAGE>
Item 8 -- Financial Statements and Supplementary Data
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Shoe Pavilion, Inc.
<TABLE>
<S> <C>
Independent Auditor's Report.................................................................. 21
Consolidated Balance Sheets January 1, 2000 and January 2, 1999............................... 22
Consolidated Statements of Income for Years Ended January 1, 2000,
January 2, 1999 and December 31, 1997.................................................... 23
Consolidated Statements of Stockholders' Equity for Years Ended January 1, 2000,
January 2, 1999 and December 31, 1997.................................................... 24
Consolidated Statements of Cash Flows for Years Ended January 1, 2000,
January 2, 1999 and December 31, 1997.................................................... 25
Notes to Consolidated to Financial Statements for Years Ended January 1, 2000,
January 2, 1999 and December 31, 1997.................................................... 26
</TABLE>
20
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders of
Shoe Pavilion, Inc.
We have audited the accompanying consolidated balance sheets of Shoe
Pavilion, Inc. and subsidiary (the "Company") as of January 1, 2000 and January
2, 1999, and the related consolidated statements of income, stockholders'
equity, and cash flows for each of the three years in the period ended January
1, 2000. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in
all material respects, the financial position of the Company as of January 1,
2000 and January 2, 1999, and the results of its operations and its cash flows
for each of the three years in the period ended January 1, 2000 in conformity
with generally accepted accounting principles.
DELOITTE & TOUCHE LLP
San Francisco, California
February 17, 2000
21
<PAGE>
SHOE PAVILION, INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
January 1, January 2,
2000 1999
----------- -----------
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash............................................................... $ 928,676 $ 1,921,870
Receivables........................................................ 578,070 156,966
Inventories........................................................ 32,984,783 26,892,101
Prepaid expenses and other......................................... 609,557 100,412
----------- -----------
Total current assets........................................ 35,101,086 29,071,349
FIXED ASSETS:
Store fixtures and equipment....................................... 3,810,727 2,829,933
Leasehold improvements............................................. 2,917,771 2,144,028
Information technology systems..................................... 2,212,398 1,301,295
----------- -----------
Total........................................................ 8,940,896 6,275,256
Less accumulated depreciation...................................... 3,400,923 2,440,441
----------- -----------
Net fixed assets................................................... 5,539,973 3,834,815
DEFERRED INCOME TAXES AND OTHER......................................... 971,485 628,070
----------- -----------
TOTAL....................................................... $41,612,544 $33,534,234
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable................................................... $11,139,306 $ 5,967,211
Accrued expenses................................................... 1,643,259 946,116
Short-term borrowings.............................................. 8,000,000 8,407,262
Current portion of capitalized lease obligations................... 13,232 11,868
----------- -----------
Total current liabilities................................... 20,795,797 15,332,457
DEFERRED RENT........................................................... 1,712,249 1,098,662
CAPITALIZED LEASE OBLIGATIONS, less current portion..................... 61,513 74,745
COMMITMENTS AND CONTINGENCIES........................................... - -
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 shares issued and outstanding........................... 6,800 6,800
Additional paid-in capital........................................ 13,967,258 13,967,258
Retained earnings................................................. 5,068,927 3,054,312
----------- -----------
Total stockholders' equity.................................. 19,042,985 17,028,370
----------- -----------
TOTAL....................................................... $41,612,544 $33,534,234
=========== ===========
</TABLE>
See notes to consolidated financial statements.
22
<PAGE>
SHOE PAVILION, INC.
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
January 1, January 2, December 31,
2000 1999 1997
----------- ----------- -----------
<S> <C> <C> <C>
NET SALES............................................ $71,611,220 $55,907,211 $45,074,041
COST OF SALES AND RELATED OCCUPANCY EXPENSES......... 48,076,135 35,777,493 28,922,392
----------- ----------- -----------
Gross profit................................ 23,535,085 20,129,718 16,151,649
SELLING EXPENSES..................................... 13,999,417 11,472,385 8,800,332
GENERAL AND ADMINISTRATIVE EXPENSES.................. 5,654,248 3,663,852 3,105,717
----------- ----------- -----------
Income from operations...................... 3,881,420 4,993,481 4,245,600
OTHER INCOME (EXPENSE):
Interest......................................... (618,647) (430,359) (575,471)
Other-net........................................ (14,312) (22,716) 55,601
----------- ----------- -----------
Total other expense-net..................... (632,959) (453,075) (519,870)
----------- ----------- -----------
Income before income taxes........................... 3,248,461 4,540,406 3,725,730
PROVISION FOR INCOME TAXES........................... (1,233,846) (1,146,954) (260,800)
----------- ----------- -----------
NET INCOME........................................... $ 2,014,615 $ 3,393,452 $ 3,464,930
=========== =========== ===========
Net income per share:
Basic................................................ $ 0.30 $ 0.53 $ 0.77
Diluted.............................................. $ 0.30 $ 0.52 $ 0.77
Weighted average shares outstanding:
Basic................................................ 6,800,000 6,461,580 4,500,000
Diluted.............................................. 6,801,417 6,473,771 4,500,000
PRO FORMA
Historical income before taxes on income........... - $ 4,540,406 $ 3,725,730
Pro forma provision for income taxes............... - (1,748,000) (1,434,406)
----------- -----------
Pro forma net income............................... - $ 2,792,406 $ 2,291,324
=========== ===========
Pro forma net income per share:
Basic................................................ - $ 0.42 -
Diluted.............................................. - $ 0.42 -
Pro forma weighted average shares outstanding:
Basic................................................ - 6,647,871 -
Diluted.............................................. - 6,660,062 -
</TABLE>
See notes to consolidated financial statements.
23
<PAGE>
SHOE PAVILION, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
Common Stock
----------------------- Additional
Number Paid-in Retained
of Shares Amount Capital Earnings Total
------------ --------- -------------- -------------- -----------
<S> <C> <C> <C> <C> <C>
BALANCE AT DECEMBER 31, 1996................ 4,500,000 $ 4,500 $ 812,033 $ 3,750,136 $ 4,566,669
Net income................................ 3,464,930 3,464,930
Distribution to previous sole stockholder. (703,543) (703,543)
------------ --------- -------------- -------------- -----------
BALANCE AT DECEMBER 31, 1997................ 4,500,000 4,500 812,033 6,511,523 7,328,056
Issuance of stock through initial
public offering........................ 2,300,000 2,300 14,104,562 14,106,862
Net income................................ 3,393,452 3,393,452
Distribution to previous sole stockholder. (949,337) (6,850,663) (7,800,000)
------------ --------- -------------- -------------- -----------
BALANCE AT JANUARY 2, 1999.................. 6,800,000 6,800 13,967,258 3,054,312 17,028,370
Net income................................ 2,014,615 2,014,615
------------ --------- -------------- -------------- -----------
BALANCE AT JANUARY 1, 2000.................. 6,800,000 $ 6,800 $ 13,967,258 $ 5,068,927 $19,042,985
============ ========= ============== ============== ===========
</TABLE>
See notes to consolidated financial statements.
24
<PAGE>
SHOE PAVILION, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
January 2, January 2, December 31,
2000 1999 1997
------------ ------------ ------------
<S> <C> <C> <C>
OPERATING ACTIVITIES:
Net income......................................................... $ 2,014,615 $ 3,393,452 $ 3,464,930
Adjustments to reconcile net income to net cash
provided (used) by operating activities
Depreciation..................................................... 1,209,842 798,566 617,878
Other............................................................ 17,849 34,965 701
Deferred income taxes............................................ (662,621) (485,447) -
Effect of changes in:
Inventories................................................... (6,092,682) (7,096,502) (6,309,873)
Receivables................................................... (421,104) 141,697 (294,524)
Prepaid expenses and other.................................... (189,939) (160,789) (4,320)
Accounts payable.............................................. 5,172,095 46,231 226,411
Accrued expenses and deferred rent............................ 1,310,730 305,689 527,842
------------ ------------ ------------
Net cash provided (used) by operating activities........... 2,358,785 (3,022,138) (1,770,955)
------------ ------------ ------------
INVESTING ACTIVITIES-
Purchase of fixed assets........................................ (2,932,849) (2,593,656) (1,210,911)
------------ ------------ ------------
FINANCING ACTIVITIES:
Net proceeds from initial public offering....................... - 14,106,862 -
Short-term borrowings, net...................................... (407,262) 1,020,137 3,987,125
Principal payments on capital leases............................ (11,868) (183,995) (38,220)
Principal payments on long-term debt............................ - - (70,633)
Distributions paid to previous sole stockholder................. - (7,800,000) (703,543)
------------ ------------ ------------
Net cash provided (used) by financing activities........... (419,130) 7,143,004 3,174,729
------------ ------------ ------------
NET INCREASE (DECREASE) IN CASH................................... (993,194) 1,527,210 192,863
CASH, BEGINNING OF PERIOD.......................................... 1,921,870 394,660 201,797
------------ ------------ ------------
CASH, END OF PERIOD................................................ $ 928,676 $ 1,921,870 $ 394,660
============ ============ ============
CASH PAID FOR:
Interest................................................... $ 573,769 $ 416,072 $ 571,764
Income taxes............................................... 1,618,000 1,826,000 332,262
SUPPLEMENTAL DISCLOSURE OF NONCASH INVESTING
AND FINANCING ACTIVITIES:
Capital lease obligations for store equipment.................... - - $ 105,993
</TABLE>
See notes to consolidated financial statements.
25
<PAGE>
SHOE PAVILION, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION AND OPERATIONS
General--Shoe Pavilion, Inc. (the "Company"), a Delaware corporation,
operates as a single business segment of off-price shoe stores located in
California, Washington and Oregon, under the name Shoe Pavilion. The Company had
78 and 69 stores open as of January 1, 2000 and January 2, 1999, respectively.
In addition, under a licensing agreement entered into in July 1999, the Company
operates the shoe department of 33 Gordmans, Inc. (formerly Richman Gordman 1/2
Price Stores, Inc.) department stores located in the Midwest. The Company
purchases inventory from international and domestic vendors. For 1999, the
Company's top ten suppliers accounted for 44.3% of inventory purchases.
Public Offering--On February 27, 1998, the Company sold 2,300,000 shares of
its common stock for net proceeds of $14,107,000. In connection with the
offering, on February 23, 1998, the Company terminated its status as an S
corporation and recorded a deferred income tax benefit of $485,000.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Use of Estimates--The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those estimates.
Consolidation Policy--The consolidated financial statements include the
Company and its wholly owned subsidiary, Shoe Pavilion Corporation. All
significant intercompany balances and transactions have been eliminated.
Change of Year--In December 1998, the Company changed its year end to a 52-
53 week year ending on the Saturday nearest to December 31. All references
herein to 1999 and 1998 refer to the years ended January 1, 2000 and January 2,
1999, respectively.
Cash represents cash on hand and cash held in banks.
Inventories are stated at the lower of average cost or market.
Fixed assets are stated at cost. Depreciation and amortization are provided
on the straight-line method over the estimated useful lives of the assets
ranging from three to five years. Leasehold improvements are amortized on the
straight-line method over the shorter of the useful lives of the assets or lease
term, generally five years.
Income Taxes--Effective February 23, 1998, the Company is taxed as a C
corporation for federal and state income tax purposes. The income tax provisions
as of January 1, 2000 and January 2, 1999 reflect this status. Prior to February
23, 1998, the Company was taxed as an S corporation for federal income tax and
certain state reporting purposes, which provides that taxable income or loss of
the Company is generally passed through to the individual stockholders.
Accordingly, no provision for federal and certain state income taxes has been
recorded in the accompanying financial statements prior to February 23, 1998.
Upon conversion from an S corporation to a C corporation, the Company recorded a
deferred tax asset of $485,477, which reduced tax expense. The Company elected
to be a C corporation in the state of California. Accordingly, taxes are
provided for income attributable to the Company's operations in this state.
26
<PAGE>
SHOE PAVILION, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Deferred Rent--Certain of the Company's store leases provide for free or
reduced rent during an initial portion of the lease term. Deferred rent consists
of the aggregate obligation for lease payments under these leases amortized on a
straight-line basis over the lease term, in excess of amounts paid. In addition,
deferred rent includes construction allowances received from landlords, which
are amortized on a straight-line basis over the initial lease term.
Preopening Costs--Store preopening costs are charged to expense as
incurred.
Long-lived Assets--The Company periodically reviews long-lived assets for
impairment to determine whether any events or circumstances indicate that the
carrying amount of the assets may not be recoverable. Such review includes
estimating expected future cash flows. No impairment loss provisions have been
required to date.
Net Income Per Share--Basic income per share is computed as net income
divided by the weighted average number of common shares outstanding during the
period. Diluted income per share reflects the potential dilution that could
occur from the exercise of outstanding stock options and is computed by dividing
net income by the weighted average number of common shares outstanding for the
period plus the dilutive effect of outstanding stock options.
Comprehensive Income equals net income.
Stock-Based Compensation-- The Company accounts for its stock option plans
in accordance with Accounting Principles Board Opinion No. 25, "Accounting for
Stock Issued to Employees" and its related interpretations. Accordingly, no
compensation expense has been recognized in the financial statements for stock
option arrangements.
New Accounting Pronouncements--Statement of Financial Accounting Standards
("SFAS") No. 133, "Accounting for Derivative Instruments and Hedging
Activities," as delayed by SFAS No. 137, will be effective for the Company in
fiscal 2001. SFAS No. 133 establishes accounting and reporting standards for
derivative instruments embedded in other contracts, and hedging activities. It
requires that an entity recognize all derivatives as either assets or
liabilities in the statement of financial position and measure those instruments
at fair value. The Company does not expect adoption of this new standard to have
a significant impact on its financial statements.
3. 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 a S corporation for tax purposes prior to February 23, 1998, the
effective date of the Company's initial public offering.
Income Taxes--The pro forma information presented in the consolidated
statements of income reflects a provision for income taxes at an effective rate
of 38.5% for the years ended January 2,1999 and December 31,1997.
Pro Forma Net Income Per Share--Pro forma basic net income per share is
based on the weighted average number of shares of common stock outstanding
during the period plus the estimated number of shares offered by the Company
(1,271,722) which were necessary to fund the $7,800,000 distribution paid to the
Company's stockholder upon termination of the Company's status as a S
corporation. Pro forma diluted net income 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.
27
<PAGE>
SHOE PAVILION, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
4. FINANCING AGREEMENTS
In October 1999, the Company and the financial institution lender amended
the existing credit facility agreement to increase the Company's revolving line
of credit from $15 million to $20 million and extend the expiration date from
December 1, 2000 to May 30, 2001. At the same time, the amount available under
the line of credit for the issuance of commercial and standby letters of credit
was increased from $4 million to $5 million. The Company pays interest on
outstanding amounts at the bank's prime rate or LIBOR plus 130 basis points, at
the Company's option. The weighted average interest rate was 7.5% at January 1,
2000. Borrowings under the credit facility are secured by the Company's accounts
receivable, general intangibles, inventory and other rights to payment. The
agreement contains restrictive covenants, which were amended in March 2000, that
require, among other things, that (a) total liabilities may not exceed 1.5 times
tangible net worth, (b) quarterly net income after taxes and pre-tax profit must
each not be less than one dollar, (c) EBITDA as determined on a rolling four-
quarter basis, not be less than $4.3 million as of the first and second fiscal
quarters and not be less than $5.0 million quarterly thereafter, and (d) the
outstanding balance on the line of credit, including the amount of issued
letters of credit, may not exceed 0.5 times the value of the inventory plus the
amount of issued letters of credit. Although the agreement prohibits the
declaration and payment of cash or stock dividends, the Company may repurchase
shares of its common stock up to a maximum aggregate amount of $2 million. As of
January 1, 2000, the unused and available portion of the credit facility was
approximately $9.8 million.
5. COMMITMENTS AND CONTINGENCIES
Leases--The Company is obligated under operating leases for store and
warehouse locations and equipment. While most of the agreements provide for
minimum lease payments and include rent escalation clauses, certain of the store
leases provide for additional rentals contingent upon prescribed sales volumes.
Additionally, the Company is required to pay common area maintenance and other
costs associated with the centers in which the stores operate. Most of the
leases provide for renewal at the option of the Company.
The Company's assets under capital leases as of January 1, 2000 and January
2, 1999 are as follows:
<TABLE>
<CAPTION>
January 1, January 2,
2000 1999
---------- ----------
<S> <C> <C>
Total assets under capital leases.................... $ 295,911 $ 295,911
Less accumulated amortization........................ 178,136 127,731
---------- ----------
Total................................................ $ 117,775 $ 168,180
========== ==========
</TABLE>
28
<PAGE>
SHOE PAVILION, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
5. COMMITMENTS AND CONTINGENCIES (CONTINUED)
Future minimum lease payments require are as follows:
<TABLE>
<CAPTION>
Capital Operating
Leases Leases
---------- -----------
<S> <C> <C>
Year ending
2000................................................. $ 20,833 $ 8,948,838
2001................................................. 20,833 8,372,834
2002................................................. 47,613 6,799,317
2003................................................. 5,455,893
2004................................................. - 3,928,890
Thereafter.......................................... - 6,940,237
---------- -----------
Total minimum lease payments......................... 89,279 $40,446,009
===========
Less amounts representing interest................... 14,534
----------
Present value of capital lease obligations........... 74,745
Less current portion................................. 13,232
----------
Total long-term portion.............................. $ 61,513
==========
</TABLE>
Rental expense for the years ended January 1, 2000, January 2, 1999 and
December 31, 1997 was $9,361,284, $5,934,733 and $5,438,395, respectively,
including contingent rentals of $821,863, $307,355 and $278,740, respectively.
Letters of Credit--The Company has obtained letters of credit in connection
with overseas purchase arrangements. The total amount outstanding was $2,208,990
as of January 1, 2000. The Company also has standby letters of credit relating
to rental agreements of $34,667 as of January 1, 2000.
Contingencies--The Company is party to various legal proceedings arising
from normal business activities. Management believes that the resolution of
these matters will not have an adverse material effect on the Company's
financial position or results of operations.
29
<PAGE>
SHOE PAVILION, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
6. INCOME TAXES
The components of deferred tax assets (liabilities) are as follows:
<TABLE>
<CAPTION>
CURRENT January 1, 2000 January 2, 1999
<S> <C> <C>
Uniform capitalization of inventory costs.............................. $ 315,785 $182,218
Accrued Vacation....................................................... 10,348 -
Inventory reserve...................................................... 39,020 7,703
Prepaid expenses....................................................... (31,714) (7,986)
State Taxes............................................................ (74,220) 2,889
NONCURRENT
Difference in basis of fixed assets................................... 156,731 (44,575)
Deferred rent and tenant improvements.................................. 732,116 345,198
---------- --------
Net Deferred Tax Asset..................................................... $1,148,066 $485,447
========== ========
</TABLE>
The provision for income taxes consisted of the following:
<TABLE>
<CAPTION>
Current January 1, 2000 January 2, 1999
<S> <C> <C>
Federal................................................................ $1,535,150 $1,419,981
State.................................................................. 361,316 212,450
---------- ----------
Total current................................................... 1,896,466 1,632,431
Deferred................................................................... 662,620 485,477
---------- ----------
Total provision............................................................ $1,233,846 $1,146,954
========== ==========
</TABLE>
A reconciliation of the statutory federal income tax rate with the
Company's effective income tax rate is as follows:
<TABLE>
<CAPTION>
January 1, 2000 January 2, 1999
<S> <C> <C>
Statutory federal rate...................................................... 34.0% 34.0%
State income taxes, net of federal income tax benefit....................... 4.6 3.09
Other....................................................................... (0.6) (1.14)
Change in tax status........................................................ 0.0 (10.69)
---- ------
Effective tax rate.......................................................... 38.0% 25.26%
==== ======
</TABLE>
30
<PAGE>
SHOE PAVILION, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
7. STOCKHOLDERS' EQUITY
Stock Options--In January 1998, the Company adopted the 1998 Equity
Incentive Plan (the "1998 Plan") authorizing the issuance of 1,000,000 shares of
Common Stock to key employees and consultants of the Company. The 1998 Plan
provides for awards of nonqualified stock option grants to purchase Common Stock
at prices equal to fair market value at the date of grant. During 1999, the
Company granted options under this plan for the purchase of 81,000 shares of
Common Stock at exercise prices ranging from $3.25 to $6.75 per share, the fair
market value of the shares at the date of grant. Such options vest 20% each
year, beginning at the date of grant and expire ten years from that date. At
January 1, 2000, 708,750 options were available for grants and 49,750 options
were exercisable.
Directors' Stock Options--In January 1998, the Company adopted the
Directors' Stock Option Plan (the "Directors' Plan") authorizing the issuance of
100,000 shares of Common Stock to non-employee directors of the Company. The
Directors' Plan provides for awards of nonqualified stock options to purchase
Common Stock at prices equal to fair market value at the date of grant. During
1999, the Company granted options under this plan for the purchase of 5,000
shares of Common Stock at an exercise price of $5.00 per share, the fair market
value of the shares at the date of grant. Such options vest 100% one year from
grant date and expire six years from that date. At January 1, 2000, 80,000
options were available for grant and 15,000 options were exercisable.
The following tables summarize information about the stock options under
both plans outstanding at January 1, 2000:
<TABLE>
<CAPTION>
Weighted
Number Average
of Shares Exercise Price
------------- ----------------
<S> <C> <C>
Balance at December 31, 1997 - -
Options granted............................................ 334,000 $ 6.96
Options canceled........................................... (26,000) (7.52)
-------
Balance at January 2, 1999...................................... 308,000 6.91
Options granted............................................ 86,000 4.36
Options canceled........................................... (82,750) (6.67)
------- ------
Balance at January 1, 2000...................................... 311,250 $ 6.27
======= ======
Weighted average fair value of options granted during 1999...... $ 4.35
Weighted average fair value of options granted during 1998...... $ 5.06
</TABLE>
<TABLE>
<CAPTION>
Weighted Average
Number Remaining Number
Range of Outstanding Contractual Life Weighted Average Exercisable at Weighted Average
Exercise Prices at January 1, 2000 (in years) Exercise Price January 1, 2000 Exercise Price
- ----------------- ------------------ ----------------- ---------------- --------------- -----------------
<S> <C> <C> <C> <C> <C>
$3.25 50,000 9.84 $3.25 0 $0.00
$ 4.75-$6.75 42,500 8.53 $5.59 0 $0.00
$7.00-$10.25 218,750 7.88 $7.10 64,750 $7.07
------------ ------ ------ ----- ------ -----
$3.25-$10.25 311,250 8.28 $6.27 64,750 $7.07
============ ======= ====== ===== ====== =====
</TABLE>
31
<PAGE>
SHOE PAVILION, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
7. STOCKHOLDERS' EQUITY (CONTINUED)
SFAS No. 123, "Accounting for Stock-Based Compensation," requires the
disclosure of pro forma net income and net income per share as though the
Company had adopted the fair value method as of the beginning of 1995. Under
SFAS No. 123, the fair value of stock-based awards to employees is calculated
through the use of option pricing models, even though such models were developed
to estimate the fair value of freely tradable, fully transferable options
without vesting restrictions, which significantly differ from the Company's
stock option awards. These models also require subjective assumptions, including
future stock price volatility and expected time to exercise, which greatly
affect the calculated values. The Company's calculations were made using the
Black-Scholes option pricing model with the following weighted average
assumptions and forfeitures being recognized as they occur.
<TABLE>
<CAPTION>
Year Ended Year Ended
January 1, 2000 January 2, 1999
--------------- ---------------
<S> <C> <C>
Expected life in years following vesting 9.2 years 5.7 years
Stock price volatility........................... 87.01% 85.17%
Risk free interest rate.......................... 6.0% 6.0%
Dividends during term............................ None None
</TABLE>
If the computed fair values of all awards had been amortized to expense
over the vesting period of the awards, net income would have been reduced to the
pro forma amounts indicated below.
<TABLE>
<CAPTION>
Year Ended Year Ended
January 1, 2000 January 2, 1999
--------------- ---------------
<S> <C> <C>
Net income:
As reported................................... $2,014,615 $3,393,452
Pro forma for the effect of stock options..... $1,787,608 $2,994,316
Net income per share:
As reported:
Basic......................................... $ 0.30 $ 0.53
Diluted....................................... $ 0.30 $ 0.52
Pro forma for the effect of stock options:
Basic and diluted............................. $ 0.26 $ 0.46
</TABLE>
8. EMPLOYEE BENEFIT PLAN
The Company established a 401(k) Savings Plan (the "Plan") effective
January 1, 1998. An employee becomes eligible to participate in the Plan after
completing one year of service and attainment of the age 21; however, all
employees hired prior to January 1, 1998, regardless of length of service, were
permitted to enroll in the Plan. Generally, employees may contribute up to 15%
of their compensation or a maximum of $10,000 in accordance with IRC Sections
402(g), 401(k) and 415. For every dollar contributed to the Plan, the Company
will match 50 cents, up to a maximum of 3% of the employee's compensation. The
Company contributed $25,041 for the year ending January 1, 2000 and no
contributions were made for the year ended January 2, 1999. The Company's
contributions vest over a five-year period.
32
<PAGE>
SHOE PAVILION, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
9. QUARTERLY FINANCIAL DATA (UNAUDITED)
<TABLE>
<CAPTION>
(In thousands, Historical
----------------------------------------------
except per share data Net Income
Per Share
---------
Gross Net
Sales Profit Income Basic Diluted
----- ------ ------ ----- -------
<S> <C> <C> <C> <C> <C>
1999 Quarters
4th Quarter.......... $21,699 $ 6,894 $ 385 $ 0.06 $ 0.06
3rd Quarter.......... 18,469 6,177 245 0.04 0.04
2nd Quarter.......... 17,190 6,023 842 0.12 0.12
1st Quarter.......... 14,253 4,657 543 0.08 0.08
1998 Quarters
4th Quarter.......... $16,432 $ 6,145 $ 885 $ 0.13 $ 0.13
3rd Quarter.......... 14,638 5,380 800 0.12 0.12
2nd Quarter.......... 13,386 4,795 686 0.10 0.10
1st Quarter(1)....... 11,451 3,810 1,023 0.19 0.19
</TABLE>
(1) In connection with its public offering in February 1998, the Company
terminated its status as an S corporation and recorded a deferred income tax
benefit of $485,000. Pro forma net income (see Note 3) for the first quarter
of 1998 was $427,000 and basic and diluted net income per share was $.07.
33
<PAGE>
Item 9 -- Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
None.
PART III
Item 10 -- Directors and Executive Officers of the Registrant
The information required by this item is incorporated by reference from the
Company's Definitive Proxy Statement for the Company's 1999 Annual Meeting of
Stockholders under the captions "Election of Directors" and "Section 16(a)
Beneficial Ownership Reporting Compliance." See also Item 1 above.
Item 11 -- Executive Compensation
The information required by this item is incorporated by reference from the
Company's Definitive Proxy Statement for the Company's 1999 Annual Meeting of
Stockholders under the caption "Executive Compensation."
Item 12 -- Security Ownership of Certain Beneficial Owners and Management
The information required by this item is incorporated by reference from the
Company's Definitive Proxy Statement for the Company's 1999 Annual Meeting of
Stockholders under the caption "Ownership of Management and Principal
Stockholders."
Item 13 -- Certain Relationships and Related Transactions
The information required by this item is incorporated by reference from the
Company's Definitive Proxy Statement for the Company's 1999 Annual Meeting of
Stockholders under the captions "Compensation Committee Interlocks and Insider
Participation" and "Transactions with the Company."
PART IV
Item 14 -- Exhibits, Financial Statement Schedules and Reports on Form 8-K
(a) The following documents are filed as part of this report:
(1) Consolidated Financial Statements of the Company are included in
Part II, Item 8:
Independent Auditors' Report
Consolidated Balance Sheets
Consolidated Statements of Income
Consolidated Statements of Cash Flows
Consolidated Statements of Shareholders' Equity
Notes to Consolidated Financial Statements
(2) Consolidated Supplementary Financial Statement Schedule for the
years ended January 1, 2000 and January 2, 1999:
None.
All other schedules are omitted because of the absence of conditions
under which they are required or because the required information is
included in the consolidated financial statements or notes thereto.
34
<PAGE>
(3) Exhibits:
See attached Exhibit Index.
(b) The Company filed the following reports on Form 8-K during the fourth
quarter of 1998:
(1) A report dated December 29, 1998 disclosing a fiscal year end
change.
35
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
Date: March 22, 2000
SHOE PAVILION, INC.
By /s/ Dmitry Beinus
----------------------------------------
Dmitry Beinus
Chairman of the Board, President
and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities indicated.
Signature Capacity Date
--------- -------- ----
/s/ Dmitry Beinus Chairman, President and Chief March 22, 2000
- -----------------------
Dmitry Beinus Executive Officer (Principal
Executive Officer)
/s/ Gary A. Schwartz Vice President, Chief Financial March 22, 2000
- -----------------------
Gary A. Schwartz Officer (Principal Financial Officer
and Principal Accounting Officer)
/s/ David H. Folkman Director March 22, 2000
- -----------------------
David H. Folkman
/s/ Peter G. Hanelt Director March 22, 2000
- -----------------------
Peter G. Hanelt
36
<PAGE>
EXHIBIT INDEX
Set forth below is a list of exhibits that are being filed or incorporated
by reference into this Form 10-K:
<TABLE>
<CAPTION>
Exhibit
Number Exhibit
--------- -------
<S> <C>
2.1 Exchange Agreement dated February 23, 1998 by and among Shoe Pavilion, Inc.,
Shoe Inn, Inc. and Dmitry Beinus (Incorporated by reference from Exhibit 2.1 to
Registration Statement No. 333-41877).
3.1 Certificate of Incorporation of the Registrant (Incorporated by reference from
Exhibit 3.1 to Registration Statement No. 333-41877).
3.2 Bylaws of the Registrant (Incorporated by reference from Exhibit 3.2 to
Registration Statement No. 333-41877).
4.1 Specimen Common Stock Certificate (Incorporated by reference from Exhibit 4.1
to Registration Statement No. 33-41877).
10.1 Lease Agreement between Lincoln-Whitehall Pacific, LLC and Shoe Inn, Inc. dated
October 28, 1996 (Incorporated by reference from Exhibit 10.1 to Registration
Statement No. 333-41877).
10.2 First Amendment to Lease Agreement between Lincoln-Whitehall Pacific, LLC and
Shoe Pavilion Corporation dated September 17, 1998. (Incorporated by reference
from Exhibit 10.2 to the Company's 10-K filed March 23, 1999.)
10.3 Second Amendment to Lease Agreement between Lincoln-Whitehall Pacific, LLC and
Shoe Pavilion Corporation dated January 11, 1999. (Incorporated by reference
from Exhibit 10.3 to the Company's 10-K filed March 23, 1999.)
10.4 1998 Equity Incentive Plan with forms of non-qualified and incentive stock
option agreements (Incorporated by reference from Exhibit 10.2 to Registration
Statement No. 333-41877).
10.5 Directors' Stock Option Plan with form of stock option agreement (Incorporated
by reference from Exhibit 10.3 to Registration Statement No. 333-41877).
10.6 Credit Agreement dated December 1, 1998 between Shoe Pavilion Corporation and
Wells Fargo Bank, National Association. (Incorporated by reference from Exhibit
10.6 to the Company's 10-K filed March 23, 1999.)
10.7 Revolving Line of Credit Note dated December 1, 1998 between Shoe Pavilion
Corporation and Wells Fargo Bank, National Association. Incorporated by
reference from Exhibit 10.7 to the Company's 10-K filed March 23, 1999.)
10.8 Continuing Guaranty dated December 1, 1998 between Shoe Pavilion, Inc. and
Wells Fargo Bank, National Association. (Incorporated by reference from Exhibit
10.8 to the Company's 10-K filed March 23, 1999.)
10.9 Tax Allocation Agreement dated February 18, 1998 between Shoe Inn, Inc. and
Dmitry Beinus (Incorporated by reference from Exhibit 10.5 to Registration
Statement No. 333-41877).
10.10 Agreement of Purchase and Sale dated as of April 14, 1997 among Standard Shoe
Company and Shoe Inn, Inc. (Incorporated by reference from Exhibit 10.6 to
Registration Statement No. 333-41877).
10.11 Form of Indemnification Agreement between the Registrant and certain of its
officers and directors (Incorporated by reference from Exhibit 10.7 to
Registration Statement No. 333-41877).
10.12 License Agreement dated July 7, 1999 between Richman Gordman 1/2 Price Stores,
Inc. and Shoe Pavilion, Inc. (Incorporated by reference from Exhibit 10.1 to
the Company's 10-Q filed August 5, 1999.)
</TABLE>
(continued on following page)
37
<PAGE>
EXHIBIT INDEX - CONTINUED
(continued from previous page)
<TABLE>
<CAPTION>
Exhibit
Number Exhibit
--------- -------
<S> <C>
10.13 First Amendment to License Agreement between Richman Gordman 1/2 Price Stores,
Inc. and Shoe Pavilion, Inc. dated December 20, 1999.
10.14 First Amendment to Credit Agreement between Shoe Pavilion Corporation and Wells
Fargo Bank, National Association dated October 30, 1999.
10.15 Second Amendment to Credit Agreement between Shoe Pavilion Corporation and
Wells Fargo Bank, National Association dated February 8, 2000.
10.16 Third Amendment to Credit Agreement between Shoe Pavilion Corporation and Wells
Fargo Bank, National Association dated March 9, 2000.
21 List of Subsidiaries
23 Independent Auditors' Consent
27 Financial Data Schedule
</TABLE>
____________________
38
<PAGE>
EXHIBIT 10.13
FIRST AMENDMENT TO LICENSE AGREEMENT
This FIRST AMENDMENT TO LICENSE AGREEMENT (the "First Amendment") is
entered into as of the 20thday of December, 1999, 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").
WHEREAS, Licensor and Licensee entered into that certain License Agreement
(the "Agreement") dated as of July 7, 1999, whereby Licensor granted 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 the Agreement;
WHEREAS, Licensor and Licensee desire to amend such Agreement under the
terms and conditions specified in this First Amendment;
NOW, THEREFORE, in consideration of the covenants contained herein, the
parties hereto agree as follows:
Section 1. Section 22.3 Purchase of Inventory, paragraphs (a) and (b), is
---------------------
amended to read as follows:
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 Footwear
inventory in the Stores. Such option may be exercised
by written notice given to Licensee within the time
specified in paragraph (b) below. The price for such
purchase shall be the Fair Value as specified below.
a "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")
<PAGE>
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 and Licensee each shall bear the
fees and costs, if any, of the Appraiser it appoints,
and shall bear equally the fees and costs of any
independent Third Appraiser. Within five days after
Licensor receives notice of the amount of the Fair
Value, as determined or agreed upon, Licensor shall
give written notice to Licensee as to whether Licensor
shall exercise the option referred to in paragraph (a)
above. 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
Licensor receives notice of such Fair Value amount.
Section 2. Except as expressly provided in this First Amendment, the
Agreement shall remain in full force and effect.
Section 3. All capitalized terms not defined herein shall have their
respective meanings as set forth in the Agreement.
Section 4. This First Amendment may be executed in original or by fax
counterparts and such counterparts together shall constitute a
single agreement.
This First Amendment shall be effective as of the 20th day of December,
1999. Each of Licensor and Licensee hereby represents and warrants that is
authorized to execute, deliver and perform its obligations under this First
Amendment.
RICHMAN GORDMAN 1/2 PRICE STORES, INC.
By: _________________________________
Title: ______________________________
SHOE PAVILION INC.
By: _________________________________
Title: ______________________________
2
<PAGE>
EXHIBIT 10.14
FIRST AMENDMENT TO CREDIT AGREEMENT
THIS FIRST AMENDMENT TO CREDIT AGREEMENT (this "Amendment") is entered into
as of October 30, 1999, by and between SHOE PAVILION CORPORATION, a Washington
corporation ("Borrower"), and WELLS FARGO BANK, NATIONAL ASSOCIATION ("Bank").
RECITALS
--------
WHEREAS, Borrower is currently indebted to Bank pursuant to the terms and
conditions of that certain Credit Agreement between Borrower and Bank dated as
of December 1, 1998, as amended from time to time ("Credit Agreement").
WHEREAS, Bank and Borrower have agreed to certain changes in the terms and
conditions set forth in the Credit Agreement and have agreed to amend the Credit
Agreement to reflect said changes.
NOW, THEREFORE, for valuable consideration, the receipt and sufficiency of
which are hereby acknowledged, the parties hereto agree that the Credit
Agreement shall be amended as follows:
1. Section 1.1.(a) is hereby amended (a) by deleting "December 1, 2000"
as the last day on which Bank will make advances under the Line of Credit, and
by substituting for said date "May 30, 2001," and (b) by deleting "Fifteen
Million Dollars ($15,000,000.00)" as the maximum principal amount available
under the Line of Credit, and by substituting for said amount "Twenty Million
Dollars ($20,000,000.00)," with such changes to be effective upon the execution
and delivery to Bank of a promissory note substantially in the form of Exhibit A
attached hereto (which promissory note shall replace and be deemed the Line of
Credit Note defined in and made pursuant to the Credit Agreement) and all other
contracts, instruments and documents required by Bank to evidence such change.
2. Section 1.1.(b) is hereby deleted in its entirety, and the following
substituted therefor:
"SECTION 1.1. (b) Letter of Credit Subfeature. As a subfeature
---------------------------
under the Line of Credit, Bank agrees from time to time during the term
thereof to issue commercial and standby letters of credit for the
account of Borrower to finance inventory purchases (each, a "Letter of
Credit" and collectively, "Letters of Credit"); provided however, that
the form and substance of each Letter of Credit shall be subject to
approval by Bank, in its sole discretion; and provided further, that
the aggregate undrawn amount of all
<PAGE>
outstanding Letters of Credit shall not at any time exceed Five Million
Dollars ($5,000,000.00). Each Letter of Credit shall be issued for a
term not to exceed three hundred sixty-five (365) days, as designated
by Borrower; provided however, that no Letter of Credit shall have an
expiration date subsequent to the maturity date of the Line of Credit.
The undrawn amount of all Letters of Credit shall be reserved under the
Line of Credit and shall not be available for borrowings thereunder.
Each Letter of Credit shall be subject to the additional terms and
conditions of the Letter of Credit Agreement and related documents, if
any, required by Bank in connection with the issuance thereof (each, a
"Letter of Credit Agreement" and collectively, "Letter of Credit
Agreements"). Each draft paid by Bank under a Letter of Credit shall be
deemed an advance under the Line of Credit and shall be repaid by
Borrower in accordance with the terms and conditions of this letter
applicable to such advances; provided however, that if advances under
the Line of Credit are not available, for any reason, at the time any
draft is paid by Bank, then Borrower shall immediately pay to Bank the
full amount of such draft, together with interest thereon from the date
such amount is paid by Bank to the date such amount is fully repaid by
Borrower, at the rate of interest applicable to advances under the Line
of Credit. In such event Borrower agrees that Bank, in its sole
discretion, may debit the following demand deposit accounts maintained
by Borrower with Bank for the amount of any such draft: 4038-148840,
4038-148953, 4038-148912, and 7038-148995, or if there are insufficient
funds for such purpose in said accounts, any other demand deposit
account maintained by Borrower with Bank."
3. Section 1.5. is hereby deleted in its entirety, and the following
substituted therefor:
"SECTION 1.5. GUARANTIES. All indebtedness of Borrower to Bank shall
be guaranteed by Shoe Pavilion, Inc. In the principal amount of Twenty
Million Dollars ($20,000,000.00), as evidenced by and subject to the terms
of a Continuing Guaranty in form and substance satisfactory to Bank."
4. Section 4.8.(c) is hereby deleted in its entirety, and the following
substituted therefor:
2
<PAGE>
"(c) EBITDA not less than $5,000,000.00 on a rolling four-quarter
basis, determined as of each fiscal quarter end, with "EBITDA" defined as
net profit before tax plus interest expense (net of capitalized interest
expense), depreciation expense and amortization expense."
5. Except as specifically provided herein, all terms and conditions of
the Credit Agreement remain in full force and effect, without waiver or
modification. All terms defined in the Credit Agreement shall have the same
meaning when used in this Amendment. This Amendment and the Credit Agreement
shall be read together, as one document.
6. Borrower hereby remakes all representations and warranties contained
in the Credit Agreement and reaffirms all covenants set forth therein. Borrower
further certifies that as of the date of this Amendment there exists no Event of
Default as defined in the Credit Agreement, nor any condition, act or event
which with the giving of notice or the passage of time or both would constitute
any such Event of Default.
IN WITNESS WHEREOF, the parties hereto have caused this Amendment to be
executed as of the day and year first written above.
WELLS FARGO BANK,
SHOE PAVILION CORPORATION NATIONAL ASSOCIATION
By: ____________________________ By: ____________________________
Gary Schwartz Brian O'Melveny
Vice President/CFO Vice President
3
<PAGE>
WELLS FARGO BANK REVOLVING LINE OF CREDIT NOTE
- -------------------------------------------------------------------------------
$20,000,000.00 Oakland, California
October 30, 1999
FOR VALUE RECEIVED, the undersigned Shoe Pavillion Corporation, ("Borrower")
promises to pay to the order of WELLS FARGO BANK, NATIONAL ASSOCIATION ("Bank")
at its office at East Bay RCBO, One Kaiser Plaza Suite 860, Oakland, CA 94812,
or at such other place as the holder hereof may designate, in lawful money of
the United States of America and in immediately available funds, the principal
sum of $20,000,000.00, or so much thereof as may be advanced and be outstanding,
with interest thereon, to be computed on each advance from the date of its
disbursement as set forth herein.
DEFINITIONS:
As used herein, the following terms shall have the meanings set forth after
each, and any other term defined in this Note shall have the meaning set forth
at the place defined:
(a) "Business Day" means any day except a Saturday, Sunday or any other day
on which commercial banks in California are authorized or required by law to
close.
(b) "Fixed Rate Term" means a period commencing on a Business Day and
continuing for 1, 2, 3, 6 or 12 months, as designated by Borrower, during which
all or a portion of the outstanding principal balance of this Note bears
Interest determined In relation to LIBOR; provided however, that no Fixed Rate
Term may be selected for a principal amount less than $500,000.00; and provided
further, that no Fixed Rate Term shall extend beyond the scheduled maturity date
hereof. If any Fixed Rate Term would end on a day which is not a Business Day,
then such Fixed Rate Term shall be extended to the next succeeding Business Day.
(c) "LIBOR" means the rate per annum (rounded upward, if necessary, to the
nearest whole 1/8 of 1%) determined by dividing Base LIBOR by a percentage
equal to 100% less any LIBOR Reserve Percentage.
(i) "Base LIBOR" means the rate per annum for United States dollar
deposits quoted by Bank as the Inter-Bank Market Offered Rate, with the
understanding that such rate is quoted by Bank for the purpose of calculating
effective rates of interest for loans making reference thereto, on the first day
of a Fixed Rate Term for delivery of funds on said date for a period of time
approximately equal to the number of days in such Fixed Rate Term and in an
amount approximately equal to the principal amount to which such Fixed Rate Term
applies. Borrower understands and agrees that Bank may base its quotation of the
Inter-Bank Market Offered Rate upon such offers or other market indicators of
the Inter-Bank Market as Bank in its discretion deems appropriate including, but
not limited to, the rate offered for U.S. dollar deposits on the London Inter-
Bank Market.
(ii) "LIBOR Reserve Percentage" means the reserve percentage prescribed by
the Board of Governors of the Federal Reserve System (or any successor) for
"Eurocurrency Liabilities" (as defined in Regulation D of the Federal Reserve
Board, as amended), adjusted by Bank for expected changes in such reserve
percentage during the applicable Fixed Rate Term.
(d) "Prime Rate" means at any time the rate of Interest most recently
announced within Bank at its principal office as its Prime Rate, with the
understanding that the Prime Rate is one of Bank's base rates and serves as the
basis upon which effective rates of Interest are calculated for those loans
making reference thereto, and is evidenced by the recording thereof after its
announcement in such internal publication of publications as Bank may designate.
INTEREST:
(a) Interest. The outstanding principal balance of this Note shall bear
--------
Interest (computed on the basis of a 360-day year, actual days elapsed) either
(i) at a fluctuating rate per annum equal to the Prime Rate in effect from time
to time, or (ii) at a fixed rate per annum determined by Bank to be 1.30000%
above LIBOR in effect on the first day of the applicable Fixed Rate Term. When
interest is determined in relation to the Prime Rate, each chance in the rate of
interest hereunder shall become effective on the date each Prime Rate change is
announced within Bank. With respect to each LIBOR selection option selected
hereunder, Bank is hereby authorized to note the date, principal amount,
interest rate and Fixed Rate Term applicable thereto and any payments
made thereon on Bank's books and records (either manually or by electronic
entry) and/or on any schedule attached to this Note, which notations shall be
prima facie evidence of the accuracy of the information noted.
(b) Selection of Interest Rate Options. At any time any portion of this
----------------------------------
Note bears interest determined in relation to LIBOR, it may be continued by
Borrower at the and of the Fixed Rate Term applicable thereto so that all or a
portion thereof bears interest determined in relation to the Prime Rate or to
LIBOR for a new Fixed Rate Term designated by Borrower. At any time any portion
of this Note bears interest determined in relation to the Prime Rate, Borrower
may convert all of a portion thereof so that it bears interest determined in
relation to LIBOR for a Fixed Rate Term designated by Borrower. At such time as
Borrower requests an advance hereunder or wishes to select a LIBOR option for
all or a portion of the outstanding principal balance hereof,
Page 1
<PAGE>
and at the end of each Fixed Rate Term, Borrower shall give Bank notice
specifying: (i) the Interest rate option selected by Borrower; (ii) the
principal amount subject thereto; and (iii) for each LIBOR selection, the
length of the applicable Fixed Rate Term. Any such notice may be given by
telephone go long as, with respect to each LIBOR selection, (A) Bank
receives written confirmation from Borrower not later than 3 Business Days
after such telephone notice is given, and (B) such notice is given to Bank
prior to 10.00 a.m., California time, on the first day of the Fixed Rate
Term. For each LIBOR option requested hereunder, Bank will quote the
applicable fixed rate to Borrower at approximately 10:00 a.m., California
time, on the first day of the Fixed Rate Term. If Borrower does not
immediately accept the rate quoted by Bank, any subsequent acceptance by
Borrower shall be subject to a redetermination by Bank of the applicable
fixed rate; provided however, that if Borrower fails to accept any such rate
by 11:00 a.m., California time, on the Business Day such quotation is
given, then the quoted rate shall expire and Bank shall have no obligation
to permit a LIBOR option to be selected on such day. If no specific
designation of interest is made at the time any advance is requested
hereunder or at the end of any Fixed Rate Term, Borrower shall be deemed to
have made a Prime Rate interest selection for such advance or the principal
amount to which such Fixed Rate Term applied.
(c) Additional LIBOR Provisions.
---------------------------
(i) If Bank at any time shall determine that for any reason
adequate and reasonable means do not exist for ascertaining LIBOR, then
Bank shall promptly give notice thereof to Borrower, if such notice is
given and until such notice has been withdrawn by Bank, then (A) no new
LIBOR option may be selected by Borrower, and (B) any portion of the
outstanding principal balance hereof which bears interest determined in
relation to LIBOR, subsequent to the end of the Fixed Rate Term applicable
thereto, shall bear interest determined in relation to the Prime Rate.
(ii) If any law, treaty, rule, regulation or determination of a
court or governmental authority or any change therein or in the
interpretation or application thereof (each, a "Change in Law") shall make
it unlawful for Bank (A) to make LIBOR options available hereunder, or (B)
to maintain interest rates based on LIBOR, then in the former event, any
obligation of Bank to make available such unlawful LIBOR options shall
immediately be cancelled, and in the latter event, any such unlawful LIBOR-
based interest rates then outstanding shall be converted, at Bank's option,
so that interest on the portion of the outstanding principal balance subject
thereto is determined in relation to the Prime Rate; provided however, that
if any such Change in Law shall permit any LIBOR-based interest rates to
remain in effect until the expiration of the Fixed Rate Term applicable
thereto, then such permitted LIBOR-based Interest rates shall continue in
effect until the expiration of such Fixed Rate Term. Upon the occurrence of
any of the foregoing events, Borrower shall pay to Bank immediately upon
demand such amounts as may be necessary to compensate Bank for any fines,
fees, charges, penalties or other costs incurred or payable by Bank as a
result thereof and which are attributable to any LIBOR options made
available to Borrower hereunder, and any reasonable allocation made by Bank
among its operations shall be conclusive and binding upon Borrower.
(iii) If any Change in Law or compliance by Bank with any request or
directive (whether or not having the force of law) from any central bank or
other governmental authority shall:
(A) subject Bank to any tax, duty or other charge with respect to any
LIBOR options, or change the basis of taxation of payments to
Bank of principal, interest, fees or any other amount payable
hereunder (except for changes in the rate of tax on the overall
net income of Bank); or
(B) impose, modify or hold applicable any reserve, special deposit,
compulsory loan or similar requirement against assets held by,
deposits or other liabilities in or for the account of, advances
or loans by, or any other acquisition of funds by any office of
Bank; or
(C) impose on Bank any other condition;
and the result of any of the foregoing is to increase the cost to Bank of
making, renewing of maintaining any LIBOR options hereunder and/or to reduce
any amount receivable by Bank in connection therewith, then in any such
case, Borrower shall pay to Bank immediately upon demand such amounts as
may be necessary to compensate Bank for any additional costs incurred by
Bank and/or reductions in amounts received by Bank which are attributable
to such LIBOR options. In determining which costs incurred by Bank and/of
reductions in amounts received by Bank are attributable to any LIBOR options
made available to Borrower hereunder, any reasonable allocation made by
Bank among its operations shall be conclusive and binding upon Borrower.
(d) Payment of Interest. Interest accrued on this Note shall be payable
-------------------
on the 1st day of each month, commencing December 1, 1999.
(e) Default Interest. From and after the maturity date of this Note, or
----------------
such earlier date as all principal owing hereunder becomes due and payable
by acceleration or otherwise, the outstanding principal balance of this Note
shall bear interest until paid in full at an increased rate per annum
(computed on the basis of a 360-day year, actual days elapsed) equal to 4%
above the rate of Interest from time to time applicable to this Note.
BORROWING AND REPAYMENT:
(a) Borrowing and Repayment. Borrower may from time to time during the
-----------------------
term of this Note borrow, partially or wholly repay its outstanding
borrowings, and reborrow, subject to all of the limitations, terms and
Page 2
<PAGE>
however, that the total outstanding borrowings under this Note shall not at any
time exceed the principal amount stated above. The unpaid principal balance of
this obligation at any time shall be the total amounts advanced hereunder by the
holder hereof less the amount of principal payments made hereon by or for any
Borrower, which balance may be endorsed hereon from time to time by the holder.
The outstanding principal balance of this Note shall be due and payable in full
on May 30, 2001.
(b) Advances. Advances hereunder, to the total amount of the principal sum
--------
available hereunder, may be made by the holder at the oral or written request of
(i) Gary Schwartz, any one acting alone, who are authorized to request advances
and direct the disposition of any advances until written notice of the
revocation of such authority is received by the holder at the office designated
above, or (ii) any person, with respect to advances deposited to the credit of
any account of any Borrower with the holder, which advances, when so deposited,
shall be conclusively presumed to have been made to or for the benefit of each
Borrower regardless of the fact that persons other than those authorized to
request advances may have authority to draw against such account. The holder
shall have no obligation to determine whether any person requesting an advance
is or has been authorized by any Borrower.
(c) Application of Payments. Each payment made on this Note shall be
-------------------------
credited first, to any interest then due and second, to the outstanding
principal balance hereof. All payments credited to principal shall be applied
first, to the outstanding principal balance of this Note which bears interest
determined in relation to the Prime Rate, if any, and second, to the outstanding
principal balance of this Note which bears interest determined in relation to
LIBOR, with such payments applied to the oldest Fixed Rate Term first.
PREPAYMENT:
(a) Prime Rate. Borrower may prepay principal on any portion of this Note
----------
which bears interest determined in relation to the Prime Rate at any time, in
any amount and without penalty.
(b) LIBOR. Borrower may prepay principal on any portion of this Note which
-----
bears interest determined in relation to LIBOR at any time and in the minimum
amount of $500,000.00; provided however, that if the outstanding principal
balance of such portion of this Note is less than said amount, the minimum
prepayment amount shall be the entire outstanding principal balance thereof. In
consideration of Bank providing this prepayment option to Borrower, or if any
such portion of this Note shall become due and payable at any time prior to the
last day of the Fixed Rate Term applicable thereto by acceleration or
otherwise, Borrower shall pay to Bank immediately upon demand a fee which is the
sum of the discounted monthly differences for each month from the month of
prepayment through the month in which such Fixed Rate Term matures, calculated
as follows for each such month:
(i) Determine the amount of interest which would have accrued each month
---------
on the amount prepaid at the interest rate applicable to such amount had it
remained outstanding until the last day of the Fixed Rate Term applicable
thereto.
(ii) Subtract from the amount determined in (i) above the amount of
--------
interest which would have accrued for the same month on the amount prepaid for
the remaining term of such Fixed Rate Term at LIBOR in effect on the date of
prepayment for new loans made for such term and in a principal amount equal to
the amount prepaid.
(iii) If the result obtained in (ii) for any month is greater than zero,
discount that difference by LIBOR used in (ii) above.
Each Borrower acknowledges that prepayment of such amount may result in Bank
incurring additional costs, expenses and/or liabilities, and that it is
difficult to ascertain the full extent of such costs, expenses and/or
liabilities. Each Borrower, therefore, agrees to pay the above-described
prepayment fee and agrees that said amount represents a reasonable estimate of
the prepayment costs, expenses and/or liabilities of Bank. If Borrower fails to
pay any prepayment fee when due, the amount of such prepayment fee shall
thereafter bear interest until paid at a rate per annum 2.000% above the Prime
Rate in effect from time to time (computed on the basis of a 360-day year,
actual days elapsed). Each change in the rate of interest on any such past due
prepayment fee shall become effective on the date each Prime Rate change is
announced within Bank.
EVENTS OF DEFAULT:
This Note is made pursuant to and is subject to the terms and conditions of
that certain Credit Agreement between Borrower and Bank dated as of December 1,
1998, as amended from time to time (the "Credit Agreement"). Any default in the
payment or performance of any obligation under this Note, or any defined event
of default under the Credit Agreement, shall constitute an "Event of Default"
under this Note.
MISCELLANEOUS:
(a) Remedies. Upon the occurrence of any Event of Default as defined in
--------
the Credit Agreement, the holder of this Note, at the holder's option, may
declare all sums of principal and interest outstanding hereunder to be
immediately due and payable without presentment, demand, notice of
nonperformance, notice of protest, protest or notice of dishonor, all of which
are expressly waived by each Borrower* and the obligation, if any, of the
holder to extend any further credit hereunder shall immediately cease and
terminate. Each Borrower shall pay to the holder immediately upon demand the
full amount of all payments, advances,
* subject to the terms of the Credit Agreement.
Page 3
<PAGE>
charges, costs and expenses, including reasonable attorneys' fees (to include
outside counsel fees and all allocated costs of the holder's in-house counsel),
expended or incurred by the holder in connection with the enforcement of the
holder's rights and/or the collection of any amounts which become due to the
holder under this Note, and the prosecution or defense of any action in any way
related to this Note, including without limitation, any action for declaratory
relief, whether incurred at the trial or appellate level, in an arbitration
proceeding or otherwise, and including any of the foregoing incurred in
connection with any bankruptcy proceeding (including without limitation, any
adversary proceeding, contested matter or motion brought by Bank or any other
person) relating to any Borrower or any other person or entity.
(b) Obligations Joint and Several. Should more than one person or entity
-----------------------------
sign this Note as a Borrower, the obligations of each such Borrower shall be
joint and several.
(c) Governing Law. This Note shall be governed by and construed in
-------------
accordance with the laws of the state of California.
IN WITNESS WHEREOF, the undersigned has executed this Note as of the date
first written above.
Shoe Pavilion Corporation
By: /s/ [SIGNATURE ILLEGIBLE]^^
------------------------------
Title: CHAIRMAN & CEO
--------------------------
Page 4
<PAGE>
EXHIBIT 10.15
SECOND AMENDMENT TO CREDIT AGREEMENT
THIS SECOND AMENDMENT TO CREDIT AGREEMENT (this "Amendment") is entered
into as of February 8, 2000, by and between SHOE PAVILION CORPORATION, a
Washington corporation ("Borrower"), and WELLS FARGO BANK, NATIONAL ASSOCIATION
("Bank").
RECITALS
--------
WHEREAS, Borrower is currently indebted to Bank pursuant to the terms and
conditions of that certain Credit Agreement between Borrower and Bank dated as
of December 1, 1998, as amended from time to time ("Credit Agreement").
WHEREAS, Bank and Borrower have agreed to certain changes in the terms and
conditions set forth in the Credit Agreement and have agreed to amend the Credit
Agreement to reflect said changes.
NOW, THEREFORE, for valuable consideration, the receipt and sufficiency of
which are hereby acknowledged, the parties hereto agree that the Credit
Agreement shall be amended as follows:
1. Section 5.6 is hereby deleted in its entirety, and the following
substituted therefor:
"SECTION 5.6. DIVIDENDS, DISTRIBUTIONS. Declare or pay
any dividend or distribution either in cash, stock or
any other property on Borrower's stock now or hereafter
outstanding, nor redeem, retire, repurchase or
otherwise acquire any shares of any class of Borrower's
stock now or hereafter; provided however, Borrower may
repurchase any such shares of stock, in a maximum
aggregate amount of $2,000,000.00."
2. Except as specifically provided herein, all terms and conditions of
the Credit Agreement remain in full force and effect, without waiver or
modification. All terms defined in the Credit Agreement shall have the same
meaning when used in this Amendment. This Amendment and the Credit Agreement
shall be read together, as one document.
3. Borrower hereby remakes all representations and warranties contained
in the Credit Agreement and reaffirms all covenants set forth therein. Borrower
further certifies that as of the date of this Amendment there exists no Event of
Default as defined in the Credit Agreement, nor any condition, act or event
which with the giving of notice or the passage of time or both would constitute
any such Event of Default.
-1-
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Amendment to be
executed as of the day and year first written above.
WELLS FARGO BANK,
SHOE PAVILION CORPORATION NATIONAL ASSOCIATION
By: /s/ [ILLEGIBLE]^^ By: /s/ Brian O'Melveny
------------------------- ------------------------
Brian O'Melveny
Title: CHAIRMAN & CEO Vice President
----------------------
-2-
<PAGE>
CORPORATE RESOLUTION:
WELLS FARGO BANK CONTINUING GUARANTY
- --------------------------------------------------------------------------------
TO: WELLS FARGO BANK, NATIONAL ASSOCIATION
RESOLVED: That this corporation, Shoe Pavilion, Inc., will benefit by any
credit now or hereafter extended by Wells Fargo Bank, National Association
("Bank") to Shoe Pavilion Corporation ("Borrower").
BE IT FURTHER RESOLVED, that any one of the following officers:
CHAIRMAN & CEO, VICE PRESIDENT & CFO
together with any one of the following officers:
NONE
of this corporation be and they are hereby authorized and empowered for and on
behalf of and in the name of this corporation and as its corporate act and deed:
(a) to guarantee the repayment of any indebtedness of Borrower to Bank in
an amount or amounts not to exceed at any one time the sum of $20,000,000.00
for principal, plus all interest accrued thereto and costs and expenses
pertaining thereto; and
(b) to execute and deliver to Bank such continuing guaranties and
endorsements, all in form and substance satisfactory to Bank, as Bank may
request, together with such other contracts or instruments as Bank deems
necessary or convenient to accomplish the purposes of this resolution and/or to
perfect or continue the rights and remedies to be given to Bank pursuant hereto.
BE IT FURTHER RESOLVED, that the authority hereby conferred is in addition
to that conferred by any other resolution heretofore or hereafter delivered by
this corporation to Bank and shall continue in full force and effect until Bank
shall have received notice in writing, certified by the Secretary of this
corporation, of the revocation hereof by a resolution duly adopted by the Board
of Directors of this corporation. Any such revocation shall be effective only as
to credit which is extended or committed by Bank, or actions which are taken by
this corporation pursuant to the resolutions contained herein, subsequent to
Bank's receipt of such notice. The authority hereby conferred shall be deemed
retroactive, and any and all acts authorized herein which were performed prior
to the passage of this resolution are hereby approved and ratified.
SEE REVERSE OF FORM FOR CERTIFICATION
Page 1
<PAGE>
CERTIFICATION
I, Gary Schwartz, Secretary of Shoe Pavilion, Inc., a corporation created
and existing under the laws of the state of Delaware, do hereby certify and
declare that the foregoing is a full, true and correct copy of the resolutions
duly passed and adopted by the Board of Directors of said corporation, by
written consent of all Directors of said corporation or at a meeting of said
Board duly and regularly called, noticed and held on 2/15/00, at which meeting a
quorum of the Board of Directors was present and voted in favor of said
resolutions; that said resolutions are now in full force and effect; that there
is no provision in the Articles of Incorporation or Bylaws of said corporation,
or any shareholder agreement, limiting the power of the Board of Directors of
said corporation to pass the foregoing resolutions and that such resolutions are
in conformity with the provisions of such Articles of Incorporation and Bylaws;
and that no approval by the shareholders of, or of the outstanding shares of,
said corporation is required with respect to the matters which are the subject
of the foregoing resolutions.
IN WITNESS WHEREOF, I have hereunto set my hand and, if required by Bank
affixed the corporate seal of said corporation, as of 2/15/00.
/s/ Gary Schwartz
--------------------------------
Gary Schwartz, Secretary
(SEAL)
<PAGE>
WELLS FARGO BANK CERTIFICATE OF INCUMBENCY
- --------------------------------------------------------------------------------
TO: WELLS FARGO BANK, NATIONAL ASSOCIATION
The undersigned, Gary Schwartz, Secretary of Shoe Pavilion, Inc., a
corporation created and existing under the laws of the state of Delaware, hereby
certifies to Wells Fargo Bank, National Association ("Bank") that (a) the
following named persons are duly elected officers of this corporation and
presently hold the titles specified below, (b) said officers are authorized to
act on behalf of this Corporation in transactions with Bank, and (c) the
signature opposite each officer's name is his or her true signature:
TITLE NAME SIGNATURE
Chairman & CEO Dmitry Beinus /s/ D Beinus
- -------------------- ------------- ------------------------
Vice President & CEO Gary Schwartz /s/ Gary Schwartz
- -------------------- ------------- ------------------------
- -------------------- ------------- ------------------------
- -------------------- ------------- ------------------------
- -------------------- ------------- ------------------------
The undersigned further certifies that if any of the above-named officers
change, or if, at any time, any of said officers are no longer authorized to act
on behalf of this corporation in transactions with Bank, this corporation shall
immediately provide to Bank a new Certificate of Incumbency. Bank is hereby
authorized to rely on this Certificate of Incumbency until a new Certificate of
Incumbency certified by the Secretary of this corporation is received by Bank.
IN TESTIMONY WHEREOF, I have hereunto set my hand and affixed the corporate
seal of said corporation as of 2/15/00.
/s/ Gary Schwartz
--------------------------------
Gary Schwartz, Secretary
(SEAL)
Page 1
<PAGE>
WELLS FARGO BANK CORPORATE RESOLUTION: BORROWING
- --------------------------------------------------------------------------------
TO: WELLS FARGO BANK, NATIONAL ASSOCIATION
RESOLVED: That this corporation, Shoe Pavilion Corporation, proposes to
obtain credit from time to time, or has obtained credit, from Wells Fargo Bank,
National Association ('Bank').
BE IT FURTHER RESOLVED, that any one of the following officers:
CHAIRMAN & CEO, VICE PRESIDENT & CFO together with any one of the following
officers:
NONE
of this corporation be and they are hereby authorized and empowered for and on
behalf of and in the name of this corporation and as its corporate act and deed:
(a) To borrow money from Bank and to assume any liabilities of any other
person or entity to Bank, in such form and on such terms and conditions as shall
be agreed upon by those authorized above and Bank, and to sign and deliver to
Bank such promissory notes and other evidences of indebtedness for money
borrowed or advanced and/or for indebtedness assumed as Bank shall require; such
promissory notes or other evidences of indebtedness may provide that advances be
requested by telephone communication and by any officer, employee or agent of
this corporation so long as the advances are deposited into any deposit account
of this corporation with Bank; this corporation shall be bound to Bank by, and
Bank may rely upon, any communication or act, including telephone
communications, purporting to be done by any officer, employee or agent of this
corporation provided that Bank believes, in good faith, that the same is done by
such person.
(b) To contract for the issuance by Bank of letters of credit, to discount
with Bank notes, acceptances and evidences of indebtedness payable to or due
this corporation, to endorse the same and execute such contracts and instruments
for repayment thereof to Bank as Bank shall require, and to enter into foreign
exchange transactions with or through Bank.
(c) To mortgage, encumber, pledge, convey, grant, assign or otherwise
transfer all or any part of this corporation's real or personal property for the
purpose of securing the payment of any of the promissory notes, contracts,
instruments and other evidences of indebtedness authorized hereby, and to
execute and deliver to Bank such deeds of trust, mortgages, pledge agreements,
security agreements and/or other related documents as Bank shall require.
(d) To perform all acts and to execute and deliver all documents described
above and all other contracts and instruments which Bank deems necessary or
convenient to accomplish the purposes of this resolution and/or to perfect or
continue the rights, remedies and security interests to be given to Bank
pursuant hereto, including without limitation, any modifications, renewals
and/or extensions of any of this corporation's obligations to Bank, however
evidenced; provided that the aggregate principal amount of all sums borrowed and
credits established pursuant to this resolution shall not at any time exceed the
sum of $2S,000,000.00 outstanding and unpaid.
Loans made pursuant to a special resolution and loans made by offices of
Bank other than the office to which this resolution is delivered shall be in
addition to foregoing limitation.
BE IT FURTHER RESOLVED, that the authority hereby conferred is in addition
to that conferred by any other resolution heretofore or hereafter delivered by
this corporation to Bank and shall continue in full force and effect until Bank
shall have received notice in writing, certified by the Secretary of this
corporation, of the revocation hereof by a resolution duly adopted by the Board
of Directors of this corporation. Any such revocation shall be effective only as
to credit which is extended or committed by Bank, or actions which are
Page 1
<PAGE>
taken by this corporation pursuant to the resolutions contained herein,
subsequent to Bank's receipt of such notice. The authority hereby conferred
shall be deemed retroactive, and any and all acts authorized herein which were
performed prior to the passage of this resolution are hereby approved and
ratified.
CERTIFICATION
I, Gary Schwartz, Secretary of Shoe Pavilion Corporation, a corporation
created and existing under the laws of the state of Washington, do hereby
certify and declare that the foregoing is a full, true and correct copy of the
resolutions duly passed and adopted by the Board of Directors of said
corporation, by written consent of all Directors of said corporation or at a
meeting of said Board duly and regularly called, noticed and held on 2/15/00, at
which meeting a quorum of the Board of Directors was present and voted in favor
of said resolutions; that said resolutions are now in full force and effect;
that there is no provision in the Articles of Incorporation or Bylaws of said
corporation, or any shareholder agreement, limiting the power of the Board of
Directors of said corporation to pass the foregoing resolutions and that such
resolutions are in conformity with the provisions of such Articles of
Incorporation and Bylaws; and that no approval by the shareholders of, or of the
outstanding shares of, said corporation is required with respect to the matters
which are the subject of the foregoing resolutions.
IN WITNESS WHEREOF, I have hereunto set my hand and, if required by Bank
affixed the corporate seal of said corporation, as of 2/15/00.
/s/ Gary Schwartz
-----------------------------
Gary Schwartz, Secretary
(SEAL)
Page 2
<PAGE>
WELLS FARGO BANK CERTIFICATE OF INCUMBENCY
- --------------------------------------------------------------------------------
TO: WELLS FARGO BANK, NATIONAL ASSOCIATION
The undersigned, Gary Schwartz, Secretary of Shoe Pavilion Corporation, a
corporation created and existing under the laws of the state of Washington,
hereby certifies to Wells Fargo Bank, National Association ("Bank") that (a) the
following named persons are duly elected officers of this corporation and
presently hold the titles specified below, (b) said officers are authorized to
act on behalf of this Corporation in transactions with Bank, and (c) the
signature opposite each officer's name is his or her true signature:
TITLE NAME SIGNATURE
Chairman CEO Dmitry Beinus /s/ D Beinus
- ------------------------ ---------------------- --------------------
Vice President & CEO Gary Schwartz /s/ Gary Schwartz
- ------------------------ ---------------------- --------------------
- ------------------------ ---------------------- --------------------
- ------------------------ ---------------------- --------------------
- ------------------------ ---------------------- --------------------
- ------------------------ ---------------------- --------------------
The undersigned further certifies that if any of the above-named officers
change, or if, at any time, any of said officers are no longer authorized to act
on behalf of this corporation in transactions with Bank, this corporation shall
immediately provide to Bank a new Certificate of Incumbency. Bank is hereby
authorized to rely on this Certificate of Incumbency until a new Certificate of
Incumbency certified by the Secretary of this corporation is received by Bank.
IN TESTIMONY WHEREOF, I have hereunto set my hand and affixed the corporate
seal of said corporation as of 2/15/00.
/s/ Gary Schwartz
-------------------------------
Gary Schwartz, Secretary
(SEAL)
Page 1
<PAGE>
EXHIBIT 10.16
THIRD AMENDMENT TO CREDIT AGREEMENT
THIS THIRD AMENDMENT TO CREDIT AGREEMENT (this "Amendment") is entered into
as of March 9, 2000, by and between SHOE PAVILION CORPORATION, a Washington
corporation ("Borrower"), and WELLS FARGO BANK, NATIONAL ASSOCIATION ("Bank").
RECITALS
--------
WHEREAS, Borrower is currently indebted to Bank pursuant to the terms and
conditions of that certain Credit Agreement between Borrower and Bank dated as
of December 1, 1998, as amended from time to time ("Credit Agreement").
WHEREAS, Bank and Borrower have agreed to certain changes in the terms and
conditions set forth in the Credit Agreement and have agreed to amend the Credit
Agreement to reflect said changes.
NOW, THEREFORE, for valuable consideration, the receipt and sufficiency of
which are hereby acknowledged, the parties hereto agree that the Credit
Agreement shall be amended as follows:
1. The following is hereby added to the Credit Agreement as Section 1.2
(d):
"(d) Unused Commitment Fee. Borrower shall pay to Bank
---------------------
a fee equal to one-quarter percent (0.25%) per annum
(computed on the basis of a 360-day year, actual days
elapsed) On the average daily unused amount of the Line of
Credit, which fee shall be calculated on a monthly basis by
Bank and shall be due and payable by Borrower in arrears on
first day of Each month, effective on April 1, 2000 through
and expiring on October 1, 2000."
2. Section 4.8 (c) is hereby deleted in its entirety, and the following
substituted therefore:
"(c) EBITDA, as determined on a rolling four-quarter
basis, shall not be less than $4,300,000.00 as of the first
and second fiscal quarters for the fiscal year 2000, and
shall not be less than $5,000,000.00 quarterly thereafter,
with "EBITDA" defined as net profit before tax plus interest
expense (net of capitalized interest expense), depreciation
expense and amortization expense."
3. Except as specifically provided herein, all terms and conditions of
the Credit Agreement remain in full force and effect, without waiver or
modification. All terms defined in the Credit Agreement shall have the same
meaning when used in this Amendment. This Amendment and the Credit Agreement
shall be read together, as one document.
4. Borrower hereby remakes all representations and warranties contained
in the Credit Agreement and reaffirms all covenants set forth therein. Borrower
further certifies that as of the date of this Amendment there exists no Event of
Default as defined in the Credit
-1-
<PAGE>
Agreement, nor any condition, act or event which with the giving of notice or
the passage of time or both would constitute any such Event of Default.
IN WITNESS WHEREOF, the parties hereto have caused this Amendment to be
executed as of the day and year first written above.
WELLS FARGO BANK,
SHOE PAVILION CORPORATION NATIONAL ASSOCIATION
By: _____________________________ By: _____________________________
Brian O'Melveny
Vice President
Title: __________________________
-2-
<PAGE>
EXHIBIT 21
LIST OF SUBSIDIARIES
The following table sets forth certain information concerning the sole
subsidiary of the Company.
State or Other
Name Jurisdiction of Incorporation
---- -----------------------------
Shoe Pavilion Corporation Washington
<PAGE>
EXHIBIT 23
INDEPENDENT AUDITORS' CONSENT
We consent to the incorporation by reference in Registration Statement Nos.
333-49007 and 333-49009 of Shoe Pavilion, Inc. each on Form S-8 regarding the
Directors' Stock Option Plan and the 1998 Equity Incentive Plan, respectively,
of our report dated February 17, 2000, appearing in this Annual Report on Form
10-K of Shoe Pavilion, Inc. for the year ended January 1, 2000.
DELOITTE & TOUCHE LLP
San Francisco, California
March 21, 2000
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C> <C>
<PERIOD-TYPE> 12-MOS 12-MOS
<FISCAL-YEAR-END> JAN-01-2000 JAN-02-1999
<PERIOD-START> JAN-03-1999 JAN-01-1998
<PERIOD-END> JAN-01-2000 JAN-02-1999
<CASH> 929 1,922
<SECURITIES> 0 0
<RECEIVABLES> 578 157
<ALLOWANCES> 0 0
<INVENTORY> 32,985 26,892
<CURRENT-ASSETS> 35,101 29,071
<PP&E> 8,941 6,275
<DEPRECIATION> 3,401 2,440
<TOTAL-ASSETS> 41,613 33,534
<CURRENT-LIABILITIES> 20,796 15,332
<BONDS> 0 0
0 0
0 0
<COMMON> 7 7
<OTHER-SE> 19,036 17,022
<TOTAL-LIABILITY-AND-EQUITY> 41,613 33,534
<SALES> 71,611 55,907
<TOTAL-REVENUES> 71,611 55,907
<CGS> 48,076 35,777
<TOTAL-COSTS> 48,076 35,777
<OTHER-EXPENSES> 19,654 15,136
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 619 430
<INCOME-PRETAX> 3,249 4,540
<INCOME-TAX> 1,234 1,147
<INCOME-CONTINUING> 2,015 3,393
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> 2,015 3,393
<EPS-BASIC> .30 .53
<EPS-DILUTED> .30 .52
</TABLE>