<PAGE>
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
_________________
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended October 2, 1999
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from __________ to __________
Commission File Number 0-23669
SHOE PAVILION, INC.
(Exact name of Registrant as Specified in its Charter)
Delaware 94-3289691
(State or Other Jurisdiction of Incorporation (IRS Employer
or Organization) Identification Number)
3200-F Regatta Boulevard, Richmond, California 94804
(Address of principal executive offices) (Zip Code)
(510) 970-9775
(Registrant's telephone number, including area code)
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X]. No [_].
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Common Stock outstanding as of November 9, 1999 was 6,800,000 shares
<PAGE>
FORWARD-LOOKING STATEMENTS
This Quarterly Report on Form 10-Q contains certain "forward-looking"
statements within the meaning of the Private Securities Litigation Reform Act of
1995 which provides a "safe harbor" for these types of statements. These
forward-looking statements are subject to risks and uncertainties that could
cause the Company's actual results to differ materially from management's
current expectations. These factors include, without limitation, expansion into
a new geographic region, competitive pressures in the footwear industry, changes
in the level of consumer spending on or preferences in footwear merchandise, the
Company's ability to purchase attractive name brand merchandise at financially
reasonable discounts and the availability of desirable store locations as well
as management's ability to negotiate acceptable lease terms and open new stores
in a timely manner. Other risk factors are detailed in the Company's filings
with the Securities and Exchange Commission. The Company assumes no obligation
to update forward-looking statements.
SHOE PAVILION, INC.
INDEX TO FORM 10-Q
PART I
FINANCIAL INFORMATION
Page
----
Item 1 - Condensed Consolidated Financial Statements (Unaudited)
Condensed Consolidated Balance Sheets........................... 3
Condensed Consolidated Statements of Income..................... 4
Condensed Consolidated Statements of Cash Flows................. 5
Notes to Condensed Consolidated Financial Statements............ 6
Item 2 - Management's Discussion and Analysis of Financial Condition and
Results of Operations........................................... 7-9
Item 3 - Quantitative and Qualitative Disclosures About Market Risk...... 9
PART II
OTHER INFORMATION
Item 6 - Exhibits and Reports on Form 8-K................................ 10
2
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PART I
FINANCIAL INFORMATION
Item 1. Condensed Consolidated Financial Statements.
The following financial statements and related financial information are filed
as part of this report:
Shoe Pavilion, Inc.
Condensed Consolidated Balance Sheets
(Unaudited)
<TABLE>
<CAPTION>
(In thousands, except share data) October 2 January 2 September 30
1999 1999 1998
<S> <C> <C> <C>
ASSETS
Current assets
Cash $ 574 $ 1,922 $ 676
Inventories 33,828 26,892 27,223
Prepaid expenses and other 922 257 371
------- ------- -------
Total current assets 35,324 29,071 28,270
Property and equipment, net 5,151 3,835 3,116
Other assets 643 628 627
------- ------- -------
Total assets $41,118 $33,534 $32,013
======= ======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Accounts payable $10,794 $ 5,967 $ 6,982
Accrued expenses 100 946 995
Line of credit 10,025 8,407 6,800
Current portion of long-term obligations 12 12 21
------- ------- -------
Total current liabilities 20,931 15,332 14,798
Deferred rent 1,462 1,098 1,002
Long-term obligations, less current portion 66 75 69
------- ------- -------
Total liabilities 22,459 16,505 15,869
------- ------- -------
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;
issued and outstanding, 6,800,000 7 7 7
Additional paid-in capital 13,968 13,968 13,968
Retained earnings 4,684 3,054 2,169
------- ------- -------
Total stockholders' equity 18,659 17,029 16,144
------- ------- -------
Total liabilities and stockholders' equity $41,118 $33,534 $32,013
======= ======= =======
</TABLE>
See notes to condensed consolidated financial statements.
3
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Shoe Pavilion, Inc.
Condensed Consolidated Statements of Income
(Unaudited)
(In thousands, except per share and number of stores)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
October 2 September 30 October 2 September 30
1999 1998 1999 1998
<S> <C> <C> <C> <C>
Net sales $18,469 $14,638 $49,912 $39,476
Cost of sales and related occupancy expenses 12,292 9,258 33,055 25,491
------- ------- ------- -------
Gross profit 6,177 5,380 16,857 13,985
Selling, general and administrative expenses 5,634 3,980 13,772 10,617
------- ------- ------- -------
Income from operations 543 1,400 3,085 3,368
Interest and other, net 168 100 439 268
------- ------- ------- -------
Income before taxes 375 1,300 2,646 3,100
Income taxes 130 500 1,016 592
------- ------- ------- -------
Net Income $ 245 $ 800 $ 1,630 $ 2,508
======= ======= ======= =======
Earnings per share:
Basic $0.04 $0.12 $0.24 $ 0.40
Diluted $0.04 $0.12 $0.24 $ 0.39
Weighted average shares outstanding:
Basic 6,800 6,800 6,800 6,345
Diluted 6,800 6,803 6,801 6,365
PRO FORMA
Historical income before taxes on income $ 3,100
Pro forma provision for income taxes 1,194
-------
Pro forma net income $ 1,906
=======
Pro forma earnings per share
Basic $ 0.29
Diluted $ 0.29
Pro forma weighted average shares outstanding
Basic 6,597
Diluted 6,617
Stores operated at end of period 111 62
</TABLE>
See notes to condensed consolidated financial statements.
4
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Shoe Pavilion, Inc.
Condensed Consolidated Statements of Cash Flows
(Unaudited)
(In thousands)
<TABLE>
<CAPTION>
Nine Months Ended
October 2 September 30
1999 1998
<S> <C> <C>
Operating activities:
Net income $ 1,630 $ 2,508
Adjustments to reconcile net income to net cash
used by operating activities:
Depreciation and Amortization 877 566
Deferred taxes (46) (485)
Cash provided (used) by changes in:
Inventories (6,936) (7,428)
Prepaid expenses and other current assets (665) (298)
Accounts payable 4,827 1,061
Accrued expenses (846) 152
Other assets 31 166
Deferred rent 364 106
------- -------
Net cash used by operating activities (764) (3,652)
Investing activity -
Purchase of property and equipment, net (2,193) (1,607)
Financing activities:
Net proceeds from initial public offering - 14,107
(Payment) Proceeds (to) from line of credit 1,618 (587)
Principal payments on capital leases (9) (180)
Distributions paid to stockholder - (7,800)
------- -------
Net cash provided by financing activities 1,609 5,540
------- -------
NET DECREASE IN CASH (1,348) 281
CASH, BEGINNING OF PERIOD 1,922 395
------- -------
CASH, END OF PERIOD $ 574 $ 676
======= =======
</TABLE>
See notes to condensed consolidated financial statements.
5
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Notes to Condensed Consolidated Financial Statements
1. Basis of Presentation
General - The accompanying unaudited condensed consolidated financial statements
have been prepared from the records of the Company without audit and, in the
opinion of management, include all adjustments necessary to present fairly the
Company's financial position at October 2, 1999 and September 30, 1998 and the
interim results of operations and cash flows for the three and nine months then
ended. The balance sheet as of January 2, 1999 presented herein, has been
derived from the audited financial statements of the Company as of January 2,
1999.
Accounting policies followed by the Company are described in Note 2 to the
audited consolidated financial statements for the year ended January 2, 1999.
Certain information and footnote disclosures normally included in financial
statements prepared in accordance with generally accepted accounting principles
have been condensed or omitted for purposes of the condensed consolidated
interim financial statements. The condensed consolidated financial statements
should be read in conjunction with the audited consolidated financial
statements, including the notes thereto, included in the Company's annual report
on Form 10-K for the year ended January 2, 1999.
The results of operations for the three and nine-month periods presented herein
are not necessarily indicative of the results to be expected for the full year.
In July 1999, the Company entered into an agreement with Richman Gordman 1/2
Price Stores, Inc. to operate the licensed shoe departments in 33 stores located
in the eight Midwestern states of Colorado, Iowa, Illinois, Kansas, Missouri,
Nebraska, Oklahoma and South Dakota.
Public Offering - On February 27, 1998 the Company sold 2,300,000 shares of its
common stock for net proceeds of $14,107,651. In connection with the offering,
the Company terminated its status as an S corporation and recorded a deferred
tax benefit of $485,000.
Comprehensive Income and net income are the same.
2. Pro Forma Information
The objective of the pro forma information is to show what the significant
effects on the historical information might have been had the Company not been
treated as an S Corporation for tax purposes prior to February 23, 1998, the
effective date of the Company's initial public offering.
Income Taxes - The pro forma information presented on the condensed consolidated
statements of income reflects a provision for income taxes at an effective rate
of 38.5% for the nine months ended September 30, 1998.
Pro Forma Earnings Per Share - Pro forma basic earnings per share is based on
the weighted average number of shares of common stock outstanding during the
period plus the estimated number of shares offered by the Company (1,271,650
shares) which were necessary to fund the $7,800,000 distribution paid to the
Company's stockholder upon termination of the Company's status as an S
Corporation. Pro forma diluted earnings per share is calculated using the
number of shares used in the basic calculation plus the dilutive effect of stock
options outstanding during the period.
6
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Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations.
Overview
Shoe Pavilion is the largest independent off-price footwear retailer on the
West Coast that offers a broad selection of women's and men's designer label and
name brand merchandise. The Company operated 78 retail stores in California,
Washington and Oregon and 33 licensed shoe departments in Colorado, Illinois,
Iowa, Kansas, Missouri, Nebraska, Oklahoma and South Dakota as of October 2,
1999 compared to 62 stores as of September 30, 1998.
Results of Operations
Net sales increased 26.1% to $18.5 million for the third quarter ended October
2, 1999 from $14.6 million for the third quarter of 1998. Net sales for the nine
months ended October 2, 1999 were $49.9 million, a 26.4% increase from sales of
$39.5 million for the nine months ended September 30, 1998. This increase in net
sales was primarily attributable to new store sales, including licensed shoe
departments, of $7.4 and $15.2 million for the three and nine-month periods
ended October 2, 1999, respectively, offset by a decrease in comparable store
sales of 8.0% and 2.8% for the three and nine-month periods ended October 2,
1999, respectively.
Gross profit increased 14.8% to $6.2 million for the third quarter ended
October 2, 1999 from $5.4 million for the third quarter of 1998, but decreased
as a percentage of net sales to 33.4% from 36.8% for the comparable period in
1998. Gross profit for the nine months ended October 2, 1999 increased 20.5% to
$16.9 million from $14.0 million for the nine months ended September 30, 1998,
but decreased as a percentage of net sales to 33.8% from 35.4% for the
comparable period in 1998. The decrease in gross profit as a percentage of net
sales for the three and nine month periods ended October 2, 1999 was primarily
attributable to higher fixed occupancy costs as a percentage of net sales.
Selling, general and administrative expenses increased 41.6% to $5.6 million
for the third quarter ended October 2, 1999 from $4.0 million for the third
quarter of 1998, and increased as a percentage of net sales to 30.5% from 27.2%
for the comparable period in 1998. Selling, general and administrative expenses
increased 29.7% to $13.8 million for the nine months ended October 2, 1999 from
$10.6 million for the nine months ended September 30, 1998, and increased as a
percentage of net sales to 27.6% from 26.9% for the comparable period in 1998.
The increase in selling, general and administrative expenses as a percentage of
net sales for the three and nine-month periods ended October 2, 1999 was
primarily attributable to increases in payroll costs as a result of new store
openings and fees associated with the licensed shoe departments offset by the
leveraging of advertising and promotional expenses.
Interest expense and other, net increased 68% to $168,000 for the third
quarter ended October 2, 1999 from $100,000 for the third quarter of 1998.
Interest expense and other, net increased 63.8% to $439,000 for the nine months
ended October 2, 1999 from $268,000 for the nine months ended September 30,
1998. The increase for the three and nine month periods ended October 2, 1999
was attributable to higher average borrowings on the Company's revolving line to
support increased inventory levels for new stores.
7
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Liquidity and Capital Resources
Historically, the Company has funded its cash requirements primarily through
cash flow from operations, borrowings under its credit facility and in 1998 with
proceeds from its initial public offering. Net cash used by operating activities
for the nine months ended October 2, 1999 was $764,000. Net cash used in
investing activities for the nine months ended October 2, 1999 totaled $2.2
million and was used for the purchase of property and equipment. Net cash
provided by financing activities totaled $1.6 million for the nine months ended
October 2, 1999 and was primarily funded from the Company's line of credit.
Capital expenditures for the nine months ended October 2, 1999 were primarily
for the build-out of 15 new stores plus fixtures for 33 licensed shoe
departments and the Company's new management information systems. The Company's
primary cash requirements have been related to capital expenditures for new
stores including merchandise inventory for such stores and leasehold
improvements. During the remainder of 1999, the Company anticipates that cash
will be used primarily for merchandise inventory and capital expenditures. The
Company estimates that the cost of capital expenditures for fiscal 1999,
excluding the cost of any possible acquisitions, will total approximately $3.4
million, primarily for the build-out of approximately 17 new stores, fixtures
for licensed shoe departments and costs associated with the Company's management
information systems.
The Company has a credit facility agreement with a commercial bank, which
includes a revolving line of credit for $15.0 million expiring on December 31,
2000. As of October 2, 1999, the unused and available portion of the credit
facility, less outstanding letters of credit, was approximately $4.4 million.
The Company believes that operating cash flow and borrowings under its credit
facility will be sufficient to complete the Company's 1999 store expansion
program and to satisfy the Company's other capital requirements through the end
of fiscal 1999. This credit facility was amended on October 30, 1999, increasing
the limit to $20 million and extending the maturity date to May 30, 2001, under
substantially the same terms and conditions.
Impact of Year 2000
The "Year 2000 Issue" is the result of computer programs being written using
two digits rather than four to define the applicable year. Computer programs
that have time-sensitive software may recognize a date using "00" as the year
1900 rather than the year 2000. This situation could result in a system failure
or miscalculations causing disruptions to operations, including, among other
things, a temporary inability to process transactions, send payments, or engage
in similar normal business activities.
State of Readiness. Beginning in early 1998, the Company began an overall
assessment of its computer systems, including Year 2000 readiness. The Company
determined that certain of its software was not Year 2000 compliant. In mid-
1998, the Company, with the guidance of outside consultants, implemented a plan
to replace its existing information systems primarily in response to business
demand and growth. The new systems were designed to replace the Company's
information systems which were not Year 2000 compliant in the areas of order
processing, warehousing, finance and point-of-sale on a fully integrated
enterprise-wide basis.
The Company has used both internal and external sources to replace and test
its information systems software for Year 2000 compliance. An Executive
Oversight Steering Committee, consisting of members from senior management, the
Company's information systems officer and outside vendors and consultants, was
formed to supervise the replacement, implementation and testing process.
Installation of these new systems, which began in June 1998, is substantially
complete as of October 2, 1999.
The Company instituted communications with significant suppliers to determine
the extent to which the Company may be vulnerable to a failure by any of these
third parties to remediate their own Year 2000 issues. The Company's exposure to
supplier-related Year 2000 business disruptions is reduced because it does not
currently communicate electronically with its suppliers. In addition to
suppliers, the Company also relies upon governmental agencies, utility
companies, telecommunication service companies and other service providers
outside of the Company's control. There can be no assurance that the Company's
suppliers, governmental agencies or other third parties will not suffer a Year
2000 business disruption that could have a material adverse effect on the
Company's business, financial condition and operating results. The Company has
not been informed by any supplier of their inability to comply with Year 2000
issues.
8
<PAGE>
Costs to Address the Year 2000 Issue. The Company has incurred, through
October 2, 1999, approximately $2.0 million in costs relating to the
implementation of the new systems and addressing Year 2000 issues. The Company
currently estimates that the total costs for implementing the new systems will
be approximately $2.3 million. Included in the costs of implementing the new
systems is the cost of equipment which the Company presently leases over 36 to
60 months. The Company will capitalize and depreciate the new systems technology
over its estimated useful life and to the extent that Year 2000 costs do not
qualify as capital investments, the Company will expense such costs as incurred.
Risks Presented by the Year 2000 Issue. The Company presently believes that
with the implementation of new systems and conversion to new software, the Year
2000 Issue will not pose significant operational problems for its computer
systems. It should be noted, however, that in the event any third parties which
provide goods or services essential to the Company's business activities fail to
address appropriately their Year 2000 issues, such failure could have a material
adverse effect on the Company's business, financial condition and operating
results. For example, a Year 2000 related disruption on the part of the
financial institutions which process the Company's credit card sales would have
a material adverse effect on the Company's business, financial condition and
operating results.
Item 3. Quantitative and Qualitative Disclosures About Market Risk.
There have been no material changes from the information reported in the
Company's annual report on Form 10-K for the fiscal year ended January 2, 1999.
9
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PART II
OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits required to be filed by Item 601 of Regulation S-K:
27.1 Financial Data Schedule
(b) Reports on Form 8-K filed during the quarter ended October 2,
1999:
None.
10
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized on the 9th day of November 1999.
SHOE PAVILION, INC., as Registrant
By /s/ Dmitry Beinus
---------------------------------------------
Dmitry Beinus
Chairman and Chief Executive Officer
By /s/ Gary A. Schwartz
---------------------------------------------
Gary A. Schwartz
Vice President and Chief Financial Officer
11
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INDEX TO EXHIBITS
Exhibit Number Description
- -------------- -----------
27.1 Financial Data Schedule
12
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C> <C>
<PERIOD-TYPE> 3-MOS 9-MOS
<FISCAL-YEAR-END> JAN-01-2000 JAN-01-2000
<PERIOD-START> JUL-04-1999 JAN-03-1999
<PERIOD-END> OCT-02-1999 OCT-02-1999
<CASH> 574 574
<SECURITIES> 0 0
<RECEIVABLES> 0 0
<ALLOWANCES> 0 0
<INVENTORY> 33,828 33,828
<CURRENT-ASSETS> 35,324 35,324
<PP&E> 8,275 8,275
<DEPRECIATION> 3,124 3,124
<TOTAL-ASSETS> 41,118 41,118
<CURRENT-LIABILITIES> 20,931 20,931
<BONDS> 0 0
0 0
0 0
<COMMON> 7 7
<OTHER-SE> 18,652 18,652
<TOTAL-LIABILITY-AND-EQUITY> 41,118 41,118
<SALES> 18,469 49,912
<TOTAL-REVENUES> 18,469 49,912
<CGS> 12,292 33,055
<TOTAL-COSTS> 12,292 33,055
<OTHER-EXPENSES> 5,634 13,772
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 168 439
<INCOME-PRETAX> 375 2,646
<INCOME-TAX> 130 1,016
<INCOME-CONTINUING> 245 1,630
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> 245 1,630
<EPS-BASIC> .04 .24
<EPS-DILUTED> .04 .24
</TABLE>
