<PAGE>
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
_________________
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended April 3, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from __________ to __________
Commission File Number 0-23669
SHOE PAVILION, INC.
(Exact name of Registrant as Specified in its Charter)
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 May 14, 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, competitive
pressures in the footwear industry, changes in the level of consumer spending on
or preferences in footwear merchandise, the Company's ability to purchase
attractive name brand merchandise at desirable discounts and the availability of
desirable store locations and management's ability to negotiate acceptable lease
terms and open new stores in a timely manner. Other risk factors are detailed
in the Company's filing with the Securities and Exchange Commission. The
Company assumes no obligation to update forward-looking statements.
SHOE PAVILION, INC.
INDEX TO FORM 10-Q
PART I
FINANCIAL INFORMATION
<TABLE>
<CAPTION>
Page
Item 1 - Condensed Consolidated Financial Statements ----
<S> <C>
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
</TABLE>
2
<PAGE>
PART I
FINANCIAL INFORMATION
Item 1. Condensed Consolidated Financial Statements.
The following financial statements and related financial information are filed
as part of this report:
<TABLE>
<CAPTION>
Shoe Pavilion, Inc.
Condensed Consolidated Balance Sheets
(Unaudited)
(In thousands, except share data) April 3 January 2 March 31
1999 1999 1998
------- ------- -------
<S> <C> <C> <C>
ASSETS
Current assets
Cash ........................................................... $ 918 $ 1,922 $ 218
Inventories ................................................... 29,587 26,892 22,208
Prepaid expenses and other .................................... 842 257 414
------- ------- -------
Total current assets ................................... 31,347 29,071 22,840
Property and equipment, net ........................................ 4,204 3,835 2,016
Other assets ....................................................... 630 628 639
------- ------- -------
Total assets ........................................... $36,181 $33,534 $25,495
======= ======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Accounts payable .............................................. $ 8,397 $ 5,967 $ 6,755
Accrued expenses .............................................. 956 946 936
Line of credit ................................................ 8,000 8,407 1,987
Current portion of long-term obligations ...................... 12 12 16
------- ------- -------
Total current liabilities .............................. 17,365 15,332 9,694
Deferred rent ...................................................... 1,172 1,098 913
Long-term obligations, less current portion ........................ 72 75 230
Stockholders' equity
Common stock- $.001 par value: 15,000,000 shares authorized;
issued; 6,800,000 ............................................ 7 7 7
Preferred stock- $.001 par value; 1,000,000 shares authorized;
no shares issued or outstanding .............................. -- -- --
Additional paid-in capital ................................... 13,968 13,968 13,968
Retained earnings ............................................ 3,597 3,054 683
------- ------- -------
Total stockholders' equity ............................. 17,572 17,029 14,658
------- ------- -------
Total liabilities and stockholders' equity ............. $36,181 $33,534 $25,495
======= ======= =======
</TABLE>
See notes to condensed consolidated financial statements.
3
<PAGE>
<TABLE>
<CAPTION>
Shoe Pavilion, Inc.
Condensed Consolidated Statements of Income
(Unaudited)
(In thousands, except per share and store data)
Three Months Ended
-----------------------
April 3 March 31
1999 1998
-------- --------
<S> <C> <C>
Net sales ................................... $ 14,253 $ 11,451
Cost of sales and related occupancy expenses 9,596 7,641
-------- --------
Gross profit ................................ 4,657 3,810
Selling, general and administrative expenses 3,618 3,008
-------- --------
Income from operations ...................... 1,039 802
Interest and other, net ..................... 134 117
-------- --------
Income before taxes ......................... 905 685
Income tax provision (benefit) .............. 362 (337)
-------- --------
NET INCOME .................................. $ 543 $ 1,022
======== ========
Earnings per share
Basic ....................................... $ 0.08 $ 0.19
Diluted ..................................... $ 0.08 $ 0.19
Weighted average shares outstanding
Basic ....................................... 6,800 5,420
Diluted ..................................... 6,805 5,433
Stores open at end of period ................ 69 56
PRO FORMA 1998 AMOUNTS
Historical income before taxes on income .... $ 685
Pro forma provision for income taxes ........ 258
--------
Pro forma net income ........................ $ 427
========
Pro forma earnings per share
Basic ....................................... $ 0.07
Diluted ..................................... $ 0.07
Pro forma weighted average shares outstanding
Basic ....................................... 6,183
Diluted ..................................... 6,196
</TABLE>
See notes to condensed consolidated financial statements.
4
<PAGE>
<TABLE>
<CAPTION>
Shoe Pavilion, Inc.
Condensed Consolidated Statements of Cash Flows
(Unaudited)
(In thousands)
Three Months Ended
------------------------
April 3 March 31
1999 1998
-------- --------
<S> <C> <C>
Operating activities
Net income ..................................... $ 543 $ 1,022
Adjustments to reconcile net income to net cash
used by operating activities
Depreciation ................................. 237 175
Deferred taxes ............................... -- (485)
Cash provided (used) by changes in:
Inventories ................................. (2,695) (2,413)
Prepaid expenses and other current assets ... (585) (341)
Accounts payable ............................ 2,430 834
Accrued expenses ............................ 10 93
Other assets ................................ (2) 154
Deferred rent ............................... 74 17
-------- --------
Net cash provided (used) by operating
activities ................................ 12 (944)
Investing activities
Purchase of property and equipment, net ...... (606) (116)
Financing activities
Net proceeds from initial public offering .... -- 14,108
Payments on line of credit ................... (407) (5,400)
Principal payments on longterm obligations ... -- (25)
Principal payments on capital leases ......... (3) --
Distributions paid to stockholder ............ -- (7,800)
-------- --------
Net cash provided (used) by financing
activities ................................ (410) 883
-------- --------
NET DECREASE IN CASH ........................... (1,004) (177)
CASH, BEGINNING OF PERIOD ...................... 1,922 395
-------- --------
CASH, END OF PERIOD ............................ $ 918 $ 218
======== ========
Interest paid .................................. $ 98 $ 118
Income taxes paid .............................. -- 33
</TABLE>
See notes to condensed consolidated financial statements.
5
<PAGE>
Notes to Condensed Consolidated Financial Statements
1. Basis of Presentation
General - The accompanying unaudited condensed consolidated financial statements
have been prepared from the records of the Company without audit, and in the
opinion of management, include all adjustments necessary to present fairly the
financial position at April 3, 1999 and March 31, 1998 and the interim results
of operations and cash flows for the three 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, for the year ended January 2, 1999 on
Form 10-K.
The results of operations for the three-month periods presented herein are not
necessarily indicative of the results to be expected for the full year.
Public Offering - On February 27, 1998 the Company sold 2,300,000 shares of its
common stock for net proceeds of $14,107,651. In connection with the offering,
the Company terminated its status as an S corporation and recorded a deferred
tax benefit of $485,000.
Comprehensive Income and net income are the same.
2. Pro Forma Information
The objective of the pro forma information is to show what the significant
effects on the historical information might have been had the Company not been
treated as an S Corporation for tax purposes prior to the February 23, 1998, the
effective date of the Company's initial public offering.
Income Taxes - The pro forma information presented on the condensed consolidated
statements of income reflects a provision for income taxes at an effective rate
of 38.0% for the quarter ended March 31, 1998.
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 (1,271,650
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 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.
6
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations.
Overview
Shoe Pavilion is the largest independent off-price footwear retailer on the West
Coast that offers a broad selection of women's and men's designer label and name
brand merchandise. The Company operated 69 retail stores in California,
Washington, Oregon and Nevada as of April 3, 1999 compared to 56 stores as of
March 31, 1998.
Results of Operations
Net sales increased 24.5% to $14.3 million for the first quarter ended April 3,
1999 from $11.5 million for the first quarter of 1998. This increase in net
sales was attributable to new stores sales of $3.1 million, including two stores
opened during the period, stores closed during the period of $100,000, offset by
a 1.5% decrease in comparable store sales of $11.1 million. The decrease in
comparable store sales was primarily due to weather- related sales decreases,
specifically in stores located in the Northwestern United States.
Gross profit increased 22.2% to $4.7 million for the first quarter ended April
3, 1999 from $3.8 million for the first quarter of 1998, but decreased as a
percentage of net sales to 32.7% from 33.3%. The decrease in gross profit as a
percentage of net sales was primarily attributable to higher fixed occupancy
costs as a percentage of net sales due to a lower sales base.
Selling, general and administrative expenses increased 20.3% to $3.6 million for
the first quarter ended April 3, 1999 from $3.0 million for the first quarter
of 1998, but decreased as a percentage of net sales to 25.4% from 26.3%. The
decrease in selling, general and administrative expenses as a percentage
of net sales was primarily attributable to the leveraging of advertising and
promotional expenses.
Interest expense and other, net increased 14.5% to $134,000 for the first
quarter ended April 3, 1999 from $117,000 for the first quarter of 1998. The
increase was attributable to higher average borrowings on the Company's
revolving line to support increased inventory levels for new stores. During the
quarter ended March 31, 1998, $6.0 million of the Company's line of credit was
repaid with the proceeds from the initial public offering.
Liquidity and Capital Resources
Historically, the Company has funded its cash requirements primarily through
cash flow from operations and borrowings under its credit facility. Net cash
provided by operating activities for the quarter ended April 3, 1999 was
$12,000. Net cash used in investing activities for the quarter ended April 3,
1999 was $606,000 primarily for the purchase of property and equipment. Net cash
used by financing activities was $410,000 for the quarter ended April 3,1999,
primarily from $407,000 in repayments on the Company's line of credit.
Capital expenditures for the quarter ended April 3, 1999 was primarily for the
build-out of two new stores plus construction-in-progress of three additional
stores 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 1999, the Company anticipates that cash will be used
primarily for merchandise inventory and capital expenditures. The Company
7
<PAGE>
estimates that the cost of capital expenditures for fiscal 1999, excluding the
cost of any possible acquisitions, will total approximately $2.5 million,
primarily for the build-out of approximately 15 to 20 new stores and costs
associated with the Company's management information systems.
The Company has a credit facility agreement with a commercial bank, which
includes a revolving line of credit for $15.0 million expiring on December 31,
2000. As of April 3, 1999, the unused and available portion of the credit
facility was approximately $7.0 million. The Company believes that operating
cash flow and borrowings under its credit facility will be sufficient to
complete the Company's 1999-store expansion program and to satisfy the Company's
other capital requirements through fiscal 1999.
Impact of Year 2000
The Company is currently in the process of addressing a problem that is facing
all users of automated information systems. The "Year 2000 Issue" is the result
of computer programs being written using two digits rather than four to define
the applicable year. Computer programs that have time-sensitive software may
recognize a date using "00" as the year 1900 rather than the year 2000. This
situation could result in a system failure or miscalculations causing
disruptions to operations, including, among other things, a temporary inability
to process transactions, send payments, or engage in similar normal business
activities.
State of Readiness. Beginning in early 1998, the Company began an overall
assessment of its computer systems, including Year 2000 readiness. The Company
determined that certain of its software was not Year 2000 compliant. In mid-
1998, the Company, with the guidance of outside consultants, implemented a plan
to replace its existing information systems primarily in response to business
demand and growth. The new systems are designed to replace the Company's
information systems for order processing, warehousing, finance and point-of-sale
on a fully integrated enterprise-wide basis. These systems will replace
existing software that is not Year 2000 compliant.
The Company will utilize both internal and external resources to replace and
test its information systems software for Year 2000 compliance. An Executive
Oversight Steering Committee, consisting of internal executive management, the
Company's information systems officer and various outside third parties, has
been formed to supervise the replacement, implementation and testing process.
Installation of the new systems began in June 1998, and Company personnel have
been trained on the new systems. The Company estimates that the installation of
the new systems will be completed by the end of the third quarter of 1999.
The Company has begun communicating with significant suppliers to determine
the extent to which the Company may be vulnerable to a failure by any of these
third parties to remediate their own Year 2000 issues. The Company's exposure to
supplier Year 2000 business disruptions is reduced because it does not currently
communicate electronically with its suppliers. In addition to suppliers, the
Company also relies upon governmental agencies, utility companies,
telecommunication service companies and other service providers outside of the
Company's control. There can be no assurance that the Company's suppliers,
governmental agencies or other third parties will not suffer a Year 2000
business disruption that could have a material adverse effect on the Company's
business, financial condition and operating results. The Company has not been
informed by any supplier of inability to comply with year 2000 issues.
Costs to Address the Year 2000 Issue. The Company has incurred, through April
3, 1999, approximately $1.5 million relating to the implementation of the new
systems and addressing Year 2000 issues. The Company currently estimates that
the total costs for implementing the new systems will approximate $2 million.
Included in the costs of implementing the new systems is the cost of equipment
which the Company presently leases over 36 to 60 months. The Company will
capitalize and depreciate the new systems technology over its estimated useful
life and to the extent that Year 2000 costs do not qualify as capital
investments, the Company will expense such costs as incurred.
The costs of Year 2000 compliance and the date on which the Company believes
it will complete the project are based on management's best estimates, which
were derived utilizing numerous assumptions of future events, including the
continued availability of certain third party resources and other factors.
However, there can be no guarantee that these estimates will be achieved and
actual results could differ materially from those anticipated. Specific factors
that might cause such material differences include, but are not limited to, the
availability and cost of personnel trained in this area, supplier compliance and
contingency actions, and similar uncertainties. The
8
<PAGE>
Company's total Year 2000 project costs do not include the estimated costs and
time associated with anticipated third party Year 2000 issues based on presently
available information.
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. In addition, if any third parties which provide goods or services
essential to the Company's business activities fail to address appropriately
their Year 2000 issues, such failure could have a material adverse effect on the
Company's business, financial condition and operating results. For example, a
Year 2000 related disruption on the part of the financial institutions which
process the Company's credit card sales would have a material adverse effect on
the Company's business, financial condition and operating results.
Contingency Plans. The Company's Executive Oversight Steering Committee is
developing contingency plans in the event that the Company has not completed all
of its remediation plans in a timely manner or any third parties who provide
goods or services essential to the Company's business fail to appropriately
address their Year 2000 issues. The committee expects to conclude the
development of these contingency plans by the end of the third quarter of 1999.
Item 3. Quantitative and Qualitative Disclosures About Market Risk.
There have been no material changes from the information reported in the
Company's Form 10-K for the fiscal year ended January 2, 1999.
9
<PAGE>
PART II
OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits required to be filed by Item 601 of Regulation S-K:
27.1 Financial Data Schedule
(b) Reports on Form 8-K filed during the quarter ended April 3, 1999:
None.
10
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized on the 14th day of May 1999.
SHOE PAVILION, INC., as Registrant
By /s/ Dmitry Beinus
------------------------
Dmitry Beinus
Chairman and Chief Executive Officer
By /s/ Gary A. Schwartz
------------------------
Gary A. Schwartz
Vice President and Chief Financial Officer
11
<PAGE>
INDEX TO EXHIBITS
Exhibit Number Description
- -------------- -----------
27.1 Financial Data Schedule
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> JAN-01-2000
<PERIOD-START> JAN-03-1999
<PERIOD-END> APR-03-1999
<CASH> 918
<SECURITIES> 0
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 29,587
<CURRENT-ASSETS> 31,347
<PP&E> 6,882
<DEPRECIATION> 2,678
<TOTAL-ASSETS> 36,181
<CURRENT-LIABILITIES> 17,365
<BONDS> 0
0
0
<COMMON> 7
<OTHER-SE> 17,565
<TOTAL-LIABILITY-AND-EQUITY> 36,181
<SALES> 14,253
<TOTAL-REVENUES> 14,253
<CGS> 9,596
<TOTAL-COSTS> 9,596
<OTHER-EXPENSES> 3,618
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 134
<INCOME-PRETAX> 905
<INCOME-TAX> 362
<INCOME-CONTINUING> 543
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 543
<EPS-PRIMARY> .08
<EPS-DILUTED> .08
</TABLE>
