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 June 30, 1998
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 August 5, 1998 was 6,800,000 shares
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
Prospectus dated February 23, 1998, filed with the Securities and Exchange
Commission. The Company assumes no obligation to update forward-looking
statements.
SHOE PAVILION, INC.
INDEX TO FORM 10-Q
PART I
FINANCIAL INFORMATION
Item 1 - Condensed Consolidated Financial Statements (Unaudited): Page
----
Balance Sheets.................................................. 3
Statements of Income............................................ 4
Statements of Cash Flows........................................ 5
Notes to Financial Statements................................... 6
Item 2 - Management's Discussion And Analysis Of Financial Condition And
Results Of Operations........................................... 7-8
Item 3 - Quantitative And Qualitative Disclosures About Market Risk...... 8
PART II
OTHER INFORMATION
Item 6 - Exhibits and Reports on Form 8-K................................ 9
2
PART I
FINANCIAL INFORMATION
ITEM 1. 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)
(In thousands, except share data) June 30 December 31 June 30
1998 1997 1997
---------- ----------- ----------
ASSETS
Current assets
Cash $ 323 $ 395 $ 306
Inventories 24,888 19,795 18,579
Prepaid expenses and other 298 73 50
---------- ----------- ----------
Total current assets 25,509 20,263 18,935
Property and equipment, net 2,382 2,075 1,718
Other assets 573 308 81
---------- ----------- ----------
Total assets $ 28,464 $ 22,646 $ 20,734
========== =========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Accounts payable $ 8,284 $ 5,921 $ 8,390
Accrued expenses 602 843 971
Line of credit 3,200 7,387 4,987
Current portion of long-term obligations 21 68 69
---------- ----------- ----------
Total current liabilities 12,107 14,219 14,417
Deferred rent 942 896 629
Long-term obligations, less current portion 71 203 153
---------- ----------- ----------
Total liabilities 13,120 15,318 15,199
---------- ----------- ----------
Stockholders' equity
Common stock - $.001 par value: 15,000,000 shares authorized;
issued and outstanding; 6,800,000, 4,500,000, 4,500,000 7 4 4
Preferred stock - $.001 par value; 1,000,000 shares authorized;
no shares issued or outstanding - - -
Additional paid-in capital 14,453 812 812
Retained earnings 884 6,512 4,719
---------- ----------- ----------
Total stockholders' equity 15,344 7,328 5,535
---------- ----------- ----------
Total liabilities and stockholders' equity $ 28,464 $ 22,646 $ 20,734
========== =========== ==========
See notes to condensed consolidated financial statements
3
Shoe Pavilion, Inc.
Condensed Consolidated Statements of Income
(Unaudited)
(In thousands, except per share and number of stores)
Three Months Ended Six Months Ended
June 30 June 30
------------------ ------------------
1998 1997 1998 1997
Net sales $13,386 $12,174 $24,837 $20,329
Cost of sales and related occupancy expenses 8,591 7,665 16,232 13,140
--------- ------- ------- --------
Gross profit 4,795 4,509 8,605 7,189
Selling, general and administrative expenses 3,628 3,116 6,636 5,151
--------- ------- ------- --------
Income from operations 1,167 1,393 1,969 2,038
Interest and other, net 52 127 169 239
--------- ------- ------- --------
Income before taxes 1,115 1,266 1,800 1,799
Income taxes 429 89 577 126
--------- ------- ------- --------
Net Income $ 686 $ 1,177 $ 1,223 $ 1,673
========= ======= ======= ========
Earnings per share:
Basic $ 0.10
Diluted $ 0.10
Weighted average shares outstanding:
Basic 6,800
Diluted 6,845
PRO FORMA
Historical income before taxes on income $ 1,266 $ 1,800 $ 1,799
Pro forma provision for income taxes 478 687 679
------- ------- --------
Pro forma net income $ 788 $ 1,113 $ 1,120
======= ======= ========
Pro forma earnings per share
Basic $ 0.17
Diluted $ 0.17
Pro forma weighted average shares outstanding
Basic 6,493
Diluted 6,521
Stores open at end of period 58 54
See notes to condensed consolidated financial statements.
4
Shoe Pavilion, Inc.
Condensed Consolidated Statements of Cash Flows
(Unaudited)
(In thousands)
Six Months Ended
June 30
------------------
1998 1997
Operating activities:
Net income $ 1,223 $ 1,673
Adjustments to reconcile net income to net cash
used by operating activities
Depreciation 362 258
Effect of changes in:
Inventories (5,093) (5,092)
Prepaid expenses and other current assets (225) 24
Accounts payable 2,363 2,695
Accrued expenses (241) 197
Other assets 220 (73)
Deferred rent 46 191
------- --------
Net cash used by operating activities (1,345) (127)
------- --------
Investing activities-
Purchase of property and equipment, net (669) (601)
------- --------
Financing activities:
Net proceeds from initial public offering 14,108 -
Borrowings (repayments) on line of credit (4,187) 1,587
Principal payments on capital leases (179) (51)
Distributions paid to stockholder (7,800) (704)
------- --------
Net cash provided by financing activities 1,942 832
------- --------
NET (DECREASE) INCREASE IN CASH (72) 104
CASH, BEGINNING OF PERIOD 395 202
------- --------
CASH, END OF PERIOD $ 323 $ 306
======= ========
See notes to condensed consolidated financial statements.
5
NOTES TO 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 June 30, 1998 and 1997 and the interim results of
operations for the three and six months then ended and cash flows for the six
months then ended. The balance sheet as of December 31, 1997, presented
herein, has been derived from the audited financial statements of the Company
for the year then ended.
Accounting policies followed by the Company are described in Note 2 to the
audited consolidated financial statements for the year ended December 31, 1997,
included in the Company's prospectus dated February 23, 1998. 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 December 31, 1997.
The results of operations for the three-month and six-month periods presented
herein are not necessarily indicative of the results to be expected for the full
year.
PUBLIC OFFERING - On February 27, 1998, the Company sold 2,300,000 shares of its
common stock for net proceeds of $14,107,651. In connection with the offering,
the Company terminated its status as an S corporation and recorded deferred
taxes of $485,000 with a corresponding adjustment to paid-in capital.
NEW ACCOUNTING PRONOUNCEMENT - The Company adopted Statement of Financial
Accounting Standards (SFAS) No. 130, Reporting Comprehensive Income during the
------------------------------
quarter ended March 31, 1998. SFAS 130 requires that an enterprise report, by
major components and as a single total, the change in its net assets during the
period from nonowner sources. As the Company has no changes in net assets from
nonowner sources, comprehensive income and net income are the same.
2. PRO FORMA INFORMATION
The objective of the pro forma information is to show what the significant
effects on the historical information might have been had the Company not been
treated as an S Corporation for tax purposes prior to the February 23, 1998, the
effective date of the Company's initial public offering.
INCOME TAXES - The pro forma information presented on the condensed consolidated
statements of income reflects a provision for income taxes at an effective rate
of 38.5% for the six months ended June 30, 1998 and 1997 and the quarter ended
June 30, 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 (1,271,650
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
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 58 retail stores in California,
Washington, Oregon and Nevada as of June 30, 1998 compared to 54 stores as of
June 30, 1997.
RESULTS OF OPERATIONS
Net sales increased 10.0% to $13.4 million for the second quarter ended June
30,1998 from $12.2 million for the second quarter of 1997. Net sales for the six
months ended June 30, 1998 were $24.8 million, a 22.2% increase from sales of
$20.3 million for the six months ended June 30, 1997. The increase in net sales
was attributable to a 6.2% and 4.7% increase in comparable store sales for the
three and six months ended June 30, 1998, respectively, and sales of new stores
opened.
Gross profit increased 6.3% to $4.8 million for the second quarter ended June
30, 1998 from $4.5 million for the second quarter of 1997, but decreased as a
percentage of net sales to 35.8% from 37.0%. Gross profit for the six months
ended June 30, 1998 increased 19.7% to $8.6 million from $7.2 million for the
six months ended June 30, 1997 but decreased as a percentage of net sales to
34.6% from 35.4% for the comparable period in 1997. In April 1997, the Company
assumed the leasehold interests of Standard Shoes and purchased Standard Shoes'
inventory at 60% of Standard Shoes' cost. During the quarter ended June 30,
1997, the Company liquidated that inventory, which resulted in net sales of
approximately $2.8 million and an increase in gross profit as a percentage of
net sales of 3.3 percentage points. The decrease in gross profit as a percentage
of net sales for the second quarter and six-month period ended June 30, 1998
compared to the comparable periods in 1997 was primarily attributable to the
liquidation of inventory from Standard Shoes.
Selling expenses consist of payroll and related costs, advertising and
promotional expenses. General and administrative expenses consist primarily of
corporate and administrative expenses, including payroll, employee benefits and
warehousing costs. Selling, general and administrative expenses increased 16.4%
to $3.6 million for the second quarter ended June 30, 1998 from $3.1 million
for the second quarter of 1997, and increased as a percentage of net sales to
27.1% from 25.6%. Selling, general and administrative expenses for the six
months-ended June 30,1998 increased $1.4 million or 28.8% to $6.6 million from
$5.2 million for the six-months ended June 30, 1997 and increased as a
percentage of sales to 26.7% from 25.3% for the six-months ended June 30, 1997.
The increase in selling, general and administrative expenses was primarily
attributable to increases in advertising expenses and freight expenses, as a
result of the increase in the number of stores, offset by a decrease in
warehouse payroll expense. In addition, the six months ended June 30, 1997,
included approximately $143,000 in expenses relating to the relocation of the
Company's headquarters.
Interest expense and other decreased 59.1% to $52,000 for the second quarter
ended June 30, 1998 from $127,000 for the second quarter of 1997. Interest
expense for the six months ended June 30,1998 decreased $66,000 or 27.6% to
$173,000 from $239,000 for the six months ended June 30, 1997. The decrease was
attributable to lower average borrowings 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 initial public offering.
7
LIQUIDITY AND CAPITAL RESOURCES
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 used by
operating activities for the six months ended June 30, 1998 was $1,345,000,
resulting primarily from a $5.3 million increase in inventory and prepaid
expenses offset by an increase in accounts payable. The increase in inventory
was primarily attributable to the opening of new stores and expansion of the
inventory selection. Net cash used in investing activities was $669,000
primarily for the purchase of property and equipment. Net cash provided by
financing activities was $1,942,000 for the six months ended June 30, 1998,
primarily from $14.1 million raised in the Company's initial public offering
offset by a $7.8 million payment for a S corporation distribution and a $4.2
million payment on the Company's line of credit net of borrowings.
Capital expenditures for the six months ended June 30, 1998 were $669,000,
primarily for the build-out of three new stores opened through June 30, 1998,
plus construction-in-progress of three additional stores and upgrades to
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 1998, 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 1998, excluding the cost of any possible acquisitions,
will total approximately $2.5 million, primarily for the build-out of
approximately 10 to 20 new stores and an upgrade of 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 $10.0 million expiring on April 30, 1999
along with a $500,000 term line available for the purchase or lease of
equipment. As of June 30, 1998, the unused and available portion of the credit
facility was approximately $6.8 million. The Company believes that operating
cash flow and borrowings under its credit facility will be sufficient to
complete the Company's 1998-store expansion program and to satisfy the Company's
other capital requirements through fiscal 1998.
IMPACT OF YEAR 2000
Some older computer programs were written using two digits rather than four to
define the applicable year. As a result, those computer programs have time-
sensitive software that recognizes a date using "00" as the year 1900 rather
than 2000. This failure to use four digits to define the applicable year has
created what is commonly referred to as the "Year 2000 Issue" and could cause a
system failure or miscalculations causing disruption of operations, including a
temporary inability to process transactions or engage in similar normal business
activities.
The Company recognizes the need to ensure that the Year 2000 Issue will not
adversely impact its operations. While the Company's software used internally is
not fully Year 2000 compliant, the Company has purchased new compliant software
and is in the process of implementing its use. As a result, the Company does not
believe that it has material exposure to the Year 2000 Issue with respect to its
own information systems. The Company does not currently communicate
electronically with its suppliers.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
Not applicable.
8
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 June 30, 1998:
None.
9
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized on the 5th day of August 1998.
SHOE PAVILION, INC., as Registrant
By /s/ Dmitry Beinus
---------------------
Dmitry Beinus
Chairman and Chief Executive Officer
By /s/ Gary A. Schwartz
---------------------
Gary A. Schwartz
Vice President and Chief Financial Officer
10
INDEX TO EXHIBITS
EXHIBIT NUMBER DESCRIPTION
- -------------- -----------
27.1 Financial Data Schedule