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 September 29, 2001
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 (IRS Employer
Incorporation 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.
As of October 31, 2001 the Registrant had 6,800,000 shares of Common Stock
outstanding.
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, change in the
trend of same store sales, competitive pressures in the footwear industry,
changes in the level of consumer spending on or preferences in footwear
merchandise, economic and other factors affecting the retail market conditions,
including the events of September 11, 2001 and uncertainties related to the
ongoing conflict, the Company's ability to purchase attractive name brand
merchandise at desirable discounts and the availability of desirable store
locations as well as management's ability to negotiate acceptable lease terms,
and maintain supplier and business relationships including the license agreement
with Gordmans Inc. 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
Item 1 - Condensed Consolidated Financial Statements (Unaudited): Page
----
Condensed Consolidated Balance Sheets...................... 3
Condensed Consolidated Statements of Income................ 4
Condensed Consolidated Statements of Cash Flows............ 5
Notes to Condensed Consolidated Financial Statements....... 6
Item 2 - Management's Discussion and Analysis of Financial
Condition and Results of Operations........................ 7-8
Item 3 - Quantitative and Qualitative Disclosures About Market Risk. 8
PART II
OTHER INFORMATION
Item 4 - Submission of Matters to a Vote of Security Holders........ 9
Item 6 - Exhibits and Reports on Form 8-K........................... 9
Signatures ........................................................... 10
2
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)
(In thousands, except share data) September 29, December 30,
2001 2000
ASSETS
Current assets
Cash $ 594 $ 814
Accounts receivable 313 740
Inventories 33,222 38,187
Prepaid expenses and other 1,072 941
------------ -----------
Total current assets 35,201 40,682
Property and equipment, net 4,655 5,284
Other assets 970 949
------------ -----------
Total assets $ 40,826 $ 46,915
============ ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Accounts payable $ 8,456 $ 8,750
Accrued expenses 1,840 2,028
Current portion of capital lease obligations 50 15
------------ -----------
Total current liabilities 10,346 10,793
Long-term debt 7,350 13,975
Deferred rent 1,767 1,930
------------ -----------
Total liabilities 19,463 26,698
------------ -----------
Stockholders' equity
Preferred stock- $.001 par value; 1,000,000 shares authorized;
no shares issued or outstanding - -
Common stock- $.001 par value; 15,000,000 shares authorized;
6,800,000 issued and outstanding 7 7
Additional paid-in capital 13,967 13,967
Retained earnings 7,389 6,243
------------ -----------
Total stockholders' equity 21,363 20,217
------------ -----------
Total liabilities and stockholders' equity $ 40,826 $ 46,915
============ ===========
See notes to condensed consolidated financial statements.
3
Shoe Pavilion, Inc.
Condensed Consolidated Statements of Income
(Unaudited)
(In thousands, except per share amounts and number of stores)
Thirteen weeks ended Thirty-nine weeks ended
------------------------------- -------------------------------
September 29, September 30, September 29, September 30,
2001 2000 2001 2000
Net sales $ 21,304 $ 23,148 $ 64,271 $ 67,421
Cost of sales and related occupancy expenses 14,886 15,527 44,354 45,162
------------- ------------- --------------- ------------
Gross profit 6,418 7,621 19,917 22,259
Selling, general and administrative expenses 5,953 6,602 17,446 18,515
------------- ------------- --------------- ------------
Income from operations 465 1,019 2,471 3,744
Interest expense 123 349 625 772
Other expense (income) (40) 28 (64) 58
------------- ------------- --------------- ------------
Income before taxes 382 642 1,910 2,914
Income tax provision 153 253 764 1,150
------------- ------------- --------------- ------------
Net income $ 229 $ 389 $ 1,146 $ 1,764
============= ============= =============== ============
Earnings per share:
Basic $ 0.03 $ 0.06 $ 0.17 $ 0.26
Diluted $ 0.03 $ 0.06 $ 0.17 $ 0.26
Weighted average shares outstanding:
Basic 6,800 6,800 6,800 6,800
Diluted 6,800 6,845 6,801 6,810
Stores operated at end of period 118 113
See notes to condensed consolidated financial statements.
4
Shoe Pavilion, Inc.
Condensed Consolidated Statements of Cash Flows
(Unaudited)
(In thousands)
Thirty-nine weeks ended
--------------------------------------
September 29, September 30,
2001 2000
Operating activities:
Net income $ 1,146 $ 1,764
Adjustments to reconcile net income to net cash
provided (used) by operating activities
Depreciation and amortization 1,151 1,055
Loss on disposal of fixed assets 1 79
Effect of changes in:
Inventories 4,965 (10,787)
Accounts receivables 427 58
Prepaid expenses and other (152) (207)
Accounts payable (294) 628
Accrued expenses (187) 129
Deferred rent (117) (247)
------------- -------------
Net cash provided (used) by operating activities 6,940 (7,528)
------------- -------------
Investing activity-
Purchase of property and equipment (523) (789)
Financing activities:
Proceeds from (payments on) line of credit, net (6,625) 8,080
Principal payments on capital leases (12) (10)
------------- -------------
Net cash provided (used) by financing activities (6,637) 8,070
------------- -------------
Net decrease in cash (220) (247)
Cash, beginning of period 814 929
------------- -------------
Cash, end of period $ 594 $ 682
============= =============
See notes to condensed consolidated financial statements.
5
Shoe Pavilion, Inc.
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 Shoe Pavilion, Inc. (the "Company")
without audit, and in the opinion of management, include all adjustments
necessary to present fairly the financial position of the Company and the
results of its operations and its cash flows for the periods presented. The
balance sheet as of December 30, 2000 presented herein has been derived from the
audited financial statements of the Company as of December 30, 2000.
Accounting policies followed by the Company are described in Note 2 to the
audited consolidated financial statements for the year ended December 30, 2000.
Certain information and footnote disclosures normally included in financial
statements prepared in accordance with accounting principles generally accepted
in the United States of America 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 30, 2000 on Form 10-K.
The results of operations for the thirteen weeks and thirty-nine weeks ended
September 29, 2001 presented herein are not necessarily indicative of the
results to be expected for the full year.
Comprehensive Income and net income are the same.
2. Recently Issued Accounting Standards
On December 31, 2000 the Company adopted Statement of Financial Accounting
Standards No. 133 ("SFAS 133"), "Accounting for Derivative Instruments and
Hedging Activities", as amended by SFAS 137 and SFAS 138. SFAS 133 requires all
derivative financial instruments to be recognized on the balance sheet at fair
value. The effect of adopting SFAS 133 was immaterial.
The Company has minimal purchases outside of the United States that involve
foreign currencies and, therefore, has only minimal exposure to foreign currency
exchange risks. The Company does not typically hedge against foreign currency
risks and believes that foreign currency exchange risk is insignificant.
At September 29, 2001 the Company had a foreign exchange contract outstanding to
hedge certain purchases in Euro Dollars. The purpose of the Company's foreign
currency hedging activities is to protect the Company from the risk that the
eventual dollar net cash outflow resulting from inventory purchases will be
affected by changes in exchange rates. As of September 29, 2001 the notional
amount and fair value of the Company's foreign exchange contract in U.S. dollars
were $500,000 and $28,203, respectively.
In July 2001, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standard (SFAS) No. 141, Business Combinations and SFAS
No.142, Goodwill and Other Intangible Assets. SFAS No. 141 requires that all
business combinations initiated after June 30, 2001 be accounted for under the
purchase method and addresses the initial recognition and measurement of
goodwill and other intangible assets acquired in a business combination. SFAS
No. 142 addresses the initial recognition and measurement of intangible assets
acquired outside of a business combination and the accounting for goodwill and
other intangible assets subsequent to their acquisition. SFAS No. 142 provides
that intangible assets with finite useful lives be amortized and that goodwill
and intangible assets with indefinite lives will not be amortized, but will
rather be tested at least annually for impairment. The Company will adopt SFAS
No. 142 for its fiscal year beginning December 30, 2001 and is currently
evaluating the provisions of the new standards and assessing their potential
impact, if any, on the Company's financial position and results of operations.
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. As of September 29, 2001, the Company operated 80 retail
stores in California, Washington and Oregon and 38 licensed shoe departments in
Colorado, Illinois, Iowa, Kansas, Missouri, Nebraska, North Dakota, Oklahoma and
South Dakota.
The Company operates and manages the 38 shoe departments pursuant to a licensing
agreement entered into in July 1999 with Gordmans, Inc., a Midwestern department
store chain. The initial term of the agreement shall expire, unless terminated
sooner as provided by the agreement, on June 29, 2002. Upon the expiration of
the initial term, the agreement shall automatically renew for an additional term
of three years, expiring on July 2, 2005, unless either the Company or Gordmans
gives the other party written notice on or before January 1, 2002, that they do
not intend to renew the agreement.
Results of Operations
Net sales for the thirteen weeks ended September 29, 2001 decreased 8.0% to
$21.3 million, from net sales of $23.1 million for the same period last year.
Net sales for the thirty-nine weeks ended September 29, 2001 decreased 4.7% to
$64.3 million, from net sales of $67.4 million for the same period last year.
The decrease in net sales for these periods is principally attributable to the
decline in comparable store net sales of 9.3% or $1.9 million and 6.7% or $3.9
million for the thirteen weeks and thirty-nine weeks ended September 29, 2001,
respectively. These decreases were partially offset by the increase in new store
net sales.
Gross profit for the thirteen weeks ended September 29, 2001 decreased 15.8% to
$6.4 million from gross profit of $7.6 million for the same period last year.
Gross profit as a percentage of net sales decreased to 30.1% for the thirteen
weeks ended September 29, 2001 from 32.9% for the same period last year. For the
thirty-nine weeks ended September 29, 2001 gross profit decreased 10.5% to $19.9
million, from gross profit of $22.3 million for the comparable period last year.
Gross profit as a percentage of net sales decreased to 31.0% for the thirty-nine
weeks ended September 29, 2001 from 33.0% for the comparable period last year.
The decrease in gross profit as a percentage of net sales for the thirteen weeks
and thirty-nine weeks ended September 29, 2001 is principally attributable to an
increase in occupancy costs coupled with the decrease in net sales.
Selling, general and administrative expenses for the thirteen weeks ended
September 29, 2001 decreased by $649,000 or 9.8% compared to the same period
last year, and decreased as a percentage of net sales to 27.9% from 28.5% for
the same period last year. For the thirty-nine weeks ended September 29, 2001,
selling, general and administrative expenses decreased by $1.1 million or 5.8%
compared to the same period last year, and decreased as a percentage of net
sales to 27.1% from 27.5% for the same period last year. The decrease in
selling, general and administrative expenses for the thirteen weeks ended
September 29, 2001 is principally due to the reduction in advertising expense.
The decrease in selling, general and administrative expenses for the thirty-nine
weeks ended September 29, 2001 is principally due to the reduction in
advertising and freight expense. These decreases during the thirty-nine weeks
ended September 29, 2001 were partially offset by an increase in sales payroll.
Interest expense decreased 64.8% to $123,000 for the thirteen weeks ended
September 29, 2001 from $349,000 for the comparable period in 2000. This
decrease was attributable to reduced average borrowings and a lower average
interest rate on the Company's revolving line of credit. For the thirty-nine
weeks ended September 29, 2001 interest expense decreased 19.0% to $625,000 from
$772,000 for the comparable period
7
in 2000. The decrease was principally attributable to a lower average interest
rate on borrowings on the Company's revolving line of credit.
The effective income tax rate increased slightly to 40.0% for the thirty-nine
weeks ended September 29, 2001 from 39.5% for the same period last year. The
increase resulted from higher state income taxes.
Liquidity and Capital Resources
The Company has historically funded its cash requirements primarily through cash
flows from operations and borrowings under its credit facility. Net cash
provided by operating activities during the thirty-nine weeks ended September
29, 2001 totaled $6.9 million and was primarily generated from a reduction in
inventory. Merchandise inventory decreased $5.0 million to $33.2 million at
September 29, 2001 from $38.2 million at December 30, 2000. This decrease in
inventory is the result of the Company's efforts to improve liquidity. Net cash
used by financing activities for the thirty-nine weeks ended September 29, 2001
totaled $6.6 million consisting principally of net payments on the Company's
line of credit. Working capital decreased to $24.9 million at September 29, 2001
from $29.9 million at December 30, 2000.
Capital expenditures for the thirty-nine weeks ended September 29, 2001 were
$523,000. These expenditures were principally related to the build-out of four
new stores and two leased departments and the purchase of fixtures for the
remodeling of existing stores. During the remainder of the Company's fiscal
year 2001, the Company anticipates that cash will be used primarily to acquire
merchandise inventory, and to a lesser degree, for capital expenditures.
The Company has a credit facility agreement with a commercial bank, which
includes a revolving line of credit for $20.0 million. On June 1, 2001 the
commercial bank extended the maturity date of the revolver to June 1, 2003. As
of September 29, 2001, the unused and available portion of the credit facility
was approximately $8.3 million.
The Company believes that operating cash flow and borrowings under its credit
facility will satisfy its cash requirements for at least the next 12 months.
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 year ended December 30, 2000.
8
PART II
OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders.
None.
Item 6. Exhibits and Reports on Form 8-k.
(a) Exhibits required to be filed by Item 601 of Regulation S-K:
10.18 First Amendment to Credit Agreement between Shoe Pavilion
Corporation and Wells Fargo Bank, National Association
dated June 1, 2001
10.19 Second Amendment to Credit Agreement between Shoe Pavilion
Corporation and Wells Fargo Bank, National Association
dated September 1, 2001
(b) Reports on Form 8-K filed during the quarter ended
September 29, 2001:
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 9th day of November 2001.
SHOE PAVILION, INC., as Registrant
By /s/ Dmitry Beinus
------------------------------------------
Dmitry Beinus
Chairman and Chief Executive Officer
By /s/ John D. Hellmann
------------------------------------------
John D. Hellmann
Vice President and Chief Financial Officer
10
INDEX TO EXHIBITS
Exhibit Number Description
-------------- -----------
10.18 First Amendment to Credit Agreement between Shoe Pavilion
Corporation and Wells Fargo Bank, National Association dated
June 1, 2001
10.19 Second Amendment to Credit Agreement between Shoe Pavilion
Corporation and Wells Fargo Bank, National Association dated
September 1, 2001