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 July 3, 2004
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 or Organization) |
(IRS Employer Identification Number) |
1380 Fitzgerald Drive, Pinole, California 94564
(Address of principal executive offices) (Zip Code)
(510) 222-4405
(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 by check mark whether the Registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No x
Indicate the number of shares outstanding of each of the issuer’s classes of Common Stock, as of the latest practicable date.
As of August 10, 2004 the Registrant had 6,800,000 shares of Common Stock outstanding.
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 and the Company’s actual results could 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, economic and other factors affecting retail market conditions, the Company’s ability to purchase attractive name brand merchandise at reasonable discounts, the availability of desirable store locations as well as management’s ability to negotiate acceptable lease terms and maintain supplier and business relationships 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
2
FINANCIAL INFORMATION
Item 1. Condensed Consolidated Financial Statements.
The following financial statements and related financial information are filed as part of this report:
Condensed Consolidated Balance Sheets
(Unaudited)
(In thousands, except share data)
| July 3, 2004 |
January 3, 2004 | |||||
| ASSETS | ||||||
| CURRENT ASSETS: |
||||||
| Cash |
$ | 944 | $ | 1,034 | ||
| Receivables |
39 | 130 | ||||
| Income tax receivables |
4 | 13 | ||||
| Inventories |
33,080 | 26,960 | ||||
| Deferred income taxes |
1,966 | 1,966 | ||||
| Prepaid expenses |
1,717 | 1,521 | ||||
| Total current assets |
37,750 | 31,624 | ||||
| Property and equipment, net |
2,734 | 3,080 | ||||
| Deferred income taxes and other |
1,586 | 1,605 | ||||
| TOTAL |
$ | 42,070 | $ | 36,309 | ||
| LIABILITIES AND STOCKHOLDERS’ EQUITY | ||||||
| CURRENT LIABILITIES: |
||||||
| Borrowings under credit agreement |
$ | 4,300 | $ | 5,045 | ||
| Accounts payable |
11,131 | 6,720 | ||||
| Accrued expenses |
4,350 | 3,680 | ||||
| Current portion of capitalized lease obligations |
170 | — | ||||
| Total current liabilities |
19,951 | 15,445 | ||||
| Deferred rent |
1,976 | 1,767 | ||||
| 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 |
7 | 7 | ||||
| Additional paid-in capital |
13,967 | 13,967 | ||||
| Retained earnings |
6,169 | 5,123 | ||||
| Total stockholders’ equity |
20,143 | 19,097 | ||||
| TOTAL |
$ | 42,070 | $ | 36,309 | ||
See notes to condensed consolidated financial statements.
3
Condensed Consolidated Statements of Operations
(Unaudited)
(In thousands, except per share amounts and number of stores)
| Thirteen weeks ended |
Twenty-six weeks ended |
|||||||||||||||
| July 3, 2004 |
June 28, 2003 |
July 3, 2004 |
June 28, 2003 |
|||||||||||||
| Net sales |
$ | 20,729 | $ | 21,162 | $ | 40,302 | $ | 39,745 | ||||||||
| Cost of sales and related occupancy expenses |
13,383 | 15,030 | 26,331 | 29,376 | ||||||||||||
| Gross profit |
7,346 | 6,132 | 13,971 | 10,369 | ||||||||||||
| Selling, general and administrative expenses |
6,120 | 6,427 | 12,089 | 12,801 | ||||||||||||
| Income (loss) from operations |
1,226 | (295 | ) | 1,882 | (2,432 | ) | ||||||||||
| Interest expense |
(70 | ) | (89 | ) | (142 | ) | (149 | ) | ||||||||
| Income (loss) before income taxes |
1,156 | (384 | ) | 1,740 | (2,581 | ) | ||||||||||
| Income tax benefit (expense) |
(462 | ) | 153 | (694 | ) | 1,032 | ||||||||||
| Net income (loss) |
$ | 694 | $ | (231 | ) | $ | 1,046 | $ | (1,549 | ) | ||||||
| Earnings (loss) per share: |
||||||||||||||||
| Basic |
$ | 0.10 | $ | (0.03 | ) | $ | 0.15 | $ | (0.23 | ) | ||||||
| Diluted |
$ | 0.10 | $ | (0.03 | ) | $ | 0.15 | $ | (0.23 | ) | ||||||
| Weighted average shares outstanding: |
||||||||||||||||
| Basic |
6,800 | 6,800 | 6,800 | 6,800 | ||||||||||||
| Diluted |
6,925 | 6,800 | 6,852 | 6,800 | ||||||||||||
| Stores operated at end of period |
83 | 87 | ||||||||||||||
See notes to condensed consolidated financial statements.
4
Condensed Consolidated Statements of Cash Flows
(Unaudited)
(In thousands)
| Twenty-six weeks ended |
||||||||
| July 3, 2004 |
June 28, 2003 |
|||||||
| Operating activities: |
||||||||
| Net income (loss) |
$ | 1,046 | $ | (1,549 | ) | |||
| Adjustments to reconcile net income (loss) to net cash provided by operating activities |
||||||||
| Depreciation and amortization |
693 | 770 | ||||||
| Asset impairment expense |
57 | 42 | ||||||
| Loss on disposition of assets |
6 | 7 | ||||||
| Effect of changes in: |
||||||||
| Inventories |
(6,120 | ) | 4,014 | |||||
| Receivables |
100 | (212 | ) | |||||
| Prepaid expenses and other |
(213 | ) | (269 | ) | ||||
| Accounts payable |
4,411 | (222 | ) | |||||
| Accrued expenses and deferred rent |
885 | (209 | ) | |||||
| Net cash provided by operating activities |
865 | 2,372 | ||||||
| Investing activity: |
||||||||
| Purchase of property and equipment |
(190 | ) | (771 | ) | ||||
| Net cash used in investing activity |
(190 | ) | (771 | ) | ||||
| Financing activities: |
||||||||
| Payments on credit facility, net |
(745 | ) | (1,526 | ) | ||||
| Principal payments on capital leases |
(20 | ) | — | |||||
| Net cash used in financing activities |
(765 | ) | (1,526 | ) | ||||
| Net increase (decrease) in cash |
(90 | ) | 75 | |||||
| Cash, beginning of period |
1,034 | 779 | ||||||
| Cash, end of period |
$ | 944 | $ | 854 | ||||
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 January 3, 2004 presented herein has been derived from the audited financial statements of the Company included in the Annual Report on Form 10-K for the year ended January 3, 2004.
The significant accounting policies followed by the Company are described in Note 2 to the audited consolidated financial statements for the year ended January 3, 2004. 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 included herein should be read in conjunction with the audited consolidated financial statements, including the notes thereto, for the year ended January 3, 2004.
The results of operations for the thirteen weeks and twenty-six weeks ended July 3, 2004 presented herein are not necessarily indicative of the results to be expected for the full year.
Reclassifications – Certain amounts in the prior year’s financial statements have been reclassified to conform to the current year’s presentation.
Comprehensive Income (Loss) and net income (loss) are the same.
Impairment of Long-Lived Assets - The Company reviews long lived assets for impairment whenever events or changes in circumstances indicate that their carrying value may not be recoverable. Management evaluates the carrying value of assets associated with stores which have been open longer than 14 months. Using its best estimates based upon reasonable assumptions and projections, the Company records an impairment charge to write down the assets to their estimated fair value if the carrying values of such assets exceed their related expected future cash flows. The impairment charge is recorded in selling, general and administrative expenses. Management’s estimates and assumptions used in the projections are subject to a high degree of judgement and if actual results differ, additional losses may be recorded.
During the first quarter of 2004 the Company identified one store where the carrying value of its long-lived assets would not be recoverable through future cash flows. Accordingly an impairment charge of $57,000 was recorded during the thirteen weeks ended April 3, 2004 to write down such assets to their estimated fair value. Based upon the Company’s review of long lived assets for the second quarter ended July 3, 2004 no impairment charge was recorded during the second quarter.
Net Income (Loss) Per Share – Basic income (loss) per share is computed as net income (loss) 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 the net income by the weighted average number of common shares outstanding for the period plus the dilutive effect of outstanding stock options. The following table summarizes the incremental shares from these potentially dilutive securities, calculated using the treasury stock method.
| Thirteen weeks ended |
Twenty-six weeks ended | |||||||
| July 3, 2004 |
June 28, 2003 |
July 3, 2004 |
June 28, 2003 | |||||
| ( in thousands) | ( in thousands) | |||||||
| Weighted average number of shares - basic |
6,800 | 6,800 | 6,800 | 6,800 | ||||
| Add: effect of dilutive securities |
125 | — | 52 | — | ||||
| Weighted average number of shares - diluted |
6,925 | 6,800 | 6,852 | 6,800 | ||||
6
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.
The following table illustrates the effect on net income (loss) and net income (loss) per share if the Company had applied the fair value recognition provisions of Statement of Financial Accounting Standards (“SFAS”) No. 123, as amended by SFAS No. 148, “Accounting for Stock Based Compensation”.
| Thirteen weeks ended |
Twenty-six weeks ended |
|||||||||||||||
| July 3, 2004 |
June 28, 2003 |
July 3, 2004 |
June 28, 2003 |
|||||||||||||
| Net income (loss), as reported |
$ | 694,000 | $ | (231,000 | ) | $ | 1,046,000 | $ | (1,549,000 | ) | ||||||
| Deduct stock-based compensation determined under fair value method, net of related tax benefits |
(34,317 | ) | (1,222 | ) | (47,351 | ) | (5,696 | ) | ||||||||
| Pro forma net income (loss) |
$ | 659,683 | $ | (232,222 | ) | $ | 998,649 | $ | (1,554,696 | ) | ||||||
| Net income (loss) per share: |
||||||||||||||||
| As reported: |
||||||||||||||||
| Basic and diluted |
$ | 0.10 | $ | (0.03 | ) | $ | 0.15 | $ | (0.23 | ) | ||||||
| Pro forma: |
||||||||||||||||
| Basic and diluted |
$ | 0.10 | $ | (0.03 | ) | $ | 0.15 | $ | (0.23 | ) | ||||||
2. Financing Agreements
In April 2003, the Company entered into a credit facility agreement with Wells Fargo Retail Finance, LLC. The facility expires on April 18, 2006 and provides financing for up to $20.0 million, including a $5.0 million sublimit for the issuance of letters of credit. Borrowings under the facility are based upon a percentage of eligible inventory less certain reserves. Borrowings are secured by inventory, equipment, general intangibles and other rights to payments. The credit facility prohibits the payment of cash dividends and contains various restrictive covenants including a limitation on the amount of capital expenditures and the number of stores the Company may open and close during any fiscal year.
Interest on borrowings is at prime plus up to .25% or Libor plus 1.75% to 2.25%, depending on the amount the Company has available for advances under the line of credit. The average interest rate on outstanding borrowings at July 3, 2004 was 3.4%. As of July 3, 2004 approximately $10.8 million was available for advances under the facility. As of July 3, 2004 the Company was in compliance with its loan covenants.
Although the credit facility expires in April 2006 and the Company has the intent and ability to maintain this debt outstanding for more than one year, the Company has classified its borrowings under the facility as a current liability in accordance with the provisions set forth in Emerging Issues Task Force (EITF) 95-22 “Balance Sheet Classifications, Borrowings Outstanding Under Revolving Credit Agreements that