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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934.
For the fiscal year ended December 30, 2000
Commission File Number 0-23669
SHOE PAVILION, INC.
(Exact name of registrant as specified in its charter)
94-3289691
Delaware (IRS Employer
(State or other jurisdiction Identification Number)
of incorporation or organization)
94804
3200-F Regatta Boulevard, Richmond, (Zip Code)
California
(Address of principal executive
offices)
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Telephone Number: (510) 970-9775
Securities Registered Pursuant to Section 12(b) of the Act:
Name of each exchange on which
Title of each class registered
------------------- ------------------------------
None None
Securities Registered Pursuant to Section 12(g) of the Act:
Common Stock
------------
(Title of Class)
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 if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K ((S) 229.405 of this chapter) is not contained herein,
and will not be contained, to the best of registrant's knowledge, in definitive
proxy or information statements incorporated by reference in Part III of this
Form 10-K or any amendment to this Form 10-K. [_]
At March 19, 2001 the aggregate market value of the registrant's Common
Stock held by non-affiliates of the registrant was approximately $3,737,500.
At March 19, 2001 the number of shares outstanding of registrant's Common
Stock was 6,800,000.
DOCUMENTS INCORPORATED BY REFERENCE
Definitive Proxy Statement for the Company's 2000 Annual Meeting of
Stockholders--Part III of this Form 10-K.
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Shoe Pavilion, Inc.
Index to Annual Report on Form 10-K
For the year ended December 30, 2000
Page
----
PART I
Item 1 Business............................................................................... 3
Item 2 Properties............................................................................. 8
Item 3 Legal Proceedings...................................................................... 8
Item 4 Submission of Matters to a Vote of Security Holders.................................... 8
PART II
Item 5 Market for the Registrant's Common Equity and Related Stockholder Matters.............. 9
Item 6 Selected Financial Data................................................................ 10
Item 7 Management's Discussion and Analysis of Financial Condition and Results of Operations.. 11
Item 7A Quantitative and Qualitative Disclosure About Market Risk.............................. 19
Item 8 Financial Statements and Supplementary Data............................................ 20
Item 9 Changes in and Disagreements with Accountants on Accounting and Financial Disclosure... 34
PART III
Item 10 Directors and Executive Officers of the Registrant..................................... 34
Item 11 Executive Compensation................................................................. 34
Item 12 Security Ownership of Certain Beneficial Owners and Management......................... 34
Item 13 Certain Relationships and Related Transactions......................................... 34
PART IV
Item 14 Exhibits, Financial Statement Schedules and Reports on Form 8-K........................ 34
2
PART I
Item 1--Business
General
Shoe Pavilion, Inc. 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 was among the first footwear
retailers on the West Coast to expand the off-price concept into the designer
and name brand footwear market. As of December 30, 2000 the Company operated 80
retail stores in California, Washington, Oregon and Oklahoma, of which 79
operated under the trade name Shoe Pavilion. In addition, as of December 30,
2000, the Company operated the shoe department of 36 Gordmans, Inc. (formerly
Richman Gordman 1/2 Price Stores, Inc.) department stores in Colorado,
Illinois, Iowa, Kansas, Missouri, Nebraska, Oklahoma and South Dakota under a
licensing agreement entered into in July 1999.
The Company offers quality designer and name brand footwear such as Clarks,
Dexter, Fila, Florsheim, Naturalizer, Nickles and Rockport, typically at 30% to
70% below regular department store prices for the same shoes. Such price
discounts appeal to value-oriented consumers seeking quality brand name
footwear not typically found at other off-price retailers or mass
merchandisers. The Company is able to offer lower prices by (i) selectively
purchasing large blocks of production over-runs, over-orders, mid- and late-
season deliveries and last season's stock from manufacturers and other
retailers at significant discounts, (ii) sourcing in-season name brand and
branded design merchandise directly from factories in Italy, Brazil, China and
Spain and (iii) negotiating favorable prices with manufacturers by ordering
merchandise during off-peak production periods and taking delivery at its
central warehouse in Richmond, California. During 2000, the Company purchased
footwear merchandise from over 100 domestic and international vendors,
independent resellers, manufacturers and other retailers that frequently have
excess inventory for sale.
The Company's stores utilize a self-service format that allows inventory to
be stored directly under a displayed shoe, thereby eliminating the need for a
stockroom and significantly increasing retail floor space. The functionality
and simplicity of this format enable flexible store layouts that can be easily
reconfigured to accommodate a new mix of merchandise. Moreover, this format
allows customers to locate all available sizes of a particular shoe and to try
them on for comfort and fit without a salesperson's assistance, thereby
reducing in-store staffing needs and allowing customers to make independent,
rapid purchasing decisions.
Shoe Pavilion is a standardized concept that offers a bright, clean, low
maintenance and functional shopping environment to customers interested in
purchasing quality men's and women's value priced footwear. The Company's
stores are strategically located in strip malls, outlet centers and downtown
locations, frequently in close proximity to other off-price apparel retailers
that attract similar customers. Shoe Pavilion stores average approximately
8,000 square feet and offer between 5,000 and 41,000 pairs of shoes, while the
Gordmans licensed shoe departments average approximately 3,100 square feet and
offer between 5,000 and 10,000 pairs of shoes. The Company opened, net of
closures, 5 stores (including 3 Gordmans' shoe departments) in 2000, 42 stores
(including 33 Gordmans' shoe departments) in 1999, and 14 stores in 1998.
During 2001, the Company intends to open 2 to 4 new stores, including licensed
shoe departments, primarily in its existing markets. It also expects to close 2
to 4 stores in 2001.
The Company was incorporated in Delaware in November 1997 and is the
successor to Shoe Pavilion Corporation (formerly Shoe Inn, Inc.), which was
incorporated in Washington in 1983. The Company's executive offices are located
at 3200-F Regatta Boulevard, Richmond, California 94804, and its telephone
number is (510) 970-9775.
Operating Strategy
The Company's objective is to be the leading off-price retailer of designer
label and name brand footwear in each of the markets it serves. The operating
strategy is designed to allow the Company to offer its customers
3
quality footwear typically at 30% to 70% below department store prices for the
same shoes. The following summarizes key elements of the Company's operating
strategy:
. Off-Price Concept, Premium Name Brands. The Company differentiates itself
from other off-price retailers and deep discount chains by focusing on
higher price point merchandise, extending the off-price concept into the
designer and name brand footwear market. As a result, the Company
generally does not compete with other discount stores in obtaining the
majority of its merchandise. Similarly, while some department store and
brand name retail chains operate discount outlets, such operations
generally obtain merchandise from existing inventory of their retail
affiliates rather than from external sources. Some of the Company's most
successful stores have benefited from the heightened consumer awareness
and preference to shop at discount malls or outlet centers, both of which
typically include other off-price retailers.
. Broad Selection of Designer Footwear. The Company offers a broad
selection of quality footwear from over 75 name brands such as Skechers,
New Balance, BCBG, Naturalizer, Hush Puppy, Fila and Dexter. The
availability and wide variety of premium brand names distinguish Shoe
Pavilion and serve to attract first time buyers and consumers who
otherwise might shop at more expensive department stores. The wide
variety of brand names also enables the Company to tailor its merchandise
from store to store to accommodate consumer preferences that may vary by
location.
. Selective Bulk Purchases; Diverse Vendor Network. The Company is able to
offer lower prices by selectively purchasing large blocks of over-runs,
over-orders, mid- and late-season deliveries and last season's stock from
over 100 domestic and international vendors, independent resellers,
manufacturers and other retailers at significant discounts. The diversity
and scope of its vendor network help to provide a constant source of
quality merchandise, and the purchase of name brand, traditional styles
helps to mitigate the likelihood of inventory writedowns. To augment
available merchandise with the latest in-season styles, the Company
purchases branded design footwear directly from factories in Italy,
Brazil, China and Spain.
. Self-Service Stores. The Company believes that the self-service format
reinforces its off-price strategy and appeals to value-oriented
consumers. The Company's format allows inventory to be stored directly
under a displayed shoe, thereby eliminating the need for a stockroom and
significantly increasing retail floor space. The functionality and
simplicity of this format enable flexible store layouts that can be
easily rearranged to complement the current merchandise. Moreover, this
format allows customers to locate all available sizes of a particular
shoe and to try them on for comfort and fit without a salesperson's
assistance, thereby reducing in-store staffing needs and allowing
customers to make independent, rapid purchasing decisions.
Growth Strategy
Since opening its first store in 1979 in Washington, the Company has
expanded to 116 stores, including 36 licensed shoe departments, in eleven
states. The Company intends to continue to expand by opening new stores and
enhancing comparable store sales.
. Continue New Store Openings. The Company intends to increase its presence
in its current markets and to enter new markets by selectively opening
new stores, which can be served by the Company's business support and
distribution infrastructure. When entering a new market, the Company
prefers to open multiple stores, thereby creating an immediate market
presence and enabling television advertising costs to be spread
economically across a number of stores. The Company opened 7 stores and 3
licensed shoe departments in 2000, 17 stores and 33 licensed shoe
department locations in 1999, and 16 stores in 1998. The Company closed 5
stores in 2000, 8 stores in 1999, and 2 stores in 1998. During 2001, the
Company intends to open 2 to 4 new stores, including licensed shoe
departments, primarily in its existing markets. Management believes that
new store openings in the Company's current markets will further increase
name recognition, which, in turn, will facilitate expansion into new
markets.
4
. Increase Comparable Store Sales. During 2000, the Company achieved an
increase of 9.4% in comparable store sales after experiencing a 1.2%
downturn in 1999 and a 6.1% increase in 1998. Management intends to focus
on achieving historical same store growth rates through a continuing
refinement of its store locations and merchandise selection.
The Company's ability to execute its operating and growth strategy is
subject to numerous risks and uncertainties. There can be no assurance that the
Company will be successful in implementing its strategy or that its strategy,
even if implemented, will lead to successful achievement of the Company's
objectives.
Merchandising
Unlike deep-discount retailers, Shoe Pavilion offers high quality
merchandise and a consistent selection of name brand dress and casual shoes for
men and women. List prices generally range between $19.99 and $69.99 for
women's shoes, and between $39.99 and $99.99 for men's shoes. The principal
categories of footwear offered by Shoe Pavilion stores, and selected brands for
each, are summarized in the following table:
Women's Men's Athletic
------------ ---------- -----------
BCBG Airwalk Adidas
Caressa Bass Avia
Esprit Dexter Converse
Hush Puppies Lugz Fila
Life Stride Nunn Bush New Balance
Naturalizer Rockport Nike
Nickles Skechers Reebok
Rockport Timberland Saucony
Site Selection, Opening Costs and Leases
The Company uses an exclusive broker on the West Coast to identify potential
retail sites as well as possible acquisition candidates. Before entering a new
market, management reviews detailed reports on demographics; spending, traffic,
and consumption patterns; and other site and market related data. As of
December 30, 2000, 46 of the Company's stores were located in strip malls, 11
were located in outlet centers, 10 were located in free standing stores and 13
were located in other types of facilities.
In July 1999, the Company entered into a license agreement to operate 33
shoe departments at Gordmans, Inc., a Midwest name brand family apparel,
accessories and home fashions off-price retailer. All of the shoe departments
are located within Gordmans department stores, which are primarily located in
strip centers or free standing locations. Because there are no leasehold
improvement or equipment requirements and licensed shoe departments average
approximately one-half the size of Company stores, opening costs are
substantially less than Shoe Pavilion stores. Opening costs for licensed shoe
departments are primarily for fixtures and inventory, and average $125,000,
consisting of approximately $25,000 for fixtures and $100,000 for inventory.
Opening costs for stores are typically minimal, excluding the initial
stocking of inventory. The Company estimates that its total cash requirements
to open a typical new store average $400,000, consisting of approximately
$90,000 for fixtures, equipment and leasehold improvements; $300,000 for
inventory; and the balance for working capital needs. Costs vary from store to
store depending on, among other things, the location, size, property condition,
and the tenant improvement package offered by the landlord. The Company has
been able to renegotiate some of its existing leases to be more heavily
revenue-based. The Company does not own any of its real estate.
The Company actively monitors individual store performance and closes
underperforming stores, including five stores in 2000, eight stores in 1999 and
two stores in 1998. The relatively small investment required to open new stores
affords the Company the flexibility to close stores more quickly than other
retailers. During
5
2001, the Company expects to close two to four stores. See "Item 7--
Management's Discussion and Analysis of Financial Condition and Results of
Operations--Factors Affecting Financial Performance--Risks Associated with
Expansion."
Sourcing And Purchasing
Vendors. During 2000, the Company purchased its inventory from over 100
domestic and international vendors, independent resellers and other retailers
who have over bought merchandise. In 2000, the Company's top ten suppliers
accounted for approximately 32% of its inventory purchases. No vendor accounted
for more than 10% of total inventory purchases in 2000. The Company purchases
from its suppliers on an order-by-order basis and has no long-term purchase
contracts or other contractual assurances of continued supply or pricing. Since
the Company has locations in a number of markets along the West Coast and the
Midwest, Shoe Pavilion can accommodate and distribute a wide variety of
merchandise that meets the needs of customers in different geographic areas.
Management believes that the strength and variety of its supplier network
mitigates much of the Company's exposure to inventory supply risks. See "Item
7--Management's Discussion and Analysis of Financial Condition and Results of
Operations--Factors Affecting Financial Performance--Inventory and Sourcing
Risk."
Direct Sourcing. The Company purchases in-season name brand and branded
design merchandise directly from factories in Italy, Brazil, China and Spain.
These purchases include both labeled and non-labeled goods and provide a
consistent source of in-season merchandise. Directly sourced goods accounted
for approximately 13.4% and 10.8% of the Company's net sales in 2000 and 1999
respectively. The Company purchases from its manufacturing sources on an order-
by-order basis and has no long-term purchase contracts or other contractual
assurances of continued supply or pricing. See "Item 7--Management's Discussion
and Analysis of Financial Condition and Results of Operations--Factors
Affecting Financial Performance--International Purchasing."
Marketing
The Company believes that television advertising benefits all stores in a
common viewing market. In 2000 the Company spent approximately 4.7% of net
sales, or $4.3 million, net of vendor contributions. In 1999, the amount was
approximately 3.3% of net sales, or $2.4 million, net of vendor contributions.
In 1998 the amount was 5.4% of net sales, or $3.0 million without any vendor
contributions. The Company believes that advertising costs for a particular
market will be more effectively and economically leveraged as the number of
stores increases in that market. The Company occasionally uses print
advertising, usually at the time of a new store opening; however, it has found
print advertising to be less effective than television advertising. Shoe
Pavilion's signage is consistent at all of its locations, with highly visible
signage at the front and, when appropriate, rear of the store.
Merchandise Distribution
The Company operates a 92,000 square foot distribution facility located in
Richmond, California. This distribution facility also houses the Company's
executive and administrative headquarters. Vendors ship all products to this
central distribution center where the merchandise is inspected, verified
against the original purchase order, ticketed and repackaged for shipment to
stores. The Company believes that this facility can accommodate the Company's
planned growth for the foreseeable future.
Information Systems
During 1999, the Company completed an upgrade of its information systems on
an enterprise-wide basis, including all critical areas of corporate office,
network infrastructure and point of sale (POS). This fully integrated upgrade,
uses an IBM AS 400 that is reliable and scalable, allowing simple upgrades of
processing power as the business grows. In addition, the corporate network
infrastructure was upgraded to a Windows NT
6
environment with standardized workstations and a common set of desktop
applications that may be used throughout the Company. This upgrade provided a
stable networking environment as well as a foundation for future growth. As of
January 1, 2000, the Company had incurred approximately $2.8 million in total
costs for implementing these new systems. These costs include approximately
$800,000 for equipment, which is being leased by the Company over 36 to 60
months. No additional implementation costs were incurred in 2000.
Competition
The retail footwear market is highly competitive, and the Company expects
the level of competition to increase. The Company competes with off-price and
discount retailers (e.g., Nordstrom Rack, Payless ShoeSource, Ross Dress for
Less and Famous Footwear), branded retail outlets (e.g., Nine West), national
retail stores (e.g., Nordstrom, Marshalls, Macy's, Sears, J.C. Penney,
Loehmann's, Robinsons-May and Mervyn's), traditional shoe stores and mass
merchants. Many of these competitors have stores in the markets in which the
Company now operates and in which it plans to expand.
Employees
As of December 30, 2000, the Company had approximately 326 full-time
employees and 402 part-time employees. The number of part-time employees
fluctuates depending upon seasonal needs. The Company's 22 warehouse employees
in Richmond, CA are represented by Local 315, International Brotherhood of
Teamsters. In December 1998, the Company signed a collective bargaining
agreement with Local 315 that terminates on January 31, 2002. The Company
generally considers its relationship with its employees to be good.
Executive Officers
Certain information regarding the executive officers of the Company is set
forth below:
Name Age Position
---- --- --------
Dmitry Beinus........... 48 Chairman of the Board and Chief Executive Officer
Robert R. Hall.......... 48 Vice President and Chief Operating Officer
John D. Hellmann........ 50 Vice President of Finance, Chief Financial Officer, and Secretary
Dmitry Beinus has served as Chairman of the Board, President and Chief
Executive Officer of the Company since founding the Company in 1979. From 1976
to 1978, Mr. Beinus was employed in the shoe department of Nordstrom, Inc.
Robert R. Hall has served as Vice President and Chief Operating Officer of
the Company since January 1997. Mr. Hall joined the Company as a Regional
Manager in 1990, and has held various positions within the Company including
Operations Manager and Vice President of Merchandising.
John D. Hellmann has served as Vice President of Finance and Chief Financial
Officer of the Company since June 2000. From September 1995 until June 2000,
Mr. Hellmann served as Vice President and Chief Financial Officer of The Lamaur
Corporation, a manufacturer and wholesaler of hair care products. Mr. Hellmann
is a Certified Public Accountant.
The Company's executive officers serve at the discretion of the Board of
Directors. There is no family relationship between any of the Company's
executive officers or between any executive officer and any of the Company's
directors.
7
Item 2--Properties
The Company's corporate offices and distribution facility are located in a
92,000 square foot facility in Richmond, California, which the Company occupies
under a lease expiring in 2002. As of December 30, 2000 the Company's 80 stores
occupied an aggregate of approximately 649,000 square feet of space. The 36
licensed shoe departments had an aggregate of 110,000 square feet of space as
of December 30, 2000. The Company leases all of its stores, with leases
expiring between 2001 and 2010. The Company has options to renew most of its
leases.
Store Locations
As of December 30, 2000, the Company operated 80 retail stores in the states
of California, Washington, Oregon and Oklahoma and 36 licensed shoe departments
in Colorado, Illinois, Iowa, Kansas, Missouri, Nebraska, Oklahoma and South
Dakota. The number of stores in each geographic area is set forth below:
Stores at Year End
------------------------
Location 2000 1999 1998 1997 1996
-------- ---- ---- ---- ---- ----
Northern California............................... 32 31 27 24 22
Southern California............................... 33 30 25 16 4
Nevada............................................ 0 0 0 1 1
Oregon............................................ 4 4 4 2 2
Washington........................................ 10 13 13 12 12
Oklahoma.......................................... 1 0 0 0 0
--- --- --- --- ---
Total........................................... 80 78 69 55 41
=== === === === ===
Licensed Shoe
Departments
-------------
Location 2000 1999
-------- ------ ------
Colorado................................................... 3 3
Illinois................................................... 3 1
Iowa....................................................... 7 6
Kansas..................................................... 5 5
Missouri................................................... 7 7
Nebraska................................................... 8 8
Oklahoma................................................... 2 2
South Dakota............................................... 1 1
------ ------
Total.................................................... 36 33
====== ======
Item 3--Legal Proceedings
The Company is not a party to any material pending legal proceedings.
Item 4--Submission of Matters to a Vote of Security Holders
Inapplicable.
8
PART II
Item 5--Market for the Registrant's Common Equity and Related Stockholder
Matters
The common stock of the Company has been traded on the Nasdaq National
Market(R) under the symbol SHOE since the Company's initial public offering on
February 23, 1998. The following table sets forth, for the periods indicated,
the highest and lowest closing sale prices for the common stock, as reported by
the Nasdaq National Market(R).
High Low
---- ----
2000
First Quarter.................................................... 2.72 1.75
Second Quarter................................................... 2.38 1.50
Third Quarter.................................................... 3.38 2.00
Fourth Quarter................................................... 3.06 1.13
1999
First Quarter.................................................... 8.50 5.00
Second Quarter................................................... 5.50 4.06
Third Quarter.................................................... 6.00 3.53
Fourth Quarter................................................... 3.75 1.59
On March 1, 2001 the Company received a Nasdaq Staff Determination
indicating that the Company had failed to comply with the Minimum Market Value
of Public Float requirement for continued listing set forth in Marketplace Rule
4450 (a) (2) (the "Rule"), and that its shares, therefore, were subject to
delisting from The Nasdaq National Market. The Company has requested a hearing
before a Nasdaq Listing Qualifications Panel to review the Staff Determination.
The hearing is scheduled for April 6, 2001. The hearing request has stayed the
delisting of the Company's common stock pending the Panel's decision. There can
be no assurance the Panel will grant the Company's request for continued
listing. In order to maintain a Minimum Market Value of Public Float of $5.0
Million and be in compliance with the Rule, the 2,300,000 shares of the
Company's common stock included in the public float would need to trade at
approximately $2.17 per share for a minimum of 10 consecutive trading days. If
the Panel does not grant the Company's request for continued listing on the
Nasdaq National Market, the Company intends to apply for listing of its common
stock on the Nasdaq SmallCap Market. The Company currently satisfies the
requirements for listing on the Nasdaq SmallCap Market. No assurance can be
given, however, that the Company will continue to meet the requirements for
listing on the Nasdaq SmallCap Market.
As of December 30, 2000, there were approximately 13 holders of record of
the Company's common stock.
From August 1988 through February 1998, the Company made distributions to
its sole stockholder primarily to allow the stockholder to pay taxes on
earnings of the Company included or includable in the taxable income of the
stockholder as a result of the Company's S corporation status. Upon completion
of its initial public offering, the Company made an S corporation distribution
in the amount of $7.8 million to its previous sole stockholder, which
approximately equaled the estimated earned and previously undistributed taxable
S corporation income of the Company through the day preceding the termination
date of its S corporation status. Except as mentioned in the previous
sentences, the Company has not paid any cash dividends in the past. The Company
currently intends to retain any earnings for use in its business and does not
anticipate paying any cash dividends on its Common Stock in the foreseeable
future. In addition, the Company's line of credit restricts the Company's
ability to pay dividends. See Note 4 of Notes to Consolidated Financial
Statements.
9
Item 6 -- Selected Financial Data
The selected consolidated financial and operating data set forth below
should be read in conjunction with "Item 8--Financial Statements and
Supplementary Data--Consolidated Financial Statements of the Company and
related Notes thereto" and "Item 7--Management's Discussion and Analysis of
Financial Condition and Results of Operations" included herein.
Year Ended
--------------------------------------------
2000 1999 1998(1) 1997 1996
------- ------- ------- ------- -------
(In thousands, except per share and
operating data)
Statement of Operations Data:
Net sales....................... $91,058 $71,611 $55,907 $45,074 $30,315
Cost of sales and related
occupancy expenses............. 61,662 48,076 35,777 28,922 20,318
------- ------- ------- ------- -------
Gross profit.................... 29,396 23,535 20,130 16,152 9,997
Selling expenses................ 19,134 13,999 11,472 8,800 5,592
General and administrative
expenses....................... 7,014 5,655 3,664 3,106 2,630
------- ------- ------- ------- -------
Income from operations.......... 3,248 3,881 4,994 4,246 1,775
Interest and other expense,
net............................ (1,295) (633) (453) (520) (287)
------- ------- ------- ------- -------
Income before income taxes...... 1,953 3,248 4,541 3,726 1,488
Provision for income taxes...... (779) (1,233) (1,147) (261) (98)
------- ------- ------- ------- -------
Net income...................... $1 ,174 $ 2,015 $ 3,394 $ 3,465 $ 1,390
======= ======= ======= ======= =======
Net income per share:
Basic.......................... $ 0.17 $ 0.30 $ 0.53 $ 0.77 $ 0.31
Diluted........................ $ 0.17 $ 0.30 $ 0.52 $ 0.77 $ 0.31
Weighted average shares
outstanding:
Basic.......................... 6,800 6,800 6,462 4,500 4,500
Diluted........................ 6,810 6,801 6,474 4,500 4,500
Pro Forma:
Historical income before income
taxes.......................... -- -- $ 4,541 $ 3,726 $ 1,488
Pro forma provision for income
taxes (2)...................... -- -- (1,748) (1,435) (566)
------- ------- ------- ------- -------
Pro forma net income (2)........ -- -- $ 2,793 $ 2,291 $ 922
======= ======= ======= ======= =======
Pro forma net income per share
(2)............................ -- -- $ 0.42 -- --
Pro forma weighted average
shares outstanding (2)......... -- -- 6,600 -- --
Selected Operating Data:
Number of stores:
Opened during period (3)....... 10 50 16 16 9
Closed during period........... 5 8 2 2 6
Open at end of period.......... 116 111 69 55 41
Comparable store sales increase
(decrease)..................... 9.4% (1.2)% 6.1% 4.6% 8.0%
Year Ended
---------------------------------------
2000 1999 1998 1997 1996
------- ------- ------- ------- -------
Balance Sheet Data:
Working Capital....................... $29,890 $14,305 $13,739 $ 6,045 $ 3,783
Total assets.......................... 46,915 41,613 33,534 22,646 15,146
Total indebtedness (including current
portion)............................. 14,037 8,075 8,494 7,658 3,673
Stockholders' equity.................. 20,217 19,043 17,028 7,328 4,567
- --------
(1) In 1998, the Company changed its year end to a 52-53 week year ending on
the Saturday nearest to December 31. Due to this change, sales for the
fourth quarter and year ended January 2, 1999 include two
10
additional days; had these days not been included comparable store sales
would have increased 5.3% for the year ended January 2, 1999. All
references herein to 1998 refer to the year ended January 2, 1999.
(2) Prior to February 1998, the Company operated as an S corporation and was
not subject to federal and certain state income taxes. Upon the completion
of its initial public offering, the Company became subject to federal and
state income taxes. Pro forma net income reflects federal and state income
taxes as if the Company had not elected S corporation status for income
tax purposes. Pro forma 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 (1,271,722
shares) which were necessary to fund the $7.8 million distribution paid to
the Company's stockholder upon termination of the Company's status as an S
Corporation. See Note 3 of Notes to Consolidated Financial Statements.
(3) 2000 and 1999 include 3 and 33 licensed shoe departments, respectively,
operated pursuant to a license agreement with Gordmans, Inc.
Item 7--Management's Discussion and Analysis of Financial Condition and
Results of Operations
The statements contained in this Form 10-K which are not historical facts
are forward-looking statements that are subject to risks and uncertainties
that could cause actual results to differ materially from those set forth in
or implied by forward-looking statements. Factors that could cause or
contribute to such differences include those discussed in the Company's
filings with the Securities and Exchange Commission, including, without
limitation, the factors discussed in this Form 10-K under the captions--
"Factors Affecting Financial Performance" and "Liquidity and Capital
Resources," as well as those discussed elsewhere in this Form 10-K.
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 was among the first footwear retailers
on the West Coast to expand the off-price concept into the designer and name
brand footwear market. As of December 30, 2000 the Company operated 80 retail
stores in California, Washington, Oregon and Oklahoma, of which 79 operated
under the trade name Shoe Pavilion. In addition, as of December 30, 2000, the
Company operated the shoe department of 36 Gordmans, Inc. (formerly Richman
Gordman 1/2 Price Stores, Inc.) department stores in Colorado, Illinois, Iowa,
Kansas, Missouri, Nebraska, Oklahoma and South Dakota under a licensing
agreement entered into in July 1999.
The Company opened, net of closures, 5 stores in 2000, 42 new stores in
1999, and 14 stores in 1998. During 2001, the Company intends to open
approximately 2 to 4 new stores, including leased shoe departments, primarily
in its existing markets. It also expects to close 2 to 4 stores in 2001.
The Company's growth in net sales historically has resulted primarily from
the opening of new stores. In 2000 and 1999 the Company also experienced
growth in net sales as a result of the opening of 36 shoe departments pursuant
to a licensing agreement entered into with Gordmans in 1999. The Company
expects that the primary source of future sales growth will continue to be new
store openings. Because the Company's comparable store sales have fluctuated
widely, the Company does not expect that comparable store sales will
contribute significantly to future growth in net sales. The Company defines
comparable stores as those stores that have been open for at least 14
consecutive months. Stores open less than 14 consecutive months are treated as
new stores, and stores closed during the period are excluded from comparable
store sales. The Company's comparable store sales increased 9.4% in 2000,
decreased 1.2% in 1999 and increased 6.1% in 1998. The Company believes that
the decline in 1999 comparable store sales was due in part to unusual weather
patterns causing delays in normal seasonal sales; the high same store sales
comparisons from the prior year; the rapid expansion into the licensed stores
causing delays in replenishments to the existing stores; and an overall soft
footwear environment exacerbated by several prominent store liquidations which
dictated more promotional activity by the Company.
11
The Company seeks to acquire footwear merchandise on favorable financing
terms and in quantities large enough to support future growth. This strategy
causes an increase in inventory levels at various times throughout the year. As
a result, similar to other off-price retailers, the Company's inventory
turnover rates are typically less than full-price retailers. Because of the
substantial increase in net sales, inventory levels increased from $33.0
million at January 1, 2000 to $38.2 million at December 30, 2000.
Prior to its initial public offering in February 1998, Shoe Pavilion was
treated as an S corporation for federal and certain state income tax purposes
since August 1988. As a result, the Company's earnings from August 1988 through
February 22, 1998 were taxed, with certain exceptions, directly to the
Company's sole stockholder rather than to the Company. The Company's S
corporation status terminated on February 22, 1998, and the Company is now
subject to state and federal income taxes as a C corporation. In connection
with its conversion to C corporation status, the Company recorded a
nonrecurring tax benefit of $485,000. The pro forma adjustments reflect federal
and state income taxes as if the Company had not elected S corporation status
for income tax purposes. See Note 3 of Notes to Consolidated Financial
Statements.
Results of Operations
The following table sets forth, for the periods indicated, the relative
percentages that certain income and expense items bear to net sales:
2000 1999 1998
----- ----- -----
Net sales............................................. 100.0% 100.0% 100.0%
Gross profit.......................................... 32.3 32.9 36.0
Selling expenses...................................... 21.0 19.6 20.5
General and administative expenses.................... 7.7 7.9 6.6
----- ----- -----
Income from operations................................ 3.6 5.4 8.9
Interest and other expenses, net...................... (1.4) (0.9) (0.8)
----- ----- -----
Income before income taxes............................ 2.2 4.5 8.1
Provision for income taxes............................ (0.9) (1.7) --
----- -----
Net income............................................ 1.3% 2.8% --
===== ===== -----
Pro forma provision for income taxes.................. (3.1)
-----
Pro forma net income.................................. 5.0%
=====
2000 Compared with 1999
Net Sales. Net sales increased 27.2% to $91.1 million for 2000 from net
sales of $71.6 million for 1999. Approximately $18.8 million of the increase in
net sales is attributable to the increase in new store sales, including sales
from the new leased shoe departments. In addition, the Company's comparable
store net sales increased $4.8 million or 9.4%. These increases were partially
offset by store closings.
Gross Profit. Cost of sales includes landed merchandise and occupancy costs
and the license fee paid to Gordmans for the leased shoe departments. Gross
profit increased 24.9% to $29.4 million from $23.5 million for 1999. This
increase in gross profit dollars is attributable to the increase in net sales
in 2000. Gross profit as a percentage of net sales decreased slightly to 32.3%
for 2000 from 32.9% for 1999. This reduction in the gross profit percentage is
principally due to higher merchandise cost as a percentage of sales, which was
partially offset by the decrease in occupancy costs as a percentage of sales.
The Company was able to reduce its occupancy costs as a percent of sales by
leveraging both its increase in comparable store sales and the license fee paid
for the shoe departments the Company operates.
Selling Expenses. Selling expenses consist principally of payroll and
related costs, advertising and promotional expenses, freight out and credit
card processing fees. Selling expenses increased by 36.7% to $19.1 million for
2000 from $14.0 million in 1999 and increased as a percentage of sales to 21.0%
in 2000
12
from 19.6% in 1999. The increase in selling expenses is primarily attributable
to the increase in advertising, payroll costs, freight out and credit card
fees which were in part directly related to the increase in net sales in 2000.
The increase in selling expenses as a percentage of net sales is principally
the result of the increase in advertising costs. For 2000, advertising costs
were $4.3 million or 4.7% of net sales compared to $2.4 million or 3.3% of net
sales for 1999.
General and Administrative Expenses. General and administrative expenses
consist primarily of corporate and administrative expenses, including payroll,
employee benefits and warehousing costs. General and administrative expenses
increased 24% to $7.0 million for 2000 from $5.7 million for 1999 and
decreased slightly as a percentage of net sales to 7.7% in 2000 from 7.9% in
1999. The increase in general and administrative expenses was primarily
attributable to increased administrative and warehouse payroll costs,
information system costs related to the computer system installed in 1999 and
increased enrollment in the Company's employee benefit plan.
Interest and Other Expense, Net. Interest and other expense, net, increased
to $1.3 million for 2000 from $.6 million for 1999. The increase was primarily
attributable to higher average borrowings on the Company's revolving line of
credit to fund increased inventory levels related in part to the higher sales
in 2000. In addition, the weighted average interest rate in 2000 increased to
8.4% from 6.8% in 1999.
Income Taxes. In 2000 a greater portion of the Company's business was
generated in states with a higher tax rate compared with 1999. As a result the
effective tax rate for 2000 increased to 39.9% from 38.0% in 1999.
1999 Compared with 1998
Net Sales. Net sales increased 28.1% to $71.6 million for 1999 from $55.9
million for 1998. This increase in net sales was primarily attributable to new
store sales, including sales from leased shoe departments, of $24.4 million
and was offset by store closures and a 1.2% decrease in comparable store
sales.
Gross Profit. Gross profit increased 16.9% to $23.5 million for 1999 from
$20.1 million for 1998 but decreased as a percentage of net sales to 32.9%
from 36.0%. The decrease in gross profit percentage was attributable to
several factors including, the deleveraging of net sales as a result of higher
fixed occupancy costs coupled with a decrease in comparable store sales; and
generally, a more highly competitive environment.
Selling Expenses. Selling expenses increased 22.0% to $14.0 million for
1999 from $11.5 million for 1998, but decreased as a percentage of net sales
to 19.6% from 20.5%. The increase in selling expenses was primarily
attributable to increases in payroll and related expenses incurred in
connection with new store openings and the costs associated with leasing new
information system equipment, offset by the leveraging of advertising and
promotional expenses.
General and Administrative Expenses. General and administrative expenses
increased 54.3% to $5.7 million for 1999 from $3.6 million for 1998, and
increased as a percentage of net sales to 7.9% from 6.5%. The increase in
general and administrative expenses was primarily attributable to increased
enrollment in new employee benefit programs, new store openings, including
leased shoe departments and amortization of new information systems coupled
with the costs of leasing new information system equipment.
Interest and Other Expense, Net. Interest and other expense, net, increased
39.7% to $633,000 for 1999 from $453,000 for 1998. The increase was
attributable to higher average borrowings on the Company's revolving line of
credit to fund store expansion.
Income Taxes. The effective tax rate for 1999 was 38.0% and the pro forma
tax rate for 1998 was 38.5%.
Inflation
The Company does not believe that inflation has had a material impact on
its results of operations. There can be no assurance, however, that inflation
will not have such an effect in future periods.
13
Liquidity and Capital Resources
The Company had $29.9 million in working capital as of December 30, 2000,
compared to $14.3 million at January 1, 2000. At December 30, 2000, borrowings
under the revolving line of credit of $14.0 million were classified as long
term since the line matures in May 2002. However, in 1999 the Company's
revolver of $8.0 million was classified as short-term. The Company's capital
requirements relate primarily to merchandise inventory and leasehold
improvements. The Company's working capital needs are typically higher in the
second and third quarters as a result of increased inventory purchases for the
spring and fall selling seasons.
Historically, the Company has funded its cash requirements primarily through
cash flows from operations and borrowings under its credit facility. Net cash
provided by (used in) operating activities was ($4.8) million, $2.4 million,
and ($3.0) million for 2000, 1999, and 1998, respectively. Net cash provided by
(used in) operating activities historically has been driven primarily by net
income and fluctuations in inventory and accounts payable. Inventory levels
have increased throughout these years due to a net increase in the number of
stores and the increase in net sales. During 2000, the Company used cash
primarily to purchase merchandise inventory and to a lesser extent for capital
expenditures.
Capital expenditures were $1.3 million, $2.9 million and $2.6 million in
2000, 1999 and 1998, respectively. Expenditures for 2000 were primarily for the
build out of 7 new stores and 3 new Gordmans' shoe departments and the
remodeling of twelve stores. Expenditures for 1999 were primarily for the
build-out of 17 new stores, 33 new Gordmans' shoe departments and the Company's
new information systems. Expenditures for 1998 were primarily for the build out
of 16 new stores plus work-in-progress of the Company's new management
information systems. The Company estimates that capital expenditures for 2001
will total approximately $300,000, primarily for the build-out of approximately
2 to 4 new stores, including new Gordmans' shoe departments.
Financing activities provided (used) cash of $6.0 million, ($419,000) and
$7.1 million in 2000, 1999 and 1998 respectively. The cash provided by
financing activities in 2000 primarily relates to the net increase in
borrowings under the Company's revolving line of credit. The cash use in 1999
primarily related to paying down balances on the Company's revolving line of
credit. The cash provided by financing activities for 1998 primarily reflects
$14.1 million raised in the Company's initial public offering offset by a $7.8
million payment for an S corporation distribution and a $1.0 million increase
on the Company's line of credit. During 1997 the Company made distributions to
its then sole stockholder of $704,000. Upon completion of its initial public
offering, the Company made an S corporation distribution in the amount of $7.8
million to its previous sole stockholder, which approximately equaled the
estimated earned and previously undistributed taxable S corporation income of
the Company through the day preceding the termination date of its S corporation
status. See Note 3 of Notes to Consolidated Financial Statements.
As of December 30, 2000, the Company had a credit agreement with a financial
institution for a revolving line of credit up to $20.0 million, including a
$5.0 million sublimit for the issuance of letters of credit. Borrowings are
based upon eligible inventory. Borrowings under the credit facility are secured
by the Company's accounts receivable, general intangibles, inventory and other
rights to payment. The agreement prohibits the declaration and payment of cash
or stock dividends. The agreement contained various restrictive and financial
covenants including minimum EBITDA as determined on a rolling four quarters
basis and minimum quarterly pre tax profit and minimum net income. At December
30, 2000, the Company was not in compliance with the minimum EBITDA, minimum
quarterly pretax profit and minimum net income covenants. In conjunction with
the new loan agreement entered into in February 2001, as described below, the
financial institution adjusted these covenants so the Company was in
compliance. The weighted average interest rate was 8.74% at December 30, 2000.
As of December 30, 2000, the unused and available portion of the credit
facility was approximately $4.1 million.
In February 2001, the Company and its lender entered into a new loan
agreement for a revolving line of credit up to $20.0 million, including a $5.0
million sublimit for the issuance of letters of credit, with a maturity date of
June 1, 2002. The new agreement adjusted certain economic terms and financial
covenants. Interest on
14
outstanding borrowings will be at the bank's floating prime rate or Libor plus
from 1.3% to 1.8%, depending on the Company's achievement of certain financial
ratios. Certain adjustments were made to the financial covenants including
lowering the minimum EBITDA requirement for 2001.
The Company expects that anticipated cash flow from operations and available
borrowings under the Company's credit facility will satisfy its cash
requirements for at least the next 12 months. The Company's capital
requirements may vary significantly from anticipated needs, depending upon such
factors as operating results, the number and timing of new store openings.
Recently Issued Accounting Standards
Statement of Financial Accounting Standards ("SFAS") No. 133, "Accounting
for Derivative Instruments and Hedging Activities," will be effective for the
Company as of December 31, 2000. SFAS 133, as amended, establishes accounting
and reporting standards for derivative instruments, including certain
derivative instruments embedded in other contracts, and for hedging activities.
It requires that an entity recognize all derivatives as either assets or
liabilities in the statement of financial position and measure those
instruments at fair value. Additionally, under SFAS 133, certain contracts that
were not formerly considered derivatives may now meet the definition of a
derivative. The Company will adopt SFAS 133 effective December 31, 2000.
Adoption of this new standard will not have a significant impact on the
Company's financial statements.
Weather and Seasonality
The Company has experienced, and expects to continue to experience, seasonal
fluctuations in its net sales and net income. Historically, net sales and net
income have been weakest during the first quarter. The Company's quarterly
results of operations may also fluctuate significantly as a result of a variety
of factors, including timing of new store openings, the level of net sales
contributed by new stores, merchandise mix, the timing and level of price
markdowns, availability of inventory, store closures, advertising costs,
competitive pressures and changes in the demand for off-price footwear.
Factors Affecting Financial Performance
In addition to the other information in this Form 10-K, the following
factors should be considered carefully in evaluating an investment in the
shares of common stock of the Company. The statements contained in this Form
10-K which are not historical facts are forward-looking statements that are
subject to risks and uncertainties that could cause actual results to differ
materially from those set forth in or implied by forward-looking statements.
Factors that could cause or contribute to such differences include those
discussed below, as well as those discussed elsewhere in this Form 10-K.
Risks Associated with Expansion
The Company has experienced rapid and substantial growth in net sales as
well as in its employee base. The Company's continued growth will depend to a
significant degree on its ability to expand its operations through the opening
of new stores and to operate these stores on a profitable basis. The success of
the Company's planned expansion will be significantly dependent upon the
Company's ability to locate suitable store sites and negotiate acceptable lease
terms. In addition, several other factors could affect the Company's ability to
expand, including the adequacy of the Company's capital resources, the ability
to hire, train and integrate employees and the ability to adapt the Company's
distribution and other operational systems. There can be no assurance that the
Company will achieve its planned expansion or that any such expansion will be
profitable. In addition, there can be no assurance that the Company's expansion
within its existing markets will not adversely affect the individual financial
performance of the Company's existing stores or its overall operating results,
or that new stores will achieve net sales and profitability levels consistent
with existing stores. To manage its planned expansion, the Company regularly
evaluates the adequacy of its existing systems and procedures, including
product distribution facilities, store management, financial controls and
management information systems. However, there can be no assurance that the
Company will anticipate all of the changing
15
demands that expanded operations may impose on such systems. Failure to adapt
its distribution capabilities or other internal systems or procedures as
required could have a material adverse effect on the Company's business,
financial condition and results of operations.
The Company actively monitors individual store performance and has closed
underperforming stores in the past, including five in 2000 eight in 1999 and
two in 1998. The Company intends to continue to close underperforming stores in
the future, and if it were to close a number of stores, it could incur
significant closure costs and reductions in net sales. In certain instances,
the Company may be unable to close an underperforming store on a timely basis
because of lease terms. A significant increase in closure costs or the
inability to close one or more underperforming stores on a timely basis could
have a material adverse effect on the Company's business, financial condition
and results of operations.
License Agreement
In July 1999, the Company entered into a license agreement to operate the
shoe department of Gordmans, Inc. department stores located in the Midwest. 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. The Company operated 36 shoe departments of
Gordmans at December 30, 2000. There can be no assurance that the agreement
will not be terminated before the expiration of its initial term or that the
agreement will be renewed after the expiration of its initial term. Early
termination of the agreement or failure of either party to renew the agreement
could adversely affect the Company's net sales, financial condition and results
of operations.
Inventory and Sourcing Risk
The Company's future success will be significantly dependent on its ability
to obtain merchandise that consumers want to buy, particularly name brand
merchandise with long-term retail appeal, and to acquire such merchandise under
favorable terms and conditions. In 2000, the Company's top ten suppliers
accounted for approximately 32% of inventory purchases. The deterioration of
the Company's relationship with any key vendor could result in delivery delays,
merchandise shortages or less favorable terms than the Company currently
enjoys. The Company deals with its suppliers on an order-by-order basis and has
no long-term purchase contracts or other contractual assurances of continued
supply or pricing. As the Company's operations expand, its demand for off-price
inventory will continue to increase. The Company's footwear purchases typically
involve manufacturing over-runs, over-orders, mid- or late-season deliveries or
last season's stock. The inability of the Company to obtain a sufficient supply
of readily salable, high margin inventory, to negotiate favorable discount and
payment agreements with its suppliers or to sell large inventory purchases
without markdowns could have a material adverse effect on the Company's
business, financial condition and results of operations. See " Item 1--
Business--Sourcing and Purchasing."
Reliance on Key Personnel
The Company's future success will be dependent, to a significant extent, on
the efforts and abilities of its executive officers. The loss of the services
of any one of the Company's executive officers could have a material adverse
effect on the Company's operating results. In addition, the Company's continued
growth will depend, in part, on its ability to attract, motivate and retain
skilled managerial and merchandising personnel. Competition for such personnel
is intense, and there can be no assurance that the Company will be able to
retain a substantial percentage of its existing personnel or attract additional
qualified personnel in the future.
Uncertainty of Future Operating Results; Fluctuations in Comparable Store
Sales
Although the Company has been profitable, there can be no assurance that the
Company will continue to remain profitable. Future operating results will
depend upon many factors, including general economic
16
conditions, the level of competition and the ability of the Company to acquire
sufficient inventory, achieve its expansion plans and effectively monitor and
control costs. There can be no assurance that the Company's recent gross margin
levels will be sustainable in the future.
Although the Company achieved a substantial portion of its 1999 net sales
growth through the licensing agreement with Gordmans, historically its growth
in net sales has resulted primarily from new store openings. At the present
time, the Company expects that the primary source of future sales growth will
be from new store openings.
Historically, the Company's comparable store sales have fluctuated widely,
and the Company does not expect that comparable store sales will contribute
significantly to future growth in net sales. The Company defines comparable
stores as those stores that have been open for at least 14 consecutive months.
Stores open less than 14 consecutive months are treated as new stores, and
stores closed during the period are excluded from comparable store sales. The
Company's comparable store sales increased 9.4% in 2000, decreased 1.2% in 1999
and increased 6.1% in 1998.
Risks Associated with Possible Acquisitions
The Company may pursue the acquisition of companies and assets that
complement its existing business. Acquisitions involve a number of special
risks, including the diversion of management's attention to the assimilation of
the operations and personnel of the acquired businesses, potential adverse
short-term effects on the Company's operating results and amortization of
acquired intangible assets. The Company has limited experience in identifying,
completing and integrating acquisitions. The Company does not have any current
plans to acquire any other companies, and there can be no assurance that the
Company will identify attractive acquisition candidates, that acquisitions will
be consummated on acceptable terms or that any acquired companies will be
integrated successfully into the Company's operations.
Seasonality and Quarterly Fluctuations
The Company has experienced, and expects to continue to experience, seasonal
fluctuations in its net sales and net income. Historically, net sales and net
income have been weakest during the first quarter. The Company's quarterly
results of operations may also fluctuate significantly as a result of a variety
of factors, including timing of new store openings, the level of net sales
contributed by new stores, merchandise mix the timing and level of price
markdowns, availability of inventory, store closures, advertising costs,
competitive pressures and changes in the demand for off- price footwear. Any
such fluctuations could have a material adverse effect on the market price of
the Company's common stock.
Dependence on Consumer Spending and Preferences
The success of the Company's operations depends upon a number of general
economic factors relating to consumer spending, including employment levels,
business conditions, interest rates, inflation and taxation. There can be no
assurance that consumer spending will not decline in response to economic
conditions, thereby adversely affecting the Company's operating results.
All of the Company's products are subject to changing consumer preferences.
Consumer preferences could shift to types of footwear other than those that the
Company currently offers. Any such shift could have a material adverse effect
on the Company's operating results. The Company's future success will depend,
in part, on its ability to anticipate and respond to changes in consumer
preferences, and there can be no assurance that the Company will be able to
anticipate effectively or respond to such changes on a timely basis or at all.
Failure to anticipate and respond to changing consumer preferences could lead
to, among other things, lower net sales, excess inventory and lower gross
margins, any of which could have a material adverse effect on the Company's
business, financial condition and results of operations.
17
International Purchasing
The Company purchases in-season name brand and branded-design merchandise
directly from factories in Italy, Brazil, China and Spain. Directly-sourced
goods accounted for approximately 13.4% and 10.8% of net sales in 2000 and
1999, respectively. The Company has no long-term contracts with direct
manufacturing sources and competes with other companies for production
facilities. All of the manufacturers with which the Company conducts business
are located outside of the United States, and the Company is subject to the
risks generally associated with an import business, including foreign currency
fluctuations, unexpected changes in foreign regulatory requirements,
disruptions or delays in shipments and the risks associated with United States
import laws and regulations, including quotas, duties, taxes, tariffs and other
restrictions. There can be no assurance that the foregoing factors will not
disrupt the Company's supply of directly-sourced goods or otherwise adversely
impact the Company's business, financial condition and results of operations in
the future. See "Item 1--Business--Sourcing and Purchasing."
Inventory Shrinkage
The retail industry is subject to theft by customers and employees. Because
the Company uses a self-service format, where shoppers have access to both
shoes of a pair, the Company must maintain substantial store security. Although
the Company has implemented enhanced security procedures, there can be no
assurance that the Company will not suffer from significant inventory shrinkage
in the future, which could have a material adverse effect on the Company's
business, financial condition and results of operations.
Competition
The retail footwear market is highly competitive, and the Company expects
the level of competition to increase. The Company competes with off-price and
discount retailers (e.g., Nordstrom Rack, Payless ShoeSource, Ross, Dress for
Less and Famous Footwear), branded retail outlets (e.g., Nine West), national
retail stores (e.g., Nordstrom, Marshalls, Macy's, Sears, J.C. Penney,
Loehmann's, Robinsons-May and Mervyn's), traditional shoe stores and mass
merchants. Many of these competitors have stores in the markets in which the
Company now operates and in which it plans to expand. Many of the Company's
competitors have significantly greater financial, marketing and other resources
than the Company. In addition, there can be no assurance that in the future new
participants will not enter the off-price segment of the footwear market.
Competitive pressures resulting from competitors' pricing policies could
materially adversely affect the Company's gross margins. There can be no
assurance that the Company will not face greater competition from other
national, regional or local retailers or that the Company will be able to
compete successfully with existing and new competitors. The inability of the
Company to respond to such competition could have a material adverse effect on
the Company's business, financial condition and results of operations.
Future Capital Needs
The Company expects that anticipated cash flows from operations and
available borrowings under the Company's credit facility will satisfy its cash
requirements for at least the next 12 months. To the extent that the foregoing
cash resources are insufficient to fund the Company's activities, including new
store openings planned for 2001, additional funds will be required. There can
be no assurance that additional financing will be available on reasonable terms
or at all. Failure to obtain such financing could delay or prevent the
Company's planned expansion, which could adversely affect the Company's
business, financial condition and results of operations.
Substantial Control by Single Stockholder
Dmitry Beinus, the Company's Chairman of the Board, President and Chief
Executive Officer owns approximately 66.2% of the Company's outstanding Common
Stock. As a result, Mr. Beinus is able to decide all matters requiring
stockholder approval, including the election of directors and approval of
significant corporate transactions. Concentration of stock ownership could also
have the effect of preventing a change in control of the Company.
18
Possible Volatility of Stock Price
The Company's common stock is quoted on the Nasdaq National Market, which
has experienced and is likely to experience in the future significant price
and volume fluctuations, either of which could adversely affect the market
price of the common stock without regard to the operating performance of the
Company. In addition, the trading price of the Company's common stock could be
subject to wide fluctuations in response to quarterly variations in operating
results, fluctuations in the Company's comparable store sales, announcements
by other footwear retailers, the failure of the Company's earnings to meet the
expectations of investors, as well as other events or factors.
On March 1, 2001 the Company received a Nasdaq Staff Determination
indicating that the Company had failed to comply with the Minimum Market Value
of Public Float requirement for continued listing set forth in Marketplace
Rule 4450 (a) (2) (the "Rule"), and that its shares, therefore, were subject
to delisting from The Nasdaq National Market. The Company has requested a
hearing before a Nasdaq Listing Qualifications Panel to review the Staff
Determination. The hearing is scheduled for April 6, 2001. The hearing request
has stayed the delisting of the Company's common stock pending the Panel's
decision. There can be no assurance the Panel will grant the Company's request
for continued listing. In order to maintain a Minimum Market Value of Public
Float of $5.0 Million and be in compliance with the Rule, the 2,300,000 shares
of the Company's common stock included in the public float would need to trade
at approximately $2.17 per share for a minimum of 10 consecutive trading days.
If the Panel does not grant the Company's request for continued listing on the
Nasdaq National Market, the Company intends to apply for listing of its common
stock on the Nasdaq SmallCap Market. The Company currently satisfies the
requirements for listing on the Nasdaq SmallCap Market. No assurance can be
given, however, that the Company will continue to meet the requirements for
listing on the Nasdaq SmallCap Market.
Item 7A--Quantitative and Qualitative Disclosure about Market Risk
The Company is exposed to market risks, which include changes in U.S.
interest rates and foreign exchange rates. The Company does not engage in
financial transactions for trading or speculative purposes.
Interest Rate Risk. The interest payable on the Company's bank line of
credit is based on variable interest rates and therefore is affected by
changes in market rates. The Company does not use derivative financial
instruments in its investment portfolio and believes that the market risk is
insignificant.
Commodity Prices. The Company is not exposed to fluctuation in market
prices for any commodities.
Foreign Currency Risks. As of December 30, 2000, the Company had two
foreign exchange contracts outstanding to hedge certain purchases in Italian
Lira. 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 December 30, 2000 the notional amount and fair value of the Company's
foreign exchange contracts in U.S. dollars were $ 397,886 and $ 2,375,
respectively.
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.
19
Item 8--Financial Statements and Supplementary Data
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Shoe Pavilion, Inc.
Independent Auditors' Report............................................. 21
Consolidated Balance Sheets at December 30, 2000 and January 1, 2000..... 22
Consolidated Statements of Income for Years Ended December 30, 2000,
January 1, 2000 and January 2, 1999..................................... 23
Consolidated Statements of Stockholders' Equity for Years Ended December
30, 2000,
January 1, 2000 and January 2, 1999..................................... 24
Consolidated Statements of Cash Flows for Years Ended December 30, 2000,
January 1, 2000 and January 2, 1999..................................... 25
Notes to Consolidated to Financial Statements for Years Ended December
30, 2000, January 1, 2000 and January 2, 1999........................... 26
20
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders of
Shoe Pavilion, Inc.
We have audited the accompanying consolidated balance sheets of Shoe
Pavilion, Inc. and subsidiary (the "Company") as of December 30, 2000 and
January 1, 2000, and the related consolidated statements of income,
stockholders' equity, and cash flows for each of the three years in the period
ended December 30, 2000. These financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States of America. Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in
all material respects, the financial position of the Company as of December 30,
2000 and January 1, 2000 , and the results of its operations and its cash flows
for each of the three years in the period ended December 30, 2000 in conformity
with accounting principles generally accepted in the United States of America.
DELOITTE & TOUCHE LLP
San Francisco, California
February 9, 2001
(February 27, 2001 as to Note 4)
21
SHOE PAVILION, INC.
CONSOLIDATED BALANCE SHEETS
December January 1,
30, 2000 2000
----------- -----------
ASSETS
CURRENT ASSETS:
Cash................................................. $ 814,228 $ 928,676
Receivables.......................................... 740,460 578,070
Inventories.......................................... 38,187,378 32,984,783
Prepaid expenses and other........................... 940,636 609,557
----------- -----------
Total current assets................................ 40,682,702 35,101,086
FIXED ASSETS:
Store fixtures and equipment......................... 4,136,138 3,810,727
Leasehold improvements............................... 3,296,800 2,917,771
Information technology systems....................... 2,240,028 2,212,398
----------- -----------
Total............................................... 9,672,966 8,940,896
Less accumulated depreciation........................ 4,389,243 3,400,923
----------- -----------
Net fixed assets..................................... 5,283,723 5,539,973
Deferred income taxes and other........................ 948,785 971,485
----------- -----------
TOTAL............................................... $46,915,210 $41,612,544
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable..................................... $ 8,750,084 $11,139,306
Accrued expenses..................................... 2,027,768 1,643,259
Short-term borrowings................................ -- 8,000,000
Current portion of capitalized lease obligations..... 14,754 13,232
----------- -----------
Total current liabilities........................... 10,792,606 20,795,797
Long-term debt......................................... 13,975,231 --
Deferred rent.......................................... 1,883,546 1,712,249
Capitalized lease obligations, less current portion.... 46,759 61,513
Commitments and contingencies.......................... -- --
STOCKHOLDERS' EQUITY:
Preferred stock--$.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......................................... 6,800 6,800
Additional paid-in capital........................... 13,967,258 13,967,258
Retained earnings.................................... 6,243,010 5,068,927
----------- -----------
Total stockholders' equity.......................... 20,217,068 19,042,985
----------- -----------
TOTAL............................................... $46,915,210 $41,612,544
=========== ===========
See notes to consolidated financial statements.
22
SHOE PAVILION, INC.
CONSOLIDATED STATEMENTS OF INCOME
December January 1, January 2,
30, 2000 2000 1999
----------- ----------- -----------
Net sales............................... $91,058,092 $71,611,220 $55,907,211
Cost of sales and related occupancy
expenses .............................. 61,662,190 48,076,135 35,777,493
----------- ----------- -----------
Gross profit........................ 29,395,902 23,535,085 20,129,718
Selling expenses........................ 19,134,430 13,999,417 11,472,385
General and administrative expenses..... 7,013,724 5,654,248 3,663,852
----------- ----------- -----------
Income from operations.............. 3,247,748 3,881,420 4,993,481
Other expense:
Interest.............................. (1,121,904) (618,647) (430,359)
Other--net............................ (173,257) (14,312) (22,716)
----------- ----------- -----------
Total other expense--net............ (1,295,161) (632,959) (453,075)
----------- ----------- -----------
Income before income taxes.............. 1,952,587 3,248,461 4,540,406
Provision for income taxes.............. (778,504) (1,233,846) (1,146,954)
----------- ----------- -----------
Net income.............................. $ 1,174,083 $ 2,014,615 $ 3,393,452
=========== =========== ===========
Net income per share:
Basic................................. $ 0.17 $ 0.30 $ 0.53
Diluted............................... $ 0.17 $ 0.30 $ 0.52
Weighted average shares outstanding:
Basic................................. 6,800,000 6,800,000 6,461,580
Diluted............................... 6,810,258 6,801,417 6,473,771
PRO FORMA:
Historical income before income
taxes................................ -- -- $ 4,540,406
Pro forma provision for income taxes.. -- -- (1,748,000)
-----------
Pro forma net income.................. -- -- $ 2,792,406
===========
Pro forma net income per share:
Basic................................. -- -- $ 0.42
Diluted............................... -- -- $ 0.42
Pro forma weighted average shares
outstanding:
Basic................................. -- -- 6,647,871
Diluted............................... -- -- 6,660,062
See notes to consolidated financial statements.
23
SHOE PAVILION, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
Common Stock
----------------
Additional
Number of Paid-in Retained
Shares Amount Capital Earnings Total
--------- ------ ----------- ----------- -----------
Balance at December 31,
1997................... 4,500,000 $4,500 $ 812,033 $ 6,511,523 $ 7,328,056
Issuance of stock
through initial
public offering...... 2,300,000 2,300 14,104,562 14,106,862
Net income............ 3,393,452 3,393,452
Distribution to
previous sole
stockholder.......... (949,337) (6,850,663) (7,800,000)
--------- ------ ----------- ----------- -----------
Balance at JANUARY 2,
1999................... 6,800,000 6,800 13,967,258 3,054,312 17,028,370
Net income............ 2,014,615 2,014,615
--------- ------ ----------- ----------- -----------
Balance at JANUARY 1,
2000................... 6,800,000 6,800 13,967,258 5,068,927 19,042,985
Net income............ 1,174,083 1,174,083
--------- ------ ----------- ----------- -----------
Balance at December 30,
2000................... 6,800,000 $6,800 $13,967,258 $ 6,243,010 $20,217,068
========= ====== =========== =========== ===========
See notes to consolidated financial statements.
24
SHOE PAVILION, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
December 30, January 1, January 2,
2000 2000 1999
------------ ----------- -----------
OPERATING ACTIVITIES:
Net income............................ $ 1,174,083 $ 2,014,615 $ 3,393,452
Adjustments to reconcile net income to
net cash provided (used) by operating
activities:
Depreciation........................ 1,432,809 1,209,842 798,566
Other............................... 116,863 17,849 34,965
Deferred income taxes............... (466,840) (662,620) (485,447)
Effect of changes in:
Inventories........................ (5,202,595) (6,092,682) (7,096,502)
Receivables........................ (162,390) (421,104) 141,697
Prepaid expenses and other......... 158,461 (189,940) (160,789)
Accounts payable................... (2,389,222) 5,172,095 46,231
Accrued expenses and deferred
rent.............................. 555,806 1,310,730 305,689
----------- ----------- -----------
Net cash provided (used) by
operating activities............. (4,783,025) 2,358,785 (3,022,138)
----------- ----------- -----------
INVESTING ACTIVITIES:
Purchase of fixed assets............ (1,293,422) (2,932,849) (2,593,656)
----------- ----------- -----------
FINANCING ACTIVITIES:
Net proceeds from initial public
offering........................... -- -- 14,106,862
Borrowings (payments) on credit
facility, net...................... 5,975,231 (407,262) 1,020,137
Principal payments on capital
leases............................. (13,232) (11,868) (183,995)
Distributions paid to previous sole
stockholder........................ -- -- (7,800,000)
----------- ----------- -----------
Net cash provided (used) by
financing activities.............. 5,961,999 (419,130) 7,143,004
----------- ----------- -----------
Net increase (decrease) in cash....... (114,448) (993,194) 1,527,210
Cash, beginning of period............. 928,676 1,921,870 394,660
----------- ----------- -----------
Cash, end of period................... $ 814,228 $ 928,676 $ 1,921,870
=========== =========== ===========
CASH PAID FOR:
Interest............................ $ 1,066,700 $ 573,769 $ 416,072
Income taxes........................ $ 1,502,792 $ 1,618,000 $ 1,826,000
See notes to consolidated financial statements.
25
SHOE PAVILION, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION AND OPERATIONS
General--Shoe Pavilion, Inc. (the "Company"), a Delaware corporation,
operates as a single business segment of off-price shoe stores located in
California, Washington, Oregon and Oklahoma, under the name Shoe Pavilion. The
Company had 80 and 78 stores open as of December 30, 2000 and January 1, 2000,
respectively. In July 1999, the Company entered into a licensing agreement to
operate the shoe department of Gordmans, Inc. (formerly Richman Gordman 1/2
Price Stores, Inc.) department stores located in the Midwest. 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. The Company operated 36 and 33 shoe departments of
Gordmans, Inc. at December 30, 2000 and January 1, 2000, respectively. The
Company purchases inventory from international and domestic vendors. For 2000,
the Company's top ten suppliers accounted for approximately 32% of inventory
purchases.
Public Offering--On February 27, 1998, the Company sold 2,300,000 shares of
its common stock for net proceeds of $14,107,000. In connection with the
offering, on February 23, 1998, the Company terminated its status as an S
corporation and recorded a deferred income tax benefit of $485,000.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Use of Estimates--The preparation of financial statements in conformity with
accounting principles generally accepted in the United States of America
requires management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements and the reported amounts of
revenues and expenses during the reporting period. Actual results could differ
from those estimates.
Consolidation Policy--The consolidated financial statements include the
Company and its wholly-owned subsidiary, Shoe Pavilion Corporation. All
significant intercompany balances and transactions have been eliminated.
Change of Year--In December 1998, the Company changed its year end to a 52-
53 week year ending on the Saturday nearest to December 31. All references
herein to 2000 and 1999 refer to the years ended December 30, 2000 and January
1, 2000, respectively.
Cash represents cash on hand and cash held in banks.
Estimated fair value of financial instruments--The carrying value of cash,
accounts receivable, accounts payable and debt approximates their estimated
fair values at December 30, 2000. As of December 30, 2000, the notional amount
and fair value of the Company's foreign exchange contracts in U.S. dollars were
$397,886 and $2,375, respectively.
Inventories are stated at the lower of average cost or market.
Fixed assets are stated at cost. Depreciation and amortization are provided
on the straight-line method over the estimated useful lives of the assets
ranging from three to five years. Leasehold improvements are amortized on the
straight-line method over the shorter of the useful lives of the assets or
lease term, generally five years.
Income Taxes--Effective February 23, 1998, the Company is taxed as a C
corporation for federal and state income tax purposes. The income tax
provisions as of December 30, 2000 and January 1, 2000 reflect this
26
SHOE PAVILION, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
status. Prior to February 23, 1998, the Company was taxed as an S corporation
for federal income tax and certain state reporting purposes, which provides
that taxable income or loss of the Company is generally passed through to the
individual stockholders. Accordingly, no provision for federal and certain
state income taxes has been recorded in the accompanying financial statements
prior to February 23, 1998. Upon conversion from an S corporation to a C
corporation, the Company recorded a deferred tax asset of $485,477, which
reduced tax expense.
Deferred Rent--Certain of the Company's store leases provide for free or
reduced rent during an initial portion of the lease term. Deferred rent
consists of the aggregate obligation for lease payments under these leases
amortized on a straight-line basis over the lease term, in excess of amounts
paid. In addition, deferred rent includes construction allowances received from
landlords, which are amortized on a straight-line basis over the initial lease
term.
Preopening Costs--Store preopening costs are charged to expense as incurred.
Long-lived Assets--The Company periodically reviews long-lived assets for
impairment to determine whether any events or circumstances indicate that the
carrying amount of the assets may not be recoverable. Such review includes
estimating expected future cash flows. No impairment loss provisions have been
required to date.
Net Income Per Share--Basic income per share is computed as net income
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 net income by the weighted average number of common shares outstanding
for the period plus the dilutive effect of outstanding stock options.
Comprehensive Income equals net income.
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.
Recently Issued Accounting Standards--Statement of Financial Accounting
Standards ("SFAS") No. 133, "Accounting for Derivative Instruments and Hedging
Activities," will be effective for the Company as of December 31, 2000. SFAS
No. 133, as amended, establishes accounting and reporting standards for
derivative instruments, including certain derivative instruments embedded in
other contracts, and for hedging activities. It requires that an entity
recognize all derivatives as either assets or liabilities in the statement of
financial position and measure those instruments at fair value. Additionally,
under SFAS 133, certain contracts that were not formerly considered derivatives
may now meet the definition of a derivative. The Company will adopt SFAS 133
effective December 31, 2000. Adoption of this new standard will not have a
significant impact on the Company's financial statements.
3. 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 a S corporation for tax purposes prior to February 23, 1998, the
effective date of the Company's initial public offering.
27
SHOE PAVILION, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
3. PRO FORMA INFORMATION (Continued)
Income Taxes--The pro forma information presented in the consolidated
statements of income reflects a provision for income taxes at an effective
rate of 38.5% for the year ended January 2,1999.
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
(1,271,722) which were necessary to fund the $7,800,000 distribution paid to
the Company's stockholder upon termination of the Company's status as a 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.
4. FINANCING AGREEMENTS
As of December 30, 2000, the Company had a credit agreement with a
financial institution for a revolving line of credit up to $20.0 million,
including a $5.0 million sublimit for the issuance of letters of credit.
Borrowings are based upon eligible inventory. Borrowings under the credit
facility are secured by the Company's accounts receivable, general
intangibles, inventory and other rights to payment. The agreement prohibits
the declaration and payment of cash or stock dividends. The agreement
contained various restrictive and financial covenants including minimum EBITDA
as determined on a rolling four quarters basis and minimum quarterly pre tax
profit and minimum net income. At December 30, 2000, the Company was not in
compliance with the minimum EBITDA, minimum quarterly pretax profit and
minimum net income covenants. In conjunction with the new loan agreement
entered into in February 2001, as described below, the financial institution
adjusted these covenants so the Company was in compliance. The weighted
average interest rate was 8.74% at December 30, 2000. As of December 30, 2000,
the unused and available portion of the credit facility was approximately $4.1
million.
In February 2001, the Company and its lender entered into a new loan
agreement for a revolving line of credit up to $20.0 million, including a $5.0
million sublimit for the issuance of letters of credit, with a maturity date
of June 1, 2002. The new agreement adjusted certain economic terms and
financial covenants. Interest on outstanding borrowings will be at the bank's
floating prime rate or Libor plus from 1.3% to 1.87%, depending on the
Company's achievement of certain financial ratios. Certain adjustments were
made to the financial covenants including lowering the minimum EBITDA
requirement for 2001.
5. COMMITMENTS AND CONTINGENCIES
Leases--The Company is obligated under operating leases for store and
warehouse locations and equipment. While most of the agreements provide for
minimum lease payments and include rent escalation clauses, certain of the
store leases provide for additional rentals contingent upon prescribed sales
volumes. Additionally, the Company is required to pay common area maintenance
and other costs associated with the centers in which the stores operate. Most
of the leases provide for renewal at the option of the Company.
The Company's assets under capital leases as of December 30, 2000 and
January 1, 2000 are as follows:
December 30, January
2000 1, 2000
------------ --------
Total assets under capital leases..................... $105,995 $295,911
Less accumulated amortization......................... 47,417 178,136
-------- --------
$ 58,578 $117,775
======== ========
28
SHOE PAVILION, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
5. COMMITMENTS AND CONTINGENCIES (Continued)
Future minimum lease payments required are as follows:
Capital Operating
Leases Leases
------- -----------
Year ending:
2001................................................. $20,833 $ 9,828,661
2002................................................. 47,613 8,250,800
2003................................................. 6,958,174
2004................................................. 5,374,574
2005................................................. 3,507,183
Thereafter......................................... 6,295,403
------- -----------
Total minimum lease payments.......................... 68,446 $40,214,795
===========
Less amounts representing interest.................... 6,933
-------
Present value of capital lease obligations............ 61,513
Less current portion.................................. 14,754
-------
Total long-term portion............................... $46,759
=======
Rental expense for the years ended December 30, 2000, January 1, 2000 and
January 2, 1999 was $11,395,249, $9,361,284, and $5,934,733, respectively,
including contingent rentals of $1,584,793, $821,863, and $307,355,
respectively.
Letters of Credit--The Company has obtained letters of credit in connection
with overseas purchase arrangements. The total amount outstanding was
$1,285,408 as of December 30, 2000. The Company also has a standby letter of
credit relating to a rental agreement of $14,667 as of December 30, 2000.
Contingencies--The Company is party to various legal proceedings arising
from normal business activities. Management believes that the resolution of
these matters will not have an adverse material effect on the Company's
financial position or results of operations.
29
SHOE PAVILION, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
6. INCOME TAXES
The components of deferred tax assets (liabilities) are as follows:
December 30, January 1,
2000 2000
------------ ----------
Current:
Uniform capitalization of inventory costs........ $ 662,112 $ 315,785
Accrued vacation................................. 83,724 10,348
Inventory reserve................................ 98,539 39,020
Prepaid expenses................................. (4,015) (31,714)
State taxes...................................... (112,904) (74,220)
---------- ----------
Total current (reported in prepaid expenses and
other).......................................... 727,456 259,219
---------- ----------
Non-Current:
Difference in basis of fixed assets.............. 229,220 156,731
Deferred rent and tenant improvements............ 658,230 732,116
---------- ----------
Total non-current................................ 887,450 888,847
---------- ----------
Net deferred tax asset............................ $1,614,906 $1,148,066
========== ==========
The provision for income taxes consisted of the following:
December 30, January 1,
2000 2000
------------ ----------
Current:
Federal.......................................... $1,003,195 $1,535,150
State............................................ 242,149 361,316
---------- ----------
Total current.................................. 1,245,344 1,896,466
Deferred.......................................... (466,840) (662,620)
---------- ----------
Total provision................................... $ 778,504 $1,233,846
========== ==========
A reconciliation of the statutory federal income tax rate with the Company's
effective tax rate is as follows:
December 30, January 1,
2000 2000
------------ ----------
Statutory federal rate............................ 34.0% 34.0%
State income taxes, net of federal income tax
benefit.......................................... 5.7 4.6
Other............................................. 0.2 (0.6)
---------- ----------
Effective tax rate................................ 39.9% 38.0%
========== ==========
30
SHOE PAVILION, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
7. STOCKHOLDERS' EQUITY
Stock Options--In January 1998, the Company adopted the 1998 Equity
Incentive Plan (the "1998 Plan") authorizing the issuance of 1,000,000 shares
of common stock to key employees and consultants of the Company. The 1998 Plan
provides for awards of incentive stock options and nonqualified stock option
grants to purchase common stock at prices equal to fair market value at the
date of grant. During 2000, the Company granted options under this plan for the
purchase of 165,500 shares of common stock at exercise prices ranging from
$1.81 to $1.94 per share, the fair market value of the shares at the date of
grant. Such options vest from 25% to 33% each year, beginning on each
anniversary date from the date of grant and expire ten years from that date. At
December 30, 2000, 729,250 options were available for grants and 73,625 options
were exercisable.
Directors' Stock Options--In January 1998, the Company adopted the
Directors' Stock Option Plan (the "Directors' Plan") authorizing the issuance
of 100,000 shares of common stock to non-employee directors of the Company. The
Directors' Plan provides for awards of nonqualified stock options to purchase
common stock at prices equal to fair market value at the date of grant. During
2000, the Company granted options under this plan for the purchase of 5,000
shares of common stock at an exercise price of $1.83 per share, the fair market
value of the shares at the date of grant. Such options vest 100% one year from
grant date and expire six years from that date. At December 30, 2000, 75,000
options were available for grant and 20,000 options were exercisable.
The following tables summarize information about the stock options under
both plans outstanding at December 30, 2000:
Weighted
Number of Average
Shares Exercise Price
--------- --------------
Balance at December 31, 1997..................... -- --
Options granted................................. 334,000 $6.96
Options canceled................................ (26,000) 7.52
--------
Balance at January 2, 1999....................... 308,000 6.91
Options granted................................. 86,000 4.36
Options canceled................................ (82,750) 6.67
--------
Balance at January 1, 2000....................... 311,250 6.27
Options granted................................. 170,500 1.91
Options canceled................................ (186,000) 4.64
--------
Balance at December 30, 2000..................... 295,750 $4.78
========
Weighted average fair value of options granted
during 2000..................................... $1.61
Range Weighted Average Weighted Number Weighted
of Number Remaining Average Exerciseable at Average
Exercise Outstanding at Contractual Life Exercise December 30, Exercise
Prices December 30, 2000 (in years) Price 2000 Price
-------- ----------------- ---------------- -------- --------------- --------
$1.81 -
$1.94... 125,500 9.28 $1.92 -- $ --
$4.75 -
$6.75... 27,250 7.31 5.67 8,625 5.71
$7.00 -
$10.25.. 143,000 6.74 7.13 85,000 7.09
------- ---- ----- ------ -----
$1.81 -
$10.25.. 295,750 7.87 $4.78 93,625 $6.96
======= ==== ===== ====== =====
31
SHOE PAVILION, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
7. STOCKHOLDERS' EQUITY (CONTINUED)
SFAS No. 123, "Accounting for Stock-Based Compensation," requires the
disclosure of pro forma net income and net income per share as though the
Company had adopted the fair value method as of the beginning of 1995. Under
SFAS No. 123, the fair value of stock-based awards to employees is calculated
through the use of option pricing models, even though such models were
developed to estimate the fair value of freely tradable, fully transferable
options without vesting restrictions, which significantly differ from the
Company's stock option awards. These models also require subjective
assumptions, including future stock price volatility and expected time to
exercise, which greatly affect the calculated values. The Company's
calculations were made using the Black-Scholes option pricing model with the
following weighted average assumptions and forfeitures being recognized as they
occur.
Year Ended Year Ended Year Ended
December 30, 2000 January 1, 2000 January 2, 1999
----------------- --------------- ---------------
Expected life in years
following vesting...... 9.2 years 9.2 years 5.7 years
Stock price volatility.. 94.70% 87.01% 85.17%
Risk free interest
rate................... 6.0% 6.0% 6.0%
Dividends during term... None None None
If the computed fair values of all awards had been amortized over the
vesting period of the awards, net income would have been reduced to the pro
forma amounts indicated below.
Year Ended Year Ended Year Ended
December 30, 2000 January 1, 2000 January 2, 1999
----------------- --------------- ---------------
Net Income:
As reported............. $1,174,083 $2,014,615 $3,393,452
Pro forma............... $1,152,053 $1,787,608 $2,994,316
Net Income per share:
As reported:
Basic................. $ 0.17 $ 0.30 $ 0.53
Diluted............... $ 0.17 $ 0.30 $ 0.52
Pro forma:
Basic and diluted..... $ 0.17 $ 0.26 $ 0.46
8. EMPLOYEE BENEFIT PLAN
The Company established a 401(k) Savings Plan (the "Plan") effective January
1, 1998. An employee becomes eligible to participate in the Plan after
completing one year of service and attainment of the age 21; however, all
employees hired prior to January 1, 1998, regardless of length of service, were
permitted to enroll in the Plan. Generally, employees may contribute up to 15%
of their compensation or a maximum of $10,500 in accordance with IRC Sections
402(g), 401(k) and 415. For every dollar contributed to the Plan, the Company
will match 50 cents, up to a maximum of 3% of the employee's compensation. The
Company contributed $18,794 and $25,041 for the years ending December 30, 2000
and January 1, 2000, respectively. The Company's contributions vest over a
five-year period.
32
SHOE PAVILION, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
9. QUARTERLY FINANCIAL DATA (UNAUDITED)
Net Income
(loss)
Net Per Share
Gross Income ---------------
Sales Profit (loss) Basic Diluted
------- ------ ------ ------ -------
(In thousands, except per share
data)
2000 Quarters
4th Quarter......................... $23,637 $7,137 $ (590) $(0.09) $(0.09)
3rd Quarter......................... 23,148 7,621 389 0.06 0.06
2nd Quarter......................... 24,951 8,551 1,146 0.17 0.17
1st Quarter......................... 19,322 6,087 229 0.03 0.03
1999 Quarters
4th Quarter......................... $21,699 $6,894 $ 385 $ 0.06 $ 0.06
3rd Quarter......................... 18,469 5,961 245 0.04 0.04
2nd Quarter......................... 17,190 6,034 842 0.12 0.12
1st Quarter......................... 14,253 4,646 543 0.08 0.08
33
Item 9--Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
None.
PART III
Item 10--Directors and Executive Officers of the Registrant
The information required by this item is incorporated by reference from the
Company's Definitive Proxy Statement for the Company's 2000 Annual Meeting of
Stockholders under the captions "Election of Directors" and "Section 16(a)
Beneficial Ownership Reporting Compliance." See also Item 1 above.
Item 11--Executive Compensation
The information required by this item is incorporated by reference from the
Company's Definitive Proxy Statement for the Company's 2000 Annual Meeting of
Stockholders under the caption "Executive Compensation."
Item 12--Security Ownership of Certain Beneficial Owners and Management
The information required by this item is incorporated by reference from the
Company's Definitive Proxy Statement for the Company's 2000 Annual Meeting of
Stockholders under the caption "Ownership of Management and Principal
Stockholders."
Item 13--Certain Relationships and Related Transactions
The information required by this item is incorporated by reference from the
Company's Definitive Proxy Statement for the Company's 2000 Annual Meeting of
Stockholders under the captions "Compensation Committee Interlocks and Insider
Participation" and "Transactions with the Company."
PART IV
Item 14--Exhibits, Financial Statement Schedules and Reports on Form 8-K
(a) The following documents are filed as part of this report:
(1) Consolidated Financial Statements of the Company are included in
Part II, Item 8:
Independent Auditors' Report
Consolidated Balance Sheets
Consolidated Statements of Income
Consolidated Statements of Cash Flows
Consolidated Statements of Shareholders' Equity
Notes to Consolidated Financial Statements
(2) Consolidated Supplementary Financial Statement Schedule for the
years ended December 30, 2000 and January 1, 2000:
None.
All other schedules are omitted because of the absence of conditions under
which they are required or because the required information is included in the
consolidated financial statements or notes thereto.
34
(3) Exhibits:
See attached Exhibit Index.
(b) The Company filed the following reports on Form 8-K during the fourth
quarter of 1998:
(1) A report dated December 29, 1998 disclosing a fiscal year end
change.
35
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
Date: March 27, 2001
SHOE PAVILION, INC.
/s/ Dmitry Beinus
By: _________________________________
Dmitry Beinus
Chairman of the Board, President
and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities indicated.
Signature Capacity Date
--------- -------- ----
/s/ Dmitry Beinus Chairman, President and March 27, 2001
_________________________________ Chief Executive Officer
Dmitry Beinus (Principal Executive
Officer)
/s/ John D. Hellmann Vice President, Chief March 27, 2001
_________________________________ Financial Officer
John D. Hellmann (Principal Financial
Officer and Principal
Accounting Officer)
/s/ David H. Folkman Director March 27, 2001
_________________________________
David H. Folkman
/s/ Peter G. Hanelt Director March 27, 2001
_________________________________
Peter G. Hanelt
36
EXHIBIT INDEX
Set forth below is a list of exhibits that are being filed or incorporated
by reference into this Form 10-K:
Exhibit
Number Exhibit
------- -------
2.1 -- Exchange Agreement dated February 23, 1998 by and among Shoe
Pavilion, Inc., Shoe Inn, Inc. and Dmitry Beinus (Incorporated by
reference from Exhibit 2.1 to Registration Statement
No. 333-41877).
3.1 -- Certificate of Incorporation of the Registrant (Incorporated by
reference from Exhibit 3.1 to Registration Statement No. 333-
41877).
3.2 -- Bylaws of the Registrant (Incorporated by reference from Exhibit
3.2 to Registration Statement No. 333-41877).
4.1 -- Specimen Common Stock Certificate (Incorporated by reference from
Exhibit 4.1 to Registration Statement No. 33-41877).
10.1 -- Lease Agreement between Lincoln-Whitehall Pacific, LLC and Shoe
Inn, Inc. dated October 28, 1996 (Incorporated by reference from
Exhibit 10.1 to Registration Statement No. 333-41877).
10.2 -- First Amendment to Lease Agreement between Lincoln-Whitehall
Pacific, LLC and Shoe Pavilion Corporation dated September 17,
1998 (Incorporated by reference from Exhibit 10.2 to the Company's
10-K filed March 23, 1999).
10.3 -- Second Amendment to Lease Agreement between Lincoln-Whitehall
Pacific, LLC and Shoe Pavilion Corporation dated January 11, 1999
(Incorporated by reference from Exhibit 10.3 to the Company's 10-K
filed March 23, 1999).
10.4 -- 1998 Equity Incentive Plan with forms of non-qualified and
incentive stock option agreements (Incorporated by reference from
Exhibit 10.2 to Registration Statement No. 333-41877).
10.5 -- Directors' Stock Option Plan with form of stock option agreement
(Incorporated by reference from Exhibit 10.3 to Registration
Statement No. 333-41877).
10.6 -- Credit Agreement dated December 1, 1998 between Shoe Pavilion
Corporation and Wells Fargo Bank, National Association
(Incorporated by reference from Exhibit 10.6 to the Company's
10-K filed March 23, 1999).
10.7 -- Revolving Line of Credit Note dated December 1, 1998 between Shoe
Pavilion Corporation and Wells Fargo Bank, National Association
(Incorporated by reference from Exhibit 10.7 to the Company's 10-K
filed March 23, 1999).
10.8 -- Continuing Guaranty dated December 1, 1998 between Shoe Pavilion,
Inc. and Wells Fargo Bank, National Association (Incorporated by
reference from Exhibit 10.8 to the Company's 10-K filed March 23,
1999).
10.9 -- Tax Allocation Agreement dated February 18, 1998 between Shoe Inn,
Inc. and Dmitry Beinus (Incorporated by reference from Exhibit
10.5 to Registration Statement No. 333-41877).
10.10 -- Agreement of Purchase and Sale dated as of April 14, 1997 among
Standard Shoe Company and Shoe Inn, Inc. (Incorporated by
reference from Exhibit 10.6 to Registration Statement
No. 333-41877).
10.11 -- Form of Indemnification Agreement between the Registrant and
certain of its officers and directors (Incorporated by reference
from Exhibit 10.7 to Registration Statement No. 333-41877).
10.12 -- License Agreement dated July 7, 1999 between Richman Gordman 1/2
Price Stores, Inc. and Shoe Pavilion, Inc. (Incorporated by
reference from Exhibit 10.1 to the Company's 10-Q filed
August 5, 1999).
(continued on following page)
EXHIBIT INDEX
(continued from previous page)
Exhibit
Number Exhibit
------- -------
10.13 -- First Amendment to License Agreement between Richman Gordman 1/2
Price Stores, Inc. and Shoe Pavilion, Inc. dated December 20, 1999
(Incorporated by reference from Exhibit 10.13 to the Company's 10-
K filed March 27, 2000).
10.14 -- First Amendment to Credit Agreement between Shoe Pavilion
Corporation and Wells Fargo Bank, National Association dated
October 30, 1999 (Incorporated by reference from Exhibit 10.14 to
the Company's 10-K filed March 27, 2000).
10.15 -- Second Amendment to Credit Agreement between Shoe Pavilion
Corporation and Wells Fargo Bank, National Association dated
February 8, 2000 (Incorporated by reference from Exhibit 10.15 to
the Company's 10-K filed March 27, 2000).
10.16 -- Third Amendment to Credit Agreement between Shoe Pavilion
Corporation and Wells Fargo Bank, National Association dated March
9, 2000 (Incorporated by reference from Exhibit 10.16 to the
Company's 10-K filed March 27, 2000).
10.17 -- Credit Agreement dated February 27, 2001 between Shoe Pavilion
Corporation and Wells Fargo Bank, National Association.
21 -- List of Subsidiaries
23 -- Independent Auditors' Consent