-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, VCp3Qf8G4vRWhFWHt51sNIfxGBNFOBfzJEjmyRHseGcHZd75LW9G9k33zXKl7/fT L4vSsvcrQK58lTNqdFKDCA== 0000895447-98-000006.txt : 19980504 0000895447-98-000006.hdr.sgml : 19980504 ACCESSION NUMBER: 0000895447-98-000006 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 19980131 FILED AS OF DATE: 19980430 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: SHOE CARNIVAL INC CENTRAL INDEX KEY: 0000895447 STANDARD INDUSTRIAL CLASSIFICATION: RETAIL-SHOE STORES [5661] IRS NUMBER: 351736614 STATE OF INCORPORATION: IN FISCAL YEAR END: 0131 FILING VALUES: FORM TYPE: 10-K405 SEC ACT: SEC FILE NUMBER: 000-21360 FILM NUMBER: 98606928 BUSINESS ADDRESS: STREET 1: 8233 BAUMGART ROAD CITY: EVANSVILLE STATE: IN ZIP: 47711 BUSINESS PHONE: 8128674039 MAIL ADDRESS: STREET 1: 8233 BAUMGART RD CITY: EVANSVILLE STATE: IN ZIP: 47711 10-K405 1 1997 10-K UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, DC 20549 FORM 10-K (Mark One) [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended: January 31, 1998 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from ___________ to __________ Commission file number: 0-21360 SHOE CARNIVAL, INC. (Exact name of registrant as specified in its charter) Indiana 35-1736614 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 8233 Baumgart Road Evansville, Indiana 47711 (Address of principal executive offices) (Zip Code) (812) 867-6471 (Registrant's telephone number, including area code) Securities registered pursuant to Section 12(b)of the Act: NONE Securities registered pursuant to Section 12(g)of the Act: COMMON STOCK, WITHOUT PAR VALUE 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 of Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of the 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 [ X ] Aggregate market value of the voting stock held by non-affiliates of the Registrant based on the last sale price for such stock at March 31, 1998 was approximately $85,830,215 (assuming solely for the purposes of this calculation that all Directors and executive officers of the Registrant are "affiliates"). Number of Shares of Common Stock, without par value, outstanding at April 17, 1998 was 13,120,344. DOCUMENTS INCORPORATED BY REFERENCE Certain information contained in the Definitive Proxy Statement for the Annual Meeting of Shareholders of Registrant to be held on June 11, 1998 is incorporated by reference into Part III hereof. Shoe Carnival, Inc. Evansville, Indiana Annual Report to Securities and Exchange Commission January 31, 1998 PART I ITEM 1. BUSINESS General Shoe Carnival, Inc. (the "Company") is a high volume, value-oriented retailer of family footwear operating predominately in the Midwest, South and Southeastern regions of the United States. The Company adheres to a highly promotional marketing concept that enables it to be competitive in the retail markets it enters. The Company's stores are characterized by a high energy atmosphere designed to encourage customer participation and provide a fun and exciting shopping experience. Business Strategy The Company's goal is to establish itself as one of the nation's leading family footwear retailers and the dominant footwear retailer in each market it serves. To accomplish its goal, the Company provides a selection and variety of footwear normally associated with a "category killer" superstore in an exciting retail environment. In the 52 week period ended January 31, 1998 ("fiscal 1997"), the average size, annual sales and sales per square foot for Shoe Carnival's stores open the full year were approximately 11,100 square feet, $2.7 million and $245, respectively, each substantially above the industry averages. Management believes that shoppers prefer the value, convenience and selection of the superstore retail format and that, as a result, superstores will continue to grow and increase their market share at the expense of department stores, mass merchandisers and traditional specialty retailers. This trend is evidenced by the acceptance of superstores in other specialty niches, including, among others, toys, office products, consumer electronics and do-it-yourself home improvement. Management believes that the Company differentiates itself from its competitors and gains significant competitive advantage through certain business strategies which include: Distinctive Retail Approach. The Company's stores are larger than traditional shoe stores. The Company seeks to create a carnival-like atmosphere in each of its stores by decorating with bright lights, colors and neon signs, and by featuring an in-store "barker" who advertises current specials, organizes contests and games, and assists and educates customers with the features and location of merchandise. This exciting in-store atmosphere is designed to encourage customer participation and spontaneity, producing a sense of urgency to buy. Management believes this highly promotional atmosphere results in various competitive advantages, including increased multiple unit sales, the building of a loyal repeat customer base and the creation of word-of-mouth advertising. Broad Merchandise Assortment. The Company's merchandising strategy is to provide superior value to its customers by offering a broad selection of competitively priced name brand and private label merchandise. The average store carries over 29,500 pairs of shoes in four general categories -- men's, women's, children's and athletics. The Company buys dress, casual and athletic shoes as well as boots and sandals from a wide variety of vendors. In addition to footwear, Shoe Carnival stores also carry selected accessory items complimentary to the sale of footwear. Emphasis on Value. Management believes that its wide selection of popular styles of name brand merchandise at competitive prices generates broad customer appeal. To supplement its name brand offerings, the Company has established a private label program that offers the consumer quality footwear at lower prices than name brand merchandise. Sales of private label merchandise generally result in higher gross profit margins for the Company than sales of name brand merchandise. The Company believes that providing a wide selection of competitively priced name brand and quality private label footwear provides superior value to its customers. 2 Low Operating Costs. The Company's operating methods, cost control programs and store locations are all designed to minimize operating costs. Merchandise in the Company's stores is displayed by style and color on the selling floor, enabling customers who so choose to serve themselves. This approach, in conjunction with wage and inventory control programs, results in lower labor costs than those incurred by department stores and traditional shoe stores. In addition, the Company prefers to locate stores predominantly in strip shopping centers, as opposed to enclosed malls, to take advantage of the generally lower occupancy costs. Competitive Pricing. The Company, as a result of its low-cost operating structure and high volume, is able to price its merchandise below that of traditional department stores and shoe store chains. During 1996 the Company eliminated the policy of "lowest price guarantee" on any shoe. Instead, the Company has focused on offering value to customers with specialized promotions, competitive pricing and a vast selection of name brand and private label merchandise. Emphasis on Information Technology. The Company has invested significant resources in information technology. The Company's systems are designed to provide management with the timely information necessary to monitor and control all phases of operations. Management is planning further technological enhancements related to point-of-sale, purchasing and inventory control, labor management and distribution, which should enable the Company to better manage its operations. Expansion Strategy The majority of the Company's sale and earnings growth is expected to result from the opening of new stores. The opening of new stores will be dependent upon, among other things, the availability of desirable locations, the negotiation of acceptable lease terms and general economic and business conditions affecting consumer spending in the areas the Company targets for expansion. The Company's strategy is to expand into new markets and to consolidate and improve its market share position in its existing markets through the clustering of stores. Clustering involves the operation of multiple locations in a particular metropolitan area or in several smaller markets located in reasonable proximity to one another. Management believes this strategy enables the Company to obtain economies of scale with respect to advertising, distribution and management costs. The Company plans to open 15-20 stores in 1998. Thereafter, the Company intends to expand at a rate of approximately 15% to 20% per year. During fiscal 1997 and 1998, new stores are expected to be located primarily in the North Central, Midwest, Midsouth and Southeast. The Company intends to enter larger markets (populations greater than 400,000) by opening two or more stores at approximately the same time. In smaller markets that can only support a single store, the Company will seek locations in reasonably close proximity to other Company markets. This strategy allows for more efficient management and reduces distribution costs. In addition to new market expansion and consistent with its clustering approach, the Company has targeted certain of its existing markets for additional new stores when appropriate store locations become available. Although opening new stores in existing markets may adversely affect the sales of existing stores, management believes that cost efficiencies and overall incremental sales gains should more than offset any detrimental effect. Prior to entering a new market, the Company performs a market, demographic and competition analysis to evaluate the suitability of the potential market. Potential store site selection criteria include, among other factors, market demographics, traffic counts, the retail mix of a potential strip center, visibility within the center and from major thoroughfares, overall retail activity of the area and proposed lease terms. The time required to open a store after signing a lease depends primarily upon the landlord's ability to deliver the premises to the Company. Upon acceptance of the premises from the landlord, the Company can generally open a store within 30 to 45 days. Merchandising The Company's merchandising strategy is designed to provide a very large selection of quality family footwear at a price competitive with or slightly below that of competitors. The Company's stores carry a broad assortment of current season name brand footwear, supplemented with the Company's private label merchandise and select name brand close-out merchandise. 3 The combination of name brand and private label footwear gives the Company a merchandise assortment that enables it to compete effectively. The mix of merchandise and the name brands offered in a particular store are based upon the demographics of each market, among other factors. The Company typically offers lower prices on both name brand and private label merchandise than department stores and traditional shoe stores. Furthermore, the Company competes with off-price retailers, mass merchandisers and discount stores by offering a wider and deeper selection of merchandise at competitive prices. The Company's stores also carry selected other merchandise such as handbags, wallets, shoe care items, socks and sports apparel. Women's. The women's department offers current season name brand, branded close-out and private label merchandise providing a wider selection than that of most of the Company's competitors. This department is further segmented into women's dress shoes, casual shoes, sandals, boots and sport shoes, thus covering all facets of a woman's footwear needs. Men's. The men's department offers primarily name brand footwear and is segmented into men's dress shoes, casual shoes, sandals and boots. The Company's stores offer a complete assortment of men's footwear at affordable prices. As in the women's department, this assortment is supplemented with name brand close-outs and private label products. Children's. Children's footwear is segmented into dress shoes, casual shoes, boots, athletic shoes, sandals and infant shoes, again offering a complete selection of footwear for the child. Approximately 83% of the children's business is done in the athletic shoe category. Athletics. The men's and women's athletic business is divided into a number of buying groups representing a complete assortment of athletic footwear. The Company carries court shoes, fitness and aerobic shoes, leisure shoes, walking shoes, running shoes and many specialty shoes such as cleats and soccer shoes. The table below sets forth the Company's percentage of sales by product category for fiscal 1997, 1996 and 1995. 1997 1996 1995 ------ ------ ------ Women's 27.2% 27.2% 28.6% Men's 16.9 17.7 17.8 Children's 16.4 16.4 15.0 Athletic 34.6 34.0 33.3 Accessories and Miscellaneous Items 4.9 4.7 5.3 ------ ------ ------ 100.0% 100.0% 100.0% ====== ====== ====== Pricing The Company's pricing strategy is designed to emphasize value. Initial pricing decisions are guided by gross profit margin targets which vary by merchandise category and depend on whether the item is name brand or private label merchandise. Markdowns are centrally managed by the buying staff through the use of weekly sales and inventory analysis generated by the Company's management information system. In-store signage is used extensively to highlight special promotional markdowns and to advertise markdowns to meet or beat competitors' sale prices. Advertising and Promotion In-store promotions are a key ingredient in the Company's marketing effort. Although most in-store promotions are pre-planned, store managers are encouraged to use their own creativity in devising on-the-spot promotional activities, such as customer contests and games. The Company has several standardized promotions, including a Spin-N-Win(TM) wheel, where a customer can win instant discounts, and a "Money Machine," where randomly selected customers attempt to catch cash and coupons during a 30-second period inside a transparent booth where cash and coupons are blown furiously around them. Both of these promotions exemplify the Company's emphasis on fun and excitement in order to enhance the customer's total shopping experience. 4 The Company uses various forms of media advertising in conjunction with its extensive in-store promotions. The focus of the Company's media advertising is to communicate the exceptional value offered by the Company on name brand and private label footwear. Print ads typically display a selection of special sale items or desirable new products. Radio and television spots utilize an entertaining format to capture the consumers attention while highlighting on sale items or special promotions. The Company directs approximately 70% of its total advertising budget to television and radio, but also utilizes print media (including newspaper inserts and direct mail) and outdoor advertising. A special effort is made to utilize the cooperative advertising dollars offered by vendors whenever possible. By widely advertising through newspaper, television and radio prior to a grand opening, the Company strives to make each new store opening a major retail event. Major promotions during the grand openings and peak selling periods allow customers to win prizes such as cruises, computers, merchandise or cash. Store Operations Management of store operations is the responsibility of the Company's Senior Vice President - Store Operations, who is assisted by regional managers and the individual store managers. The Company's store management structure is flat relative to most other retailers. This permits the Company to reduce management expense by eliminating the district manager position and delegating more responsibility to store managers. Each regional manager is responsible for the operation of between five and thirteen stores and is required to visit each store periodically, concentrating more heavily on underperforming stores. Regional managers meet collectively each quarter with the Senior Vice President - - Store Operations and other members of senior management to discuss Company strategies, merchandise, advertising, financial performance and personnel requirements. Each store has a store manager and one to three assistant managers, depending on the sales volume of the store. The sales staff ranges from 6 to 68 employees depending on the size of the store and the time of year. Store managers and most assistant managers are paid a salary, while all other store employees are paid on an hourly basis. The Company provides an incentive compensation plan for virtually all employees. Regional and store manager incentive plans are based primarily upon the sales and profitability of their respective stores as compared to defined goals. Assistant store managers and other store employees earn incentive compensation based on the store exceeding inventory shrinkage goals. Administrative functions are centrally controlled from corporate headquarters. These functions include accounting, purchasing, store maintenance, information systems, advertising, distribution and pricing. Regional and store managers are expected and encouraged to provide feedback to all corporate departments to improve efficiencies. Regional and store managers are charged with making merchandising decisions necessary to maximize sales and profits primarily though merchandise placement, signage and timely clearance of slower selling items. The Company maintains inventory shrinkage rates (.4% of sales in fiscal 1997) substantially below the retail industry average. Management attributes this success to an expanded in-store loss prevention staff, improved information reporting and surveillance systems in many of the Company's stores. Management also believes that tying incentive compensation for store employees to the achievement of targeted shrinkage levels raises employee awareness of loss prevention. Store Location and Design The number of stores opened and closed for fiscal years 1997, 1996 and 1995 are as follows: Fiscal Year 1997 1996 1995 ------ ------ ------ Stores open at beginning of year 93 95 87 Opened during year 4 5 9 Closed during year 5 7 7 ------ ------ ------ Stores open at end of year 92 93 95 ====== ====== ====== 5 At January 31, 1998, the Company had 92 stores located in 16 states, primarily in the Midwest, South and Southeastern regions of the United States. Although three stores are located in enclosed malls, the Company prefers strip shopping center locations, where occupancy costs are typically lower and the Company enjoys greater operating freedom to implement its non-traditional retail methods. Management feels that most consumers enjoy the convenience offered by strip shopping centers as opposed to enclosed malls. All of the Company's stores are leased rather than owned. Management believes that the flexibility afforded by leasing allows the Company to avoid the inherent risk of owning real estate, particularly with respect to underperforming stores. In a particular market, potential store site selection criteria include, among other factors, market demographics, traffic counts, the retail mix of a potential retail strip center, visibility within the center and from major thoroughfares, overall retail activity of the area and proposed lease terms. The Company's stores are designed and fixtured to reflect the high energy level of its retail concept and to convey a carnival-like atmosphere. Stores are typically equipped with a sound system, microphone, "Money Machine" and Spin-N-Win(TM) wheel. Open-stock inventories, neon signs, flashing colored lights and large mirrors, striking fixtures and colorful carpet are utilized to make the stores appear larger and more exciting. Merchandise is typically displayed within a store by category, with athletic footwear (and licensed team sports apparel in certain stores) generally located in the center of the store to provide a transition between women's and men's footwear. Checkout counters are located at the front of each store, supermarket style, to facilitate high-volume throughput and minimize inventory shrinkage. The average store has approximately five checkout lanes. The Company has utilized a new store prototype design in all new and remodeled stores since the fourth quarter of 1995. In order to take advantage of the positive effects of the new store prototype design, the Company expended significant resources in 1996 and 1997 to remodel virtually all of the Company's existing stores. The design emphasizes the entertainment aspect of the store concept and enhances the ease of shopping by widening the aisles, adds additional seating and merchandise displays, improves the graphics identifying the various departments and opens the sitelines throughout the store. As of January 31, 1998, the Company's stores averaged approximately 11,100 square feet, ranging in size from 6,600 to 26,500 square feet, except for an atypical mall store of approximately 2,100 square feet. The size of the new prototype stores have increased from the Company's prior prototype of 10,000 square feet to between 12,000 and 18,000 square feet depending upon, among other factors, the location of the store and the population base the store is expected to service. The sales area of most stores is approximately 85% of the gross store size. Capital expenditures for new stores are expected to average approximately $400,000, including point-of-sale equipment which is generally acquired through equipment leasing transactions. The average inventory in a new store is expected to range from $550,000 to $850,000, depending on the size and sales expectation of the store and the timing of the new store opening. Pre-opening expenses, such as advertising, salaries, supplies and utilities are expected to average approximately $60,000 per store. Distribution The Company operates a single distribution facility of 108,000 square feet in Evansville, Indiana. Management anticipates that with additional investment in technology and a planned 45,000 square foot expansion of the existing structure, the facility will be able to meet the distribution needs of the Company for at least the next 24 months. The distribution center processes virtually all merchandise prior to shipping to the stores. At a minimum, this includes count verification, price and bar code labeling of each unit, redistribution of an order into size assortments and allocation of shipments to individual stores. Once a distribution order form is received from the buying staff, the remainder of the distribution process, including packing, allocating, storing and shipping is essentially paperless. Merchandise is shipped to each store from one to two times a week, depending on store volume, proximity to other stores and proximity to the distribution center. The majority of shipments are handled by a dedicated carrier, with occasional use of common carriers. 6 Management Information Systems The Company has devoted significant resources to expand its sophisticated information technology systems. The corporate mainframe is connected to every store via a Wide Area Network, providing up-to-date sales and inventory information as required. Each store has an independent point-of-sale controller, with two to 13 point-of-sale terminals per store. To provide maximum flexibility and maintain data integrity, the Company's mainframe systems are based upon relational database technology. The Company's distribution facility utilizes a spread spectrum radio frequency network to assure accurate, real-time information throughout the distribution operation. Each member of the buying and distribution staff has on-line access to up-to-date sales and inventory information broken down by store, style, color, size and width. Additional data analysis can be quickly provided on demand by using either a fourth generation language programming tool or personal computer tools that access the Company's database. State of the art point-of-sales systems utilize bar code technology to capture sales, gross margin and inventory information. The system provides, in addition to other features, full price management (including price look-up), promotional tracking capabilities (in support of the spontaneous nature of the in-store price promotions), real-time margin analysis by product category at the store level, check approval and customer tracking. Competition The retail footwear business is highly competitive. The Company believes that the principal competitive factors in its industry are merchandise selection, price, fashion, quality, location, store environment and service. The Company competes primarily with department stores, shoe stores, sporting goods stores and mass merchandisers. Many of the Company's competitors are significantly larger and have substantially greater financial and other resources than the Company. However, management believes that its distinctive retail format, in combination with its wide merchandise selection, competitive prices and low operating costs, enable the Company to compete effectively in each market that it enters. Employees At January 31, 1998, the Company had approximately 1,735 employees, of which approximately 875 were employed on a part-time or seasonal basis. The number of employees fluctuates during the year primarily due to seasonality. None of the Company's employees is represented by a labor union. Management attributes a large portion of the Company's success in various areas of cost control to its inclusion of virtually all employees in incentive compensation plans. The Company also contributes all or a portion of the cost of medical, disability and life insurance coverage for those employees who are eligible to participate in Company sponsored plans. All employees also receive discounts on Company merchandise. The Company considers its relationship with its employees to be satisfactory. Trademarks The Company owns the following federally registered trademarks and servicemarks: Shoe Carnival(R), The Carnival(R), Nuff Said(R), Donna Lawrence(R), Oak Meadow(R), Victoria Spenser(R), Chase and Brittany's(R), Via Nova(R), Fresh Stuff(R), Innocence(R) and Carnival Lites(R). The Company believes its marks are valuable and, accordingly, intends to maintain its marks and the related registrations. The Company is not aware of any pending claims of infringement or other challenges to the Company's right to use its marks. 7 ITEM 2. PROPERTIES The Company leases all existing stores and intends to lease all future stores. All leases for existing stores provide for fixed minimum rentals and most provide for contingent rental payments based upon various specified percentages of sales above minimum levels. Certain leases also contain escalator clauses for increases in minimum rentals, operating costs and taxes. The Company owns its headquarters and distribution center which are located at 8233 Baumgart Road, Evansville, Indiana. See ITEM 1 "Business--Distribution." ITEM 3. LEGAL PROCEEDINGS The Company is involved in various legal proceedings incidental to the conduct of its business. Management does not expect that any such proceedings will have a material adverse effect on the Company's financial position and results of operations. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS The Company did not submit any matters to a vote of security holders during the fourth quarter of the 1997 fiscal year. 8 Executive Officers of the Company Name Age Position - ------------------ --- ----------------------------------------------- J. Wayne Weaver 63 Chairman of the Board and Director Mark L. Lemond 43 President, Chief Executive Officer and Director Timothy T. Baker 41 Senior Vice President - Store Operations Clifton E. Sifford 44 Senior Vice President - General Merchandise Manager Larry L. Linville 55 Vice President - Information Systems W. Kerry Jackson 36 Vice President - Chief Financial Officer and Treasurer David A. Kapp 34 Vice President - Inventory Controller and Secretary Mr. Weaver is the Company's principal shareholder and has served as Chairman of the Board of the Company since March 1988. From 1978 until February 2, 1993, Mr. Weaver had served as president and chief executive officer of Nine West Group Inc., a designer, developer and marketer of women's footwear. He has over 40 years of experience in the footwear industry. Mr. Weaver is a former director of Nine West Group Inc. Mr. Weaver serves as chairman and chief executive officer of Jacksonville Jaguars, LTD and chairman and chief executive officer of LC Footwear, Inc. Mr. Lemond has been employed by the Company as President and Chief Executive Officer since September 1996. From March 1988 to September 1996, Mr. Lemond served as Executive Vice President, Chief Financial Officer, Treasurer and Assistant Secretary. On February 3, 1994, Mr. Lemond was promoted to the position of Chief Operating Officer. Mr. Lemond has served as a director of the Company since March 1988. Prior to March 1988, he served in similar officer capabilities with Russell's Shoe Biz, Inc. Prior to joining Russell's Shoe Biz, Inc. in 1987, Mr. Lemond was a partner with a public accounting firm. He is a Certified Public Accountant. Mr. Baker has been employed by the Company as Vice President - Store Operations since May 1992. Prior to that time, he served as a Regional Manager of the Company. Mr. Baker was promoted to Senior Vice President on March 25, 1994. From 1983 to June 1989, Mr. Baker held various retail positions with Payless ShoeSource. Mr. Sifford has been employed by the Company as Senior Vice President - General Merchandise Manager since April 13, 1997. Prior to joining the Company and for at least the past five years, Mr. Sifford served as merchandise manager-shoes for Belk Store Services, Inc. Mr. Linville has been employed by the Company as Vice President - Management Information Systems since August 1994. From February 1990 to February 1994, he served as vice president of information systems for Dollar General Corporation. Prior to 1990, Mr. Linville was employed in various management positions within the information systems areas of Hecks Department Stores (2 years) and Service Merchandise, Inc. (11 years). Mr. Jackson has been employed by the Company as Vice President - Chief Financial Officer and Treasurer since September 1996. From January 1993 to September 1996 Mr. Jackson served as Vice President - Controller and Chief Accounting Officer. Prior to January 1993, Mr. Jackson held various accounting positions with the Company. Prior to joining the Company in 1988, Mr. Jackson was associated with a public accounting firm. He is a Certified Public Accountant. Mr. Kapp has been employed by the Company since March 1988, most recently as Vice President - Inventory Controller and Secretary. Prior to assuming his current position, Mr. Kapp held various accounting and retail positions with the Company and its predecessor. He is a Certified Cash Manager. Executive officers of the Company serve at the discretion of the Board of Directors. There is no family relationship between any of the directors or executive officers of the Company. (Pursuant to General Instruction G(3) of Form 10-K, the foregoing information is included as an unnumbered Item in Part I of this Annual Report in lieu of being included in the Company's Proxy Statement for its 1998 Annual Meeting of Shareholders.) 9 PART II ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS The Common Stock has been quoted on the Nasdaq Stock Market under the trading symbol "SCVL" since March 16, 1993. The quarterly high and low trading prices for 1997 and 1996 are as follows: High Low ------ ------ Fiscal Year 1997 First Quarter $ 6.50 $ 4.38 Second Quarter 11.00 6.25 Third Quarter 11.50 6.88 Fourth Quarter 9.63 7.50 Fiscal Year 1996 First Quarter $ 4.88 $ 2.75 Second Quarter 5.88 3.13 Third Quarter 5.63 3.38 Fourth Quarter 6.13 3.63 On March 23, 1993, the Company consummated its initial public offering of 3,622,500 shares of Common Stock at a price to the public of $8.67 per share. As of April 17, 1998, there were approximately 356 holders of record of the Common Stock. The Company does not currently intend to pay cash dividends on its Common Stock in the foreseeable future. The payment of any future dividends will be at the discretion of the Company's Board of Directors and will depend upon, among other things, future earnings, operations, capital requirements, the general financial condition of the Company and general business conditions. The Company's credit agreement with various banks limits the payment of dividends (except for any stock split or stock dividends) to 30% of the prior year's net income. No unregistered equity securities were sold by the Company during fiscal 1997. 10 ITEM 6. SELECTED FINANCIAL DATA
(In thousands, except share and operating data) Fiscal years (1) 1997 1996 1995 1994 1993 -------- -------- -------- -------- -------- Income Statement Data: Net sales $246,520 $233,945 $228,263 $214,528 $157,329 Cost of sales (including buying, distribution and occupancy costs) 173,953 168,814 176,019 158,614 111,666 -------- -------- -------- -------- -------- Gross profit 72,567 65,131 52,244 55,914 45,663 Selling, general and administrative expenses 59,438 57,405 58,946 52,907 35,370 Restructuring (credit) charge (474) 3,282 267 -------- -------- -------- -------- -------- Operating income (loss) 13,129 8,200 (9,984) 2,740 10,293 Interest expense 912 1,242 1,626 665 726 -------- -------- -------- -------- -------- Income (loss) before income taxes 12,217 6,958 (11,610) 2,075 9,567 Income tax expense (benefit) 4,826 2,818 (4,420) 874 4,464 -------- -------- -------- -------- --------- Net income (loss) $ 7,391 $ 4,140 $ (7,190) $ 1,201 $ 5,103 ======== ======== ======== ======== ======== Net income (loss) per share: Basic (2) $ .57 $ .32 $ (.55) $ .09 $ .55 (3) Diluted (2) .56 .32 (.55) .09 .55 (3) Average shares outstanding: Basic 13,049 13,023 13,019 13,024 10,689 Diluted 13,238 13,029 13,031 13,051 10,759 - -------------------------------------------------------------------------------- Selected Operating Data (4): Stores open at end of period 92 93 95 87 57 Square footage of store space at year end (000's) 1,021 1,026 1,024 939 640 Average sales per store(000's)$ 2,720 $ 2,543 $ 2,497 $ 3,145 $ 3,454 Average sales per square foot $ 245 $ 233 $ 230 $ 277 $ 291 Comparable store sales 6.1% (1.1%) (10.0%) (3.4%) 4.4% - -------------------------------------------------------------------------------- Balance Sheet Data: Working capital $ 48,889 $ 45,090 $ 50,206 $ 60,766 $ 51,789 Total assets 95,554 93,926 102,265 105,155 79,619 Long-term debt and other indebtedness 6,133 9,621 18,922 20,597 768 Total shareholders' equity 71,609 63,772 59,571 67,577 66,332 - -------------------------------------------------------------------------------- (1) On February 9, 1995, the Company's Board of Directors approved a change in the fiscal year to a 52/53 week year ending on the Saturday closest to January 31. Unless otherwise stated, references to years 1997, 1996, 1995, 1994 and 1993 relate respectively to the fiscal years ended January 31, 1998, February 1, 1997, February 3, 1996, December 31, 1994 and January 1, 1994. Fiscal year 1995 consisted of 53 weeks and the other fiscal years consisted of 52 weeks. The Company recorded a net loss of $816,000 for the four week transition period ended January 28, 1995. (2) Per share data have been restated for the adoption of SFAS 128. (3) Pro forma Income Statement Data: Earnings per share for 1993 of $.55 is based on net income of $5,905. The pro forma adjustments made to historical net income and weighted average shares outstanding were (i) the reduction of interest expense of $113,000 in 1993 that would have resulted from the repayment of the $6.5 million subordinated notes to the Company's principal shareholder, (ii) the issuance of the number of shares (749,711) sold by the Company at the initial offering price of $8.67 per share that would have been necessary to fund such repayment as if the initial offering had occurred on January 2, 1993, and (iii) federal and state income taxes (assuming an effective tax rate of 39% for 1993) as if the Company had been a C Corporation for all of 1993, but excludes the impact of the non-recurring charge relating to the change in the tax status of the Company from an S Corporation to a C Corporation, which resulted in an increase in income tax expense of $888,000 in 1993 pursuant to the provisions of SFAS No. 109. Pro forma income taxes were $3,775,000 in 1993. Supplemental Pro forma net income per share is $.54 in 1993. (4) Selected Operating Data has been adjusted to a comparable 52 week basis for 1995.
11 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The Company's fiscal year consists of a 52/53 week period ending on the Saturday closest to January 31. Unless otherwise stated, references to the years 1997, 1996 and 1995 relate respectively to the fiscal years ended January 31, 1998, February 1, 1997 and February 3, 1996. Fiscal year 1995 consisted of 53 weeks and the other fiscal years consisted of 52 weeks. Overview During the past two years, management has enacted a plan to improve the Company's financial performance. This plan included certain key strategic initiatives designed to change the operation of the Company's stores and merchandising efforts. These initiatives are interrelated in that the effective execution of each is dependent upon the effective execution of the others. Close Unprofitable Stores Seven poor performing stores were closed in 1996 and five stores were closed in 1997. These 12 stores contained an aggregate of 117,000 square feet, an average of 9,750 square feet per store. Upgraded Store Design A new store design was developed, upgrading the store look in order to eliminate Shoe Carnival's deep discount image. During 1996 and 1997, 74 existing stores were retrofitted with most elements of this new design. Additionally, to allow for the "showcasing" of merchandise, new visual merchandising techniques were introduced in nearly all stores. The prototype store design now contains approximately 12,000 square feet. Enhanced Product Offering The upgraded store design, including significantly improved visual presentation, provided the venue for the introduction of better quality, name brand footwear. The merchandise mix was enhanced with higher quality footwear from existing vendors, as well as the addition of desirable branded merchandise from new vendors. The Company replaced its toy merchandise with handbags, wallets and an expanded selection of shoe care items and socks. Lower Inventory Levels During a two year period, beginning in 1995, inventories on a per-store basis were reduced by approximately 30 percent. This has allowed the Company to reduce the amount of everyday discounting and to focus markdowns on the slowest moving product. Because the Shoe Carnival concept is "open-stock", lower inventory levels, combined with the larger new store design, have made the stores easier to shop. New Stores The Company opened five stores in 1996 and four stores in 1997. These nine new stores contain an aggregate of 111,000 square feet, an average of 12,300 square feet. Each of the new stores opened with the new store design. The Company plans to open 15 to 20 new stores in 1998. It is management's belief that the increase in sales productivity and gross profit margins, the leveraging of selling, general and administrative expense and, consequently, the increase in operating margin in 1997 were a direct result of the aforementioned initiatives. 12 Results of Operations The following table sets forth the Company's results of operations expressed as a percentage of net sales for the following fiscal years: 1997 1996 1995 ------ ------ ------ Net sales 100.0% 100.0% 100.0% Cost of sales (including buying, distribution and occupancy costs) 70.6 72.2 77.1 ------ ------ ------ Gross profit 29.4 27.8 22.9 Selling, general and administrative expenses 24.1 24.5 25.8 Restructuring (credit) charge (0.2) 1.5 ------ ------ ------ Operating income (loss) 5.3 3.5 (4.4) Interest expense 0.3 0.5 0.7 ------ ------ ------ Income (loss) before income taxes 5.0 3.0 (5.1) Income tax expense (benefit) 2.0 1.2 (1.9) ------ ------ ------ Net income (loss) 3.0% 1.8% (3.2%) ====== ====== ====== 1997 Compared to 1996 Net Sales Net sales increased $12.6 million to $246.5 million in 1997, a 5.4% increase over net sales of $233.9 million in 1996. The increase was attributable to the opening of four stores in 1997, five stores in 1996 and a comparable store sales increase of 6.1%, partially offset by the closing of five stores in 1997. All major product categories recorded increases in comparable store sales resulting from increases in the average price realized on the sale of merchandise. Average sales per square foot in stores open the full year increased 5.2% to $245 in 1997 from $233 in 1996. The increase was a result of the comparable store increase and the closing of low productivity stores. Sales of private label and non-name brand footwear constituted 16.6% and 17.3% of total footwear sales in 1997 and 1996, respectively. Gross Profit Gross profit increased $7.4 million to $72.6 million in 1997, an 11.4% increase from gross profit of $65.1 million in 1996. The Company's gross profit margin increased to 29.4% from 27.8%. As a percentage of sales, buying, distribution and occupancy costs decreased 0.3% while the merchandise gross profit margin increased by 1.3%. The increase in the gross profit margin was broad based with all major product categories improving over the prior year. During 1996, certain initiatives were undertaken to improve the gross profit margin. These initiatives included raising the average sale price realized on the sale of footwear by reducing the discounting allowed on merchandise sold and improving the quality of footwear sold. Selling, General and Administrative Expenses Selling, general and administrative expenses increased $2.0 million to $59.4 million in 1997 from $57.4 million in 1996. As a percentage of sales, these expenses decreased 0.4% in 1997. The Company implemented a new advertising campaign and consequently increased advertising expenditures in 1997. However, an increase in comparable store sales combined with cost control initiatives in payroll and other cost areas resulted in a decrease in total expenses as a percent of sales. 13 The Company's policy is to expense all non-capital expenditures incurred prior to the opening of a new store in the month of opening. Pre-opening expenses for new stores aggregated approximately $211,000, or 0.1% of sales for four new stores in 1997, and $427,000, or 0.2% of sales for five new stores in 1996. Interest Expense Net interest expense of $912,000 in 1997 resulted from interest expense of $946,000 and interest income of $34,000. Net interest expense of $1.2 million in 1996 resulted from interest expense of $1.3 million and interest income of $43,000. The decrease in interest expense was attributable to lower average debt balances in 1997 and a decrease in the weighted average interest rate on total debt to 7.7% in 1997 from 8.3% in 1996. Income Taxes The reduction in the effective income tax rate for 1997 to 39.5%, as compared to 40.5% in 1996 was primarily due to lower effective income tax rates in certain states. The effective income tax rate in 1997 differed from the statutory rate due primarily to state and local income taxes, net of the federal tax benefit. 1996 Compared to 1995 Net Sales Net sales increased $5.7 million to $233.9 million in 1996, a 2.5% increase over net sales of $228.3 million in 1995. The increase was attributable to the opening of five stores in 1996 and nine stores in 1995, partially offset by a comparable store sales decrease of 1.1% on a 52 week basis, the closing of seven stores in 1996 and sales in the additional week in 1995. Average sales per square foot in stores open the full year increased 1.3% to $233 in 1996 from $230 in 1995. The increase was attributable to the exclusion in 1996 of the eight low productivity stores which were closed in 1996 and 1997. Sales of private label and non-name brand footwear constituted 17.3% and 19.5% of total footwear sales in 1996 and 1995, respectively. During 1995 and 1996, the Company's primary initiatives were to significantly reduce inventory levels and reposition the women's inventory to a more branded focus. These initiatives negatively impacted comparable store sales in the first half of the year, but significantly improved profitability. On a per-store basis, inventories were 18% lower at the beginning of 1996 as compared with inventories at the beginning of 1995. Gross Profit Gross profit increased $12.9 million to $65.1 million in 1996, a 24.7% increase from gross profit of $52.2 million in 1995. The Company's gross profit margin increased to 27.8% from 22.9%. As a percentage of sales, buying, distribution and occupancy costs decreased 0.3% while the merchandise gross profit margin increased by 4.6%. The increase in the merchandise margin was broad based with most categories improving over the prior year due to lower inventories which helped to minimize the exposure to markdowns. The largest increase in gross margin was realized on the sale of women's private label footwear. During 1995, the writedown of inventory to the lower of cost or market reduced gross profit by $1.3 million. Selling, General and Administrative Expenses Selling, general and administrative expenses decreased $1.5 million to $57.4 million in 1996 from $58.9 million in 1995. The Company incurred $2 million less in store selling expenses in the seven stores closed in 1996 as compared with the prior year. However, this decrease was partially offset by the additional costs incurred for the stores opened in 1995 and 1996. Additionally, general and administrative expenses decreased by $600,000 due to tighter expense control. As a percentage of sales, these expenses decreased 1.3% in 1996, primarily as a result of the positive effect of the increase in net sales and lower advertising costs. 14 The Company's policy is to expense all non-capital expenditures incurred prior to the opening of a new store in the month of opening. Pre-opening expenses for new stores aggregated approximately $427,000, or 0.2% of sales for five new stores in 1996, and $605,000, or 0.3% of sales for nine new stores in 1995. Interest Expense Net interest expense of $1.2 million in 1996 resulted from interest expense of $1.3 million and interest income of $43,000. Net interest expense of $1.6 million in 1995 resulted from interest expense of $1.7 million and interest income of $51,000. The decrease in interest expense was attributable to lower average debt balances in 1996 and a decrease in the weighted average interest rate on total debt to 8.3% in 1996 from 8.7% in 1995. Income Taxes The higher effective income tax expense (benefit) rate for 1996 of 40.5%, as compared to (38.1)% for 1995, was primarily the result of unfavorable tax treatment of the 1995 net operating losses in certain states. The effective income tax rate in 1996 differed from the statutory rate due primarily to state and local income taxes, net of the federal tax benefit. Restructuring (see Note 7 of Notes to Financial Statements) During the fourth quarter of 1995, the Company recorded a restructuring charge of $3.3 million to close eight unprofitable stores. The charge included $2.0 million for store closing and lease termination costs and $1.3 million for non-cash write-offs of equipment and leasehold improvements. In 1996 and 1995, the eight stores generated sales of $3.9 million and $9.6 million, and operating losses of $1.7 million and $1.8 million (net of depreciation expense of $127,000 and $375,000), respectively. Pursuant to the 1995 restructuring plan, seven stores were closed in fiscal 1996 and one store was closed in February 1997. The results of operations in the fourth quarter of 1996 includes a credit of $474,000 resulting from the partial reversal of the restructuring expense recorded in 1995. The expense reversal was primarily due to the favorable negotiation of lease termination costs for the stores closed in 1996. Liquidity and Capital Resources The Company's sources and uses of cash are summarized as follows: (000's) Fiscal years 1997 1996 1995 -------- -------- -------- Net income (loss) plus depreciation and amortization $ 13,145 $ 9,376 $ (2,479) Restructuring (credit) charge (474) 3,282 Deferred income taxes 219 1,550 (1,818) Working capital (increases) decreases (3,149) 6,059 8,403 Other operating activities 400 117 45 -------- -------- -------- Net cash provided by operating activities 10,615 16,628 7,433 Net cash used in investing activities (7,469) (6,577) (4,546) Net cash used in financing activities (3,200) (9,326) (3,746) -------- -------- -------- Net (decrease) increase in cash and cash equivalents (54) 725 (859) Cash and cash equivalents at beginning of year 1,625 900 1,759 -------- -------- -------- Cash and cash equivalents at end of year $ 1,571 $ 1,625 $ 900 ======== ======== ======== 15 The Company's primary sources of funds are cash flows from operations and borrowings under its revolving credit facility. Cash provided from operating activities was $10.6 million, $16.6 million and $7.4 million in 1997, 1996 and 1995, respectively. Excluding changes in operating assets and liabilities, $13.8 million and $10.6 million was provided by operating activities in 1997 and 1996, respectively, while $1 million was used in operating activities in 1995. Merchandise inventories remained stable at $59.4 million at January 31, 1998 compared with $59.2 million at February 1, 1997. Cash provided by operating activities was used during 1997 to fund capital expenditures and to reduce long-term debt by $3.5 million. Working capital was $48.9 million at January 31, 1998 and $45.1 million at February 1, 1997. The increase from the prior year was primarily a result of a decrease in accounts payable. The current ratio at January 31, 1998 was 4.3 as compared to 3.5 at February 1, 1997. As a result of a $3.5 million reduction in debt, long-term debt as a percentage of total capital (long-term debt plus shareholders' equity) was reduced to 7.9% at January 31, 1998 as compared to 13.1% at February 1, 1997. Capital expenditures were $7.5 million in 1997, $6.5 million in 1996 and $5.3 million in 1995. These amounts include $162,000 and $257,000 of capital lease obligations incurred in 1996 and 1995, respectively. No capital lease obligations were incurred in 1997. Of the 1997 expenditures, $1.6 million was incurred for new stores and $4.6 million was incurred for improvements to and the remodeling of existing stores. Sixty-six stores were remodeled during 1997 to upgrade the appearance of the stores by incorporating the current store prototype design. The remaining capital expenditures in 1997 were primarily for various store improvements, enhancements to computer systems and distribution equipment. Capital expenditures, including assets acquired through leasing arrangements, are expected to be $14 million to $16 million in fiscal 1998. The actual amount of cash required for capital expenditures depends in part on the number of new stores opened, the amount of lease incentives, if any, received from landlords and the number of stores remodeled. The opening of new stores will be dependent upon, among other things, the availability of desirable locations, the negotiation of acceptable lease terms and general economic and business conditions affecting consumer spending in areas the Company targets for expansion. In 1998, the Company intends to open approximately 15 to 20 stores at an expected aggregate cost of between $6.5 million and $8.5 million. In addition, a major upgrade to the point-of-sale system in most existing stores is expected to cost approximately $3 million. The remaining capital expenditures are expected to be incurred for various store improvements and visual presentation enhancements, upgrades to administrative computer systems and distribution equipment. The Company's current store prototype utilizes between 12,000 and 18,000 square feet depending upon, among other factors, the location of the store and the population base the store is expected to service. Capital expenditures for a new store is expected to average approximately $400,000, including point-of-sale equipment which is generally acquired through equipment leasing transactions. The average inventory investment in a new store is expected to range from $550,000 to $850,000, depending on the size and sales expectation of the store and the timing of the new store opening. Pre-opening expenses, such as advertising, salaries, supplies and utilities, are expected to average approximately $60,000 per store. On a per-store basis, for the four stores opened during 1997, the initial inventory investment averaged $593,000, capital expenditures averaged $286,000 and pre-opening expenses averaged $53,000. At January 31, 1998, the Company's credit facility provided for $35 million in cash advances and letters of credit issuances. Borrowings under the credit facility are based on eligible inventory. Borrowings and letters of credit outstanding under this facility at January 31, 1998 were $5.7 million and $7 million, respectively. On March 31, 1998 the credit agreement was amended primarily to extend the maturity date to March 31, 2000 and to eliminate a covenant that placed limits on capital expenditures. The Company anticipates that its existing cash and cash flow from operations, supplemented by borrowings under its revolving credit line will be sufficient to fund its planned expansion and other operating cash requirements for at least the next 12 months. 16 Impact of Year 2000 The Company has invested significant resources in the latest information technologies over the past five years and therefore has minimized the effect of the Year 2000 problem. Management initiated a company wide program to evaluate all computer systems and applications and has determined the adjustments necessary to become Year 2000 compliant. It is anticipated that existing internal resources will be sufficient to correct any internal systems deficiencies by the end of fiscal 1998 at an estimated cost of $150,000. However, there can be no assurance that the systems of other companies, on which the Company's systems rely, also will be timely corrected, or that any such failure to correct such systems by another company would not have a material adverse effect on the Company's systems. Seasonality and Inflation The Company's quarterly results of operations have fluctuated, and are expected to continue to fluctuate in the future, primarily as a result of seasonal variances and the timing of sales and costs associated with opening new stores. Non-capital expenditures, such as advertising and payroll, incurred prior to the opening of a new store are charged to expense in the month the store is opened. Therefore, results of operations may be adversely affected in any quarter in which the Company opens new stores. The Company has three distinct peak selling periods: Easter, back-to-school and Christmas. Factors That May Effect Future Results This Annual Report contains certain forward looking statements that involve a number of risks and uncertainties. Among the factors that could cause actual results to differ materially are the following: general economic conditions in the areas of the United States in which the Company's stores are located; changes in the overall retail environment and more specifically in the apparel and footwear retail sectors; the impact of competition, weather patterns, consumer buying trends and the ability of the Company to identify and respond to emerging fashion trends; the availability of desirable store locations and management's ability to negotiate acceptable lease terms and open new stores in a timely manner; and changes in the political and economic environments in the People's Republic of China, where most of the Company's private label products are manufactured, and the continued favorable trade relationships between China and the United States. ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK Not Applicable 17 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA Report of Management Management of the Company is responsible for the preparation, integrity and objectivity of the financial information included in this Annual Report. The financial statements have been prepared in conformity with generally accepted accounting principles and necessarily include amounts which are based upon estimates and judgments by management. Management maintains internal accounting control systems designed to provide reasonable assurance that assets are safeguarded, transactions are executed in accordance with management's authorization and the accounting records may be relied upon for the preparation of financial statements and other financial information. This system of internal controls has been designed and is maintained in recognition of the concept that the cost of controls should not exceed the benefit derived therefrom. The Audit Committee of the Board of Directors meets periodically with management and the independent auditors to review matters relating to the Company's financial reporting, the adequacy of internal control systems and the scope and results of the annual audit. Representatives of the independent auditors have free access to the Audit Committee and the Board of Directors. The Company's financial statements have been audited by Deloitte & Touche LLP, whose report, which follows, expresses an opinion as to the fair presentation of the financial statements and is based on an independent audit performed in accordance with generally accepted auditing standards. Independent Auditors' Report To the Board of Directors and Shareholders of Shoe Carnival, Inc.: We have audited the accompanying balance sheets of Shoe Carnival, Inc., as of January 31, 1998 and February 1, 1997 and the related statements of income, shareholders' equity and cash flows for the years ended January 31, 1998, February 1, 1997 and February 3, 1996. Our audits also included the financial statement schedule listed in the Index at Item 14. These financial statements and financial statement schedule 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 generally accepted auditing standards. 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 our audits provide a reasonable basis for our opinion. In our opinion, such financial statements present fairly, in all material respects, the financial position of Shoe Carnival, Inc., at January 31, 1998 and February 1, 1997, and the results of its operations and its cash flows for the years ended January 31, 1998, February 1, 1997 and February 3, 1996, in conformity with generally accepted accounting principles. Also, in our opinion, such financial statement schedule, when considered in relation to the basic financial statements taken as a whole, present fairly in all material respects the information set forth. /s/ Deloitte & Touche LLP Deloitte & Touche LLP Stamford, Connecticut February 26, 1998 (March 31, 1998 as to Note 5) 18
Shoe Carnival, Inc. Balance Sheets January 31, February 1, (In thousands) 1998 1997 ----------- ----------- Assets Current Assets: Cash and cash equivalents $ 1,571 $ 1,625 Accounts receivable 781 916 Notes receivable from shareholders 22 22 Merchandise inventories 59,444 59,240 Deferred income tax benefit 933 400 Other 834 906 ----------- ----------- Total Current Assets 63,585 63,109 Property and equipment-net 31,969 30,817 ----------- ----------- Total Assets $ 95,554 $ 93,926 =========== =========== Liabilities and Shareholders' Equity Current Liabilities: Accounts payable $ 9,521 $ 12,159 Accrued and other liabilities 4,487 5,172 Current portion of long-term debt 688 688 ----------- ----------- Total Current Liabilities 14,696 18,019 Long-term debt 6,133 9,621 Deferred lease incentives 1,308 1,458 Deferred income taxes 1,808 1,056 ----------- ----------- Total Liabilities 23,945 30,154 ----------- ----------- Shareholders' Equity: Common stock, no par value, 50,000 shares authorized 13,088 and 13,032 shares issued and outstanding 0 0 Additional paid-in capital 61,844 61,398 Retained earnings 9,765 2,374 ----------- ----------- Total Shareholders' Equity 71,609 63,772 ----------- ----------- Total Liabilities and Shareholders' Equity $ 95,554 $ 93,926 =========== ===========
See notes to financial statements 19
Shoe Carnival, Inc. Statements of Income (In thousands, except per share data) For fiscal years ended January 31, February 1, February 3, 1998 1997 1996 ----------- ----------- ----------- Net sales $ 246,520 $ 233,945 $ 228,263 Cost of sales (including buying, distribution and occupancy costs) 173,953 168,814 176,019 ----------- ----------- ----------- Gross profit 72,567 65,131 52,244 Selling, general and administrative expenses 59,438 57,405 58,946 Restructuring (credit) charge (474) 3,282 ----------- ----------- ----------- Operating income (loss) 13,129 8,200 (9,984) Interest expense 912 1,242 1,626 ----------- ----------- ----------- Income (loss) before income taxes 12,217 6,958 (11,610) Income tax expense (benefit) 4,826 2,818 (4,420) ----------- ----------- ----------- Net income (loss) $ 7,391 $ 4,140 $ (7,190) =========== =========== =========== Net income (loss) per share: Basic $ .57 $ .32 $ (.55) Diluted .56 .32 (.55) Average shares outstanding: Basic 13,049 13,023 13,019 Diluted 13,238 13,029 13,031
See notes to financial statements 20
Shoe Carnival, Inc. Statements of Shareholders' Equity (In thousands) Additional Retained Common Stock Paid-In Earnings Shares Amount Capital (Deficit) Total ------- ------- -------- --------- -------- Balance at January 28, 1995 13,019 $ 1,302 $ 60,035 $ 5,424 $ 66,761 Net loss (7,190) (7,190) ------ ------- -------- -------- -------- Balance at February 3, 1996 13,019 1,302 60,035 (1,766) 59,571 Employee stock purchase plan purchases 13 61 61 Elimination of par value (1,302) 1,302 Net income 4,140 4,140 ------ ------- -------- -------- -------- Balance at February 1, 1997 13,032 0 61,398 2,374 63,772 Compensation from stock option grant 158 158 Exercise of stock options 41 191 191 Employee stock purchase plan purchases 15 97 97 Net income 7,391 7,391 ------ ------- -------- -------- -------- Balance at January 31, 1998 13,088 $ 0 $ 61,844 $ 9,765 $ 71,609 ====== ======= ======== ======== ========
See notes to financial statements 21
Shoe Carnival, Inc. Statements of Cash Flows (In thousands) Fiscal years ended January 31, February 1, February 3, 1998 1997 1996 ---------- ---------- ---------- Cash Flows From Operating Activities Net income (loss) $ 7,391 $ 4,140 $ (7,190) Adjustments to reconcile net income (loss) to net cash provided by operating activities: Depreciation and amortization 5,754 5,236 4,711 Restructuring (credit) charge (474) 3,282 Loss on retirement of assets 392 305 293 Deferred income taxes 219 1,550 (1,818) Compensation for forgiveness of debt 158 Other (150) (188) (248) Changes in operating assets and liabilities: Merchandise inventories (204) 3,459 7,670 Accounts receivable 137 69 (425) Accounts payable and accrued liabilities (3,153) (1,221) 2,364 Other 71 3,752 (1,206) ---------- ---------- ---------- Net cash provided by operating activities 10,615 16,628 7,433 ---------- ---------- ---------- Cash Flows From Investing Activities Purchases of property and equipment (7,493) (6,294) (5,074) Notes from shareholders 18 34 Lease incentives (303) 494 Other 24 2 ---------- ---------- ---------- Net cash used in investing activities (7,469) (6,577) (4,546) ---------- ---------- ---------- Cash Flows From Financing Activities Borrowings under line of credit 141,600 174,450 138,625 Payments on line of credit (144,400) (183,200) (141,775) Payments on long-term debt (688) (637) (596) Proceeds from issuance of stock 288 61 ---------- ---------- ---------- Net cash used in financing activities (3,200) (9,326) (3,746) ---------- ---------- ---------- Net (decrease) increase in cash and cash equivalents (54) 725 (859) Cash and cash equivalents at beginning of year 1,625 900 1,759 ---------- ---------- ---------- Cash and cash equivalents at end of year $ 1,571 $ 1,625 $ 900 ========== ========== ========== Supplemental disclosures of cash flow information: Cash paid during year for interest $ 953 $ 1,337 $ 1,814 Cash paid (refunded) during year for income taxes 4,350 (2,150) (919) Capital lease obligations incurred 162 257
See notes to financial statements 22 Shoe Carnival, Inc. Notes to Financial Statements Note 1 - Organization and Description of Business Shoe Carnival, Inc. (the "Company"), was incorporated on February 25, 1988 under the name of DAR Group Investments, Inc. The Company changed its name to Shoe Carnival, Inc., on January 15, 1993. The Company's primary activity is the sale of footwear and related products through Company-operated retail stores in the Midwest, South and Southeastern regions of the United States. Note 2 - Summary of Significant Accounting Policies Fiscal Year The Company's fiscal year consists of a 52/53 week period ending on the Saturday closest to January 31. Unless otherwise stated, references to the years 1997, 1996 and 1995 relate respectively to the fiscal years ended January 31, 1998, February 1, 1997 and February 3, 1996. Fiscal year 1995 consisted of 53 weeks and the other fiscal years consisted of 52 weeks. Cash and Cash Equivalents The Company considers all certificates of deposit and other short-term investments with an original maturity date of three months or less to be cash equivalents. Merchandise Inventories Merchandise inventories are stated at the lower of cost or market using the first-in, first-out (FIFO) method. In determining market value, management estimates the future sales price of items of merchandise contained in the inventory as of the balance sheet date. Factors considered in this determination include among others, current and recently recorded sales prices, the length of time product has been held in inventory and quantities of various product styles contained in inventory. The ultimate amount realized from the sale of certain product could differ materially from management's estimates. Property and Equipment Property and equipment is stated at cost. Depreciation and amortization of property, equipment and leasehold improvements are provided on the straight-line method over the shorter of the estimated useful lives of the assets or the applicable lease terms. Lives used in computing depreciation and amortization range from two to 30 years. Expenditures for maintenance and repairs are charged to expense as incurred. Expenditures which materially increase values, improve capacities or extend useful lives are capitalized. Upon sale or retirement, the costs and related accumulated depreciation or amortization are eliminated from the respective accounts and any resulting gain or loss is included in operations. Deferred Lease Incentives All incentives received from landlords for leasehold improvements and fixturing of new stores are recorded as deferred income and amortized over the life of the lease on a straight-line basis as a reduction of rental expense. Revenue Recognition Sales are recorded net of an estimate for returns and allowances. Store Opening Costs Non-capital expenditures incurred prior to the opening of a new store are charged to expense in the month the store is opened. 23 Shoe Carnival, Inc. Notes to Financial Statements - Continued Earnings Per Share In February 1997, The Financial Accounting Standards Board issued SFAS No. 128, "Earnings Per Share," which was adopted by the Company in the fourth quarter of 1997. SFAS No. 128 requires the presentation of basic and diluted earnings per share. Basic earnings per share is based on the weighted average number of common shares outstanding during each period. The diluted earnings per share is based on the weighted average number of common shares outstanding plus dilutive common stock equivalents outstanding during each period. Stock options represent the common stock equivalents for the Company. The adoption of SFAS No. 128 had no material impact on prior years stated earnings per share amounts. Other Accounting Pronouncements In June 1997, The Financial Accounting Standards Board issued SFAS No. 130, "Comprehensive Income" and SFAS No. 131, "Disclosures about Segments of an Enterprise and Related Information". The Company has determined that adoption of these statements, which will be applicable for fiscal 1998, will have no material impact on its financial statements. Use of Management Estimates The preparation of financial statements in conformity with generally accepted accounting principles requires that management make certain 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. The reported amounts of revenues and expenses during the reporting period may be affected by the estimates and assumptions management is required to make. Actual results could differ from those estimates. Note 3 - Property and Equipment-net The following is a summary of property and equipment: (000's) January 31, February 1, 1998 1997 ----------- ----------- Land $ 205 $ 205 Buildings 5,845 5,813 Furniture, fixtures and equipment 25,674 22,052 Leasehold improvements 18,558 16,573 Equipment under capital leases 3,737 3,737 ----------- ---------- Total 54,019 48,380 Less accumulated depreciation and amortization 22,050 17,563 ----------- ----------- Property and equipment-net $ 31,969 $ 30,817 =========== =========== 24 Shoe Carnival, Inc. Notes to Financial Statements - Continued Note 4 - Accrued and Other Liabilities Accrued and other liabilities consisted of the following: (000's) January 31, February 1, 1998 1997 ---------- ----------- Restructuring reserve (See Note 7) $ 318 Advertising 1,515 Employee compensation and benefits $ 1,919 1,179 Sales and use tax 699 597 Accrued rent 884 676 Other 985 887 ---------- ----------- Total accrued and other liabilities $ 4,487 $ 5,172 ========== =========== Note 5 - Long-Term Debt Long-term debt consisted of the following: (000's) January 31, February 1, 1998 1997 ---------- ----------- Revolving line of credit $ 5,700 $ 8,500 Capital lease obligations (see Note 6) 1,121 1,809 ---------- ----------- Total 6,821 10,309 Less current portion 688 688 ---------- ----------- Total long-term debt, net of current portion $ 6,133 $ 9,621 ========== =========== During 1997, the Company had an unsecured $35 million credit agreement (the "Credit Agreement") with a bank group. Borrowings are based on eligible inventory and bear interest, at the Company's option, at the agent bank's prime rate (8.5% at January 31, 1998) or the applicable London Inter-Bank Offered Rate (LIBOR) plus from 1% to 2%, depending on the Company's achievement of certain performance criteria. A commitment fee of .25% per annum is charged on the unused portion of the first $30 million of the bank group's commitment. The Credit Agreement contains various restrictive and financial covenants, including the maintenance of specific financial ratios, and a limitation on the payment of dividends. At January 31, 1998, outstanding letters of credit were approximately $7 million. On March 31, 1998 the credit agreement was amended primarily to extend the maturity date to March 31, 2000 and to eliminate a covenant that placed limits on capital expenditures. Also the interest rate charged on LIBOR borrowings was changed to LIBOR plus from .75% to 2%, depending on the Company's achievement of certain performance criteria. Note 6 - Leases The Company leases all of its retail locations and certain equipment under operating leases expiring at various dates through 2015. Eighty-one leases provide for contingent rental payments of between 2% and 5% of sales in excess of stated amounts. Certain leases also contain escalation clauses for increases in minimum rentals, operating costs and taxes. In addition, the Company leases equipment under capitalized leases expiring at various dates through 2001. 25 Shoe Carnival, Inc. Notes to Financial Statements - Continued Rental expense for the Company's operating leases consisted of: (000's) Fiscal years 1997 1996 1995 ---------- ----------- ---------- Rentals for real property $ 12,210 $ 12,208 $ 12,062 Equipment rentals 393 411 397 ---------- ----------- ---------- Total $ 12,603 $ 12,619 $ 12,459 ========== =========== ========== Future minimum lease payments at January 31, 1998 are as follows: (000's) Operating Capital Fiscal years Leases Leases ----------- ---------- 1998 $ 12,388 $ 770 1999 12,711 391 2000 12,305 78 2001 11,796 4 2002 11,661 Thereafter to 2015 35,195 ----------- ---------- Minimum lease payments $ 96,056 1,243 =========== Less imputed interest at rates ranging from 8.2% to 11.9% 122 ---------- Present value of net minimum lease payments of which $688 included in current liabilities $ 1,121 ========== The present value of minimum lease payments for equipment under capital lease is included in long-term debt (see Note 5). Investment in equipment under capital lease, which is included in property and equipment, was: (000's) January 31, February 1, 1998 1997 ----------- ---------- Equipment $ 3,737 $ 3,737 Less accumulated amortization 2,758 2,124 ----------- ---------- Equipment under capital lease-net $ 979 $ 1,613 =========== ========== 26 Shoe Carnival, Inc. Notes to Financial Statements - Continued Note 7 - Restructuring Charge In the fourth quarters of 1995 and 1994, the Company recorded restructuring charges related to its plan to close a total of nine unprofitable stores. At February 1, 1997, eight stores had been closed with the final store closing in February 1997. The components of the restructuring charge and an analysis of the amounts charged against the reserve are outlined in the following table: (000's) January 31, February 1, February 3, 1998 1997 1996 ---------- ---------- ---------- Beginning restructuring reserve $ 318 $ 3,468 $ 229 Restructuring (credit) charge: Store closing and lease termination costs (474) 1,953 Equipment and leasehold improvement write-offs 1,329 ---------- ---------- ---------- Total restructuring (credit) charge 0 (474) 3,282 Costs applied against reserve: Store closing and lease termination costs (147) (1,418) (43) Equipment and leasehold improvement write-offs (171) (1,258) ---------- ---------- ---------- Ending restructuring reserve $ 0 $ 318 $ 3,468 ========== ========== ========== In the aggregate, the eight stores closed in fiscal 1996 and February 1997 generated sales of $3.9 million and $9.6 million, and operating losses of $1.7 million and $1.8 million (including depreciation expense of $127,000 and $375,000) during 1996 and 1995, respectively. Cash outlays for 1997, 1996 and 1995 were $147,000, $1.7 million and $43,000, respectively. The 1996 cash outlays consisted of $1.4 million for lease termination, store closing costs and the repayment of $293,000 of lease incentives which were recorded as a deferred liability. The restructuring credit recorded in the fourth quarter of 1996 resulted primarily from favorable negotiation of lease termination costs. Note 8 - Income Taxes The provision (benefit) for income taxes consisted of: (000's) Fiscal years 1997 1996 1995 ---------- ---------- ---------- Current: Federal $ 3,965 $ 976 $ (2,211) State 641 292 (392) ---------- ---------- ---------- Total current 4,606 1,268 (2,603) ---------- ---------- ---------- Deferred: Federal 189 1,390 (1,575) State 31 160 (242) ---------- ---------- ---------- Total deferred 220 1,550 (1,817) ---------- ---------- ---------- Total provision (benefit) $ 4,826 $ 2,818 $ (4,420) ========== ========== ========== 27 Shoe Carnival, Inc. Notes to Financial Statements - Continued Included in other current assets are income tax receivables in the amounts of $29,000, $285,000 and $3.9 million as of January 31, 1998, February 1, 1997 and February 3, 1996, respectively. A reconciliation between the statutory federal income tax rate and the effective income tax rate is as follows: Fiscal years 1997 1996 1995 ---------- ---------- ---------- U.S. Federal statutory tax rate 34.0% 34.0% (34.0%) State and local income taxes, net of federal tax benefit 5.1 5.5 (3.9) Other 0.4 1.0 (.2) ---------- ---------- ---------- Effective income tax rate 39.5% 40.5% (38.1%) ========== ========== ========== Deferred income taxes are the result of temporary differences in the recognition of revenue and expense for tax and financial reporting purposes. The sources of these differences and the tax effect of each are as follows: (000's) January 31, February 1, 1998 1997 ---------- ---------- Deferred tax assets: Restructuring reserve $ 121 Alternative minimum tax credit carryforward 723 Accrued rent $ 348 244 Accrued compensation 173 166 Federal net operating loss carryforward 218 State net operating loss carryforwards 60 Lease incentives 33 19 Inventory valuation 264 Other 107 99 ---------- ---------- Total deferred tax assets $ 1,143 $ 1,432 ========== ========== Deferred tax liabilities: Depreciation $ 1,052 $ 928 Purchase accounting adjustments 966 932 Inventory valuation 227 ---------- ---------- Total deferred tax liabilities $ 2,018 $ 2,087 ========== ========== Note 9 - Employee Benefit Plans Retirement Savings Plan On February 24, 1994, the Company's Board of Directors approved the Shoe Carnival Retirement Savings Plan (the "Retirement Plan"). The Retirement Plan is open to all employees who have been employed for one year, are at least 21 years of age and who work at least 1,000 hours per year. The primary savings mechanism under the Retirement Plan is a 401(k) plan under which an employee may contribute up to 15% of earnings with the Company matching the first 4% at a rate of 50%. Employee and Company contributions are paid to a trustee and 28 Shoe Carnival, Inc. Notes to Financial Statements - Continued invested in up to 16 investment options at the participants' direction. The Company contributions to the participants' accounts become fully vested upon completion of five years of participation in the Retirement Plan. Contributions charged to expense in 1997, 1996 and 1995 were $214,000, $198,000 and $172,000, respectively. Stock Purchase Plan On May 11, 1995, the Company's shareholders approved the Shoe Carnival, Inc. Employee Stock Purchase Plan (the "Stock Purchase Plan") as adopted by the Company's Board of Directors on February 9, 1995. The Stock Purchase Plan reserves 300,000 shares of the Company's common stock (subject to adjustment for any subsequent stock splits, stock dividends and certain other changes in the common stock) for issuance and sale to any employee who has been employed for more than a year at the beginning of the calendar year, and who is not a 10% owner of the Company's stock, at 85% of the then fair market value up to a maximum of $5,000 in any calendar year. During 1997, 15,045 shares of common stock were purchased by participants in the plan and proceeds to the Company for the sale of those shares totaled approximately $97,000. Note 10 - Stock Option and Incentive Plans 1989 Stock Option Plan Non-qualified stock options for a total of 1,500,000 shares of common stock were granted to certain officers, directors and other key employees prior to 1993. On November 1, 1992, the participants exercised all outstanding stock options and the plan was effectively terminated. Net proceeds to the Company from the sale of such shares were $239,000. In November 1992, the Company loaned an aggregate of $633,000 on a fully recourse basis to the participants to permit them to pay an estimated amount of income taxes due as a result of the stock option exercise. Of this amount, $239,000 was classified as a reduction to paid-in capital and $158,000 was recorded as a current asset. The notes evidencing such loans bear interest at a rate of 6% per annum and were originally due in four equal annual installments, the first of which was paid in 1993. The 1995 principal payment was extended for one year for participants who were employees of the Company on the date the payment was originally due. In 1996, certain participants paid an aggregate of $18,000 in principal (plus accrued interest) to the Company to retire their outstanding notes. The 1995 and 1996 principal payment for the remaining participants was extended for one year. In May 1997, an outstanding balance of $158,000 for the Company's former vice chairman, president and chief executive officer was forgiven as part of a retirement package. The aggregate principal balance outstanding on the loans to the participants was $103,000 and $261,000 as of January 31, 1998 and February 1, 1997, respectively. The outstanding principal balance for the remaining participants was paid in March 1998. 1993 Stock Option and Incentive Plan Effective January 15, 1993, the Company's Board of Directors and shareholders approved the 1993 Stock Option and Incentive Plan (the "1993 Plan"). The 1993 Plan reserves for issuance 1,500,000 shares of the Company's common stock (subject to adjustment for any subsequent stock splits, stock dividends and certain other changes in the common stock) pursuant to any incentive awards granted by the Stock Option Committee of the Board of Directors which administers the 1993 Plan. The 1993 Plan provides for the grant of incentive awards in the form of stock options or restricted stock to officers and other key employees of the Company. Stock options granted under the plan may be either options intended to qualify for federal income tax purposes as "incentive stock options" or options not qualifying for favorable tax treatment ("non-qualified stock options"). At January 31, 1998, options to purchase 507,683 common shares were exercisable and 718,311 shares of unissued common stock were reserved for future grants under the plan. On April 10, 1998, the Stock Option Committee granted options for an aggregate of 210,000 shares of the Company's common stock to certain officers and key employees. The options were granted at an exercise price of $11.00 per share, and have a term of 10 years. The options become exercisable in thirds on each of the first three anniversaries of the grant date. 29 Shoe Carnival, Inc. Notes to Financial Statements - Continued The Company applies Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees" (APB No. 25), in accounting for employee stock options. Accordingly, no compensation expense has been recognized for the 1993 Plan. Pro forma information regarding net income and earnings per share is required by SFAS No. 123, "Accounting for Stock-Based Compensation," and has been determined as if the Company had accounted for its stock options under SFAS No. 123's fair value method. The fair value of these options was estimated at grant date using Black-Scholes option pricing model with the following weighted average assumptions: Fiscal years 1997 1996 1995 ---------- ---------- ---------- Risk free interest rate 6.8% 6.8% 7.6% Expected dividend yield 0.0% 0.0% 0.0% Expected volatility 53.4% 50.5% 45.7% Expected term 5 Years 5 Years 5 Years For the purpose of pro forma disclosures, the estimated fair value of the options is amortized to expense over the options' vesting period. The Company's pro forma information follows: (000's, except per share data) Fiscal years 1997 1996 1995 ---------- ---------- ---------- Pro forma net income (loss) $ 6,789 $ 3,984 $ (7,263) Pro forma net income (loss) per share-Basic $ .52 $ .31 $ (.56) Pro forma net income (loss) per share-Diluted $ .51 $ .31 $ (.56) The weighted-average fair value of options granted was $3.29, $2.79 and $2.37 for 1997, 1996 and 1995, respectively. The following table summarizes the transactions pursuant to the stock option plans for the three-year period ended January 31, 1998: Weighted Average Shares Exercise Price -------- ---------------- Balance at December 31, 1994 457,925 $ 10.82 Granted 155,500 4.83 Cancelled (55,125) 9.63 -------- -------- Balance at February 3, 1996 558,300 9.27 Granted 339,500 5.31 Cancelled (253,875) 11.94 -------- -------- Balance at February 1, 1997 643,925 6.15 Granted 208,500 6.10 Cancelled (73,836) 5.73 Exercised (51,121) 5.70 -------- -------- Balance at January 31, 1998 727,468 $ 6.21 ======== ======== 30 Shoe Carnival, Inc. Notes to Financial Statements - Continued Note 11 - Contingencies Litigation The Company is involved in various routine legal proceedings incidental to the conduct of its business, none of which is expected to have a material adverse effect on the Company's financial position. Note 12 - Other Related Party Transactions The Company's Chairman and Principal Shareholder and his son are principal shareholders of LC Footwear, Inc. and PL Footwear, Inc. The Chairman's son also owns and operates Weaver International Footwear, Inc. ("Weaver International"). The Company purchases name brand merchandise from LC Footwear, Inc., while Weaver International and PL Footwear, Inc. serve as import agents for the Company. Weaver International and PL Footwear, Inc. have represented the Company on a commission basis in dealings with shoe factories in mainland China, where most of the Company's private label shoes are manufactured. The Company purchased approximately $34,000 and $258,000 of merchandise from LC Footwear, Inc. in 1997 and 1996, respectively. Commissions paid to Weaver International were $730,000, $915,000 and $1,256,000 in 1997, 1996 and 1995, respectively. Commissions paid to PL Footwear, Inc. were $26,000 in 1997. Note 13 - Quarterly Results (Unaudited) Quarterly results are determined in accordance with the accounting policies used for annual data and include certain items based upon estimates for the entire year. All fiscal quarters in 1997 and 1996 include results for 13 weeks. The following table summarizes results for 1997 and 1996: (000's, except per share data) First Second Third Fourth 1997 Quarter Quarter Quarter Quarter -------- -------- -------- -------- Net sales $ 59,328 $ 62,393 $ 66,364 $ 58,435 Gross profit 18,330 18,122 20,490 15,625 Operating income 3,286 3,547 5,307 989 Net income 1,818 1,963 3,090 520 Net income per share - Basic $ .14 $ .15 $ .24 $ .04 Net income per share - Diluted $ .14 $ .15 $ .23 $ .04 (000's, except per share data) First Second Third Fourth 1996 Quarter Quarter Quarter Quarter -------- -------- -------- -------- Net sales $ 58,208 $ 57,597 $ 63,882 $ 54,258 Gross profit 16,349 15,928 19,018 13,836 Operating income 2,000 1,842 3,971 387 Net income (1) 921 891 2,197 131 Net income per share - Basic $ .07 $ .07 $ .17 $ .01 Net income per share - Diluted $ .07 $ .07 $ .17 $ .01 (1) The results of operations in the fourth quarter of 1996 includes a pre-tax credit of $474,000 resulting from the partial reversal of the restructuring charge taken in 1995. 31 SHOE CARNIVAL, INC. SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS Charged Balance at (Credited) to Balance at Beginning Costs and End of Descriptions of Period Expenses Period - ----------------------------- --------- ------------- ---------- Year ended February 3, 1996 Reserve for sales returns and allowances 114,492 0 114,492 Inventory reserve 3,000,000 1,300,000 4,300,000 Year ended February 1, 1997 Reserve for sales returns and allowances 114,492 0 114,492 Inventory reserve 4,300,000 (3,000,000) 1,300,000 Year ended January 31, 1998 Reserve for sales returns and allowances 114,492 0 114,492 Inventory reserve 1,300,000 125,000 1,425,000 ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE There have been no changes in or disagreements with the Company's independent accountants on accounting or financial disclosures. 32 PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT The information required by this Item concerning the Directors and nominees for Director of the Company and concerning any disclosure of delinquent filers is incorporated herein by reference to the Company's definitive Proxy Statement for its 1998 Annual Meeting of Shareholders, to be filed with the Commission pursuant to Regulation 14A within 120 days after the end of the Company's fiscal year. Information concerning the executive officers of the Company is included under the caption "Executive Officers of the Company" at the end of Part I of this Annual Report. Such information is incorporated herein by reference, in accordance with General Instruction G(3) to Form 10-K and Instruction 3 to Item 401(b) of Regulation S-K. ITEM 11. EXECUTIVE COMPENSATION The information required by this Item concerning remuneration of the Company's officers and Directors and information concerning material transactions involving such officers and Directors is incorporated herein by reference to the Company's definitive Proxy Statement for its 1998 Annual Meeting of Shareholders which will be filed pursuant to Regulation 14A within 120 days after the end of the Company's fiscal year. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The information required by this Item concerning the stock ownership of management and five percent beneficial owners is incorporated herein by reference to the Company's definitive Proxy Statement for its 1998 Annual Meeting of Shareholders which will be filed pursuant to Regulation 14A within 120 days after the end of the Company's last fiscal year. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS The information required by this Item concerning certain relationships and related transactions is incorporated herein by reference to the Company's definitive Proxy Statement for its 1998 Annual Meeting of Shareholders which will be filed pursuant to Regulation 14A within 120 days after the end of the Company's last fiscal year. 33 PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K (a).1. Financial Statements: The following financial statements of the Company are set forth in Part II, Item 8. Report of Management Independent Auditors' Report Balance Sheets at January 31, 1998 and February 1, 1997 Statements of Income for the years ended January 31, 1998, February 1, 1997 and February 3, 1996 Statements of Shareholders' Equity for the years ended January 31, 1998, February 1, 1997 and February 3, 1996 Statements of Cash Flows for the years ended January 31, 1998, February 1, 1997 and February 3, 1996 Notes to Financial Statements 2. Financial Statement Schedules: The following financial statement schedule of the Company is set forth in Part II, Item 8. Schedule II Valuation and Qualifying Accounts 3. Exhibits: A list of exhibits required to be filed as part of this report is set forth in the Index to Exhibits, which immediately precedes such exhibits, and is incorporated herein by reference. (b) Reports on Form 8-K No reports on Form 8-K were filed during the quarter ended January 31, 1998. 34 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. Shoe Carnival, Inc. Date: April 28, 1998 By: /s/ Mark L. Lemond ------------------------------------- Mark L. Lemond 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 and on the dates indicated. Signature Title Date - -------------------- ---------------------------------- -------------- /s/ J. Wayne Weaver Chairman of the Board and Director April 28, 1998 - -------------------- J. Wayne Weaver /s/ Mark L. Lemond President, Chief Executive Officer April 28, 1998 - -------------------- and Director Mark L. Lemond (Principal Executive Officer) /s/ William E. Bindley Director April 28, 1998 - ---------------------- William E. Bindley /s/ Gerald W. Schoor Director April 28, 1998 - ---------------------- Gerald W. Schoor /s/ W. Kerry Jackson Vice President - Chief Financial April 28, 1998 - ---------------------- Officer and Treasurer W. Kerry Jackson (Principal Financial and Accounting Officer) 35 INDEX TO EXHIBITS Exhibit No. Description - ------- ---------------------------------------------------------------- 3-A (9) Restated Articles of Incorporation of Registrant 3-B (10) By-laws of Registrant, as amended to date 4 (2) (i) Credit Agreement dated February 16, 1994 between Registrant and Mercantile Bank of St. Louis National Association and Firstar Bank of Milwaukee, N.A.; (ii) Promissory Notes of Registrant dated February 16, 1994 (3) (ii) Amendment to Loan and Security Agreement and Promissory Note dated October 1, 1994 (4) (iii) Amended and Restated Credit Agreement and Promissory Notes dated November 15, 1994 (4) (iv) Amendment to Amended and Restated Credit Agreement and Promissory Notes dated November 22, 1994 (4) (v) Second Amendment to Amended and Restated Credit Agreement and Promissory Notes dated February 10, 1995 (6) (vi) Third Amendment to Amended and Restated Credit Agreement and Promissory Notes dated June 26, 1995 (7) (vii) Fourth Amendment to Amended and Restated Credit Agreement and Promissory Notes dated November 15, 1995 (8) (viii) Fifth Amendment to Amended and Restated Credit Agreement and Promissory Notes dated April 10, 1996 (11) (ix) Sixth Amendment to Amended and Restated Credit Agreement and Promissory Notes dated February 1, 1997 (x) Seventh Amendment to Amended and Restated Credit Agreement and Promissory Notes dated March 31, 1998 10-D* (1) 1989 Stock Option Plan of Registrant and amendments to such Plan 10-E* (5) 1993 Stock Option and Incentive Plan of Registrant, as amended 10-F* (1) Executive Incentive Compensation Plan of Registrant 10-I (1) Non-competition Agreement dated as of January 15, 1993, between Registrant J. Wayne Weaver 10-K (1) Form of stock option exercise documents dated November 1, 1992, between Registrant and each of fourteen executive officers and key employees, including: (I) Exercise Notice; (ii) Subscription Agreement; (iii) Promissory Note; (iv) Pledge Agreement; (v) Stock Power 10-L* (5) Employee Stock Purchase Plan of Registrant, as amended 10-M* (12) Consulting agreement dated May 28, 1997, between Registrant and David H. Russell 36 10-N* (13) Employment agreement dated April 14, 1997, between Registrant and Clifton E. Sifford 23 Written consent of Deloitte & Touche LLP 27 Financial Data Schedule - -------------------------------------------------------------------------------- * The indicated exhibit is a management contract, compensatory plan or arrangement required to filed by Item 601 of Regulation S-K. (1) The copy of this exhibit filed as the same exhibit number to the Company's Registration Statement on Form S-1 (Registration No. 33-57902) is incorporated herein by reference. (2) The copy of this exhibit filed as the same exhibit number to the Company's Annual Report on Form 10-K for the year ended January 1, 1994 is incorporated herein by reference. (3) The copy of this exhibit filed as the same exhibit number to the Company's Quarterly Report on Form 10-Q for the quarter ended October 1, 1994 is incorporated herein by reference. (4) The copy of this exhibit filed as the same exhibit number to the Company's Annual Report on Form 10-K for the year ended December 31, 1994 is incorporated herein by reference. (5) The copy of this exhibit filed as the same exhibit number to the Company's Quarterly Report on Form 10-Q for the quarter ended August 2, 1997 is incorporated herein by reference. (6) The copy of this exhibit filed as the same exhibit number to the Company's Quarterly Report on Form 10-Q for the quarter ended July 29, 1995 is incorporated herein by reference. (7) The copy of this exhibit filed as the same exhibit number to the Company's Quarterly Report on Form 10-Q for the quarter ended October 28, 1995 is incorporated herein by reference. (8) The copy of this exhibit filed as the same exhibit number to the Company's Quarterly Report on Form 10-Q for the quarter ended May 4, 1996 is incorporated herein by reference. (9) The copy of this exhibit filed as exhibit number 3.1 to the Company's current Report on Form 8-K dated July 17, 1996 is incorporated herein by reference. (10) The copy of this exhibit filed as the same exhibit number to the Company's Quarterly Report on Form 10-Q for the quarter ended November 2, 1996 is incorporated herein by reference. (11) The copy of this exhibit filed as same exhibit number to the Company's Annual Report on Form 10-K for the year ended February 1, 1997 is incorporated herein by reference. (12) The copy of this exhibit filed as the same exhibit number to the Company's current Report on Form 8-K dated June 9, 1997 is incorporated herein by reference. (13) The copy of this exhibit filed as the same exhibit number to the Company's Quarterly Report on Form 10-Q for the quarter ended May 3, 1997 is incorporated herein by reference. 37 EX-4.(X) 2 AMENDED AND RESTATED CREDIT AGREEMENT SEVENTH AMENDMENT TO AMENDED AND RESTATED CREDIT AGREEMENT THIS SEVENTH AMENDMENT TO AMENDED AND RESTATED CREDIT AGREEMENT, effective as of the 31st day of March, 1998 is made by and between MERCANTILE BANK NATIONAL ASSOCIATION, successor by merger to and formerly known as Mercantile Bank of St. Louis National Association ("Mercantile"), FIRSTAR BANK MILWAUKEE, N.A. ("Firstar"), FIRST UNION NATIONAL BANK OF FLORIDA ("First Union," and collectively with Mercantile and Firstar referred to herein as the "Banks"), MERCANTILE BANK NATIONAL ASSOCIATION, as Agent (in such capacity, the "Agent"), and SHOE CARNIVAL, INC. ("Borrower"). WITNESSETH: WHEREAS, Mercantile, Firstar, Harris Trust and Savings Bank ("Harris") and Borrower are parties to a certain Amended and Restated Credit Agreement dated as of November 15, 1994, as previously amended by such parties and First Union pursuant to an Amendment to Amended and Restated Credit Agreement dated as of November 22, 1994, as further amended by Banks, Harris, Agent and Borrower pursuant to a Second Amendment to Amended and Restated Credit Agreement dated as of February 10, 1995, as further amended by Banks, Harris, Agent and Borrower pursuant to a Third Amendment to Amended and Restated Credit Agreement dated as of June 26, 1995, as further amended by Banks, Harris, Agent and Borrower pursuant to a Fourth Amendment to Amended and Restated Credit Agreement dated as of November 15, 1995, as further amended by Banks, Harris, Agent and Borrower pursuant to a Fifth Amendment to Amended and Restated Credit Agreement dated as of April 10, 1996 and as further amended by Banks, Agent and Borrower pursuant to a Sixth Amendment to Amended and Restated Credit Agreement dated as of February 1, 1997 (as amended, the "Agreement"), pursuant to which Banks have agreed to loan Borrower such sums, not to exceed $35,000,000.00 outstanding at any one time, as Borrower may request from time to time, which obligations of Borrower are presently evidenced by the Agreement and by a certain Amended and Restated Promissory Note dated February 1, 1997 made by Borrower payable to the order of Mercantile in the original principal amount of Twelve Million Five Hundred Thousand Dollars ($12,500,000.00), by a certain Amended and Restated Promissory Note dated February 1, 1997 made by Borrower payable to the order of Firstar in the original principal amount of Ten Million Dollars ($10,000,000.00), and by a certain Amended and Restated Promissory Note dated February 1, 1997 made by Borrower payable to the order of First Union in the original principal amount of Twelve Million Five Hundred Thousand Dollars ($12,500,000.00) (as amended, the "Notes"); WHEREAS, Borrower and Banks wish to further amend the Agreement and the Notes to extend the maturity thereof to March 31, 2000, to change certain covenants contained in the Agreement and to make certain other revisions to the Agreement as hereinafter set forth; NOW, THEREFORE, in order to effect such amendments and in consideration of the premises herein set forth, Borrower and Banks agree as follows: 1. Paragraph (b) in the definition of "Interest Period" in Section 1.1 of the Agreement is hereby amended to provide as follows: (b) Any Interest Period which includes March 31, 2000 shall end on such date. 2. The definition of "Notes" in Section 1.1 of the Agreement is hereby amended to provide as follows: "Notes" mean the amended and restated promissory notes of Borrower in the form of Exhibits A, B and I attached to that certain Seventh Amendment to Amended and Restated Credit Agreement dated as of March 31, 1998, evidencing the obligation of Borrower to repay the Loans and amounts outstanding under any Reimbursement Agreements. 3. The Note of Borrower payable to the order of Mercantile shall hereafter be amended and restated in the form of that Note attached to this Seventh Amendment as Exhibit A and incorporated herein by reference. The Note of Borrower payable to the order of Firstar shall hereafter be amended and restated in the form of that Note attached to this Seventh Amendment as Exhibit B and incorporated herein by reference. The Note of Borrower payable to the order of First Union shall hereafter be amended and restated in the form of that Note attached to this Seventh Amendment as Exhibit I and incorporated herein by reference. Hereafter, all references in the Agreement, in any other documents or agreements executed in connection with the Agreement or securing Borrower's Obligations thereunder and herein to the "Notes" shall be amended and deemed to refer to the Amended and Restated Promissory Notes of Borrower in favor of Mercantile, Firstar and First Union as attached hereto, as the same may be amended, modified, renewed or restated hereafter. 4. The definition of "Term" in Section 1.1 of the Agreement is hereby amended to provide as follows: "Term" means the period from the Effective Date up to and including March 31, 2000; except that (i) all, but not less than all, of the Banks may, in their sole discretion, extend such Term for additional one-year periods by notifying Borrower of each such extension at least 12 months prior to the expiration of the then current Term end of their intention to extend the Term by an additional year; and (ii) Agent may terminate Banks' obligations hereunder at any time prior to such stated maturity date or any extension thereof pursuant to Article 6 herein. 5. The definition of "Eurocurrency Margin" in Section 2.5(b) of the Agreement is hereby deleted in its entirety, and in its place shall be substituted the following: -2- "Eurocurrency Margin" applicable to any Interest Period means Two Percent (2.00%) for any Interest Period commencing prior to the date upon which Borrower delivers to Agent its fiscal quarter-end financial statements as required under Section 5.1(a)(iii) for the fiscal quarter ending August 3, 1996, and for any Interest Period commencing after delivery of Borrower's August 3, 1996 quarter-end financial statements, and each subsequent quarter-end and year-end financial statements, shall be determined as follows: (i) Two Percent (2.00%) for any Interest Period commencing after delivery of Borrower's then most recent quarter-end or fiscal year-end financial statements delivered to Banks pursuant to Sections 5.1(a)(i) or (iii), which financial statements disclose the Borrower's ratio of Funded Debt to EBITDA (as defined below) as of the end of the immediately preceding fiscal quarter was greater than or equal to 1.50 to 1.0; (ii) One and One Half Percent (1.50%) for any Interest Period commencing after delivery of Borrower's then most recent quarter-end or fiscal year-end financial statements delivered to Banks pursuant to Sections 5.1(a)(i) or (iii), which financial statements disclose that Borrower's ratio of Funded Debt to EBITDA as of the end of the immediately preceding fiscal quarter was less than 1.50 to 1.0 but greater than or equal to 1.25 to 1.0; (iii) One Percent (1.00%) for any Interest Period commencing after delivery of Borrower's then most recent quarter-end or fiscal year-end financial statements delivered to Banks pursuant to Sections 5.1(a)(i) or (iii), which financial statements disclose that Borrower's ratio of Funded Debt to EBITDA as of the end of the immediately preceding fiscal quarter was less than 1.25 to 1.0 but greater than or equal to 1.00 to 1.0; and (iv) Three-Fourths of One Percent (0.75%) for any Interest Period commencing after delivery of Borrower's then most recent quarter-end or fiscal year-end financial statements delivered to Banks pursuant to Section 5.1(a)(i) or (iii), which financial statements disclose that Borrower's ratio of Funded Debt to EBITDA as of the end of the immediately preceding fiscal quarter was less than 1.00 to 1.0. As used herein, the term "Funded Debt" at any date shall mean all Indebtedness of Borrower for borrowed money as of such date, including, but not limited to, all liabilities of Borrower under any Capitalized Leases. As used herein, the term "EBITDA" as of any date shall mean Borrower's net income before taxes, plus interest expense, plus depreciation, plus amortization, as determined in accordance with generally accepted accounting principles consistently applied, for that portion of Borrower's fiscal year to date as the date of such calculation, annualized for a full fiscal year (i.e. multiplied by 365 and divided by the number of days in the fiscal year to date period for which such actual EBITDA amount has been calculated). 6. Section 5.1(e)(iii) of the Agreement is hereby amended to provide as follows: (iii) Have a Net Worth of not less than $71,000,000.00 as of the end of each fiscal quarter during the Term hereof. -3- 7. Section 5.2(m) of the Agreement is hereby deleted in its entirety and is left blank intentionally. 8. The Compliance Certificate (as defined in the Agreement) attached as Exhibit D to the Agreement, shall be amended and restated in the form of that certain Compliance Certificate attached hereto as Exhibit D. All references in the Agreement to the "Compliance Certificate" and other references of similar import shall hereafter be amended and deemed to refer to the Compliance Certificate in the form of that attached hereto as Exhibit D, which shall be submitted by Borrower to Banks as required in the Agreement. 9. Borrower hereby represents and warrants to Agent and to Banks that: (a) The execution, delivery and performance by Borrower of this Seventh Amendment are within the corporate powers of Borrower, have been duly authorized by all necessary corporate action and require no action by or in respect of, or filing with, any governmental or regulatory body, agency or official. The execution, delivery and performance by Borrower of this Seventh Amendment do not conflict with, or result in a breach of the terms, conditions or provisions of, or constitute a default under or result in any violation of, and Borrower is not now in default under or in violation of, the terms of the Articles of Incorporation or Bylaws of Borrower, any applicable law, any rule, regulation, order, writ, judgment or decree of any court or governmental or regulatory agency or instrumentality, or any agreement or instrument to which Borrower is a party or by which it is bound or to which it is subject; (b) This Seventh Amendment has been duly executed and delivered and constitutes the legal, valid and binding obligation of Borrower enforceable in accordance with its terms; and (c) As of the date hereof, all of the covenants, representations and warranties of Borrower set forth in the Agreement are true and correct and no "Event of Default" (as defined therein) under or within the meaning of the Agreement, as hereby amended, has occurred and is continuing. 10. The Agreement, as hereby amended, and the Notes, as hereby amended, are and shall remain the binding obligations of Borrower, and except to the extent amended by this Seventh Amendment, all of the terms, provisions, conditions, agreements, covenants, representations, warranties and powers contained in the Agreement and the Notes shall be and remain in full force and effect and the same are hereby ratified and confirmed. This Seventh Amendment amends the Agreement and is not a novation thereof. 11. All references in the Agreement to "this Agreement" and to the "Notes" and any other references of similar import shall henceforth mean the Agreement or the Notes, as the case may be, as amended by this Seventh Amendment. All references in the Notes or other documents to "the Agreement" and to the "Notes" and any other references of similar import shall henceforth mean the Agreement or the Notes, as the case may be, as amended by this Seventh Amendment. -4- 12. This Seventh Amendment shall be binding upon and inure to the benefit of the parties hereto and their respective successors and assigns, except that Borrower may not assign, transfer or delegate any of its rights or obligations hereunder. 13. This Seventh Amendment is made solely for the benefit of Borrower, Agent and Banks as set forth herein, and is not intended to be relied upon or enforced by any other person or entity. 14. ORAL AGREEMENTS OR COMMITMENTS TO LOAN MONEY, EXTEND CREDIT OR TO FOREBEAR FROM ENFORCING REPAYMENT OF A DEBT, INCLUDING PROMISES TO EXTEND OR RENEW SUCH DEBT, ARE NOT ENFORCEABLE. TO PROTECT BORROWER, AGENT AND BANKS FROM ANY MISUNDERSTANDING OR DISAPPOINTMENT, ANY AGREEMENTS REACHED BY BORROWER, AGENT AND BANKS COVERING SUCH MATTERS ARE CONTAINED IN THIS SEVENTH AMENDMENT, THE NOTES AND THE AGREEMENT, WHICH CONSTITUTE A COMPLETE AND EXCLUSIVE STATEMENT OF THE AGREEMENTS BETWEEN BORROWER, AGENT AND BANKS EXCEPT AS BORROWER, AGENT AND BANKS MAY LATER AGREE IN WRITING TO MODIFY. THIS SEVENTH AMENDMENT, THE NOTES AND THE AGREEMENT EMBODY THE ENTIRE AGREEMENT AND UNDERSTANDING BETWEEN THE PARTIES HERETO AND SUPERSEDE ALL PRIOR AGREEMENTS AND UNDERSTANDINGS (ORAL OR WRITTEN) RELATING TO THE SUBJECT MATTER HEREOF. 15. This Seventh Amendment shall be governed by and construed in accordance with the internal laws of the State of Missouri. 16. In the event of any inconsistency or conflict between this Seventh Amendment and the Agreement or the Notes, the terms, provisions and conditions of this Seventh Amendment shall govern and control. IN WITNESS WHEREOF the parties hereto have executed this Seventh Amendment to Amended and Restated Credit Agreement as of the day and year first above written on this 31st day of March, 1998. SHOE CARNIVAL, INC. By: /S/ W. Kerry Jackson W. Kerry Jackson, Vice President, Chief Financial Officer and Treasurer -5- Commitment: MERCANTILE BANK Facility A: $12,500,000.00 (35.714%) NATIONAL ASSOCIATION By: /s/ Katherine K. Miller Katherine K. Miller, Assistant Vice President Commitment: FIRSTAR BANK MILWAUKEE, N.A. Facility A: $10,000,000.00 (28.572%) By: /s/ Douglas A. Gallun Douglas A. Gallun, Vice President Commitment: FIRST UNION NATIONAL BANK OF FLORIDA Facility A: $12,500,000.00 (35.714%) By: /s/ Richard P. Sliva Richard P. Silva, Vice President MERCANTILE BANK NATIONAL ASSOCIATION, AS AGENT By: /s/ Katherine K. Miller Katherine K. Miller, Assistant Vice President -6- EXHIBIT A AMENDED AND RESTATED PROMISSORY NOTE $12,500,000.00 St. Louis, Missouri March 31, 1998 FOR VALUE RECEIVED, SHOE CARNIVAL, INC., an Indiana corporation (formerly a Delaware corporation) ("Borrower"), hereby promises to pay to the order of Mercantile Bank National Association, a national banking association ("Bank") on March 31, 2000, the lesser of (a) Twelve Million Five Hundred Thousand Dollars ($12,500,000.00), or (b) the aggregate unpaid principal amount of all Loans made by Bank to Borrower in accordance with the terms and conditions hereof and of that certain Amended and Restated Credit Agreement dated as of November 15, 1994, made by and between Borrower, Mercantile Bank National Association, formerly known as Mercantile Bank of St. Louis National Association, as Agent (the "Agent") and the Banks named therein, as from time to time amended (as amended, the "Credit Agreement") and the unreimbursed amount of any draws under any Letters of Credit issued for the account of Borrower in accordance with the terms and conditions of the Credit Agreement and the Reimbursement Agreements (as defined in the Credit Agreement). The aggregate principal amount which Bank may have outstanding hereunder at any one time for all Loans shall not exceed the lesser of (i) Twelve Million Five Hundred Thousand Dollars ($12,500,000.00) minus the face amount of all Letters of Credit then outstanding under Section 2.1(a) of the Credit Agreement, or (ii) Thirty-Five and 714/1,000ths Percent (35.714%) of the then current Borrowing Base, which amounts may be borrowed, paid, reborrowed and repaid, in full or in part, prior to March 31, 2000 subject to the terms and conditions hereof and of the Credit Agreement. If at any time the aggregate principal amount of all Loans outstanding under this Note should exceed the amount set forth in the preceding sentence, whether as a result of a reduction in the Borrowing Base or otherwise, Borrower shall be automatically required (without demand or notice of any kind by Bank, all of which are hereby expressly waived by Borrower), to immediately repay the Loans in an amount sufficient to reduce such aggregate principal amount of Loans outstanding under this Note to the amount set forth in the preceding sentence. Additionally, Borrower promises to pay to the order of Bank all accrued interest owing on the principal amount of all Loan advances and Letter of Credit reimbursement obligations outstanding hereunder. Advances hereunder shall bear interest at the rate per annum equal to such of the following as Borrower, at its option, shall select: (a) the interest rate announced from time to time by Agent as its "Prime Rate" on commercial loans, which rate shall fluctuate as and when said Prime Rate shall change, or -7- (b) the London Interbank Offered Rate plus Eurocurrency Margin (as defined in the Credit Agreement) for the applicable Interest Period, determined in each case as of the date of a Prime Rate Loan made hereunder, or the commencement of a Interest Period for Eurocurrency Loans, as the case may be. Said interest shall be payable on the dates provided in the Credit Agreement. After maturity, the unpaid principal hereof shall bear interest at a rate per annum equal to three percent (3%) in excess of the interest rate announced from time to time by Agent as its "Prime Rate" on commercial loans, which rate shall fluctuate as and when said Prime Rate shall change. Interest shall be computed on the basis of a 360-day year for the actual number of days elapsed for all Loans made hereunder. Payments of principal, interest and fees shall be made in lawful money of the United States of America in immediately available funds at the office of Agent situated at 721 Locust Street, St. Louis, Missouri 63101 or at such other place as the holder of this Note may designate, and such payments shall be applied to the payment of interest or principal (or any combination of the foregoing) owing on this Note in such order as Bank (or such holder) shall determine. All advances and all principal payments made hereunder and all Interest Periods and interest rates applicable to Eurocurrency Loans may be endorsed by the Bank on its records or the sheet attached to this Note, which information so endorsed or recorded shall constitute prima facie evidence thereof; provided, however that the obligation of Borrower to repay each advance made hereunder shall be absolute and unconditional, notwithstanding any failure of Bank to endorse or record or any mistake by Bank in connection with any recordation or with any endorsement on the sheet attached to this Note or to give to Borrower or receive from Borrower any notice or confirmation of each advance. Borrower shall be privileged to prepay in whole or in part the principal outstanding hereunder; provided, however, that (subject to the right of Bank to accelerate payment hereunder) any Eurocurrency Loan may be prepaid only at the expiration of the applicable Interest Period; and provided further, however, that on any such prepayment, Borrower shall also pay all interest accrued on the principal amount being prepaid to and including the date of such prepayment. Any payment of a Eurocurrency Loan other than on the last day of the applicable Interest Period in contravention of this paragraph shall obligate Borrower to pay to Bank the amount of any funding losses or other breakage costs which may be incurred by Bank as set forth in Section 2.10 of the Credit Agreement. Consistent with the terms of this Note, the Agent shall determine each interest rate applicable to the advances hereunder, which determination shall be conclusive in the absence of manifest error. -8- This Note is one of the Notes referred to in the Credit Agreement, which Credit Agreement, among other things, contains provisions for acceleration of the maturity hereof upon the occurrence of certain stated events and also for prepayments on account of principal hereof and interest hereon prior to the maturity hereof upon the terms and conditions specified therein. Terms defined in the Credit Agreement are used herein with the same meanings. In the event that any payment due hereunder shall not be paid when due, whether by reason of demand or otherwise, and this Note shall be placed in the hands of an attorney for collection hereof, Borrower agrees to pay in addition to all other amounts due hereon the costs and expenses of collection, including reasonable attorneys' fees and expenses, whether or not litigation is commenced in aid thereof. Borrower hereby waives presentment, demand, protest, notice of protest and notice of dishonor. This Note shall be governed by and construed in accordance with the internal laws of the State of Missouri. This Note is a renewal, restatement and continuation of the obligations due Bank as evidenced by a prior amended and Restated Promissory Note dated February 1, 1997 from Borrower to Bank, and is not a novation thereof. All interest evidenced by the prior Note being renewed by this instrument shall continue to be due and payable until paid. SHOE CARNIVAL, INC. By: /s/ W. Kerry Jackson W. Kerry Jackson, Vice President, Chief Financial Officer and Treasurer -9- STATE OF INDIANA ) ) SS. COUNTY OF VANDERBURGH ) On this 31st day of March, 1998, before me appeared W. Kerry Jackson, to me personally known, who being by me duly sworn, did say that he is the Vice President, Chief Financial Officer and Treasurer of Shoe Carnival, Inc., an Indiana corporation, and that said instrument was signed in behalf of said corporation by authority of its Board of Directors; and said W. Kerry Jackson acknowledged said instrument to be the free act and deed of said corporation. IN TESTIMONY WHEREOF, I have hereunto set my hand and affixed my official seal in the County and State aforesaid, the day and year first above written. (Seal) Notary Public /s/ Molly A. Graham My Commission Expires: 6/23/01 -10- EXHIBIT B AMENDED AND RESTATED PROMISSORY NOTE $10,000,000.00 St. Louis, Missouri March 31, 1998 FOR VALUE RECEIVED, SHOE CARNIVAL, INC., an Indiana corporation (formerly a Delaware corporation) ("Borrower"), hereby promises to pay to the order of Firstar Bank Milwaukee, N.A., a national banking association ("Bank") on March 31, 2000, the lesser of (a) Ten Million Dollars ($10,000,000.00), or (b) the aggregate unpaid principal amount of all Loans made by Bank to Borrower in accordance with the terms and conditions hereof and of that certain Amended and Restated Credit Agreement dated as of November 15, 1994 made by and between Borrower, Mercantile Bank National Association, formerly known as Mercantile Bank of St. Louis National Association, as Agent (the "Agent") and the Banks named therein, as from time to time amended (as amended, the "Credit Agreement") and the unreimbursed amount of any draws under any Letters of Credit issued for the account of Borrower in accordance with the terms and conditions of the Credit Agreement and the Reimbursement Agreements (as defined in the Credit Agreement). The aggregate principal amount which Bank may have outstanding hereunder at any one time for all Loans shall not exceed the lesser of (i) Ten Million Dollars ($10,000,000.00) minus the face amount of all Letters of Credit then outstanding under Section 2.1(a) of the Credit Agreement, or (ii) Twenty-Eight and 572/1,000ths Percent (28.572%) of the then current Borrowing Base, which amounts may be borrowed, paid, reborrowed and repaid, in whole or in part, prior to March 31, 2000 subject to the terms and conditions hereof and of the Credit Agreement. If at any time the aggregate principal amount of all Loans outstanding under this Note should exceed the amount set forth in the preceding sentence, whether as a result of a reduction in the Borrowing Base or otherwise, Borrower shall be automatically required (without demand or notice of any kind by Bank, all of which are hereby expressly waived by Borrower), to immediately repay the Loans in an amount sufficient to reduce such aggregate principal amount of Loans outstanding under this Note to the amount set forth in the preceding sentence. Additionally, Borrower promises to pay to the order of Bank all accrued interest owing on the principal amount of all Loan advances and Letter of Credit reimbursement obligations outstanding hereunder. Advances hereunder shall bear interest at the rate per annum equal to such of the following as Borrower, at its option, shall select: (a) the interest rate announced from time to time by Agent as its "Prime Rate" on commercial loans, which rate shall fluctuate as and when said Prime Rate shall change, or -11- (b) the London Interbank Offered Rate plus Eurocurrency Margin (as defined in the Credit Agreement) for the applicable Interest Period, determined in each case as of the date of a Prime Rate Loan made hereunder, or the commencement of a Interest Period for Eurocurrency Loans, as the case may be. Said interest shall be payable on the dates provided in the Credit Agreement. After maturity, the unpaid principal hereof shall bear interest at a rate per annum equal to three percent (3%) in excess of the interest rate announced from time to time by Agent as its "Prime Rate" on commercial loans, which rate shall fluctuate as and when said Prime Rate shall change. Interest shall be computed on the basis of a 360-day year for the actual number of days elapsed for all Loans made hereunder. Payments of principal, interest and fees shall be made in lawful money of the United States of America in immediately available funds at the office of Agent situated at 721 Locust Street, St. Louis, Missouri 63101 or at such other place as the holder of this Note may designate, and such payments shall be applied to the payment of interest or principal (or any combination of the foregoing) owing on this Note in such order as Bank (or such holder) shall determine. All advances and all principal payments made hereunder and all Interest Periods and interest rates applicable to Eurocurrency Loans may be endorsed by the Bank on its records or the sheet attached to this Note, which information so endorsed or recorded shall constitute prima facie evidence thereof; provided, however that the obligation of Borrower to repay each advance made hereunder shall be absolute and unconditional, notwithstanding any failure of Bank to endorse or record or any mistake by Bank in connection with any recordation or with any endorsement on the sheet attached to this Note or to give to Borrower or receive from Borrower any notice or confirmation of each advance. Borrower shall be privileged to prepay in whole or in part the principal outstanding hereunder; provided, however, that (subject to the right of Bank to accelerate payment hereunder) any Eurocurrency Loan may be prepaid only at the expiration of the applicable Interest Period; and provided further, however, that on any such prepayment, Borrower shall also pay all interest accrued on the principal amount being prepaid to and including the date of such prepayment. Any payment of a Eurocurrency Loan other than on the last day of the applicable Interest Period in contravention of this paragraph shall obligate Borrower to pay to Bank the amount of any funding losses or other breakage costs which may be incurred by Bank as set forth in Section 2.10 of the Credit Agreement. Consistent with the terms of this Note, the Agent shall determine each interest rate applicable to the advances hereunder, which determination shall be conclusive in the absence of manifest error. This Note is one of the Notes referred to in the Credit Agreement, which Credit Agreement, among other things, contains provisions for acceleration of the maturity hereof upon the occurrence of certain stated events and also for prepayments on account of principal hereof and interest hereon prior to the maturity hereof upon the terms and conditions specified therein. Terms defined in the Credit Agreement are used herein with the same meanings. -12- In the event that any payment due hereunder shall not be paid when due, whether by reason of demand or otherwise, and this Note shall be placed in the hands of an attorney for collection hereof, Borrower agrees to pay in addition to all other amounts due hereon the costs and expenses of collection, including reasonable attorneys' fees and expenses, whether or not litigation is commenced in aid thereof. Borrower hereby waives presentment, demand, protest, notice of protest and notice of dishonor. This Note shall be governed by and construed in accordance with the internal laws of the State of Missouri. This Note is a renewal, restatement and continuation of the obligations due Bank as evidenced by a prior amended and Restated Promissory Note dated February 1, 1997 from Borrower to Bank, and is not a novation thereof. All interest evidenced by the prior Note being renewed by this instrument shall continue to be due and payable until paid. SHOE CARNIVAL, INC. By: /s/ W. Kerry Jackson W. Kerry Jackson, Vice President, Chief Financial Officer and Treasurer -13- STATE OF INDIANA ) ) SS. COUNTY OF VANDERBURCH ) On this 31st day of March, 1998, before me appeared W. Kerry Jackson, to me personally known, who being by me duly sworn, did say that he is the Vice President, Chief Financial Officer and Treasurer of Shoe Carnival, Inc., an Indiana corporation, and that said instrument was signed in behalf of said corporation by authority of its Board of Directors; and said W. Kerry Jackson acknowledged said instrument to be the free act and deed of said corporation. IN TESTIMONY WHEREOF, I have hereunto set my hand and affixed my official seal in the County and State aforesaid, the day and year first above written. (Seal) Notary Public /s/ Molly A. Graham My Commission Expires: 6/23/01 -14- EXHIBIT I AMENDED AND RESTATED PROMISSORY NOTE $12,500,000.00 St. Louis, Missouri March 31, 1998 FOR VALUE RECEIVED, SHOE CARNIVAL, INC., an Indiana corporation (formerly a Delaware corporation) ("Borrower"), hereby promises to pay to the order of First Union National Bank of Florida, a national banking association ("Bank") on March 31, 2000, the lesser of (a) Twelve Million Five Hundred Thousand Dollars ($12,500,000.00), or (b) the aggregate unpaid principal amount of all Loans made by Bank to Borrower in accordance with the terms and conditions hereof and of that certain Amended and Restated Credit Agreement dated as of November 15, 1994 made by and between Borrower, Mercantile Bank National Association, formerly known as Mercantile Bank of St. Louis National Association, as Agent (the "Agent") and the Banks named therein, as amended from time to time (as amended, the "Credit Agreement") and the unreimbursed amount of any draws under any Letters of Credit issued for the account of Borrower in accordance with the terms and conditions of the Credit Agreement and the Reimbursement Agreements (as defined in the Credit Agreement). The aggregate principal amount which Bank may have outstanding hereunder at any one time for all Loans shall not exceed the lesser of (i) Twelve Million Five Hundred Thousand Dollars ($12,500,000.00) minus the face amount of all Letters of Credit then outstanding under Section 2.1(a) of the Credit Agreement, or (ii) Thirty-Five and 714/1,000ths Percent (35.714%) of the then current Borrowing Base, which amounts may be borrowed, paid, reborrowed and repaid, in whole or in part, prior to March 31, 2000 subject to the terms and conditions hereof and of the Credit Agreement. If at any time the aggregate principal amount of all Loans outstanding under this Note should exceed the amount set forth in the preceding sentence, whether as a result of a reduction in the Borrowing Base or otherwise, Borrower shall be automatically required (without demand or notice of any kind by Bank, all of which are hereby expressly waived by Borrower), to immediately repay the Loans in an amount sufficient to reduce such aggregate principal amount of Loans outstanding under this Note to the amount set forth in the preceding sentence. Additionally, Borrower promises to pay to the order of Bank all accrued interest owing on the principal amount of all Loan advances and Letter of Credit reimbursement obligations outstanding hereunder. Advances hereunder shall bear interest at the rate per annum equal to such of the following as Borrower, at its option, shall select: (a) the interest rate announced from time to time by Agent as its "Prime Rate" on commercial loans, which rate shall fluctuate as and when said Prime Rate shall change, or -15- (b) the London Interbank Offered Rate plus Eurocurrency Margin (as defined in the Credit Agreement) for the applicable Interest Period, determined in each case as of the date of a Prime Rate Loan made hereunder, or the commencement of a Interest Period for Eurocurrency Loans, as the case may be. Said interest shall be payable on the dates provided in the Credit Agreement. After maturity, the unpaid principal hereof shall bear interest at a rate per annum equal to three percent (3%) in excess of the interest rate announced from time to time by Agent as its "Prime Rate" on commercial loans, which rate shall fluctuate as and when said Prime Rate shall change. Interest shall be computed on the basis of a 360-day year for the actual number of days elapsed for all Loans made hereunder. Payments of principal, interest and fees shall be made in lawful money of the United States of America in immediately available funds at the office of Agent situated at 721 Locust Street, St. Louis, Missouri 63101 or at such other place as the holder of this Note may designate, and such payments shall be applied to the payment of interest or principal (or any combination of the foregoing) owing on this Note in such order as Bank (or such holder) shall determine. All advances and all principal payments made hereunder and all Interest Periods and interest rates applicable to Eurocurrency Loans may be endorsed by the Bank on its records or the sheet attached to this Note, which information so endorsed or recorded shall constitute prima facie evidence thereof; provided, however that the obligation of Borrower to repay each advance made hereunder shall be absolute and unconditional, notwithstanding any failure of Bank to endorse or record or any mistake by Bank in connection with any recordation or with any endorsement on the sheet attached to this Note or to give to Borrower or receive from Borrower any notice or confirmation of each advance. Borrower shall be privileged to prepay in whole or in part the principal outstanding hereunder; provided, however, that (subject to the right of Bank to accelerate payment hereunder) any Eurocurrency Loan may be prepaid only at the expiration of the applicable Interest Period; and provided further, however, that on any such prepayment, Borrower shall also pay all interest accrued on the principal amount being prepaid to and including the date of such prepayment. Any payment of a Eurocurrency Loan other than on the last day of the applicable Interest Period in contravention of this paragraph shall obligate Borrower to pay to Bank the amount of any funding losses or other breakage costs which may be incurred by Bank as set forth in Section 2.10 of the Credit Agreement. Consistent with the terms of this Note, the Agent shall determine each interest rate applicable to the advances hereunder, which determination shall be conclusive in the absence of manifest error. -16- This Note is one of the Notes referred to in the Credit Agreement, which Credit Agreement, among other things, contains provisions for acceleration of the maturity hereof upon the occurrence of certain stated events and also for prepayments on account of principal hereof and interest hereon prior to the maturity hereof upon the terms and conditions specified therein. Terms defined in the Credit Agreement are used herein with the same meanings. In the event that any payment due hereunder shall not be paid when due, whether by reason of demand or otherwise, and this Note shall be placed in the hands of an attorney for collection hereof, Borrower agrees to pay in addition to all other amounts due hereon the costs and expenses of collection, including reasonable attorneys' fees and expenses, whether or not litigation is commenced in aid thereof. Borrower hereby waives presentment, demand, protest, notice of protest and notice of dishonor. This Note shall be governed by and construed in accordance with the internal laws of the State of Missouri. This Note is a renewal, restatement and continuation of the obligations due Bank as evidenced by a prior amended and Restated Promissory Note dated February 1, 1997 from Borrower to Bank, and is not a novation thereof. All interest evidenced by the prior Note being renewed by this instrument shall continue to be due and payable until paid. SHOE CARNIVAL, INC. By: /s/ W. Kerry Jackson W. Kerry Jackson, Vice President, Chief Financial Officer and Treasurer -17- STATE OF INDIANA ) ) SS. COUNTY OF VANDERBURGH ) On this 31st day of March, 1998, before me appeared W. Kerry Jackson, to me personally known, who being by me duly sworn, did say that he is the Vice President, Chief Financial Officer and Treasurer of Shoe Carnival, Inc., an Indiana corporation, and that said instrument was signed in behalf of said corporation by authority of its Board of Directors; and said W. Kerry Jackson acknowledged said instrument to be the free act and deed of said corporation. IN TESTIMONY WHEREOF, I have hereunto set my hand and affixed my official seal in the County and State aforesaid, the day and year first above written. (Seal) Notary Public /s/ Molly A. Graham My Commission Expires: 6/23/01 -18- EX-23 3 INDEPENDENT AUDITORS' CONSENT INDEPENDENT AUDITORS' CONSENT We consent to the incorporation by reference in the Registration Statements on Form S-8 (Nos. 33-74050 and 333-44047) relating to the 1993 Stock Option and Incentive Plan of Shoe Carnival, Inc. and the Registration Statement on Form S-8 (No. 33-80979) relating to the Employee Stock Purchase Plan of Shoe Carnival, Inc. of our report dated February 26, 1998 (March 31, 1998 as to Note 5), appearing in the Annual Report on Form 10-K of Shoe Carnival, Inc. for the year ended January 31, 1998. Stamford Connecticut April 30, 1998 EX-27.1 4 FINANCIAL DATA SCHEDULE
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE FINANCIAL STATEMENTS FOR THE PERIOD ENDED JANUARY 31, 1998, AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000 12-MOS JAN-31-1998 FEB-02-1997 JAN-31-1998 1,571 0 803 0 59,444 63,585 54,019 22,050 95,554 14,696 6,133 0 0 0 71,609 95,554 246,520 246,520 173,953 173,953 0 0 912 12,217 4,826 7,391 0 0 0 7,391 .57 .56
EX-27.2 5 RESTATED FINANCIAL DATA SCHEDULE 1997 3RD QTR
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE FINANCIAL STATEMENTS FOR THE PERIOD ENDED NOVEMBER 1, 1997, AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000 9-MOS JAN-31-1998 FEB-02-1997 NOV-01-1997 1,687 0 1,037 0 67,160 71,077 52,922 21,030 102,969 16,777 12,580 0 0 0 70,918 102,969 188,085 188,085 131,143 131,143 0 0 725 11,415 4,544 0 0 0 0 6,871 .53 .52
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