SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10 - Q
X Quarterly report pursuant to Section 13 or 15(d) of the Securities
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Exchange Act of 1934 for the quarterly period ended August 3, 1996 or
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Transition report pursuant to Section 13 or 15(d) of the Securities
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Exchange Act of 1934 for the transition period from to
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Commission File Number 0-7264
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PAUL HARRIS STORES, INC.
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(Exact name of registrant as specified in its charter)
Indiana 35-0907402
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
6003 Guion Rd., Indianapolis, IN 46254
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(Address of principal executive offices) (Zip Code)
(317) 293-3900
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(Registrant's telephone number, including area code)
Not Applicable
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(Former name, address and fiscal year, if changed since last report)
Indicate by check mark 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 periods 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
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Indicate by check mark whether the registrant has filed all documents and
reports required to be filed by Sections 12,13, or 15(d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a plan
confirmed by a court. Yes X No
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As of September 3, 1996, 10,052,079 common shares were outstanding (including
3,013,039 shares of non-voting common stock).
<PAGE>
INDEX
PAUL HARRIS STORES, INC. AND SUBSIDIARIES
Part I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets - August 3, 1996,
February 3, 1996 and July 29, 1995 1
Consolidated Statements of Operations - For the thirteen
weeks ended August 3, 1996 and July 29, 1995 2
Consolidated Statements of Operations - For the twenty-six
weeks ended August 3, 1996 and July 29, 1995 3
Consolidated Statements of Cash Flows - For the
twenty-six weeks ended August 3, 1996 and July 29, 1995 4
Consolidated Statements of Shareholders' Equity -
For the twenty-six weeks ended August 3, 1996 and July 29, 1995 5
Notes to Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 7-9
Part II. OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders 9
Item 6. Exhibits and Reports on Form 8-K 9
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PAUL HARRIS STORES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
UNAUDITED
(in thousands)
August 3, February 3, July 29,
1996 1996 1995
---------- ---------- ----------
<S> <C> <C> <C>
ASSETS
Current assets
Cash and cash equivalents $ 11,920 $ 19,886 $ 17,307
Merchandise inventories 20,700 17,645 22,089
Other receivables 414 539 895
Prepaid expenses 1,207 1,013 1,029
Income tax recoverable 1,042
---------- ---------- ----------
Total current assets 34,241 39,083 42,362
---------- ---------- ----------
Property, fixtures and equipment
Land, building and improvements 5,756 5,715 5,715
Store fixtures and equipment 12,230 11,575 10,565
Leasehold improvements and other 11,755 11,389 10,852
---------- ---------- ----------
29,741 28,679 27,132
Less accumulated depreciation and amortization (12,104) (10,785) (8,373)
---------- ---------- ----------
Property, fixtures and equipment, net 17,637 17,894 18,759
Other assets 836 873 1,057
---------- ---------- ----------
$ 52,714 $ 57,850 $ 62,178
========== ========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities
Accounts payable $ 6,343 $ 6,012 $ 9,107
Compensation and related taxes 858 778 1,231
Income taxes payable 25 45 183
Other accrued expenses 2,873 3,447 4,432
Current maturities of long-term debt 4,320 4,320 4,320
---------- ---------- ----------
Total current liabilities 14,419 14,602 19,273
---------- ---------- ----------
Long-term debt 12,480 17,640 21,910
Other non-current liabilities 2,562 2,704 3,100
Shareholders' equity
Preferred stock (no par value)
Authorized 1,000 shares; none issued
Common stock (no par value)
Authorized 20,000 shares; issued and outstanding
10,039, 10,019 and 9,998 respectively 1,750 1,716 1,684
Additional paid-in capital 5,102 4,989 3,637
Retained earnings 16,401 16,199 12,574
---------- ---------- ----------
Total shareholders' equity 23,253 22,904 17,895
---------- ---------- ----------
$ 52,714 $ 57,850 $ 62,178
========== ========== ==========
See accompanying "Notes To Consolidated Financial Statements".
1
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PAUL HARRIS STORES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
UNAUDITED
(in thousands, except per share data)
For the For the
thirteen thirteen
weeks ended weeks ended
August 3, July 29,
1996 1995
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<S> <C> <C>
Net sales $ 36,721 $ 36,509
Cost of sales, including occupancy expenses
exclusive of depreciation 24,161 24,792
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Gross income 12,560 11,717
Selling, general and administrative expenses 11,390 11,549
Depreciation and amortization 766 935
Interest expense, net 297 516
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Income (loss) before income taxes 107 (1,283)
Provision (credit) for income taxes 43 (503)
--------------- ---------------
Net income (loss) $ 64 $ (780)
=============== ===============
Net income (loss) per common share $ .01 $ (.08)
=============== ===============
Weighted average number of shares and
share equivalents outstanding 10,516 9,998
=============== ===============
See accompanying "Notes To Consolidated Financial Statements".
2
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PAUL HARRIS STORES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
UNAUDITED
(in thousands, except per share data)
For the For the
twenty-six twenty-six
weeks ended weeks ended
August 3, July 29,
1996 1995
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<S> <C> <C>
Net sales $ 76,360 $ 71,310
Cost of sales, including occupancy expenses
exclusive of depreciation 50,973 49,409
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Gross income 25,387 21,901
Selling, general and administrative expenses 22,817 22,307
Depreciation and amortization 1,556 1,830
Interest expense, net 675 1,029
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Income (loss) before income taxes 339 (3,265)
Provision (credit) for income taxes 137 (1,270)
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Net income (loss) $ 202 $ (1,995)
=============== ===============
Net income (loss) per common share $ .02 $ (.20)
============== ===============
Weighted average number of shares and
share equivalents outstanding 10,421 9,998
=============== ===============
See accompanying "Notes To Consolidated Financial Statements".
3
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PAUL HARRIS STORES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
UNAUDITED
(in thousands)
For the For the
twenty-six twenty-six
weeks ended weeks ended
August 3, July 29,
1996 1995
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<S> <C> <C>
Cash flow from operating activities:
Net income $ 202 $ (1,995)
Adjustments to reconcile earnings to cash provided:
Depreciation and amortization 1,556 1,830
Net disposal of assets 438 182
Utilization of net operating loss carryforward 113
(Increase) decrease in current assets:
Merchandise inventories (3,055) (2,523)
Other receivables 125 54
Prepaid expenses (194) (13)
Income taxes recoverable (1,042)
Increase (decrease) in current liabilities:
Accounts payable 331 1,500
Compensation and related taxes 80 (150)
Income taxes payable (20) (232)
Other accrued expenses (574) (279)
Other (37) (2)
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Net cash flow from operating activities (1,035) (2,670)
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Net cash flow from investing activities:
Additions to fixed assets (1,805) (1,312)
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Cash flow from financing activities:
Repayment of long-term debt (5,160) (60)
Sale of common stock under stock plan 34
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Net cash flow from financing activities (5,126) (60)
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$ (7,966) $ (4,042)
=============== ===============
Cash and cash equivalents
At beginning of period $ 19,886 $ 21,349
At end of period 11,920 17,307
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$ (7,966) $ (4,042)
=============== ===============
Supplemental disclosures of cash flow information:
Cash paid during the period for interest $ 1,229 $ 1,531
=============== ===============
Cash paid during the period for income taxes $ 44 $ 4
=============== ===============
See accompanying "Notes To Consolidated Financial Statements".
4
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PAUL HARRIS STORES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
UNAUDITED
(in thousands)
For the twenty-six For the twenty-six
weeks ended weeks ended
August 3, 1996 July 29, 1995
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SHARES AMOUNT SHARES AMOUNT
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<S> <C> <C> <C> <C>
PREFERRED STOCK (1,000 AUTHORIZED):
COMMON STOCK (20,000 AUTHORIZED):
(16,500 voting shares; 3,500 non-voting shares)
Beginning balance 10,019 $ 1,716 9,998 $ 1,684
Exercise of stock options 20 34
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Ending balance 10,039 $ 1,750 9,998 $ 1,684
======= ======== ======= ========
ADDITIONAL PAID IN CAPITAL:
Beginning balance $ 4,989 $ 3,637
Benefit of net operating loss carryforward 113
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Ending balance $ 5,102 $ 3,637
======== ========
RETAINED EARNINGS:
Beginning balance $ 16,199 $ 14,569
Net income (loss) 202 (1,995)
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Ending balance $ 16,401 $ 12,574
======== =========
See accompanying "Notes To Consolidated Financial Statements".
5
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<PAGE>
PAUL HARRIS STORES, INC., AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Basis of Presentation
The accompanying unaudited financial statements of the Company have been
prepared in accordance with instructions to Form 10-Q and Article 10 of
Regulation S-X and accordingly certain information and footnote disclosures
have been condensed or omitted. These condensed financial statements should be
read in conjunction with the financial statements and notes thereto included in
the Company's February 3, 1996 Annual Report on Form 10-K.
In the opinion of management, all adjustments (which include only normal
recurring adjustments) necessary to present fairly the financial position,
results of operations and cash flows at August 3, 1996 and for all other
periods presented have been made.
The results of operations for the first and second quarter of fiscal year 1996
are not necessarily indicative of the results to be expected for the entire
fiscal year 1996. The Company has historically produced a majority of its
income in the fourth quarter of the fiscal year due to the stronger sales
experienced during the December holiday season.
Certain amounts in the prior periods have been reclassified to conform with the
current period presentation.
2. Accounting for Stock Based Compensation
The Company has adopted the Statement of Financial Accounting Standards No.
123, "Accounting for Stock-Based Compensation" (SFAS No. 123). Management has
elected to adopt the disclosure provisions of the statement and remain under
the existing accounting rules for stock options as contained in APB Opinion No.
25 as they relate to the recognition of compensation expense in the Statement
of Operations. There will be no effect on the results of operations of the
Company as a result of this election under SFAS No. 123.
3. Distribution of Residual Notes and Stock
Pursuant to the Company's confirmed Plan of Reorganization (the "Plan"),
certain of the shares of Common Stock and 11.375% Notes to be distributed under
the Plan were to be distributed upon final resolution of all claims to the
holders of allowed claims on a pro rata basis. On May 10, 1996 the Company
completed the distribution. Of the shares of Common Stock required to be
distributed, 162,127 shares were issued as Non-voting Common Stock. All of the
shares of Common Stock to be distributed under the Plan have been reflected in
the Company's financial statements as issued and outstanding since the
confirmation of the Plan in September 1992.
6
<PAGE>
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations
Results of operations
Second quarter of fiscal year 1996
The Company's net sales increased approximately 0.6% to $36,721,000 in the
second quarter of fiscal year 1996 (the thirteen weeks ended August 3, 1996)
from $36,509,000 in the second quarter of fiscal year 1995 (the thirteen weeks
ended July 29, 1995). The increase in net sales was attributable to a 13%
increase in comparable store sales that was partially offset by a decrease in
the number of stores open during the second quarter of fiscal year 1996
compared to the second quarter of fiscal year 1995. The Company operated 215
stores as of August 3, 1996 compared to 243 stores on July 29, 1995. The 13%
comparable store sales increase was due to a positive response by customers to
the Company's overall merchandise selection.
Gross income increased from $11,717,000 or approximately 32.1% of net sales in
the second quarter of fiscal year 1995 to $12,560,000 or approximately 34.2% of
net sales for the second quarter of fiscal year 1996. This was the fourth
consecutive quarter of improvement in gross income as a percentage of sales
compared to the previous year. This increase was due primarily to lower
merchandise costs resulting from better sourcing of goods and recognizing
higher margins on accessories.
Selling, general and administrative expenses (SG&A) decreased from $11,549,000,
or approximately 31.6% of net sales, for the second quarter of fiscal year 1995
to $11,390,000, or approximately 31.0% of net sales, for the second quarter of
fiscal year 1996. This was the second consecutive quarter of improvement in
SG&A as a percentage of sales. The percentage decrease is primarily the result
of spreading fixed expenses over a higher sales base due to an increase in
comparable store sales.
Interest expense, net, decreased approximately 42% from $516,000 for the second
quarter of fiscal year 1995 to $297,000 for the second quarter of fiscal year
1996. Interest expense, net, was reduced primarily as a result of the Company
making scheduled principal payments of $2.1 million each, on July 31, 1995,
January 31, 1996, July 31, 1996 and the prepayment (without penalty) of $3
million in May 1996 on the Company's 11.375% Notes.
The Company has provided for income taxes based on statutory rates of $43,000
for the second quarter of fiscal year 1996. Due to the utilization of tax loss
carryforwards the Company benefited by a credit to additional paid-in capital
of $35,000. The Company expects to pay, in cash, only minimal income taxes for
fiscal year 1996.
As a result of the above factors, the Company recognized net income of $64,000
for the second quarter of fiscal year 1996 compared to a net loss of $780,000
for the second quarter of fiscal year 1995. The Company historically has
produced a majority of its net income in the fourth quarter of its fiscal year
due to stronger sales experienced during the December holiday season.
7
<<page>
First half of fiscal year 1996
The Company's net sales increased approximately 7.1% to $76,360,000 in the
first half of fiscal year 1996 (the twenty-six weeks ended August 3, 1996) from
$71,310,000 for the first half of fiscal year 1995 (the twenty-six weeks ended
July 29, 1995). The increase in net sales was attributable to a 15% increase in
comparable store sales that was partially offset by a decrease in the number of
stores open during the first half of fiscal year 1996 compared to the first
half of fiscal year 1995. The Company operated 215 stores as of August 3, 1996
compared to 243 stores on July 29, 1995. The 15% comparable store sales
increase was due to a positive response by customers to the Company's overall
merchandise selection.
Gross income increased from $21,901,000 or approximately 30.7% of net sales in
the first half of fiscal year 1995 to $25,387,000 or approximately 33.2% of net
sales for the first half of fiscal year 1996. This increase was due to lower
merchandise costs resulting from better sourcing of goods, the elimination of
an underperforming unit of the Company and recognizing higher margins on
accessories.
Selling, general and administrative expenses were $22,817,000, or approximately
29.9% of net sales, for the first half of fiscal year 1996 compared to
$22,307,000, or approximately 31.3% of net sales, for the first half of fiscal
year 1995. This percentage decrease is primarily the result of spreading fixed
expenses over a higher sales base due to an increase in comparable store sales.
Interest expense, net, decreased approximately 34% from $1,029,000 for the
first half of fiscal year 1995 to $675,000 for the first half of fiscal year
1996. Interest expense, net, was reduced primarily as a result of the Company
making scheduled principal payments of $2.1 million each, on July 31, 1995,
January 31, 1996, July 31, 1996 and the prepayment (without penalty) of $3
million in May 1996 on the Company's 11.375% Notes.
The Company has provided for income taxes based on statutory rates of $137,000
for the first half of fiscal year 1996. Due to the utilization of tax loss
carryforwards the Company benefited by a credit to additional paid-in capital
of $113,000. The Company expects to pay, in cash, only minimal income taxes for
fiscal year 1996.
As a result of the above factors, the Company recognized net income of $202,000
for the first half of fiscal year 1996 compared to a net loss of $1,995,000 for
the first half of fiscal year 1995. The Company historically has produced a
majority of its net income in the fourth quarter of its fiscal year due to
stronger sales experienced during the December holiday season.
Liquidity and Capital Resources
Cash and cash equivalents totaled $11,920,000 at the end of the first half of
fiscal year 1996 compared to $17,307,000 at the end of the first half of fiscal
year 1995. However, during this same period, the Company repaid over $9.4
million of long-term debt. In addition, due to the timing of the period end
(August 3, 1996 vs. July 29, 1995), the Company paid approximately $2.2 million
in accrued expenses and monthly rent payments. During the first half of fiscal
year 1996, the Company's operations used only $1,035,000 of cash compared to
$2,670,000 during the first half of fiscal year 1995. The Company repaid
approximately $5.2 million of debt in the first half of fiscal year 1996
compared to less than $100,000 in the first half of fiscal year 1995.
Although merchandise inventories decreased from $22,089,000 at the end of the
first half of fiscal year 1995 to $20,700,000 at the end of the first half of
fiscal year 1996, inventories actually increased approximately 6% on a store
for store basis due to the decrease in number of stores. This increase was
mainly in the accessory portion of the business that has experienced a
significantly higher comparable store sale increase than apparel. The
Company's inventory turn increased for the first half of fiscal year 1996
compared to the first half of year 1995.
8
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The Company has a $20 million revolving bank line of credit facility which
expires in June 1997 that is principally intended for the funding of letters of
credit for merchandise purchased overseas. The Company may make direct
borrowings of up to $10 million of this revolving bank line of credit facility.
Capital spending by the Company for the first half of fiscal year of 1996 was
$1,806,000, primarily for store fixtures and remodel of existing stores. During
the first half of fiscal year 1996 the Company opened 1 store and closed 21
stores. The Company plans to open approximately 10-15 new stores during the
remainder of fiscal year 1996.
Sales levels to date, during the third quarter of fiscal year 1996 have been
favorable. Unexpectedly harsh weather during the 1996 December holiday season
or a severe economic down-turn could negatively impact earnings and cash flow;
however, the Company anticipates it will be able to satisfy its ongoing cash
requirements for its operations and capital spending, including debt service
payments, primarily with cash flows from operations supplemented by its
revolving bank line of credit facility.
PART II. OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders
On June 19, 1996, the Company held its annual meeting of shareholders. At
the meeting, the shareholders elected the following directors by the vote
indicated, to serve until the 1999 annual meeting of shareholders.
FOR WITHHELD
Rudy Greer 5,633,863 35,583
Gerald Paul 5,637,939 31,507
There were 0 broker non-votes.
In addition, the following directors continue in office until the annual
meeting of shareholders in the year indicated.
Term
Expires
Charlotte G. Fischer 1997
Stig A. Kry 1998
Robert I. Logan 1998
Sally M. Tassani 1997
Price Waterhouse L.L.P. was approved as auditors for the Company for the
fiscal year 1996 by the following vote:
5,652,565 For 12,365 Against 4,516 Abstentions and broker non-votes
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits: (10)(i) Amended and Restated Employment Agreement between the
Company and Charlotte G. Fischer dated June 17, 1996
(27) Financial Data Schedule
(b) Reports on Form 8-K : None
9
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Paul Harris Stores, Inc.
------------------------
(Registrant)
Date: September 11, 1996 /s/ John H. Boyers
------------------- --------------------------
John H. Boyers
Senior Vice President - Finance and Treasurer
Signing on behalf of the registrant and as
principal financial officer.
AMENDED AND RESTATED
EMPLOYMENT AGREEMENT
THIS AMENDED AND RESTATED EMPLOYMENT AGREEMENT (the
"Agreement"), is made this 17th day of June 1996, by and
between Paul Harris Stores, Inc., an Indiana corporation (the
"Company"), and Charlotte G. Fischer ("Fischer").
Recitals
A. Fischer has been employed with the Company since
April 29, 1994, and since January 29, 1995, Fischer has served as
the Company's President, Chief Executive Officer and Chairman.
B. On April 18, 1994, the Company and Fischer entered
into a written employment agreement governing the terms and
conditions of Fischer's employment with the Company during the
term beginning April 29, 1994, and ending April 29, 1997, subject
to extension and earlier termination as set out in the Employment
Agreement.
C. The Company and Fischer now desire to extend the
term of Fischer's employment with the Company and to amend and
restate her employment agreement with the Company.
Agreement
In consideration of the matters stated in the Recitals,
the parties' covenants contained in this Agreement and the acts to
be performed under this Agreement, the Company and Fischer agree
as follows:
1. Employment. The Company shall employ Fischer on
the terms and conditions set forth in this Agreement. During her
employment under this Agreement, Fischer shall hold the office of
Chairman of the Board of Directors and Chief Executive Officer of
the Company, and she shall render such services and perform such
duties for the Company and the Company's subsidiaries (together,
the "Company Group") as are customarily performed by Chairmen and
Chief Executive Officers, including, without limitation, those
services and duties consistent with her position as may from time
to time be assigned to her by the Company's Board of Directors.
In addition, Fischer shall hold such offices, directorships and
other positions with the Company Group as are consistent with her
status to which she may from time to time be elected or appointed.
Fischer's authority shall be subject only to the direction and
control of the Company's Board of Directors. Fischer shall serve
the Company Group faithfully, diligently and to the best of her
ability, and she shall devote her full working time, attention,
energy and skills exclusively to the business and affairs of the
Company Group and to the promotion and advancement of its
interests, except that she may engage in such civic and charitable
activities as do not interfere with her obligations under this
Agreement, and she may hold such directorships as are permitted
pursuant to Section 6(b) of this Agreement.
2. Term of Employment; Termination of Agreement.
(a) The term of Fischer's employment under this
Agreement shall commence on the parties' signing of this
Agreement (the "Commencement Date"), and shall end on January
28, 2000 (the "Termination Date"), except that the
-2-
<PAGE>
term shall extend beyond the Termination Date to a date six
(6) months after either Fischer or the Company gives written
notice of the termination of Fischer's employment, and
except that the term shall end earlier than the Termination
Date: (i) on the date of Fischer's death; (ii) if Fischer
shall have been unable to perform any material duties under
this Agreement by reason of physical or mental disability
(with such disability to be determined by a qualified
physician selected by the Company's Board of Directors) for
a period of more than three (3) consecutive months, or a
period of more than one hundred eighty (180) days in the
aggregate in any eighteen-month period, on the date on which
the Company shall elect to terminate her employment by
reason of such disability; (iii) upon at least one hundred
eighty (180) days' prior written notice from Fischer to the
Company; or (iv) on the date on which the Company shall
elect to terminate Fischer's employment for "cause," as
defined in Section 2(b) below.
(b) For purposes of this Agreement "cause" means any
one or more of the following: (i) Fischer's willful and
continued failure to perform her duties with the Company
(other than any such failure resulting from her physical or
mental disability) after the Company delivers to her written
demand that identifies the manner in which the Company
believes that she has not performed her duties and accords
to her a reasonable opportunity thereafter to cure such
-3-<PAGE>
failure; (ii) Fischer's engaging in misconduct that, in the
opinion of a majority of the Board of Directors, is
materially and demonstrably injurious to the Company,
including, but not limited to, her conviction of or guilty
plea to any felony crime; or (iii) her material breach of
any provision of this Agreement after (A) the Company
delivers to her written notice, (B) Board of Directors'
action, and (C) at least thirty (30) days' opportunity to
cure the alleged breach.
(c) In the event that her employment terminates due to
an event described in Section 2(a), all further obligations
on the Company's part under this Agreement shall terminate,
except (i) for the payment of Fischer's Base Salary that
accrued prior to the termination of her employment, (ii) any
bonus to which she may be entitled to pursuant to Section
3(b) and (iii) for reimbursement of expenses incurred prior
to such termination in accordance with Section 5 of this
Agreement.
(d) If during the term of this Agreement, Fischer's
title or responsibilities are reduced so that she no longer
serves as Chairman and Chief Executive Officer reporting to,
and performing services and duties assigned to her by, the
Board of Directors, Fischer may, after written notice to the
Board of Directors, and after at least thirty (30) days'
opportunity to cure, elect to terminate her employment on
the ground that such reduction shall be deemed a
-4-<PAGE>
constructive termination of the term of employment under
this Agreement without cause, thereby entitling her to the
remedies available to her under Section 2(e) below.
(e) In the event that the Company terminates Fischer's
employment during the term of this Agreement without
"cause," as defined in Section 2(b), the Company shall be
obligated to pay Fischer the Base Salary to which she would
have been entitled through the Termination Date had her
employment not terminated; provided, however, that the
payment to Fischer under this Section 2(e) shall be no less
than one (1) full year's Base Salary at the rate of Base
Salary in effect immediately preceding the termination of
her employment.
(f) If her employment with the Company terminates
during the term of this Agreement, the Company shall, in all
events and regardless of the circumstances under which
Fischer's employment with the Company ended, take reasonable
steps acceptable to the Company's group medical insurance
carriers to obtain coverage for Fischer under the Company's
medical insurance policies for no less than thirty-six (36)
months following the end of Fischer's employment; provided,
however, that except to the extent that the Company shall be
responsible for paying premiums for such coverage under
Section 7(b)(iv), Fischer shall be responsible for paying all
premiums for such coverage.
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<PAGE>
3. Compensation.
(a) As full compensation for her services (including
service as an officer and director of members of the Company
Group, if Fischer is so appointed or elected), the Company
shall pay Fischer the following: (i) a salary at the rate
of $400,000.00 per annum beginning January 29, 1996, and
ending February 1, 1997, payable in accordance with the
Company's normal payroll practices ("Base Salary"), (ii)
bonuses as provided in Section 3(b) below. By January 15,
of each of the Company's fiscal years 1997, 1998 and 1999,
the Company's Board of Directors and Fischer shall review
Fischer's Base Salary and agree on her Base Salary for the
ensuing fiscal year. Until the Company's Board and Fischer
agree on her Base Salary, she shall be paid at the Base
Salary in effect for the immediately preceding fiscal year,
but upon such agreement, the new rate of Base Salary shall
be paid to Fischer retroactive to the beginning of the
current fiscal year.
(b) During the term of this Agreement, the Company
shall pay Fischer bonus compensation as follows: (i) in
respect of the Company's fiscal year ending February 1,
1997, the Company shall pay Fischer a bonus based on the
Company's net pretax income according to the following
schedule:
$4.5 million -- 20% of Base Salary;
$5.5 million -- 35% of Base Salary;
$6.5 million -- 50% of Base Salary;
$7.5 million -- 65% of Base Salary;
-6-<PAGE>
$8.5 million -- 80% of Base Salary;
$10 million -- 100% of Base Salary.
Should the Company's net pretax income exceed $10 million
dollars for that fiscal year, the Board of Directors may
authorize payment of a bonus to Fischer that exceeds 100% of
her Base Salary;
(ii) Fischer's bonuses for the Company's fiscal
years 1997, 1998 and 1999, shall be based on the same
formula set forth in Section 3(b)(i) above; provided,
however, that the lowest net pretax income of the
Company that will qualify Fischer for payment of a
bonus shall be no greater than 80% of the Company's
earned or budgeted (the Terms "budget" and "budgeted,"
as used herein, shall refer to the net income budget
for the Company as proposed by management and approved
by the Company's Board of Directors) net pretax income
(whichever is greater) for the previous fiscal year and
provided further that:
(A) if the lowest net pretax income for
payment of a bonus to Fischer under this Paragraph
3(b)(ii) shall be determined based on 80% of the
previous fiscal year's earned or budgeted net
pretax income, then in succeeding fiscal years,
the Company must achieve budgeted net pretax
income before the 80 percent minimum standard may
be used again under this Agreement to determine
-7-<PAGE>
the lowest level of net pretax income at which a
bonus is payable;
(B) if the Company does not achieve budgeted
net pretax income in the year immediately
following any year in which 80 percent of the
previous year's net pretax income earned or
budgeted was used to establish the lowest level at
which a bonus is payable to Fischer, then, for
that year 90 percent of the prior year's earned or
budgeted (whichever is greater) net pretax income
shall be used to establish the lowest level at
which a bonus is payable to Fischer;
(C) if the Company does not achieve budgeted
net pretax income in the year following the year
in which the lowest level at which a bonus is
payable to Fischer was determined using the 90
percent figure of Section 3(b)(ii)(B), then, for
that year, the lowest level at which a bonus will
be payable to Fischer shall be 100 percent of the
prior year's earned or budgeted (whichever is
greater) net pretax income.
No later than ninety (90) days following the beginning
of each fiscal year, Fischer and the Company shall review
and agree on the precise amounts of net pretax income of the
Company at which percentages of Base Salary shall be payable
-8-
<PAGE>
as bonus compensation to Fischer for the current fiscal
year.
(c) (i) Fischer shall retain all of the rights to
purchase shares of Common Stock under the nontransferable
Option granted to her under Section 2(d) of her Employment
Agreement with the Company dated April 18, 1994.
(ii) The Company and Fischer confirm that on or about
March 8, 1996, and subject to approval of the Company's
shareholders meeting the requirements of Section 162(m) of
the Internal Revenue Code of 1986, the Compensation
Committee of the Board of Directors of the Company
authorized the Company to grant to Fischer a nontransferable
Option for her to purchase an additional 100,000 shares of
the Company's Common Stock at $2.125 per share. The right
to purchase shares under the March 8, 1996, Option shall
vest and become exercisable upon the execution of this
Agreement and may be exercised while Fischer is employed
with the Company. Any portion of the Option not exercised
at the termination of her employment shall terminate and be
of no effect.
(iii) During the term of this Agreement, the Company
shall, subject to approval of the Company's shareholders
meeting the requirements of Section 162(m) of the Internal
Revenue Code of 1986, grant to Fischer nontransferable
Options to purchase shares of the Company's Common Stock as
follows:
-9-<PAGE>
(A) Subject to the limitations of Section
3(c)(iii)(B) below, if the Company achieves 80 percent
of budgeted net pretax income for any fiscal year
during the term of this Agreement, the Company's Board
of Directors shall during January of the fiscal year
(and in no event later than sixty (60) days after the
end of the fiscal year) authorize the Company to grant
to Fischer a nontransferable Option to purchase at
least 100,000 shares of the Company's Common Stock at a
price equal to the fair market value of such shares on
the date of the grant, which Option shall vest and be
exercisable on and after the date of the grant;
provided that any such Option must be exercised while
Fischer is employed with the Company, and any Option
that is not so exercised shall terminate and be of no
effect.
(B) If the Company grants to Fischer an Option to
purchase shares of the Company's Common Stock pursuant
to Section 3(b)(iii)(A) above for any fiscal year
during the term of this Agreement and the Company's net
pretax income for that fiscal year shall be less than
90 percent of the Company's budgeted net pretax income
for that fiscal year, then for the immediately
succeeding fiscal year, the Company shall achieve at
least 90 percent of its budget net pretax income for
Fischer to be eligible for the grant of an Option under
-10-<PAGE>
Section 3(b)(iii)(A), and if the Company's net pretax
income in the year following any year in which the 90
percent figure was used to authorize an award of
Options to Fischer is less than 100 percent of budgeted
net pretax income, then the Board of Directors shall
not award Options to Fischer to purchase shares of the
Company's Common Stock under Section 3(b)(iii);
provided, however, that the 80 percent formula may be
used to authorize a grant of an Option to Fischer to
purchase shares of the Company's Common Stock in any
fiscal year following a fiscal year in which the
Company's net pretax income is at or above budgeted net
pretax income for that fiscal year.
4. Benefits. During Fischer's employment under this
Agreement, the Company shall provide her with such life,
disability, health insurance and other benefits as are provided
to the Company's key executives. If, during the term of this
Agreement, the Board of Directors adopts a comprehensive
compensation program for key executives of the Company that
addresses benefits, including insurance benefits, that are to be
provided to the Company's executive employees, Fischer's benefits
will be governed by that program from and after its adoption. In
no event shall Fischer's benefits be less than those that the
Company provides to its executive employees generally.
5. Reimbursement of Expenses. During her employment,
the Company will reimburse Fischer for her reasonable travel and
-11-<PAGE>
other expenses incident to her rendering services under this
Agreement in conformity with the Company's regular policies from
time to time in effect regarding reimbursement of expenses.
Payments to Fischer for such expenses will be made upon
presentation of expense vouchers in such detail as the Company
may from time to time reasonably require.
6. Confidentiality and Noncompetition. Fischer
acknowledges that, in the course of her employment, she will
occupy a position of trust and confidence with the Company Group.
All information pertaining to the prior, current or future
business of any member of the Company Group (excluding publicly
available information, in substantially the form in which it is
publicly available, unless such information is publicly available
by reason of an unauthorized disclosure, and excluding
information known to Fischer from sources other than her
employment with the Company) constitutes valuable and
confidential assets of the Company Group to which Fischer will
have access solely as a result of her positions with the Company.
Fischer acknowledges that her agreement to comply with this
Section 6 is a material inducement to the Company to enter into
this Agreement.
(a) Fischer shall never use, divulge, furnish or make
accessible to any third person or organization, other than
in the proper course of performing her duties under this
Agreement and in connection with the Company's business, any
confidential or proprietary information concerning any
-12-<PAGE>
member of the Company Group or its businesses or affairs,
and she shall not disparage or deprecate any member of the
Company Group or its businesses or affairs or any individual
connected with the Company Group (it being understood that
statements Fischer makes to members of the Board of
Directors of the Company or to the respective individuals
involved in or to his or her superior are not intended to
be, and shall not be, encompassed by the final clause of
this sentence). The Company shall never use, divulge,
furnish or make accessible to any third person or
organization other than in the proper course of its business
any confidential or proprietary information concerning
Fischer or her businesses or affairs, and the Company shall
not disparage or deprecate Fischer or her businesses or
affairs.
(b) During her employment with the Company, and if and
only if (i) Fischer terminates her employment in violation
of this Agreement before the end of its term, or (ii) the
Company terminates her employment for "cause," as defined in
Section 2(b), then for an additional period of one (1) year
following the termination of her employment, Fischer shall
not, directly or indirectly, individually or on behalf of
other persons, (A) engage or be interested (whether as
owner, stockholder, partner, lender, consultant, employee,
agent or otherwise) in any business, activity or enterprise
which is then competitive with the business of any division
-13-<PAGE>
or operation of the Company Group in any region of the
United States in which such business is being conducted, it
being understood that the Company Group currently is engaged
in the business of operating retail women's apparel
specialty stores, or (B) hire or employ any person who has
been an employee, representative or agent of any member of
the Company Group at any time during Fischer's employment or
solicit, aid or induce such person to leave his or her
employment with any member of the Company Group to accept
employment with another person or entity. Fischer's
ownership of less than 1% of any class of stock in a
publicly traded corporation or her membership on any board
of directors that the Board of Directors of the Company then
believes does not interfere with her duties to the Company
and is not inimical to the interests of the Company shall
not be deemed a breach of this Section 6(b). Fischer shall
not accept an appointment to a board of directors for an
organization outside the Company Group that would be
inconsistent with her performing her obligations to the
Company, and she shall inform the Company's Board of
Directors of any and all of her memberships on such boards
of directors.
(c) Fischer's breach or attempted or threatened breach
of any provision contained in this Section 6 will result in
immediate and irreparable injury to the Company for which
the Company would not have an adequate remedy at law.
-14-<PAGE>
Accordingly, the Company shall be entitled, in addition to
all other remedies, to a temporary and permanent injunction
and/or a decree for specific performance of the terms of this
Section 6, without the necessity of showing any actual
damage or posting bond or furnishing other security.
(d) The provisions of this Section 6 shall survive the
termination or expiration of this Agreement (without regard
to the reasons therefor), and are in addition to and
independent of any agreements or covenants contained in any
other agreement and to any rights that the Company may have
at law or in equity.
7. Change in Control. If a Change in Control occurs
during the Term of this Agreement, the Executive shall be
entitled to the benefits outlined in Section 7(b) if Fischer's
employment is terminated or constructively terminated (as defined
in Section 2(d)) subsequent to the Change in Control and during
the Term of this Agreement for reasons other than those
stipulated in Section 2(b) of the Agreement.
(a) Definition of Change in Control. As used in this
Agreement, "Change in Control" of the Company means:
(i) The acquisition by any individual, entity or
group (within the meaning of Section 13(d)(3)
or 14(d)(2) of the Securities Exchange Act of 1934, as
amended (the "Exchange Act")) (a "Person") of beneficial
ownership (within the meaning of Rule 13d-3 promulgated under
the Exchange Act as in effect from
-15-<PAGE>
time to time) of twenty-five percent (25%) or more of
either (A) the then outstanding shares of all classes
of common stock of the Company or (B) the combined
voting power of the then outstanding voting securities
of the Company entitled to vote generally in the
election of directors; provided, however, that the
following acquisitions shall not constitute an
acquisition of control: (1) any acquisition directly
from the Company (excluding an acquisition by virtue of
the exercise of a conversion privilege), (2) any
acquisition by the Company, (3) any acquisition by any
employee benefit plan (or related trust) sponsored or
maintained by the Company or any corporation affiliated
with the Company, (4) any reorganization, merger or
consolidation, if following such reorganization, merger
or consolidation, the conditions described in Section
7(a)(iv)(A), (iv)(B) and (iv)(C) are satisfied, or (5)
any acquisition resulting from the conversion of
outstanding shares of nonvoting common stock of the
Company into voting common stock as long as such
converted shares are held by the Prudential Insurance
Company of America ("Prudential") or any entity or fund
controlled by, controlling or under common control with
Prudential.
(ii) Individuals who, as of January 29, 1996,
constitute the Board of Directors of the Company (the
-16-<PAGE>
"Incumbent Board") cease for any reason to constitute
at least a majority of the Board of Directors of the
Company (the "Board"); provided, however, that any
individual becoming a director subsequent to the date
hereof whose election, or nomination for election by
the Company's majority of the directors then comprising
the Incumbent Board shall be considered as though such
individual were a member of the Incumbent Board, but
excluding for this purpose, any such individual whose
initial assumption of service occurs as a result of
either an actual or threatened election contest (as
such terms are used in Rule 14a-11 of Regulation 14A
promulgated under the Exchange Act) or other actual or
threatened solicitation of proxies or consents by or on
behalf of a Person other than the Board; or
(iii) Approval by the shareholders of the Company
of a complete liquidation or dissolution of the
Company; or
(iv) Approval by the shareholders of the Company
of a reorganization, merger or consolidation
("Restructuring") into a resulting corporation or the
sale or other disposition of all or substantially all
of the assets of the Company ("Asset Sale") to a
purchasing corporation, unless following such
Restructuring or Asset Sale (A) more than sixty percent
(60%) of, respectively, the then outstanding shares of
-17-<PAGE>
common stock of the resulting corporation or purchasing
corporation, as the case may be ("successor
corporation") and the combined voting power of the then
outstanding voting securities of the successor
corporation entitled to vote generally in the election
of directors is then beneficially owned, directly or
indirectly, by all or substantially all of the
individuals and entities who were the beneficial
owners, respectively, of the outstanding Company common
stock and outstanding Company voting securities
immediately prior to such Restructuring or Asset Sale,
as the case may be, (B) no Person (excluding the
Company and any employee benefit plan or related trust
of the Company or the successor corporation and any
Person beneficially owning, immediately prior to such
Restructuring or Asset Sale, directly or indirectly, twenty-
five percent (25%) or more of the outstanding Company common
stock or outstanding Company voting securities, as the case
may be) beneficially owns, directly or indirectly, twenty-
five percent (25%) or more of, respectively, the then
outstanding shares of common stock of the successor
corporation and the combined voting power of the then
outstanding voting securities of the successor corporation
entitled to vote generally in the election of directors, and
(C) at least a majority of the members of the board of
directors of the successor corporation were members of the
-198-<PAGE>
Incumbent Board at the time of the execution of the initial
agreement or action of the Board providing for such
Restructuring or Asset Sale.
(b) Change in Control Benefits. The following
benefits, less any amounts required to be withheld therefrom
under any applicable federal, state or local income tax,
other tax, or social security laws or similar statutes,
shall be paid to Fischer upon any termination of her
employment with the Company or upon the constructive
termination of her employment (as defined in Section 2(d))
subsequent to a Change in Control:
(i) Within ten (10) days following such a
termination, Fischer shall be paid, at her then
effective Base Salary, for services performed through
the date of her termination.
(ii) Within ten (10) days following such a termination
or constructive termination, Fischer shall be paid a lump
sum payment of an amount equal to two and nine-tenths (2.9)
times her then current Base Salary; provided, that the
present value of the amount of any payment under this
subparagraph (ii) shall be reduced by the full amount of the
present value of all other payments in the nature of
compensation to or for the benefit of Fischer which are
deemed contingent upon a change (A) in the ownership or
effective control of the Company or (B) in the ownership of
a substantial portion of the assets of the Company as such
-19-<PAGE>
concepts are defined by Section 280G of the Internal Revenue
Code and are, from time to time, interpreted by applicable
regulations and rulings of the Internal Revenue Service.
The sole purpose of the limitation imposed by this proviso
is to preclude the amount payable pursuant to this
subparagraph (ii) from being characterized as a "parachute
payment" under Section 280G of the Code. It is the
intention of the parties that this subparagraph be
interpreted and construed in a manner so as to allow the
greatest dollar payment to Fischer without such payment
being classified as a "parachute payment," as such term is
defined by Section 280G of the Code. The Company and
Fischer agree that any dispute between them as to the amount
of the payment provided under this subparagraph (ii) and the
application of the limitation of Section 280G of the Code
shall be resolved by an opinion of competent counsel
selected by and acceptable to the Company and Fischer.
Counsel's fee for the opinion required herein shall be paid
by the Company.
(iii) Fischer shall be paid a bonus under Section 2(b)
for the fiscal year in which her termination or constructive
termination occurs.
(iv) Fischer shall receive continued Company-paid
coverage under the Company's insured or self-insured
welfare benefit plans for a period of one (1) year
following the date of her termination.
-20-<PAGE>
Payment in accordance with subparagraphs (i), (ii),
(iii) and (iv) shall be deemed to constitute a full settlement
and discharge of any and all obligations of the Company to
Fischer arising out of her employment with the Company and the
termination or constructive termination thereof, except for any
vested rights the Executive may then have under any insurance,
pension, supplemental pension, retirement savings, profit
sharing, employee stock ownership, or stock option plans
sponsored or made available by the Company.
8. No Conflicting Agreement. Fischer and the Company
represent and warrant to each other that they have no obligations
to any other person or entity that would affect or conflict with
any of their obligations under this Agreement.
9. Notices. Any notice or other communication
required or permitted to be given under this Agreement shall be
deemed to have been duly given when personally delivered or when
sent by certified mail, return receipt requested, postage
prepaid, as follows: (a) If to the Company, at the following
address: Paul Harris Stores, Inc., 6003 Guion Road, Indianapolis,
Indiana 46254, Attention: Secretary of the Company. (b) If to
Fischer, at the following address: 9815 Summerlakes Drive,
Carmel, Indiana 46032. Either party may change its or her
address for the purpose of this Section by written notice
similarly given.
10. Severability. If any clause or provision of this
Agreement shall be held to be invalid or unenforceable, such
-21-<PAGE>
clause or provision shall be construed and enforced as if it had
been more narrowly drawn so as not to be invalid or enforceable,
and such invalidity and unenforceability shall not affect or
render invalid or unenforceable any other provision of this
Agreement.
11. Miscellaneous. This Agreement sets forth the
parties' final and entire agreement, and it supersedes any and
all prior understandings with respect to their subject matter.
The headings in this Agreement are for convenience of reference
only and shall not affect the interpretation of this Agreement.
This Agreement shall inure to the benefit of and be binding upon
the Company, its successors and assigns and upon Fischer, and her
heirs, administrators and legal representatives, but no right or
obligation under this Agreement may be assigned or delegated. No
failure or delay by either party in exercising any right, option,
power or privilege under this Agreement shall operate as a waiver
thereof, nor shall any single or partial exercise thereof
preclude any other or further exercise thereof, or the exercise
of any other right, option or privilege. This Agreement can be
changed, waived or terminated only by a writing signed by Fischer
and the Company and shall be governed by the internal laws of the
State of Indiana (without reference to its rules as to conflicts
of laws).
-22-<PAGE>
IN WITNESS WHEREOF, the parties have signed this
Agreement as of the date first above written.
PAUL HARRIS STORES, INC.
By /s/Gerald Paul
Name: Gerald Paul
Title: Chairman Emeritus
/s/Charlotte G, Fischer
Charlotte G. Fischer
-23-
<PAGE>
<TABLE> <S> <C>
<ARTICLE> 5
<CAPTION>
EXHIBIT 27 - FINANCIAL DATA SCHEDULE
PAUL HARRIS STORES, INC. AND SUBSIDIARIES
FORM 10-Q FOR THE SIX MONTHS ENDED AUGUST 3, 1996
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> FEB-01-1997
<PERIOD-END> AUG-03-1996
<CASH> 11,920,000
<SECURITIES> 0
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 20,700,000
<CURRENT-ASSETS> 34,241,000
<PP&E> 29,741,000
<DEPRECIATION> (12,104,000)
<TOTAL-ASSETS> 52,714,000
<CURRENT-LIABILITIES> 14,419,000
<BONDS> 12,480,000
<COMMON> 1,750,000
0
0
<OTHER-SE> 21,503,000
<TOTAL-LIABILITY-AND-EQUITY> 52,714,000
<SALES> 76,360,000
<TOTAL-REVENUES> 76,360,000
<CGS> 50,973,000
<TOTAL-COSTS> 50,973,000
<OTHER-EXPENSES> 24,373,000
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 675,000
<INCOME-PRETAX> 339,000
<INCOME-TAX> 137,000
<INCOME-CONTINUING> 202,000
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 202,000
<EPS-PRIMARY> 0.02
<EPS-DILUTED> 0.02
</TABLE>
