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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 November 1, 1997 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 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 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 December 1, 1997, 1997, 11,248,964 common shares were outstanding.
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INDEX
PAUL HARRIS STORES, INC. AND SUBSIDIARIES
Part I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets - November 2, 1996,
February 1, 1997 and November 1, 1997 3
Consolidated Statements of Income - For the thirteen
weeks ended November 2, 1996 and November 1, 1997 4
Consolidated Statements of Income - For the thirty-nine
weeks ended November 2, 1996 and November 1, 1997 5
Consolidated Statements of Cash Flows - For the
thirty-nine weeks ended November 2, 1996 and November 1, 1997 6
Consolidated Statements of Shareholders' Equity - For the thirty-nine
weeks ended November 2, 1996 and November 1, 1997 7
Notes to Consolidated Financial Statements 8
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 9
Part II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K 14
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<TABLE><CAPTION>
PAUL HARRIS STORES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
UNAUDITED
(in thousands)
November 2, February 1, November 1,
1996 1997 1997
----------- ----------- -----------
<S> <C> <C> <C>
ASSETS
Current assets
Cash and cash equivalents $ 11,825 $ 16,001 $ 16,049
Merchandise inventories 31,318 19,759 41,741
Other receivables 457 861 1,552
Prepaid expenses 1,142 836 985
Deferred income taxes 0 0 183
----------- ----------- -----------
Total current assets 44,742 37,457 60,510
----------- ----------- -----------
Property, fixtures and equipment
Land, building and improvements 5,784 5,787 5,850
Store fixtures and equipment 12,907 14,067 21,955
Leasehold improvements and other 12,313 12,567 18,192
----------- ----------- -----------
31,004 32,421 45,997
Less accumulated depreciation and amortization (12,821) (13,315) (15,313)
----------- ----------- -----------
Property, fixtures and equipment, net 18,183 19,106 30,684
Deferred income taxes 0 0 2,147
Other assets 819 756 789
----------- ----------- -----------
$ 63,744 $ 57,319 $ 94,130
=========== =========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities
Accounts payable $ 10,903 $ 8,515 $ 19,417
Compensation and related taxes 2,742 3,774 2,149
Income taxes payable 186 37 53
Other accrued expenses 4,546 3,554 5,412
Current maturities of long-term debt 4,320 120 120
----------- ----------- -----------
Total current liabilities 22,697 16,000 27,151
----------- ----------- -----------
Long-term debt 12,450 1,930 1,840
Other non-current liabilities 2,447 2,478 2,981
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
10,067, 10,115 and 11,248 respectively 1,804 1,930 17,310
Additional paid-in capital 6,124 9,963 13,873
Retained earnings 18,222 25,018 30,975
----------- ----------- -----------
Total shareholders' equity 26,150 36,911 62,158
----------- ----------- -----------
$ 63,744 $ 57,319 $ 94,130
=========== =========== ===========
See accompanying "Notes To Consolidated Financial Statements".
</TABLE>
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<TABLE><CAPTION>
PAUL HARRIS STORES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
UNAUDITED
(in thousands, except per share data)
For the For the
thirteen thirteen
weeks ended weeks ended
November 2, November 1,
1996 1997
-------------- --------------
<S> <C> <C>
Net sales $ 45,413 $ 51,057
Cost of sales, including occupancy expenses
exclusive of depreciation 27,339 30,667
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Gross income 18,074 20,390
Selling, general and administrative expenses 13,852 14,749
Depreciation and amortization 795 1,220
-------------- --------------
Operating income 3,427 4,421
Interest expense (income), net 369 (189)
-------------- --------------
Income before income taxes 3,058 4,610
Provision for income taxes 1,237 1,142
-------------- --------------
Net income $ 1,821 $ 3,468
============== ==============
Net income per common share $ 0.17 $ 0.29
============== ==============
Weighted average number of shares and
share equivalents outstanding 10,704 11,918
============== ==============
See accompanying "Notes To Consolidated Financial Statements".
</TABLE>
4
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<TABLE><CAPTION>
PAUL HARRIS STORES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
UNAUDITED
(in thousands, except per share data)
For the For the
thirty-nine thirty-nine
weeks ended weeks ended
November 2, November 1,
1996 1997
-------------- --------------
<S> <C> <C>
Net sales $ 121,773 $ 135,814
Cost of sales, including occupancy expenses
exclusive of depreciation 78,312 84,178
-------------- --------------
Gross income 43,461 51,636
Selling, general and administrative expenses 36,668 40,407
Depreciation and amortization 2,351 3,180
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Operating income 4,442 8,049
Interest expense (income), net 1,045 (743)
-------------- --------------
Income before income taxes 3,397 8,792
Provision for income taxes 1,374 2,834
-------------- --------------
Net income $ 2,023 $ 5,958
============== ==============
Net income per common share $ 0.19 $ 0.52
============== ==============
Weighted average number of shares and
share equivalents outstanding 10,515 11,465
============== ==============
See accompanying "Notes To Consolidated Financial Statements".
</TABLE>
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<TABLE><CAPTION>
PAUL HARRIS STORES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
UNAUDITED
(in thousands)
For the For the
thirty-nine thirty-nine
weeks ended weeks ended
November 2, November 1,
1996 1997
-------------- --------------
<S> <C> <C>
Cash flow from operating activities:
Net income $ 2,023 $ 5,958
Adjustments to reconcile earnings to cash provided:
Depreciation and amortization 2,351 3,180
Net disposal of assets 349 118
Deferred income taxes 0 (695)
Utilization of net operating loss carryforward 1,135 1,399
(Increase) decrease in current assets:
Merchandise inventories (13,673) (21,982)
Other receivables 82 (691)
Prepaid expenses (129) (149)
Increase (decrease) in current liabilities:
Accounts payable 4,891 10,902
Compensation and related taxes 1,964 (1,625)
Income taxes payable 141 892
Other accrued expenses 1,099 1,858
Other 13 581
-------------- --------------
Net cash flow from operating activities 246 (254)
-------------- --------------
Net cash flow from investing activities:
Additions to fixed assets (3,205) (14,988)
-------------- --------------
Cash flow from financing activities:
Repayment of long-term debt (5,190) (90)
Sale of common stock 88 15,380
-------------- --------------
Net cash flow from financing activities (5,102) 15,290
-------------- --------------
$ (8,061) $ 48
============== ==============
Cash and cash equivalents
At beginning of period $ 19,886 $ 16,001
At end of period 11,825 16,049
-------------- --------------
$ (8,061) $ 48
============== ==============
Supplemental disclosures of cash flow information:
Cash paid during the period for interest $ 1,335 $ 259
============== ==============
Cash paid during the period for income taxes $ 98 $ 1,492
============== ==============
See accompanying "Notes To Consolidated Financial Statements".
</TABLE>
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<TABLE><CAPTION>
PAUL HARRIS STORES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
UNAUDITED
(in thousands)
For the thirty-nine For the thirty-nine
weeks ended weeks ended
November 2, 1996 November 1, 1997
---------------------- ----------------------
SHARES AMOUNT SHARES AMOUNT
--------- ---------- --------- ----------
<S> <C> <C> <C> <C>
PREFERRED STOCK (1,000 AUTHORIZED):
COMMON STOCK (20,000 AUTHORIZED):
Beginning balance 10,019 $ 1,716 10,115 $ 1,930
Stock offering 0 0 995 14,959
Exercise of stock options 48 88 138 421
-------- ---------- ------- ----------
Ending balance 10,067 $ 1,804 11,248 $ 17,310
======== ========== ======= ==========
ADDITIONAL PAID IN CAPITAL:
Beginning balance $ 4,989 $ 9,963
Tax benefit on exercise of stock options 0 1,075
Benefit of net operating loss carryforward 1,135 2,835
---------- ----------
Ending balance $ 6,124 $ 13,873
========== ==========
RETAINED EARNINGS:
Beginning balance $ 16,199 $ 25,017
Net income 2,023 5,958
---------- ----------
Ending balance $ 18,222 $ 30,975
========== ==========
See accompanying "Notes To Consolidated Financial Statements".
</TABLE>
7
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PAUL HARRIS STORES, INC., AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Basis of Presentation
The accompanying unaudited consolidated financial statements include the
accounts of Paul Harris Stores, Inc. and subsidiaries (the "Company"). The
Company is a specialty retailer of moderately-priced private-label sportswear
and accessories for women.
The 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 1, 1997 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 November 1, 1997 and for all other
periods presented, have been made.
The Company's fiscal year ends on the Saturday closest to January 31. All
references in this report to fiscal years are to the calendar years in which
such fiscal years began. For example, fiscal 1997 refers to the fiscal year
that began on February 2, 1997 and will end on January 31, 1998.
The results of operations for the first three quarters of fiscal 1997 are not
necessarily indicative of the results to be expected for all of fiscal 1997.
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
month of December.
2. Earnings Per Share
The Company will adopt Statement of Financial Accounting Standards No. 128
(SFAS 128), "Earnings per Share", for fiscal 1997 year-end reporting and
restate its reporting for all prior periods reported as required. The adoption
of SFAS 128 will not have a material impact on earnings per share amounts for
the first three quarters of fiscal 1997.
3. Bank Revolving Credit Facility
On April 9, 1997, the Company and its lender agreed to modify the secured
revolving credit facility. The revised agreement increased the credit facility
from $20 million to $30 million. The Company may use the entire amount of the
credit facility for letters of credit or direct borrowings.
The term of the credit facility was extended to June 30, 1999. The annual
interest rate on the direct borrowings was decreased from a variable rate equal
to the prime rate of the lender plus one percent to the prime rate plus one
quarter of one percent (.250%). Issuance fees for letters of credit were
reduced to one quarter of one percent (.250%) from three eighths of one percent
(0.375%) of the face amount of each letter of credit. The advance rate on
inventory for the period of August 1 to November 30 was increased from 60% to
70%. The previous agreement contained several covenants relating to
indebtedness, capital expenditures, dividends and cash balances. The new
agreement eliminated many of these covenants for the credit facility and term
loan (mortgage) and modified the remaining covenants related to tangible net
worth and operating cash flow requirements.
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4. Shareholder Rights Plan
On April 10, 1997 the Company adopted a shareholder rights plan. The plan is
designed to ensure that the Company's shareholders receive fair treatment in
the event of an unsolicited attempt to acquire control of the Company. Under
the plan, holders of the Company's outstanding common stock on April 25, 1997
received one Right for each share of common stock. Initially each Right
represents the right to purchase one one-hundredth (1/100th) of a share of the
Company's Series A Participating Cumulative Preferred Stock at an exercise
price of $90. The Company may redeem the Rights for $.01 in cash or securities
at any time prior to the acquisition by a person or group of beneficial
ownership of 15% or more of the Company's common stock or the expiration of the
Rights on April 10, 2007. The Rights are not exercisable or transferable apart
from the Company's common stock unless a person or group discloses an intent or
becomes a beneficial owner of 15% or more of the Company's outstanding common
stock. When the Rights become exercisable and transferable, each holder of a
Right (other than the person or group acquiring or attempting to acquire 15% or
more of the Company's common stock) will be entitled to purchase at the Right's
then-current exercise price, shares of the Preferred Stock having a value of
twice the Rights exercise price.
5. Sale of Common Stock
During May 1997 the Company sold a total of 995,000 newly issued shares of
common stock in an underwritten public offering. The Company received
approximately $15.0 million, net of expenses, from the offering. In addition,
a selling shareholder sold 2.8 million shares in the offering.
6. Income Tax Adjustment
In the third quarter of fiscal 1997, the Company fully utilized its remaining
income tax net operating loss carryforwards generated during the pre-Chapter 11
period. In accordance with AICPA SOP 90-7 the utilization of these net
operating loss carryforwards resulted in an increase in additional paid-in
capital of $2.8 million for the thirty-nine weeks ended November 1, 1997. As a
result of this utilization, and management's belief that the realization of the
benefit of the Company's net deferred tax assets is reasonably assured, the
Company reduced the valuation allowance against its remaining net deferred tax
assets, resulting in a reduction of income tax expense of $695,000, or $0.06
per share. The reduction of the valuation allowance on the Company's deferred
tax asset related to minimum tax credit carryforwards resulted in an increase
in additional paid-in capital in accordance with the provisions of SOP 90-7.
These adjustments had no impact on cash flows from operations. At November 1,
1997 no valuation allowance against net deferred tax assets remained.
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations
Certain statements made in this report may constitute "forward-looking
statements" within the meaning of the Private Securities Litigation Reform Act
of 1995. Such forward-looking statements involve known and unknown risks,
uncertainties and other factors which may cause the actual results,
performances or achievements of the Company or the retailing industry to be
materially different from any future results, performance or achievements
expressed or implied by such forward-looking statements. Such factors include,
among others, local, regional and national economic conditions; extreme or
unseasonable weather conditions; legislation and regulatory matters affecting
payroll costs or other aspects of retailing; the ability to identify and
respond to emerging fashion trends; and governmental actions such as import or
trade restrictions.
Overview
The Company is a specialty retailer of moderately-priced sportswear and
accessories for women sold under the Paul Harris Design, Paul Harris Denim and
PHD brand names. The Company
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currently operates 276 stores in 28 states and the District of Columbia with
the greatest concentration of stores in the Midwest.
The Company is expanding and remodeling its store base. The Company's stores
average 4,300 gross square feet and are located primarily in regional enclosed
shopping malls and, to a lesser extent, strip shopping centers. During the
first three quarters of fiscal 1997, the Company opened 43 stores, closed 8
stores and remodeled 34 stores. The Company plans to open up to 52 net new
stores in fiscal 1997 and 70 to 80 net new stores in fiscal 1998. In addition,
the Company plans to remodel 35 to 40 stores in fiscal 1997 and intends to
remodel 80 to 100 stores in the three fiscal years thereafter. Management
expects new stores will be located primarily in the Company's existing markets
in order to enhance recognition of the Paul Harris name, leverage field
management, facilitate targeted marketing efforts and utilize the Company's
sales team at its greatest operational efficiency. However, management will
evaluate expansion opportunities in other markets as they arise.
Results of Operations
The following discussion is based upon the unaudited financial statements
appearing elsewhere in this report. The following table sets forth certain
income statement items as a percentage of net sales.
<TABLE><CAPTION>
PAUL HARRIS STORES, INC. AND SUBSIDIARIES
RESULTS OF OPERATIONS AS A
PERCENTAGE OF NET SALES
Thirteen weeks ended Thirty-nine weeks ended
------------------------- -------------------------
November 2, November 1, November 2, November 1,
1996 1997 1996 1997
------------ ----------- ---------- ----------
<S> <C> <C> <C> <C>
Net sales 100.0% 100.0% 100.0% 100.0%
Cost of sales, including occupancy
expenses exclusive of depreciation (1) 60.2% 60.1% 64.3% 62.0%
--------- -------- --------- ---------
Gross income 39.8% 39.9% 35.7% 38.8%
Selling, general and administrative expenses (2) 30.5% 28.9% 30.1% 29.8%
Depreciation and amortization 1.8% 2.4% 1.9% 2.3%
--------- -------- --------- ---------
Operating income 7.5% 8.6% 3.7% 5.9%
Interest expense (income), net 0.8% (0.4%) 0.9% (0.5%)
--------- -------- --------- ---------
Income before income taxes 6.7% 9.0% 2.8% 6.4%
Provision for income taxes 2.7% 2.2% 1.1% 2.1%
--------- -------- --------- ---------
Net income 4.0% 6.8% 1.7% 4.3%
========= ======== ========= =========
- ----------------------------------
(1) Occupancy expenses include store level base rent, percentage rent and real estate taxes.
(2) Includes all store level occupancy expenses not included in cost of sales.
</TABLE>
10
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Third quarter of fiscal 1997
The Company's net sales increased to $51.1 million in the third quarter of
fiscal 1997 from $45.4 million in the third quarter of fiscal 1996, an increase
of $5.7 million or 12.4%. The increase in net sales was primarily attributable
to a 6% increase in comparable store sales (stores open at least twelve months)
and an increase of 32 stores open during the third quarter of fiscal 1997
compared to the third quarter of fiscal 1996. The 6% comparable store sales
increase was due to a positive response by customers to the Company's overall
merchandise selection as reflected by a 13.6% increase in the average customer
transactions per store. This was the eighth consecutive quarterly improvement
in sales and the seventh consecutive quarter comparable store sales increases.
The Company operated 258 stores as of November 1, 1997 as compared to 226
stores on November 2, 1996.
Gross income increased to $20.4 million in the third quarter of fiscal 1997
from $18.1 million in the prior year, an increase of $2.3 million or 12.8%.
Gross income, as a percentage of net sales, increased to 39.9% in the third
quarter of fiscal 1997 from 39.8% of net sales in the third quarter of fiscal
1996. Gross income increased primarily due to the increase in net sales. Gross
income, as a percentage of net sales, increased slightly as a result of selling
a higher proportion of lower cost merchandise from overseas sources and
continuing growth in net sales of accessories, which generally have higher
gross margins than apparel. This was the ninth consecutive quarterly
improvement in gross income.
Selling, general and administrative expenses increased to $14.7 million, or
28.9% of net sales, for the third quarter of fiscal 1997 from $13.9 million,
or 30.5% of net sales, for the third quarter of fiscal 1996. The increase of
$800,000 was primarily the result of increased payroll costs for stores and
increased overhead needed to support the increase in sales and store growth.
Depreciation and amortization increased to $1.2 million for the third quarter
of fiscal 1997 from $795,000 for the third quarter of fiscal 1996, an increase
of $425,000 or 53.4%. The increase is a result of an approximately $15.0
million net increase in fixed assets consisting primarily of leasehold
improvements, store fixtures and point of sale equipment at the end of the
third quarter of fiscal 1997 compared to the end of the third quarter of fiscal
1996. Approximately, $4.7 million of this amount represents the new point of
sale equipment purchased during fiscal 1997 that has a shorter depreciable life
than most other depreciable assets of the Company. As a percentage of net
sales, depreciation and amortization increased to 2.4% in the third quarter of
fiscal 1997 from 1.8% in the third quarter of fiscal 1996.
Operating income increased to $4.4 million in the third quarter of fiscal 1997
from $3.4 million for the third quarter of fiscal 1996, an increase of $1.0
million or 29.0%. As a percentage of net sales, operating income increased to
8.6% in the third quarter of fiscal 1997 from 7.5% in the third quarter of
fiscal 1996.
Interest income, net, of $189,000 for the third quarter of fiscal 1997 improved
by $558,000 from an interest expense, net, of $369,000 for the third quarter of
fiscal 1996. This improvement was primarily the result of the repayment during
the fourth quarter of fiscal 1996 of the remaining balance of the $24.0 million
aggregate principal amount of 11.375% Notes due January 31, 2000 that the
Company had issued in 1992, and the receipt of approximately $15.0 million from
the sale of 995,000 shares of common stock in May 1997.
The provision for income taxes, based on statutory rates, was $1,837,000 for
the third quarter of fiscal 1997 as compared to $1,237,000 for the third
quarter of fiscal 1996, an increase of $600,000, as a result of the increase in
income before income taxes. The Company's effective tax rate of 24.8% in the
third quarter of fiscal 1997 was lower than the 40.4% in the third quarter of
fiscal 1996. In the third quarter of 1997, the Company fully utilized its
remaining income tax net operating loss carryforwards. As a result of this
utilization, and management's belief that the realization of the benefit of the
Company's net deferred tax assets is reasonably assured, in the
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third quarter the Company reduced the valuation allowance against its
remaining net deferred tax assets, resulting in a reduction of income tax
expense of $695,000, or $0.06 per share.
As a result of the above factors, the Company's net income increased to $3.5
million for the third quarter of fiscal 1997 from $1.8 million for the third
quarter of fiscal 1996, an increase of $1.7 million or 94.4%.
First three quarters of fiscal 1997
The Company's net sales increased to $135.8 million in the first three quarters
of fiscal 1997 from $121.8 million in the first three quarters of fiscal 1996
an increase of $14.0 million or 11.5%. The increase in net sales was primarily
attributable to a 8% increase in comparable store sales (stores open at least
twelve months) and an increase of 32 stores open during the first three
quarters of fiscal 1997 as compared to the first three quarters of fiscal 1996.
The 8% comparable store sales increase was due to a positive response by
customers to the Company's overall merchandise selection reflected by a 25.5%
increase in customer transactions per store. The Company operated 258 stores
as of November 1, 1997 as compared to 226 stores on November 2, 1996.
Gross income increased to $51.6 million in the first three quarters of fiscal
1997 from $43.5 million in the prior year, an increase of $8.1 million or
18.8%. Gross income, as a percentage of net sales, increased to 38.0% in the
first three quarters of fiscal 1997 from 35.7% of net sales in the first three
quarters of fiscal 1996. Gross income increased primarily due to the increase
in net sales. Gross income, as a percentage of net sales, increased as a
result of selling a higher proportion of lower cost merchandise from overseas
sources and growth in net sales of accessories, which generally have higher
gross margins than apparel.
Selling, general and administrative expenses increased to $40.4 million, or
29.8% of net sales, for the first three quarters of fiscal 1997 from $36.7
million, or 30.1% of net sales, for the first three quarters of fiscal 1996.
The increase of $3.7 million was primarily the result of increased payroll
costs for stores and increased overhead needed to support the increase in sales
and planned store growth.
Depreciation and amortization increased to $3.2 million for the first three
quarters of fiscal 1997 from $2.4 million for the first three quarters of
fiscal 1996, an increase of $800,000 or 35.3%. The increase is a result of an
approximately $15 million increase in fixed assets consisting primarily of
leasehold improvements, store fixtures and point of sale equipment at the end
of the third quarter of fiscal 1997 compared to the end of the third quarter of
fiscal 1996. In addition, the new point of sale equipment purchased in the
first three quarters of fiscal 1997 has a shorter depreciable life than most
other depreciable assets of the Company. As a percentage of net sales,
depreciation and amortization increased to 2.3% in the first three quarters of
fiscal 1997 from 1.9% in the first three quarters of fiscal 1996.
Operating income increased to $8.0 million in the first three quarters of
fiscal 1997 from $4.4 million for the first three quarters of fiscal 1996, an
increase of 81.2%. As a percentage of net sales, operating income increased to
5.9% in the first three quarters of fiscal 1997 from 3.7% in the first three
quarters of fiscal 1996.
Interest income, net, of $743,000 for the first three quarters of fiscal 1997
improved by $1.8 million from an interest expense, net, of $1.0 million for the
first three quarters of fiscal 1996. This improvement was primarily the result
of the repayment during the fourth quarter of fiscal 1996 of the remaining
balance of the $24.0 million aggregate principal amount of 11.375% Notes due
January 31, 2000 that the Company had issued in 1992, and the receipt of
approximately $15.0 million from the sale of 995,000 shares of common stock in
May 1997.
The provision for income taxes, based on statutory rates, was $3.5 million for
the first three quarters of fiscal 1997 as compared to $1.4 million for the
first three quarters of fiscal 1996, an increase of $2.1 million, as a result
of the increase in income before income taxes. The
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Company's effective tax rate of 32.2% in the first three quarters of fiscal
1997 is slightly lower than the 40.4% in the first three quarters of fiscal
1996. In the third quarter of 1997, the Company fully utilized its remaining
income tax net operating loss carryforwards. As a result of this utilization,
and management's belief that the realization of the benefit of the Company's
net deferred tax assets is reasonably assured, in the third quarter the Company
reduced the valuation allowance against its remaining net deferred tax assets,
resulting in a reduction of income tax expense of $695,000, or $0.06 per share.
As a result of the above factors, the Company's net income increased to $6.0
million for the first three quarters of fiscal 1997 from $2.0 million for the
first three quarters of fiscal 1996, an increase of $4.0 million or 200.0%.
Seasonality
The Company's business, like that of most retailers, is subject to seasonal
influences. A significant portion of the Company's net sales and profits are
realized during the Company's fourth fiscal quarter, which includes the holiday
selling season. Results for any quarter are not necessarily indicative of the
results that may be achieved for a full fiscal year. Quarterly results may
fluctuate materially depending upon, among other things, the timing of new
store openings, net sales and profitability contributed by new stores,
increases or decreases in comparable store sales, adverse weather conditions,
shifts in the timing of certain holidays and promotions, and changes in the
Company's merchandise mix.
Liquidity and Capital Resources
The Company's primary sources of working capital consist of internally
generated cash and its $30 million secured, revolving credit facility. While
this credit facility is principally intended for letters of credit for import
merchandise, the Company may make direct borrowings of up to the maximum amount
of the credit facility. The credit facility expires June 30, 1999. The annual
interest rate on borrowings outstanding under the credit facility is a variable
rate equal to the prime rate of the Company's lender plus 0.25%. In addition,
letters of credit carry an initial issuance fee plus a fee of 0.25% of the face
amount of such letters of credit. The credit facility also contains certain
financial covenants which set limits on tangible net worth and cash flow from
operations. The credit facility is secured by a security interest in the
Company's inventory, equipment, fixtures, cash and an assignment of leases. At
November 1, 1997, there were outstanding letters of credit issued in favor of
the Company under the credit facility in an aggregate amount of $9.1 million.
On the same date, there were no outstanding direct borrowings under the credit
facility.
In May 1997 the Company received approximately $15.0 million, net of expenses,
as the proceeds of an underwritten public offering of its common stock. The
net proceeds have been added to the Company's working capital and are available
for general corporate purposes.
The Company made capital expenditures of approximately $15.0 million in the
first three quarters of fiscal 1997, primarily for remodeling existing stores
(approximately $5.3 million), for opening new stores (approximately $4.8
million), for the Company's new point of sale system (approximately $4.7
million) and $200,000 for other items. The Company anticipates opening up to
52 net new stores and remodeling 35 to 40 stores during fiscal 1997.
Net cash flow from operating activities was a negative $254,000 in the first
three quarters of fiscal 1997. Net cash flow from financing activities
aggregated $15.3 million in the first three quarters of fiscal 1997, including
the proceeds from the sale of new common stock and the exercise of common stock
options.
Cash and cash equivalents was unchanged at $16.0 million at the end of the
first three quarters of fiscal 1997 compared to $16.0 million at the beginning
of the fiscal 1997.
13
<PAGE>
Management believes that cash on hand and cash generated from operations
together with borrowings available under the Company's credit facility are
sufficient to meet the Company's working capital expenditure needs for the
foreseeable future.
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits: (27) Financial Data Schedule
(b) Reports on Form 8-K : None
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: December 15, 1997 /s/ John H. Boyers
------------------
John H. Boyers
Senior Vice President - Finance and Treasurer
Signing on behalf of the registrant and as
principal financial officer.
14
<PAGE>
<TABLE> <S> <C>
<ARTICLE> 5
<CAPTION>
EXHIBIT 27 - FINANCIAL DATA SCHEDULE
PAUL HARRIS STORES, INC. AND SUBSIDIARIES
FORM 10-Q FOR YEAR-TO-DATE ENDED November 1, 1997
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> JAN-31-1998
<PERIOD-END> NOV-01-1997
<CASH> 16,049,000
<SECURITIES> 0
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 41,741,000
<CURRENT-ASSETS> 60,510,000
<PP&E> 45,997,000
<DEPRECIATION> (15,313,000)
<TOTAL-ASSETS> 94,130,000
<CURRENT-LIABILITIES> 27,151,000
<BONDS> 1,840,000
<COMMON> 17,310,000
0
0
<OTHER-SE> 44,848,000
<TOTAL-LIABILITY-AND-EQUITY> 94,130,000
<SALES> 135,814,000
<TOTAL-REVENUES> 135,814,000
<CGS> 84,178,000
<TOTAL-COSTS> 84,178,000
<OTHER-EXPENSES> 43,587,000
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (743,000)
<INCOME-PRETAX> 8,792,000
<INCOME-TAX> 2,834,000
<INCOME-CONTINUING> 5,958,000
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 5,958,000
<EPS-PRIMARY> 0.52
<EPS-DILUTED> 0.52
</TABLE>
