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 May 3, 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 May 30, 1997, 11,118,487 common shares were outstanding.
1
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INDEX
PAUL HARRIS STORES, INC. AND SUBSIDIARIES
Part I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets - May 4, 1996,
February 1, 1997 and May 3, 1997 3
Consolidated Statements of Income - For the thirteen
weeks ended May 4, 1996 and May 3, 1997 4
Consolidated Statements of Cash Flows - For the
thirteen weeks ended May 4, 1996 and May 3, 1997 5
Consolidated Statements of Shareholders' Equity -
For the thirteen weeks ended May 4, 1996 and May 3, 1997 6
Notes to Consolidated Financial Statements 7
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 8
Part II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K 11
2
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<TABLE><CAPTION>
PAUL HARRIS STORES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
UNAUDITED
(in thousands)
May 4, February 1, May 3,
1996 1997 1997
----------- ---------- ----------
<S> <C> <C> <C>
ASSETS
Current assets
Cash and cash equivalents $ 19,859 $ 16,001 $ 16,713
Merchandise inventories 20,864 19,759 18,319
Other receivables 565 861 189
Prepaid expenses 1,095 836 856
----------- ---------- ----------
Total current assets 42,383 37,457 36,077
----------- ---------- ----------
Property, fixtures and equipment
Land, building and improvements 5,730 5,787 5,801
Store fixtures and equipment 11,964 14,067 15,240
Leasehold improvements and other 11,502 12,567 13,180
----------- ---------- ----------
29,196 32,421 34,221
Less accumulated depreciation and amortization(11,481) (13,315) (14,072)
----------- ---------- ----------
Property, fixtures and equipment, net 17,715 19,106 20,149
Other assets 843 756 722
----------- ---------- ----------
$ 60,941 $ 57,319 $ 56,948
=========== ========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities
Accounts payable $ 7,676 $ 8,515 $ 7,470
Compensation and related taxes 1,320 3,774 1,756
Income taxes payable 38 37 133
Other accrued expenses 4,176 3,554 4,042
Current maturities of long-term debt 4,320 120 120
----------- ---------- ----------
Total current liabilities 17,530 16,000 13,521
----------- ---------- ----------
Long-term debt 17,610 1,930 1,890
Other non-current liabilities 2,674 2,478 2,551
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
10,024, 10,115 and 10,120 respectively 1,723 1,930 1,938
Additional paid-in capital 5,067 9,963 10,707
Retained earnings 16,337 25,018 26,341
----------- ---------- ----------
Total shareholders' equity 23,127 36,911 38,986
$ 60,941 $ 57,319 $ 56,948
=========== ========== ==========
See accompanying "Notes To Consolidated Financial Statements".
3
</TABLE>
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<TABLE><CAPTION>
PAUL HARRIS STORES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
UNAUDITED
(in thousands, except per share data)
<S> <C> <C>
For the For the
thirteen thirteen
weeks ended weeks ended
May 4, May 3,
1996 1997
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Net sales $ 39,639 $ 43,838
Cost of sales, including occupancy expenses
exclusive of depreciation 26,812 28,016
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Gross income 12,827 15,822
Selling, general and administrative expenses 11,427 12,888
Depreciation and amortization 790 920
----------- -----------
Operating income 610 2,014
Interest expense (income), net 378 (210)
----------- -----------
Income before income taxes 232 2,224
Provision for income taxes 94 900
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Net income $ 138 $ 1,324
========== ===========
Net income per common share $ 0.01 $ 0.12
========== ===========
Weighted average number of shares and
share equivalents outstanding 10,325 10,851
========== ===========
See accompanying "Notes To Consolidated Financial Statements".
4
</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
thirteen thirteen
weeks ended weeks ended
May 4, May 3,
1996 1997
--------------- ---------------
<S> <C> <C>
Cash flow from operating activities:
Net income $ 138 $ 1,324
Adjustments to reconcile earnings to cash provided:
Depreciation and amortization 790 920
Net disposal of assets 130 75
Utilization of net operating loss carryforward 78 744
(Increase) decrease in current assets:
Merchandise inventories (3,219) 1,440
Other receivables (26) 672
Prepaid expenses (82) (20)
Increase (decrease) in current liabilities:
Accounts payable 1,664 (1,045)
Compensation and related taxes 542 (2,018)
Income taxes payable (7) 96
Other accrued expenses 729 488
Other 91 180
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Net cash flow from operating activities 828 2,856
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Net cash flow from investing activities:
Additions to fixed assets (832) (2,112)
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Cash flow from financing activities:
Repayment of long-term debt (30) (40)
Sale of common stock under stock plan 7 8
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Net cash flow from financing activities (23) (32)
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$ (27) $ 712
=============== ===============
Cash and cash equivalents
At beginning of period $ 19,886 $ 16,001
At end of period 19,859 16,713
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$ (27) $ 712
=============== ===============
Supplemental disclosures of cash flow information:
Cash paid during the period for interest $ 82 $ 100
=============== ===============
Cash paid during the period for income taxes $ 23 $ 59
=============== ===============
See accompanying "Notes To Consolidated Financial Statements".
5
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<TABLE><CAPTION>
PAUL HARRIS STORES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
UNAUDITED
(in thousands)
For the thirteen For the thirteen
weeks ended weeks ended
May 4, 1996 May 3, 1997
-------------------- --------------------
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 10,115 $ 1,930
Exercise of stock options 5 7 5 8
------ ---------- ------ ----------
Ending balance 10,024 $ 1,723 10,120 $ 1,938
====== ========== ====== ==========
ADDITIONAL PAID IN CAPITAL:
Beginning balance $ 4,989 $ 9,963
Benefit of net operating loss carryforward 78 744
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Ending balance $ 5,067 $ 10,707
========== ==========
RETAINED EARNINGS:
Beginning balance $ 16,199 $ 25,017
Net income 138 1,324
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Ending balance $ 16,337 $ 26,341
========== ==========
See accompanying "Notes To Consolidated Financial Statements".
6
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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 May 3, 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 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 quarter 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.
Certain amounts in the prior periods have been reclassified to conform with the
current period presentation.
2. Earnings Per Share
The Company will adopt Financial Accounting Standards Board Statement No. 128
(FASB 128), "Earnings per Share", for fiscal 1997 year-end reporting and
restate its reporting for all prior periods reported as required. The adoption
of FASB 128 will not have a material impact on earnings per share amounts for
the first quarter 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.
7
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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. Subsequent Event
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.
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 currently operates 222 stores in 26 states and the
District of Columbia with the greatest concentration of stores in the Midwest.
The Company is expanding and remodeling some of its store base. The Company's
stores average 4,100 gross square feet and are located primarily in regional
enclosed shopping malls and, to a lesser extent, strip shopping centers. During
the first quarter of fiscal 1997, the Company opened two stores and closed four
stores. The Company plans to open 30 net new stores in fiscal 1997 and 45 to
50 net new stores in fiscal 1998. In addition, the Company plans to remodel 30
to 35 stores in fiscal 1997 and intends to remodel 80 to 100 stores in the
three fiscal years thereafter. The Company expects that new stores will be
usually located 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.
8
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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>
Thirteen weeks ended
--------------------
May 4, May 3,
1996 1997
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<S> <C> <C>
Net sales 100.0% 100.0%
Cost of sales, including occupancy
expenses exclusive of depreciation(1) 67.6% 63.9%
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Gross income 32.4% 36.1%
Selling, general and administrative expenses(2) 28.8% 29.4%
Depreciation and amortization 2.0% 2.1%
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Operating income 1.6% 4.6%
Interest expense (income), net 1.0% (0.5%)
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Income before income taxes 0.6% 5.1%
Provision for income taxes 0.2% 2.1%
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Net income 0.4% 3.0%
====== ======
</TABLE>
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(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.
The Company's net sales increased to $43.8 million in the first quarter of
fiscal 1997 from $39.6 million in the first quarter of fiscal 1996, an increase
of $4.2 million or 10.6%. The increase in net sales was primarily attributable
to a 10% increase in comparable store sales (stores open at least twelve
months). The increase in comparable store sales was primarily the result of an
increase in consumer demand generally and wider acceptance of the Company's
product offering, as reflected by a 31.0% increase in average customer
transactions per store. The Company operated 221 stores as of May 3, 1997
compared to 227 stores on May 4, 1996. New stores (stores open less than
twelve months) have generally produced higher sales than stores which were
closed during the last twelve months.
Gross income increased to $15.8 million in the first quarter of fiscal 1997
from $12.8 million in the prior year, an increase of $3.0 million or 23.4%.
Gross income, as a percentage of net sales, increased to 36.1% in the first
quarter of fiscal 1997 from 32.4% of net sales in the first quarter of fiscal
1996. Gross income primarily increased due to the increase in net sales.
Gross income, as a percentage of net sales, increased as a result of a higher
proportion of lower cost merchandise from overseas sources, a lower level of
promotional activity for the first quarter of fiscal 1997 compared to the first
quarter of fiscal 1996 and growth in net sales from accessories, which
generally have higher gross margins than apparel.
9
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Selling, general and administrative expenses increased to $12.9 million, or
29.4% of net sales, for the first quarter of fiscal 1997 from $11.4 million, or
28.8% of net sales, for the first quarter of fiscal 1996. The increase of $1.5
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 $920,000 for the first quarter of
fiscal 1997 from $790,000 for the first quarter of fiscal 1996, an increase of
16.5%. The increase is a result of approximately $5.0 million increase of
fixed assets at the end of the first quarter of fiscal 1997 compared to the end
of the first quarter of fiscal 1996. In addition, new point of sale equipment
purchased in the first quarter of fiscal 1997, has a shorter depreciable life
than the majority of the other assets of the Company. As a percentage of net
sales, depreciation and amortization increased slightly to 2.1% in the first
quarter of fiscal 1997 from 2.0% in the first quarter of fiscal 1996.
Operating income increased to $2.0 million in the first quarter of fiscal 1997
from $610,000 for the first quarter of fiscal 1996, an increase of 227.9%. As
a percentage of net sales, operating income increased to 4.6% in the first
quarter of fiscal 1997 from 1.6% in the first quarter of fiscal 1996.
Interest (income), net, of $210,000 for the first quarter of fiscal 1997
improved by $588,000 from an interest expense, net, of $378,000 for the first
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.
The provision for income taxes, based on statutory rates, was $900,000 for the
first quarter of fiscal 1997 as compared to $94,000 for the first quarter of
fiscal 1996, an increase of $806,000 or 857.4%, as a result of the increase in
income before income taxes. The Company's effective tax rate of 40.5% remained
the same for the first quarter of fiscal 1997 as in the first quarter of fiscal
1996. Due to the utilization of tax loss carryforwards the Company benefited
by a reduction of income taxes payable (reflected as a credit to additional
paid-in capital) of $744,000.
As a result of the above factors, the Company's net income increased to $1.3
million for the first quarter of fiscal 1997 from $138,000 for the first
quarter of fiscal 1996, an increase of $1.2 million or 859.4%.
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.
10
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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
May 3, 1997, there were outstanding letters of credit issued in favor of the
Company under the credit facility in an aggregate amount of $6.4 million. On
the same date, there were no outstanding direct borrowings under the credit
facility.
In addition, during 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 $2.1 million in the
first quarter of fiscal 1997, primarily for the Company's new point of sale
system (approximately $764,000), for opening new stores (approximately
$598,000) and for remodeling existing stores (approximately $389,000). The
Company anticipates opening 30 net new stores and remodeling 30 to 35 stores
during fiscal 1997.
Net cash flow from operating activities was $2.9 million in the first quarter
of fiscal 1997. Net cash outflow from financing activities aggregated $32,000
in the first quarter of fiscal 1997, including the proceeds from the exercise
of common stock options.
Cash and cash equivalents increased to $16.7 million at the end of the first
quarter of fiscal 1997 from $16.0 million at the beginning of the quarter, an
increase of $700,000 or 4.4%.
Management believes that the net proceeds to the Company from the recent public
offering together with cash generated from operations and borrowings under the
Company's credit facility, if any, will be sufficient to meet the Company's
working capital expenditure needs in 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: The Company filed a current report on form
8-K dated April 11, 1997, reporting under
Item 5 the adoption of a shareholders rights
plan.
11
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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: June 16, 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.
12
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<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 May 3, 1997
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> JAN-31-1998
<PERIOD-END> MAY-03-1997
<CASH> 16,713,000
<SECURITIES> 0
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 18,319,000
<CURRENT-ASSETS> 36,077,000
<PP&E> 34,221,000
<DEPRECIATION> (14,072,000)
<TOTAL-ASSETS> 56,948,000
<CURRENT-LIABILITIES> 13,521,000
<BONDS> 1,890,000
<COMMON> 1,938,000
0
0
<OTHER-SE> 37,048,000
<TOTAL-LIABILITY-AND-EQUITY> 56,948,000
<SALES> 43,838,000
<TOTAL-REVENUES> 43,838,000
<CGS> 28,016,000
<TOTAL-COSTS> 28,016,000
<OTHER-EXPENSES> 13,808,000
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (210,000)
<INCOME-PRETAX> 2,224,000
<INCOME-TAX> 900,000
<INCOME-CONTINUING> 1,324,000
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,324,000
<EPS-PRIMARY> 0.12
<EPS-DILUTED> 0.12
</TABLE>
