<PAGE>
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
---------------
FORM 10-K
(Mark
One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended February 1, 1997
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Transition period from to
COMMISSION FILE NO. 0-7264
PAUL HARRIS STORES, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
INDIANA 35-0907402
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
6003 GUION RD., INDIANAPOLIS, IN 46254
(ADDRESS OF PRINCIPAL EXECUTIVE (ZIP CODE)
OFFICES)
(317) 293-3900
(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
COMMON STOCK WITHOUT PAR VALUE
(TITLE OF CLASS)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes X No
Indicate by check mark if disclosure of the delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [_]
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
As of April 8, 1997, 10,119,403 common shares were outstanding (including
3,013,039 shares of non-voting common stock). The aggregate market value of
the common shares held by non-affiliates (based upon the closing price on
April 8, 1997 on the Nasdaq National Market System of $16.25 per share) was
approximately $160,306,000. For the purposes of such calculation, all
outstanding shares of common stock have been considered held by non-
affiliates, other than the 254,446 shares owned by directors and executive
officers of the registrant. In making such calculation the registrant does not
determine the affiliate or non-affiliate status of any shares for any other
purpose.
The information required by Part III (Items 10, 11, 12, and 13) is
incorporated herein by reference from the registrant's definitive Proxy
Statement for the Annual Meeting of the Shareholders to be filed with the
Commission pursuant to Regulation 14A.
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<PAGE>
PART I
ITEM 1. BUSINESS
Paul Harris Stores, Inc. (the "Company"), incorporated under the laws of
Indiana in 1952, is a specialty retailer of moderately-priced sportswear and
accessories sold under the Paul Harris Design, Paul Harris Denim and PHD brand
names. At February 1, 1997 the Company operated 223 stores in 26 states and
the District of Columbia.
The Company's fiscal year ends on the Saturday closest to January 31.
References in this report to a fiscal year refers to the calendar year in
which the fiscal year began. For example, fiscal 1996 refers to the fiscal
year which began on February 4, 1996 and ended on February 1, 1997.
The Company operated retail stores in the following jurisdictions on the
dates indicated:
<TABLE>
<CAPTION>
NUMBER OF STORES AS OF
-----------------------
FEBRUARY 3, FEBRUARY 1,
1996 1997
----------- -----------
<S> <C> <C>
Arkansas......... 2 2
Delaware......... 1 1
District of
Columbia........ 1 1
Florida.......... 5 6
Georgia.......... 8 7
Illinois......... 27 29
Indiana.......... 44 35
Iowa............. 7 7
Kentucky......... 7 6
Louisiana........ 3 2
Maryland......... 8 8
Massachusetts.... 1 1
Michigan......... 2 2
Mississippi...... 2 2
</TABLE>
<TABLE>
<CAPTION>
NUMBER OF STORES AS OF
-----------------------
FEBRUARY 3, FEBRUARY 1,
1996 1997
----------- -----------
<S> <C> <C>
Missouri......... 6 10
Nebraska......... 2 1
New Jersey....... 5 5
New York......... 2 2
North Carolina... 12 12
Ohio............. 32 26
Pennsylvania..... 23 23
South Carolina... 5 5
South Dakota..... 1 1
Tennessee........ 11 11
Texas............ 7 6
Virginia......... 8 7
Wisconsin........ 3 5
--- ---
Total Stores..... 235 223
=== ===
</TABLE>
Of the Company's 223 stores at February 1, 1997, 181 are located in regional
enclosed shopping malls.
The Company sells quality merchandise and emphasizes casual clothing
coordinated by color, style and fabric. Approximately 89% of all products sold
by Paul Harris Stores consists of apparel, with the balance being accessories.
Merchandise is available from a large number of domestic and foreign
suppliers under a variety of trade terms and conditions. During fiscal 1996,
40 third party manufacturers supplied 68% of the Company's merchandise
purchases; however no manufacturer provided more than 7% of the Company's
merchandise. Approximately 63% of all merchandise was purchased from foreign
suppliers in fiscal 1996. Virtually all merchandise purchased is private brand
merchandise which is manufactured specifically for the Company. Importing
operations are subject to normal merchandise quota restrictions imposed by the
country of origin, but the Company anticipates no events which would
significantly limit its supply of imported merchandise in the near future. All
merchandise is distributed to the Company's retail stores from the Company's
distribution center in Indianapolis.
The Company stresses testing of styles, colors and pricing to better
identify consumer demand and typically contracts for manufacture of products
to respond to such consumer demand.
1
<PAGE>
The Company uses various trademarks such as "Paul Harris", "Pasta" (a
trademark used on 5 stores and a line of sportswear) and other trademarks of
lesser importance. The Company has no patents, licenses, franchises or other
concessions which are considered important to its operations.
Characteristic of the women's retail apparel industry, the Company realizes
its highest sales during the month of December. This sales pattern requires
higher inventory levels during the fourth quarter of the fiscal year. Various
promotional efforts, including markdowns, are used to promote rapid turnover of
inventory. In line with the characteristics of the industry, no single customer
or group of customers significantly affects the Company's business, and there
are no backorders.
The Company accepts major national credit cards as an incentive to increase
sales. Credit card sales are converted to cash on a daily basis. The Paul
Harris Fashion Card ("PHFC"), a private label credit card, was introduced in
all Paul Harris Stores effective August 1994 and accounted for approximately
10.8% of the total Company sales during fiscal 1996.
During fiscal 1996, the average sale per PHFC transaction was $60, compared
to an average sale per transaction of $29 for all other forms of payment. The
Company assumes no credit risk for the PHFC, but pays a percentage of sales as
a service fee to an unaffiliated third party. In fiscal 1996 approximately
47.6% of the Company's sales were for cash (including checks) and approximately
41.6% were from major national credit cards in fiscal 1996.
The retail sale of women's apparel is a highly competitive business. The
Company competes with other women's fashion apparel chain stores, department
stores, individual stores and discount stores. The manner of competition
relates to style, selection, quality, display and price of merchandise, as well
as customer service, store design and location. Many of the Company's
competitors have greater financial resources and sales than the Company. The
Company is unable to rank itself with regards to number of stores and gross
sales, but believes it is one of many similar moderate-sized competitors in an
industry which includes a small number of better known larger competitors.
The Company had approximately 2,500 permanent employees (full and part-time)
as of February 1, 1997. During the 1996 holiday peak shopping season, the
Company hired approximately 1,400 temporary employees.
This report contains statements that constitute "forward-looking statements"
within the meaning of Section 27A of the Securities Act (and Section 21E of the
Exchange Act). The words "expect," "estimate," "anticipate," "predict,"
"believe," and similar expressions and variations thereof are intended to
identify forward-looking statements. Such statements appear in a number of
places in this report and include statements regarding the intent, belief or
current expectations of the Company, its directors or its officers with respect
to, among other things: (i) trends affecting the Company's financial condition
or results of operations; (ii) the Company's plans; (iii) the Company's
business and growth strategies; and (iv) the declaration and payment of
dividends. Prospective investors are cautioned that any such forward-looking
statements are not guarantees of future performance and involve risks and
uncertainties, and that actual results may differ materially from those
projected in the forward-looking statements as a result of various factors.
Such factors include, among others (i) changes in general economic and business
conditions; (ii) adverse weather during the Christmas selling season; (iii)
unanticipated changes in fashion; and (iv) governmental actions or other
developments that adversely affect sources of imported merchandise.
ITEM 2. PROPERTIES
The Company owns its headquarters and distribution center in Indianapolis,
Indiana. Situated on 19.5 acres of land, the headquarters and distribution
center have a total area of 435,000 square feet of space. The Company utilizes
approximately 85% of this facility, and leases the remaining space to an
unaffiliated party for a term
2
<PAGE>
expiring in 1997 with a 4-year option, ending in 2001. Either party may
terminate the lease on six months' prior notice. The Company believes that the
facility is sufficient to accommodate planned future business volume. The
property is subject to a term loan (mortgage) described in "Note 2. Long-Term
Debt and Credit Arrangements" of the "Notes To Consolidated Financial
Statements".
The Company leases all of its stores. In general, the store leases have an
initial term of 3 to 10 years, with some having one or more 5-year options to
extend. Some leases have incorporated a "kick-out" clause if sales have not
reached an acceptable level after a certain number of years of operation,
which normally permits either party to terminate if the appropriate sales
levels are not achieved.
ITEM 3. LEGAL PROCEEDINGS
The Company is involved from time to time in legal proceedings arising in
the ordinary course of its business. In the opinion of management, no pending
proceedings will have a material adverse effect on the Company's financial
condition, results of operations or cash flows.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
There were no matters submitted to a vote of security holders during the
fourth quarter of fiscal 1996.
EXECUTIVE OFFICERS OF THE REGISTRANT
Officers are elected by the Board of Directors and serve at the discretion
of the Board. The following sets forth the name, age, position(s) and business
experience of the executive officers of the Company.
<TABLE>
<CAPTION>
NAME AGE TITLE
---- --- -----
<S> <C> <C>
Charlotte G. Fischer............. 47 Chairman of the Board, President and
Chief Executive Officer
Ana P. Porter.................... 32 Executive Vice President--
Merchandising and
Planning/Distribution
John H. Boyers................... 52 Senior Vice President--Finance and
Treasurer
</TABLE>
Ms. Fischer became Chairman of the Board, President and Chief Executive
Officer of the Company in January 1995. From April 1994 until January 1995,
Ms. Fischer was Vice Chairman and Chief Executive Officer Designate. She was a
consultant to the Company from September 1993, when she first joined the
board, until April 1994. From October 1991 to March 1994, Ms. Fischer was an
independent retail consultant. In addition, she was the President of C.G.F.,
Inc., a specialty company, which she founded in November 1992. Ms. Fischer was
employed by Claire's Boutiques, Inc., a specialty retailer of costume jewelry,
from 1986 to 1991, serving as its president and chief operating officer from
October 1986 to September 1989 and its president and Chief executive officer
thereafter. She was also a director of its parent corporation, Claire's
Stores, Inc. Ms. Fischer is a director of Trans World Entertainment Corp.,
Inc.
Ms. Porter was named Executive Vice President--Merchandising and
Planning/Distribution in February 1997. From December 1996 to February 1997,
Ms. Porter was an independent retail consultant. Ms. Porter was Vice
President--Merchandising, Marketing and Planning/Allocation for Cotton Ginny
Ltd. of Canada, a women's apparel retailer, from January 1993 until January
1996 and Merchandise Manager of Cotton Ginny Ltd. of Canada, from January 1991
until January 1993. Ms. Porter also served on the board of directors of Cotton
Ginny Ltd. from 1993 to 1995.
Mr. Boyers was named Senior Vice President--Finance and Treasurer in March
1995. From January 1995 to March 1995, he acted as a consultant to the
Company. Mr. Boyers was self-employed as a consultant for the period of July
1994 to January 1995. From 1990 through July 1994, he was director of
financial reporting for The Wackenhut Corporation, a provider of security
personnel, in Coral Gables, Florida and also served as controller of Wackenhut
Corrections Corporation, a subsidiary of The Wackenhut Corporation.
3
<PAGE>
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company's common stock is traded on the Nasdaq National Market System.
The following table sets forth for the past eight fiscal quarters, the range
of high and low closing sales prices for the Company's common stock as
reported by the Nasdaq National Market System.
<TABLE>
<CAPTION>
MARKET PRICE OF COMMON STOCK
-------------------------------------------------
FISCAL 1995 QUARTERS FISCAL 1996 QUARTERS
----------------------- -------------------------
1ST 2ND 3RD 4TH 1ST 2ND 3RD 4TH
----- ----- ----- ----- ----- ----- ------ ------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
High.......................... $3.13 $2.63 $2.50 $2.63 $5.13 $8.50 $13.25 $22.50
Low........................... $1.25 $1.38 $1.25 $1.06 $1.75 $4.00 $ 6.25 $11.25
</TABLE>
There were approximately 1,600 registered holders of record of common stock
at February 1, 1997 and 1 holder of non-voting common stock. The shares of
non-voting common stock are convertible to common stock upon sale or certain
other conditions described in the Company's Amended and Restated Articles of
Incorporation.
The Company has not declared or paid any cash dividends on the Common Stock
since fiscal 1978. The Company's Board of Directors presently intends to
continue a policy of retaining earnings to finance the development and
expansion of the Company's business. Future cash dividends, if any, will be at
the discretion of the Company's Board of Directors and will depend upon the
Company's earnings, capital requirements, financial condition, contractual
restrictions, if any, and other factors considered relevant by the Company's
Board of Directors.
During the period covered by this report, the Company did not sell any
equity securities in a transaction that was exempt from the registration
provisions of the Securities Act of 1933, as amended.
ITEM 6. SELECTED FINANCIAL DATA
The selected consolidated financial data set forth below should be read in
conjunction with "Management's Discussion and Analysis of Financial Condition
and Results of Operations" and the Consolidated Financial Statements and Notes
thereto included in this report.
<TABLE>
<CAPTION>
TWENTY-SIX WEEKS ENDED FISCAL YEAR
-------------------------- -----------------------------------
AUGUST 2, JANUARY 30,
1992 (1) 1993 (1) 1993 1994 1995 1996
----------- ------------ -------- -------- -------- --------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Net sales............... $ 60,606 $ 84,968 $154,309 $167,778 $167,523 $190,288
Cost of sales, including
occupancy expenses
exclusive of
depreciation (2)....... 40,905 52,892 99,556 111,397 112,297 118,066
----------- ----------- -------- -------- -------- --------
Gross income............ 19,701 32,076 54,753 56,381 55,226 72,222
Selling, general and
administrative expenses
(3).................... 17,443 19,749 38,905 45,539 47,081 53,300
Depreciation and
amortization........... 2,200 2,005 3,496 3,330 3,472 3,270
----------- ----------- -------- -------- -------- --------
Operating income........ 58 10,322 12,352 7,512 4,673 15,652
Interest expense, net... 259 1,200 3,051 2,539 2,034 1,235
----------- ----------- -------- -------- -------- --------
Income (loss) before
taxes, reorganization
items and extraordinary
items.................. (201) 9,122 9,301 4,973 2,639 14,417
Reorganization items.... 507 -- -- -- -- --
Provision for income
taxes.................. -- 3,401 3,530 1,895 1,010 5,598
Extraordinary items..... 6,484 -- -- -- -- --
----------- ----------- -------- -------- -------- --------
Net income.............. $ 6,790 $ 5,721 $ 5,771 $ 3,078 $ 1,629 $ 8,819
=========== =========== ======== ======== ======== ========
Net income per share
(4).................... $ -- $ 0.61 $ 0.59 $ 0.31 $ 0.16 $ 0.83
=========== =========== ======== ======== ======== ========
Weighted average common
and common equivalent
shares outstanding..... -- 9,445 9,822 9,981 10,067 10,616
</TABLE>
4
<PAGE>
<TABLE>
<CAPTION>
TWENTY-SIX WEEKS ENDED FISCAL YEAR
-------------------------- ----------------------------------
AUGUST 2, JANUARY 30,
1992 (1) 1993 (1) 1993 1994 1995 1996
----------- ------------ ------- ------- ------- -------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C>
OPERATING DATA:
Gross income %.......... 35.5% 33.6% 33.0% 38.0%
Operating income %...... 8.0% 4.5% 2.8% 8.2%
Stores open at beginning
of period.............. 201 211 239 235
Stores opened during
period................. 22 40 19 19
Stores closed during
period................. (12) (12) (23) (31)
----------- ----------- ------- -------
Stores open at end of
period................. 211 239 235 223
=========== =========== ======= =======
Weighted average sales
per store.............. $ 748 $ 740 $ 683 $ 845
Comparable store sales
increase (decrease)
(5).................... 3% 0% (7%) 20%
Inventory turnover...... 4.9x 4.6x 4.7x 5.1x
BALANCE SHEET DATA (AT
END OF PERIOD):
Working capital......... $ 7,906 $ 15,750 $24,603 $24,446 $24,481 $21,457
Total assets............ 67,000 53,684 58,553 63,454 57,850 57,319
Long-term debt.......... 29,670 27,025 26,290 21,970 17,640 1,930
Shareholders' equity.... 1,575 7,296 15,096 19,890 22,904 36,911
</TABLE>
- --------
(1) From February 1991 until the third quarter of fiscal 1992, the Company
operated under Chapter 11 of the Bankruptcy Code. The Company emerged from
bankruptcy upon the confirmation of its Plan of Reorganization (the
"Plan"). In accordance with AICPA guidelines, the Company restated its
balance sheet with the adoption of "fresh start" accounting to reflect the
impact of the Plan as of August 2, 1992. A "black line" has been drawn
between the pre- and post-emergence financial information delineating
their non-comparability.
(2) Occupancy expenses include store level base rent, percentage rent and real
estate taxes.
(3) Includes all other store level occupancy expenses not included in cost of
sales.
(4) Net income per share and share data are not disclosed for the period prior
to the twenty-six weeks ended January 30, 1993, due to significant changes
in the capital structure as part of the Plan.
(5) Calculated using net sales of stores opened for at least a 12 month
period.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following discussion should be read in conjunction with the Selected
Financial Data and the Consolidated Financial Statements and Notes thereto
appearing elsewhere herein.
OVERVIEW
The Company was founded in 1952 and currently operates 221 stores in 26
states and the District of Columbia. Substantially all of the Company's stores
are operated under the Paul Harris name ("Paul Harris Stores"). Primarily as a
result of a very weak fourth quarter in fiscal 1990, the Company disposed of
slow-moving inventory at substantial markdowns, resulting in substantial
losses in both fiscal 1990 and fiscal 1991 and defaults under the Company's
debt agreements. On February 27, 1991, the Company and two subsidiaries filed
for protection from their creditors under Chapter 11 of the Bankruptcy Code.
The Company's Chapter 11 Plan was confirmed on August 31, 1992. Under the
Plan, liabilities subject to compromise were settled through initial and
deferred payments of cash, shares of Common Stock and $24.0 million aggregate
principal amount of 11.375% Notes due January 31, 2000 (the "11.375% Notes")
issued by the Company.
5
<PAGE>
In January 1995, the Board of Directors appointed Charlotte G. Fischer as
Chief Executive Officer. Ms. Fischer assembled a new senior management team
and took action to improve the Company's revenues and profitability. These
actions included: (i) remerchandising and expanding the product assortment to
better serve the Company's target customer; (ii) upgrading stores through new
fixtures and leasehold improvements; (iii) closing the Company's discount
store division, which had operated under "The $5-$10-$15-$20 Place" name (the
"$5-$20 Stores") and marketed off-priced apparel and close-out merchandise;
(iv) expanding sourcing to be more cost-effective and efficient; and (v)
improving inventory management.
During fiscal 1995, the implementation of these new actions, particularly
the reduction of excess inventories and the phasing out of the $5-$20 Stores,
adversely affected operating results. Beginning in the third quarter of fiscal
1995, the Company's operating results began to recover as these actions began
to take effect. The Company reported record operating income for fiscal 1996.
In addition, the Company reduced its financial leverage by repaying $4.2
million of its 11.375% Notes in fiscal 1995 and the remaining $19.8 million in
fiscal 1996, three years ahead of schedule.
In fiscal 1996, the Company opened 19 stores of which 18 were opened in the
second half of the year. The Company also opened a new format store in April
1996 and is currently operating seven new format stores. The new format stores
incorporate the latest version of the Company's store layout and fixture
package, larger dressing rooms, an expanded accessory department and, in some
cases, seating and children's play areas. The Company anticipates opening 30
net new stores in fiscal 1997 and 45 to 50 net new stores in fiscal 1998.
Approximately one-third of the stores to be opened in fiscal 1997 are expected
to be new format stores. The Company is also remodeling stores based largely
on the positive customer feedback and financial performance of its new format
stores. The Company remodeled 15 stores in fiscal 1996. The Company expects to
remodel 30 to 35 stores in fiscal 1997 and 80 to 100 stores in the three
fiscal years thereafter.
RESULTS OF OPERATIONS
The following table sets forth certain income statement items and operating
data as a percentage of net sales.
<TABLE>
<CAPTION>
FISCAL YEAR
-------------------
1994 1995 1996
----- ----- -----
<S> <C> <C> <C>
Net sales.............................................. 100.0% 100.0% 100.0%
Cost of sales, including occupancy expenses exclusive
of depreciation (1)................................... 66.4 67.0 62.0
----- ----- -----
Gross income......................................... 33.6 33.0 38.0
Selling, general and administrative expenses (2)....... 27.1 28.1 28.0
Depreciation and amortization.......................... 2.0 2.1 1.8
----- ----- -----
Operating income..................................... 4.5 2.8 8.2
Interest expense, net.................................. 1.5 1.2 0.7
----- ----- -----
Income before income taxes........................... 3.0 1.6 7.5
Provision for income taxes........................... 1.2 0.6 2.9
----- ----- -----
Net income............................................. 1.8% 1.0% 4.6%
===== ===== =====
</TABLE>
- --------
(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.
6
<PAGE>
FISCAL 1996 COMPARED TO FISCAL 1995
The Company's net sales increased to $190.3 million in fiscal 1996 from
$167.5 million in fiscal 1995, an increase of $22.8 million or 13.6%. The
increase in net sales was primarily attributable to a 20% increase in
comparable store sales, which was partially offset by a decrease in the
average number of stores open during fiscal 1996. The increase in comparable
store sales in fiscal 1996 was primarily a result of an increase in consumer
demand generally and wider acceptance of the Company's product offering, as
reflected by a 22.5% increase in average customer transactions per store. The
Company experienced positive comparable store sales for each month of fiscal
1996, with increases of 10% or more in each of the last 11 months, including a
23% increase for December 1996. The Company operated 223 stores on February 1,
1997, compared to 235 stores on February 3, 1996. During fiscal 1996, the
Company opened 19 stores and closed 31 stores (excluding three $5-$20 Stores
converted to Paul Harris Stores).
Gross income increased to $72.2 million in fiscal 1996 from $55.2 million in
fiscal 1995, an increase of $17.0 million or 30.8%. As a percentage of net
sales, gross income increased to 38.0% in fiscal 1996 from 33.0% in fiscal
1995. Gross income increased primarily due to the increase in net sales. Gross
income as a percentage of net sales increased as a result of a higher
percentage of lower cost merchandise from overseas sources and a growth in net
sales of accessories, which generally have higher gross margins than apparel.
Selling, general and administrative expenses increased to $53.3 million in
fiscal 1996 from $47.1 million in fiscal 1995, an increase of $6.2 million or
13.2%. As a percentage of net sales, selling, general and administrative
expenses decreased to 28.0% in fiscal 1996 from 28.1% in fiscal 1995. Of the
$6.2 million increase, $3.7 million was attributable to increased incentive
compensation payable as a result of the Company's attainment of performance
targets set by the Board of Directors for net sales (for field personnel) and
pretax income (for headquarters personnel). The remaining $2.5 million
resulted from increases in payroll, credit card and other expenses.
Depreciation and amortization decreased to $3.3 million in fiscal 1996 from
$3.5 million in fiscal 1995, a decrease of $202,000 or 5.8%. As a percentage
of net sales, depreciation and amortization decreased to 1.8% in fiscal 1996
from 2.1% in fiscal 1995.
Operating income increased to $15.7 million in fiscal 1996 from $4.7 million
in fiscal 1995, an increase of $11.0 million or 234.9%. As a percentage of net
sales, operating income increased to 8.2% in fiscal 1996 from 2.8% in fiscal
1995.
Interest expense, net, decreased to $1.2 million in fiscal 1996 from $2.0
million in fiscal 1995, a decrease of $799,000 or 39.3%. The decrease resulted
primarily from repayment of the 11.375% Notes.
Provision for income taxes increased to $5.6 million in fiscal 1996 from
$1.0 million in fiscal 1995, an increase of $4.6 million, or 454.3%, primarily
because of the increase in income before income taxes. The Company's effective
income tax rate increased to 38.8% in fiscal 1996 from 38.3% in fiscal 1995.
The Company had approximately $3.4 million of federal income tax loss
carryforwards remaining available after the provision for income taxes for
fiscal 1996. Due to the utilization of federal and state income tax loss
carryforwards, the Company benefited in fiscal 1996 from a reduction of income
taxes payable (reflected as a credit to additional paid-in capital) of $5.0
million.
As a result of all the above factors, the Company's net income increased to
$8.8 million in fiscal 1996 from $1.6 million in fiscal 1995, an increase of
$7.2 million, or 441.4%.
7
<PAGE>
FISCAL 1995 COMPARED TO FISCAL 1994
The Company's net sales decreased to $167.5 million in fiscal 1995 from
$167.8 million in fiscal 1994, a decrease of $255,000 or less than 1.0%. The
decrease in net sales was primarily attributable to a 7% decline in total
comparable store sales, which was partially offset by an increase in the
average number of stores open during fiscal 1995. The fiscal 1995 decline in
comparable store sales included a (i) 6% decline in comparable store sales for
the Paul Harris Stores due to fewer customers, fewer units sold per
transaction and a lower price per unit sold and (ii) an 18% decline in
comparable store sales for the $5-$20 Stores due to fewer customers and a
lower price per unit sold, partially offset by an increase in units sold per
transaction. The Company operated 235 stores on February 3, 1996, compared to
239 stores on January 28, 1995. During fiscal 1995, the Company opened 19
stores and closed 23 stores (excluding 15 $5-$20 Stores that were converted to
Paul Harris Stores).
Gross income decreased to $55.2 million in fiscal 1995 from $56.4 million in
fiscal 1994, a decrease of $1.2 million or 2.0%. As a percentage of net sales,
gross income decreased to 33.0% in fiscal 1995 from 33.6% in fiscal 1994.
Gross income decreased due to the decrease in net sales, which was partially
offset by negotiated lower pricing on increased amounts of merchandise sourced
overseas.
Selling, general, and administrative expenses increased to $47.1 million in
fiscal 1995 from $45.5 million in fiscal 1994, an increase of $1.6 million or
3.4%. As a percentage of net sales, selling, general and administrative
expenses increased to 28.1% in fiscal 1995 from 27.1% in fiscal 1994. Higher
common area maintenance and utility charges resulted in increased selling,
general and administrative expenses. Further, fiscal 1994 expenses were
reduced (relative to fiscal 1995) by a one-time curtailment gain, net of
current pension expense, of $428,000 that resulted from the Company's decision
to freeze its defined benefit pension plan.
Depreciation and amortization increased to $3.5 million in fiscal 1995 from
$3.3 million in fiscal 1994, an increase of $142,000 or 4.3%. As a percentage
of net sales, depreciation and amortization increased to 2.1% in fiscal 1995
from 2.0% in fiscal 1994.
Operating income decreased to $4.7 million in fiscal 1995 from $7.5 million
in fiscal 1994, a decrease of $2.8 million or 37.8%. As a percentage of net
sales, operating income decreased to 2.8% in fiscal 1995 from 4.5% in fiscal
1994.
Interest expense, net, decreased to $2.0 million in fiscal 1995 from $2.5
million in fiscal 1994, a decrease of $505,000 or 19.9%. The decrease resulted
primarily from payment on the 11.375% Notes and interest income earned on
higher cash balances during fiscal 1995.
Provision for income taxes decreased to $1.0 million in fiscal 1995 from
$1.9 million in fiscal 1994, a decrease of $885,000 or 46.7%, primarily
because of the decrease in income before income taxes. The Company's effective
income tax rate for fiscal 1995 was 38.3% as compared to 38.1% for fiscal
1994. The Company had approximately $18.2 million of federal income tax loss
carryforwards remaining available after the provision for income taxes for
fiscal 1995. Due to the utilization of federal and state income tax loss
carryforwards and recognition of prior and current years' state tax loss
carryforwards, the Company benefited in fiscal 1995 from a reduction of
federal income taxes payable (reflected as a credit to additional paid-in
capital) of $1.4 million (including $440,000 for recognition of current and
prior years' state tax loss carryforwards).
As a result of all the above factors, the Company's net income decreased to
$1.6 million for fiscal 1995 from $3.1 million in fiscal 1994, a decrease of
$1.5 million or 47.1%.
SEASONALITY AND QUARTERLY RESULTS
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.
8
<PAGE>
The following table sets forth certain unaudited quarterly income statement
information for fiscal 1996 and fiscal 1995. The unaudited quarterly
information includes all normal recurring adjustments that management
considers necessary for a fair presentation of the information shown.
<TABLE>
<CAPTION>
FISCAL QUARTER ENDED
----------------------------------------------------------------------------------------
APRIL 29, JULY 29, OCTOBER 28, FEBRUARY 3, MAY 4, AUGUST 3, NOVEMBER 2, FEBRUARY 1,
1995 1995 1995 1996 1996 1996 1996 1997
--------- -------- ----------- ----------- ------- --------- ----------- -----------
(DOLLARS IN THOUSANDS, EXCEPT FOR PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net sales............... $34,801 $36,509 $36,880 $59,333 $39,639 $36,721 $45,413 $68,515
Gross income............ 10,184 11,717 11,634 21,691 12,827 12,560 18,074 28,761
Operating income (loss). (1,468) (767) (442) 7,350 610 404 3,427 11,211
Income (loss) before
income taxes........... (1,982) (1,283) (996) 6,900 232 107 3,058 11,020
Net income (loss)....... $(1,215) $ (780) $ (612) $ 4,236 $ 138 $ 64 $ 1,821 $ 6,796
Net income (loss) per
share.................. $ (0.12) $ (0.08) $ (0.06) $ 0.42 $ 0.01 $ 0.01 $ 0.17 $ 0.62
AS A PERCENTAGE OF NET SALES:
Net sales............... 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%
Gross income............ 29.3 32.1 31.5 36.6 32.4 34.2 39.8 42.0
Operating income (loss). (4.2) (2.1) (1.2) 12.4 1.5 1.1 7.5 16.4
Income (loss) before
income taxes........... (5.7) (3.5) (2.7) 11.6 0.6 0.3 6.7 16.1
Net income (loss)....... (3.5%) (2.1%) (1.7%) 7.1% 0.3% 0.2% 4.0% 9.9%
</TABLE>
LIQUIDITY AND CAPITAL RESOURCES
The Company's primary source of working capital consists of internally
generated cash and its secured, revolving credit facility which was recently
increased to $30.0 million. 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, the 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
February 1, 1997, there were outstanding letters of credit issued in favor of
the Company under the credit facility in an aggregate amount of $9.6 million.
On the same date, there were no outstanding direct borrowings under the credit
facility.
The Company made capital expenditures of approximately $5.2 million in
fiscal 1996, primarily for opening new stores (approximately $1.3 million) and
remodeling existing stores and updating store fixtures (approximately $2.8
million). The Company expects to make capital expenditures in fiscal 1997 of
approximately $12.5 million, primarily for the new point-of-sale system
(approximately $4.4 million), for opening new stores (approximately $2.9
million) and for remodeling existing stores (approximately $3.7 million). The
Company anticipates opening 30 net new stores and remodeling 30 to 35 stores
during fiscal 1997.
Net cash flow from operating activities was $21.0 million in fiscal 1996.
Net cash outflow for financing activities aggregated $19.7 million in fiscal
1996, including the repayment of $19.9 million of long-term debt, primarily
the 11.375% Notes, net of $214,000 received from the sale of Common Stock in
connection with the exercise of stock options.
Net cash flow from operating activities was $5.1 million in fiscal 1995. The
Company's investing activities in fiscal 1995 included the investment of $2.2
million in capital improvements. Net cash outflow for financing activities
aggregated $4.3 million in fiscal 1995 and was attributable to the repayment
of $4.3 million of long-term debt, primarily the 11.375% Notes.
Cash and cash equivalents decreased to $16.0 million at the end of fiscal
1996 from $19.9 million at the beginning of fiscal 1996, a decrease of $3.9
million or 19.5%.
Management believes that the net proceeds to the Company from the 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 and capital expenditure needs in the foreseeable future.
9
<PAGE>
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTAL DATA
The information required by this item is presented under Item 14 of this
report.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
There have been no changes in or disagreements with the Company's independent
accountants on accounting or financial disclosures.
PART III
The information required by this Part III (Items 10, 11, 12, and 13) is
incorporated herein by reference from the registrant's definitive Proxy
Statement for the Annual Meeting of the Shareholders to be filed with the
Commission pursuant to Regulation 14A.
10
<PAGE>
PART IV
ITEM 14. FINANCIAL STATEMENTS, FINANCIAL STATEMENT SCHEDULES, EXHIBITS AND
REPORTS ON FORM 8-K
(a) (1) Financial Statements
<TABLE>
<CAPTION>
PAGE NO.
--------
<S> <C>
Consolidated Balance Sheets--As of February 3, 1996 and February
1, 1997......................................................... 12
Consolidated Statements of Income--for Fiscal 1994, Fiscal 1995
and Fiscal 1996................................................. 13
Consolidated Statements of Cash Flows--for Fiscal 1994, Fiscal
1995 and Fiscal 1996............................................ 14
Consolidated Statements of Shareholders' Equity--for Fiscal 1994,
Fiscal 1995 and Fiscal 1996..................................... 15
Notes to Financial Statements.................................... 16
Report of Independent Accountants................................ 26
</TABLE>
(a) (2) Financial Statement Schedules
Not applicable.
(a) (3) Exhibits
The Exhibit Index that appears on page 28 is hereby incorporated by
reference in response to this item.
(b) Reports on Form 8-K
None.
11
<PAGE>
PAUL HARRIS STORES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
FEBRUARY 3, FEBRUARY 1,
1996 1997
----------- -----------
(IN THOUSANDS)
<S> <C> <C>
ASSETS
Current assets
Cash and cash equivalents............................ $19,886 $16,001
Merchandise inventories.............................. 17,645 19,759
Other receivables.................................... 539 861
Prepaid expenses..................................... 1,013 836
------- -------
Total current assets............................... 39,083 37,457
------- -------
Property, fixtures and equipment
Land, building and improvements...................... 5,715 5,787
Store fixtures and equipment......................... 11,575 14,067
Leasehold improvements and other..................... 11,389 12,567
------- -------
28,679 32,421
Less accumulated depreciation and amortization....... (10,785) (13,315)
------- -------
Property, fixtures and equipment, net.............. 17,894 19,106
Other assets........................................... 873 756
------- -------
$57,850 $57,319
======= =======
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities
Accounts payable..................................... $ 6,012 $ 8,515
Compensation and related taxes....................... 778 3,774
Income taxes payable................................. 45 37
Other accrued expenses............................... 3,447 3,554
Current maturities of long-term debt................. 4,320 120
------- -------
Total current liabilities.......................... 14,602 16,000
------- -------
Long-term debt......................................... 17,640 1,930
Other non-current liabilities.......................... 2,704 2,478
Commitments and contingent liabilities (see Note 5).... -- --
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
10,115 and 10,019, respectively..................... 1,716 1,930
Additional paid-in capital........................... 4,989 9,963
Retained earnings.................................... 16,199 25,018
------- -------
Total shareholders' equity......................... 22,904 36,911
------- -------
$57,850 $57,319
======= =======
</TABLE>
See accompanying "Notes To Consolidated Financial Statements".
12
<PAGE>
PAUL HARRIS STORES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
FOR THE FOR THE FOR THE
FIFTY-TWO FIFTY-THREE FIFTY-TWO
WEEKS ENDED WEEKS ENDED WEEKS ENDED
JANUARY 28, FEBRUARY 3, FEBRUARY 1,
1995 1996 1997
----------- ----------- -----------
(IN THOUSANDS, EXCEPT PER SHARE
DATA)
<S> <C> <C> <C>
Net sales.................................. $167,778 $167,523 $190,288
Cost of sales, including occupancy expenses
exclusive of depreciation................. 111,397 112,297 118,066
-------- -------- --------
Gross income............................... 56,381 55,226 72,222
Selling, general and administrative
expenses.................................. 45,539 47,081 53,300
Depreciation and amortization.............. 3,330 3,472 3,270
Interest expense, net...................... 2,539 2,034 1,235
-------- -------- --------
Income before income taxes................. 4,973 2,639 14,417
Provision for income taxes................. 1,895 1,010 5,598
-------- -------- --------
Net income................................. $ 3,078 $ 1,629 $ 8,819
======== ======== ========
Net income per common share................ $ .31 $ .16 $ .83
======== ======== ========
Weighted average number of shares and
share equivalents outstanding............. 9,981 10,067 10,616
======== ======== ========
</TABLE>
See accompanying "Notes To Consolidated Financial Statements".
13
<PAGE>
PAUL HARRIS STORES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
FOR THE FOR THE FOR THE
FIFTY-TWO FIFTY-THREE FIFTY-TWO
WEEKS ENDED WEEKS ENDED WEEKS ENDED
JANUARY 28, FEBRUARY 3, FEBRUARY 1,
1995 1996 1997
----------- ----------- -----------
(IN THOUSANDS)
<S> <C> <C> <C>
Cash flow from operating activities:
Net income................................ $ 3,078 $ 1,629 $ 8,819
Adjustments to reconcile earnings to cash
provided:
Depreciation and amortization........... 3,330 3,472 3,270
Net loss on disposal of assets.......... 328 169 560
Utilization of net operating loss
carryforward........................... 1,629 1,353 4,974
(Increase) decrease in current assets:
Merchandise inventories............... (530) 1,922 (2,114)
Other receivables..................... 350 410 (322)
Prepaid expenses...................... (41) 3 177
Increase (decrease) in current
liabilities:
Accounts payable...................... 1,653 (1,595) 2,503
Compensation and related taxes........ (33) (604) 2,996
Income taxes payable.................. 25 (371) (8)
Other accrued expenses................ (800) (1,718) 107
Other................................... (422) 412 79
------- ------- --------
Net cash flow from operating activities... 8,567 5,082 21,041
------- ------- --------
Net cash flow from investing activities:
Additions to fixed assets............... (3,781) (2,247) (5,230)
------- ------- --------
Cash flow from financing activities:
Repayment of long-term debt............. (737) (4,330) (19,910)
Proceeds from sale of common stock...... 87 32 214
------- ------- --------
Net cash flow from financing activities... (650) (4,298) (19,696)
------- ------- --------
$ 4,136 $(1,463) $ (3,885)
======= ======= ========
Cash and cash equivalents
At beginning of period.................. $17,213 $21,349 $ 19,886
At end of period........................ 21,349 19,886 16,001
------- ------- --------
$ 4,136 $(1,463) $ (3,885)
======= ======= ========
Supplemental disclosures of cash flow
information:
Cash paid during the period for
interest............................... $ 3,122 $ 4,321 $ 2,188
======= ======= ========
Cash paid during the period for income
taxes................................... $ 119 $ 11 $ 632
======= ======= ========
</TABLE>
See accompanying "Notes To Consolidated Financial Statements".
14
<PAGE>
PAUL HARRIS STORES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
COMMON STOCK ADDITIONAL
------------- PAID-IN RETAINED
SHARES AMOUNT CAPITAL EARNINGS
------ ------ ---------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Balance as of January 29,
1994..................... 9,662 $1,597 $2,007 $11,492
Issuance of stock
grants................. 301 -- -- --
Exercise of stock
options................ 35 87 -- --
Benefit of net operating
loss carryforward...... -- -- 1,629 --
Net income for fiscal
year 1994.............. -- -- -- 3,078
------ ------ ------ -------
Balance as of January 28,
1995..................... 9,998 1,684 3,636 14,570
Exercise of stock
options................ 21 32 -- --
Benefit of net operating
loss carryforward...... -- -- 1,353 --
Net income for fiscal
year 1995.............. -- -- -- 1,629
------ ------ ------ -------
Balance as of February 3,
1996..................... 10,019 1,716 4,989 16,199
Exercise of stock
options................ 96 214 -- --
Benefit of net operating
loss carryforward...... -- -- 4,974 --
Net income for fiscal
year 1996.............. -- -- -- 8,819
------ ------ ------ -------
Balance as of February 1,
1997..................... 10,115 $1,930 $9,963 $25,018
====== ====== ====== =======
</TABLE>
See accompanying "Notes To Consolidated Financial Statements".
15
<PAGE>
PAUL HARRIS STORES, INC., AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Nature of Business
Paul Harris Stores, Inc. (the "Company") is a specialty retailer of
moderately-priced sportswear and accessories sold under the Paul Harris
Design, Paul Harris Denim and PHD brand names. Stores are located primarily in
regional enclosed shopping malls and, to a lesser extent, strip shopping
centers, with the greatest concentration of stores in the Midwest.
Definition of Fiscal Year
The Company's fiscal year ends on the Saturday closest to the last day of
January. Fiscal 1995 included 53 weeks. Fiscal 1996 and 1994 were 52 weeks
each.
Principles of Consolidation
The consolidated financial statements include the accounts of Paul Harris
Stores, Inc. and its wholly-owned subsidiaries. All significant intercompany
balances and transactions are eliminated in consolidation. Certain amounts in
the prior year have been reclassified to conform to the current year
presentation.
Management's Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and the
disclosure of contingent assets and liabilities at the date of the financial
statements and reported amounts of revenues and expenses during the reporting
period. Actual results could differ from those estimates.
Fair Value of Financial Instruments
Management has estimated that the carrying value of cash and cash
equivalents, receivables, prepaid expenses and trade accounts payable
approximates their fair value due to the relatively short period of time until
expected realization. Management has estimated the fair value of long-term
debt using discounted cash flow analyses, based on the Company's current
expected borrowing rates for similar types of borrowing arrangements.
Property, Fixtures and Equipment
Property, fixtures and equipment are recorded at cost. Leasehold
improvements, store fixtures and equipment, net of accumulated depreciation,
are written off for closed stores. Depreciation is computed using the
straight-line method over the estimated useful lives of the assets, which are
as follows: Buildings and improvements 15-40 years; Store fixtures and
equipment 3-10 years; Leasehold improvements 1-15 years.
Cash and Cash Equivalents
Cash equivalents are highly liquid investments with a maturity of less than
three months (primarily money market funds). Investment income is recognized
when earned.
Merchandise Inventories
Inventories of merchandise on hand are valued at the lower of cost or market
as determined by the first-in, first-out ("FIFO") retail inventory method,
which approximates FIFO cost.
16
<PAGE>
PAUL HARRIS STORES, INC., AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Net Income Per Share
Net income per share of common stock is based on the weighted average number
of common and dilutive common equivalent shares outstanding.
Income Taxes
Income taxes have been provided in accordance with Statement of Financial
Accounting Standards No. 109 (SFAS 109), "Accounting for Income Taxes". SFAS
109 is an asset and liability approach which requires the recognition of
deferred tax liabilities and assets for the expected future tax consequences
of temporary differences, based on current tax rates, between the financial
reporting bases and tax bases of assets and liabilities.
Stock Based Compensation
The Company has elected to continue following the existing accounting rules
for stock options as contained in the Accounting Principles Board Opinion No.
25, "Accounting for Stock Issued to Employees" (APB Opinion No. 25).
NOTE 2. LONG-TERM DEBT AND CREDIT ARRANGEMENTS
The Company has entered into an agreement with a financial institution for a
revolving credit facility. This agreement was modified as of May 8, 1996 to
increase the line of credit facility from $13.5 million to $20 million and
extend the term to June 30, 1997. The financial institution has agreed to make
revolving loans and to issue letters of credit in amounts not to exceed $20
million, with the direct borrowings limited to $10 million. The Company made
no direct borrowings during fiscal 1996. Letters of credit outstanding as of
February 1, 1997 were $9.6 million. The annual interest rate on the direct
borrowings is a variable rate equal to the prime rate of the bank plus 1
percent. The letters of credit carry an initial issuance fee plus negotiation
fees of three eighths of a percent (0.375%) of the face amount of each letter
of credit. Also, during January 1994, the Company entered into a term loan
(mortgage) with the same financial institution for $2.4 million with monthly
principal payments of $10,000 plus interest at 7.84% per annum. The balance of
this term loan (mortgage) is due in full February 1999 and is secured by the
land and buildings of the Company. The revolving credit facility contains
several covenants which set limits on indebtedness, tangible net worth, cash
balances, cash flow from operations, capital expenditures, liquid assets and
also restrict dividends. The Company is also required to maintain all of its
primary operating accounts with this institution. The revolving credit
facility is secured by the Company's inventory, equipment, fixtures, cash and
assignment of leases.
On September 15, 1992 the Company issued notes in an aggregate principal
amount of $24 million bearing interest of 11.375% per annum, payable semi-
annually (the "11.375% Notes"). The principal amount of the 11.375% Notes were
required to be redeemed pro rata in eight equal installments of $2.1 million
payable on each January 31 and July 31 commencing with July 31, 1995 and
ending with January 31, 1999 and the final two installments of $3.6 million on
July 31, 1999 and January 31, 2000. The Indenture relating to the 11.375%
Notes also contained several covenants relating to certain operational and
financial requirements. The Company repaid the $19,800,000 balance outstanding
on these 11.375% Notes at February 3, 1996 (current and long-term portion) in
fiscal 1996.
17
<PAGE>
PAUL HARRIS STORES, INC., AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Long-term debt, exclusive of amounts maturing in one year, is summarized
below:
<TABLE>
<CAPTION>
FEBRUARY 3, FEBRUARY
1996 1, 1997
----------- ----------
<S> <C> <C>
Notes payable in semi-annual payments from July
31, 1995 through January 31, 2000 plus interest
payable at the rate of 11.375% per annum....... $15,600,000 --
Term loan (mortgage) on land and buildings
payable in monthly payments through February
1999 including interest at the fixed rate of
7.84% per year................................. 2,040,000 $1,930,000
----------- ----------
Total long-term debt.......................... $17,640,000 $1,930,000
=========== ==========
</TABLE>
The term loan (mortgage) has covenants restricting indebtedness, tangible net
worth, cash balances, cash flow from operations, capital expenditures, liquid
assets and also restricts dividends. The book value of assets subject to this
lien as of February 1, 1997 was $4,486,000.
Scheduled maturities of long-term debt over the next three fiscal years are:
$120,000 in each of fiscal 1997 and 1998 and $1,810,000 in fiscal 1999.
The estimated fair market value of the term loan (mortgage) was $2,012,000
and $1,915,000 as of February 3, 1996 and February 1, 1997, respectively. The
estimated fair market value of the 11.375% Notes was $15,897,000 as of February
3, 1996.
NOTE 3. SHAREHOLDERS' EQUITY
All outstanding shares are shares of voting common stock with the exception
of 3,013,039 shares of non-voting common stock held by a single institutional
holder. This holder may request to convert the non-voting common stock to
voting common stock on a share for share basis upon the occurrence of certain
events specified in the Company's Amended and Restated Articles of
Incorporation, including the sale of shares of common stock by the Company in
an underwritten public offering.
Pursuant to the Company's confirmed Plan of Reorganization (the "Plan"),
certain of the shares of Common Stock and the 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 305,723 shares of Common Stock required to
be distributed, 162,127 shares were issued as Non-voting Common Stock. All of
these 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 1992.
The Company and a major shareholder are parties to a stock transfer agreement
whereby under specific guidelines, at the option of the shareholder's estate,
the Company must repurchase shares of the Company's stock from the immediate
family of the shareholder upon his death, to the extent that the Company
receives net proceeds from life insurance policies held by the Company on the
life of that shareholder. As of February 1, 1997, the Company owns and is the
beneficiary of approximately $225,000 in face amount of life insurance on the
life of the shareholder.
18
<PAGE>
PAUL HARRIS STORES, INC., AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE 4. INCOME TAXES
The provision for income taxes was as follows:
<TABLE>
<CAPTION>
FISCAL FISCAL FISCAL
1994 1995 1996
---------- ---------- ----------
<S> <C> <C> <C>
Current tax expense:
Federal................................ $ 80,000 $ 72,000 $ 293,000
State.................................. 67,000 25,000 325,000
Deferred tax expense:
Federal................................ 1,519,000 780,000 4,431,000
State.................................. 229,000 133,000 549,000
---------- ---------- ----------
Income tax provision..................... $1,895,000 $1,010,000 $5,598,000
========== ========== ==========
</TABLE>
The provision for income taxes differs from the amount of income tax
determined by applying the U.S. statutory Federal income tax rate to pretax
income from continuing operations as a result of the following differences:
<TABLE>
<CAPTION>
FISCAL FISCAL FISCAL
1994 1995 1996
---------- ---------- ----------
<S> <C> <C> <C>
Statutory U.S. taxes................... $1,703,000 $ 897,000 $4,945,000
State and local taxes, net
of federal benefit.................... 196,000 104,000 574,000
Other.................................. (4,000) 9,000 79,000
---------- ---------- ----------
$1,895,000 $1,010,000 $5,598,000
========== ========== ==========
</TABLE>
Deferred tax assets (liabilities) are comprised of the following:
<TABLE>
<CAPTION>
FEBRUARY 3, FEBRUARY 1,
1996 1997
----------- -----------
<S> <C> <C>
Deferred rent................................... $ 991,000 $ 943,000
Depreciation.................................... 10,000 465,000
Minimum tax credit.............................. 671,000 958,000
Loss carryforwards.............................. 6,925,000 1,292,000
Other........................................... 181,000 162,000
----------- -----------
Gross deferred tax assets..................... 8,778,000 3,820,000
----------- -----------
Pre-paid pension................................ (162,000) (162,000)
Other........................................... (193,000) (209,000)
----------- -----------
Gross deferred tax liabilities................ (355,000) (371,000)
----------- -----------
Valuation allowance............................. (8,423,000) (3,449,000)
----------- -----------
Net deferred taxes.............................. $ -- $ --
=========== ===========
</TABLE>
In accordance with SFAS 109, deferred tax assets are established to give
recognition to prior loss carryforwards. Additionally, deferred assets and
liabilities are established related to normal temporary differences. Due to
the seasonal nature of the Company's business (and its historical reliance on
fourth quarter results), the volatility of trends in women's apparel, and the
relatively short amount of time that has passed since the Company's emergence
from Chapter 11, the net deferred tax assets have been reduced by a valuation
allowance until realization of those assets is reasonably assured. As required
by SOP 90-7, any utilization of net operating loss carryforwards results in an
increase in additional paid-in capital. Approximately $3,404,000 of the
Company's loss carryforwards remain at February 1, 1997 which, if unused, will
expire in fiscal 2006 and 2007.
19
<PAGE>
PAUL HARRIS STORES, INC., AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE 5. COMMITMENTS AND CONTINGENT LIABILITIES
All stores are leased under operating leases which expire on various dates
through fiscal 2007. Approximately 73% of the store leases contain rent
escalation clauses. Expense related to these leases is recorded on a straight-
line basis. The Company also leases automobiles under operating leases with
terms of 24 to 36 months. Following is a summary of future minimum rental
payments required by operating leases at February 1, 1997:
<TABLE>
<CAPTION>
PAYABLE
IN MINIMUM RENTAL
FISCAL PAYMENTS
YEAR STORES AND OTHER
------- ----------------
<S> <C>
1997............................. $11,728,000
1998............................. 10,200,000
1999............................. 8,273,000
2000............................. 7,495,000
2001............................. 6,814,000
Later Years...................... 19,230,000
-----------
Total.......................... $63,740,000
===========
</TABLE>
In addition to minimum lease payments, the Company may be obligated to pay
other contingent amounts: (1) Some store leases provide for additional rentals
if sales exceed specified amounts. These additional rentals approximated 2% of
rental expense for fiscal 1996, 1% for fiscal 1995, and 1% for fiscal 1994; (2)
the Company has a number of leases which are paid based on a percentage of
monthly sales dollars. Such leases accounted for 13% of rental expense in
fiscal 1996, 10% for fiscal 1995 and 6% for fiscal 1994; (3) Under certain
store leases, additional payments are required of the Company for real estate
taxes, utilities and other expenses. Rental expense under store leases for
these items aggregated $15,089,000 for fiscal 1996, $14,904,000 for fiscal 1995
and $13,026,000 for fiscal 1994.
In January 1997 the Company entered into various agreements for the purchase
of new "point of sale" hardware and related software in an aggregate amount of
approximately $4,900,000.
In December 1993 the Company contracted with a local printing company to
provide the Company with printing services and has agreed to purchase annual
print volume of $500,000 per year for a period of five (5) years.
NOTE 6. RETIREMENT PLAN
The Company has a non-contributory defined benefit pension plan covering
substantially all full-time employees. The benefits are based on years of
service and the average annual compensation for the employee's five highest
consecutive years of employment with the Company. Until December 31, 1994 the
Company's funding policy was to contribute annually the maximum amount that can
be deducted for federal income tax purposes. Contributions were intended to
provide for current service and for any unfunded projected future benefit
obligation over a reasonable period.
The Company ceased benefit accrual under the defined benefit plan effective
December 31, 1994. No new employees will be able to enter into the plan.
Participants will maintain benefits accrued through December 31, 1994, but will
not accrue any benefit for service or compensation in future years. As a result
of freezing the accrued benefits, a curtailment as described under Statement of
Accounting Financial Standards No. 88 (SFAS 88) "Employers' Accounting for
Settlements and Curtailments of Defined Benefit Pension Plans and for
Termination Benefits" occurred in fiscal 1994. The curtailment gain of $572,000
is included in the Company's results of operations for fiscal 1994, net of
fiscal 1994 pension expense of $144,000.
20
<PAGE>
PAUL HARRIS STORES, INC., AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Net pension expense (income) for fiscal 1994, 1995 and 1996 includes the
following components:
<TABLE>
<CAPTION>
FISCAL FISCAL FISCAL
1994 1995 1996
--------- --------- ---------
<S> <C> <C> <C>
Service expense--benefits earned
during the year...................... $ 211,000 $ -- $ --
Interest expense on projected benefit
obligation........................... 156,000 106,000 91,000
Actual loss (gain) on plan assets..... 266,000 (332,000) (278,000)
Net amortization and deferral......... (489,000) 210,000 133,000
--------- --------- ---------
Net pension expense (income).......... $ 144,000 $ (16,000) $(54,000)
========= ========= =========
</TABLE>
The funded status of the plan is as follows:
<TABLE>
<CAPTION>
FEBRUARY 3, FEBRUARY 1,
1996 1997
----------- -----------
<S> <C> <C>
Vested........................................... $1,201,000 $1,173,000
Nonvested........................................ 63,000 32,000
---------- ----------
Accumulated benefit obligation................... 1,264,000 1,205,000
Projected impact of future salary increases...... -- --
---------- ----------
Projected benefit obligation..................... 1,264,000 1,205,000
Market value of plan assets available for
benefits........................................ 1,825,000 1,869,000
---------- ----------
Funded position.................................. $ 561,000 $ 664,000
========== ==========
Consisting of:
Unrecognized loss (gain) on assets............. $ 107,000 $ 131,000
Prepaid asset.................................. 454,000 533,000
---------- ----------
Funded position.................................. $ 561,000 $ 664,000
========== ==========
</TABLE>
The assets of the plan, comprised almost entirely of U.S. Government
obligations and high grade stocks and bonds, included 6,363 shares of the
Company's common stock as of January 28, 1995, February 3, 1996, and February
1, 1997.
The weighted-average discount rates utilized in determining the actuarial
present value of the projected benefit obligations were 7% and 7.25% for
fiscal 1995 and 1996, respectively. The expected long-term rate of return on
assets was 8% in fiscal 1995 and 1996.
NOTE 7. EMPLOYEE BENEFIT PLANS
Stock Option Plans
The Company has options outstanding under its 1992 Non-Qualified Stock
Option Plan (the "1992 Plan") and pursuant to an agreement with its Chief
Executive Officer. In addition, the Board of Directors has approved two other
stock based compensation plans--the 1996 Stock Option and Incentive Plan (the
"1996 Plan") and the Outside Directors Stock Option Plan (the "Directors
Plan"). Both the adoption of the 1996 Plan and the Directors Plan and the
options granted under such plans are subject to shareholders approval at the
1997 annual meeting of shareholders.
The Company has elected to continue following 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.
Accordingly, no compensation expense has been recognized in the results of
operations of the Company.
21
<PAGE>
PAUL HARRIS STORES, INC., AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The 1992 Plan provides additional incentive to key employees and persons who
are not employees of the Company but whose efforts are expected to be of
substantial benefit to the Company. The 1992 Plan provides that a Committee,
appointed by the Board of Directors, may from time to time grant to employees
of the Company and to persons who are not employees of the Company, stock
options to purchase shares of common stock of the Company. The Committee is
authorized to issue options to purchase up to 900,000 shares of common stock of
the Company under the 1992 Plan. In addition, grants of options were made to
non-employee directors in 1992, 1993 and 1994. As of February 1, 1997 virtually
all options under the 1992 Plan have been granted at an exercise price ranging
from $1.31 to $17.50 per share.
The 1996 Plan provides a means for attracting and retaining officers and key
employees of the Company. The 1996 Plan is to be administered by a Committee
appointed by the Board of Directors. The maximum number of shares of common
stock of the Company that may be granted under the 1996 Plan is 1,000,000
shares. Grants may be in the form of stock options, restricted stock, or stock
appreciation rights. Stock options granted under the 1996 Plan may be in the
form of non-qualified stock options or incentive stock options. As of February
1, 1997 options to purchase 76,100 shares of common stock of the Company have
been granted at an exercise price of $17.00 per share.
Generally, options may be granted under the above plans at any time prior to
the tenth anniversary of their respective effective dates. Options awarded to
date generally vest in equal amounts from one to three years and expire ten
years from grant date under these plans. Generally the price of the options may
be tendered in cash or in shares of common stock valued at fair market value on
the date of exercise for each plan.
The Directors Plan encourages increased common stock ownership of the Company
by members of the Board of Directors who are not employees of the Company. The
Directors Plan reserves for the issuance of 100,000 shares of common stock of
the Company. Each eligible director is automatically granted an option to
purchase 3,000 shares of stock in the month following each annual meeting of
shareholders held after June 19, 1996. In addition, an eligible director who
did not receive options under the Company's 1992 Plan is entitled to receive
options to purchase 5,000 shares of common stock in the month following the
month in which he or she is first elected as a director. As of February 1,
1997, options to purchase 15,000 shares of common stock of the Company have
been granted under this plan.
Pursuant to an employment agreement by and between the Company and Ms.
Fischer the compensation committee granted a non-transferable option to
purchase 350,000 shares of the common stock of the Company at an exercise price
of $5.68 per share.
22
<PAGE>
PAUL HARRIS STORES, INC., AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The following table summarizes options outstanding and available for
issuance under these plans and arrangements:
<TABLE>
<CAPTION>
FISCAL FISCAL FISCAL
1994 1995 1996
--------- --------- ----------
<S> <C> <C> <C>
Options outstanding at beginning of
year................................. 553,000 883,000 904,000
Options granted..................... 572,000 385,000 444,000
Options exercised................... (35,000) (21,000) (96,000)
Options expired..................... (207,000) (343,000) (82,000)
--------- --------- ----------
Options outstanding at year-end....... 883,000 904,000 1,170,000
========= ========= ==========
Options exercisable at year-end....... 429,000 684,000 657,000
========= ========= ==========
Options available for grant at year-
end.................................. 324,000 282,000 1,020,000
========= ========= ==========
Weighted average option prices per
share:
At beginning of year................ $ 3.62 $ 4.68 $ 3.47
Granted............................. 5.32 1.50 10.39
Exercised........................... 2.52 1.50 2.23
Expired............................. 3.60 4.32 2.66
Outstanding at year-end............. 4.68 3.47 6.30
Exercisable at year-end............. $ 3.41 $ 3.83 $ 5.75
</TABLE>
For the weighted average fair value of options granted during the year, the
fair value of each option granted is estimated on the date of the grant using
the Black-Scholes option-pricing model with the following weighted-average
assumptions used for grants in 1995 and 1996, respectively: dividend yield of
0.0 and 0.0 percent; expected volatility of 37.8 and 41.4 percent; risk free
interest rates of 6.1 and 6.3 percent; and expected lives of 4.4 and 7.3
years.
<TABLE>
<CAPTION>
FISCAL FISCAL
1995 1996
------ ------
<S> <C> <C>
Weighted-average fair value per option of options granted
during the year.......................................... $0.54 $5.17
</TABLE>
Had compensation expense for the Company's stock options been determined
based on the fair value at the grant dates for the awards under those plans
consistent with the method of Statement of Financial Accounting Standards No.
123, "Accounting for Stock-Based Compensation," the Company's net income and
earnings per share would have been reduced to the pro forma amounts indicated
below:
<TABLE>
<CAPTION>
FISCAL FISCAL
1995 1996
------ ------
<S> <C> <C>
Net income (in thousands)
As reported.............................................. $1,629 $8,819
Pro forma................................................ $1,596 $7,863
Net income per common share
As reported.............................................. $ .16 $ .83
Pro forma................................................ $ .16 $ .74
</TABLE>
Compensation expense based on the fair value of options granted prior to
January 29, 1995 were not included in the preceding pro forma calculations.
Therefore, the resulting pro forma compensation expense may not be
representative of that to be expected in future years.
23
<PAGE>
PAUL HARRIS STORES, INC., AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The following table summarizes information about stock options outstanding
and options exercisable at February 1, 1997.
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
--------------------------------- ---------------------
NUMBER WEIGHTED- WEIGHTED- NUMBER WEIGHTED-
RANGE OF OUTSTANDING AVERAGE AVERAGE EXERCISABLE AVERAGE
EXERCISE AT FEB. 1, CONTRACTUAL EXERCISE AT FEB. 1, EXERCISE
PRICES 1997 LIFE PRICE 1997 PRICE
-------- ----------- ----------- --------- ----------- ---------
<S> <C> <C> <C> <C> <C>
$ 1.31 221,500 8.70 $ 1.31 117,900 $ 1.31
$ 1.32-$ 3.99 243,500 8.36 1.96 157,900 2.02
$ 4.00-$ 5.99 429,500 7.26 5.57 281,200 5.54
$ 6.00-$12.99 61,500 9.59 9.37 0 0.00
$13.00-$17.50 214,000 9.80 $17.24 100,000 $17.50
</TABLE>
Thrift/Profit-Sharing Plan
The Company has established a thrift/profit-sharing plan for substantially
all employees which allows participating employees to authorize payroll
deductions from their earnings for contribution to the plan. The Company
contributes amounts as a set percentage of employees deductions as defined in
the plan. Additionally, the Company may contribute amounts to the plan as
determined annually by the Board of Directors from Company profits.
NOTE 8. QUARTERLY INFORMATION (UNAUDITED)
<TABLE>
<CAPTION>
FISCAL 1995 QUARTERS
----------------------------------
1ST 2ND 3RD 4TH
------- ------- ------- -------
(IN THOUSANDS, EXCEPT PER SHARE
DATA)
<S> <C> <C> <C> <C>
Net sales................................... $34,801 $36,509 $36,880 $59,333
Gross income................................ 10,184 11,717 11,634 21,691
Income (loss) before income taxes........... (1,982) (1,283) (996) 6,900
Net income (loss)........................... $(1,215) $ (780) $ (612) $ 4,236
======= ======= ======= =======
Net income (loss) per share................. $ (.12) $ (.08) $ (.06) $ .42
======= ======= ======= =======
<CAPTION>
FISCAL 1996 QUARTERS
----------------------------------
1ST 2ND 3RD 4TH
------- ------- ------- -------
(IN THOUSANDS, EXCEPT PER SHARE
DATA)
<S> <C> <C> <C> <C>
Net sales................................... $39,639 $36,721 $45,413 $68,515
Gross income................................ 12,827 12,560 18,074 28,761
Income before income taxes.................. 232 107 3,058 11,020
Net income.................................. $ 138 $ 64 $ 1,821 $ 6,796
======= ======= ======= =======
Net income per share........................ $ .01 $ .01 $ .17 $ .62
======= ======= ======= =======
</TABLE>
NOTE 9. SUBSEQUENT EVENTS
Bank Revolving Credit Facility
On April 9, 1997, the Company and its lender agreed to modify the secured
revolving credit facility described in "Note 2. Long-Term Debt and Credit
Arrangements." The revised agreement increases the credit facility from
$20,000,000 to $30,000,000. The Company may use the entire amount of the
credit facility for letters of credit or direct borrowings.
24
<PAGE>
PAUL HARRIS STORES, INC., AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONCLUDED)
The term of the credit facility has been 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 such as those items
relating to indebtedness, capital expenditures, dividends and cash balances.
The new agreement has 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.
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
will receive one Right for each share they hold. Initially each Right will
represent 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.
25
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Shareholders of Paul Harris Stores, Inc.
In our opinion, the consolidated financial statements listed in the index
appearing under Item 14(a)(1) on page 11 present fairly, in all material
respects, the financial position of Paul Harris Stores, Inc. and its
subsidiaries at February 1, 1997 and February 3, 1996, and the results of
their operations and their cash flows for each of the three years in the
period ended February 1, 1997, in conformity with generally accepted
accounting principles. These financial statements are the responsibility of
the Company's management; our responsibility is to express an opinion on these
financial statements based on our audits. We conducted our audits of these
statements in accordance with generally accepted auditing standards which
require that we plan and perform the audit to obtain reasonable assurance
about whether the financial statements are free of material misstatement. An
audit includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for the opinion expressed above.
Price Waterhouse LLP
Indianapolis, Indiana
February 27, 1997, Except as to Note 9 which is as of April 10, 1997
26
<PAGE>
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934, THE REGISTRANT HAS DULY CAUSED THIS REPORT TO BE SIGNED
ON ITS BEHALF BY THE UNDERSIGNED, THEREUNTO DULY AUTHORIZED.
Paul Harris Stores, Inc.
April 9, 1997 /s/ Charlotte G. Fischer
By: _________________________________
Charlotte G. Fischer, Chairman of
the Board, President and Chief
Executive Officer (Principal
Executive Officer)
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES EXCHANGE ACT OF 1934, THIS
REPORT HAS BEEN SIGNED BELOW BY THE FOLLOWING PERSONS ON BEHALF OF THE
REGISTRANT AND IN THE CAPACITIES AND ON THE DATES INDICATED.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<S> <C> <C>
/s/ Charlotte G. Fischer Chairman of the Board, April 9, 1997
____________________________________ President and Chief
Charlotte G. Fischer Executive Officer
(Principal Executive
Officer)
/s/ John H. Boyers Senior Vice President-- April 9, 1997
____________________________________ Finance and Treasurer
John H. Boyers (Principal Financial
Officer)
/s/ Keith L. Himmel, Jr. Vice President--Finance, April 9, 1997
____________________________________ Controller and
Keith L. Himmel, Jr. Corporate Secretary
(Principal Accounting
Officer)
/s/ Richard A. Feinberg Ph.D. Director April 9, 1997
____________________________________
Richard A. Feinberg Ph.D.
Director April , 1997
____________________________________
Rudy Greer
/s/ Robert Logan Director April 9, 1997
____________________________________
Robert Logan
Director April , 1997
____________________________________
James T. Morris
/s/ Gerald Paul Director and Chairman April 9, 1997
____________________________________ Emeritus
Gerald Paul of the Board
/s/ John E. Rau Director April 9, 1997
____________________________________
John E. Rau
/s/ Sally Tassani Director April 9, 1997
____________________________________
Sally Tassani
</TABLE>
27
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
<C> <S> <C>
(3)(a)(i) Amended and Restated Articles of Incorporation of the Regis-
trant dated September 8, 1992 (incorporated herein by refer-
ence from Form 8-K dated April 11, 1997).
(a)(ii) Amendment to Amended and Restated Articles of Incorporation
dated July 6, 1993 (incorporated herein by reference from
Form 8-K dated April 11, 1997).
(a)(iii) Amendment to Amended and Restated Articles of Incorporation
dated April 10, 1997 (incorporated herein by reference from
Form 8-K dated April 11, 1997).
(b)* Restated Bylaws of the Registrant
(4)(a) Indenture dated as of September 15, 1992 between the Regis-
trant and IBJ Schroder Bank & Trust Company, as trustee, re-
lating to the Company's 11.375% Notes due 2000 (the "Inden-
ture") (incorporated herein by reference from Form 8-K dated
August 31, 1992).
(b) First Supplemental Indenture as of October 25, 1993 between
the Registrant and IBJ Schroder Bank & Trust Company, as
trustee, relating to the Company's 11.375% Notes due 2000
(the "Indenture") (incorporated herein by reference from
Form 10-Q for the fiscal quarter ended October 30, 1993).
(c) Secured Credit Agreement dated as of October 28, 1993 by and
between the Registrant and LaSalle National Bank (incorpo-
rated herein by reference from Form 10-Q for the fiscal
quarter ended October 30, 1993).
(d) Amended and Restated Secured Credit Agreement dated as of
January 20, 1994 by and between the Registrant and LaSalle
National Bank (incorporated herein by reference from Form
10-Q for the fiscal quarter ended April 30, 1994).
(e) First Modification of Secured Credit Agreement, Notes, Mort-
gage and Other Loan Documents dated as of October 31, 1994
by and between the Registrant and LaSalle National Bank (in-
corporated herein by reference from Form 10-K for the fiscal
year ended January 28, 1995).
(f) Second Modification of Secured Credit Agreement, Notes,
Mortgage and Other Loan Documents dated as of January 31,
1995 by and between the Registrant and LaSalle National Bank
(incorporated herein by reference from Form 10-K for the
fiscal year ended January 28, 1995).
(g) Third Modification of Secured Credit Agreement, Notes, Mort-
gage and Other Loan Documents dated as of September 28, 1995
by and between the Registrant and LaSalle National Bank (in-
corporated herein by reference from Form 10-Q for the fiscal
quarter ended October 28, 1995).
(h) Fourth Modification of Secured Credit Agreement, Revolving
Note, and Other Loan Documents dated as of May 8, 1996 by
and between the Registrant and LaSalle National Bank (incor-
porated herein by reference from Form 10-Q for the fiscal
quarter ended May 4, 1996).
(i)* Fifth Modification of Secured Credit Agreement, Revolving
Note, and Other Loan Documents dated as of April 9, 1997 by
and between the Registrant and LaSalle National Bank.
(j) Rights Agreement between the Registrant and The First Na-
tional Bank of Boston, as rights agent, dated April 10, 1997
(incororated herein by reference from Form 8-K dated April
11, 1997).
</TABLE>
28
<PAGE>
<TABLE>
<CAPTION>
<C> <S> <C>
(10)(a) The Registrant's 1992 Non-Qualified Stock Option Plan (incor-
porated herein by reference from Form 10-K for the fiscal year
ended January 30, 1993).
(b) Amended and Restated Employment Agreement and Settlement of
the Deferred Compensation Agreement both dated August 31, 1992
between the Registrant and Gerald Paul (incorporated herein by
reference from Form 10-K for the fiscal year ended January 30,
1993).
(c) Stock Transfer Agreement with Gerald Paul dated September 2,
1981 (incorporated herein by reference from Form 10-K for the
fiscal year ended January 30, 1993).
(d) Supplement to the Amended and Restated Employment Agreement
between the Registrant and Gerald Paul dated March 21, 1994
(incorporated herein by reference from Form 10-K for the fis-
cal year ended January 29, 1994).
(e) Employment Agreement between the Registrant and Charlotte G.
Fischer dated April 28, 1994 (incorporated herein by reference
from Form 10-Q for the fiscal quarter ended April 30, 1994).
(f) Stock Option Agreement dated as of April 29, 1994, between the
Registrant and Charlotte G. Fischer (incorporated herein by
reference from Form 10-K for the fiscal year ended January 28,
1995).
(g) Letter dated March 2, 1995 to John H. Boyers describing pro-
posed terms of employment (incorporated herein by reference
from Form 10-K for the fiscal year ended February 3, 1996).
(h) Amended and Restated Employment Agreement between the Company
and Charlotte G. Fischer dated June 17, 1996 (incorporated
herein by reference from Form 10-Q for the fiscal quarter
ended August 3, 1996).
(i)* Amended and Restated Employment Agreement between the Company
and Charlotte G. Fischer dated November 22, 1996.
(23)* Consent of Price Waterhouse LLP.
(27)* Financial Data Schedule.
</TABLE>
- --------
*Filed with this report.
29
<PAGE>
EXHIBIT 3(b)
BY-LAWS
OF
PAUL HARRIS STORES, INC.
(As Amended Through April 9, 1997)
ARTICLE I
Meetings of Shareholders
------------------------
Section 1.1. Annual Meetings. Annual meetings of the shareholders of
the Corporation shall be held on the third Tuesday in June of each year, at such
hour and at such place within or without the State of Indiana as shall be
designated by the Board of Directors. In the absence of designation, the meeting
shall be held at the principal office of the Corporation at 9:00 a.m. (local
time). The Board of Directors may, by resolution, change the date or time of
such annual meeting. If the day fixed for any annual meeting of shareholders
shall fall on a legal holiday, then such annual meeting shall be held on the
first following business day that is not a legal holiday.
Section 1.2. Special Meetings. A special meeting of the shareholders
of the Corporation may be called at any time by the Board of Directors or the
Chairman of the Board. The Board of Directors or the Chairman of the Board, as
the case may be, calling a special meeting of shareholders shall set the date,
time and place of such meeting, which may be held within or without the State of
Indiana.
Section 1.3. Notices. A written notice, stating the date, time, and
place of any meeting of the shareholders, and, in the case of a special meeting,
the purpose or purposes for which such meeting is called, shall be delivered or
mailed by the Secretary of the Corporation to each shareholder of record of the
Corporation entitled to notice of or to vote at such meeting no fewer than ten
(10) nor more than sixty (60) days before the date of the meeting. Notice of
shareholders' meetings, if mailed, shall be mailed, postage prepaid, to each
shareholder at his address shown in the Corporation's current record of
shareholders.
Notice of a meeting of shareholders shall be given to shareholders not
entitled to vote, but only if a purpose for the meeting is to vote on any
amendment to the Articles of Incorporation, merger, or share exchange to which
the Corporation would be a party, sale of the Corporation's assets, dissolution
of the Corporation, or consideration of voting rights to be accorded to shares
acquired or to be acquired in a "control share acquisition" (as such term is
defined in the Indiana Business Corporation law). Except as required by the
foregoing sentence or as otherwise required by the Indiana Business Corporation
Law or the Articles of Incorporation, notice of a meeting of shareholders is
required to be given only to shareholders entitled to vote at the meeting.
A shareholder or his proxy may at any time waive notice of a meeting
if the waiver is in writing and is delivered to the Corporation for inclusion in
the minutes or filing with the Corporation's records. A shareholder's
attendance at a meeting, whether in person or by
<PAGE>
proxy, (a) waives objection to lack of notice or defective notice of the
meeting, unless the shareholder or his proxy at the beginning of the meeting
objects to holding the meeting or transacting business at the meeting, and (b)
waives objection to consideration of a particular matter at the meeting that is
not within the purpose or purposes described in the meeting notice, unless the
shareholder or his proxy objects to considering the matter when it is presented.
Each shareholder who has, in the manner above provided, waived notice or
objection to notice of a shareholders' meeting shall be conclusively presumed to
have been given due notice of such meeting, including the purpose or purposes
thereof.
If an annual or special shareholders' meeting is adjourned to a
different date, time, or place, notice need not be given of the new date, time,
or place if the new date, time, or place is announced at the meeting before
adjournment, unless a new record date is or must be established for the
adjourned meeting.
Section 1.4. Voting. Except as otherwise provided by the Indiana
Business Corporation law or the Articles of Incorporation, each share of the
Voting Common Stock of the Corporation that is outstanding at the record date
established for any annual or special meeting of shareholders and is outstanding
at the time of and represented in person or by proxy at the annual or special
meeting, shall entitle the record holder thereof, or his proxy, to one (1) vote
on each matter voted on at the meeting. Each share of the Corporation's
Nonvoting Common Stock and Preferred Stock shall have any voting rights required
by the Indiana Business Corporation Law or the Articles of Incorporation,
including, for the nonvoting Common Stock, the Special Voting Rights set forth
in Article VI, Section 1.d. of the Articles of Incorporation.
Section 1.5. Quorum. Unless the Articles of Incorporation or the
Indiana Business Corporation Law provide otherwise, at all meetings of
shareholders, a majority of the votes entitled to be cast on a matter,
represented in person or by proxy, constitutes a quorum for action on the
matter. Action may be taken at a shareholders' meeting only on matters with
respect to which a quorum exists; provided, however, that any meeting of
shareholders, including annual and special meetings and any adjournments
thereof, may be adjourned to a later date although less than a quorum is
present. Once a share is represented for any purpose at a meeting, it is deemed
present for quorum purposes for the remainder of the meeting and for any
adjournment of that meeting unless a new record date is or must be set for that
adjourned meeting.
Section 1.6. Vote Required To Take Action. If a quorum exists as to
a matter to be considered at a meeting of shareholders, action on such matter
(other than the election of Directors) is approved if the votes properly cast
favoring the action exceed the votes properly cast opposing the action, except
as the Articles of Incorporation or the Indiana Business Corporation Law require
a greater number of affirmative votes. Directors shall be elected by a
plurality of the votes properly cast.
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Section 1.7. Record Date. Only such persons shall be entitled to
notice of or to vote, in person or by proxy, at any shareholders' meeting as
shall appear as shareholders upon the books of the Corporation as of such record
date as the Board of Directors shall determine, which date may not be earlier
than the date seventy (70) days immediately preceding the meeting. In the
absence of such determination, the record date shall be the fiftieth (50/th/)
day immediately preceding the date of such meeting. Unless otherwise provided
by the Board of Directors, shareholders shall be determined as of the close of
business on the record date.
Section 1.8. Proxies. A shareholder may vote his shares either in
person or by proxy. A shareholder may appoint a proxy to vote or otherwise act
for the shareholder (including authorizing the proxy to receive, or to waive,
notice of any shareholders' meeting within the effective period of such proxy)
by signing an appointment form, either personally or by the shareholder's
attorney-in-fact. An appointment of a proxy is effective when received by the
Secretary or other officer or agent authorized to tabulate votes and is
effective for eleven (11) months unless a longer period is expressly provided in
the appointment form. The proxy's authority may be limited to a particular
meeting or may be general and authorize the proxy to represent the shareholder
at any meeting of shareholders held within the time provided in the appointment
form. Subject to the Indiana Business Corporation Law and to any express
limitation on the proxy's authority appearing on the face of the appointment
form, the Corporation is entitled to accept the proxy's vote or other action as
that of the shareholder making the appointment.
Section 1.9. Removal of Directors. Any or all of the members of the
Board of Directors may be removed, with or without good cause, only at a meeting
of the shareholders called expressly for that purpose, by a vote of the holders
of outstanding shares representing at least fifty percent (50%) of the votes
then entitled to be cast at an election of Directors.
Section 1.10. Business of Shareholder Meetings. At an annual meeting
of the shareholders, only such business shall be conducted as shall have been
properly brought before the meeting. To be properly brought before an annual
meeting, business must be (a) specified in the notice of meeting (or any
supplement thereto) given by or at the direction of the Board of Directors, (b)
otherwise properly brought before the meeting by or at the direction of the
Board of Directors, or (c) otherwise properly brought before the meeting by a
shareholder. For business to be properly brought before an annual meeting by a
shareholder, the shareholder must have the legal right and authority to make the
proposal for consideration at the meeting, and the shareholder must have given
timely notice thereof in writing to the Secretary of the Corporation. To be
timely, a shareholder's notice must be delivered to or mailed and received at
the principal executive offices of the Corporation not less than sixty (60) days
prior to the meeting; provided, however, that in the event that less than
seventy (70) days notice or prior public disclosure of the date of the meeting
is given or made to shareholders (which notice or public disclosure shall
include the date of the annual meeting specified in these By-Laws, if such By-
Laws have been filed with the Securities and Exchange Commission and if the
annual meeting is held on such date), notice by the
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shareholder to be timely must be so received not later than the close of
business on the tenth (10/th/) day following the day on which such notice of the
date of the annual meeting was mailed or such public disclosure was made. A
shareholder's notice to the Secretary shall set forth as to each matter the
shareholder proposes to bring before the annual meeting (a) a brief description
of the business desired to be brought before the annual meeting and the reasons
for conducting such business at the annual meeting, (b) the name and record
address of the shareholder proposing such business, (c) the class and number of
shares of the Corporation that are beneficially owned by the shareholder, and
(d) any material interest of the shareholder in such business. Notwithstanding
anything in these By-Laws to the contrary, no business shall be conducted at an
annual meeting except in accordance with the procedures set forth in this
Section 1.10. The Chairman of an annual meeting shall, if the facts warrant,
determine and declare to the meeting that business was not properly brought
before the meeting and in accordance with the provisions of this Section 1.10,
and if he should so determine, he shall so declare to the meeting and any such
business not properly brought before the meeting shall not be transacted. At
any special meeting of the shareholders, only such business shall be conducted
as shall have been specified in the notice of meeting (or any supplement
thereto) or otherwise properly brought before the meeting by or at the direction
of the Board of Directors.
Section 1.11. Notice of Shareholder Nominees. Only persons who are
nominated in accordance with the procedures set forth in this Section 1.11 shall
be eligible for election as Directors. Nominations of persons for election to
the Board of Directors may be made at a meeting of shareholders by or at the
direction of the Board of Directors, by a Nominating Committee appointed by the
Board of Directors, or by any shareholder of the Corporation entitled to vote
for the election of Directors at the meeting who complies with the notice
procedures set forth in this Section 1.11. Such nominations, other than those
made by or at the direction of the Board of Directors shall be made pursuant to
timely notice in writing to the Secretary of the Corporation. To be timely, a
shareholder's notice shall be delivered to or mailed and received at the
principal executive offices of the Corporation not less than sixty (60) days
prior to the meeting; provided, however, that in the event that less than
seventy (70) days notice or prior public disclosure of the date of the meeting
is given or made to shareholders (which notice or public disclosure shall
include the date of the annual meeting specified in these By-Laws, if such By-
Laws have been filed with the Securities and Exchange Commission and if the
annual meeting is held on such date), notice by the shareholders to be timely
must be so received not later than the close of business on the tenth (10/th/)
day following the day on which such notice of the date of the meeting was mailed
or such public disclosure was made. Such shareholder's notice shall set forth
(a) as to each person whom the shareholder proposes to nominate for election or
re-election as a Director, (i) the name, age, business address, and residence
address of such person, (ii) the principal occupation or employment of such
person, (iii) the class and number of shares of the Corporation that are
beneficially owned by such person, and (iv) any other information relating to
such person that is required to be disclosed in solicitations of proxies for
election of Directors, or is otherwise required, in each case pursuant to
Regulation 14A under the
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Securities Exchange Act of 1934, as amended (including without limitation such
person's written consent to being named in the proxy statement as a nominee and
to serving as a Director if elected); and (b) as to the shareholder giving the
notice (i) the name and record address of such shareholder and (ii) the class
and number of shares of the Corporation that are beneficially owned by such
shareholder. No person shall be eligible for election as a Director of the
Corporation unless nominated in accordance with the procedures set forth in this
Section 1.11. The Chairman of the meeting shall, if the facts warrant,
determine and declare to the meeting that a nomination was not made in
accordance with the procedures prescribed by these By-Laws, and if he should so
determine, he shall so declare to the meeting and the defective nomination shall
be disregarded.
ARTICLE II
Directors
---------
Section 2.1. Number, Terms and Qualifications. The business and
affairs of the Corporation shall be managed under the direction of a Board of
Directors consisting of nine (9) directors. The number of directors may be
hereafter increased to no more than twelve (12) or decreased to no fewer than
six (6), with the exact number specified from time to time by resolution adopted
by not less than a majority of the Directors then in office.
The Directors shall be divided into three (3) groups, with each group
consisting of one-third (1/3) of the total Directors, as near as may be, and
shall be elected for a term expiring at the third succeeding annual meeting of
shareholders, such that the term of office of one group of Directors shall
expire each year.
Despite the expiration of a Director's term, the Director shall
continue to serve until his successor is elected and qualified, or until the
earlier of his death, resignation, disqualification or removal, or until there
is a decrease in the number of Directors. Any vacancy occurring in the Board of
Directors, from whatever cause arising, shall be filled by selection of a
successor by a majority vote of the remaining members of the Board of Directors
(although less than a quorum); provided, however, that if such vacancy or
vacancies leave the Board of Directors with no members or if the remaining
members of the Board are unable to agree upon a successor or determine not to
select a successor, such vacancy may be filled by a vote of the shareholders at
a special meeting called for that purpose or at the next annual meeting of
shareholders. The term of a Director elected or selected to fill a vacancy
shall expire at the next following annual meeting of shareholders; and the
Director chosen to succeed the Director whose term then expires shall be elected
to a group, as specified at the time of election, as to make all groups as
nearly equal in number as possible.
No director shall be elected or re-elected who would attain the age of
seventy (70) years before or during the term of office for which the director
seeks election.
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Section 2.2. Quorum and Vote Required To Take Action. A majority of
the whole Board of Directors shall be necessary to constitute a quorum for the
transaction of any business, except the filling of vacancies. If a quorum is
present when a vote is taken, the affirmative vote of a majority of the
Directors present shall be the act of the Board of Directors, unless the act of
a greater number is required by the Indiana Business Corporation law, the
Articles of Incorporation, or these By-Laws.
Section 2.3. Annual Meetings. The Board of Directors shall meet
annually, without notice, immediately following the annual meeting of the
shareholders, for the purpose of transacting such business as properly may come
before the meeting.
Section 2.4. Other Meetings. Other meetings of the Board of
Directors may be called by the Chairman of the Board upon request of any two (2)
members of the Board of Directors upon not less than twenty-four (24) hours'
notice given to each Director of the date, time, and place of the meeting, which
notice need not specify the purpose or purposes of the special meeting. Such
notice may be communicated in person (either in writing or orally), by
telephone, telegraph, teletype, or other form of wire or wireless communication,
or by mail, and shall be effective at the earlier of the time of its receipt or,
if mailed, five (5) days after its mailing. Notice of any meeting of the Board
may be waived in writing at any time if the waiver is signed by the Director
entitled to the notice and is filed with the minutes or corporate records. A
Director's attendance at or participation in a meeting waives any required
notice to the Director of the meeting, unless the Director at the beginning of
the meeting (or promptly upon the Director's arrival) objects to holding the
meeting or transacting business at the meeting and does not thereafter vote for
or assent to action taken at the meeting.
Section 2.5. Written Consents. Any action required or permitted to
be taken at any meeting of the Board of Directors may be taken without a meeting
if the action is taken by all members of the Board. The action must be
evidenced by one (1) or more written consents describing the action taken,
signed by each Director, and included in the minutes or filed with the corporate
records reflecting the action taken. Action taken under this Section 2.5 is
effective when the last Director signs the consent, unless the consent specifies
a different prior or subsequent effective date, in which cases the action is
effective on or as of the specified date. A consent signed under this Section
2.5 shall have the same effect as a unanimous vote of all members of the Board
and may be described as such in any document.
Section 2.6. Participation by Conference Telephone. The Board of
Directors may permit any or all Directors to participate in a regular or special
meeting by, or through the use of, any means of communication, such as
conference telephone, by which all Directors participating may simultaneously
hear each other during the meeting. A Director participating in a meeting by
such means shall be deemed to be present in person at the meeting.
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Section 2.7. Committees. The Board of Directors may create one (1)
or more committees and appoint members of the Board of Directors to serve on
them, by resolution of the board of Directors adopted by a majority of all the
Directors in office when the resolution is adopted. Each committee may have one
(1) or more members, and all the members of a committee shall serve at the
pleasure of the Board of Directors.
Section 2.8. Compensation and Stock Option Committee. The Board of
Directors shall appoint a Compensation and Stock Option Committee consisting of
at least two members of the Board. Each member of this committee shall be a
"non-employee director" within the meaning of SEC Rule 16b-3 and an "outside
director" within the meaning of Section 162(m) of the Internal Revenue Code.
The committee is responsible for assuring that the officers and key management
personnel of the Corporation are effectively compensated in terms of salaries,
stock options, supplemental compensation, and benefits that are internally
equitable and externally competitive. The committee shall review and recommend
to the Board compensation submitted by the President for all executive officers.
The committee, upon the recommendation of Corporation management, shall review
and approve the number of shares, price per share, and period of duration for
stock grants under any approved stock option plan. The committee shall review
annually the compensation and allowances for directors as recommended by
Corporation management.
Section 2.9. Audit and Finance Committee. The Board of Directors
shall appoint an Audit and Finance Committee consisting of at least two (2)
members of the Board. The committee shall have such responsibilities and powers
appropriate to the nature of said committee, including a review of the adequacy
of internal controls and other financial reporting matters and a review of the
annual audit prepared by the independent auditors. The committee shall annually
recommend the appointment of the independent accountants.
Section 2.10. Nominating Committee. The Board of Directors may
appoint a Nominating Committee consisting of at least two (2) members of the
Board. The committee shall review and aid in attracting possible candidates for
the Board by determining the balance of expertise and composition of the Board
members. The committee shall review management's slate of directors to be
elected by the shareholders at the Annual Meeting and recommend to the Board the
inclusion of the slate in the proxy statement.
Section 2.11. Limitations on Committees; Notice, Quorum and Voting.
(a) No committee may:
(1) authorize dividends or other distributions, except a committee may
authorize or approve a reacquisition of shares if done according to a
formula or method prescribed by the Board of Directors;
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(2) approve or propose to shareholders action that is required to be approved
by shareholders;
(3) fill vacancies on the Board of Directors or on any of its committees;
(4) except as permitted under Section 2.11(a)(7) below, amend the Articles of
Incorporation under IC 23-1-38-2;
(5) adopt, amend, repeal, or waive provisions of these By-Laws;
(6) approve a plan of merger not requiring shareholder approval; or
(7) authorize or approve the issuance or sale or a contract for sale of shares,
or determine the designation and relative rights, preferences, and
limitations of a class or series of shares, except the Board of Directors
may authorize a committee (or an executive officer of the Corporation
designated by the Board of Directors) to take the action described in this
Section 2.11(a)(7) within limits prescribed by the Board of Directors.
(b) Except to the extent inconsistent with the resolutions creating a
committee, Sections 2.1 through 2.6 of these By-Laws, which govern meetings,
action without meetings, notice and waiver of notice, quorum and voting
requirements, and telephone participation in meetings of the Board of Directors,
apply to each committee and its members as well.
ARTICLE III
Officers
--------
Section 3.1. Designation, Selection and Terms. The officers of the
Corporation shall consist of the Chairman of the Board, the President, the
Secretary, and the Treasurer. The Board of Directors may also elect one or more
Executive Vice Presidents, Senior Vice Presidents, Corporate Vice Presidents,
and such other officers or assistant officers as it may from time to time
determine by resolution creating the office and defining the duties thereof. In
addition, the Chairman of the Board or the President may, by a certificate of
appointment creating the office and defining the duties thereof delivered to the
Secretary for inclusion with the corporate records, from time to time create and
appoint such Divisional Vice Presidents and assistant officers as they deem
desirable. The officers of the Corporation shall be elected by the Board of
Directors (or appointed by the Chairman of the Board or the President as
provided above) and need not be selected from among the members of the Board of
Directors, except for the Chairman of the Board and the President who shall be
members of the Board of Directors. Any two (2) or more offices may be held by
the same person. All officers shall serve at the pleasure of the Board of
Directors and, with respect to officers appointed by the Chairman of the Board
or the President, also at the pleasure of such officers. The election or
appointment of an officer does not itself create contract rights.
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Section 3.2. Removal. The Board of Directors may remove any officer at
any time with or without cause. An officer appointed by the Chairman of the
Board or the President may also be removed at any time, with or without cause,
by either of such officers. Vacancies in such offices, however occurring, may be
filled by the Board of Directors at any meeting of the Board of Directors (or by
appointment by the Chairman of the Board or the President, to the extent
provided in Section 3.1 of these By-Laws).
Section 3.3. Chairman of the Board. The Chairman of the Board shall be a
member of the Board of Directors. The Chairman of the Board shall be the chief
executive officer of the Corporation and shall: (a) have the responsibility for
the general management, control and supervision of all the affairs and business
of the Corporation; (b) perform all duties and have all powers which are
commonly incident to the office of chief executive officer or which from time to
time are delegated by the Board of Directors; (c) preside at all meetings of the
shareholders and of the Board of Directors; (d) have all authority and powers
necessary for the general supervision and direction of all of the other officers
and agents of the Corporation; and (e) have the power to call, subject to the
notice provisions in these By-Laws, meetings of the Board of Directors and
special meetings of the shareholders.
Section 3.4. President. The President shall be the chief operating
officer of the Corporation, shall exercise the powers and perform the duties
that ordinarily appertain to that office and shall manage and operate the
business and affairs of the Corporation in conformity with the policies
established by the Board of Directors and by the Chairman of the Board, or as
may be provided for in these By-Laws. In connection with the performance of the
President's duties, the President shall keep the Chairman of the Board fully
informed as to all phases of the Corporation's activities. In the absence of the
Chairman of the Board, the President shall preside at meetings of the
shareholders and, if a director of the Corporation, at meetings of the Board of
Directors.
Section 3.5. Vice Presidents. Each Executive Vice President, Senior Vice
President or Corporate Vice President shall have such powers and perform such
duties as the Board of Directors may, from time to time, prescribe and as the
Chairman of the Board or the President may, from time to time, delegate.
Divisional Vice Presidents shall be appointed by the Chairman of the Board or
the President as provided in Section 3.1 and shall have such powers and perform
such duties as the Chairman of the Board or the President may from time to time
delegate.
Section 3.6. Treasurer. The Treasurer shall perform all of the duties
customary to that office, shall be the chief accounting officer of the
Corporation, and shall be responsible for maintaining the Corporation's
accounting books and records and preparing its financial statements, subject to
the supervision and direction of the Chairman of the Board and the President and
other superior officers within the Corporation.
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Section 3.7. Secretary. The Secretary shall be the custodian of the
books, papers, and records of the Corporation and of its corporate seal, if any,
and shall be responsible for seeing that the Corporation maintains the records
required by the Indiana Business Corporation Law. The Secretary shall be
responsible for preparing minutes of the meetings of the shareholders and of the
Board of Directors and for authenticating records of the Corporation and shall
perform all of the other duties usual in the office of Secretary of a
corporation.
ARTICLE IV
Execution of Instruments
------------------------
Section 4.1. Execution of Instruments Generally. All deeds, contracts,
and other instruments requiring execution by the Corporation may be signed by
the Chairman of the Board, the President or any Executive, Senior or Corporate
Vice President. Authority to sign any deed, contract, or other instrument
requiring execution by the Corporation may be conferred by the Board of
Directors upon any person or persons whether or not such person or persons be
officers of the Corporation. Such person or persons may delegate, from time to
time, by instrument in writing, all or any part of such authority to any other
person or persons if authorized to do so by the Board of Directors.
Section 4.2. Notes, Checks, Other Instruments. All notes, drafts,
acceptances, checks, endorsements, and all evidences of indebtedness of the
Corporation whatsoever, shall be signed by such officer or officers or such
agent or agents of the Corporation and in such manner as the Board of Directors
from time to time may determine. Endorsements for deposit to the credit of the
Corporation in any of its duly authorized depositories shall be made in such
manner as the Board of Directors from time to time may determine.
Section 4.3. Proxies. Proxies to vote with respect to shares of other
corporations owned by or standing in the name of the Corporation may be executed
and delivered from time to time on behalf of the Corporation by the Chairman of
the Board, the President or an Executive, Senior or Corporate Vice president or
by any other person or persons thereunto authorized by the Board of Directors.
ARTICLE V
Shares
------
Section 5.1. Execution. Certificates for shares of the Corporation shall
be signed by the Chairman of the Board or the President and by the Secretary and
the seal of the Corporation (or a facsimile thereof), if any, may be thereto
affixed. Where any such certificate is also signed by a transfer agent or a
registrar, or both, the signatures of the officers of the Corporation may be
facsimiles. The Corporation may issue and deliver any
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such certificate notwithstanding that any such officer who shall have signed, or
whose facsimile signature shall have been imprinted on, such certificate shall
have ceased to be such officer.
Section 5.2. Contents. Each certificate issued after the adoption of
these By-Laws shall state on its face the name of the Corporation and that it is
organized under the laws of the State of Indiana, the name of the person to whom
it is issued, and the number and class of shares and the designation of the
series, if any, the certificate represents, and shall state conspicuously on its
front or back that the Corporation will furnish the shareholder, upon his
written request and without charge, a summary of the designations, relative
rights, preferences, and limitations applicable to each class and the variations
in rights, preferences, and limitations determined for each series (and the
authority of the Board of Directors to determine variations for future series).
Section 5.3. Transfers. Except as otherwise provided by law or by
resolution of the Board of Directors, transfers of shares of the Corporation
shall be made only on the books of the Corporation by the holder thereof, in
person or by duly authorized attorney, on payment of all taxes thereon and
surrender for cancellation of the certificate or certificates for such shares
(except as hereinafter provided in the case of loss, destruction, or mutilation
of certificates) properly endorsed by the holder thereof or accompanied by the
proper evidence of succession, assignment, or authority to transfer, and
delivered to the Secretary or an Assistant Secretary. The certificate shall also
bear all legends required by the Articles of Incorporation.
Section 5.4. Stock Transfer Records. There shall be entered upon the
stock records of the Corporation the number of each certificate issued, the name
and address of the registered holder of such certificate, the number, kind, and
class of shares represented by such certificate, the date of issue, whether the
shares are originally issued or transferred, the registered holder from whom
transferred, and such other information as is commonly required to be shown by
such records. The stock records of the Corporation shall be kept at its
principal office, unless the Corporation appoints a transfer agent or registrar,
in which case the Corporation shall keep at its principal office a complete and
accurate shareholders' list giving the names and addresses of all shareholders
and the number and class of shares held by each. If a transfer agent is
appointed by the Corporation, shareholders shall give written notice of any
changes in their addresses from time to time to the transfer agent.
Section 5.5. Transfer Agents and Registrars. The Board of Directors may
appoint one or more transfer agents and one or more registrars and may require
each stock certificate to bear the signature of either or both.
Section 5.6. Loss, Destruction, or Mutilation of Certificates. The holder
of any shares of the Corporation shall immediately notify the Corporation of any
loss, destruction, or mutilation of the certificate therefor, and the Board of
Directors may, in its discretion, cause
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to be issued to him a new certificate or certificates of stock, upon the
surrender of the mutilated certificate, or, in the case of loss or destruction,
upon satisfactory proof of such loss or destruction. The Board of Directors
may, in its discretion, require the holder of the lost or destroyed certificate
or his legal representative to give the Corporation a bond in such sum and in
such form, and with such surety or sureties as it may direct, to indemnify the
Corporation, its transfer agents, and registrars, if any, against any claim that
may be made against them or any of them with respect to the shares represented
by the certificate or certificates alleged to have been lost or destroyed, but
the Board of Directors may, in its discretion, refuse to issue a new certificate
or certificates, save upon the order of a court having jurisdiction in such
matters.
Section 5.7. Form of Certificates. The form of the certificates for
shares of the Corporation shall conform to the requirements of Section 5.2 of
these By-Laws and be in such printed form as shall from time to time be approved
by resolution of the Board of Directors.
ARTICLE VI
Miscellaneous
-------------
Section 6.1. Corporate Seal. The corporate seal of the Corporation shall,
if the Corporation elects to have one, be in the form of a disc, with the words
"Paul Harris Stores, Inc." appearing about the upper periphery and the word
"SEAL" in the center.
Section 6.2. Indiana Business Corporation Law. The provisions of the
Indiana Business Corporation law, as amended, applicable to all matters relevant
to, but not specifically covered by, these By-Laws are hereby, by reference,
incorporated in and made a part of these By-Laws.
Section 6.3. Fiscal Year. The fiscal year of the Corporation shall begin
on the first day of February in each year and end upon the last day of January
next succeeding; provided, however, that the fiscal year of the Corporation
shall end upon the Saturday closest to the last day of January in each year and
begin upon the Sunday next succeeding whenever January 31 shall not fall on a
Saturday.
Section 6.4. Amendments. These By-Laws may be rescinded, changed, or
amended, and provisions hereof may be waived, at any meeting of the Board of
Directors by the affirmative vote of a majority of the entire number of
Directors at the time, except as otherwise required by the Articles of
Incorporation or by the Indiana Business Corporation Law.
Section 6.5. Definition of Articles of Incorporation. The term "Articles
of Incorporation" as used in these By-Laws means the Amended or Restated
Articles of Incorporation of the Corporation as from time to time are in
effect.
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Exhibit 4(i)
FIFTH MODIFICATION OF SECURED CREDIT AGREEMENT,
REVOLVING NOTE AND OTHER LOAN DOCUMENTS
----------------------------------------------
THIS FIFTH MODIFICATION OF SECURED CREDIT AGREEMENT, REVOLVING NOTE AND
OTHER LOAN DOCUMENTS (this "Agreement") is made, and shall be deemed effective,
as of the 9th day of April, 1997 by and between PAUL HARRIS STORES, INC., an
Indiana corporation (herein, together with its successors and assigns, called
the "Borrower") and LASALLE NATIONAL BANK, a national banking association
(herein, together with its successors and assigns, called the "Bank").
ALL CAPITALIZED TERMS AND PHRASES, UNLESS DEFINED HEREIN, SHALL HAVE THE
SPECIFIC MEANINGS AS ARE SET FORTH IN THAT CERTAIN SECURED CREDIT AGREEMENT
DATED AS OF OCTOBER 28, 1993, BY AND BETWEEN BORROWER AND BANK, AS AMENDED AND
RESTATED BY THAT CERTAIN AMENDED AND RESTATED SECURED CREDIT AGREEMENT DATED AS
OF JANUARY 20, 1994, AS MODIFIED BY THAT CERTAIN FIRST MODIFICATION OF SECURED
CREDIT AGREEMENT, NOTES, MORTGAGE AND OTHER LOAN DOCUMENTS DATED AS OF OCTOBER
31, 1994, AS FURTHER MODIFIED BY THAT CERTAIN SECOND MODIFICATION OF SECURED
CREDIT AGREEMENT, NOTES, MORTGAGE AND OTHER LOAN DOCUMENTS DATED AS OF JANUARY
31, 1995, AS FURTHER MODIFIED BY THAT CERTAIN THIRD MODIFICATION OF SECURED
CREDIT AGREEMENT, NOTES, MORTGAGE AND OTHER LOAN DOCUMENTS DATED AS OF SEPTEMBER
28, 1995, AS FURTHER MODIFIED BY THAT CERTAIN AMENDED AND RESTATED THIRD
MODIFICATION OF SECURED CREDIT AGREEMENT, NOTES, MORTGAGE AND OTHER LOAN
DOCUMENTS DATED AS OF SEPTEMBER 28, 1995, AND AS FURTHER MODIFIED BY THAT
CERTAIN FOURTH MODIFICATION OF SECURED CREDIT AGREEMENT, REVOLVING NOTE AND
OTHER LOAN DOCUMENTS DATED AS OF MAY 8, 1996 (the "Credit Agreement").
WHEREAS, Borrower has previously requested loans and advances from Bank for
the purpose of funding Borrower's working capital needs, and in connection
therewith, Borrower and Bank entered into and executed the Credit Agreement,
pursuant to which the Bank, inter alia, agreed to make a term loan in an amount
of up to $2,400,000.00 and a revolving credit loan in an amount of up to
$20,000,000.00 to the Borrower; and
WHEREAS, Borrower has previously executed and delivered to Bank (i) a
Secured Promissory Note (Revolver) dated October 28, 1993, as amended (the
"Revolving Note"), in the principal amount of $20,000,000.00, evidencing an
indebtedness owed by Borrower to Bank in like amount (the "Revolving Loan") and
(ii) a Secured Promissory Note (Term) dated January 20, 1994 (the "Term Note")
in the principal amount of $2,400,000.00 evidencing an indebtedness owed by
Borrower to Bank in like amount (the "Term Loan"); and
WHEREAS, repayment of the Term Note is secured by, among other items of
collateral, a certain Mortgage, Assignment of Leases and Rents and Security
Agreement dated as of January 20, 1994, made by Borrower to Bank (the
"Mortgage"), recorded on February 1, 1994 in the Office of the Recorder, Marion
County, Indiana as Instrument
<PAGE>
Number 94-17807, encumbering the property legally described therein (the
"Premises"); and
WHEREAS, repayment of the Term Note is additionally secured by a certain
Assignment of Distribution Center Leases and Rents dated as of January 20, 1994
(the "Distribution Assignment"), made by Borrower to Bank; and
WHEREAS, repayment of the Revolving Note is secured by a certain Security
Agreement and Financing Statement dated as of October 28, 1993, as amended (the
"Security Agreement"), made by Borrower to Bank; and
WHEREAS, repayment of the Revolving Note is additionally secured by a
certain Assignment of Leases dated as of October 28, 1994, as amended, made by
Borrower to Bank (the "Assignment"), affecting the Premises; and
WHEREAS, repayment of the Revolving Note and the Term Note (collectively,
the "Notes") is additionally secured by UCC Financing Statements made by
Borrower, as debtor, to Bank, as secured party (the "Financing Statements"); and
WHEREAS, the Credit Agreement, the Notes, the Mortgage, the Security
Agreement, the Assignment, the Distribution Assignment and the Financing
Statements, together with all other documents and instruments now or hereafter
securing repayment of the Liabilities, or any portion thereof, evidenced by the
Notes are hereinafter collectively referred to as the "Loan Documents"; and
WHEREAS, Borrower has requested that Bank increase the present Revolving
Loan Commitment, extend the present Revolving Credit Maturity Date and make
other modifications to the Loan Documents, and Bank has so agreed, on the terms
and conditions more specifically set forth herein.
NOW, THEREFORE, for and in consideration of the foregoing premises and for
other good and valuable consideration, the receipt and sufficiency of which
hereby are acknowledged, Borrower and Bank do hereby agree as follows:
1. The preambles to this Agreement are fully incorporated herein by this
reference thereto with the same force and effect as though restated herein.
2. Effective as of April 9, 1997 (the "Modification Date"), the Credit
Agreement is modified as set forth below:
a. The definition of "Borrowing Base" set forth in Section 1.1 of the
Credit Agreement is amended by adding the following paragraph to the end of
such definition:
-2-
<PAGE>
"Notwithstanding anything contained in this definition to the
contrary, during and only during each period from August 1 of any year
through November 30 of such year, the phrase "seventy percent (70.0%)"
shall be substituted in the place and stead of each reference to
"sixty percent (60.0%)" contained in clause (a) of this definition.
b. The definition of "Maximum Revolving Credit Availability" set
forth in Section 1.1 of the Credit Agreement is deleted in its entirety and
the following definition is substituted therefor:
"MAXIMUM REVOLVING CREDIT AVAILABILITY" means, as of any given
date, the lesser of (i) the Borrowing Base minus the Letter of Credit
Reserve minus the Revolving Loan Balance or (ii) $30,000,000 minus the
Letter of Credit Reserve minus the Revolving Loan Balance, each such
amount calculated as of such date and subject further to the
limitations set forth in Section 2.1."
c. The definition of "Revolving Credit Maturity Date" set forth in
Section 1.1 of the Credit Agreement is deleted in its entirety and the
following definition is substituted therefor:
"REVOLVING CREDIT MATURITY DATE" means, with respect to the
Revolving Credit Commitment, June 30, 1999.
d. The definition of "Revolving Loan Rate" set forth in Section 1.1
of the Credit Agreement is deleted in its entirety and the following
definition is substituted therefor:
"REVOLVING LOAN RATE" means the Prime Rate from time to time in
effect plus one-quarter of one percent (0.25%) per annum."
e. Section 2.1 of the Credit Agreement is deleted in its entirety
and the following is substituted in its place and stead:
"2.1 REVOLVING CREDIT COMMITMENT. On the terms and subject to the
conditions set forth in this Agreement, Bank agrees to make Revolving
Loans to Borrower and to issue Letters of Credit, pursuant to Section
2.3, for the account of the Borrower, from time to time before the
Revolving Credit Termination Date in such aggregate amounts as
Borrower may from time to time request but not exceeding at any one
time outstanding the lesser of (i) the Borrowing Base or (ii)
$30,000,000; provided, however, that the issuance of standby Letters
of Credit shall be limited to $1,000,000 in the aggregate.
-3-
<PAGE>
Borrower shall have the right to repay and reborrow any of the
Revolving Loans in increments of $100,000 (or $25,000 integral
multiples); provided, however, that it shall be a condition precedent
to any reborrowing that as of the date of any reborrowing all of the
conditions to borrowing set forth in this Agreement shall be satisfied
and all representations and warranties made herein shall be true and
correct in all material respects as of such date."
f. Within clause (i) of paragraph (a) of subsection 2.3.5 of the
Credit Agreement, the reference to "three-eighths of one percent (0.375%)"
is deleted in its entirety and the phrase "one-quarter of one percent
(0.25%)" is substituted in its place and stead.
g. The following Section 2.5 is added to the Credit Agreement in the
appropriate numerical order:
"2.5 REVOLVING LOAN NON-USE FEE. Borrower shall pay to Bank, on
a quarterly basis, a non-use fee for the period beginning April 9,
1997 and continuing until, but excluding, the Revolving Credit
Termination Date of one-quarter of one percent (0.25%) per annum on
the lesser of (i) the excess of (A) $30,000,000.00 over (B) the daily
average of the aggregate principal amount of (X) all outstanding
Revolving Loans and (Y) all Letters of Credit for the quarter (or, if
applicable, shorter period) then ending and (ii) $10,000,000.00. Such
non-use fee shall be payable in arrears on the first day of each May,
August, November and February (commencing on May 1, 1997 for the
quarter ending April 30, 1997), for the quarters ending on January 31,
April 30, July 31 and October 31 of each year during the term of this
Agreement and on the Revolving Credit Termination Date."
h. Subsection 6.2.1 of the Credit Agreement is deleted in its
entirety and the following is substituted in its place and stead:
"6.2.1 REVOLVING LOAN. The Revolving Loan Balance may be
reduced by Bank from time to time as provided in subsection 5.4(b),
and the entire Revolving Loan Balance, together with all accrued and
unpaid interest thereon, shall be due and payable in full on June 30,
1999."
i. Subsection 6.2.2 of the Credit Agreement is deleted in its
entirety and the following is substituted in its place and stead:
-4-
<PAGE>
"6.2.2 ANNUAL REDUCTION OF REVOLVING CREDIT COMMITMENT. All
amounts outstanding pursuant to the Revolving Loans provisions of the
Revolving Credit Commitment must be reduced by the Borrower to zero
($0.00) for a period of ninety (90) consecutive days during each
fiscal year of the Borrower, commencing with Borrower's fiscal year
beginning February 1, 1997."
j. Section 9.7 of the Credit Agreement is deleted in its entirety
and the following is substituted in its place and stead:
"9.7 INTENTIONALLY OMITTED."
k. Section 9.8 of the Credit Agreement is deleted in its entirety
and the following is substituted in its place and stead:
"9.8 INTENTIONALLY OMITTED."
l. Section 9.9 of the Credit Agreement is deleted in its entirety
and the following is substituted in its place and stead:
"9.9 MINIMUM TANGIBLE NET WORTH. Not permit Borrower's Tangible
Net Worth measured quarterly to be less than $30,000,000 as of January
31, April 30, July 31 and October 31 of any year, commencing April 30,
1997."
m. Section 9.10 of the Credit Agreement is deleted in its entirety
and the following is substituted in its place and stead:
"9.10 INTENTIONALLY OMITTED."
n. Section 9.11 of the Credit Agreement is deleted in its entirety
and the following is substituted in its place and stead:
"9.11 INTENTIONALLY OMITTED."
o. Section 9.13 of the Credit Agreement is deleted in its entirety
and the following is substituted in its place and stead:
"9.13 INTENTIONALLY OMITTED."
p. Section 9.15 of the Credit Agreement is deleted in its entirety
and the following is substituted in its place and stead:
-5-
<PAGE>
"9.15 GUARANTIES, LOANS OR ADVANCES. Not become, or be a
guarantor or surety of, or otherwise become or be responsible in any
manner (whether by agreement to purchase any obligations, stock,
assets, goods or services, or to supply or advance any funds, assets,
goods or services, or otherwise) with respect to any undertaking of
any other Person, or make or permit to exist any loans or advances to
any other Person, except for (a) the endorsement, in the ordinary
course of collection, of instruments payable to it or to its order,
(b) guaranties of which Bank is the beneficiary or (c) loans to
officers of Borrower not exceeding $500,000 in the aggregate
outstanding at any time."
q. Section 9.18 of the Credit Agreement is deleted in its entirety
and the following is substituted in its place and stead:
"9.18 INTENTIONALLY OMITTED."
r. Schedule A to the Credit Agreement is deleted in its entirety and
the revised Schedule A attached hereto and made a part hereof is
substituted in its place and stead.
3. All references in the Loan Documents to the Credit Agreement hereby
are understood to be to the Credit Agreement as modified hereby.
4. Effective as of the Modification Date, paragraph one of page one of
the Revolving Note is hereby deleted in its entirety and the following is
substituted in its place and stead:
REVOLVING NOTE
$30,000,000.00 CHICAGO, ILLINOIS
OCTOBER 28, 1993
FOR VALUE RECEIVED, PAUL HARRIS STORES, INC., an Indiana corporation
(together with its successors and assigns, "Maker"), promises to pay to the
order of LASALLE NATIONAL BANK, a national banking association (together
with its successors and assigns, "Bank"), on or before June 30, 1999, at
the Bank's principal office in Chicago, Illinois, the principal sum of
THIRTY MILLION AND NO/100THS DOLLARS ($30,000,000.00), or, if less, the
REVOLVING LOAN BALANCE at such time, plus accrued and unpaid interest
thereon and all other charges applicable thereto, all as set forth more
fully in that Secured Credit Agreement originally dated as of October 28,
1993, between Maker and Bank (as the same may be amended,
-6-
<PAGE>
modified, supplemented or restated from time to time, the "Credit
Agreement"). All capitalized terms used but not elsewhere defined herein
shall have the same meanings as are ascribed to them in the Credit
Agreement."
5. All references in the Loan Documents to the Revolving Note are hereby
understood to be the Revolving Note as modified hereby.
6. In the event of any conflict among the terms of the Credit Agreement
and the other Loan Documents as modified by this Agreement, the terms of the
Credit Agreement as modified by this Agreement shall control. All terms and
provisions of the Loan Documents corresponding to terms and provisions of the
Credit Agreement prior to the date of this Agreement shall be deemed modified in
accordance with the terms of this Agreement.
7. Borrower hereby warrants and represents that (i) Borrower has no
defense, offset or counterclaim with respect to the payment of any sum owed to
Bank, or with respect to any covenant in the Loan Documents; (ii) Bank, on and
as of the date hereof, has fully performed all obligations to Borrower which it
may have had or has on and as of the date hereof; (iii) other than as expressly
set forth herein, by entering into this Agreement, Bank does not waive any
condition or obligation in the Loan Documents and (iv) no individual figure in
Borrower's audited financial statements dated February 1, 1997 will vary by more
than five percent (5%) from the corresponding figure in the Company prepared
financial statements previously delivered to Bank relating to the same period,
it being understood and agreed that any deviation in any number between the two
sets of financial statements of more than five percent (5%) shall constitute an
Event of Default under the Loan Documents.
8. Borrower hereby agrees to execute and deliver promptly to Bank, at
Bank's request, such other documents as Bank, in its reasonable discretion,
shall deem necessary or appropriate to evidence the transaction contemplated
herein.
9. Borrower agrees to pay all fees and expenses associated with the
consummation of the transactions contemplated in this Agreement, including,
without limitation, fees and expenses of Bank's counsel and related expenses.
10. Time is of the essence of this Agreement. Unless this Agreement is
executed by Borrower and Bank on or before April 30, 1997, it shall become null
and void and shall have no force or effect.
11. This Agreement may be executed in any number of counterparts, each of
which shall constitute an original, but all of which, taken together, shall
constitute one and the same Agreement.
-7-
<PAGE>
12. Except as otherwise set forth herein to the contrary, the Loan
Documents remain unmodified and continue in full force and effect. Borrower
hereby reaffirms, confirms and ratifies each and every covenant, condition,
obligation and provision set forth in the Loan Documents, each as modified
hereby.
[End of Page]
-8-
<PAGE>
IN WITNESS WHEREOF, the undersigned, intending to be legally bound hereby,
have executed and delivered this Agreement as of the day and year first above
written.
BORROWER:
PAUL HARRIS STORES, INC., an Indiana corporation
By: /s/ John H. Boyers
---------------------------------------------
Title:
------------------------------------------
Its: Senior Vice President-Finance and Treasurer
--------------------------------------------
BANK:
LASALLE NATIONAL BANK, a national banking
association
By: /s/ Brian Soeldner
-----------------------------
Title:
--------------------------
Its: Loan Officer
----------------------------
-9-
<PAGE>
SCHEDULE A
----------
ADDITIONAL FINANCIAL COVENANTS
------------------------------
Operating Cash Flow Before Working Capital Changes based on minimum
cumulative cash flow on a rolling four quarter basis shall not be less than
$12,000,000 on April 30, 1997 and on each July 31, October 31, January 31 and
April 30 thereafter.
-10-
<PAGE>
EXHIBIT 10(i)
AMENDMENT TO EMPLOYMENT AGREEMENT
This Amendment to Employment Agreement ("Amendment") is made and dated as
of November 22, 1996, by and between Paul Harris Stores, Inc., an Indiana
corporation (the "Company"), and Charlotte G. Fischer ("Fischer").
W I T N E S S E T H:
-------------------
WHEREAS, Fischer is currently employed by the Company under an Amended and
Restated Employment Agreement dated as of June 17, 1996 (the "Prior Agreement"),
as the Company's President, Chief Executive Officer and Chairman;
WHEREAS, the parties now desire to amend the Prior Agreement on the terms
contained herein.
NOW, THEREFORE, in consideration of these premises and the mutual covenants
and undertakings herein contained, the parties agree as follows:
1. The first sentence of Section 3(a) of the Prior Agreement is amended to
read as follows:
"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 $500,000.00 per annum, effective as of the date of
this Amendment, payable in accordance with the Company's normal payroll
practices ("Base Salary") and (ii) Bonuses as provided in Section 3(b)
below."
2. Section 3(b) of the Prior Agreement is amended to read as follows:
"(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;
$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, Fischer shall receive a Bonus equal to 100% of her Base
Salary, plus an amount equal to 15% of Base Salary for each full $1.0
million of
<PAGE>
the Company's net pretax income in excess of $10 million. For purposes of
this Section, the Base Salary used shall be the Base Salary in effect at
the beginning of the fiscal year."
[Subsection 3(b)(ii) is not amended.]
3. Sections 3(c)(ii) and 3(c)(iii) are hereby amended to read as follows:
"(ii) The Company and Fischer confirm that on 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 granted 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 under and pursuant to the
Company's 1992 Non-Qualified Stock Option Plan (the "Plan"). 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 and thereafter as specifically set
forth in the Plan and the Stock Option Agreement between the Company and
Fischer that evidences such Option. Any portion of the Option not so
exercised 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
under and pursuant to the Plan (or any successor thereto that meets the
requirements of Section 162(m) of the Internal Revenue Code of 1986) as
follows:
(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
Compensation Committee shall during January of the fiscal year (and in
no event later than sixty (60) days after the end of the fiscal year)
grant to Fischer a nontransferable Option to purchase at least 100,000
shares of the Company's Common Stock
-2-
<PAGE>
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 the date
of the grant; provided that any such Option must be exercised while
Fischer is employed with the Company (or at such later date as is
customarily afforded to Company employees who are granted Options
under the Plan), and any Option that is not so exercised shall
terminate and be of no effect."
[Subsection 3(c)(iii)(B) is not amended.]
4. Section 3(c) of the Prior Agreement is further amended to add a new
subsection (iv) to read as follows:
"(iv) Effective as of the date of this Amendment, the Stock Option and
Compensation Committee of the Company has awarded to Fischer a
nontransferable Option to purchase 100,000 shares of the Company's common
stock at $17.50 per share under the Company's 1992 Non-qualified Stock
Option Plan, such Option shall vest and become exercisable immediately.
Such Option shall be in lieu of any nontransferable Option otherwise
issuable pursuant to Section 3(c)(iii)(A) during January 1997."
5. Except as expressly modified in this Amendment, the other provisions
of the Prior Agreement shall remain in full force and effect.
IN WITNESS WHEREOF, the parties have caused this Amendment to be executed
and delivered as of the day and year first above set forth.
PAUL HARRIS STORES, INC.
By /s/ Stig A. Kry
---------------------------------
Stig A. Kry, Chairman of Stock
Option and Compensation Committee
/s/ Charlotte G. Fischer
---------------------------------
Charlotte G. Fischer
-3-
<PAGE>
EXHIBIT 23
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the incorporation by reference in the Registration
Statement on Form S-8 (No. 33-60359) of Paul Harris Stores, Inc. of our report
dated February 27, 1997, except as to Note 9, which is as of April 10, 1997,
appearing in Paul Harris Stores, Inc.'s Annual Report on Form 10-K for the
year ended February 1, 1997.
Price Waterhouse LLP
Indianapolis, Indiana
April 10, 1997
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> FEB-01-1997
<PERIOD-START> FEB-04-1996
<PERIOD-END> FEB-01-1997
<CASH> 16,001,000
<SECURITIES> 0
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 19,759,000
<CURRENT-ASSETS> 37,457,000
<PP&E> 32,421,000
<DEPRECIATION> (13,315,000)
<TOTAL-ASSETS> 57,319,000
<CURRENT-LIABILITIES> 16,000,000
<BONDS> 1,930,000
0
0
<COMMON> 1,930,000
<OTHER-SE> 34,981,000
<TOTAL-LIABILITY-AND-EQUITY> 57,319,000
<SALES> 190,288,000
<TOTAL-REVENUES> 190,288,000
<CGS> 118,066,000
<TOTAL-COSTS> 118,066,000
<OTHER-EXPENSES> 56,570,000
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,235,000
<INCOME-PRETAX> 14,417,000
<INCOME-TAX> 5,598,000
<INCOME-CONTINUING> 8,819,000
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 8,819,000
<EPS-PRIMARY> .83
<EPS-DILUTED> .83
</TABLE>
