<PAGE>
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10 - Q
X Quarterly report pursuant to Section 13 or 15(d) of the Securities
- -----
Exchange Act of 1934 for the quarterly period ended August 1, 1998 or
Transition report pursuant to Section 13 or 15(d) of the Securities
- -----
Exchange Act of 1934 for the transition period from to
------ ------
Commission File Number 0-7264
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 offices) (Zip Code)
(317) 293-3900
(Registrant's telephone number, including area code)
Indicate by check mark the registrant (1) has filed all reports required to be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter periods that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
---------- ---------
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 August 28, 1998, 11,219,131 common shares were outstanding.
<PAGE>
INDEX
PAUL HARRIS STORES, INC. AND SUBSIDIARIES
Part I. FINANCIAL INFORMATION
Item 1. Financial Statements Page #
Consolidated Balance Sheets -- August 2, 1997,
January 31, 1998 and August 1, 1998 3
Consolidated Statements of Income -- For the thirteen
weeks ended August 2, 1997 and August 1, 1998 4
Consolidated Statements of Income -- For the twenty-six
weeks ended August 2, 1997 and August 1, 1998 5
Consolidated Statements of Cash Flows -- For the twenty-six
weeks ended August 2, 1997 and August 1, 1998 6
Consolidated Statements of Shareholders' Equity -- For the
twenty-six weeks ended August 2, 1997 and August 1, 1998 7
Notes to Consolidated Financial Statements 8
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 8
Part II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K 13
2
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<TABLE><CAPTION>
PAUL HARRIS STORES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands)
August 2, January 31, August 1,
1997 1998 1998
------------ ------------ ------------
(unaudited) (unaudited)
<S> <C> <C> <C>
ASSETS
Current assets
Cash and cash equivalents $ 25,876 $ 17,990 $ 10,541
Merchandise inventories 23,497 31,940 33,515
Other receivables 1,091 3,330 3,174
Prepaid expenses 1,349 1,359 1,397
Deferred income taxes - 124 100
------------ ------------ ------------
Total current assets 51,813 54,743 48,727
------------ ------------ ------------
Property, fixtures and equipment
Land, building and improvements 5,818 5,871 5,978
Store fixtures and equipment 18,674 25,838 31,869
Leasehold improvements and other 13,677 19,462 24,180
------------ ------------ ------------
38,169 51,171 62,027
Accumulated depreciation and amortization (14,959) (16,368) (18,864)
------------ ------------ ------------
Property, fixtures and equipment, net 23,210 34,803 43,163
Deferred income taxes - 952 529
Other assets 709 800 772
------------ ------------ ------------
$ 75,732 $ 91,298 $ 93,191
============ ============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities
Accounts payable $ 9,876 $ 12,725 $ 14,453
Compensation and related taxes 954 2,780 824
Income taxes payable - 377 -
Other accrued expenses 4,296 4,345 4,944
Current maturities of long-term debt 120 120 1,870
------------ ------------ ------------
Total current liabilities 15,246 20,347 22,091
------------ ------------ ------------
Long-term debt 1,870 1,810 -
Other non-current liabilities 2,674 3,137 3,348
Shareholders' equity
Preferred stock (no par value)
Authorized 1,000 shares; none issued
Common stock (no par value)
Authorized 20,000 shares; issued
11,172, 11,256 and 11,264 respectively 17,073 17,354 17,390
Additional paid-in capital 11,362 13,904 13,933
Retained earnings 27,507 34,746 36,891
------------ ------------ ------------
55,942 66,004 68,214
Common stock in treasury, at cost
0, 0, and 45 shares respectively - - (462)
------------ ------------ ------------
Total shareholders' equity 55,942 66,004 67,752
------------ ------------ ------------
$ 75,732 $ 91,298 $ 93,191
============ ============ ============
See accompanying "Notes To Consolidated Financial Statements".
</TABLE>
3
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<TABLE><CAPTION>
PAUL HARRIS STORES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
UNAUDITED
(in thousands, except per share data)
For the For the
thirteen thirteen
weeks ended weeks ended
August 2, August 1,
1997 1998
----------- -----------
<S> <C> <C>
Net sales $ 40,920 $ 48,095
Cost of sales, including occupancy expenses
exclusive of depreciation 25,496 29,966
----------- -----------
Gross income 15,424 18,129
Selling, general and administrative expenses 12,771 15,880
Depreciation and amortization 1,040 1,423
----------- -----------
Operating income 1,613 826
Interest income, net 345 124
----------- -----------
Income before income taxes 1,958 950
Provision for income taxes 793 377
----------- -----------
Net income $ 1,165 $ 573
=========== ===========
Basic earnings per share $ 0.11 $ 0.05
=========== ===========
Weighted average number of shares outstanding 10,945 11,261
=========== ===========
Diluted earnings per share $ 0.10 $ 0.05
=========== ===========
Weighted average number of shares and
share equivalents outstanding 11,356 11,605
=========== ===========
See accompanying "Notes To Consolidated Financial Statements".
</TABLE>
4
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<TABLE><CAPTION>
PAUL HARRIS STORES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
UNAUDITED
(in thousands, except per share data)
For the For the
twenty-six twenty-six
weeks ended weeks ended
August 2, August 1,
1997 1998
----------- -----------
<S> <C> <C>
Net sales $ 84,758 $ 100,373
Cost of sales, including occupancy expenses
exclusive of depreciation 53,512 61,947
----------- -----------
Gross income 31,246 38,426
Selling, general and administrative expenses 25,659 32,250
Depreciation and amortization 1,960 2,892
----------- -----------
Operating income 3,627 3,284
Interest income, net 555 247
----------- -----------
Income before income taxes 4,182 3,531
Provision for income taxes 1,693 1,386
----------- -----------
Net income $ 2,489 $ 2,145
=========== ===========
Basic earnings per share $ 0.24 $ 0.19
=========== ===========
Weighted average number of shares outstanding 10,532 11,261
=========== ===========
Diluted earnings per share $ 0.23 $ 0.19
=========== ===========
Weighted average number of shares and
share equivalents outstanding 10,957 11,579
=========== ===========
See accompanying "Notes To Consolidated Financial Statements".
</TABLE>
5
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<TABLE><CAPTION>
PAUL HARRIS STORES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
UNAUDITED
(in thousands)
For the For the
twenty-six twenty-six
weeks ended weeks ended
August 2, August 1,
1997 1998
---------- ----------
<S> <C> <C>
Cash flow from operating activities:
Net income $ 2,489 $ 2,145
Adjustments to reconcile earnings to cash provided:
Depreciation and amortization 1,960 2,892
Net disposal of assets 103 298
Deferred income taxes - 447
Utilization of net operating loss carryforward 1,399 -
(Increase) decrease in current assets:
Merchandise inventories (3,738) (1,575)
Other receivables (230) 156
Prepaid expenses (513) (38)
Increase (decrease) in current liabilities:
Accounts payable 1,361 1,728
Compensation and related taxes (2,820) (1,956)
Income taxes payable (37) (377)
Other accrued expenses 742 599
Other 317 222
---------- ----------
Net cash flow from operating activities 1,033 4,541
---------- ----------
Net cash flow for investing activities:
Additions to fixed assets (6,241) (11,533)
---------- ----------
Cash flow (for) from financing activities:
Repayment of long-term debt (60) (60)
Proceeds from issuance of common stock and related
tax benefits 15,143 65
Purchase of treasury stock - (462)
---------- ----------
Net cash flow (for) from financing activities 15,083 (457)
---------- ----------
$ 9,875 $ (7,449)
========== ==========
Cash and cash equivalents
At beginning of period $ 16,001 $ 17,990
At end of period 25,876 10,541
---------- ----------
$ 9,875 $ (7,449)
========== ==========
Supplemental disclosures of cash flow information:
Cash paid during the period for interest $ 168 $ 153
========== ==========
Cash paid during the period for income taxes $ 432 $ 2,023
========== ==========
See accompanying "Notes To Consolidated Financial Statements".
</TABLE>
6
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<TABLE><CAPTION>
PAUL HARRIS STORES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
UNAUDITED
(in thousands)
For the twenty-six For the twenty-six
weeks ended weeks ended
August 2, 1997 August 1, 1998
Shares Amount Shares Amount
--------- ---------- --------- ----------
<S> <C> <C> <C> <C>
Preferred stock (1,000 authorized):
Common stock (20,000 authorized):
Beginning balance 10,115 $ 1,930 11,256 $ 17,354
Stock offering 995 14,959 - -
Exercise of stock options 62 184 8 36
--------- ---------- --------- ----------
Ending balance 11,172 $ 17,073 11,264 $ 17,390
========== =========== ======== ===========
Additional paid in capital:
Beginning balance $ 9,963 $ 13,904
Tax benefit on exercise of stock options - 29
Benefit of net operating loss carryforward 1,399 -
----------- -----------
Ending balance $ 11,362 $ 13,933
=========== ============
Retained earnings:
Beginning balance $ 25,018 $ 34,746
Net income 2,489 2,145
----------- -----------
Ending balance $ 27,507 $ 36,891
=========== ===========
Common stock in treasury:
Beginning balance - $ - - $ -
Purchase of treasury stock - - 45 (462)
--------- ---------- --------- ----------
- - -
Ending balance - $ - 45 $ (462)
========== =========== ======== ===========
See accompanying "Notes To Consolidated Financial Statements".
</TABLE>
7
<PAGE>
PAUL HARRIS STORES, INC., AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Basis of Presentation
The accompanying unaudited consolidated financial statements include the
accounts of Paul Harris Stores, Inc. and subsidiaries (the "Company"). The
Company is a specialty retailer of moderately priced private-label causal
attire and accessories for women.
The unaudited financial statements of the Company have been prepared in
accordance with instructions to Form 10-Q and Article 10 of Regulation S-X and
accordingly certain information and footnote disclosures have been condensed
or omitted. These condensed financial statements should be read in
conjunction with the financial statements and notes thereto included in the
Company's January 31, 1998, Annual Report on Form 10-K.
In the opinion of management, all adjustments, which include only normal
recurring adjustments, necessary to present fairly the financial position,
results of operations and cash flows at August 1, 1998, and for all other
periods presented, have been made.
The Company's fiscal year ends on the Saturday closest to January 31. All
references in this report to fiscal years are to the calendar years in which
such fiscal years began. For example, fiscal 1998 refers to the fiscal year
that began on February 1, 1998, and will end on January 30, 1999.
The results of operations for the first and second quarter of fiscal 1998 are
not necessarily indicative of the results to be expected for all of fiscal
1998. The Company has historically produced a majority of its income in the
fourth quarter of the fiscal year due to the stronger sales experienced during
the month of December.
2. Earnings Per Share
In fiscal 1997, the Company adopted Statement of Financial Accounting
Standards No. 128 (SFAS 128), "Earnings per Share." Prior period earnings per
share amounts have been restated in accordance with the provisions of SFAS
128. The following table (in thousands) reconciles the numerators and
denominators used in the basic and diluted earnings per share computations:
<TABLE><CAPTION>
For the thirteen weeks ended For the twenty-six weeks ended
---------------------------- ------------------------------
August 2, 1997 August 1, 1998 August 2, 1997 August 1, 1998
------------------------------------ ---------------------------------------
Net Income Shares Net Income Shares Net Income Shares Net Income Shares
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Basic earnings per share $ 1,165 10,945 $ 573 11,261 $ 2,489 10,532 $ 2,145 11,261
Effect of dilutive options - 411 - 344 - 425 - 318
--------- ------ --------- ------ --------- ------ --------- ------
Diluted earning per share $ 1,165 11,356 $ 573 11,605 $ 2,489 10,957 $ 2,145 11,579
========= ====== ========= ====== ========= ====== ========= ======
</TABLE>
3. Treasury Stock Repurchase Program
The Board of Directors approved a stock repurchase plan on July 14, 1998. The
Board authorized the Company to repurchase up to 500,000 shares of its
outstanding common stock at prevailing market prices for up to an aggregate
amount of $6.0 million. As of August 1, 1998 the Company has acquired 45,000
shares for $462,000.
.Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations
Certain statements made in this report may constitute "forward-looking
statements" within the meaning of the Private Securities Litigation Reform Act
of 1995. Such forward-looking statements involve known and unknown risks,
uncertainties and other factors that may cause the actual results,
performances or achievements of the Company or the retailing industry to be
8
<PAGE>
materially different from any future results, performance or achievements
expressed or implied by such forward-looking statements. Such factors
include, among others: local, regional and national economic conditions;
extreme or unseasonable weather conditions; legislation and regulatory matters
affecting payroll costs or other aspects of retailing; the ability to identify
and respond to emerging fashion trends; and governmental actions such as
import or trade restrictions.
Overview
The Company is a specialty retailer of moderately-priced casual attire and
accessories for women sold under the Paul Harris, Paul Harris Design, and Paul
Harris Denim brand names. As of August 1, 1998, the Company operated 288
stores in 29 states with the greatest concentration of stores in the Midwest.
The Company is expanding and remodeling some of its store base. The Company's
stores currently average approximately 4,500 gross square feet and are located
primarily in regional enclosed shopping malls and, to a lesser extent, strip
shopping centers. During the first half of fiscal 1998, the Company opened
twenty-three stores and closed ten stores. The Company expects that new stores
will be generally located in the Company's existing markets in order to
enhance recognition of the Paul Harris name, leverage field management,
facilitate targeted marketing efforts and utilize the Company's sales team at
its greatest operational efficiency.
Results of Operations
The following discussion is based upon the unaudited financial statements
appearing elsewhere in this report. The following table sets forth certain
income statement items as a percentage of net sales.
<TABLE><CAPTION>
PAUL HARRIS STORES, INC. AND SUBSIDIARIES
RESULTS OF OPERATIONS AS A
PERCENTAGE OF NET SALES
Thirteen weeks ended Twenty-six weeks ended
-------------------- ----------------------
August 2, August 1, August 2, August 1,
1997 1998 1997 1998
------ ------ ------ ------
<S> <C> <C> <C> <C>
Net sales 100.0% 100.0% 100.0% 100.0%
Cost of sales, including occupancy
expenses exclusive of depreciation (1) 62.3% 62.3% 63.1% 61.7%
------ ------ ------ ------
Gross income 37.7% 37.7% 36.9% 38.3%
Selling, general and administrative expenses(2) 31.2% 33.0% 30.3% 32.1%
Depreciation and amortization 2.5% 3.0% 2.3% 2.9%
------ ------ ------ ------
Operating income 4.0% 1.7% 4.3% 3.3%
Interest income, net 0.8% 0.3% 0.7% 0.2%
------ ------ ------ ------
Income before income taxes 4.8% 2.0% 5.0% 3.5%
Provision for income taxes 1.9% 0.8% 2.0% 1.4%
------ ------ ------ ------
Net income 2.9% 1.2% 3.0% 2.1%
===== ===== ===== =====
- -----------------------------------------------
(1) Occupancy expenses include store level base rent, percentage rent and real estate taxes.
(2) Includes all store level occupancy expenses not included in cost of sales.
</TABLE>
9
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Second quarter of fiscal 1998
The Company's net sales increased to $48.1 million in the second quarter of
fiscal 1998 from $40.9 million in the second quarter of fiscal 1997, an
increase of $7.2 million or 17.5%. The increase in net sales was primarily
attributable to a 23.6% increase in store count. The Company operated 288
stores as of August 1, 1998 compared to 233 stores on August 2, 1997.
Comparable store sales were down 4% for the quarter.
Gross income increased to $18.1 million in the second quarter of fiscal 1998
from $15.4 million in the prior year, an increase of $2.7 million or 17.5%.
Gross income, as a percentage of net sales, was 37.7% in the second quarter of
fiscal 1998 which was unchanged from the second quarter of fiscal 1997.
Gross income primarily increased due to the increase in net sales. Gross
income, as a percentage of net sales, was positively impacted by the increase
in selling margin as a result of a management decision to offer fewer sales
promotions for the second quarter of fiscal 1998 compared to the second
quarter of fiscal 1997. Gross income, for the second quarter of fiscal 1998
compared to the second quarter of fiscal 1997, as a percentage of net sales,
was negatively impacted by the increase in occupancy expenses, especially for
stores opened in the last twelve months.
Selling, general and administrative expenses increased to $15.9 million, or
33.0% of net sales, for the second quarter of fiscal 1998 from $12.8 million,
or 31.2% of net sales, for the second quarter of fiscal 1997. The increase of
$3.1 million was primarily the result of increased store payroll costs and
occupancy expense to support the increase in sales and planned store growth..
Partially offsetting this increase was a $300,000 one time gain recorded upon
the filing of amended property tax returns related to prior years.
Depreciation and amortization increased to $1.4 million for the second quarter
of fiscal 1998 from $1.0 million for the second quarter of fiscal 1997, an
increase of $383,000 or 36.8%. The increase is a result of $20.0 million net
increase in fixed assets at the end of the second quarter of fiscal 1998
compared to the end of the second quarter of fiscal 1997. In addition, the
new point of sale equipment purchased in fiscal 1997 has a shorter depreciable
life than most other depreciable assets of the Company. As a percentage of
net sales, depreciation and amortization increased to 3.0% in the second
quarter of fiscal 1998 from 2.5% in the second quarter of fiscal 1997.
Operating income decreased to $826,000 in the second quarter of fiscal 1998
from $1.6 million for the second quarter of fiscal 1997, a decrease of
$787,000 or 48.8%. As a percentage of net sales, operating income decreased
to 1.7% in the second quarter of fiscal 1998 from 4.0% in the second quarter
of fiscal 1997.
Interest income, net, of $124,000 for the second quarter of fiscal 1998
decreased by $221,000 from interest income, net, of $345,000 for the second
quarter of fiscal 1997. This was primarily due to lower cash balances
resulting from the purchase of $20.0 million in fixed assets since the end of
the second quarter of fiscal 1997.
The provision for income taxes, based on statutory rates, was $377,000 for the
second quarter of fiscal 1998 as compared to $793,000 for the second quarter
of fiscal 1997, a decrease of $416,000, as a result of the decrease in income
before income taxes. The Company's effective tax rate of 39.7% in the second
quarter of fiscal 1998 was lower than the 40.5% in the second quarter of
fiscal 1997 primarily as a result of lower state effective income tax rates.
As a result of the above factors, the Company's net income decreased to
$573,000 for the second quarter of fiscal 1998 from $1.2 million for the
second quarter of fiscal 1997.
10
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First half of fiscal 1998
The Company's net sales increased to $100.4 million in the first half of
fiscal 1998 from $84.8 million in the first half of fiscal 1997, an increase
of $15.6 million or 18.4%. The increase in net sales was primarily
attributable to a 23.6% increase in store count. The Company operated 288
stores as of August 1, 1998 compared to 233 stores on August 2, 1997.
Comparable store sales were down 2% for the first half of fiscal 1998.
Gross income increased to $38.4 million in the first half of fiscal 1998 from
$31.2 million in the prior year, an increase of $7.2 million or 23.0%. Gross
income, as a percentage of net sales, increased to 38.3% in the first half of
fiscal 1998 from 36.9% of net sales for the first half of fiscal 1997. Gross
income primarily increased due to the increase in net sales. Gross income, as
a percentage of net sales, was positively impacted by the increase in selling
margin as a result of a management decision to offer fewer sales promotions
for the first half of fiscal 1998 compared to the first half of fiscal 1997.
Partially offsetting this, as a percentage of net sales, was the increase in
occupancy expenses, especially for stores opened in the last twelve months,
for the first half of fiscal 1998 compared to the first half of fiscal 1997.
Selling, general and administrative expenses increased to $32.2 million, or
32.1% of net sales, for the first half of fiscal 1998 from $25.7 million, or
30.3% of net sales, for the first half of fiscal 1997. The increase of $6.5
million was primarily the result of increased store payroll costs and
occupancy expense to support the increase in sales and planned store growth.
Partially offsetting this increase was a $300,000 one time gain recorded upon
the filing of amended property tax returns related to prior years.
Depreciation and amortization increased to $2.9 million for the first half of
fiscal 1998 from $2.0 million for the first half of fiscal 1997, an increase
of $0.9 million or 47.6%. The increase is a result of $20.0 million net
increase in fixed assets at the end of the first half of fiscal 1998 compared
to the end of the first half of fiscal 1997. In addition, the new point of
sale equipment purchased in fiscal 1997 has a shorter depreciable life than
most other depreciable assets of the Company. As a percentage of net sales,
depreciation and amortization increased to 2.9% in the first half of fiscal
1998 from 2.3% in the first half of fiscal 1997 as a result of $20.0 million
net increase in fixed asset purchases during the last twelve months.
Operating income decreased to $3.3 million in the first half of fiscal 1998
from $3.6 million for the first half of fiscal 1997, a decrease of $343,000 or
9.5%. As a percentage of net sales, operating income decreased to 3.3% in the
first half of fiscal 1998 from 4.3% in the first half of fiscal 1997.
Interest income, net, of $247,000 for the first half of fiscal 1998 decreased
by $308,000 from an interest income, net, of $555,000 for the first half of
fiscal 1997. This was primarily due to lower cash balances as a result of the
net increase in fixed assets of $20.0 million at the end of the first half of
fiscal 1998 compared to the end of the first half of fiscal 1997.
The provision for income taxes, based on statutory rates, was $1.4 million for
the first half of fiscal 1998 as compared to $1.7 million for the first half
of fiscal 1997, a decrease of $307,000, as a result of the decrease in income
before income taxes. The Company's effective tax rate of 39.3% in the first
half of fiscal 1998 was lower than the 40.5% in the first half of fiscal 1997
primarily as a result of lower state effective income tax rates.
As a result of the above factors, the Company's net income decreased to $2.1
million for the first half of fiscal 1998 from $2.5 million for the first half
of fiscal 1997.
11
<PAGE>
Seasonality
The Company's business, like that of most retailers, is subject to seasonal
influences. A significant portion of the Company's net sales and profits are
realized during the Company's fourth fiscal quarter, which includes the
holiday selling season. Results for any quarter are not necessarily
indicative of the results that may be achieved for a full fiscal year.
Quarterly results may fluctuate materially depending upon, among other things,
the timing of new store openings, net sales and profitability contributed by
new stores, increases or decreases in comparable store sales, adverse weather
conditions, shifts in the timing of certain holidays and promotions, and
changes in the Company's merchandise mix.
Liquidity and Capital Resources
The Company's primary sources of working capital consist of internally
generated cash and a $30.0 million secured, revolving credit facility. While
this credit facility is principally intended for letters of credit for import
merchandise, the Company may make direct borrowings of up to the maximum
amount of the credit facility. The credit facility expires June 30, 1999.
The annual interest rate on borrowings outstanding under the credit facility
is a variable rate equal to the prime rate of the Company's lender plus 0.25%.
In addition, letters of credit carry an initial issuance fee plus a fee of
0.25% of the face amount of such letters of credit. The credit facility also
contains certain financial covenants that 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 August 1, 1998, there were outstanding letters of
credit issued in favor of the Company under the credit facility in an
aggregate amount of $11.3 million. On the same date, there were no
outstanding direct borrowings under the credit facility.
The Company made capital expenditures of approximately $11.5 million in the
first half of fiscal 1998, primarily for opening 23 new stores for $4.8
million and $4.2 million for remodeling and relocation of existing stores.
The company anticipates opening 25 to 30 new stores for approximately $6.0
million to $7.0 million during the remainder of this fiscal year.
Net cash flow from operating activities was $4.5 million in the first half of
fiscal 1998 compared to $1.0 million in the first half of fiscal 1997. The
primary reason for the increase in net cash flow was a smaller increase in
merchandise inventories for the first half of fiscal 1998 compared to the
first half of fiscal 1997. Net cash flow from financing activities, for the
first half of fiscal 1998, included the repurchase of 45,000 shares of the
Company's stock for $462,000 compared to receiving proceeds of $15.1 million
from the issuance of common stock in the first half of fiscal 1997.
Cash and cash equivalents decreased from $25.9 million at the end of the first
half of fiscal 1997 to $10.5 million at the end of the first half of fiscal
1998 primarily due to the purchase of fixed assets.
Management believes that 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.
12
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Year 2000 Compliance
The year 2000 will pose a unique set of challenges to those industries reliant
on information technology. As a result of methods employed by early
programmers, many software applications and operational programs may be unable
to distinguish the year 2000 from the year 1900. If not effectively
addressed, this problem could result in the production of inaccurate data, or,
in the worst cases, the inability of the systems to continue to function
altogether. The Company and other retailers are vulnerable to the industry's
dependence on electronic point of sale and inventory control systems.
In May 1996, the Company initiated the process of preparing its computer
systems and applications for the year 2000. This process included replacing
the store point of sale systems during the third quarter of fiscal 1997 and
will involve upgrading corporate hardware and software components by the first
quarter of fiscal 1999. Management estimates the total cumulative costs will
be approximately $8.2 million, which includes the $6.2 million already
invested in the new point of sale systems and $615,000 invested in new
mainframe software.
Management believes that the expenditures required to bring the Company's
systems into compliance will not have a materially adverse effect on the
Company's performance. However, the year 2000 problem is pervasive and
complex and can potentially affect any computer process. Accordingly, no
assurance can be given that the year 2000 compliance can be achieved without
additional unanticipated expenditures and uncertainties that might affect
future financial results.
Moreover, to operate its business, the Company relies upon government
agencies, utility companies, telecommunications companies, shipping companies,
suppliers and other third party service providers over which it can assert
little control. The Company's ability to conduct its business is dependent
upon the ability of these third parties to avoid year 2000 related
disruptions. The Company has contacted and will continue to contact its key
suppliers and other third party service providers to inquire as to their year
2000 readiness. If these third parties do not adequately address their year
2000 issues, the Company's business my be materially affected which could
result in a materially adverse effect on the Company's results of operations
and financial condition.
The Company has not to date developed any contingency plans in the event the
Company or any key third party providers should fail to become year 2000
complaint.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits: (27) Financial Data Schedule
(b) Reports on Form 8-K: None
13
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Paul Harris Stores, Inc.
(Registrant)
Date: September 15,1998 /s/ John H. Boyers
----------------------
Senior Vice President -- Finance and
Treasurer
(Signing on behalf of the registrant and as
principal financial officer)
14
<TABLE> <S> <C>
<ARTICLE> 5
<CAPTION>
EXHIBIT 27 - FINANCIAL DATA SCHEDULE
PAUL HARRIS STORES, INC. AND SUBSIDIARIES
FORM 10-Q FOR YEAR-TO-DATE ENDED August 1, 1998
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> JAN-30-1999
<PERIOD-END> AUG-01-1998
<CASH> 10,541,000
<SECURITIES> 0
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 33,515,000
<CURRENT-ASSETS> 48,727,000
<PP&E> 62,027,000
<DEPRECIATION> (18,864,000)
<TOTAL-ASSETS> 93,191,000
<CURRENT-LIABILITIES> 22,091,000
<BONDS> 0
<COMMON> 17,390,000
0
0
<OTHER-SE> 50,824,000
<TOTAL-LIABILITY-AND-EQUITY> 93,191,000
<SALES> 100,373,000
<TOTAL-REVENUES> 100,373,000
<CGS> 61,947,000
<TOTAL-COSTS> 61,947,000
<OTHER-EXPENSES> 35,142,000
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (247,000)
<INCOME-PRETAX> 3,531,000
<INCOME-TAX> 1,386,000
<INCOME-CONTINUING> 2,145,000
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,145,000
<EPS-PRIMARY> 0.19
<EPS-DILUTED> 0.19
</TABLE>
