SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10 - K
X Annual report pursuant to Section 13 or 15(d) of the Securities
- -----
Exchange Act of 1934. For the fiscal year ended January 31, 1998 or
Transition report pursuant to Section 13 or 15(d) of the Securities
- -----
Exchange Act of 1934. For the transition period from to
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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)
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 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 if disclosure of 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, 1998, 11,262,161 common shares were outstanding. The aggregate
market value of the common shares held by non-affiliates (based upon the
closing price on April 8, 1998 on The Nasdaq Stock Market of $10.44 per share)
was approximately $116,430,000. For the purposes of such calculation, all
outstanding shares of common stock have been considered held by non-
affiliates, other than the 109,800 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.
<PAGE>
PART I
ITEM 1. BUSINESS
The Company is a specialty retailer which offers moderately-priced casual
attire for fashion-conscious women. As of January 31, 1998, the Company
operated 275 stores in 28 states of which 229 are located in regional enclosed
shopping malls. Paul Harris Stores, Inc. is an Indiana corporation that was
incorporated in 1952. Except as otherwise indicated by the context, the term
"the Company" means Paul Harris Stores, Inc. and its consolidated
subsidiaries.
The Company's fiscal year ends on the Saturday closest to January 31.
References in this report to a fiscal year refer to the calendar year in which
the fiscal year began. For example, fiscal 1997 refers to the fiscal year
which began on February 2, 1997 and ended on January 31, 1998.
The Company operated retail stores in the following states on the dates
indicated:
<TABLE><CAPTION>
Number of Stores as of Number of Stores as of
February 1, January 31, February 1, January 31,
1997 1998 1997 1998
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Arkansas 2 2 Missouri 10 10
Connecticut 0 3 Nebraska 1 2
Delaware 1 1 New Jersey 5 5
District of Columbia 1 0 New York 2 3
Florida 6 10 North Carolina 12 14
Georgia 7 12 Ohio 26 29
Illinois 29 33 Pennsylvania 23 24
Indiana 35 34 South Carolina 5 6
Iowa 7 7 South Dakota 1 1
Kentucky 6 5 Tennessee 11 10
Louisiana 2 6 Texas 6 6
Maryland 8 15 Vermont 0 1
Massachusetts 1 5 Virginia 7 12
Michigan 2 12 Wisconsin 5 5
Mississippi 2 2 ------ ----
Total Stores 223 275
====== ====
</Table
The Company sells quality merchandise and emphasizes casual clothing
coordinated by color, style and fabric. Approximately 87% 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 1997,
no supplier provided more than 5% of the Company's merchandise. A majority of
the Company's domestic merchandise is purchased in the New York and Los
Angeles areas. Approximately 62% of all merchandise was purchased from
foreign suppliers in fiscal 1997. Virtually all merchandise purchased
directly for the stores 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 its 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.
The Company uses various trademarks such as "Paul Harris", "Pasta" (a
trademark used on 2 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.
1
<PAGE>
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
9.9% of the total Company sales during fiscal 1997.
During fiscal 1997, the average sale per PHFC transaction was $56, which
compares to an average sale per transaction of $26 from 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 1997 approximately 48.2% of the Company's sales were for cash
(including checks). Approximately 41.9% of the Company's sales were from
major national credit cards in fiscal 1997.
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 moderately-sized competitors in
an industry which includes a small number of better-known, larger,
competitors.
The Company had approximately 3,100 permanent employees (full and part-
time) as of January 31, 1998. During the 1997 holiday peak shopping season,
the Company hired approximately 1,300 additional 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 expiring 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 12 years, with some having one or more 5-year options to
extend. Some leases have a "kick-out" clause if sales have not reached a
specified level after a certain number years of operation, which normally
permits either party to terminate the lease if the specified sales levels are
not achieved.
2
<PAGE>
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 1997.
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.
Name Age Title
---- --- -----
Charlotte G. Fischer 48 Chairman of the Board, President and
Chief Executive Officer
John H. Boyers 53 Senior Vice President - Finance and
Treasurer
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 of the Board 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., Ms. Fischer is a director of Trans World
Entertainment Corp., Inc. and NatCity National Bank of Indiana.
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.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company's common stock is traded on The Nasdaq Stock Market under the
symbol PAUH. The following table sets forth, for the past eight fiscal
quarters, the range of high and low sales prices for the Company's common
stock as reported by The Nasdaq Stock Market.
Market Price of Common Stock
----------------------------
Fiscal 1996 Quarters Fiscal 1997 Quarters
-------------------- --------------------
1st 2nd 3rd 4th 1st 2nd 3rd 4th
----- ----- ------ ------ ------ ------ ------ ------
High $5.13 $8.50 $13.25 $22.50 $23.13 $19.38 $30.63 $23.25
Low $1.75 $4.00 $ 6.25 $11.25 $12.50 $13.00 $15.00 $ 8.25
There were approximately 1,500 registered holders of record of common stock
on April 8, 1998. The Company has not declared or paid any cash dividends on
its 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.
3
<PAGE>
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>
<TABLE><CAPTION>
FISCAL YEAR
------------------------------------------------------------
1993 1994 1995 1996 1997
------------------------------------------------------------
(Dollars in thousands, except per share data)
<S> <C> <C> <C> <C> <C>
Income Statement Data:
Net sales $154,309 $167,778 $167,523 $190,288 $209,236
Cost of sales, including occupancy expenses
exclusive of depreciation (1) 99,556 111,397 112,297 118,066 130,589
-------- -------- -------- -------- --------
Gross income 54,753 56,381 55,226 72,222 78,647
Selling, general and administrative
expenses (2) 38,905 45,539 47,081 53,300 59,733
Depreciation and amortization 3,496 3,330 3,472 3,270 4,148
-------- -------- -------- -------- --------
Operating income 12,352 7,512 4,673 15,652 14,766
Interest expense (income), net 3,051 2,539 2,034 1,235 (941)
-------- -------- -------- -------- --------
Income before income taxes 9,301 4,973 2,639 14,417 15,707
Provision for income taxes 3,530 1,895 1,010 5,598 5,979
-------- -------- -------- -------- --------
Net income $ 5,771 $ 3,078 $ 1,629 $ 8,819 $ 9,728
======== ======== ======== ======== ========
Basic earnings per share $ 0.60 $ 0.31 $ 0.16 $ 0.88 $ 0.89
======== ======== ======== ======== ========
Weighted average number of shares outstanding 9,653 9,981 10,006 10,052 10,880
======== ======== ======== ======== ========
Diluted earnings per share $ 0.59 $ 0.31 $ 0.16 $ 0.85 $ 0.86
======== ======== ======== ======== ========
Weighted average number of shares and
share equivalents outstanding 9,752 10,065 10,029 10,368 11,292
======== ======== ======== ======== ========
Operating and Store Data:
Gross income % 35.5% 33.6% 33.0% 38.0% 37.6%
Operating income % 8.0% 4.5% 2.8% 8.2% 7.1%
Weighted average sales per store $ 748 $ 740 $ 683 $ 845 $ 875
Comparable store sales increase (decrease) (3) 3% 0% (7%) 20% 2%
Inventory turnover 4.9x 4.6x 4.7x 5.1x 4.7x
Stores open at beginning of period 201 211 239 235 223
Stores opened during period 22 40 19 19 65
Stores closed during period (12) (12) (23) (31) (13)
======== ======== ======== ======== ========
Stores open at end of period 211 239 235 223 275
======== ======== ======== ======== ========
Balance Sheet Data (at end of period):
Working capital $ 24,603 $ 24,446 $ 24,481 $ 21,457 $ 34,396
Total assets 58,553 63,454 57,850 57,319 91,298
Long-term debt 26,290 21,970 17,640 1,930 1,810
Shareholders' equity 15,096 19,890 22,904 36,911 66,004
(1) Occupancy expenses include store level base rent, percentage rent and real estate taxes.
(2) Includes all other store level occupancy expenses not included in cost of sales.
(3) Calculated using net sales of stores opened for at least a 12 month period.
4
</table
<PAGE>
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.
Results of Operations
The following table sets forth certain income statement items as a
percentage of net sales
</TABLE>
<TABLE><CAPTION>
Fiscal Year
----------------------
1995 1996 1997
----------------------
<S> <C> <C> <C>
Net sales 100.0% 100.0% 100.0%
Cost of sales, including occupancy expenses exclusive of depreciation (1) 67.0 62.0 62.4
------ ------ ------
Gross income 33.0 38.0 37.6
Selling, general and administrative expenses (2) 28.1 28.0 28.5
Depreciation and amortization 2.1 1.8 2.0
------ ------ ------
Operating income 2.8 8.2 7.1
Interest expense (income), net 1.2 0.7 (0.4)
------ ------ ------
Income before income taxes 1.6 7.5 7.5
Provision for income taxes 0.6 2.9 2.9
------ ------ ------
Net income 1.0% 4.6% 4.6%
====== ====== ======
(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.
5
</table
<PAGE>
FISCAL 1997 COMPARED TO FISCAL 1996
The Company's net sales increased to $209.2 million in fiscal 1997 from
$190.3 million in fiscal 1996, an increase of $18.9 million or 10.0%. The
increase in net sales was primarily attributable to a 23% increase in the
number of stores open during fiscal 1997. The Company operated 275 stores on
January 31, 1998, compared to 223 stores on February 1, 1997. During fiscal
1997, the Company opened 65 stores and closed 13 stores. As a result of soft
holiday sales during the fourth quarter of fiscal 1997, the Company's
comparable store sales were negatively impacted. The Company experienced a 2%
positive comparable store sales increase for the year.
Gross income increased to $78.6 million in fiscal 1997 from $72.2 million
in fiscal 1996, an increase of $6.4 million or 8.9%. As a percentage of net
sales, gross income decreased to 37.6% in fiscal 1997 from 38.0% in fiscal
1996. Gross income increased primarily due to the increase in net sales.
Gross income as a percentage of net sales decreased as a result of greater
promotional activity during the fourth quarter due to soft holiday sales.
Sales of high margin items, such as sweaters, were also negatively impacted by
the unusually warm winter in the Midwest states.
Selling, general and administrative expenses increased to $59.7 million in
fiscal 1997 from $53.3 million in fiscal 1996, an increase of $6.4 million or
12.0%. As a percentage of net sales, selling, general and administrative
expenses increased to 28.5% in fiscal 1997 from 28.0% in fiscal 1996. In the
fourth quarter of 1997, the Company incurred a $1.0 million or $.09 per share
expense, representing a one-time payment as part of a new employment
commitment with Ms. Fischer, the Chairman, President & CEO. The remaining
$5.4 million resulted primarily from the increased number of stores operated
during the year.
Depreciation and amortization increased to $4.1 million in fiscal 1997 from
$3.3 million in fiscal 1996, an increase of $878,000 or 26.9%. As a
percentage of net sales, depreciation and amortization increased to 2.0% in
fiscal 1997 from 1.7% in fiscal 1996. The increase was primarily due to the
opening of 65 new stores and major remodels of 27 stores and secondarily to
the installation of a new point of sale system in the stores.
Operating income decreased to $14.8 million in fiscal 1997 from $15.7
million in fiscal 1996, a decrease of $886,000 or 5.7%. As a percentage of
net sales, operating income decreased to 7.1% in fiscal 1997 from 8.2% in
fiscal 1996.
Interest expense, net, was $941,000 in fiscal 1997 compared to an expense
of $1.2 million in fiscal 1996, for an improvement of $2.2 million. The
change resulted primarily from repayment of substantially all the long-term
debt in January 1997 and the interest income earned on the proceeds from the
sale of the Company's common stock in May 1997.
Provision for income taxes increased to $6.0 million in fiscal 1997 from
$5.6 million in fiscal 1996, an increase of $381,000, or 6.8%. In the third
quarter of fiscal 1997, the Company fully utilized its remaining income tax
operating loss carryforwards. As a result of this utilization, and
management's belief that the realization of the benefit of the Company's net
deferred tax assets is reasonably assured, the Company reduced the valuation
allowance against its remaining net deferred tax assets, resulting in a
reduction of income tax expense (and effective income tax rate) of $695,000,
or $.06 per share. In the fourth quarter, the non-deductability for taxes
under Internal Revenue Code Section 162 (m) of the $1.0 million payment to Ms.
Fischer, adversely affected the Company's taxes effective income tax rate.
The Company's effective income tax rate decreased to 38.1% in fiscal 1997 from
38.8% in fiscal 1996. As a result of the utilization of the federal and state
income tax loss carryforwards and tax deductions on the exercise of non-
qualified stock options, the Company benefited in fiscal 1997 from a reduction
of income taxes payable (reflected as a credit to additional paid-in capital)
of $2.8 million and $1.1 million, respectively.
As a result of all the above factors, the Company's net income increased to
$9.7 million in fiscal 1997 from $8.8 million in fiscal 1996, an increase of
$909,000, or 10.3%.
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 eleven 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.
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 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, due January 31, 2000
(the "11.375% Notes") issued by the Company in 1992.
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>
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.
The following table sets forth certain unaudited quarterly income statement
information for fiscal 1997 and fiscal 1996. The unaudited quarterly
information includes all normal recurring adjustments that management
considers necessary for a fair presentation of the information shown.
</TABLE>
<TABLE><CAPTION>
Fiscal Quarter Ended
-------------------------------------------------------------------------------
May 4, Aug. 3, Nov. 2, Feb. 1, May 3, Aug. 2, Nov. 1, Jan. 31,
1996 1996 1996 1997 1997 1997 1997 1998
-------------------------------------------------------------------------------
(Dollars in thousands, except for per share data)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net sales $ 39,639 $ 36,721 $ 45,413 $ 68,515 $ 43,838 $ 40,920 $ 51,057 $ 73,421
Gross income 12,827 12,560 18,074 28,761 15,822 15,424 20,390 27,011
Operating income 610 404 3,427 11,211 2,014 1,613 4,421 6,718
Income before income taxes 232 107 3,058 11,020 2,224 1,958 4,610 6,915
Net income $ 138 $ 64 $ 1,821 $ 6,796 $ 1,324 $ 1,165 $ 3,468 $ 3,771
Basic earnings per share $ 0.01 $ 0.01 $ 0.18 $ 0.67 $ 0.13 $ 0.11 $ 0.31 $ 0.34
Diluted earnings per share $ 0.01 $ 0.01 $ 0.18 $ 0.64 $ 0.13 $ 0.10 $ 0.30 $ 0.33
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 32.4 34.2 39.8 42.0 36.1 37.7 40.0 36.8
Operating income 1.5 1.1 7.5 16.4 4.6 3.9 8.7 9.2
Income before income taxes 0.6 0.3 6.7 16.1 5.1 4.8 9.0 9.4
Net income 0.3% 0.2% 4.0% 9.9% 3.0% 2.9% 6.8% 5.1%
</table
LIQUIDITY AND CAPITAL RESOURCES
The Company's primary source of working capital consists of internally
generated cash and its $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, 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 benchmarks for
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 January 31, 1998, there were
outstanding letters of credit issued in favor of the Company under the credit
facility in an aggregate amount of $10.6 million. On the same date, there
were no outstanding direct borrowings under the credit facility.
The Company made capital expenditures of approximately $20.4 million in
fiscal 1997, primarily for new stores, the remodeling of existing stores and
updating store fixtures (approximately $14.8 million), plus new point of sale
equipment (approximately $5.2). The Company made capital expenditures of
approximately $5.2 million in fiscal 1996, primarily for new stores, the
remodeling of existing stores and updating store fixtures (approximately $4.1
million). The Company expects to make capital expenditures in fiscal 1998 of
approximately $23.0 million for new stores and remodeling of existing stores
(approximately $18.0 million), and approximately $3.0 million for upgraded
corporate software and hardware components. The Company anticipates opening
75 net new stores and remodeling 35 stores during fiscal 1998.
8
<PAGE>
Net cash flow from operating activities was $6.0 million in fiscal 1997
compared to $21.0 million in fiscal 1996. The primary reason for the decrease
in net cash flow from operating activities was a result of a fiscal 1997
increase in merchandise inventories and a decrease in accrued compensation
payable.
Net cash flow from financing activities was $16.4 million primarily from
the sale of 995,000 shares of common stock during fiscal 1997. These shares
were sold in an underwritten public offering for $16 per share, net of
expenses of the offering of approximately $1.0 million. 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.
Cash and cash equivalents increased to $18.0 million at the end of fiscal
1997 from $16.0 million at the beginning of fiscal 1997, an increase of $2.0
million or 12.4%.
Management believes 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.
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 $5.7 million already
invested in the new point of sale systems.
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.
INFLATION
The effect of changing prices had minimal impact on sales and cost of sales
during the past three years. Occupancy costs and certain selling, general and
administrative costs have been affected by inflation during the period. In
general these increases have been modest and reflect current trends.
9
<PAGE>
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not applicable.
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 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 1998 Annual Meeting of the Shareholders to be filed with the
Commission pursuant to Regulation 14A.
PART IV
ITEM 14. FINANCIAL STATEMENTS, FINANCIAL STATEMENT SCHEDULES, EXHIBITS AND
REPORTS ON FORM 8-K
(a) (1) Financial Statements
Page No.
--------
Consolidated Balance Sheets -- As of February 1, 1997 and
January 31, 1998 11
Consolidated Statements of Income -- for Fiscal 1995, Fiscal 1996
and Fiscal 1997 12
Consolidated Statements of Cash Flows -- for Fiscal 1995,
Fiscal 1996 and Fiscal 1997 13
Consolidated Statements of Shareholders' Equity -- for Fiscal 1995,
Fiscal 1996 and Fiscal 1997 14
Notes to Financial Statements 15
Report of Independent Accountants 23
(a) (2) Financial Statement Schedules
Not applicable.
(a) (3) Exhibits
The Exhibit Index that appears on page 25 is hereby incorporated by
reference in response to this item.
(b) Reports on Form 8-K
None.
<PAGE>
</TABLE>
<TABLE><CAPTION>
PAUL HARRIS STORES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands)
February 1, January 31,
1997 1998
------------ ------------
<S> <C> <C>
ASSETS
Current assets
Cash and cash equivalents $ 16,001 $ 17,990
Merchandise inventories 19,759 31,940
Other receivables 861 3,330
Prepaid expenses 836 1,359
Deferred income taxes - 124
------------ ------------
Total current assets 37,457 54,743
------------ ------------
Property, fixtures and equipment
Land, building and improvements 5,787 5,871
Store fixtures and equipment 14,067 25,838
Leasehold improvements and other 12,567 19,462
------------ ------------
32,421 51,171
Less accumulated depreciation and amortization (13,315) (16,368)
------------ ------------
Property, fixtures and equipment, net 19,106 34,803
Deferred income taxes - 952
Other assets 756 800
------------ ------------
$ 57,319 $ 91,298
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities
Accounts payable $ 8,515 $ 12,725
Compensation and related taxes 3,774 2,780
Income taxes payable 37 377
Other accrued expenses 3,554 4,345
Current maturities of long-term debt 120 120
Accrued reorganization expenses and settlements - -
------------ ------------
Total current liabilities 16,000 20,347
------------ ------------
Long-term debt 1,930 1,810
Other non-current liabilities 2,478 3,137
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 11,256 respectively 1,930 17,354
Additional paid-in capital 9,963 13,904
Retained earnings 25,018 34,746
------------ ------------
Total shareholders' equity 36,911 66,004
------------ ------------
$ 57,319 $ 91,298
============ ============
See accompanying "Notes To Consolidated Financial Statements".
11
</TABLE>
<PAGE>
<TABLE><CAPTION>
PAUL HARRIS STORES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(in thousands, except per share data)
For the For the For the
fifty-three fifty-two fifty-two
weeks ended weeks ended weeks ended
February 3, February 1, January 31,
1996 1997 1998
------------- ------------- -------------
<S> <C> <C> <C>
Net sales $ 167,523 $ 190,288 $ 209,236
Cost of sales, including occupancy expenses
exclusive of depreciation 112,297 118,066 130,589
------------- ------------- -------------
Gross income 55,226 72,222 78,647
Selling, general and administrative expenses 47,081 53,300 59,733
Depreciation and amortization 3,472 3,270 4,148
------------- ------------- -------------
Operating income 4,673 15,652 14,766
Interest expense (income), net 2,034 1,235 (941)
------------- ------------- -------------
Income before income taxes 2,639 14,417 15,707
Provision for income taxes 1,010 5,598 5,979
------------- ------------- -------------
Net income $ 1,629 $ 8,819 $ 9,728
============= ============= =============
Basic earnings per share $ 0.16 $ 0.88 $ 0.89
============= ============= =============
Weighted average number of shares outstanding 10,006 10,052 10,880
============= ============= =============
Diluted earnings per share $ 0.16 $ 0.85 $ 0.86
============= ============= =============
Weighted average number of shares and
share equivalents outstanding 10,029 10,368 11,292
============= ============= =============
See accompanying "Notes To Consolidated Financial Statements".
12
</TABLE>
<PAGE>
<TABLE><CAPTION>
PAUL HARRIS STORES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
For the For the For the
fifty-three fifty-two fifty-two
weeks ended weeks ended weeks ended
February 3, February 1, January 31,
1996 1997 1998
------------- ------------- -------------
<S> <C> <C> <C>
Cash flow from operating activities:
Net income $ 1,629 $ 8,819 $ 9,728
Adjustments to reconcile earnings to cash provided:
Depreciation and amortization 3,472 3,270 4,148
Net disposal of assets 169 560 463
Deferred income taxes - - (1,076)
Utilization of net operating loss carryforward 1,353 4,974 2,835
(Increase) decrease in current assets:
Merchandise inventories 1,922 (2,114) (12,181)
Other receivables 410 (322) (2,469)
Prepaid expenses 3 177 (523)
Increase (decrease) in current liabilities:
Accounts payable (1,595) 2,503 4,210
Compensation and related taxes (604) 2,996 (994)
Income taxes payable (371) (8) 340
Other accrued expenses (1,718) 107 791
Other 412 79 715
------------- ------------- -------------
Net cash flow from operating activities 5,082 21,041 5,987
------------- ------------- -------------
Net cash flow for investing activities:
Additions to fixed assets (2,247) (5,230) (20,408)
------------- ------------- -------------
Cash flow (for) from financing activities:
Repayment of long-term debt (4,330) (19,910) (120)
Proceeds from issuance of common stock
and related tax benefits 32 214 16,530
------------- ------------- -------------
Net cash flow (for) from financing activities (4,298) (19,696) 16,410
------------- ------------- -------------
$ (1,463) $ (3,885) $ 1,989
============= ============= =============
Cash and cash equivalents
At beginning of period $ 21,349 $ 19,886 $ 16,001
At end of period 19,886 16,001 17,990
------------- ------------- -------------
$ (1,463) $ (3,885) $ 1,989
============= ============= =============
Supplemental disclosures of cash flow information:
Cash paid during the period for interest $ 4,321 $ 2,188 $ 385
============= ============= =============
Cash paid during the period for income taxes $ 11 $ 632 $ 2,684
============= ============= =============
See accompanying "Notes To Consolidated Financial Statements".
13
</TABLE>
<PAGE>
<TABLE><CAPTION>
PAUL HARRIS STORES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(in thousands)
Additional
Common Stock Paid-in Retained
Shares Amount Capital Earnings
------------ ---------- ---------- -----------
<S> <C> <C> <C> <C>
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
Issuance of common stock 995 14,957 - -
Exercise of stock options,
including related tax benefit 146 467 1,106 -
Benefit of net operating loss carryforward - - 2,835 -
Net income for fiscal year 1997 - - - 9,728
------------ ---------- ---------- -----------
Balance as of January 31, 1998 11,256 $ 17,354 $ 13,904 $ 34,746
=========== ========== ========== ===========
See accompanying "Notes To Consolidated Financial Statements"
14
</TABLE>
<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 that
offers casual attire for fashion conscious women. 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 1997 each included 52
weeks.
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 years 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.
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.
15
<PAGE>
Earnings Per Share
Basic earnings per share are based on the weighted average number of common
shares outstanding during the fiscal year. Diluted earnings per share is
based on the weighted average number of common and common equivalent shares
(dilutive stock options) outstanding during the fiscal year. In fiscal 1997,
the Company adopted Statement of Financial Accounting Standards No. 128 (SFAS
128), "Earnings per Share." Prior years' 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>
Fiscal 1995 Fiscal 1996 Fiscal 1997
------------------- ------------------ ------------------
Net Income Shares Net Income Shares Net Income Shares
<S> <C> <C> <C> <C> <C> <C>
Basic earnings per share $ 1,629 10,006 $ 8,819 10,052 $ 9,728 10,880
Effect of dilutive options 23 316 412
---------- ------ ---------- ------ ---------- ------
Diluted earnings per share $ 1,629 10,029 $ 8,819 10,368 $ 9,728 11,292
======== ====== ======== ====== ======== ======
</TABLE>
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 April 9, 1997,
to increase the line of credit facility from $20,000,000 to $30,000,000 and
extend the term to June 30, 1999. The Company may use the entire credit
facility for letters of credit or direct borrowings. The Company made no
direct borrowings during fiscal 1997. Letters of credit outstanding as of
January 31, 1998 were $10,620,000. The annual interest rate on the direct
borrowings is a variable rate equal to the prime rate of the bank plus one
quarter of one percent (0.25%). The letters of credit carry an initial
issuance fee plus negotiation fees of one quarter of one percent (0.25%) of
the face amount of each letter of credit. 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. During January 1994, the Company
entered into a term loan (mortgage) with the same financial institution for
$2,400,000 with monthly principal payments of $10,000 plus interest at 7.83%
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 and term loan contain covenants related to tangible net worth
and operating cash flow requirements.
Long-term debt, exclusive of amounts maturing in one year, is summarized
below:
February 1, January 31,
1997 1998
----------- -----------
Term loan (mortgage) on land and buildings payable
in monthly payments through February 1999 including
interest at the fixed rate of 7.83% per year $ 1,930,000 $ 1,810,000
=========== ===========
The book value of assets subject to this lien as of January 31, 1998 was
$4,291,000.
Scheduled maturities of long-term debt over the next two fiscal years are:
$120,000 in fiscal 1998 and $1,810,000 in fiscal 1999.
The estimated fair market value of the term loan (mortgage) was $1,915,000
and $1,796,000 as of February 1, 1997 and January 31, 1998, respectively.
16
<PAGE>
NOTE 3. SHAREHOLDERS' EQUITY
All outstanding shares are shares of voting common stock.
During May 1997 the Company sold a total of 995,000 newly issued shares of
common stock in an underwritten public offering. The Company received
$14,957,000, net of expenses from the offering.
On April 10, 1997, the Company adopted a shareholders 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 held. 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
entitle its holder to purchase at the Right's then-current exercise price,
shares of the Preferred Stock having a value of twice the Rights exercise
price.
NOTE 4. INCOME TAXES
The provisions for income taxes were as follows:
Fiscal 1995 Fiscal 1996 Fiscal 1997
----------- ----------- -----------
Current tax expense:
Federal $ 72,000 $ 293,000 $4,061,000
State 25,000 325,000 1,061,000
Deferred tax expense:
Federal 780,000 4,431,000 643,000
State 133,000 549,000 214,000
----------- ----------- -----------
1,010,000 $5,598,000 $5,979,000
========= ========== ==========
The provisions for income taxes differ from the amounts of income tax
calculated by applying the U.S. Federal statutory income tax rate to pretax
income from continuing operations as a result of the following:
Fiscal 1995 Fiscal 1996 Fiscal 1997
----------- ----------- -----------
Federal taxes at statutory rate $ 897,000 $ 4,945,000 $ 5,498,000
State and local taxes, net
of federal benefit 104,000 574,000 782,000
Non-deductible compensation
expense --- --- 350,000
Reduction of valuation allowance
on deferred tax assets --- --- (695,000)
Other 9,000 79,000 44,000
----------- ----------- -----------
$1,010,000 $ 5,598,000 $ 5,979,000
=========== =========== ===========
17
<PAGE>
Deferred tax assets (liabilities) are comprised of the following:
February 1, January 31,
1997 1998
----------- -----------
Deferred rent $ 943,000 $ 1,234,000
Depreciation 465,000 --
Minimum tax credit 958,000 ---
Loss carryforwards 1,292,000 ---
Other 162,000 220,000
----------- -----------
Gross deferred tax assets 3,820,000 1,454,000
----------- -----------
Depreciation --- ( 68,000)
Prepaid pension (162,000) (220,000)
Other (209,000) ( 90,000)
------------ -----------
Gross deferred tax liabilities (371,000) (378,000)
------------ ----------
Valuation allowance (3,449,000) ---
----------- ----------
Net deferred tax assets $ --- $1,076,000
=========== ==========
In the third quarter of fiscal 1997, the Company fully utilized its
remaining operating loss carryforwards. In accordance with AICPA SOP 90-7,
the utilization of these loss carryforwards resulted in an increase in
additional paid-in capital of approximately $2,835,000 in fiscal 1997. Prior
to this time, given the relative magnitude of the loss carryforward amounts,
management believed that because of the seasonal nature of the Company's
business, the volatility of trends in women's apparel, and the relatively
short amount of time that had passed since the consummation of the Company's
plan of reorganization, that a full valuation allowance against the Company's
net deferred tax assets was warranted until realization of those assets was
reasonably assured. Upon the full utilization of the loss carryforwards in
fiscal 1997, management determined that it was more likely than not that the
remaining net deferred tax assets would be realized and reduced the valuation
allowance to zero. This reduced income tax expense for fiscal 1997 by
approximately $695,000. The reduction of the valuation allowance that related
to the minimum tax credits resulted in an increase in additional paid-in
capital in accordance with the provisions of SOP 90-7.
NOTE 5. COMMITMENTS AND CONTINGENT LIABILITIES
All stores are leased under operating leases which expire on various dates
through fiscal 2013. Approximately 65% 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 48 months. Following is a summary of future
minimum rental payments required by operating leases as of January 31, 1998:
Minimum Rental
Payable in Payments
Fiscal Year Stores and Other
----------- ----------------
1998 $ 18,839,000
1999 17,662,000
2000 16,990,000
2001 16,532,000
2002 16,261,000
Later Years 63,151,000
----------------
Total $149,435,000
===============
18
<PAGE>
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 1.6%
of rental expense for fiscal 1997, 2.2% for fiscal 1996, and 0.9% for fiscal
1995; (2) the Company has a number of leases which are paid based on a
percentage of monthly sales dollars. Such leases accounted for 11.8% of rental
expense in fiscal 1997, 12.6% for fiscal 1996 and 9.7% for fiscal 1995; (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 $17,293,000 for fiscal 1997,
$15,089,000 for fiscal 1996 and $14,904,000 for fiscal 1995.
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 years.
The Company is involved from time to time in legal proceedings arising in
the ordinary course of its business. On October 15, 1997, the Company
initiated a declaratory judgment action in the United States District Court
for the Southern District of Indiana in response to certain demands made by
Citibank (South Dakota), N.A. ("Citibank"). The demands by Citibank related
to a credit plan agreement under which Citibank would have assumed the
Company's private label credit card operation. In December, 1997, Citibank
filed a counter-claim against the Company alleging breach of said credit plan
agreement. Citibank is alleging damages in excess of $3.0 million. Discovery
has begun and a trial is tentatively projected for February, 1999. The
Company believes that the counter-claim is without merit and will vigorously
contest it. Although the outcome of any litigation is uncertain, the Company
believes that the attendant liability of the Company, if any, would not have a
material adverse effect on the Company's financial position, results of
operations or liquidity.
NOTE 6. RETIREMENT PLAN
The Company has a non-contributory defined benefit pension plan
substantially covering 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.
Net pension income for fiscal 1995, 1996 and 1997 includes the following
components:
<TABLE><CAPTION>
Fiscal Fiscal Fiscal
1995 1996 1997
------- ------ ------
<S> <C> <C> <C>
Service expense - benefits earned during the year $ --- $ --- $ ---
Interest expense on projected benefit obligation (106,000) ( 91,000) ( 87,000)
Actual gain on plan assets 332,000 278,000 85,000
Net amortization and deferral (210,000) (133,000) 64,000
----------- ----------- ----------
Net pension income $ 16,000 $ 54,000 $ 62,000
=========== ========== ==========
</TABLE>
19
<PAGE>
<TABLE><CAPTION>
The funded status of the plan is as follows:
February 1, January 31,
1997 1998
-------------- -----------
<S> <C> <C>
Vested $1,173,000 $1,054,000
Nonvested 32,000 17,000
---------- ----------
Accumulated benefit obligation 1,205,000 1,071,000
Projected impact of future salary increases --- ---
Projected benefit obligation 1,205,000 1,071,000
Market value of plan assets available for benefits 1,869,000 1,484,000
---------- ----------
Funded position $ 664,000 $ 413,000
========== ==========
Consisting of:
Unrecognized loss (gain) on assets $ 131,000 $ (237,000)
Prepaid asset 533,000 650,000
---------- ----------
Funded position $ 664,000 $ 413,000
========== ==========
</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 31, 1998 and February 1, 1997.
The weighted-average discount rates utilized in determining the actuarial
present value of the projected benefit obligations was 7.25% for fiscal 1997
and 1996. The expected long-term rate of return on assets was 8% for fiscal
1997 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 options issued to the Chief Executive
Officer under a Stock Option Agreement dated April 29, 1994. In addition,
options have been issued under the 1996 Stock Option and Incentive Plan (the
"1996 Plan") and the Outside Directors Stock Option Plan (the "Directors
Plan").
In fiscal 1996, the Company adopted Statement of Financial Accounting
Standard No. 123, "Accounting for Stock-based Compensation" ("SFAS No. 123").
As allowed by SFAS No. 123, 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 Statements of
Income. Accordingly, no compensation expense has been recognized in the
results of operations of the Company for stock options granted to employees.
The 1992 Plan provides additional incentive to key employees of the Company
and to 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. As of January 31, 1998,
virtually all options under the 1992 Plan have been granted at an exercise
price ranging from $1.31 to $21.88 per share.
20
<PAGE>
The 1996 Plan promotes the long-term interests of the Company and its
shareholders by providing a means for attracting and retaining officers and
key employees of the Company. The 1996 Plan is administered by a Committee
appointed by the Board of Directors. The maximum number of shares of common
stock of the Company that may 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 January
31, 1998, options to purchase 231,800 shares of common stock of the Company
have been granted, at an exercise price ranging from $8.63 per share to $27.69
per share.
Generally, options may be granted under the above plans at any time prior
to the tenth anniversary of the Plans 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 advances the interests of the Company and its
shareholders by encouraging 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 issuance 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 January 31,
1998, options to purchase 36,000 shares of common stock of the Company have
been granted at an exercise price ranging from $8.00 per share to $19.13 per
share.
Pursuant to an employment agreement by and between the Company and Ms.
Fischer in fiscal 1994, 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.
The following table summarizes options outstanding and available under
these plans and arrangements
<TABLE><CAPTION>
Fiscal Fiscal Fiscal
1995 1996 1997
---------- ---------- ----------
<S> <C> <C> <C>
Options outstanding at beginning of year 883,000 904,000 1,170,000
Options granted 385,000 444,000 336,000
Options exercised (21,000) (96,000) (146,000)
Options expired (343,000) (82,000) (162,000)
--------- ---------- ----------
Options outstanding at year-end 904,000 1,170,000 1,198,000
=========== =========== =========
Options exercisable at year-end 684,000 657,000 841,000
=========== =========== ==========
Options available for grant at year-end 282,000 1,020,000 845,000
=========== =========== ==========
Weighted average option prices per share:
At beginning of year $ 4.68 $ 3.47 $ 6.30
Granted 1.50 10.39 16.54
Exercised 1.50 2.23 3.19
Expired 4.32 2.66 12.49
Outstanding at year-end 3.47 6.30 8.73
Exercisable at year-end $ 3.83 $ 5.75 $ 6.7
</TABLE>
21
<PAGE>
In determining the weighted average fair value of options granted during
each 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 fiscal years 1997, 1996 and
1995, respectively: dividend yield of 0.0, 0.0 and 0.0 percent; expected
volatility of 44.6, 41.4 and 37.8 percent; risk free interest rates of 5.9,
6.3 and 6.1 percent; and expected lives of 4.0, 7.3 and 4.4 years. The
results are listed in the following table:
Fiscal 1995 Fiscal 1996 Fiscal 1997
----------- ----------- -----------
Weighted average fair value per
option of options granted
during the year $0.54 $5.17 $6.16
Had compensation cost 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 SFAS No. 123, the Company's net income and earnings per share
amounts would have been reduced to the pro forma amounts indicated below:
Fiscal 1995 Fiscal 1996 Fiscal 1997
----------- ----------- -----------
Net income (in thousands)
As reported $1,629 $8,819 $9,728
Pro forma $1,596 $7,863 $9,075
Basic earnings per share
As reported $ 0.16 $ 0.88 $ 0.89
Pro forma $ 0.16 $ 0.78 $ 0.83
Diluted earnings per share
As reported $ 0.16 $ 0.85 $ 0.86
Pro forma $ 0.16 $ 0.76 $ 0.80
The following table summarizes information about stock options outstanding
and options exercisable at January 31, 1998.
<TABLE><CAPTION>
Options Outstanding Options Exercisable
Number Weighted Weighted Number Weighted
Outstanding Average Average Exercisable Average
Range of At Jan. 31, Contractual Exercise at Jan. 31, Exercise
Exercise Prices 1998 Life Price 1998 Price
- ---------------- ----------- ----------- ---------- ----------- ----------
<S> <C> <C> <C> <C> <C>
$ 1.31 152,500 7.71 $ 1.31 114.100 $ 1.31
$ 1.50 - $ 5.44 210,800 7.40 2.41 174,800 2.54
$ 5.68 - $ 10.06 428,000 6.85 6.19 388,700 6.09
$ 11.50 - $ 17.69 306,500 9.03 16.43 158,000 16.79
$ 18.25 - $ 27.69 100,500 9.62 $ 20.59 5,000 $ 19.1
</TABLE>
Thrift/Profit-Sharing Plan
The Company has established a thrift/profit-sharing plan for substantially
all employees that 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. The
Company made contributions in the amounts of $70,000, $54,000 and $44,000 for
fiscal years 1997, 1996 and 1995, respectively.
22
<PAGE>
NOTE 8. QUARTERLY INFORMATION (UNAUDITED)
(in thousands, except per share data)
<TABLE><CAPTION>
Fiscal 1996 Quarters
---------------------------------
1st 2nd 3rd 4th
--- --- --- ---
<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
======== ======== ======== ========
Basic earnings per share $ 0.01 $ 0.01 $ 0.18 $ 0.67
======== ======== ======== ========
Diluted earnings per share $ 0.01 $ 0.01 $ 0.18 $ 0.64
======== ======== ======== ========
Fiscal 1997 Quarters
--------------------------------
1st 2nd 3rd 4th
--- --- --- ---
Net sales $ 43,838 $ 40,920 $ 51,057 $ 73,421
Gross income 15,822 15,424 20,390 27,011
Income before income taxes 2,224 1,958 4,610 6,915
Net income $ 1,324 $ 1,165 $ 3,468 $ 3,771
========= ======== ======== ========
Basic earnings per share $ 0.13 $ 0.11 $ 0.31 $ 0.34
========= ======== ======== ========
Diluted earnings per share $ 0.13 $ 0.10 $ 0.30 $ 0.33
========= ======== ======== ========
</TABLE>
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 10 present fairly, in all material
respects, the financial position of Paul Harris Stores, Inc. and its
subsidiaries at February 1, 1997 and January 31, 1998, and the results of
their operations and their cash flows for each of the three years in the
period ended January 31, 1998, 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
March 2, 1998
23
<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
<TABLE><CAPTION>
PAUL HARRIS STORES, INC.
<S> <C>
April 16, 1998 By: /S/ CHARLOTTE G. FISCHER
-----------------------------------
Charlotte G. Fischer, Chairman of the Board,
President and Chief Executive Officer
(Principal Executive Officer)
</TABLE>
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, President April 16, 1998
------------------------------
Charlotte G. Fischer and Chief Executive Officer
(Principal Executive Officer)
/S/ JOHN H. BOYERS Senior Vice President - Finance and April 16, 1998
------------------------------
John H. Boyers Treasurer (Principal Financial Officer)
/S/ KEITH L. HIMMEL, JR. Vice President - Finance, Controller and April 16, 1998
------------------------------
Keith L. Himmel, Jr. Corporate Secretary
(Principal Accounting Officer)
/S/ RICHARD A. FEINBERG PH.D. Director April 16, 1998
------------------------------
Richard A. Feinberg Ph.D.
/S/ LESLIE NATHANSON JURIS, PH.D. Director April 16, 1998
------------------------------
Leslie Nathanson Juris, Ph. D.
/S/ ROBERT LOGAN Director April 16, 1998
------------------------------
Robert Logan
/S/ JAMES T. MORRIS Director April 16, 1998
------------------------------
James T. Morris
/S/ JOHN E. PETERS Director April 16, 1998
------------------------------
John E. Peters
/S/ SALLY TASSANI Director April 16, 1998
------------------------------
Sally Tassani
</TABLE>
<TABLE><CAPTION>
EXHIBIT INDEX
<C> <S>
(3)(a)(i) Amended and Restated Articles of Incorporation of the Registrant dated September 8, 1992
(incorporated herein by reference from Form 8-K dated April 11, 1997).
(a)(ii) Amendment to Amended and Restated Articles of Incorporation dated July 6, 1993 (incor-
porated 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 (in-
corporated herein by reference from Form 8-K dated April 11, 1997).
(b) Restated Bylaws of the Registrant (incorporated herein by reference from Form 10-K for
the fiscal year ended February 1, 1997).
(4)(a) Indenture dated as of September 15, 1992 between the Registrant and IBJ Schroder Bank &
Trust Company, as trustee, relating to the Company's 11.375% Notes due 2000 (the ''In-
denture'') (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 Schro-
der 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 (incorporated 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, Mortgage and Other Loan Docu-
ments dated as of October 31, 1994 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).
(f) Second Modification of Secured Credit Agreement, Notes, Mortgage and Other Loan Docu-
ments 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, Mortgage and Other Loan Docu-
ments dated as of September 28, 1995 by and between the Registrant and LaSalle National
Bank (incorporated 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 Docu-
ments dated as of May 8, 1996 by and between the Registrant and LaSalle National Bank
(incorporated 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 Docu-
ments dated as of April 9, 1997 by and between the Registrant and LaSalle National Bank
(incorporated herein by reference from Form 10-K for the fiscal year ended February 1, 1997).
25
<PAGE>
(j) Rights Agreement between the Registrant and The First National Bank of Boston, as rights
agent, dated April 10, 1997 (incorporated herein by reference from Form 8-K dated April 11,
1997).
(10)(a) The Registrant's 1992 Non-Qualified Stock Option Plan (incorporated 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 Compensa-
tion Agreement both dated August 31, 1992 between the Registrant and Gerald Paul (incor-
porated 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 fiscal 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 proposed 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 (incorporated herein by reference from Form 10-K for the
fiscal year ended February 1, 1997).
(j) 1996 Stock Option and Incentive Plan, as amended
(incorporated herein by reference from Form S-8 as exhibit 4.3 dated June 26, 1997).
(k) Outside Directors Stock Option
(incorporated herein by reference from Form S-8 as exhibit 4.4 dated June 26, 1997).
(l)* Employment Agreement between the Company and Charlotte G. Fischer
dated February 1, 1998.
(23)* Consent of Independent Accountants
(27)* Financial Data Schedule.
- ----------------
* Filed with this report.
26
</TABLE>
<PAGE>
Exhibit 10 (l)
EMPLOYMENT AGREEMENT
THIS EMPLOYMENT AGREEMENT (the "Agreement"), is made as of the 1st day of
February 1998, by and between Paul Harris Stores, Inc., an Indiana corporation
(the "Company"), and Charlotte G. Fischer ("Executive").
Recitals
A. Executive has been employed with the Company since April 29, 1994, and
since January 29, 1995, Executive has served as the Company's President, Chief
Executive Officer and Chairman.
B. On April 18, 1994, the Company and Executive entered into a written
employment agreement governing the terms and conditions of Executive's
employment with the Company during the term beginning April 29, 1994, and
ending April 29, 1997, subject to extension and earlier termination as set out
in the Employment Agreement.
C. On June 17, 1996, the Company and Executive entered into an Amended
and Restated Employment Agreement (the "June 1996 Employment Agreement")
governing the terms and conditions of Executive's employment with the Company
during the term beginning June 17, 1996, and ending January 28, 2000. The
Company and Executive signed an Amendment to Employment Agreement on November
22, 1996.
D. The Company and Executive now desire to extend the term of Executive's
employment with the Company and to enter into a new employment agreement
governing her employment with the Company.
<PAGE>
AGREEMENT
In consideration of the matters stated in the Recitals, the parties'
covenants contained in this Agreement and the acts to be performed under this
Agreement, the Company and Executive agree as follows:
1. EMPLOYMENT. The Company shall employ Executive on the terms and
conditions set forth in this Agreement. During her employment under this
Agreement, Executive shall hold the offices of Chairman of the Board of
Directors of the Company and Chief Executive Officer of the Company, and she
shall render such services and perform such duties for the Company and the
Company's subsidiaries (together, the "Company Group") as are customarily
performed by Chairmen and Chief Executive Officers, including, without
limitation, those services and duties consistent with her position as may from
time to time be assigned to her by the Company's Board of Directors. In
addition, Executive shall hold such offices, directorships and other positions
with the Company Group as are consistent with her status to which she may from
time to time be elected or appointed. Executive's authority shall be subject
only to the direction and control of the Company's Board of Directors.
Executive shall serve the Company Group faithfully, diligently and to the best
of her ability, and she shall devote her full working time, attention, energy
and skills exclusively to the business and affairs of the Company Group and to
the promotion and advancement of its interests, except that she may engage in
such civic and charitable activities as do not interfere with her obligations
under this Agreement, and she may hold such directorships as are permitted
pursuant to Section 6(b) of this Agreement.
2
<PAGE>
2. TERM OF EMPLOYMENT; TERMINATION OF AGREEMENT.
(a) The term of Executive's employment under this Agreement shall
commence on February 1, 1998 (the "Commencement Date"), and shall end on
January 31, 2003 (the "Termination Date"), except that the term shall end
earlier than the Termination Date: (i) on the date of Executive's death; (ii)
if Executive shall have been unable with or without reasonable accommodation
to perform any material duties under this Agreement by reason of physical or
mental disability (with such disability to be determined by a qualified
physician selected by the Company's Board of Directors) for a period of more
than three (3) consecutive months, or a period of more than one hundred eighty
(180) days in the aggregate in any eighteen (18)-month period, on the date on
which the Company shall elect to terminate her employment by reason of such
disability if she shall not have returned to the full-time performance of her
material duties after thirty (30) days' advance notice by the Company of such
election to terminate; (iii) upon at least one hundred eighty (180) days'
prior written notice from Executive to the Company; or (iv) on the date on
which the Company shall elect to terminate Executive's employment for "cause,"
as defined in Section 2(b) below.
(b) For purposes of this Agreement "cause" means any one or more of the
following: (i) Executive's willful and continued failure to perform her
material duties with the Company (other than any such failure resulting from
her physical or mental disability or any failure occurring after she has given
notice under Section 2(d)) in the opinion of a majority of the Company's Board
of Directors after the Company delivers to her written demand that identifies
in detail the particular manner in which the Company
3
<PAGE>
believes that she has not performed her material duties and accords to her a
reasonable opportunity (but not less than thirty (30) days) thereafter to cure
such failure; (ii) Executive's engaging in willful misconduct that, in the
opinion of a majority of the Company's Board of Directors, is materially and
demonstrably economically injurious to the Company, including, but not limited
to, her conviction of or guilty plea to any felony crime; or (iii) her
material breach of any material provision of this Agreement. The Company may
not terminate Executive's employment for cause unless (A) the Company delivers
to her advance written notice, (B) a majority of the Board of Directors of the
Company acts to terminate her employment for cause, (C) she is afforded a
hearing before the Company's Board of Directors at which she may be
represented by counsel, and (D) she is afforded at least thirty (30) days'
opportunity to cure.
(c) In the event that her employment terminates due to an event described
in Section 2(a), the Company shall: (i) pay Executive's Base Salary (as
defined in Section 3(a)) that accrued prior to the termination of her
employment; (ii) pay any bonus to which she may be entitled to pursuant to
Section 3(b); (iii) perform its obligations under any unexercised options
granted to her; and (iv) reimburse expenses incurred prior to such termination
in accordance with Section 5 of this Agreement.
(d) If during the term of this Agreement, (i) Executive's title or
responsibilities are reduced so that she no longer serves as Chairman and
Chief Executive Officer reporting to, and performing services and duties
consistent with such positions and substantially similar to past practice
assigned to her by, the Company's Board of Directors; (ii) Executive's
compensation is reduced in violation of this Agreement;
4
<PAGE>
(iii) the Company terminates Executive's employment other than in accordance
with Sections 2(a)(ii) or 2(b); (iv) the Company takes action that materially
adversely affects Executive's participation in the Company's benefit and
incentive plans (including but not limited to the Bonus Plan and the Plan, as
such terms are defined in Section 3); (v) the Company commits any material
breach of any material provision of this Agreement; (vi) the Company fails to
obtain the assumption of this Agreement by any successor or assign to the
Company; or (vii) the Company or its successor fails to enter into an
agreement with Executive that is substantially similar to this Agreement with
respect to a Change in Control (as defined in Section 7) of the Company or its
successor occurring thereafter, then Executive may, after written notice to
the Board of Directors, and after at least thirty (30) days' opportunity to
cure, elect to terminate her employment on the ground that such action shall
be deemed a constructive termination of the term of employment under this
Agreement without cause, thereby entitling her to the remedies available to
her under Section 2(e) below. Such termination of employment shall not be
considered a termination of employment by Executive in violation of the
Agreement before the end of its term.
(e) In the event that the Company terminates Executive's employment
during the term of this Agreement without "cause," as defined in Section 2(b),
the Company shall be obligated to pay Executive her Base Salary as defined in
Section 3(a) that accrued prior to her termination of employment. In
addition, the Company shall pay Executive the Base Salary to which she would
have been entitled through the Termination Date had her employment not been
terminated; provided, however, that the
5
<PAGE>
Base Salary payment to Executive under this Section 2(e) shall be no less
than $1,750,000. The Company also shall be obligated to pay Executive (i) any
unpaid bonus to which she may be entitled pursuant to Section 3(b), and (ii) a
bonus for the fiscal year during which her employment terminates equal to the
bonus to which she would be entitled under Section 3(b) for such year based on
her Base Salary and assuming that she had worked to fiscal year-end. The
Company shall also be obligated to perform its obligations under any
unexercised options granted to Executive and to reimburse expenses incurred
prior to the termination of her employment.
(f) If her employment with the Company terminates during the term of this
Agreement, the Company shall, in all events and regardless of the
circumstances under which Executive's employment with the Company ended, take
reasonable steps to obtain coverage for Executive and her dependents under the
Company's group health plan for no less than thirty-six (36) months following
the end of Executive's employment. If the Company cannot cover Executive and
her dependents under its group health plans, the Company will secure
substantially comparable coverage for Executive and her dependents. The
Company shall pay or reimburse Executive for the cost of coverage under this
Section 2(f), unless she terminates her employment voluntarily (and for a
reason other than constructive termination under Section 2(d)) or the Company
terminates her employment for cause under Section 2(b), in which cases,
Executive shall be responsible for the cost of such coverage. After the
conclusion of the thirty-six (36)- month period of continued health plan
coverage hereunder, Executive shall be entitled to
6
<PAGE>
receive continued group health plan coverage under and in accordance with the
Consolidated Omnibus Budget Reconciliation Act of 1985, as amended ("COBRA").
3. COMPENSATION.
(a) As compensation for her services (including service as an officer and
director of members of the Company Group, if Executive is so appointed or
elected), the Company shall pay Executive the following: (i) a salary payable
in accordance with the Company's normal payroll practices ("Base Salary"), for
the twelve (12)-month period commencing on February 1, 1998, and each
anniversary thereof during the term of the Agreement, as follows:
For the Period Amount of Base Salary
-------------- ---------------------
February 1, 1998 - January 31, 1999 -- $ 700,000
February 1, 1999 - January 31, 2000 -- $ 775,000
February 1, 2000 - January 31, 2001 -- $ 850,000
February 1, 2001 - January 31, 2002 -- $ 925,000
February 1, 2002 - January 31, 2003 -- $ 1,000,000;
and (ii) bonuses payable in accordance with Section 3(b). "Base Salary," as
used in this Agreement, means the Base Salary for the applicable twelve (12)-
month period as set forth in the preceding sentence and prior to any
reductions for salary deferred pursuant to any deferred compensation plan or
for contributions to a plan qualifying under Section 401(k) of the Internal
Revenue Code of 1986, as amended (the "Code") or contributions to a cafeteria
plan under Section 125 of the Code.
7
<PAGE>
(b) During the term of this Agreement, the Company shall pay Executive
bonus compensation as follows:
(i) in recognition of her past service and accomplishments as President
and Chief Executive Officer of the Company, the Company shall pay Executive a
cash bonus of $1.0 million dollars, payable as follows: $500,000 during
calendar year 1997 (paid on December 31, 1997), and $500,000 on or before
February 28, 1998 (paid on February 6, 1998);
(ii) With respect to the Company's fiscal year ending January 31, 1999, if
the Company has pretax earnings in excess of $200,000, the Company shall pay
Executive a bonus equal to the greater of $200,000 or the cash amount
(determined as a percentage of her Base Salary of $700,000) based on the
Company's pretax earnings, according to the following schedule:
If Pretax Earnings Are: Then Cash Bonus Is:
----------------------- -------------------
At least $17.5 million but less than $19.4 million 80% of Base Salary
At least $19.4 million but less than $21.3 million 90% of Base Salary
At least $21.3 million but less than $22.6 million 100% of Base Salary
At least $22.6 million but less than $23.9 million 120% of Base Salary
At least $23.9 million but less than $25.2 million 140% of Base Salary
At least $25.2 million but less than $26.6 million 170% of Base Salary
At least $26.6 million---------------------------- 200% of Base Salary
Executive's bonuses for the Company's fiscal years beginning after January 31,
1999, and during the term of this Agreement shall be negotiated by Executive
and the Compensation and Stock Option Committee ("Compensation Committee") of
the Company's Board of Directors in good faith at the commencement of each
fiscal year and shall be based on a formula, pretax earnings targets and other
terms and conditions substantially similar to the formula, pretax earnings
targets and other terms and conditions
8
<PAGE>
set forth above and consistent with past practice, including (i) a minimum
cash bonus of $200,000 each fiscal year if the Company has pretax earnings in
excess of $200,000; and (ii) a larger bonus amount based on pretax earnings
that shall be equal to at least 80% and up to $200% of Executive's Base Salary
for such fiscal year, provided, however, that the lowest pretax earnings of
the Company that will qualify Executive for payment of a larger bonus under
this clause (ii) shall be no greater than 82.16% of the Company's budgeted
(the term "budgeted," as used herein, shall refer to the pretax earnings
budget for the Company as proposed by management and approved by the Company's
Board of Directors) pretax earnings for the current fiscal year. In the event
that Executive's employment under this Agreement terminates under Section 2(a)
by reason of Executive's death or disability, she shall be entitled to receive
a bonus for the fiscal year in which the termination occurs based on the Base
Salary that accrued prior to the termination of her employment. References to
the Company's "fiscal year" in this Agreement mean the fiscal year commencing
each February 1.
(iii) If during the term of this Agreement, the Company adopts a cash
bonus performance plan for executive officers (the "Bonus Plan") that is
subject to approval of the Company's shareholders meeting the requirements of
Section 162(m) of the Code, and if on or before June 30 of the fiscal year
ending January 31, 1999, and April 30 of any fiscal year thereafter during the
term of this Agreement, Executive elects to participate under the Bonus Plan
for such fiscal year, then for such fiscal year, Executive's entitlement to
and the Company's payment to Executive of cash bonuses shall be
9
<PAGE>
governed by the Bonus Plan, and the provisions of the Bonus Plan shall
supersede Section 3(b)(ii) with respect to Executive's cash bonus for such
fiscal year. For any fiscal year during the term of this Agreement that
Executive does not so elect to participate under the Bonus Plan, then
Executive's cash bonus shall be governed by Section 3(b)(ii) of this
Agreement, and the provisions of Section 3(b)(ii) shall supersede the Bonus
Plan with respect to Executive's cash bonus for such fiscal year.
(c)(i) Executive and the Company confirm that, prior to the effective date
of this Agreement, the Company had granted to Executive the stock options
listed in Appendix A to this Agreement, which Appendix A is incorporated
herein and made a part hereof. Executive's right to purchase shares under the
options listed in Appendix A may be exercised while Executive is employed with
the Company and thereafter, as set forth in the stock option plans governing
the stock options and the stock option agreements between the Company and
Executive that relate to each stock option.
(ii) As of the last day of each fiscal year during the term of this
Agreement, the Company shall grant to Executive a fully vested immediately
exercisable non-qualified option to purchase a number of shares of the
Company's Common Stock under and pursuant to the Company's 1996 Stock Option
and Incentive Plan (together with any successor thereto that meets the
requirements of Section 162(m) of the Code, the "Plan"), based on the
Company's "annual total return to shareholders" for such fiscal year, as
compared to the "women's specialty peer group." For purposes of this section,
"annual total return to shareholders" means the return to common shareholders
as represented by common stock share price appreciation plus dividends paid on
one share of common
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<PAGE>
stock during such fiscal year. The term "women's specialty peer group" means
the group of stores listed on the attached Appendix B, which Appendix B is
incorporated herein and made a part hereof. The annual total return to
shareholders of the Company shall be measured with respect to the applicable
fiscal year of the Company. The annual total return to shareholders of the
women's specialty peer group members shall be measured with respect to a
twelve (12)-month period corresponding to the applicable fiscal year of the
Company and based on factors as reported by an independent reporting service.
With respect to each fiscal year of the Company during the term of this
Agreement, the Compensation Committee shall review Appendix B prior to the
commencement of such fiscal year and shall add or delete stores from such
Appendix B in good faith consistent with the intent of the parties that
Appendix B reflect the Company's representative peer group provided that the
number of stores listed on Appendix B shall not be less than fourteen nor more
than twenty. The number of shares of the Company's Common Stock subject to
such option for each fiscal year shall be equal to the number of shares which
results in a dollar value for the option (using the Black-Scholes valuation
formula based on the Company's historical volatility ) determined according to
the following schedule based on the Company's annual total return to
shareholders percentile ranking for such fiscal year and Executive's Base
Salary for such fiscal year:
Percentile Ranking Dollar Value of Option
------------------ ----------------------
At least 50th but less than 75th 50% of Base Salary
Equal to 75th 100% of Base Salary
Above 75th 150% of Base Salary
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<PAGE>
If the Company is below the 50th percentile based on its annual total return
to shareholders as compared to the women's specialty peer group for any fiscal
year during the term of this Agreement, then Executive shall be granted a
fully vested and immediately exercisable option to purchase 25,000 shares of
the Company's Common Stock under and pursuant to the Plan as of the last day
of such fiscal year.
(iii) As to any and all stock options that the Company grants to Executive
under Section 3(c)(ii) of this Agreement or under the Plan and notwithstanding
anything to the contrary in the Plan, any other stock option plan of the
Company, or any stock option agreement between Executive and the Company
(including any stock option agreement that forms a part of any employment
agreement between Executive and the Company), if Executive's employment with
the Company is terminated by reason of death, disability or retirement, or if
Executive's termination of employment is due to an event described in
Section 2(d), 2(e) or 7(b) of this Agreement, Executive (or in the event of
her death, the holder of the stock option) may exercise any stock option
granted to her by the Company under Section 3(c)(ii) of this Agreement or
under the Plan, to the extent vested and exercisable, at any time during the
remaining term of the stock option. Further, if Executive's termination of
employment is due to any reason or event other than those set forth in the
preceding sentence, and provided her termination of employment is not for
"cause," as defined in Section 2(b), then, notwithstanding anything to the
contrary in the Plan, any other stock option plan of the Company or any stock
option agreement between Executive and the Company (including any stock option
agreement that forms a part of any employment agreement between Executive and
the Company), Executive may
12
<PAGE>
exercise any stock option granted to her by the Company under
Section 3(c)(ii) of this Agreement or under the Plan, to the extent vested and
exercisable, for the period of at least six (6) months immediately following
her termination of employment, but in no event after the expiration date of
the subject option.
(d)(i) The Company shall grant an award to Executive of at least the
number of shares of the Company's Common Stock listed below as of the date of
Executive's completion of the following performance goals provided that
Executive has completed each such performance goal on or before January 31,
1999, for Executive to qualify for each such award:
Goals Shares
----- ------
Succession Planning. Recruitment of an individual 37,500
or individuals at the executive officer level to perform
senior merchandising/marketing functions and
operation functions; and
Customer Assessment. Initiation of an analysis of the 12,500
Company's current customer base (emphasizing purchase
behavior of private label and general credit card customers)
and development of a plan that will identify target customer
segments and how to promote sales to those customer
segments and the sales goals per average customer.
The attainment of the above performance goals shall be determined by the
Compensation Committee in good faith. The shares of Common Stock awarded
pursuant to this Section 3(d)(i) shall vest in accordance with the following
vesting schedule, provided Executive is an employee on each anniversary date:
eighty percent (80%) of the shares shall vest on the first anniversary of the
date of grant; an additional ten percent (10%) of the shares shall vest on the
second anniversary of the date of grant; and the remaining ten percent
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<PAGE>
(10%) of the shares shall vest on the third anniversary of the date of grant,
so that the award shall be fully vested on the third anniversary of the date
of grant. Any shares that do not vest because Fisher is not an employee of
the Company on such anniversary date shall be forfeited unless Executive's
termination of employment is due to death, disability or an event described in
Section 2(d), 2(e) or 7(b) of this Agreement, in which cases all shares shall
become fully vested as of the date of termination of employment.
(ii) With respect to the Company's fiscal years beginning after January
31, 1999, and during the term of this Agreement, the Company shall grant to
Executive by the end of each fiscal year an award of at least 50,000 shares of
the Company's Common Stock subject to terms and restrictions substantially
similar to those described in the foregoing Section 3(d)(i), as negotiated by
Executive and the Compensation Committee in good faith at the commencement of
each fiscal year; provided, however, all awards shall become fully vested no
later than January 31, 2003, and any performance goals shall be consistent
with the performance goals described in the foregoing Section 3(d)(i) and
based on reasonable and attainable strategic, business and financial
objectives.
(iii) In the event that on or before June 30 of the fiscal year ending
January 31, 1999, and April 30 of any fiscal year thereafter during the term
of this Agreement, Executive elects to participate under the portion of the
Plan governing performance-based awards of restricted shares of the Company's
Common Stock, then Executive's entitlement to restricted stock awards for such
fiscal year shall be governed by the terms of the Plan, and the provisions of
the Plan shall supersede the foregoing Sections 3(d)(i) and 3(d)(ii),
whichever is applicable, with respect to awards of restricted shares of the
14
<PAGE>
Company's Common Stock for such fiscal year during the term of this
Agreement. If Executive does not so elect to participate under the portion of
the Plan governing performance-based awards of restricted stock under the
Plan, then Executive's entitlement to restricted stock awards for such fiscal
year shall be governed by the terms of Section 3(d)(i) or (ii), whichever is
applicable, and the provisions of the foregoing Section 3(d)(i) or (ii),
whichever is applicable, shall supersede the terms of the Plan with respect to
awards of restricted stock for such fiscal year.
(e) The Company shall provide a Supplemental Executive Retirement Plan
for Executive on terms to which the Company and Executive shall agree in good
faith and consistent with usual and customary business practices for chief
executive officers.
4. BENEFITS. During Executive's employment under this Agreement, the
Company shall provide her with such life, disability, health insurance and
other benefits as are provided to the Company's key executives. Executive
also shall be entitled to no less than four (4) weeks' paid vacation annually.
If, during the term of this Agreement, the Board of Directors adopts a
comprehensive compensation program for key executives of the Company that
addresses employee welfare benefits, including insurance benefits, that are to
be provided to the Company's executive employees, Executive's employee welfare
benefits will be governed by that program from and after its adoption. In no
event shall Executive's employee welfare benefits be less than those that the
Company provides to its executive employees generally.
5. REIMBURSEMENT OF EXPENSES AND PERQUISITES. During her employment, the
Company will reimburse Executive for her reasonable travel and other expenses
incident to her rendering services under this Agreement in conformity with the
Company's regular policies
15
<PAGE>
from time to time in effect regarding reimbursement of expenses. In addition
Executive shall be entitled to the following:
(a) Reimbursement for legal fees incurred by Executive on and after
December 22, 1997, in connection with the negotiation and drafting of this
Agreement;
(b) Reimbursement for travel expenses of Executive's spouse when
accompanying Executive on business trips;
(c) Reimbursement for expenses incurred in connection with routine legal
assistance, financial planning and tax return preparation assistance;
(d) Payment or reimbursement of country club dues;
(e) Payment or reimbursement for annual physical examination; and
(f) Company automobile, as selected by Executive, and reimbursement for
maintenance, gas and insurance for such automobile.
Payments to Executive for such expenses will be made upon presentation of
expense vouchers that are in sufficient detail to identify the nature of the
expense, the amount of the expense, the date the expense was incurred and to
whom payment was made to incur the expense.
6. CONFIDENTIALITY AND NONCOMPETITION. Executive acknowledges that, in
the course of her employment, she will occupy a position of trust and
confidence with the Company Group. All confidential information pertaining to
the prior, current or future business of any member of the Company Group
(excluding publicly available information, in substantially the form in which
it is publicly available, unless such information is publicly available by
reason of an unauthorized disclosure, and excluding information known to
Executive from sources other than her employment with the Company) constitutes
valuable and confidential assets of the Company Group to which Executive will
have access solely as a result of her positions with the
16
<PAGE>
Company. Executive acknowledges that her agreement to comply with this
Section 6 is a material inducement to the Company to enter into this
Agreement.
(a) Executive shall never use, divulge, furnish or make accessible to any
third person or organization, other than legal counsel for Executive or any
member of the Company Group or in the proper course of performing her duties
under this Agreement and in connection with the business of any member of the
Company Group or as required by law, any confidential or proprietary
information concerning any member of the Company Group or its businesses or
affairs, and she shall not disparage or deprecate any member of the Company
Group or its businesses or affairs or any officer or director of any member of
the Company Group (it being understood that statements Executive makes to
members of the Board of Directors of the Company or any member of the Company
Group or to the respective officers or directors involved or to his or her
superior are not intended to be, and shall not be, encompassed by the final
clause of this sentence). The Company and the members of the Board of
Directors of the Company shall never use, divulge, furnish or make accessible
to any third person or organization other than legal counsel for Executive or
any member of the Company Group or in the proper course of its business or as
required by law any confidential or proprietary information concerning
Executive or her businesses or affairs, and the Company and the members of the
Board of Directors of the Company shall not disparage or deprecate Executive
or her businesses or affairs. The Company shall use its best efforts to
assure that its officers comply with the promises of this Section 6(a).
17
<PAGE>
(b) During her employment with the Company, and if and only if (i)
Executive terminates her employment in violation of this Agreement before the
end of its term (and for a reason other than an event described in Section
2(a) or 7(b) or her constructive termination as described in Section 2(d)), or
(ii) the Company terminates her employment for "cause," as defined in Section
2(b), then for an additional period of one (1) year following the termination
of her employment, Executive shall not, directly or indirectly, individually
or on behalf of other persons, (A) engage or be interested (whether as owner,
stockholder, partner, lender, consultant, employee, agent or otherwise) in any
business, activity or enterprise which is then competitive with the business
of any division or operation of the Company Group in any region of the United
States in which such business is being conducted, it being understood that the
Company Group currently is engaged in the business of operating retail women's
apparel specialty stores, or (B) hire or employ any person who has been an
employee, representative or agent of any member of the Company Group at any
time during the twelve (12)-month period preceding the termination of
Executive's employment, or solicit, aid or induce such person to leave his or
her employment with any member of the Company Group to accept employment with
another person or entity. Executive's ownership of less than 5% of any class
of stock in a corporation or, during her employment with the Company, her
membership on any board of directors that the Board of Directors of the
Company then believes does not materially interfere with her material duties
to the Company and is not inimical to the interests of the Company shall not
be deemed a breach of this Section 6(b). During her employment with the
Company, Executive shall not accept an
18
<PAGE>
appointment to a board of directors for an organization outside the Company
Group that would be materially inconsistent with her performing her material
obligations to the Company, and she shall inform the Company's Board of
Directors of any and all of her memberships on such boards of directors for an
organization outside the Company Group.
(c) Executive's breach or threatened breach of any provision contained in
this Section 6 will result in immediate and irreparable injury to the Company
for which the Company would not have an adequate remedy at law. Accordingly,
the Company shall be entitled, in addition to all other remedies, to a
temporary and permanent injunction and/or a decree for specific performance of
the terms of this Section 6, without the necessity of showing any actual
damage or posting bond or furnishing other security.
(d) The provisions of this Section 6 shall survive the termination or
expiration of this Agreement (without regard to the reasons therefor), and are
in addition to and independent of any agreements or covenants contained in any
other agreement and to any rights that the Company may have at law or in
equity.
7. CHANGE IN CONTROL. If a Change in Control occurs during the term of
this Agreement, the Executive shall be entitled to the benefits described in
Section 7(b) if Executive's employment is terminated or constructively
terminated (as defined in Section 2(d)) coincident with or subsequent to the
Change in Control and during the term of this Agreement for reasons other than
those stipulated in Section 2(b) of the Agreement.
(a) Definition of Change in Control. As used in this Agreement, "Change
in Control" of the Company means:
19
<PAGE>
(i) The acquisition by any individual, entity or group (within the
meaning of Section 13(d)(3) or 14(d)(2) of the Securities Exchange Act of
1934, as amended (the "Exchange Act")) (a "Person") of beneficial ownership
(within the meaning of Rule 13d-3 promulgated under the Exchange Act of
twenty-five percent (25%) or more of either (A) the then outstanding shares of
all classes of common stock of the Company (the "Outstanding Company Common
Stock") or (B) the combined voting power of the then outstanding voting
securities of the Company entitled to vote generally in the election of
directors (the "Outstanding Company Voting Securities"); provided, however,
that the following acquisitions shall not constitute a Change in Control:
(1) any acquisition directly from the Company (excluding an acquisition by
virtue of the exercise of a conversion privilege); (2) any acquisition by the
Company; (3) any acquisition by any employee benefit plan (or related trust)
sponsored or maintained by the Company or any corporation controlled by the
Company; or (4) any acquisition by any corporation pursuant to a
reorganization, merger or consolidation, if following such reorganization,
merger or consolidation, the conditions described in Section 7(a)(iv)(A),
(iv)(B) and (iv)(C) are satisfied.
(ii) Individuals who, as of March 23, 1998, constitute the Board of
Directors of the Company (the "Incumbent Board") cease for any reason to
constitute at least a majority of the Board of Directors of the Company (the
"Board"); provided, however, that any individual becoming a director
subsequent to March 23, 1998, whose election, or nomination for election by
the Company's
20
<PAGE>
shareholders, was approved by a vote of at least two-thirds of the directors
then comprising the Incumbent Board shall be considered as though such
individual were a member of the Incumbent Board, but excluding for this
purpose, any such individual whose initial assumption of office occurs as a
result of either an actual or threatened election contest (as such terms are
used in Rule 14a-11 of Regulation 14A promulgated under the Exchange Act) or
other actual or threatened solicitation of proxies or consents by or on behalf
of a Person other than the Board; or
(iii) Approval by the shareholders of the Company of a complete
liquidation or dissolution of the Company; or
(iv) Approval by the shareholders of the Company of a reorganization,
merger or consolidation ("Restructuring") into a resulting corporation or the
first to occur of the sale or other disposition (in one transaction or a
series of transactions) of all or substantially all of the assets of the
Company or the approval by the shareholders of the Company of any such sale or
disposition ("Asset Sale") to a purchasing corporation, unless following such
Restructuring or Asset Sale (A) more than sixty percent (60%) of,
respectively, the then outstanding shares of common stock of the resulting
corporation or purchasing corporation, as the case may be ("successor
corporation"), and the combined voting power of the then outstanding voting
securities of the successor corporation entitled to vote generally in the
election of directors is then beneficially owned, directly or indirectly, by
all or substantially all of the
21
<PAGE>
individuals and entities who were the beneficial owners, respectively, of the
Outstanding Company Common Stock and Outstanding Company Voting Securities
immediately prior to such Restructuring or Asset Sale, as the case may be, in
substantially the same proportions as their ownership, immediately prior to
such Restructuring or Asset Sale, of the Outstanding Company Common Stock and
Outstanding Company Voting Securities, as the case may be (for purposes of
determining whether such percentage test is satisfied, there shall be excluded
from the number of shares and voting securities of the successor corporation
owned by the Company's stockholders, but not from the total number of
outstanding shares and voting securities of the successor corporation, any
shares or voting securities received by any such shareholder in respect of any
consideration other than shares or voting securities of the Company), (B) no
Person (excluding the Company and any employee benefit plan or related trust
of the Company or the successor corporation and any Person beneficially
owning, immediately prior to such Restructuring or Asset Sale, directly or
indirectly, twenty-five percent (25%) or more of the Outstanding Company
Common Stock or Outstanding Company Voting Securities, as the case may be)
beneficially owns, directly or indirectly, twenty-five percent (25%) or more
of, respectively, the then outstanding shares of common stock of the successor
corporation or the combined voting power of the then outstanding voting
securities of the successor corporation entitled to vote generally in the
election of directors, and (C) at least a majority of the members of the board
of directors of the successor corporation were members of the
22
<PAGE>
Incumbent Board at the time of the execution of the initial agreement or
action of the Board providing for such Restructuring or Asset Sale.
(b) CHANGE IN CONTROL BENEFITS. The following benefits, less any amounts
required to be withheld therefrom under any applicable federal, state or local
income tax, other tax, or social security laws or similar statutes, shall be
paid to Executive upon any termination of her employment with the Company or
upon the constructive termination of her employment (as defined in Section
2(d)) coincident with or subsequent to a Change in Control:
(i) Within ten (10) days following such a termination, Executive shall be
paid, at her then effective Base Salary, for services performed through the
date of her termination. In addition, the Company shall: (A) pay any bonus
to which she may be entitled to pursuant to Section 3(b); (B) perform its
obligations under any unexercised options granted to her; and (C) reimburse
expenses incurred prior to such termination in accordance with Section 5 of
this Agreement.
(ii) Within ten (10) days following such a termination, Executive shall
be paid a lump sum payment of an amount equal to two and nine-tenths (2.9)
times the greater of her then current Base Salary or her Base Salary for the
most recent fiscal year ended prior to such termination; provided, that the
present value of the amount of any payment under this subparagraph (ii) shall
be reduced by the full amount of the present value of all other payments in
the nature of compensation to or for the benefit of Executive which are deemed
contingent upon a change (A) in the ownership or effective control of the
Company or (B) in the ownership of a substantial portion of the assets of the
Company as
23
<PAGE>
such concepts are defined by Section 280G of the Code and are, from time to
time, interpreted by applicable regulations and rulings of the Internal
Revenue Service; provided further, that the present value of the amount of any
payment under this subparagraph (ii) shall not be reduced by any payments not
treated as parachute payments under Code Section 280 G, including, but not
limited to, payments under the Company's tax-qualified plans. The sole
purpose of the limitation imposed by this proviso is to preclude the amount
payable pursuant to this subparagraph (ii) from being characterized as a
"parachute payment" under Section 280G of the Code. It is the intention of
the parties that this subparagraph be interpreted and construed in a manner so
as to allow the greatest dollar payment to Executive without such payment
being classified as a "parachute payment," as such term is defined by
Section 280G of the Code. The Company and Executive agree that any dispute
between them as to the amount of the payment provided under this
subparagraph (ii) and the application of the limitation of Section 280G of the
Code shall be resolved by an opinion of competent counsel selected by and
acceptable to the Company and Executive. Counsel's fee for the opinion
required herein shall be paid by the Company.
(iii) Executive shall be paid a cash bonus under Section 3(b) for the
fiscal year in which such termination occurs, which shall be equal to the
greater of her bonus for the most recent fiscal year ended prior to such
termination or her bonus for the fiscal year in which such termination occurs
based on her then current Base Salary, and assuming that she had been employed
by the Company for the entire fiscal year. The bonus shall be
24
<PAGE>
paid to Executive in a lump-sum payment within sixty (60) days following the
end of the fiscal year in which such termination occurs.
(iv) Executive shall receive continued Company-paid coverage under the
Company's insured or self-insured group health insurance plan for thirty-six
(36) months following the date of her termination, and under the Company's
other insured or self-insured welfare benefit plans for a period of one (1)
year following the date of her termination. After the conclusion of the
thirty-six (36)-month period of continued health coverage hereunder, Executive
shall be entitled to receive group health plan coverage under and in
accordance with COBRA.
Payment in accordance with subparagraphs (i), (ii), (iii) and (iv) shall
be deemed to constitute a full settlement and discharge of any and all
obligations of the Company to Executive arising out of her employment with the
Company and the termination or constructive termination thereof, except for
any vested rights Executive may then have under any insurance, pension,
supplemental pension, retirement savings, profit sharing, employee stock
ownership, or stock option plans sponsored or made available by the Company,
rights to reimbursement of expenses under this Agreement and any stock option
or restricted stock agreements between Executive and the Company.
8. NO CONFLICTING AGREEMENT. Executive and the Company represent and
warrant to each other that they have no obligations to any other person or
entity that would affect or conflict with any of their obligations under this
Agreement.
9. NOTICES. Any notice or other communication required or permitted to
be given under this Agreement shall be deemed to have been duly given when
personally delivered
25
<PAGE>
or when sent by certified mail, return receipt requested, postage prepaid, as
follows: (a) If to the Company, at the following address: Paul Harris Stores,
Inc., 6003 Guion Road, Indianapolis, Indiana 46254, Attention: Secretary of
the Company; and (b) if to Executive, at the following address: 9815
Summerlakes Drive, Carmel, Indiana 46032. Either party may change its or her
address for the purpose of this Section by written notice similarly given.
10. SEVERABILITY. If any clause or provision of this Agreement shall be
held to be invalid or unenforceable, such clause or provision shall be
construed and enforced as if it had been more narrowly drawn so as not to be
invalid or unenforceable, and such invalidity and unenforceability shall not
affect or render invalid or unenforceable any other provision of this
Agreement.
11. INDEMNIFICATION. The Company shall indemnify and hold Executive
harmless from and against all claims, actions, causes of action and suits
against her arising out of her performance of, or failure to perform, any acts
on behalf of the Company or the Company Group during the period in which she
was an officer, director or employee of the Company or of any member of the
Company Group to the fullest extent permitted under applicable law. The
Company's obligations under this Section 11 shall survive the termination of
this Agreement.
12. MISCELLANEOUS. Except as otherwise expressly provided herein, this
Agreement sets forth the parties' final and entire agreement, and it
supersedes the June 1996 Employment Agreement and any and all prior
understandings with respect to the subject matter hereof. The June 1996
Employment Agreement is hereby terminated and of no further force or effect.
The headings in this Agreement are for convenience of reference only and shall
not affect the interpretation or construction of this Agreement. This
Agreement shall inure to the benefit of
26
<PAGE>
and be binding upon the Company, its successors and assigns and upon
Executive, and her heirs, administrators and legal representatives. The
Company will insist and require that any successor or assign to all or
substantially all of the business or assets of the Company, by agreement in
form and substance satisfactory to Executive, expressly, absolutely and
unconditionally assume and agree to perform the Company's obligations under
this Agreement in the same manner and to the same extent that the Company
would be required to perform them if no such succession or assignment had
taken place. As used in this Agreement, "Company" shall mean the Company as
herein before defined and any successor or assign to the business or assets
which executes and delivers the agreement provided for in this Section 12 or
which otherwise becomes bound by all the terms and provisions of this
Agreement by operation of law. The parties' rights and obligations under this
Agreement shall survive the termination of this Agreement and Executive's
employment under this Agreement to the extent necessary to the intended
preservation of such rights and obligations and to the extent that any
performance by the parties is required following the termination of this
Agreement. This Agreement may be executed in two or more identical
counterparts, all of which shall be considered an original of this Agreement.
No failure or delay by either party in exercising any right, option, power or
privilege under this Agreement shall operate as a waiver thereof, nor shall
any single or partial exercise thereof preclude any other or further exercise
thereof, or the exercise of any other right, option or privilege. This
Agreement can be changed, waived or terminated only by a writing signed by
Executive and the Company and shall be governed by the internal laws of the
State of Indiana (without reference to its rules as to conflicts of laws). In
the event of a dispute between Executive and the Company over this Agreement
or either party's performance or nonperformance under, or alleged breach of,
this
27
<PAGE>
Agreement and Executive obtains a final judgment in her favor from a court of
competent jurisdiction from which no appeal may be taken, whether because the
time to do so has expired or otherwise, or her claim is settled by the Company
prior to the rendering of such a judgment, all reasonable legal fees and
expenses incurred by Executive in contesting or disputing this Agreement or
either party's performance or nonperformance under, or alleged breach of, this
Agreement, in seeking to obtain or enforce any right or benefit provided for
in this Agreement, or in otherwise pursuing her claims will be promptly paid
by the Company.
IN WITNESS WHEREOF, the parties have signed this Agreement as of the
date first above written.
PAUL HARRIS STORES, INC.
By /s/ Sally Tassani
---------------------------
Name: Sally Tassani
Title: Director and Chairman of the
Compensation Committee -
Board of Director
/s/ Charlotte G. Fischer
-----------------------------
Charlotte G. Fischer
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APPENDIX A
----------
CHARLOTTE G. FISCHER
PAUL HARRIS STORES
STOCK OPTIONS
Date Granted Exercise Date Number Price Granted
Granted
08/23/93 July - 94 5,000 4.750
09/15/93 September - 94 6,000 4.750
04/29/94 April - 95 100,000 5.680
April - 96 116,666 5.680
April - 97 116,667 5.680
April - 98 16,667 5.680
10/17/95 October - 96 75,000 1.310
03/08/96 June - 96 100,000 2.125
11/22/96 November - 97 100,000 17.50
01/30/98 January - 98 50,000 8.63
TOTAL 686,000
<PAGE>
APPENDIX B
American Eagle Outfitters
Ann Taylor
Braun's Fashions
Cashe
Catherine's Stores
Charming Shoppes
Claire's Stores
Clothestime
Deb Shops
Designs
Gantos
Loehmann's
Mother's Work
One Price Clothing Stores
United Retail Group
Urban Outfitters
Wet Seal
<PAGE>
Exhibit 23
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the incorporation by reference in the Registration
Statements on Form S-8 (no. 33-60539 and No. 333-30079) of Paul Harris Stores,
Inc. of our report dated March 2, 1998 appearing in this Form 10-K.
Price Waterhouse LLP
Indianapolis, Indiana
April 16, 1998
<PAGE>
<TABLE> <S> <C>
<ARTICLE> 5
<CAPTION>
EXHIBIT 27 - FINANCIAL DATA SCHEDULE
PAUL HARRIS STORES, INC. AND SUBSIDIARIES
FORM 10-K FOR FISCAL YEAR ENDED January 31, 1998
<S> <C>
<PERIOD-TYPE> Year
<FISCAL-YEAR-END> JAN-31-1998
<PERIOD-END> JAN-31-1998
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0
0
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</TABLE>
