<PAGE>
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10 - Q
X Quarterly report pursuant to Section 13 or 15(d) of the Securities
- -----
Exchange Act of 1934 for the quarterly period ended October 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
------ ------
Commission File Number 0-7264
PAUL HARRIS STORES, INC.
(Exact name of registrant as specified in its charter)
Indiana 35-0907402
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
6003 Guion Rd., Indianapolis, IN 46254
(Address of principal executive offices) (Zip Code)
(317) 293-3900
(Registrant's telephone number, including area code)
Indicate by check mark the registrant (1) has filed all reports required to be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter periods that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
---------- ---------
Indicate by check mark whether the registrant has filed all documents and
reports required to be filed by Sections 12, 13 or 15(d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a plan
confirmed by a court. Yes X No
--------- ---------
As of November 23, 1998, 10,777,147 common shares were outstanding.
INDEX
PAUL HARRIS STORES, INC. AND SUBSIDIARIES
Part I. FINANCIAL INFORMATION
Item 1. Financial Statements Page #
Consolidated Balance Sheets - October 31, 1998,
January 31, 1998 and November 1, 1997 3
Consolidated Statements of Income -- For the thirteen
weeks ended October 31, 1998 and November 1, 1997 4
Consolidated Statements of Income -- For the thirty-nine
weeks ended October 31, 1998 and November 1, 1997 5
Consolidated Statements of Cash Flows -- For the thirty-nine
weeks ended October 31, 1998 and November 1, 1997 6
Consolidated Statements of Shareholders' Equity -- For the
thirty-nine weeks ended October 31, 1998 and November 1, 1997 7
Notes to Consolidated Financial Statements 8
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 8
Part II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K 13
<TABLE><CAPTION>
PAUL HARRIS STORES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands)
October 31, January 31, November 1,
1998 1998 1997
----------- ----------- ------------
(unaudited) (unaudited)
<S> <C> <C> <C>
ASSETS
Current assets
Cash and cash equivalents $ 3,000 $ 17,990 $ 16,049
Merchandise inventories 45,951 31,940 41,741
Other receivables 5,221 3,330 1,552
Prepaid expenses 1,402 1,359 985
Deferred income taxes 502 124 183
------------ ------------ ------------
Total current assets 56,076 54,743 60,510
Property, fixtures and equipment
Land, building and improvements 5,978 5,871 5,850
Store fixtures and equipment 38,096 25,838 21,955
Leasehold improvements and other 24,812 19,462 18,192
------------ ------------ ------------
68,886 51,171 45,997
Less: accumulated depreciation and amortization (20,509) (16,368) (15,313)
------------ ------------ ------------
Property, fixtures and equipment, net 48,377 34,803 30,684
Deferred income taxes - 952 2,147
Other assets 752 800 789
------------ ------------ ------------
$ 105,205 $ 91,298 $ 94,130
============ ============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities
Short-term borrowings $ 4,900 $ - $ -
Accounts payable 19,735 12,725 19,417
Compensation and related taxes 2,247 2,780 2,149
Income taxes payable - 377 53
Other accrued expenses 6,517 4,345 5,412
Current maturities of long-term debt 1,840 120 120
------------ ------------ ------------
Total current liabilities 35,239 20,347 27,151
------------ ------------ ------------
Long-term debt - 1,810 1,840
Deferred income taxes 992 - -
Other non-current liabilities 3,468 3,137 2,981
Shareholders' equity
Preferred stock (no par value)
Authorized 1,000 shares; none issued
Common stock (no par value)
Authorized 20,000 shares; issued and outstanding
10,777, 11,256 and 11,248 respectively 17,410 17,354 17,310
Additional paid-in capital 13,939 13,904 13,873
Retained earnings 38,573 34,746 30,975
------------ ------------ ------------
69,922 66,004 62,158
Less: common stock in treasury, at cost
500, 0, and 0 shares respectively 4,416 - -
------------ ------------ ------------
Total shareholders' equity 65,506 66,004 62,158
------------ ------------ ------------
$ 105,205 $ 91,298 $ 94,130
============ ============ ============
See accompanying "Notes To Consolidated Financial Statements".
3
</TABLE>
<PAGE>
<TABLE><CAPTION>
PAUL HARRIS STORES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
UNAUDITED
(in thousands, except per share data)
For the For the
thirteen thirteen
weeks ended weeks ended
October 31, November 1,
1998 1997
------------ ------------
<S> <C> <C>
Net sales $ 61,212 $ 51,057
Cost of sales, including occupancy expenses
exclusive of depreciation 37,526 30,667
Gross income 23,686 20,390
------------ ------------
Selling, general and administrative expenses 19,157 14,749
Depreciation and amortization 1,657 1,220
------------ ------------
Operating income 2,872 4,421
Interest income (expense), net (91) 189
------------ ------------
Income before income taxes 2,781 4,610
Provision for income taxes 1,099 1,142
------------ ------------
Net income $ 1,682 $ 3,468
============ ============
Basic earnings per share $ 0.15 $ 0.31
============ ============
Weighted average number of shares outstanding 11,000 11,206
============ ============
Diluted earnings per share $ 0.15 $ 0.30
============ ============
Weighted average number of shares and
share equivalents outstanding 11,248 11,673
============ ============
See accompanying "Notes To Consolidated Financial Statements".
4
</TABLE>
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<TABLE><CAPTION>
PAUL HARRIS STORES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
UNAUDITED
(in thousands, except per share data)
For the For the
thirty-nine thirty-nine
weeks ended weeks ended
October 31, November 1,
1998 1997
------------ ------------
<S> <C> <C>
Net sales $ 161,585 $ 135,814
Cost of sales, including occupancy expenses
exclusive of depreciation 99,473 84,178
------------ ------------
Gross income 62,112 51,636
Selling, general and administrative expenses 51,407 40,407
Depreciation and amortization 4,549 3,180
------------ ------------
Operating income 6,156 8,049
Interest income, net 156 743
------------ ------------
Income before income taxes 6,312 8,792
Provision for income taxes 2,485 2,834
------------ ------------
Net income $ 3,827 $ 5,958
============ ============
Basic earnings per share $ 0.34 $ 0.55
============ ============
Weighted average number of shares outstanding 11,174 10,757
============ ============
Diluted earnings per share $ 0.33 $ 0.53
============ ============
Weighted average number of shares and
share equivalents outstanding 11,469 11,196
============ ============
See accompanying "Notes To Consolidated Financial Statements".
5
</TABLE>
<PAGE>
<TABLE><CAPTION>
PAUL HARRIS STORES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
UNAUDITED
(in thousands)
For the For the
thirty-nine thirty-nine
weeks ended weeks ended
October 31, November 1,
1998 1997
------------ ------------
<S> <C> <C>
Cash flow from operating activities:
Net income $ 3,827 $ 5,958
Adjustments to reconcile earnings to cash provided:
Depreciation and amortization 4,549 3,180
Net loss on disposal of assets 160 118
Deferred income taxes 1,566 (695)
Utilization of net operating loss carryforward - 1,399
(Increase) decrease in current assets:
Merchandise inventories (14,011) (21,982)
Other receivables (1,891) (691)
Prepaid expenses (43) (149)
Increase (decrease) in current liabilities:
Accounts payable 7,010 10,902
Compensation and related taxes (533) (1,625)
Income taxes payable (377) 892
Other accrued expenses 2,172 1,858
Other 363 581
------------ ------------
Net cash flow (for) from operating activities 2,792 (254)
------------ ------------
Net cash flow for investing activities:
Additions to fixed assets (18,267) (14,988)
------------ ------------
Cash flow from financing activities:
Direct borrowings under revolving line of credit 4,900 -
Repayment of long-term debt (90) (90)
Proceeds from issuance of common stock and related tax benefits 91 15,380
Purchase of treasury stock (4,416) -
------------ ------------
Net cash flow from financing activities 485 15,290
------------ ------------
$ (14,990) $ 48
============ ============
Cash and cash equivalents
At beginning of period $ 17,990 $ 16,001
At end of period 3,000 16,049
------------ ------------
$ (14,990) $ 48
============ ============
Supplemental disclosures of cash flow information:
Cash paid during the period for interest $ 271 $ 259
============ ============
Cash paid during the period for income taxes $ 2,023 $ 1,492
============ ============
See accompanying "Notes To Consolidated Financial Statements".
6
</TABLE>
<PAGE>
<TABLE><CAPTION>
PAUL HARRIS STORES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
UNAUDITED
(in thousands)
For the thirty-nine For the thirty-nine
weeks ended weeks ended
October 31, 1998 November 1, 1997
------------------- -------------------
SHARES AMOUNT SHARES AMOUNT
------- -------- ------- --------
<S> <C> <C> <C> <C>
PREFERRED STOCK (1,000 AUTHORIZED):
COMMON STOCK (20,000 AUTHORIZED):
Beginning balance 11,256 $ 17,354 10,115 $ 1,930
Stock offering - - 995 14,959
Exercise of stock options 21 56 138 421
------- -------- ------- --------
Ending balance 11,277 $ 17,410 11,248 $ 17,310
======= ======== ======= ========
ADDITIONAL PAID IN CAPITAL:
Beginning balance $ 13,904 $ 9,963
Tax benefit on exercise of stock options 35 1,075
Benefit of net operating loss carryforward - 2,835
-------- --------
Ending balance $ 13,939 $ 13,873
======== ========
RETAINED EARNINGS:
Beginning balance $ 34,746 $ 25,017
Net income 3,827 5,958
-------- --------
Ending balance $ 38,573 $ 30,975
======== ========
TREASURY STOCK:
Beginning balance - $ - - $ -
Purchase of treasury stock 500 4,416 - -
------- -------- ------- --------
Ending balance 500 $ 4,416 - $ -
======= ======== ======= ========
See accompanying "Notes To Consolidated Financial Statements".
7
</TABLE>
<PAGE>
PAUL HARRIS STORES, INC., AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Basis of Presentation
The accompanying unaudited consolidated financial statements include the
accounts of Paul Harris Stores, Inc. and its subsidiaries (the "Company"). The
Company is a specialty retailer of moderately-priced private-label apparel and
accessories for women.
The unaudited consolidated financial statements of the Company have been
prepared in accordance with instructions to Form 10-Q and Article 10 of
Regulation S-X and accordingly certain information and footnote disclosures
have been condensed or omitted. These condensed financial statements should be
read in conjunction with the financial statements and notes thereto included in
the Company's January 31, 1998, Annual Report on Form 10-K.
In the opinion of management, all adjustments, which include only normal
recurring adjustments, necessary to present fairly the financial position,
results of operations and cash flows at October 31, 1998, and for all other
periods presented, have been made.
The Company's fiscal year ends on the Saturday closest to January 31. All
references in this report to fiscal years are to the calendar years in which
such fiscal years began. For example, fiscal 1998 refers to the fiscal year
that began on February 1, 1998, and will end on January 30, 1999.
The results of operations for the first, second and third quarters of fiscal
1998 are not necessarily indicative of the results to be expected for all of
fiscal 1998. The Company has historically produced a majority of its income in
the fourth quarter of the fiscal year due to the stronger sales experienced
during the month of December.
2. Earnings Per Share
In the fourth quarter of fiscal 1997, the Company adopted Statement of
Financial Accounting Standards No. 128, "Earnings per Share" ("SFAS 128").
Prior period earnings per share have been restated in accordance with the
provisions of SFAS 128. The following table (in thousands) reconciles the
numerators and denominators used in the basic and diluted earnings per share
computations
<TABLE><CAPTION>
For the thirteen weeks ended For the thirty- nine weeks ended
---------------------------- --------------------------------
October 31, 1998 November 1, 1997 October 31, 1998 November 1, 1997
-------------------------------------- ---------------------------------------
Net Income Shares Net Income Shares Net Income Shares Net Income Shares
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Basic earnings per share $ 1,682 11,000 $ 3,468 11,207 $ 3,827 11,174 $ 5,958 10,757
Effect of dilutive options - 248 - 466 - 295 - 439
--------- ------ -------- ------ -------- ------ -------- ------
Diluted earning per share $ 1,682 11,248 $ 3,468 11,673 $ 3,827 11,469 $ 5,958 11,196
========= ====== ======== ====== ======== ====== ======== ======
</TABLE>
3. Common Stock Repurchase Program
On July 14, 1998, the Company's board of directors authorized the Company to
repurchase up to 500,000 shares of its outstanding common stock at prevailing
market prices for an aggregate amount not to exceed $6.0 million. As of
October 31, 1998 the Company had completed the repurchase of 500,000 shares of
its then outstanding common stock for $4.4 million.
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
Certain statements made in this report may constitute "forward-looking
statements" within the meaning of the Private Securities Litigation Reform Act
of 1995. Such forward-looking statements involve known and unknown risks,
uncertainties and other factors that may cause the actual results, performances
or achievements of the Company or the retailing industry to be materially
different from any future results, performance or achievements expressed or
implied
8
<PAGE>
by such forward-looking statements. Such factors include, among others: local,
regional and national economic conditions; extreme or unseasonable weather
conditions; legislation and regulatory matters affecting payroll costs or other
aspects of retailing; the ability to identify and respond to emerging fashion
trends; and governmental actions such as import or trade restrictions.
Overview
The Company is a specialty retailer of moderately priced casual apparel and
accessories for women sold under the Paul Harris, Paul Harris Design, and Paul
Harris Denim and other brand names. As of October 31, 1998, the Company
operated 292 stores in 29 states with significant concentration of stores in
the Midwest.
The Company's stores currently average approximately 4,500 gross square feet
and are located primarily in regional enclosed shopping malls and, to a lesser
extent, strip shopping centers. During the first nine months of fiscal 1998,
the Company opened thirty-four stores and closed seventeen stores. The Company
expects that new stores will be generally located in the Company's existing
markets in order to enhance recognition of the Paul Harris name, leverage field
management, facilitate targeted marketing efforts and efficiently utilize the
Company's sales team.
Results of Operations
The following discussion is based upon the unaudited consolidated financial
statements appearing elsewhere in this report. The following table sets forth
certain income statement items as a percentage of net sales.
<TABLE><CAPTION>
PAUL HARRIS STORES, INC. AND SUBSIDIARIES
RESULTS OF OPERATIONS AS A
PERCENTAGE OF NET SALES
Thirteen weeks ended Thirty-nine weeks ended
---------------------- ------------------------
October 31, November 1, October 31, November 1,
1998 1997 1998 1997
<S> <C> <C> <C> <C>
Net sales 100.0% 100.0% 100.0% 100.0%
Cost of sales, including certain
occupancy expenses (1) 61.3% 60.1% 61.6% 62.0%
--------- ---------- ---------- ----------
Gross income 38.7% 39.9% 38.4% 38.0%
Selling, general and administrative
expenses (2) 31.3% 28.9% 31.8% 29.8%
Depreciation and amortization 2.7% 2.4% 2.8% 2.3%
--------- ---------- --------- ---------
Operating income 4.7% 8.6% 3.8% 5.9%
Interest income (expense), net (0.1%) 0.4% 0.1% 0.5%
--------- ---------- --------- ---------
Income before income taxes 4.6% 9.0% 3.9% 6.4%
Provision for income taxes 1.8% 2.2% 1.5% 2.1%
--------- ---------- -------- --------
Net income 2.8% 6.8% 2.4% 4.3%
========= ========== ======== ========
- ------------------------------------
(1) Occupancy expenses include store level base rent, percentage rent and real estate taxes.
(2) Includes all store level occupancy expenses not included in cost of sales.
</TABLE>
9
<PAGE>
Third quarter of fiscal 1998
The Company's net sales increased to $61.2 million in the third quarter of
fiscal 1998 from $51.1 million in the third quarter of fiscal 1997, an increase
of $10.1 million or 19.9%. The increase in net sales was primarily
attributable to a 20.0% increase in the average number of stores open during
the third quarter of fiscal 1998 as compared to the third quarter of fiscal
1997 and an increase in comparable store sales of 1.4% during the quarter. The
Company operated 292 stores as of October 31, 1998 compared to 258 stores as of
November 1, 1997.
Due to the increase in net sales, gross income increased to $23.7 million in
the third quarter of fiscal 1998 from $20.4 million in the prior year, an
increase of $3.3 million or 16.2%.
Gross income as a percentage of net sales decreased to 38.7% in the third
quarter of 1998 compared to 39.9% in the third quarter of 1997. This decrease
was attributable to an increase in occupancy expense as a percentage of net
sales, partially offset by an increase in selling margin as a percentage of net
sales as a result of an increase in the initial markup on merchandise purchases
during the third quarter of fiscal 1998. The increase in occupancy expenses as
a percentage of net sales was due to increased occupancy costs of newer stores
and from increased occupancy costs due to re-negotiation of leases on several
existing stores.
Selling, general and administrative expenses increased to $19.2 million, or
31.3% of net sales, for the third quarter of fiscal 1998 from $14.7 million, or
28.9% of net sales, for the third quarter of fiscal 1997. The increase of $4.5
million was primarily due to increased store payroll costs and other store-
related expenses as a result of the increase in store count and net sales.
Depreciation and amortization increased to $1.7 million for the third quarter
of fiscal 1998 from $1.2 million for the third quarter of fiscal 1997, an
increase of $437,000 or 35.8%. As a percentage of net sales, depreciation and
amortization increased to 2.7% in the third quarter of fiscal 1998 from 2.4% in
the third quarter of fiscal 1997, primarily as a result of the net increase in
fixed asset expenditures and the new point of sale equipment purchased during
fiscal 1997 which has a shorter depreciable life than most other depreciable
assets of the Company.
Operating income decreased to $2.9 million in the third quarter of fiscal 1998
from $4.4 million for the third quarter of fiscal 1997, a decrease of $1.5
million or 35.0%. As a percentage of net sales, operating income decreased to
4.7% in the third quarter of fiscal 1998 from 8.6% in the third quarter of
fiscal 1997.
Interest expense, net, of $91,000 for the third quarter of fiscal 1998
decreased by $280,000 from interest income, net, of $189,000 for the third
quarter of fiscal 1997. This was primarily due to lower cash balances
resulting from capital expenditures of $22.9 million and the purchase of $4.4
million in treasury stock since the end of the third quarter of fiscal 1997.
The provision for income taxes was $1.1 million for the third quarter of fiscal
1998 and 1997. The Company's effective tax rate of 39.5% in the third quarter
of fiscal 1998 was higher than the 24.8% in the third quarter of fiscal 1997
primarily as a result of a reduction of the total tax provision during the
third quarter of fiscal 1997 by $695,000 due to the elimination of the
valuation allowance against the Company's deferred tax assets. During the third
quarter of fiscal 1998, the Company benefited from a lower state effective
income tax rate.
As a result of the above factors, the Company's net income decreased to $1.7
million for the third quarter of fiscal 1998 from $3.5 million for the third
quarter of fiscal 1997.
10
<PAGE>
First nine months of fiscal 1998
The Company's net sales increased to $161.6 million in the first nine months of
fiscal 1998 from $135.8 million in the first nine months of fiscal 1997, an
increase of $25.8 million or 19.0%. The increase in net sales was primarily
attributable to a 23.6% increase in the average stores open during the first
nine months of fiscal 1998 compared to the first nine months of fiscal 1997.
The Company operated 292 stores as of October 31, 1998 compared to 258 stores
on November 1, 1997. Comparable store sales were down .6% for the first nine
months of fiscal 1998.
Gross income increased to $62.1 million in the first nine months of fiscal 1998
from $51.6 million in the prior year, an increase of $10.5 million or 20.3%.
Gross income, as a percentage of net sales, increased to 38.4% in the first
nine months of fiscal 1998 from 38.0% of net sales for the first nine months of
fiscal 1997.
Gross income, as a percentage of net sales, was positively impacted by the
increase in selling margin as a result of a management decision to offer fewer
sales promotions during the first nine months of fiscal 1998 compared to the
same period of fiscal 1997. Partially offsetting this, as a percentage of net
sales, was the increase in occupancy expenses, especially for stores opened in
the last twelve months, for the first nine months of fiscal 1998 compared to
the first nine months of fiscal 1997.
Selling, general and administrative expenses increased to $51.4 million, or
31.8% of net sales, for the first nine months of fiscal 1998 from $40.4
million, or 29.8% of net sales, for the first nine months of fiscal 1997. The
increase of $11.0 million was mostly due to increased store payroll costs and
other store-related expenses due to the increase store count and net sales.
Partially offsetting this increase was a $300,000 one time gain recorded upon
the filing of amended property tax returns related to prior years.
Depreciation and amortization increased to $4.5 million for the first nine
months of fiscal 1998 from $3.2 million for the first nine months of fiscal
1997, an increase of $1.4 million or 43.1%. As a percentage of net sales,
depreciation and amortization increased to 2.8% in the first nine months of
fiscal 1998 from 2.3% in the first nine months of fiscal 1997 as a result of
the $22.9 million net increase in fixed asset purchases during the last twelve
months and the new point of sale equipment purchased during fiscal 1997 which
has a shorter depreciable life than most other depreciable assets of the
Company.
Operating income decreased to $6.2 million in the first nine months of fiscal
1998 from $8.0 million for the first nine months of fiscal 1997, a decrease of
$1.9 million or 23.5%. As a percentage of net sales, operating income
decreased to 3.8% in the first nine months of fiscal 1998 from 5.9% in the
first nine months of fiscal 1997.
Interest income, net, of $156,000 for the first nine months of fiscal 1998
decreased by $587,000 from interest income, net, of $743,000 for the first nine
months of fiscal 1997. This was primarily due to lower cash balances as a
result of the capital expenditures of $18.3 million and the purchase of
treasury stock of $4.4 million since the end of the third quarter of fiscal
1998.
The provision for income taxes was $2.5 million for the first nine months of
fiscal 1998 as compared to $2.8 million for the first nine months of fiscal
1997, a decrease of $349,000, as a result of the decrease in income before
income taxes and a reduction of the total tax provision during the third
quarter of fiscal 1997 by $695,000 due to the elimination of the valuation
allowance against the Company's deferred tax assets. The Company's effective
tax rate of 39.4% in the first nine months of fiscal 1998 was higher than the
32.2% in the first nine months of fiscal 1997 primarily as a result of the
reduction mentioned above, which was partially offset by a lower state
effective income tax rate.
As a result of the above factors, the Company's net income decreased to $3.8
million for the first nine months of fiscal 1998 from $6.0 million for the
first nine months of fiscal 1997.
11
<PAGE>
Seasonality
The Company's business, like that of most retailers, is subject to seasonal
influences. A significant portion of the Company's net sales and profits are
realized during the Company's fourth fiscal quarter, which includes the holiday
selling season. Additionally, results for any quarter are not necessarily
indicative of the results that may be achieved for a full fiscal year.
Quarterly results may fluctuate materially depending upon, among other things,
the timing of new store openings, net sales and profitability contributed by
new stores, increases or decreases in comparable store sales, adverse weather
conditions, shifts in the timing of certain holidays and promotions, and
changes in the Company's merchandise mix.
Liquidity and Capital Resources
The Company's primary sources of working capital consist of internally
generated cash and a $30.0 million secured, revolving credit facility. While
this credit facility is principally intended to provide letters of credit for
import merchandise, the Company may make direct borrowings of up to the maximum
amount of the credit facility, generally to finance peak inventory needs. The
credit facility expires June 30, 1999. The Company is discussing with its
current lender an extension to the credit facility at similar terms and
conditions. The annual interest rate on borrowings outstanding under the
credit facility is a variable rate equal to the prime rate of the Company's
lender plus 0.25%. In addition, letters of credit carry an initial issuance
fee, plus a fee of 0.25% of the face amount of such letters of credit. The
credit facility also contains certain financial covenants that set limits on
tangible net worth and cash flow from operations. The credit facility is
secured by a security interest in the Company's inventory, equipment, fixtures,
cash and an assignment of leases. At October 31, 1998, there were outstanding
letters of credit issued in favor of the Company under the credit facility in
an aggregate amount of $9.8 million. On the same date, there was $4.9 million
of direct borrowings outstanding under the credit facility.
The Company made capital expenditures of approximately $18.3 million in the
first nine months of fiscal 1998, primarily for opening 34 new stores and the
remodeling and relocation of 28 existing stores. The Company anticipates
opening a total of 52 new stores and will remodel or relocate a total of 32
stores during the 1998 fiscal year. Including the amounts already incurred,
the Company will spend approximately $18.0 million on these new store additions
or remodels and spend another $5.0 million on other capital expenditures during
the 1998 fiscal year.
Net cash flow from operating activities was $2.8 million in the first nine
months of fiscal 1998 compared to negative net cash flow of $254,000 in the
first nine months of fiscal 1997. The primary reason for the increase in net
cash flow was a smaller increase in merchandise inventories (net of accounts
payable) for the first nine months of fiscal 1998 compared to the first nine
months of fiscal 1997. Net cash flow from financing activities, for the first
nine months of fiscal 1998, included direct borrowings of $4.9 million under
the Company's revolving credit facility, offset in part by the repurchase of
500,000 shares of the Company's common stock for $4.4 million. This compares
to the receipt of proceeds of $15.0 million from the issuance of common stock
in the first nine months of fiscal 1997.
Cash and cash equivalents decreased to $3.0 million at the end of the first
nine months of fiscal 1998 from $16.0 million at the end of the first nine
months of fiscal 1997 due primarily to the proceeds from the stock offering in
fiscal 1997 of $15.0 million, the repurchase of 500,00 shares of treasury
stock, the increased purchases of fixed assets over the same period last fiscal
year and offset by direct borrowings of $4.9 million.
Management believes that cash generated from operations and borrowings under
the Company's credit facility, if any, will be sufficient to meet the Company's
working capital and capital expenditure needs in the foreseeable future.
12
<PAGE>
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. One part of this process included
replacing all of the store point of sale systems which was completed during the
third quarter of fiscal 1997. Another part of this process involved the
assessment of common integrated computer hardware and software components from
vendors that are able to provide year 2000 compliant products while enhancing
the Company's business information systems. The assessment and selection of
the hardware and software has been completed and implementation has begun with
expected completion by mid-1999. This implementation process is approximately
40% complete and is currently on schedule. Management has also identified
systems containing embedded technology, such as alarm systems, which are
difficult to assess the impact of the year 2000 problem, but believes that any
year 2000 problems with these type of items will not have a material
operational or financial impact on the Company. Management estimates the total
cumulative costs of preparing for the year 2000 problem will be approximately
$8.2 million, which includes the $6.2 million already invested in the new point
of sale systems and $615,000 invested in new application software.
Management believes that the expenditures required to bring the Company's
systems into compliance will not have a material adverse effect on the
Company's financial position, results of operations or liquidity. However, the
year 2000 problem is pervasive and complex and can potentially affect any
computer process. Accordingly, no assurance can be given that the year 2000
compliance can be achieved without additional unanticipated expenditures and
uncertainties that might affect future financial results.
Moreover, to operate its business, the Company relies upon government agencies,
utility companies, telecommunications companies, shipping companies, suppliers
and other third party service providers over which it can assert little
control. The Company's ability to conduct its business is dependent upon the
ability of these third parties to avoid year 2000 related disruptions. The
Company has contacted and will continue to contact its key suppliers and other
third-party service providers to inquire as to their year 2000 readiness. The
process mentioned above about the Company's efforts with regards to the year
2000 problem is expected to significantly reduce the Company's level of
uncertainty inherent in the year 2000 problem. If these third parties do not
adequately address their year 2000 issues, the Company's business my be
materially affected which could result in a material adverse effect on the
Company's results of operations and financial condition.
The Company has not to date developed any contingency plans in the event the
Company or any key third party providers should fail to become year 2000
compliant. If at such time in the future that it is determined that the
Company or its key third party suppliers are unable to be year 2000 compliant,
the Company will develop a contingency plan.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits: (27) Financial Data Schedule
(b) Reports on Form 8-K: None
13
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Paul Harris Stores, Inc.
(Registrant)
Date: December 15, 1998 /s/ Thomas McCain
-----------------
Senior Vice President -- Finance and Chief
Financial Officer
(Signing on behalf of the registrant and as
principal financial officer)
14
<TABLE> <S> <C>
<ARTICLE> 5
<CAPTION>
EXHIBIT 27 - FINANCIAL DATA SCHEDULE
PAUL HARRIS STORES, INC. AND SUBSIDIARIES
FORM 10-Q FOR YEAR-TO-DATE ENDED October 31, 1998
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> JAN-30-1999
<PERIOD-END> OCT-31-1998
<CASH> 3,000,000
<SECURITIES> 0
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 45,951,000
<CURRENT-ASSETS> 56,076,000
<PP&E> 68,886,000
<DEPRECIATION> (20,509,000)
<TOTAL-ASSETS> 105,204,000
<CURRENT-LIABILITIES> 35,239,000
<BONDS> 0
<COMMON> 17,410,000
0
0
<OTHER-SE> 52,511,000
<TOTAL-LIABILITY-AND-EQUITY> 105,204,000
<SALES> 161,585,000
<TOTAL-REVENUES> 161,585,000
<CGS> 99,473,000
<TOTAL-COSTS> 99,473,000
<OTHER-EXPENSES> 55,956,000
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (156,000)
<INCOME-PRETAX> 6,312,000
<INCOME-TAX> 2,485,000
<INCOME-CONTINUING> 3,827,000
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 3,827,000
<EPS-PRIMARY> 0.34
<EPS-DILUTED> 0.33
</TABLE>
