<PAGE> 1
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 30, 1999 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)
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
COMMON STOCK WITHOUT PAR VALUE
(Title of class)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
----- -----
Indicate by check mark if disclosure of the delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
Indicate by check mark whether the registrant has filed all documents and
reports required to be filed by Sections 12, 13, or 15(d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a plan
confirmed by a court. Yes X No
----- -----
As of April 8, 1999, 10,798,814 common shares were outstanding. The aggregate
market value of the common shares held by non-affiliates (based upon the closing
price on April 8, 1999 on The Nasdaq Stock Market of $6.875 per share) was
approximately $73,769,000. For the purposes of such calculation, all outstanding
shares of common stock have been considered held by non-affiliates, other than
the 68,800 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 filed with the Commission pursuant to
Regulation 14A.
<PAGE> 2
PART I
ITEM 1. BUSINESS
The Company is a specialty retailer that offers moderately priced casual
attire for fashion-conscious women. As of January 30, 1999, the Company operated
304 stores in 29 states of which 247 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 year refer to the calendar year in which the
fiscal year began. For example, 1998 refers to the fiscal year that began on
February 1, 1998 and ended on January 30, 1999.
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
-------------------------- ---------------------------
JANUARY 30, JANUARY 31, JANUARY 30, JANUARY 31,
1999 1998 1999 1998
----------- ------------ ------------ -----------
<S> <C> <C> <C> <C> <C>
Arkansas..................... 2 2 Nebraska...................... 2 2
Connecticut.................. 4 3 New Hampshire................. 1 0
Delaware..................... 1 1 New Jersey.................... 7 5
Florida...................... 19 10 New York...................... 3 3
Georgia...................... 11 12 North Carolina................ 15 14
Illinois..................... 32 33 Ohio ........................ 28 29
Indiana...................... 37 34 Pennsylvania.................. 24 24
Iowa......................... 7 7 South Carolina................ 6 6
Kentucky..................... 5 5 South Dakota.................. 1 1
Louisiana.................... 8 6 Tennessee..................... 13 10
Maryland..................... 17 15 Texas ........................ 12 6
Massachusetts................ 5 5 Vermont....................... 1 1
Michigan..................... 12 12 Virginia...................... 12 12
Mississippi.................. 3 2 Wisconsin .................... 6 5
Missouri..................... 10 10 --- ---
TOTAL STORES.............. 304 275
=== ===
</TABLE>
The Company sells quality merchandise and emphasizes casual clothing
coordinated by color, style and fabric. Approximately 88 percent 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 1998, no
supplier provided more than 6.2 percent of the Company's merchandise. A majority
of the Company's domestic merchandise is purchased in the New York and Los
Angeles areas. Approximately 65 percent of all merchandise was purchased from
foreign suppliers in 1998. Virtually all merchandise purchased directly for the
stores is private brand merchandise 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", "Paul Harris
Design", "PHD", "PH Sport", "Pasta" (a trademark used on 2 stores) and other
trademarks of lesser importance. The Company has no patents, licenses,
franchises or other concessions that are considered important to its operations.
1
<PAGE> 3
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 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 11.7 percent
of the Company's total sales during 1998.
During 1998, the average sale per PHFC transaction was $60, which compares
to an average sale per transaction of $28 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 1998, approximately 45.5 percent
of the Company's sales were for cash (including checks). Approximately 42.8
percent of the Company's sales were from major national credit cards in 1998.
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 3,000 permanent employees (full and
part-time) as of January 30, 1999. During the 1998 holiday peak shopping season,
the Company hired approximately 1,900 additional temporary employees.
The Company acquired from the J. Peterman Company ( "Peterman")
substantially all the assets, free and clear of all liens and encumbrances, of
Peterman on March 12, 1999 for approximately $10.0 million. Peterman had been
operating as a debtor-in-possession since filing a voluntary petition under
Chapter 11 of the Federal Bankruptcy Code on January 25, 1999. Peterman operated
a mail-order catalog distribution center in Lexington, Kentucky as well as 13
retail outlets in nine states. Peterman is an upscale retailer well known for
its catalog and unique merchandise selection. The Company is currently operating
12 of the retail outlets under the name of "J. Peterman".
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.
2
<PAGE> 4
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 retail stores under noncancellable operating leases. In
general, the store leases have an initial term of 5 to 10 years, with some
having one or more 5-year options to extend. Some leases contain 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.
ITEM 3. LEGAL PROCEEDINGS
The Company is involved from time to time in legal proceedings arising in
the ordinary course of its business as discussed further in "Note 5 Commitments
and Contingent Liabilities" of the "Notes to Consolidated Financial Statements".
In the opinion of management, no pending proceedings will have a material
adverse effect on the Company's financial condition, results of operations or
liquidity.
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 1998.
EXECUTIVE OFFICERS OF THE REGISTRANT
Officers are elected by the Board of Directors and serve at the discretion
of the Board. The following sets forth the name, age, position(s) and business
experience of the executive officers of the Company.
<TABLE>
<CAPTION>
NAME AGE TITLE
---- --- -----
<S> <C> <C>
Charlotte G. Fischer....... 49 Chairman of the Board, President and
Chief Executive Officer
Sally M. Tassani........... 50 Executive Vice President - Marketing
Thomas K. McCain........... 50 Senior Vice President of Finance and
Chief Financial Officer
</TABLE>
Ms. Fischer became Chairman of the Board, President and Chief Executive
Officer of the Company in January 1995. From April 1994 until January 1995, Ms.
Fischer was Vice Chairman 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. Ms. Fischer is a director of Trans World
Entertainment Corp., Inc. and National City Bank of Indiana.
Ms. Tassani became Executive Vice President - Marketing in July 1998. Ms.
Tassani was an independent consultant and subsequently a managing director of
Tassani Partners LLC, a strategic marketing communications firm, from July 1997
to June 1998. She was senior vice president-director of direct marketing and
sales promotion for Leo Burnett Company, Inc., an advertising agency, from
October 1995 until July 1997. From August 1995 to September 1995, she was senior
vice president of Bender, Browning, Dolby & Sanderson, an advertising agency.
Prior to August of 1995, Ms. Tassani was the chief executive officer, for more
than five years, of Tassani & Paglia, Inc., a Chicago-based marketing consulting
firm that she founded.
Mr. McCain was named Senior Vice President of Finance and Chief Financial
Officer in October 1998. Prior to October 1998, Mr. McCain was employed by
Edison Brothers Stores, Inc., for more than the past five years, in various
positions; namely, Vice President and Controller from January 1998 to September
1998, Vice President Tax and Financial Reporting from November 1996 to December
1997, Vice President of Tax and Treasury from May 1996 to October 1996 and Vice
President Tax and Assistant Treasurer prior to May 1996.
3
<PAGE> 5
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 table below sets forth, for the past eight fiscal quarters, the
range of high and low sales prices of the Company's common stock as reported by
The Nasdaq Stock Market.
<TABLE>
<CAPTION>
MARKET PRICE OF COMMON STOCK
----------------------------
1998 QUARTERS 1997 QUARTERS
----------------------------------- ---------------------------------
1ST 2ND 3RD 4TH 1ST 2ND 3RD 4TH
------ ------ ------ ------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
High........................ $15.13 $16.00 $11.38 $14.13 $23.13 $19.38 $30.63 $23.25
Low......................... $ 8.00 $ 9.75 $ 5.13 $ 6.88 $12.50 $13.00 $15.00 $ 8.25
</TABLE>
There were approximately 1,400 registered holders of record of common stock
on April 6, 1999. The Company has not declared or paid any cash dividends on its
common stock since 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.
4
<PAGE> 6
ITEM 6. SELECTED FINANCIAL DATA
The selected consolidated financial data set forth below should be read in
conjunction with Management's Discussion and Analysis of Financial Condition and
Results of Operations and the Consolidated Financial Statements and Notes
thereto included in this report.
<TABLE>
<CAPTION>
1998 1997 1996 1995 1994
------------------------------------------------------------
(DOLLARS IN MILLIONS, EXCEPT FOR PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Net sales .................................... $ 241.7 $ 209.2 $ 190.3 $ 167.5 $ 167.8
Cost of sales, including certain occupancy
expenses exclusive of depreciation ........ 149.9 130.6 118.1 112.3 111.4
-------- -------- -------- -------- --------
Gross income ................................. 91.8 78.6 72.2 55.2 56.4
Selling, general and administrative
expenses (2) .............................. 72.0 59.7 53.3 47.1 45.6
Depreciation and amortization ................ 6.3 4.1 3.3 3.5 3.3
-------- -------- -------- -------- --------
Operating income ............................. 13.5 14.8 15.6 4.6 7.5
Interest income (expense), net ............... 0.2 0.9 (1.2) (2.0) (2.5)
-------- -------- -------- -------- --------
Income before income taxes ................... 13.7 15.7 14.4 2.6 5.0
Provision for income taxes ................... 5.1 6.0 5.6 1.0 1.9
-------- -------- -------- -------- --------
Net income ................................... $ 8.6 $ 9.7 $ 8.8 $ 1.6 $ 3.1
======== ======== ======== ======== ========
Basic earnings per share ..................... $ 0.78 $ 0.89 $ 0.88 $ 0.16 $ 0.31
======== ======== ======== ======== ========
Diluted earnings per share ................... $ 0.75 $ 0.86 $ 0.85 $ 0.16 $ 0.31
======== ======== ======== ======== ========
OPERATING AND STORE DATA:
Gross income percent ......................... 38.0% 37.6% 38.0% 33.0% 33.6%
Operating income percent ..................... 5.6% 7.1% 8.2% 2.8% 4.5%
Weighted average sales per store (000's) ..... $ 844 $ 875 $ 845 $ 683 $ 740
Comparable store sales (decrease) increase (3) (2%) 2% 20% (7%) 0%
Stores open at beginning of period ........... 275 223 235 239 211
Stores opened during period .................. 50 65 19 19 40
Stores closed during period .................. (21) (13) (31) (23) (12)
-------- -------- -------- -------- --------
Stores open at end of period ................. 304 275 223 235 239
======== ======== ======== ======== ========
BALANCE SHEET DATA (AT END OF PERIOD):
Working capital .............................. $ 26.5 $ 34.4 $ 21.4 $ 24.5 $ 24.4
Total assets ................................. 100.7 91.3 57.3 57.9 63.5
Long-term debt ............................... 1.7 1.8 1.9 17.6 22.0
Shareholders' equity ......................... 70.5 66.0 36.9 22.9 19.9
</TABLE>
- --------
(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 open for at least a 12 month period.
5
<PAGE> 7
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>
<CAPTION>
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Net sales .............................................................................. 100.0% 100.0% 100.0%
Cost of sales, including certain occupancy expenses exclusive of depreciation (1) ...... 62.0 62.4 62.0
----- ----- -----
Gross income ........................................................................... 38.0 37.6 38.0
Selling, general and administrative expenses (2) ....................................... 29.8 28.5 28.0
Depreciation and amortization .......................................................... 2.6 2.0 1.8
----- ----- -----
Operating income ....................................................................... 5.6 7.1 8.2
Interest income (expense), net ........................................................ .1 0.4 (0.7)
----- ----- -----
Income before income taxes ............................................................. 5.7 7.5 7.5
Provision for income taxes ............................................................. 2.1 2.9 2.9
----- ----- -----
Net income ............................................................................. 3.6% 4.6% 4.6%
===== ===== =====
</TABLE>
(1) Occupancy expenses include store level base rent, percentage rent and real
estate taxes.
(2) Includes all store level occupancy expenses not included in cost of sales.
1998 COMPARED TO 1997
The Company's net sales increased to $241.7 million in 1998 from $209.2
million in 1997, an increase of $32.5 million or 15.5 percent. The increase in
net sales was primarily attributable to a 20.2 percent increase in the amount of
total square feet operated during 1998, due to the increase in store count and
remodeled stores, and negatively impacted by a 1.5 percent decline in comparable
store sales. The Company operated 304 stores on January 30, 1999, compared to
275 stores on January 31, 1998. During 1998, the Company opened 50 stores and
closed 21 stores.
Gross income increased to $91.8 million in 1998 from $78.6 million in 1997,
an increase of $13.2 million or 16.8 percent. As a percentage of net sales,
gross income increased to 38.0 percent in 1998 from 37.6 percent in 1997. Gross
income increased primarily due to the increase in net sales. Gross income as a
percentage of net sales increased as a result of reduced promotional activity
during the first half of the year.
Selling, general and administrative expenses increased to $72.0 million in
1998 from $59.7 million in 1997, an increase of $12.3 million or 20.6 percent.
As a percentage of net sales, selling, general and administrative expenses
increased to 29.8 percent in 1998 from 28.5 percent in 1997. The increase in
selling, general and administrative expenses resulted primarily from the 10.5
percent increase in the number of stores operated during the year, an increase
of 8.8 percent in the total average square feet per store and the increase in
the average hourly rate paid to store personnel.
Depreciation and amortization increased to $6.3 million in 1998 from $4.1
million in 1997, an increase of $2.1 million or 50.9 percent. As a percentage of
net sales, depreciation and amortization increased to 2.6 percent in 1998 from
2.0 percent in 1997. The increase was primarily due to the opening of 115 new
stores and major remodels of 59 stores within the last two years and secondarily
to the installation of a new point of sale system in the stores, which has a
shorter depreciable life than most other fixed assets of the Company.
6
<PAGE> 8
Operating income decreased to $13.5 million in 1998 from $14.8 million in
1998, a decrease of $1.2 million or 8.2 percent. As a percentage of net sales,
operating income decreased to 5.6 percent in 1998 from 7.1 percent in 1997.
Interest income, net, was $187,000 in 1998 compared to $941,000 in 1997, a
decrease of $754,000 or 80.1 percent. The decrease was due to lower cash
balances as a result of $22.5 million in capital expenditures and the purchase
of $4.4 million of treasury stock during 1998.
Provision for income taxes decreased to $5.1 million in 1998 from $6.0
million in 1997, a decrease of $828,000, or 13.8 percent. The Company's
effective income tax rate decreased to 37.5 percent in 1998 from 38.1 percent in
1997 primarily as a result of a lower state effective income tax rate.
As a result of all the above factors, the Company's net income decreased to
$8.6 million in 1998 from $9.7 million in 1997, a decrease of $1.1 million or
11.7 percent.
1997 COMPARED TO 1996
The Company's net sales increased to $209.2 million in 1997 from $190.3
million in 1996, an increase of $18.9 million or 10.0 percent. The increase in
net sales was primarily attributable to a 23 percent increase in the number of
stores open during 1997. The Company operated 275 stores on January 31, 1998,
compared to 223 stores on February 1, 1997. During 1997, the Company opened 65
stores and closed 13 stores. As a result of soft holiday sales during the fourth
quarter of 1997, the Company's comparable store sales were negatively impacted.
The Company experienced a 2 percent positive comparable store sales increase for
the year.
Gross income increased to $78.6 million in 1997 from $72.2 million in 1996,
an increase of $6.4 million or 8.9 percent. As a percentage of net sales, gross
income decreased to 37.6 percent in 1997 from 38.0 percent in 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
1997 from $53.3 million in 1996, an increase of $6.4 million or 12.0 percent. As
a percentage of net sales, selling, general and administrative expenses
increased to 28.5 percent in 1997 from 28.0 percent in 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 1997 from $3.3
million in 1996, an increase of $878,000 or 26.9 percent. As a percentage of net
sales, depreciation and amortization increased to 2.0 percent in 1997 from 1.8
percent in 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 1997 from $15.6 million in
1996, a decrease of $886,000 or 5.7 percent. As a percentage of net sales,
operating income decreased to 7.1 percent in 1997 from 8.2 percent in 1996.
Interest income, net, was $941,000 in 1997 compared to expense of $1.2
million in 1996, 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.
7
<PAGE> 9
Provision for income taxes increased to $6.0 million in 1997 from $5.6
million in 1996, an increase of $381,000, or 6.8 percent. In the third quarter
of 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 income taxes under Internal Revenue
Code Section 162 (m) of the $1.0 million payment to Ms. Fischer adversely
affected the Company's effective income tax rate. The Company's effective income
tax rate decreased to 38.1 percent in 1997 from 38.8 percent in 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 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 1997 from $8.8 million in 1996, an increase of $909,000, or 10.3
percent.
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 1998 and 1997. The unaudited quarterly information includes all
normal recurring adjustments that management considers necessary for a fair
presentation of the information shown.
<TABLE>
<CAPTION>
FISCAL QUARTER ENDED
------------------------------------------------------------------------------------------------
MAY 2, AUG. 1, OCT. 1, JAN. 30, MAY 3, AUG. 2, NOV. 1, JAN. 31,
------------------------------------------------------------------------------------------------
1998 1998 1998 1999 1997 1997 1997 1998
------------------------------------------------------------------------------------------------
(DOLLARS IN THOUSANDS, EXCEPT FOR PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net sales ........................ $ 52,278 $ 48,095 $ 61,212 $ 80,108 $ 43,838 $ 40,920 $ 51,057 $ 73,421
Gross income ..................... 20,297 18,129 23,686 29,723 15,822 15,424 20,390 27,011
Operating income ................. 2,458 826 2,872 7,394 2,014 1,613 4,421 6,718
Income before income taxes ....... 2,581 950 2,781 7,425 2,224 1,958 4,610 6,915
Net income ....................... $ 1,572 $ 573 $ 1,682 $ 4,759 $ 1,324 $ 1,165 $ 3,468 $ 3,771
Basic earnings per share ......... $ 0.14 $ 0.05 $ 0.15 $ 0.44 $ 0.13 $ 0.11 $ 0.31 $ 0.34
Diluted earnings per share ....... $ 0.14 $ 0.05 $ 0.15 $ 0.43 $ 0.13 $ 0.10 $ 0.30 $ 0.33
AS A PERCENTAGE OF NET SALES:
Gross income ..................... 38.8% 37.7% 38.7% 37.1% 36.1% 37.7% 40.0% 36.8%
Operating income ................. 4.7 1.7 4.7 9.2 4.6 3.9 8.7 9.2
Income before income taxes ....... 4.9 2.0 4.6 9.3 5.1 4.8 9.0 9.4
Net income ....................... 3.0% 1.2% 2.8% 5.9% 3.0% 2.9% 6.8% 5.1%
</TABLE>
8
<PAGE> 10
LIQUIDITY AND CAPITAL RESOURCES
The Company's primary sources of working capital consist of internally generated
cash and its $30.0 million collateralized, revolving credit facility. This
credit facility is used for letters of credit for import merchandise, and direct
borrowings of up to the maximum amount of the credit facility. The credit
facility expires June 30, 2000. The credit facility also contains certain
financial covenants as to the amount of tangible net worth and cash flow from
operations. The credit facility is collateralized by an interest in the
Company's inventory, equipment, fixtures, cash and an assignment of leases. At
January 30, 1999, there were outstanding letters of credit issued in favor of
the Company under the credit facility in an aggregate amount of $11.3 million.
On the same date, there were no outstanding direct borrowings under the credit
facility.
The Company made capital expenditures of approximately $22.5 million in
1998, primarily for new stores, the remodeling of existing stores and updating
store fixtures (approximately $18.8 million) plus computer hardware (including
new point of sale equipment) and software (approximately $3.5 million). The
Company made capital expenditures of approximately $20.4 million in 1997,
primarily for new stores, point of sale equipment, the remodeling of existing
stores and updating store fixtures. The Company expects to make capital
expenditures in 1999 of approximately $15.3 million for new stores and the
remodeling of existing stores (approximately $13.5 million) and for upgraded
corporate software and hardware components (approximately $1.8 million). The
Company anticipates opening 21 net new stores and remodeling approximately 24
stores during 1999.
Net cash flow from operating activities was $16.3 million in 1998 compared
to $6.0 million in 1997. The primary reasons for the increase in net cash flow
from operating activities were a result of the reduction of income taxes
currently payable in 1998 compared to 1997, and a smaller increase in
merchandise inventories during 1998 compared to the increase in 1997.
Net cash flow for financing activities was $4.3 million primarily for the
purchase of treasury stock during 1998. For 1997, the net cash flow from
financing activities was $16.4 million, primarily from the sale of 995,000
shares of the Company's common stock. These shares were sold in an underwritten
public offering for $16 per share, net of expenses of the offering of
approximately $1.0 million.
Cash and cash equivalents were $7.4 million at the end of 1998 compared to
$18.0 million at the beginning of 1998, a decrease of $10.6 million.
Management believes that cash generated from operations and available
borrowings under the Company's credit facility will be sufficient to meet the
Company's working capital and capital expenditure needs in the foreseeable
future.
YEAR 2000 COMPLIANCE
The year 2000 (Y2K) 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. The
problem also extends to many non-software systems, that is operating and control
systems that rely on embedded chip systems. The Company and other retailers are
vulnerable to the industry's dependence on electronic point of sale, inventory
control systems and other system failures such as payroll, accounting and
security. The Company must also be aware of the effect of Y2K failures on the
part of its suppliers, landlords and public or private infrastructure service
providers, which include electricity, water, gas, transportation and
communication.
9
<PAGE> 11
The Company's efforts in addressing the Y2K issues are directed by
senior-level management. These efforts represent a significant commitment of
time of the Company's information system staff, the efforts of outside
consultants and software testing applications. Management periodically reports
to the Board of Directors with respect to the Company's Y2K efforts. In May
1996, the Company initiated the process of preparing its computer systems and
applications for the year 2000 when the decision to replace the store point of
sale equipment was made. The store point of sale systems were replaced during
the third quarter of 1997. The Y2K process also involves upgrading corporate
hardware and software components. Management estimates the total cumulative
costs will be approximately $9.5 million, which includes the $6.2 million
already invested in the new point of sale systems.
The Company's six-phase approach and anticipated timing of each phase are
described below.
Phase 1 - Inventory. The Company's hardware and software (including
business and operational applications and operating systems) have already been
inventoried. Third party businesses have already been solicited as to their
preparation on this issue.
Phase 2 - Assessment. The Y2K task force has completed the assessment of
the business systems and established a priority for their repair or replacement.
The assessment process for internal non-IT systems and for key third-party
businesses has also been completed. Systems that are known to be critical or
important are receiving top priority in the remediation phase.
Phase 3 - Strategy. This phase involves the development of appropriate
remedial strategies for both IT and non-IT systems. These strategies may include
repairing, testing and certifying, replacing or abandonment of particular
systems. The strategy phase has been completed for all IT and non-IT systems.
Phase 4 - Remediation. The remediation phase involves the execution of the
strategies chosen. The IT systems remediation is expected to be completed by the
summer of 1999. The non-critical systems corrections should be completed by the
fall of 1999.
Phase 5 - Test and Certification. The Company expects all critical and
important systems to be tested and certified during the summer of 1999 and
non-critical systems to be tested and certified by late fall of 1999. Testing
for non-IT systems has been initiated: however, due to the Company's reliance on
many third-party vendors, the Company cannot estimate precisely when this phase
will be completed.
Phase 6 - Contingency Planning. This phase involves addressing operational
issues that may arise due to the failure of the Company's or third-party
preparations. The Company is currently assessing such issues as the loss of
communication, banking, transportation and infrastructure services. The Company
estimates that all these plans will be completed by December 1999.
Based upon its efforts to date, the Company believes that the vast majority
of both its IT and its non-IT systems will remain up and running after January
1, 2000. Accordingly, the Company does not currently anticipate that internal
systems failure will result in any material adverse effect to its operations or
financial condition. At this time, the Company believes that the most likely
"worst case" scenario involves potential disruptions in areas in which the
Company's operations must rely on third-party systems. Nonetheless, the Y2K
problem is pervasive and complex and can potentially affect any system.
Accordingly, no assurance can be given that Y2K 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.
10
<PAGE> 12
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company considers the market risks of its variable interest rates on
borrowings to not be material to its financial condition.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTAL DATA
The information required by this item is presented under Item 14 of this
report.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
There have been no changes in or disagreements with the Company's
independent accountants on accounting or financial disclosures.
PART III
The information required by this Part III (Items 10, 11, 12, and 13) is
incorporated herein by reference from the registrant's definitive Proxy
Statement for the 1999 Annual Meeting of the Shareholders 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
<TABLE>
<CAPTION>
PAGE NO.
--------
<S> <C>
Consolidated Balance Sheets -- As January 30, 1999 and January 31, 1998 12
Consolidated Statements of Income -- for 1998, 1997 and 1996................... 13
Consolidated Statements of Cash Flows -- for 1998, 1997 and 1996............... 14
Consolidated Statements of Shareholders' Equity -- for 1998, 1997 and 1996 .... 15
Notes to Consolidated Financial Statements..................................... 16
Report of Independent Accountants.............................................. 23
</TABLE>
(a) (2) Financial Statement Schedules
Not applicable.
(a) (3) Exhibits
The Exhibit Index that appears beginning on page 25 is hereby
incorporated by reference in response to this item.
(b) Reports on Form 8-K
None.
11
<PAGE> 13
PAUL HARRIS STORES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands)
<TABLE>
<CAPTION>
January 30, January 31,
1999 1998
---------- ----------
<S> <C> <C>
ASSETS
Current assets
Cash and cash equivalents $ 7,429 $ 17,990
Merchandise inventories 34,638 31,940
Construction allowances receivable 4,977 2,926
Other receivables 902 404
Prepaid expenses 1,381 1,359
Deferred income taxes -- 124
--------- ---------
Total current assets 49,327 54,743
--------- ---------
Property, fixtures and equipment
Land, building and improvements 6,013 5,871
Store fixtures and equipment 38,229 25,838
Leasehold improvements and other 27,981 19,462
--------- ---------
72,223 51,171
Less: accumulated depreciation and amortization (21,611) (16,368)
--------- ---------
Property, fixtures and equipment, net 50,612 34,803
Deferred income taxes -- 952
Other assets 746 800
--------- ---------
Total assets $ 100,685 $ 91,298
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities
Accounts payable $ 15,082 $ 12,725
Compensation and related taxes 1,245 2,780
Income taxes payable -- 377
Deferred income taxes 1,235 --
Other accrued expenses 5,114 4,345
Current maturities of long-term debt 120 120
--------- ---------
Total current liabilities 22,796 20,347
--------- ---------
Long-term debt 1,690 1,810
Deferred income taxes 2,577 --
Other non-current liabilities 3,121 3,137
Commitments and contingent liabilities (see Note 5)
Shareholders' equity
Preferred stock (no par value)
Authorized 1,000,000 shares; none issued
Common stock (no par value)
Authorized 20,000,000 shares; issued and outstanding
11,299,000 and 11,256,000 respectively 17,793 17,354
Additional paid-in capital 14,011 13,904
Unamortized restricted stock (219) --
Retained earnings 43,332 34,746
--------- ---------
74,917 66,004
Less: common stock in treasury, at cost
500,000 at January 30, 1999 4,416 --
--------- ---------
Total shareholders' equity 70,501 66,004
--------- ---------
Total liabilities and shareholders' equity $ 100,685 $ 91,298
========= =========
</TABLE>
See accompanying "Notes To Consolidated Financial Statements."
12
<PAGE> 14
PAUL HARRIS STORES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(Dollars in thousands, except for per share data)
<TABLE>
<CAPTION>
For the fifty - two weeks ended
----------------------------------
January 30, January 31, February 1,
1999 1998 1997
---------- ---------- ----------
<S> <C> <C> <C>
Net sales $ 241,693 $ 209,236 $ 190,288
Cost of sales, including certain occupancy expenses
exclusive of depreciation 149,858 130,589 118,066
--------- --------- ---------
Gross income 91,835 78,647 72,222
Selling, general and administrative expenses 72,025 59,733 53,300
Depreciation and amortization 6,260 4,148 3,270
--------- --------- ---------
Operating income 13,550 14,766 15,652
Interest income (expense), net 187 941 (1,235)
--------- --------- ---------
Income before income taxes 13,737 15,707 14,417
Provision for income taxes 5,151 5,979 5,598
--------- --------- ---------
Net income $ 8,586 $ 9,728 $ 8,819
========= ========= =========
Basic earnings per share $ 0.78 $ 0.89 $ 0.88
========= ========= =========
Weighted average number of shares outstanding 11,077 10,880 10,052
========= ========= =========
Diluted earnings per share $ 0.75 $ 0.86 $ 0.85
========= ========= =========
Weighted average number of shares and
share equivalents outstanding 11,378 11,292 10,368
========= ========= =========
</TABLE>
See accompanying "Notes To Consolidated Financial Statements."
13
<PAGE> 15
PAUL HARRIS STORES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
<TABLE>
<CAPTION>
For the fifty - two weeks ended
-----------------------------------
January 30, January 31, February 1,
1999 1998 1997
---------- ---------- -----------
<S> <C> <C> <C>
Cash flow from operating activities:
Net income $ 8,586 $ 9,728 $ 8,819
Adjustments to reconcile earnings to cash provided:
Depreciation and amortization 6,260 4,148 3,270
Restricted stock expense 128 -- --
Net loss on disposal of assets 326 463 560
Deferred income taxes 4,888 (1,076) --
Utilization of net operating loss carryforward -- 2,835 4,974
(Increase) decrease in current assets:
Merchandise inventories (2,698) (12,181) (2,114)
Construction allowances receivable (2,051) (2,494) (425)
Other receivables (498) 25 103
Prepaid expenses (22) (523) 177
Increase (decrease) in current liabilities:
Accounts payable 2,357 4,210 2,503
Compensation and related taxes (1,535) (994) 2,996
Income taxes payable (377) 340 (8)
Other accrued expenses 769 791 107
Other 127 715 79
-------- -------- --------
Net cash flow from operating activities 16,260 5,987 21,041
-------- -------- --------
Cash flow for investing activities:
Additions to fixed assets (22,484) (20,408) (5,230)
-------- -------- --------
Cash flow (for) from financing activities:
Repayment of long-term debt (120) (120) (19,910)
Proceeds from issuance of common stock and
related tax benefits 199 16,530 214
Purchase of treasury stock (4,416) -- --
-------- -------- --------
Net cash flow (for) from financing activities (4,337) 16,410 (19,696)
-------- -------- --------
Cash (used) provided $(10,561) $ 1,989 $ (3,885)
======== ======== ========
Cash and cash equivalents:
At beginning of period $ 17,990 $ 16,001 $ 19,886
At end of period 7,429 17,990 16,001
-------- -------- --------
Cash (used) provided $(10,561) $ 1,989 $ (3,885)
======== ======== ========
Supplemental disclosures of cash flow information:
Cash paid for interest $ 430 $ 385 $ 2,188
======== ======== ========
Cash paid for income taxes, net of refunds $ 1,050 $ 2,684 $ 632
======== ======== ========
</TABLE>
See accompanying "Notes To Consolidated Financial Statements."
14
<PAGE> 16
PAUL HARRIS STORES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(In thousands)
<TABLE>
<CAPTION>
Common Stock Additional Unamortized Treasury Stock
----------------- Paid-in Restricted --------------- Retained
Shares Amount Capital Stock Shares Amount Earnings
------- ------- ---------- ----------- ------ ------ --------
<S> <C> <C> <C> <C> <C> <C> <C>
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 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 1997 -- -- -- -- -- -- 9,728
------- ------- ------- ------- ------- ------- -------
Balance as of January 31, 1998 11,256 17,354 13,904 -- -- -- 34,746
Issuance of common stock -- -- -- -- -- -- --
Exercise of stock options, including
related tax benefit 43 92 107 -- -- -- --
Grant of restricted stock -- 347 -- (347) -- -- --
Amortization of restricted stock -- -- -- 128 -- -- --
Purchase of treasury stock -- -- -- -- 500 4,416 --
Net income for 1998 -- -- -- -- -- -- 8,586
------- ------- ------- ------- ------- ------- -------
Balance as of January 30, 1999 11,299 $17,793 $14,011 $ (219) 500 $ 4,416 $43,332
======= ======= ======= ======= ======= ======= =======
</TABLE>
See accompanying "Notes To Consolidated Financial Statements."
15
<PAGE> 17
PAUL HARRIS STORES, INC., AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS)
NOTE 1. DESCRIPTION OF BUSINESS AND 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, and downtown shopping districts. The Company operates stores in 29
states, with a significant concentration of stores in the Midwest.
Definition of Fiscal Year
The Company's fiscal year ends on the Saturday closest to January 31.
References to 1998, 1997, and 1996 are to the 52 weeks ended January 30, 1999,
January 31, 1998, and February 1, 1997, respectively.
The accounting policies below represent the accounting policies of all periods
presented.
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 amounts could differ from those estimates.
Income Taxes
The liability method as described in Statement of Financial Accounting
Standards No. 109, "Accounting for Income Taxes" ("SFAS 109") is used to compute
deferred income taxes resulting from temporary differences between the financial
reporting base and tax base of asset and liabilities.
Store Preopening and Closing Costs
Store preopening costs are expensed as incurred. Closing costs are accrued
at the time the decision is made to close a store.
Deferred Lease Payments
The Company is party to various lease arrangements which require scheduled
rent increases over the noncancellable lease term. Rent expense of such leases
is recognized on a straight-line basis over the related lease term.
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 are based
on the weighted average number of common and common equivalent shares (dilutive
stock options) outstanding during the fiscal year. The following table
reconciles the numerators and denominators used in the basic and diluted
earnings per share computations:
<TABLE>
<CAPTION>
1998 1997 1996
--------------- --------------- ---------------
Net Net Net
Income Shares Income Shares Income Shares
---------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Basic earnings per share $8,586 11,077 $9,728 10,880 $8,819 10,052
Effect of dilutive options -- 301 -- 412 -- 316
------ ------ ------ ------ ------ ------
Diluted earnings per share $8,586 11,378 $9,728 11,292 $8,819 10,368
====== ====== ====== ====== ====== ======
</TABLE>
16
<PAGE> 18
Cash and Cash Equivalents
Cash equivalents are highly liquid investments with original maturities of
less than three months (primarily money market funds). Investment income is
recognized when earned.
Fair Value of Financial Instruments
Management has estimated that the carrying value of cash and cash
equivalents, receivables, prepaid expenses and 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 analysis, based on the Company's current expected borrowing
rates for similar types of borrowing arrangements.
Merchandise Inventories
Merchandise inventory is stated at the lower of first-in, first-out (FIFO)
cost or market.
Property, Fixtures and Equipment
Property, fixtures and equipment are stated 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 Building Improvements 15-40 years; Store Fixtures and Equipment
3-10 years; Leasehold Improvements 1-15 years.
NOTE 2. LONG-TERM DEBT AND CREDIT ARRANGEMENTS
The Company has a committed credit facility of $30,000, which may be used
for letters of credit or direct borrowings ("Credit Facility"). The Credit
Facility is intended to provide the Company with the cash and liquidity to
conduct its operations. The Credit Facility was modified on November 19, 1998 to
extend the term to June 30, 2000.
As of January 30, 1999, there were no outstanding direct borrowings under
the Credit Facility. The balance of outstanding letters of credit was $11,329
and the amount of available borrowings under the borrowing formula of the Credit
Facility was $13,402.
As of November 19, 1998, at the Company's option, the Company may borrow
under the Credit Facility at the Prime Rate plus 0.25 percent (as defined in the
Credit Facility) or at the LIBOR Interest Rate (as defined in the Credit
Facility) plus 2.0 percent. Effective March 23, 1999 the Company may borrow
under the credit facility at the Prime Rate (as defined by the Credit Facility).
Letters of credit issued under the Credit Facility carry initial issuance
fees plus negotiation fees of 0.25 percent of the face amount of each letter of
credit. The Company's inventory, equipment, fixtures, cash and assignment of
leases collateralize the Credit Facility. The Company is also required to
maintain its primary operating cash accounts with the institution which is party
to the Credit Facility.
The Credit Facility contains covenants related to tangible net worth and
operating cash flow requirements. In addition, the Credit Facility as amended,
restricts the amount of the Company's common stock the Company may repurchase to
not exceed 1,500 shares and $15,000.
The Company also has a term loan of $1,690 (exclusive of amounts maturing
in one year) collateralized by a mortgage on the Company's land and buildings
with a book value of $4,151. The term loan was renewed on February 1, 1999 and
is due in full on March 1, 2000 with monthly principal payments of $10 plus
interest at 7.33 percent (7.83 percent in 1998 and 1997). The estimated fair
market value of the term loan approximates its carrying value.
NOTE 3. SHAREHOLDERS' EQUITY
All outstanding shares are shares of voting common stock.
During May 1997 the Company sold a total of 995 newly issued shares of the
Company's common stock in an underwritten public offering. The Company received
$14,957 net of expenses from the offering.
17
<PAGE> 19
The Company has a shareholders' rights plan, expiring April 10, 2007, which
becomes operative upon certain events involving the acquisition of 15 percent or
more of the Company's common stock by any person or group in a transaction not
approved by the Company's Board of Directors. Upon the occurrence of such an
event, each Right, unless redeemed by the Board, entitles its holder to
purchase, at the Right's then-current exercise price, shares of Preferred Stock
having a value of twice the Rights exercise price.
NOTE 4. INCOME TAXES
In accordance with the American Institute of Certified Public Accountants
("AICPA") Statement of Position ("SOP") 90-7, the utilization of net operating
loss carryforwards in 1997 resulted in an increase to additional paid-in capital
of approximately $2,835. 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. Upon the full utilization
of the loss carryforwards in 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
1997 by approximately $695. 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 AICPA SOP 90-7.
The provision for income taxes consists of:
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Current tax expense:
Federal .............. $1,333 $4,061 $ 293
State ................ 183 1,061 325
Deferred tax expense:
Federal .............. 3,194 643 4,431
State ................ 441 214 549
------ ------ ------
$5,151 $5,979 $5,598
====== ====== ======
</TABLE>
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 as a
result of the following:
<TABLE>
<CAPTION>
1998 1997 1996
------- ------- -------
<S> <C> <C> <C>
Federal taxes at statutory rate .................. $ 4,708 $ 5,498 $ 4,945
State and local taxes, net of federal benefit .... 410 782 574
Non-deductible compensation expense .............. -- 350 --
Reduction of valuation allowance
on deferred tax assets ........................ -- (695) --
Other ............................................ 33 44 79
------- ------- -------
$ 5,151 $ 5,979 $ 5,598
======= ======= =======
</TABLE>
Deferred tax assets (liabilities) are comprised of the following:
<TABLE>
<CAPTION>
JANUARY 30, JANUARY 31,
1999 1998
----------- -----------
<S> <C> <C>
Rent expense accruals ....................... $ 1,186 $ 1,234
Other ....................................... 376 220
------- -------
Total deferred tax assets ............... 1,562 1,454
------- -------
Retail inventory accruals ................... (1,555) --
Depreciation ................................ (3,516) (68)
Prepaid pension ............................. (162) (220)
Other ....................................... (141) (90)
------- -------
Total deferred tax liabilities ........... (5,374) (378)
------- -------
Net deferred tax (liabilities) assets ....... $(3,812) $ 1,076
======= =======
</TABLE>
18
<PAGE> 20
NOTE 5. COMMITMENTS AND CONTINGENT LIABILITIES
The Company leases retail stores under noncancellable operating leases that
generally have lease terms ranging from five to ten years. Most of these lease
arrangements do not provide for renewal periods. Many of the leases contain
contingent rental provisions computed on the basis of store sales. In addition
to rent payments, certain leases require the Company to pay real estate taxes,
insurance, maintenance, and other costs. The Company also leases automobiles and
computer equipment under operating leases with terms of 24 to 60 months.
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 0.7
percent of rental expense for 1998, 1.6 percent for 1997 and 2.2 percent for
1996; (2) The Company has a number of leases with rent calculated based on a
percentage of monthly sales. Such leases accounted for 7.7 percent of rental
expense in 1998, 11.8 percent for 1997 and 12.6 percent for 1996; (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 $23,325 for 1998, $17,293 for 1997 and $15,089 for
1996.
Future minimum lease payments at January 30, 1999, were as follows:
<TABLE>
<S> <C>
1999......................... $ 23,939
2000......................... 23,165
2001......................... 22,268
2002......................... 22,113
2003......................... 21,422
Thereafter................... 79,420
-------------
Total .................. $ 192,327
=============
</TABLE>
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 proceeded and a trial
is pending. 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 covering
eligible full-time employees as of December 31, 1994. 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. Participants at that date maintain benefits accrued through
December 31, 1994, but do not accrue benefits for service or compensation after
December 31, 1994. Additionally, new employees are not covered by the plan.
19
<PAGE> 21
The assets of the plan, comprised almost entirely of U.S. Government
obligations and high grade stocks and bonds, included 6 shares of the Company's
common stock as of January 30, 1999 and January 31, 1998. The following chart
summarizes the balance sheet impact, as well as the benefit obligations, assets,
funded status and rate assumptions of the plan:
<TABLE>
<CAPTION>
1998 1997
------- -------
<S> <C> <C>
Projected benefit obligation:
Beginning obligations ............... $ 1,071 $ 1,205
Interest cost .................... 77 87
Actuarial gains .................. 10 89
Benefits paid .................... (457) (470)
Other ............................ 124 160
------- -------
Ending obligations .................. 825 1,071
------- -------
Fair value of plan assets:
Beginning fair value ................ 1,484 1,869
Actual return on plan assets ..... 218 85
Benefits paid .................... (457) (470)
------- -------
Ending fair value ................... 1,245 1,484
------- -------
Funded status of the plan ........... 420 413
Unrecognized net loss ............... 171 237
------- -------
Net balance sheet asset ............. $ 591 $ 650
======= =======
Rate Assumptions:
Discount rate ....................... 7.25% 7.25%
Rate of return on plan assets ....... 8.00% 8.00%
</TABLE>
NOTE 7. EMPLOYEE BENEFIT PLANS
STOCK OPTION PLANS
Under various plans, the Company may grant stock options and other awards
to key executives, management, members of the Company's Board of Directors, and
to other persons who are not employees of the Company at exercise prices equal
to or exceeding the market price at the date of grant. In general, options
become exercisable over a one to three year period from the grant date and
expire ten years after the grant date.
The Company has adopted Statement of Financial Accounting Standard No. 123,
"Accounting for Stock-based Compensation" ("SFAS No. 123") and pursuant to its
provisions the Company has elected to continue using the intrinsic-value method
of accounting for stock-based awards granted to employees in accordance with APB
25. Accordingly, the Company has not recognized compensation expense for its
stock-based awards to employees.
The maximum number of shares of common stock of the Company that may be
granted under the Company's stock option plans is 2,000 shares.
Pursuant to an employment agreement by and between the Company and the
Company's Chairman, President and CEO in 1994, the compensation committee
granted a non-transferable option to purchase 350 shares of the common stock of
the Company at an exercise price of $5.68 per share.
Pursuant to an employment agreement by and between the Company and the
Company's Chairman, President and CEO in 1998, the compensation committee
granted on August 30, 1998 a performance based restricted stock award of 50
shares of the common stock of the Company. This award will vest at 80 percent,
10 percent and 10 percent on the next three anniversary dates of the grant,
respectively. The Company recorded compensation expense of $128 related to this
grant in 1998.
20
<PAGE> 22
The following table summarizes options outstanding and available under
these plans and arrangements:
(SHARES IN THOUSANDS, EXCEPT FOR SHARE DATA)
<TABLE>
<CAPTION>
1998 1997 1996
------ ------ ------
<S> <C> <C> <C>
Options outstanding at beginning of year ...... 1,198 1,170 904
Options granted ............................ 564 336 444
Options exercised .......................... (43) (146) (96)
Options expired ............................ (92) (162) (82)
------ ------ ------
Options outstanding at end of year ............ 1,627 1,198 1,170
====== ====== ======
Options exercisable at end of year ............ 1,194 841 657
====== ====== ======
Options available for grant at end of year .... 374 845 1,020
====== ====== ======
Weighted average option prices per share:
At beginning of year .......................... $ 8.73 $ 6.30 $ 3.47
Granted ....................................... 8.82 16.54 10.39
Exercised ..................................... 2.16 3.19 2.23
Expired ....................................... 14.73 12.49 2.66
Outstanding at end of year .................... 8.61 8.73 6.30
Exercisable at end of year .................... $ 7.78 $ 6.79 $ 5.75
</TABLE>
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 years 1998, 1997 and 1996,
respectively: dividend yield of 0.0, 0.0 and 0.0 percent; expected volatility of
45.4, 44.6 and 41.4 percent; risk free interest rates of 5.2, 5.9 and 6.3
percent; and expected lives of 4.0, 4.0 and 7.3 years. The results are listed in
the following table:
<TABLE>
<CAPTION>
1998 1997 1996
-------- -------- --------
<S> <C> <C> <C>
Weighted average fair value per option of
options granted during the year $ 3.46 $ 6.16 $ 5.17
</TABLE>
Had compensation expense for the Company's stock options been determined
based on the fair value at the grant dates for the awards under these 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:
<TABLE>
<CAPTION>
1998 1997 1996
--------- --------- ---------
<S> <C> <C> <C>
Net income
As reported ................ $ 8,586 $ 9,728 $ 8,819
Pro forma .................. $ 7,520 $ 9,075 $ 7,863
Basic earnings per share
As reported ................. $ 0.78 $ 0.89 $ 0.88
Pro forma ................... $ 0.68 $ 0.83 $ 0.78
Diluted earnings per share
As reported ................. $ 0.75 $ 0.86 $ 0.85
Pro forma ................... $ 0.66 $ 0.80 $ 0.76
</TABLE>
21
<PAGE> 23
The following table summarizes information about stock options outstanding
and stock options exercisable at January 30, 1999: (SHARES IN THOUSANDS)
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
------------------------------------------ ------------------------
NUMBER WEIGHTED WEIGHTED NUMBER WEIGHTED
OUTSTANDING AVERAGE AVERAGE EXERCISABLE AVERAGE
RANGE OF AT JAN 30, CONTRACTUAL EXERCISE AT JAN 30, EXERCISE
EXERCISE PRICES 1999 LIFE (IN YEARS) PRICE 1999 PRICE
- ---------------- ----------- -------------- --------- ----------- -----------
<S> <C> <C> <C> <C> <C>
$ 1.31........... 125 6.70 $ 1.31 125 $ 1.31
$ 1.50 - $ 3.75........... 162 6.73 1.98 158 1.97
$ 4.00 - $ 5.68........... 376 5.21 5.63 376 5.63
$ 6.50 - $ 10.25........... 527 9.40 8.02 274 8.49
$ 11.50 - $ 27.69........... 437 8.38 16.42 261 16.69
</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 employee's 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 $135, $70 and $54 for 1998, 1997 and 1996,
respectively.
NOTE 8. IMPACT OF NEW ACCOUNTING STANDARDS
In March 1998, the AICPA issued SOP 98-1, "Accounting for the Costs of
Computer Software Developed or Obtained for Internal Use," which establishes new
accounting and reporting standards for the costs of computer software developed
or obtained for internal use. This statement will be applied prospectively and
is effective for financial statements for fiscal years beginning after December
15, 1998. The impact of this new standard is not expected to have a significant
effect on the financial position or the results of operations.
In April 1998, the AICPA issued SOP 98-5, "Reporting on the Costs of
Start-Up Activities," which requires costs of start-up activities to be expensed
as incurred. This statement is effective for financial statements for fiscal
years beginning after December 15, 1998. The statement requires capitalized
costs related to start-up activities to be expensed as a cumulative effect of a
change in accounting principle when the statement is adopted. The impact of this
new standard is not expected to have a significant effect on the financial
position or the results of operations.
NOTE 9. SUBSEQUENT EVENT (UNAUDITED)
During March 1999, the Company purchased substantially all the assets of
The J. Peterman Company, at auction, from The J. Peterman Company pursuant to a
court order of the United States Bankruptcy Court, Eastern District of Kentucky
- - Lexington Division, for $10,000, free and clear of all liens, claims,
interests and encumbrances. The purchase price in excess of net assets, if any,
will be amortized over a period not to exceed 40 years.
J. Peterman is a nationally recognized upscale retailer well known for its
catalog and unique merchandise collection. There are 12 J. Peterman stores
operating in nine states.
22
<PAGE> 24
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Shareholders of Paul Harris Stores, Inc.
In our opinion, the consolidated financial statements listed in the index
appearing under Item 14(a)(1) on page 11 present fairly, in all material
respects, the financial position of Paul Harris Stores, Inc. and its
subsidiaries (the "Company") at January 30, 1999 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 30, 1999, 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.
PricewaterhouseCoopers LLP
Indianapolis, Indiana
March 2, 1999
23
<PAGE> 25
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
PAUL HARRIS STORES, INC
April 23, 1999 By: /s/ CHARLOTTE G. FISCHER
--------------------------------------------
Charlotte G. Fischer, Chairman of the Board,
President and Chief Executive Officer
(Principal Executive Officer)
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<S> <C> <C>
/s/ CHARLOTTE G. FISCHER Chairman of the Board, President April 23, 1999
- ----------------------------------------- and Chief Executive Officer
Charlotte G. Fischer (Principal Executive Officer)
/s/ SALLY TASSANI Executive Vice President - Marketing April 23, 1999
- ----------------------------------------- and Director
Sally Tassani
/s/ THOMAS MCCAIN Senior Vice President - Finance and April 23, 1999
- ----------------------------------------- Chief Financial Officer
Thomas McCain (Principal Financial Officer)
/s/ KEITH L. HIMMEL, JR. Vice President - Finance, Controller and April 23, 1999
- ----------------------------------------- Corporate Secretary
Keith L. Himmel, Jr. (Principal Accounting Officer)
/s/ RICHARD A. FEINBERG, PH.D. Director April 23, 1999
- -----------------------------------------
Richard A. Feinberg, Ph.D.
/s/ LESLIE NATHANSON JURIS, PH.D. Director April 23, 1999
- -----------------------------------------
Leslie Nathanson Juris, Ph. D.
/s/ JAMES T. MORRIS Director April 23, 1999
- -----------------------------------------
James T. Morris
/s/ JOHN E. PETERS Director April 23, 1999
- -----------------------------------------
John E. Peters
</TABLE>
24
<PAGE> 26
EXHIBIT INDEX
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).
(ii) Amendment to Amended and Restated Articles of Incorporation dated
July 6, 1993 (incorporated herein by reference from Form 8-K dated
April 11, 1997).
(iii) Amendment to Amended and Restated Articles of Incorporation dated
April 10, 1997 (incorporated herein by reference from Form 8-K
dated April 11, 1997).
(b) Restated Bylaws of the Registrant (incorporated herein by
reference from Form 10-K for the fiscal year ended February 1,
1997).
4 (a)(i) Secured Credit Agreement dated as of October 28, 1993 by and
between the Registrant and LaSalle National Bank (incorporated
herein by reference, filed as Exhibit (4)(c) from Form 10-Q for
the fiscal quarter ended October 30, 1993).
(ii) 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, filed as Exhibit (4)(d) from
Form 10-Q for the fiscal quarter ended April 30, 1994).
(iii) First Modification of Secured Credit Agreement, Notes, Mortgage
and Other Loan Documents dated as of October 31, 1994 by and
between the Registrant and LaSalle National Bank (incorporated
herein by reference, filed as Exhibit (4)(e) from Form 10-K for
the fiscal year ended January 28, 1995).
(iv) Second Modification of Secured Credit Agreement, Notes, Mortgage
and Other Loan Documents dated as of January 31, 1995 by and
between the Registrant and LaSalle National Bank (incorporated
herein by reference, filed as Exhibit (4)(f) from Form 10-K for
the fiscal year ended January 28, 1995).
(v) Third Modification of Secured Credit Agreement, Notes, Mortgage
and Other Loan Documents dated as of September 28, 1995 by and
between the Registrant and LaSalle National Bank (incorporated
herein by reference, filed as Exhibit (4)(g) from Form 10-Q for
the fiscal quarter ended October 28, 1995).
(vi) Fourth Modification of Secured Credit Agreement, Revolving Note,
and Other Loan Documents dated as of May 8, 1996 by and between
the Registrant and LaSalle National Bank (incorporated herein by
reference, filed as Exhibit (4)(h) from Form 10-Q for the fiscal
quarter ended May 4, 1996).
(vii) Fifth Modification of Secured Credit Agreement, Revolving Note,
and Other Loan Documents dated as of April 9, 1997 by and between
the Registrant and LaSalle National Bank (incorporated herein by
reference, filed as Exhibit (4)(I) from Form 10-K for the fiscal
year ended February 1, 1997).
(viii) Sixth Modification of Amended and Restated Secured Credit
Agreement, Revolving Note, and Other Loan Documents dated as of
November 19, 1998 by and between the Registrant and LaSalle
National Bank.
(ix) Seventh Modification of Secured Credit Agreement and Other Loan
Documents dated as of February 1, 1999 by and between the
Registrant and LaSalle National Bank.
(b)(i) Rights Agreement between the Registrant and The First National
Bank of Boston, as rights agent, dated April 10, 1997
(incorporated herein by reference, filed as Exhibit (4)(j) from
Form 8-K dated April 11,1997).
25
<PAGE> 27
(ii) First Amendment to Rights Agreement between the Registrant and
American Stock Transfer & Trust Company, as rights agent, dated
April 15, 1998 (incorporated herein by reference, filed as Exhibit
(10)(m) from Form 10-Q for fiscal quarter ended May 2, 1998).
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) * Stock Option Agreement dated as of April 29, 1994, between the
Registrant and Charlotte G. Fischer (incorporated herein by
reference, filed as Exhibit (10)(f) from Form 10-K for the fiscal
year ended January 28, 1995).
(c)(i) * 1996 Stock Option and Incentive Plan, as amended (incorporated
herein by reference, filed as Exhibit 4.3 from Form S-8 dated
June 26, 1997).
(ii) * First Amendment to the 1996 Stock Option and Incentive Plan, as
amended (incorporated herein by reference, filed as Exhibit
(10)(n) from Form 10-Q for the fiscal quarter ended May 2, 1998).
(d) * Outside Directors Stock Option Plan (incorporated herein by
reference, filed as Exhibit 4.4 from Form S-8 dated June 26,
1997).
(e) * Employment Agreement between the Company and Charlotte G. Fischer
dated February 1, 1998 (incorporated herein by reference, filed as
Exhibit (10)(l) from Form 10-K for the fiscal year ended
January 31, 1998).
(f) * 1998 Cash Bonus performance Plan for Executive Officers
(incorporated herein by reference, filed as Exhibit (10)(o)
from Form 10-Q for the fiscal quarter ended May 2, 1998).
(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) * Letter dated August 12, 1998 to Sally Tassani describing terms of
employment.
(i) * Letter dated September 12, 1998 to Thomas McCain describing terms
of employment.
23 Consent of Independent Accountants
27 Financial Data Schedule.
- ---------------
* The indicated exhibit is a management contract, compensation
plan or arrangement required to be filed by Item 601 of
Regulation S-K.
26
<PAGE> 1
SIXTH MODIFICATION OF AMENDED AND RESTATED, EXHIBIT 4(a)(viii)
SECURED CREDIT AGREEMENT,
REVOLVING NOTE AND OTHER LOAN DOCUMENTS
THIS SIXTH MODIFICATION OF AMENDED AND RESTATED SECURED CREDIT
AGREEMENT, REVOLVING NOTE AND OTHER LOAN DOCUMENTS (this "Agreement") is made as
of the 19th of November, 1998, but shall not be deemed to be effective until, at
the earliest, March 23, 1999, by and among PAUL HARRIS STORES, INC. ("PH
Stores"), an Indiana corporation, PAUL HARRIS MERCHANDISING, INC., an Indiana
corporation ("PH Merchandising"), PAUL HARRIS RETAILING, INC., an Indiana
corporation and LASALLE NATIONAL BANK, a national banking association (herein,
together with its successors and assigns, called the "Bank").
All capitalized terms and phrases, unless defined herein, shall have
the specific meanings as are set forth in that certain Secured Credit Agreement
dated as of October 28, 1993, by and between PH Stores and Bank, as amended and
restated by that certain Amended and Restated Secured Credit Agreement dated as
of January 20, 1994, as modified by those certain First through Fifth
Modifications of Secured Credit Agreement, Notes, Mortgage and Other Loan
Documents dated as of October 31, 1994, January 31, 1995, September 28, 1995,
May 8, 1996, and April 9, 1997 (as so amended, the "Credit Agreement").
WHEREAS, PH Stores has previously requested loans and advances from
Bank for the purpose of funding the working capital needs of PH Stores, and in
connection therewith, PH Stores and Bank entered into and executed the Credit
Agreement, pursuant to which the Bank, inter alia, agreed to make a term loan in
an amount of up to $2,400,000.00 and a revolving credit loan in an amount of up
to $30,000,000.00 to PH Stores; and
WHEREAS, PH Stores has previously executed and delivered to Bank (i) a
Secured Promissory Note (Revolver) originally dated October 28, 1993, as amended
(the "Revolving Note"), in the principal amount of $30,000,000.00, evidencing an
indebtedness owed by PH Stores to Bank in like amount (the "Revolving Loan") and
(ii) a Secured Promissory Note (Term) dated January 20, 1994 (the "Term Note")
in the principal amount of $2,400,000.00 evidencing an indebtedness owed by PH
Stores to Bank in like amount (the "Term Loan"); and
WHEREAS, repayment of the Term Note is secured by, among other items of
collateral, a certain Mortgage, Assignment of Leases and Rents and Security
Agreement dated as of January 20, 1994, made by PH Stores to Bank (the
"Mortgage"), recorded on February 1, 1994 in the Office of the Recorder, Marion
County, Indiana as Instrument Number 94-17807, encumbering the property legally
described therein (the "Premises"); and
WHEREAS, repayment of the Term Note is additionally secured by a
certain Assignment of Distribution Center Leases and Rents dated as of January
20, 1994 (the "Distribution Assignment"), made by PH Stores to Bank; and
<PAGE> 2
WHEREAS, repayment of the Revolving Note is secured by a certain
Security Agreement and Financing Statement dated as of October 28, 1993, as
amended (the "Security Agreement"), made by PH Stores to Bank; and
WHEREAS, repayment of the Revolving Note is additionally secured by a
certain Assignment of Leases dated as of October 28, 1994, as amended, made by
PH Stores to Bank (the "Assignment"), affecting the Premises; and
WHEREAS, repayment of the Revolving Note and the Term Note
(collectively, the "Notes") is additionally secured by UCC Financing Statements
made by PH Stores, as debtor, to Bank, as secured party (the "Financing
Statements"); and
WHEREAS, the Credit Agreement, the Notes, the Mortgage, the Security
Agreement, the Assignment, the Distribution Assignment and the Financing
Statements, together with all other documents and instruments now or hereafter
securing repayment of the Liabilities, or any portion thereof, evidenced by the
Notes are hereinafter collectively referred to as the "Loan Documents"; and
WHEREAS, Borrower (as that term is defined in the Credit Agreement as
modified by this Agreement) has requested that Bank make various modifications
to the Loan Documents, and Bank has so agreed, on the terms and conditions more
specifically set forth herein.
NOW, THEREFORE, for and in consideration of the foregoing premises and
for other good and valuable consideration, the receipt and sufficiency of which
hereby are acknowledged, Borrower and Bank do hereby agree as follows:
1. The preambles to this Agreement are fully incorporated herein by
this reference thereto with the same force and effect as though restated herein.
2. Effective as of March 23, 1999 (the "Modification Date"), the Credit
Agreement is modified as set forth below:
a. The definition of "Borrowing Base" set forth in Section 1.1
of the Credit Agreement is hereby deleted and the following is
substituted in lieu thereof:
""BORROWING BASE" means, without duplication, on any given
date with respect to the Revolving Loan, an amount equal to
the sum of (i), (ii) and (iii) below:
(i) an amount equal to sixty percent (60.0%) of the Value
of all Eligible Inventory in the physical possession
of Borrower at Borrower's distribution center or at
one of Borrower's stores, as set forth in the
Borrowing Base Certificate then most recently
delivered by Borrower to Bank; and
<PAGE> 3
(ii) an amount equal to the sum of sixty percent (60.0%)
of the Value of all Eligible Inventory in transit
from Borrower's distribution center to Borrower's
stores, as set forth in the Borrowing Base
Certificate then most recently delivered by Borrower
to Bank; and
(iii) an amount equal to the sum of (a) sixty percent
(60.0%) of the aggregate amounts available to be
drawn under Trade Letters of Credit issued to and for
the benefit of Borrower and (b) the lesser of (i)
sixty percent (60.0%) of the Value of Eligible
Inventory in transit to Borrower from domestic
manufacturers that is not supported by Trade Letters
of Credit and (ii) $250,000.00.
Notwithstanding anything contained in this definition to the
contrary, during and only during each period from August 1 of any year
through November 30 of such year, the phrase "seventy percent (70.0%)"
shall be substituted in the place and stead of each reference to "sixty
percent (60.0%)" contained in clause (a) of this definition."
b. The definition of "Business Day" set forth in Section 1.1
of the Credit Agreement is hereby deleted and the following is
substituted in lieu thereof:
""BUSINESS DAY" means (a) any day that is not a Saturday, Sunday, or a
day on which Bank in Chicago, Illinois is required or permitted to be
closed, and (b) with respect to all notices, determinations, fundings
and payments in connection with the LIBOR Interest Rate or LIBOR Rate
Loans, any day that is a Business Day pursuant to clause (a) above and
that is also a day on which trading in Dollars is carried on by and
between banks in the London interbank market."
c. The definition of "Revolving Credit Maturity Date" set
forth in Section 1.1 of the Credit Agreement is deleted in its entirety
and the following definition is substituted therefor:
""REVOLVING CREDIT MATURITY DATE" means, with respect
to the Revolving Credit Commitment, June 30, 2000."
d. The definition of "Revolving Loan Rate" set forth in
Section 1.1 of the Credit Agreement is deleted in its entirety and the
following definition is substituted therefor:
""REVOLVING LOAN RATE" means either (i) the Revolving
Loan Prime Rate with respect to that portion of the Revolving
Loan that is not subject to the LIBOR Interest Rate or (ii)
the LIBOR Interest Rate, with respect to the portion of the
Revolving Loan that is not subject to the Revolving Loan Prime
Rate."
<PAGE> 4
e. The following definitions are hereby inserted into Section
1.1 of the Credit Agreement in alphabetical order:
""BORROWER" - means individually and collectively
Paul Harris Stores, Inc. an Indiana corporation, Paul Harris
Merchandising, Inc. an Indiana corporation, and Paul Harris
Retailing, Inc. an Indiana corporation. Unless otherwise
provided for herein to the contrary, the use of the term
Borrower shall be deemed to be a joint and several reference
to each and all of the entities comprising Borrower. For
purposes of Section 9.1(a), the references therein to Borrower
shall be deemed to mean PH Stores only; for purposes of
Section 9.7, 9.8 and Schedule A, the references therein to
Borrower shall be deemed to be only a collective and not a
several reference to each of the entities comprising Borrower;
and for purposes of Section 13.13, the references to Borrower
shall be deemed to be only a several, and not a collective,
reference to each of the entities comprising Borrower."
"EUROCURRENCY RESERVE PERCENTAGE" means, with respect
to each LIBOR Rate Loan for any day for any Interest Period,
the maximum reserve percentage (expressed as a decimal,
rounded upward to the next 1/100th of 1%) in effect on such
day (whether or not applicable to Bank) under regulations
issued from time to time by the Federal Reserve Board for
determining the maximum reserve requirement (including any
emergency, supplemental or other marginal reserve requirement)
with respect to Eurocurrency funding (currently referred to as
"Eurocurrency liabilities").
"INTERBANK RATE" means, with respect to any Interest
Period, the rate of interest per annum (rounded upward to the
next 1/16th of 1%) identified by Bank as the rate of interest
at which dollar deposits in the approximate amount of the Loan
to be continued as, or converted into, a LIBOR Rate Loan and
having a maturity comparable to such Interest Period would be
offered by Bank's applicable lending office to major banks in
the London eurodollar market at approximately 11:00 a.m.
(London time) two Business Days prior to the commencement of
such Interest Period.
"INTEREST PERIOD" means, with respect to any LIBOR
Rate Loan, the period beginning on (and including) the date on
which such Loan is converted to or continued as a LIBOR Rate
Loan, and shall end on (but exclude) the day which numerically
corresponds to such date one, two, three, four or six months
thereafter (or, if such month has no numerically corresponding
day, on the last Business Day of such month), in either case
as Borrower may have stated in the applicable LIBOR Request;
provided, however, that (i) no Interest Period for any Loan
shall in any event extend beyond the maturity date applicable
to such Loan under this Agreement, (ii) each Interest Period
with respect to any Loan which would otherwise end on a day
which is not a Business Day shall end on the next
<PAGE> 5
succeeding Business Day unless such next succeeding Business
Day is the first Business Day of a calendar month, in which
case it shall end on the next preceding Business Day and (iii)
any Interest Period pertaining to a LIBOR Rate Loan that
begins on the last Business Day of a calendar month (or on a
day for which there is no numerically corresponding day in the
calendar month at the end of such Interest Period) shall end
on the last Business Day of the calendar month at the end of
such Interest Period."
"LIBOR RATE" means, with respect to any Interest
Period, a rate per annum (rounded upwards, if necessary, to
the nearest 1/100 of 1%) determined pursuant to the following
formula:
LIBOR Rate = Interbank Rate
(Reserve Adjusted) -----------------------------------
1 - Eurocurrency Reserve Percentage
"LIBOR INTEREST RATE" means the LIBOR Rate plus two
percent (2.0%).
"LIBOR RATE LOAN" means any portion of any Revolving
Loan that bears interest based on the LIBOR Interest Rate
during any period.
"LIBOR REQUEST" means, with respect to any portion of
any Revolving Loan, a request in writing from Borrower to
Bank, requesting that the Loan specified in such LIBOR Request
bear interest at the applicable LIBOR Interest Rate for a
certain Interest Period commencing on a date specified in such
LIBOR Request (which specified date must be at least two full
Business Days after the date Bank receives and acknowledges
its receipt of such LIBOR Request).
"NOTICE OF CONVERSION/CONTINUATION" has the meaning
specified in Subsection 5.1.3.2.
"PRIME RATE REVOLVING LOAN" means any portion of the
Revolving Loan that bears interest based on the Revolving Loan
Prime Rate during any period.
"REQUIREMENT OF LAW" means any federal, state or
local law, rule or regulations, permit or other binding
determination.
"REVOLVING LOAN PRIME RATE" means (i) a per annum
rate of interest equal to the Prime Rate from time to time in
effect plus one-quarter of one percent (.25%) per annum until
and including March 22, 1999, and (ii) a per annum rate of
interest equal to the Prime Rate after March 23, 1999."
"TRADE LETTERS OF CREDIT" means commercial or
documentary letters of credit.
<PAGE> 6
"YEAR 2000 PROBLEM" means the risk that computer
applications used by Borrower and any Subsidiary may be unable
to recognize and perform properly date-sensitive functions
involving certain dates prior to and any date on or after
December 31, 1999."
f. Section 5.1.1 of the Credit Agreement is deleted in its
entirety and the following is substituted in its place and stead:
"5.1.1 REVOLVING LOAN. Prior to November 19, 1998,
the Revolving Loans shall bear interest on the unpaid
principal balance thereof at the Revolving Loan Prime Rate,
subject to the terms of Section 5.1.5. From and after November
19, 1998, the Revolving Loan shall bear interest on the unpaid
principal balance thereof at the Revolving Loan Prime Rate or,
if Borrower has delivered a LIBOR Request to Bank, at the
LIBOR Interest Rate, each subject to the terms of Section
5.1.5. Interest charges shall be computed on the basis of a
year of 360 days and actual days elapsed and shall be payable
monthly in arrears on the first day of each calendar month
hereafter with respect to Loans which bear interest at the
Revolving Loan Prime Rate, on the last day of the Interest
Period (and for each six month Interest Period, at the end of
the first three months of such Interest Period and on the last
day of such Interest Period) with respect to each LIBOR Rate
Loan and as otherwise provided herein."
g. Section 5.1.5 is hereby added to the Credit Agreement as
follows:
"5.1.5 LIBOR; CONVERSION AND CONTINUATION ELECTIONS.
(a) The Borrower shall deliver a notice of
conversion/continuation ("Notice of Conversion/Continuation")
in the form of Exhibit 5.1.5 hereto to be received by the Bank
not later than 11:00 a.m. (Chicago time) at least two Business
Days in advance of the conversion/continuation date, if any
portion of the Revolving Loan is to be converted into or
continued as a LIBOR Rate Loan and specifying:
(i) the proposed conversion/continuation date;
(ii) the aggregate amount of the Revolving Loan to be
converted or renewed, the minimum amount of which shall not be
less than $500,000 or $100,000 minimal increments in excess
thereof; and
(iii) the duration of the requested Interest Period,
provided, however, the Borrower may not select an Interest
Period with respect to any portion of the Revolving Loan which
extends beyond an installment payment date for the Revolving
Loan unless, after giving effect to such election, the portion
of the Revolving Loan not subject to Interest Periods ending
after such installment payment date is equal to or greater
than the
<PAGE> 7
principal due on such installment payment date.
(b) If upon the expiration of any Interest Period
applicable to LIBOR Rate Loans, the Borrower has failed to
select timely a new Interest Period to be applicable to LIBOR
Rate Loans or if any Event of Default then exists or any event
(a "Default") then exists that with the giving of notice or
the passage of time would constitute an Event of Default, the
Borrower shall be deemed to have elected to convert such LIBOR
Rate Loans into Revolving Loans which bear interest based upon
the Revolving Loan Prime Rate effective as of the expiration
date of such Interest Period.
(c) During the existence of a Default or Event of
Default, the Borrower may not elect to have any portion of the
Revolving Loan converted into or continued as a LIBOR Rate
Loan.
(d) After giving effect to any conversion into or
continuation of LIBOR Rate Loans, there may not be more than
two different Interest Periods in effect."
h. Section 5.2 of the Credit Agreement is deleted in its
entirety and the following is substituted in its place and stead:
"5.2 INTEREST PAYMENT DATES. Except as provided in
Section 5.5 and in Section 5.1.1 with respect to LIBOR Rate
Loans, accrued and unpaid interest on each Loan shall be
payable on the first Business Day of each month and at
maturity, commencing, with respect to the Revolving Loan, on
the first Business Day of November, 1993. After maturity,
accrued and unpaid interest on all Loans shall be payable on
demand."
i. The following is hereby added as Section 6.2.3 to the
Credit Agreement:
"6.2.3 ADDITIONAL PROVISIONS RELATING TO REPAYMENTS.
With respect to any LIBOR Rate Loans repaid or prepaid by the
Borrower prior to the expiration of the Interest Period
applicable thereto, the Borrower agrees to pay to the Bank the
amounts described in Section 6.2.3(iii).
(i) Illegality.
(A) If Bank determines that the introduction
of any Requirement of Law, or any change in any
Requirement of Law, or in the interpretation or
administration of any Requirement of Law, has made it
unlawful, or that any central bank or other
governmental authority has asserted that it is
unlawful, for Bank or its applicable lending office
to
<PAGE> 8
make LIBOR Rate Loans, then, on notice thereof by the
Bank to the Borrower, any obligation of the Bank to
make LIBOR Rate Loans shall be suspended until the
Bank notifies the Borrower that the circumstances
giving rise to such determination no longer exist.
(B) If Bank determines that it is unlawful
to maintain any LIBOR Rate Loan, the Borrower shall,
upon its receipt of notice of such fact and demand
from such Bank, prepay in full such LIBOR Rate Loans
of the Bank then outstanding, together with interest
accrued thereon and amounts required under Section
6.2.3(iii), either on the last day of the Interest
Period thereof, if the Bank may lawfully continue to
maintain such LIBOR Rate Loans to such day, or
immediately, if the Bank may not lawfully continue to
maintain such LIBOR Rate Loan. If the Borrower is
required to so prepay any LIBOR Rate Loan, then
concurrently with such prepayment, the Borrower shall
convert such Loan to a Prime Rate Loan bearing
interest based on the Prime Rate.
(ii) Increased Costs and Reduction of Return. (A) If
Bank determines that, due to either (I) the introduction of or
any change in the interpretation of any law or regulation or
(II) the compliance by the Bank with any guideline or request
from any central bank or other governmental authority (whether
or not having the force of law), there shall be any increase
in the cost to Bank of agreeing to make or making, funding or
maintaining any LIBOR Rate Loans, then the Borrower shall be
liable for, and shall from time to time, upon demand, pay to
the Bank additional amounts as are sufficient to compensate
the Bank for such increased costs.
(iii) Funding Losses. The Borrower shall reimburse
the Bank and hold the Bank harmless from any loss or expense
which the Bank may sustain or incur as a consequence of:
(A) the failure of the Borrower to make on a
timely basis any payment of principal of any LIBOR
Rate Loan;
(B) the failure of the Borrower to continue
or convert a Loan after the Borrower has given (or is
deemed to have given) a Notice of
Conversion/Continuation;
(C) the prepayment or other payment
(including after acceleration thereof) of a LIBOR
Rate Loan on a day that is not the last day of the
relevant Interest Period;
<PAGE> 9
including any such loss or expense arising from the liquidation or
reemployment of funds obtained by it to maintain its LIBOR Rate Loans
or from fees payable to terminate the deposits from which such funds
were obtained.
(iv) Inability to Determine Rates. If the Bank determines that
for any reason adequate and reasonable means do not exist for
determining the LIBOR Rate for any requested Interest Period with
respect to a proposed LIBOR Rate Loan, or that the LIBOR Rate for any
requested Interest Period with respect to a proposed LIBOR Rate Loan
does not adequately and fairly reflect the cost to the Bank of funding
such Loan, the Bank will promptly so notify the Borrower. Thereafter,
the obligation of the Bank to make or maintain LIBOR Rate Loans
hereunder shall be suspended until the Bank revokes such notice in
writing. Upon receipt of such notice, the Borrower may revoke any
Notice of Conversion/Continuation then submitted by it. If the Borrower
does not revoke such Notice, the Bank shall convert or continue the
Loans, as proposed by the Borrower, in the amount specified in the
applicable notice submitted by the Borrower, but such Loans shall be
converted or continued as Loans which bear interest at the Term Loan
Prime Interest Rate instead of LIBOR Rate Loans.
(v) Certificates of Bank. If Bank claims reimbursement or
compensation under this Section 6.2.3, it shall deliver to the Borrower
a certificate setting forth in reasonable detail the amount payable to
the Bank hereunder and such certificate shall be conclusive and binding
on the Borrower in the absence of manifest error.
(vi) Survival. The agreements and obligations of the Borrower
in this Section 6.2.3(vi) shall survive the payment of all other
Liabilities."
j. Section 6.3 of the Credit Agreement is deleted in its
entirety and the following is substituted in its place and stead:
"6.3 OPTIONAL PREPAYMENTS. Borrower from time to time
may prepay that portion of the Revolving Loan Balance
consisting of Revolving Loans bearing interest at the
Revolving Loan Prime Rate in whole or in part, provided,
however, that partial payments shall be in increments of
$100,000 (or $25,000 integral multiples)."
k. The following is hereby added to the Credit Agreement as
Section 8.23:
"8.23 YEAR 2000 COMPLIANCE. Borrower and each
Subsidiary have reviewed the areas within their business and
operations which could be adversely affected by, and have
developed or are developing a program to address on a timely
basis, the Year 2000 Problem, and have made related
appropriate inquiry of material suppliers and vendors. Based
on such review and program, Borrower believes that the Year
2000 Problem will not have a material adverse effect on the
business or operations of Borrower."
<PAGE> 10
l. The following is hereby added to the Credit Agreement
as Section 9.13:
"9.13 PURCHASE AND REDEMPTION OF BORROWER'S
SECURITIES; DIVIDEND AND INTEREST RESTRICTIONS. Other than as
specifically permitted hereinbelow, not purchase or redeem any
shares of Borrower's or any Subsidiary's capital stock or any
options or warrants with respect thereto, declare or pay any
dividends thereon (other than dividends paid in the form of
shares of capital stock other than stock which constitutes
Indebtedness), make any distribution or payment to
stockholders or holders of options or warrants in respect of
Borrower's capital stock or set aside any funds for any such
purpose. Notwithstanding anything implied or expressed to the
contrary in the foregoing provisions of this Section 9.13, PH
Stores may buy back on the open market up to a total of
1,500,000 shares of its publicly traded common stock, provided
that the aggregate purchase price, including all costs
associated with such buy back, does not exceed $15,000,000 and
provided further (i) the purchase of such shares is completed
on or before June 30, 2000 and (ii) no Default or Event of
Default then exists or would exist after giving effect to any
purchase permitted herein."
m. The following is hereby added to the Credit Agreement
as Section 9.26:
"YEAR 2000". From time to time, at the request of
Bank, Borrower and each Subsidiary shall provide to Bank such
updated information or documentation as is requested regarding
the status of their efforts to address the Year 2000 Problem."
n. The following is hereby added to the Credit Agreement
as Section 13.13:
"RIGHT OF CONTRIBUTION. Each entity comprising
Borrower hereby agrees that to the extent that any individual
Borrower or entity shall have paid an amount hereunder which
would, but for this provision, render such Borrower insolvent
for purposes of state or federal fraudulent conveyance laws,
such Borrower shall be entitled to seek and receive
contribution from and against any other Borrower hereunder to
the extent such contribution would not render such other
Borrower insolvent. The provisions of this Section 13.13 shall
in no respect limit the obligations and liabilities of any
Borrower to the Bank and each Borrower shall remain liable to
the Bank for the full amount of such Borrower's Liabilities
hereunder."
3. All references in the Loan Documents to the Credit Agreement hereby
are understood to be to the Credit Agreement as modified hereby.
4. CONDITIONS TO EFFECTIVENESS. Provided that no unwaived Default or
Event of Default shall then exist other than those that would exist but for the
execution of this
<PAGE> 11
Amendment, this Amendment shall be deemed to be effective as of November 19,
1998 (the "Effective Date"), provided all of the following conditions are
satisfied in a manner, form and substance acceptable to Bank:
(a) EXECUTION OF RELATED DOCUMENTS. This Amendment (including
the attached Joinder), duly authorized and fully executed, and each in
form and substance satisfactory to Bank shall have been delivered to
Bank;
(b) DELIVERY OF OTHER DOCUMENTS.
(i) True, complete and accurate copies, duly
certified by an officer of each entity comprising Borrower, of
all documents evidencing any necessary corporate action,
resolutions, consents and governmental approvals, if any,
required for the execution, delivery and performance of this
Amendment, and the Joinder and any other document, instrument
or agreement executed or delivered in connection therewith by
the Borrower shall have been delivered to Bank;
(ii) Bank shall have received satisfactory, current
state and local UCC tax, lien and judgment searches in all
applicable locations for each entity comprising Borrower;
(iii) Executed original UCC Financing Statements by
each entity comprising Borrower, in form satisfactory to Bank
shall have been delivered to Bank; and
(iv) Such other documents, instruments or agreements
as the Bank may reasonably request shall have been delivered
to Bank.
5. In the event of any conflict among the terms of the Credit Agreement
and the other Loan Documents as modified by this Agreement, the terms of the
Credit Agreement as modified by this Agreement shall control. All terms and
provisions of the Documents corresponding to terms and provisions of the Credit
Agreement prior to the date of this Agreement shall be deemed modified in
accordance with the terms of this Agreement.
6. Borrower hereby warrants and represents that (i) Borrower has no
defense, offset or counterclaim with respect to the payment of any sum owed to
Bank, or with respect to any covenant in the Loan Documents; (ii) Bank, on and
as of the date hereof, has fully performed all obligations to Borrower which it
may have had or has on and as of the date hereof; and (iii) other than as
expressly set forth herein, by entering into this Agreement, Bank does not waive
any condition or obligation in the Loan Documents.
7. Borrower hereby agrees to execute and deliver promptly to Bank, at
Bank's request, such other documents as Bank, in its reasonable discretion,
shall deem necessary or appropriate to evidence the transaction contemplated
herein.
<PAGE> 12
8. Borrower agrees to pay all fees and expenses associated with the
consummation of the transactions contemplated in this Agreement, including,
without limitation, reasonable fees and expenses of Bank's counsel and related
expenses.
9. Time is of the essence of this Agreement.
10. This Agreement may be executed in any number of counterparts, each
of which shall constitute an original, but all of which, taken together, shall
constitute one and the same Agreement.
11. Except as otherwise set forth herein to the contrary, the Loan
Documents remain unmodified and continue in full force and effect. Borrower
hereby reaffirms, confirms and ratifies each and every covenant, condition,
obligation and provision set forth in the Loan Documents, each as modified
hereby.
[END OF PAGE]
<PAGE> 13
IN WITNESS WHEREOF, the undersigned, intending to be legally bound
hereby, have executed and delivered this Agreement as of the day and year first
above written.
BORROWER:
PAUL HARRIS STORES, INC., an Indiana corporation
By: /s/ Thomas McCain
---------------------------------------------------
Title: SVP
------------------------------------------------
Its:
--------------------------------------------------
PAUL HARRIS MERCHANDISING, INC., an Indiana corporation
By: /s/ Thomas McCain
---------------------------------------------------
Title: SVP
------------------------------------------------
Its:
---------------------------------------------------
PAUL HARRIS RETAILING INC., an Indiana corporation
By: /s/ Thomas McCain
---------------------------------------------------
Title: SVP
------------------------------------------------
Its:
--------------------------------------------------
BANK:
LASALLE NATIONAL BANK, a national banking association
By: /s/ Ann Ellingsen
---------------------------------------------------
Title:
------------------------------------------------
Its:
--------------------------------------------------
<PAGE> 14
EXHIBIT 5.1.4
-------------
NOTICE OF CONTINUATION/CONVERSION
[Date]
LaSalle National Bank
135 S. LaSalle Street
Chicago, Illinois 60603
Attention: Ann H. Ellingsen
Dear Ann:
The undersigned, PAUL HARRIS STORES, INC., an Indiana corporation, PAUL
HARRIS MERCHANDISING, INC., an Indiana corporation, PAUL HARRIS RETAILING, INC.,
an Indiana corporation (individually and collectively the "Borrower"), refers to
the Amended and Restated Secured Credit Agreement originally dated as of January
20, 1994 as modified by various Amendments thereto (as it may hereafter be
amended, modified, extended or restated from time to time, the "Credit
Agreement"), among the Borrower and LaSalle National Bank ("Bank"). Capitalized
terms used herein and not otherwise defined herein shall have the meanings
assigned to such terms in the Credit Agreement. The Borrower hereby gives you
notice pursuant to Section 5.1.4 of the Credit Agreement that it requests to
[convert] [continue] a Revolving Loan under the Credit Agreement, and in that
connection sets forth below the terms on which such Revolving Loan is requested
to be [converted] [continued]:
(A) Type of Loan into which
Loan is to be [converted(1/)]
[continued(2/)]:
---------------------
(B) Principal Amount of Revolving Loan
outstanding as of the date hereof
to be [converted][continued]:
----------------------
- ----------
(1/) LIBOR Rate Loan or Prime Rate Term Loan. If converted into a LIBOR Rate
Loan, state length of the Interest Period and the last day thereof,
which shall end not later than the applicable maturity date of the Term
Loan.
(2/) LIBOR Rate Loan.
<PAGE> 15
(C) Date the Revolving Loan is to be [converted(3/)]
[continued(4/)]:
---------------------
(D) Interest Period and the last day
thereof (if for LIBOR Rate loan):
---------------------
PAUL HARRIS STORES, INC., an Indiana
corporation
By:
-------------------------------------------------
Name:
------------------------------------------------
Its:
-------------------------------------------------
PAUL HARRIS MERCHANDISING, INC., an Indiana
corporation
By:
-------------------------------------------------
Name:
-----------------------------------------------
Its:
------------------------------------------------
PAUL HARRIS RETAILING, INC., an Indiana corporation
By:
-------------------------------------------------
Name:
------------------------------------------------
Its:
-------------------------------------------------
- ----------
(3/) Which must be the last day of an Interest Period with respect to the
conversion of a LIBOR Rate Loan to a Base Rate Loan.
(4/) Which must be upon the expiration of the then current Interest Period
with respect to the LIBOR Rate Loan.
<PAGE> 16
JOINDER AGREEMENT
-----------------
This JOINDER AGREEMENT (the "Joinder") is made as of the 19th day of
November, 1998 by the undersigned (collectively "Subsidiaries") subsidiaries of
Paul Harris Stores, Inc., an Indiana corporation ("PH Stores"), and LaSalle
National Bank, a national banking association ("Bank"). All capitalized terms
used and not otherwise defined herein shall have the meaning ascribed thereto in
the Credit Agreement (as hereinafter defined).
WHEREAS, Bank and PH Stores are parties to that certain Amended and
Restated Secured Credit Agreement dated as of January 20, 1994 and as modified
by five Amendments (as the same may be amended, supplemented, restated or
otherwise modified from time to time the "Credit Agreement");
WHEREAS, in order to induce Bank to make the Loans as provided for in
the Credit Agreement and to secure the Liabilities thereunder, PH Stores has
granted a continuing Lien to Bank on certain collateral pursuant to that certain
Security Agreement and Financing Statement originally dated as of October 28,
1993 (as amended, the "Security Agreement") by and between PH Stores and Bank;
WHEREAS, Subsidiaries have been formed and are qualified to borrow
Loans under the Credit Agreement and, as a result of the foregoing and pursuant
to the definition of Borrower in the Credit Agreement, Subsidiaries shall be
deemed to be a Borrower and a co-obligor under the Credit Agreement and the
other Related Documents;
WHEREAS, Subsidiaries desires to execute this Joinder and to become a
Borrower under the Credit Agreement and, in connection therewith, to become a
party to the Security Agreement granting to Bank a Lien upon certain Collateral
(as defined in the Security Agreement) owned or consigned by or to, or leased
from or to, Subsidiaries;
NOW, THEREFORE, for and in consideration of the premises and other good
and valuable consideration, the receipt and sufficiency of which are hereby
acknowledged, the parties thereto agree as follows:
1. Joinder in Credit Agreement. Each Subsidiary hereby assumes, and
agrees to perform, for the benefit of Bank, all of the Liabilities of a Borrower
under the Credit Agreement and the other Related Documents, as direct and
primary obligations of Subsidiaries (including any such Liabilities that may
have accrued prior to the date hereof), including, without limitation, its
Liabilities with respect to the Loans, and further agrees that it shall comply
with and be fully bound by the terms of the Credit Agreement and the other
Related Documents as if it had been a signatory thereto as of the date thereof;
provided that the representations and warranties made by each Subsidiary
thereunder shall be deemed true and correct as of the date of this Joinder.
As a Borrower under the Credit Agreement, each Subsidiary shall execute all
<PAGE> 17
Notes required by Bank for any Loans made, assumed or to be made, from time to
time, by Bank to such Subsidiary, and each Subsidiary agrees to pay all
Liabilities owing by it to Bank, including all payments of principal, interest
and other charges due from time to time with respect to the Loans made, assumed
or available to such Subsidiary.
2. Joinder in Security Agreement. Each Subsidiary hereby grants to
Bank, a security interest in all Collateral in which it has an interest, whether
now or hereafter arising, in accordance with the terms of the Security
Agreement. Each Subsidiary hereby assumes and agrees to perform for the benefit
of Bank, all of its obligations as a Grantor under the Security Agreement, as
direct and primary obligations of such Subsidiary (including any such
obligations that may have accrued prior to the date hereof) and further agrees
that it shall comply with and be fully bound by the terms of the Security
Agreement as if it had been a signatory thereto as of the date thereof; provided
that the representations and warranties made by such Subsidiary thereunder shall
be deemed true and correct as of the date of this Joinder.
3. Amendment to Security Agreement. Effective as of the date hereof,
the Security Agreement is hereby amended to add the information set forth on
Exhibit A attached hereto as Exhibits C and D hereto.
4. Unconditional Joinder. Each Subsidiary acknowledges that such
Subsidiary's obligations as a party to this Joinder are unconditional and are
not subject to the execution of one or more Joinders by other subsidiaries of PH
Stores or other parties.
5. Reliance. Bank shall be entitled to rely on this Joinder as evidence
that each Subsidiary has joined (i) as a Borrower under the Credit Agreement and
the other Related Documents and is fully obligated thereunder as a Borrower and
(ii) as a Grantor under the Security Agreement and is fully obligated thereunder
as a Grantor.
6. Incorporation by Reference. All terms and conditions of the Credit
Agreement, the other Related Documents and the Security Agreement, including,
but not limited to, all representations, warranties, covenants, indemnities,
guaranties and other obligations. Borrower thereunder is hereby incorporated by
reference in this Joinder as if set forth in full.
[SIGNATURE PAGE FOLLOWS]
<PAGE> 18
IN WITNESS WHEREOF, the parties hereto have executed and delivered this
Joinder Agreement as of the date set forth above.
SUBSIDIARIES:
PAUL HARRIS MERCHANDISING, INC., an Indiana corporation
By: /s/ Thomas McCain
---------------------------------------------------
Title:
------------------------------------------------
Its: SVP
--------------------------------------------------
PAUL HARRIS RETAILING, INC., an Indiana corporation
By: /s/ Thomas McCain
---------------------------------------------------
Title:
-------------------------------------------------
Its: SVP
--------------------------------------------------
BANK:
LASALLE NATIONAL BANK, a national banking association
By: /s/ Ann Ellingsen
---------------------------------------------------
Title: VP
------------------------------------------------
Its:
--------------------------------------------------
<PAGE> 19
EXHIBIT A to
JOINDER AGREEMENT
EXHIBITS C AND D (combined)
to
SECURITY AGREEMENT
SCHEDULE OF OFFICES, LOCATIONS OF COLLATERAL
AND RECORDS CONCERNING PAUL HARRIS MERCHANDISING, INC.
I. Chief Executive Office and principal place of business of Paul Harris
Merchandising, Inc., 6003 Guion Road, Indianapolis, Indiana 46268
II. Corporate Offices of Paul Harris Merchandising, Inc., 6003 Guion Road,
Indianapolis, Indiana 46268
III. Warehouses: 6003 Guion Road, Indianapolis, Indiana 46268.
IV. Other Premises at which Collateral is Stored or Located: None
V. Locations of Records Concerning Collateral: 6003 Guion Road,
Indianapolis, Indiana 46268
SCHEDULE OF OFFICES, LOCATIONS OF COLLATERAL
AND RECORDS CONCERNING PAUL HARRIS RETAILING, INC.
I. Chief Executive Office and principal place of business of Paul Harris
Retailing, Inc., 6003 Guion Road, Indianapolis, Indiana 46268
II. Corporate Offices of Paul Harris Retailing, Inc., 6003 Guion Road,
Indianapolis, Indiana 46268
III. Warehouses: None
IV. Other Premises at which Collateral is Stored or Located: See separate
Schedule attached hereto.
V. Locations of Records Concerning Collateral: 6003 Guion Road,
Indianapolis, Indiana 46268
<PAGE> 1
SEVENTH MODIFICATION OF SECURED CREDIT AGREEMENT, EXHIBIT 4(a)(ix)
AND OTHER LOAN DOCUMENTS
--------------------------------------------------------
THIS SEVENTH MODIFICATION OF SECURED CREDIT AGREEMENT AND OTHER LOAN
DOCUMENTS (this "Agreement") is made, and shall be deemed effective, as of the
1st day of February, 1999 by and among PAUL HARRIS STORES, INC., an Indiana
corporation ("PH Stores"), PAUL HARRIS MERCHANDISING, INC., an Indiana
corporation, PAUL HARRIS RETAILING, INC., an Indiana corporation (herein,
together with their respective successors and assigns, called the "Borrowers")
and LASALLE NATIONAL BANK, a national banking association (herein, together with
its successors and assigns, called the "Bank").
All capitalized terms and phrases, unless defined herein, shall have
the specific meanings as are set forth in that certain Secured Credit Agreement
dated as of October 28, 1993, by and among Borrowers and Bank, as amended and
restated by that certain Amended and Restated Secured Credit Agreement dated as
of January 20, 1994, as modified by that certain First Modification of Secured
Credit Agreement, Notes, Mortgage and Other Loan Documents dated as of October
31, 1994, as further modified by that certain Second Modification of Secured
Credit Agreement, Notes, Mortgage and Other Loan Documents dated as of January
31, 1995, as further modified by that certain Third Modification of Secured
Credit Agreement, Notes, Mortgage and Other Loan Documents dated as of September
28, 1995, as further modified by that certain Amended and Restated Third
Modification of Secured Credit Agreement, Notes, Mortgage and Other Loan
Documents dated as of September 28, 1995, as further modified by that certain
Fourth Modification of Secured Credit Agreement, Revolving Note and Other Loan
Documents dated as of May 8, 1996; as further modified by that certain Fifth
Modification of Secured Credit Agreement, Revolving Note and Other Loan
Documents dated as of April 9, 1997 and as further modified by that certain
Sixth Modification of Secured Credit Agreement, Revolving Note and Other Loan
Documents dated as of October 19, 1998 (the "Credit Agreement").
WHEREAS, Borrowers has previously requested loans and advances from
Bank for the purpose of funding Borrower's working capital needs, and in
connection therewith, Borrower and Bank entered into and executed the Credit
Agreement, pursuant to which the Bank, inter alia, agreed to make a term loan in
an amount of up to $2,400,000.00 to PH Stores and a revolving credit loan in an
amount of up to $20,000,000.00 to the Borrower; and
WHEREAS, Borrower has previously executed and delivered to Bank (i) a
Secured Promissory Note (Revolver) dated October 28, 1993, as amended (the
"Revolving Note"), in the principal amount of $20,000,000.00, evidencing an
indebtedness owed by Borrower to Bank in like amount (the "Revolving Loan") and
(ii) a Secured Promissory Note (Term Loan) dated January 20, 1994 (the "Term
Note") in the principal amount of $2,400,000.00 evidencing an indebtedness owed
by Borrower to Bank in like amount (the "Term Loan"); and
<PAGE> 2
WHEREAS, repayment of the Term Note is secured by, among other items of
collateral, a certain Mortgage, Assignment of Leases and Rents and Security
Agreement dated as of January 20, 1994, made by Borrower to Bank (the
"Mortgage"), recorded on February 1, 1994 in the Office of the Recorder, Marion
County, Indiana as Instrument Number 94-17807, encumbering the property legally
described therein (the "Premises"); and
WHEREAS, repayment of the Term Note is additionally secured by a
certain Assignment of Distribution Center Leases and Rents dated as of January
20, 1994 (the "Distribution Assignment"), made by Borrower to Bank; and
WHEREAS, repayment of the Revolving Note and the Term Note is secured
by a certain Security Agreement and Financing Statement dated as of October 28,
1993, as amended (the "Security Agreement"), made by Borrower to Bank; and
WHEREAS, repayment of the Revolving Note is additionally secured by a
certain Assignment of Leases dated as of October 28, 1994, as amended, made by
Borrower to Bank (the "Assignment"), affecting the Premises; and
WHEREAS, the Credit Agreement, the Notes, the Mortgage, the Security
Agreement, the Assignment and the Distribution Assignment, together with all
other documents and instruments now or hereafter securing repayment of the
Liabilities, or any portion thereof, evidenced by the Notes are hereinafter
collectively referred to as the "Loan Documents"; and
WHEREAS, Borrower has requested that Bank extend the present Term Loan
Maturity Date and make other modifications to the Loan Documents, and Bank has
so agreed, on the terms and conditions more specifically set forth herein.
NOW, THEREFORE, for and in consideration of the foregoing premises and
for other good and valuable consideration, the receipt and sufficiency of which
hereby are acknowledged, Borrower and Bank do hereby agree as follows:
1. The preambles to this Agreement are fully incorporated herein by
this reference thereto with the same force and effect as though restated herein.
2. Effective as of February 1, 1999 (the "Modification Date"), the
Credit Agreement is modified as set forth below:
a. The definition of "Term Loan Maturity Date" set forth in
Section 1.1 of the Credit Agreement is deleted and the following
definition substituted in lieu thereof:
""TERM LOAN MATURITY DATE" - means, with respect to the Term
Loan Commitment, March 1, 2000."
b. Section 4.2 of the Credit Agreement is deleted and the
following section substituted in lieu thereof:
<PAGE> 3
"4.2 TERM NOTE. The Term Loan shall be evidenced by a secured
promissory note (herein, as amended, modified or supplemented from time to time,
and together with any renewals thereof or exchanges or substitutions therefor,
collectively called the "Term Note"), dated as of February 1, 1999, payable to
the order of the Bank in the original principal amount of $1,810,000.00, and
payable in equal principal installments of $10,000.00 each, payable on the first
(1st) day of each month beginning with the first (1st) day of March, 1999 and
ending on the first (1st) day of February, 2000, together with a final
installment of all principal and accrued interest then outstanding, payable on
the Term Loan Maturity Date."
c. Section 5.1.2 of the Credit Agreement is deleted and the
following section substituted in lieu thereof effective as of the date
hereof:
"5.1.2 TERM LOAN. Except as provided in subsection 5.1.4,
Borrower shall pay interest on the Term Loan from and including
February 1, 1999 through the Term Loan Maturity Date (the "Fixed Rate
Period") at the rate per annum of seven and thirty-three hundredths
percent (7.33%)."
d. Section 6.4(i) of the Credit Agreement is deleted and the
following section substituted in lieu thereof:
"(i) During the Fixed Rate Period of the Term Loan, and
provided that no Event of Default then exists hereunder or under the
Related Documents, the Borrower may voluntarily prepay the principal
balance of the Term Loan, but only in whole at any time on or after the
date hereof, subject to the following conditions:
(A) Not less than thirty (30) days prior to the date
upon which the Borrower desires to make such prepayment, the
Borrower shall deliver to the Bank written notice of its
intention to prepay, which notice shall be irrevocable and
state the prepayment amount and the prepayment date (the
"Prepayment Date"); and
(B) The Borrower shall pay to the Bank, concurrently
with such prepayment, a prepayment premium (the "Prepayment
Premium") equal to the "Yield Amount" (as hereinafter
defined)."
3. All references in the Loan Documents to the Credit Agreement hereby
are understood to be to the Credit Agreement as modified hereby; and all
references to the Term Note shall be deemed a reference to the Term Note as
defined in the Credit Agreement after giving effect to this Amendment.
4. In the event of any conflict among the terms of the Credit Agreement
and the other Loan Documents as modified by this Agreement, the terms of the
Credit Agreement as modified by this Agreement shall control. All terms and
provisions of the Loan Documents corresponding to terms and provisions of the
Credit Agreement prior to the date of this
<PAGE> 4
Agreement shall be deemed modified in accordance with the terms of this
Agreement.
5. Borrower hereby warrants and represents that (i) Borrower has no
defense, offset or counterclaim with respect to the payment of any sum owed to
Bank, or with respect to any covenant in the Loan Documents; (ii) Bank, on and
as of the date hereof, has fully performed all obligations to Borrower which it
may have had or has on and as of the date hereof; and (iii) other than as
expressly set forth herein, by entering into this Agreement, Bank does not waive
any condition or obligation in the Loan Documents.
6. Borrower hereby agrees to execute and deliver promptly to Bank, at
Bank's request, such other documents as Bank, in its reasonable discretion,
shall deem necessary or appropriate to evidence the transaction contemplated
herein.
7. Borrower agrees to pay all fees and expenses associated with the
consummation of the transactions contemplated in this Agreement, including,
without limitation, fees and expenses of Bank's counsel and related expenses.
8. This Agreement may be executed in any number of counterparts, each
of which shall constitute an original, but all of which, taken together, shall
constitute one and the same Agreement.
9. Except as otherwise set forth herein to the contrary, the Loan
Documents remain unmodified and continue in full force and effect. Borrower
hereby reaffirms, confirms and ratifies each and every covenant, condition,
obligation and provision set forth in the Loan Documents, each as modified
hereby.
[End of Page]
<PAGE> 5
IN WITNESS WHEREOF, the undersigned, intending to be legally bound
hereby, have executed and delivered this Agreement as of the day and year first
above written.
BORROWERS:
PAUL HARRIS STORES, INC., an Indiana corporation
By:/s/ Thomas McCain
---------------------------------------------
Name: Thomas McCain
Its: Chief Financial Officer
PAUL HARRIS MERCHANDISING, INC., an Indiana corporation
By:/s/ Thomas McCain
---------------------------------------------
Name: Thomas McCain
Its: Chief Financial Officer
PAUL HARRIS RETAILING, INC., an Indiana corporation
By:/s/ Thomas McCain
---------------------------------------------
Name: Thomas McCain
Its: Chief Financial Officer
BANK:
LASALLE NATIONAL BANK, a national banking association
By:/s/ Ann Ellingsen
---------------------------------------------
Name: Ann H. Ellingsen
Title: VP
------------------------------------------
<PAGE> 6
AMENDED AND RESTATED
SECURED PROMISSORY NOTE
TERM LOAN
This Amended and Restated Secured Promissory Note (this "Note"), made
as of this 1st day of February, 1999, by PAUL HARRIS STORES, INC., an Indiana
corporation ("Borrower") in favor of LASALLE NATIONAL BANK, a national banking
association ("Bank"), has reference to the following facts and circumstances:
A. Bank and Borrower are parties to that certain Amended and
Restated Secured Credit Agreement originally dated as of
January 20, 1994 (as amended to date, the "Credit Agreement").
B. Pursuant to the Credit Agreement, Bank made a term loan to
Borrower in the original principal amount $2,400,000.00, which
loan is currently evidenced by a certain Secured Promissory
Note dated as of January 20, 1994 (the "Existing Note"), made
by Borrower and payable to the order of Bank in such principal
amount, the current principal amount outstanding thereunder
being $1,810,000.
C. Bank and Borrower have agreed to amend the Credit Agreement
pursuant to a certain Seventh Modification of Secured Credit
Agreement and Other Loan Documents of even date herewith
between Bank and Borrower (the "Amendment").
D. As a condition precedent to its execution of the Amendment,
Bank requires that Borrower amend and restate the Existing
Note in the manner set forth below.
NOW, THEREFORE, in consideration of the foregoing and for other good
and valuable consideration, the parties hereto agree to amend and restate the
Existing Note as follows:
<PAGE> 7
AMENDED AND RESTATED SECURED PROMISSORY NOTE
TERM LOAN
$1,810,000.00 FEBRUARY 1, 1999
CHICAGO, ILLINOIS
PAUL HARRIS STORES, INC., an Indiana corporation, for value received,
promises to pay to the order of LASALLE NATIONAL BANK, a national banking
association (herein, together with its successors and assigns, called the
"Bank"), at the Bank's principal office in Chicago, Illinois, ONE MILLION EIGHT
HUNDRED TEN THOUSAND AND NO/100THS DOLLARS ($1,810,000.00) or so much thereof as
is disbursed by the Bank to the undersigned from time to time, payable in
monthly principal installments of $10,000.00, each of the foregoing installments
being payable on the first (1st) day of each month, beginning with the first
(1st) day of March, 1999 and ending with the first (1st) day of February, 2000,
together with a final installment of all principal and accrued interest then
outstanding, payable on the first (1st) day of March, 2000.
The undersigned further promises to pay interest on the unpaid
principal amount hereof from time to time outstanding at such rates and at such
times as are provided in the "Credit Agreement" (as hereinafter defined).
Payments of both principal, prepayment of premium, if any, and interest
are to be made in lawful money of the United States of America.
This Note evidences indebtedness incurred under, and is subject to the
terms and provisions of, that certain Amended and Restated Secured Credit
Agreement dated as of January 20, 1994 (as amended to date, and as the same may
be further amended, modified or supplemented from time to time, called the
"Credit Agreement"). The Credit Agreement, to which reference is hereby made,
sets forth said terms and provisions, including those under which this Note may
or must be paid prior to its due date or may have its due date accelerated.
Terms used but not otherwise defined herein are used herein as defined in the
Credit Agreement. Repayment of the indebtedness evidenced by this Note is
secured pursuant to certain of the Collateral Documents referred to in the
Credit Agreement, including, among other things, the Mortgage, and reference is
made thereto for a statement of terms and provisions.
-2-
<PAGE> 8
In addition to, and not in limitation of, the foregoing and the
provisions of the Credit Agreement hereinabove referred to, the undersigned
further agrees, subject only to any limitation imposed by applicable law, to pay
all expenses, including reasonable attorneys' fees and expenses, incurred by the
holder of this Note in seeking to collect any amounts payable hereunder which
are not paid when due, whether by acceleration or otherwise.
This Note evidences indebtedness previously evidenced by, and is issued
in substitution and replacement for, that certain Secured Promissory Note made
payable to the Bank in the original principal amount of $2,400,000 dated as of
January 20, 1994. This Note shall not constitute a novation.
This Note is binding upon the undersigned and its successors and
assigns and shall inure to the benefit of the Bank and its successors and
assigns. This Note is made under and governed by the laws of the State of
Illinois without regard to conflict of laws principles.
PAUL HARRIS STORES, INC., an Indiana corporation
By: /s/ Thomas McCain
---------------------------------------------
Name: Thomas McCain
Its: Chief Financial Officer
-3-
<PAGE> 9
This Document Prepared By
and After Recording Return To:
R. Gibson Masters, Esq.
Katten Muchin & Zavis
525 West Monroe Street
Chicago, Illinois 60661
================================================================================
SPACE ABOVE THIS LINE RESERVED FOR RECORDER'S
USE ONLY
FIRST SUPPLEMENT TO MORTGAGE, ASSIGNMENT
OF LEASES AND RENTS AND SECURITY AGREEMENT
This First Amendment to Mortgage, Assignment of Leases and Rents and
Security Agreement dated as of February 1, 1999 (this "Supplement") is being
entered into among PAUL HARRIS STORES, INC., an Indiana corporation with its
principal place of business and mailing address at 6003 Guion Road,
Indianapolis, Indiana 46254 (hereinafter referred to as "Mortgagor") and LASALLE
NATIONAL BANK, a national banking association with a place of business and
mailing address at 135 South LaSalle, Chicago, Illinois 60603 (hereinafter
referred to as "Mortgagee");
WITNESSETH THAT:
WHEREAS, Mortgagor did heretofore execute and deliver to Mortgagee that
certain Mortgage, Assignment of Leases and Rents and Security Agreement dated as
of January 20, 1994, and recorded in the Recorder's Office of Marion County,
Indiana on February 1, 1994 as Document No. 94-17807 (the "Mortgage"),
encumbering the property described on Schedule I attached hereto, in order to
secure certain indebtedness of Mortgagor now or from time to time owing to
Mortgagee; and
WHEREAS, the Mortgage currently secures, among other things, that
certain Secured Promissory Note of Mortgagor dated as of January 20, 1994,
payable to the order of Mortgagee in the original principal amount of $2,400,000
whereby Mortgagor promises to pay said principal amount in consecutive monthly
principal installments as therein provided over the period beginning March 1,
1994, and ending February 1, 1999, the maturity date thereof, together with
interest thereon (such Secured Promissory Note being hereinafter referred to as
the
<PAGE> 10
"Existing Note"), the Existing Note having been issued under, and subject to the
provisions of, that certain Amended and Restated Secured Credit Agreement dated
as of January 20, 1994, as amended, among Mortgagee, Paul Harris Merchandising,
Inc., an Indiana corporation, Paul Harris Retailing, Inc., an Indiana
corporation and Mortgagor, a true and correct copy of which is on file at the
office of Mortgagee specified above (said Amended and Restated Secured Credit
Agreement, as amended to date and as the same may be amended, modified or
restated from time to time, being herein referred to as the Credit Agreement");
and
WHEREAS, Mortgagor has concurrently herewith entered into a Seventh
Modification of Secured Credit Agreement and Other Loan Documents with Mortgagee
bearing even date herewith (the "Amendment") whereby the parties have agreed,
among other things, to extend the maturity of the loan currently evidenced by
the Existing Note; and
WHEREAS, pursuant to the Amendment, Mortgagor is concurrently amending
and restating the Existing Note by executing and delivering to Mortgagee an
Amended and Restated Secured Promissory Note of Mortgagor bearing even date
herewith and payable to the order of Mortgagee in the face principal amount of
$1,810,000, whereby Mortgagor promises to pay consecutive monthly principal
installments as therein through March 1, 2000, the maturity date thereof,
together with interest thereon prior (such Amended and Restated Secured
Promissory Note, and any and all notes issued in extension or renewal thereof or
in substitution or replacement therefor, being hereinafter referred to as the
"Replacement Note"); and
WHEREAS, as a condition precedent to amending the Credit Agreement and
accepting the Replacement Note for the Existing Note, and making certain other
financial accommodations to Mortgagor, Mortgagee requires the Mortgagor, and to
accommodate that requirement Mortgagor desires by this Supplement, to confirm
and assure that all the real estate and other properties, rights, interests and
privileges of Mortgagor which are currently subject to the lien of the Mortgage
be and constitute collateral security for the loan which is currently evidenced
by the Existing Note and which shall hereafter evidenced by the Replacement
Note; and
WHEREAS, the Mortgage is to continue to secure all the indebtedness now
secured thereby, this Supplement being executed and delivered to confirm and
assure the foregoing;
NOW, THEREFORE, for and in consideration of the foregoing premises, and
other good and valuable consideration, receipt whereof is hereby acknowledged,
the Mortgage shall be and hereby is supplemented and amended as follows, to wit:
To secure (i) the payment of all principal and interest, and premium,
if any, on the Replacement Note as and when the same becomes due and payable
(whether by lapse of time, acceleration or otherwise, (ii) the payment of all
fees and other sums owing under the Credit Agreement, and all other
indebtedness, obligations and liabilities which this Mortgage secures pursuant
to any of its terms and (iii) the observance and performance of all covenants
and agreements contained herein, in the Credit Agreement, in the Replacement
Note and in any other instrument or document at any time evidencing or securing
any of the foregoing or setting forth terms and conditions applicable thereto
(all of such indebtedness, obligations and liabilities referred to in clauses
(i), (ii) and (iii) above being hereinafter referred to as the "Mortgagor's
Liabilities"), Mortgagor does hereby grant, bargain, sell, convey, mortgage,
warrant, assign, and
2
<PAGE> 11
pledge unto Mortgagee, and its successors and assigns, and grant to Mortgagee,
and its successors and assigns, a security interest in, all and singular that
certain real estate lying and being in Marion County in the State of Indiana
described on Exhibit A attached hereto and made a part hereof, together with all
of the properties, rights, interests and privileges described in Section 2.1 of
the Mortgage, each and all of such grants and conveyances being hereby
incorporated by reference herein with the same force and effect as though set
forth herein in their entirety. The foregoing grant of a lien is in addition to
and supplemental of and not in substitution for the grant of the lien created
and provided for by the Mortgage, and nothing herein contained shall affect or
impair the lien or priority of the Mortgage as to the indebtedness which would
be secured thereby prior to giving effect to this Supplement.
In order to induce Mortgagee to accept the Replacement Note in
substitution of the Existing Note, to enter into the Amendment, and to accept
this Supplement, Mortgagor hereby further covenants and agrees with, and
represents and warrants to, Mortgagee as follows:
1. Mortgagor hereby represents and warrants to Mortgagee that as of the
date hereof each of the representations and warranties set forth in the Mortgage
as supplemented hereby are true and correct and that no Event of Default (as
such term is defined in the Mortgage), or any other event which with the lapse
of time or the giving of notice, or both, would constitute such an Event of
Default, has occurred and is continuing or shall result after giving effect to
this Supplement. Mortgagor hereby repeats and reaffirms all covenants and
agreements contained in the Mortgage, each and all of which shall be applicable
to all of the indebtedness secured by the Mortgage as supplemented hereby. The
Mortgagor repeats and reaffirms its covenant that all the indebtedness secured
by the Mortgage as supplemented hereby will be promptly paid as and when the
same becomes due and payable.
2. All capitalized terms used herein without definition shall have the
same meanings herein as they have in the Mortgage. The definitions provided
herein of any capitalized terms shall apply to such capitalized terms as the
same appear in the Mortgage as supplemented hereby, all to the end that any
capitalized terms defined herein and used in the Mortgage as supplemented hereby
shall have the same meanings in the Mortgage as supplemented hereby as are given
to such capitalized terms herein. Without limiting the foregoing, all references
in the Mortgage to the term "Mortgagor's Liabilities" shall be deemed references
to all the indebtedness, obligations and liabilities secured by the Mortgage as
supplemented hereby; all references in the Mortgage to the term "Note" shall be
deemed a reference to the Replacement Note; and all references in the Mortgage
to the Credit Agreement shall be deemed references to the Credit Agreement as
amended to date and as amended by the Amendment and as the same may from time to
time hereafter be further amended, modified or restated.
3. All of the provisions, stipulations, powers and covenants contained
in the Mortgage shall stand and remain unchanged and in full force and effect
except to the extent specifically modified hereby and shall be applicable to all
of the indebtedness, obligations and liabilities secured by the Mortgage as
supplemented hereby.
4. Mortgagor acknowledges and agrees that the Mortgage as supplemented
hereby is and shall remain in full force and effect, and that the Mortgaged
Premises are and shall remain subject to the lien and security interest granted
and provided for by the Mortgage for the
3
<PAGE> 12
benefit and security of all the Mortgagor's Liabilities, including without
limitation the loan made by Mortgagee to Mortgagor under the Credit Agreement
which loan shall hereafter be evidenced by the Replacement Note. Without
limiting the foregoing, Mortgagor hereby agrees that, notwithstanding the
execution and delivery hereof, (i) all rights and remedies of Mortgagee under
the Mortgage, (ii) all obligations of Mortgagor thereunder and (iii) the lien
and security interest granted and provided for thereby are and as amended hereby
shall remain in full force and effect for the benefit and security of all the
Mortgagor's Liabilities, it being specifically understood and agreed that this
Supplement shall constitute and be, among other things, an acknowledgement and
continuation of the rights, remedies, lien and security interest in favor of
Mortgagee, and of the Mortgagor's Obligations of Mortgagor to Mortgagee, which
exist under the Mortgage as supplemented hereby.
5. This Supplement may be executed in any number of counterparts and by
different parties hereto on separate counterpart signature pages, each of which
when so executed shall be an original but all of which to constitute one and the
same instrument.
6. No reference to this Supplement need be made in any note, instrument
or other document making reference to the Mortgage, any reference to the
Mortgage in any of such to be deemed to be a reference to the Mortgage as
supplemented hereby. This instrument shall be construed and governed by and in
accordance with the laws of the State of Illinois.
7. Wherever herein any of the parties hereto is referred to, such
reference shall be deemed to include the successors and assigns of such party;
and all the covenants, promises and agreements by or on behalf of Mortgagor, or
by or on behalf of Mortgagee, or by or on behalf of the holder or holders of the
Mortgagor's Liabilities contained in the Mortgage as supplemented hereby shall
bind and inure to the benefit of the respective successors and assigns of such
parties, whether so expressed or not.
[REMAINDER OF PAGE LEFT INTENTIONALLY BLANK; SIGNATURE PAGE FOLLOWS]
4
<PAGE> 13
IN WITNESS WHEREOF, Mortgagor and Mortgagee have caused these presents
to be duly executed the day and year first above written.
MORTGAGOR:
PAUL HARRIS STORES, INC., an Indiana corporation
By: /s/ Thomas McCain
----------------------------------------------
Name: Thomas McCain
Its: Chief Financial Officer
MORTGAGEE:
LASALLE NATIONAL BANK, a national banking association
By: /s/ Ann Ellingsen
----------------------------------------------
Name: Ann H. Ellingsen
Its: VP
5
<PAGE> 14
STATE OF Indiana )
) SS.
COUNTY OF Marion )
I, Lara C. Schmutte , a Notary Public in and for said County, in the
State aforesaid, do hereby certify that on February 8 , 1999, Thomas McCain,
personally known to me to be the chief financial officer of PAUL HARRIS STORES,
INC., an Indiana corporation, and personally known to me to be the same person
whose name is subscribed to the foregoing instrument, appeared before me this
day in person and acknowledged that he signed and delivered the said instrument
on behalf of the aforesaid corporation, pursuant to due power and authority
conferred by its Board of Directors, as his free and voluntary act and as the
free and voluntary act of said corporation.
GIVEN under my hand and Notarial Seal this 8 day of February , 1999.
--- ------------
/s/ Lara C Schmutte
-------------------------------------
Notary Public
My commission expires:
04/13/2008
- ----------------------
6
<PAGE> 15
STATE OF Illinois )
) SS.
COUNTY OF Cook )
I, Linda R Perez , a Notary Public in and for said County, in the State
aforesaid, do hereby certify that on _______________ ___, 1999, Ann H.
Ellingsen, personally known to me to be the Vice President of LASALLE NATIONAL
BANK, a national banking association, and personally known to me to be the same
person whose name is subscribed to the foregoing instrument, appeared before me
this day in person and acknowledged that he signed and delivered the said
instrument on behalf of the aforesaid national banking association, pursuant to
due power and authority conferred by its Board of Directors, as her free and
voluntary act and as the free and voluntary act of said national banking
association.
GIVEN under my hand and Notarial Seal this 9 day of February ,
--- -----------------
1999.
/s/ Linda R Perez
---------------------------
Notary Public
My commission expires:
03/03/99
- ----------------------
7
<PAGE> 16
EXHIBIT A
LEGAL DESCRIPTION
Exhibit A "Parcel 1:..." and "Parcel 2:..." from First Modification of Secured
Credit Agreement, Notes, Mortgage and Other Loan Documents dated as of October
31, 1994 by and between Paul Harris Stores, Inc. and LaSalle National Bank.
Incorporated by reference, filed as Exhibit (4)(e) from Form 10-K for the fiscal
year ended January 28, 1995.
Exhibit A "Also described as:..." from Third Modification of Secured Credit
Agreement, Notes, Mortgage and Other Loan Documents dated as of September 28,
1995 by and between Paul Harris Stores, Inc. and LaSalle National Bank.
Incorporated by reference, filed as Exhibit (4)(g) from Form 10-Q for the fiscal
quarter ended October 28, 1995.
- -------------------------------
THIS DOCUMENT WAS PREPARED ADDRESS:
BY AND AFTER RECORDING 6003 Guion Road
SHOULD BE RETURNED TO: Indianapolis, IN 46254
R. Gibson Masters, Esq. PARCEL IDENT. NOS.:
Katten Muchin & Zavis
525 West Monroe Street 600-6003252
Suite 1600 600-6003368
Chicago, Illinois 60661-3693 600-6003107
8
<PAGE> 1
EXHIBIT 10(h)
PAUL HARRIS [letterhead]
August 12, 1998
Sally Tassani
13014 Brighton Lane
Carmel, Indiana 46032
Dear Sally:
On behalf of Paul Harris Stores, Inc., I am pleased to extend the following
terms of your employment effective as of your employment date of July 6, 1998.
Position: Executive Vice President, Marketing
Reports To: Charlotte G. Fischer, Chairman, President, and CEO
Base Salary: $250,000.00 per annum (payable in 26 equal biweekly
installments)
Bonus: Participate in the 1998 Corporate Bonus Plan effective
August 2, 1998, and therefore eligible for 50% of the
current year's annual bonus payment.
Stock Options: Total of 30,000 options of Paul Harris Stock under the
Company Stock Option Plan with effective dates of grant
as follows:
10,000 options to be granted as of July 6, 1998
10,000 options to be granted as of August 6, 1998
10,000 options to be granted as of September 6, 1998
Additionally, options on a total of 30,000 shares of
Paul Harris Stock under the Company Stock Option Plan
upon achieving the following criteria within the first
year of employment (in increments of 10,000 options upon
completion of each criteria):
1. In Store Signage--Complete 1998 In Store
Signage including Event Package; September
Package; October second half;
Holiday-Christmas Package; January Clearance
Package.
2. Rebranding of Company---AWC project and
implementation which includes new base sign
library.
3. Strategic Plan
Relocation Bonus: An amount of $50,000.00 (less any amounts directly
payable to third party for relocation), payable on
September 6, 1998, assuming employment in good
standing at payment date.
Signing Bonus: An amount of $50,000.00 payable on October 6, 1998,
assuming employment in good standing at payment date.
Car Allowance: The Company will provide a monthly car allowance not to
exceed $550.00. Gas and car insurance will be paid by
the Company.
Severance: In the event your employment with the Company is terminated
without cause, you will receive a minimum of three months
severance pay. The amount of severance pay will increase
after three months employment by an additional month of
severance pay for each additional full month employed up to
a maximum of twelve months. In the event of termination
with cause, you will have no entitlement to severance pay.
"Cause" includes both conduct and performance problems.
Sincerely,
/s/ Charlotte G. Fischer
Charlotte G. Fischer
Chairman, President, and CEO
Accepted:
/s/ Sally Tassani Aug. 12, 1998
- -------------------------------------------------------------------
Signature Date
<PAGE> 1
EXHIBIT 10(i)
PAUL HARRIS [letterhead]
September 28, 1998
Thomas McCain
12707 Corum Way Drive
Creve Couer, Mo. 63141
Dear Tom:
On behalf of Paul Harris Stores, Inc., I am pleased to extend the following
offer of employment.
- Position: Senior Vice President and Chief Financial Officer
- Reports To: Charlotte G. Fischer, Chairman, President, and CEO
- Base Salary: $190,000.00 per annum (payable in 26 equal
biweekly installments)
- Relocation Bonus: $10,000.00 payable at time of your permanent
relocation to Indianapolis
- Stock Options: Total of 50,000 options of Paul Harris Stores
stock under the Company Stock Option Plan.
Options vest in equal installments at one, two,
And three years from date of option grant.
- Moving Expense: Professional move of household goods including
packing, loading, Transport to Indianapolis,
and unloading
- Temporary Housing: Up to eight months temporary housing to be
arranged by the Company
- Severance: In the event your employment with the Company is
terminated without cause, you will receive a
minimum of three months severance pay. The amount
of severance pay will increase after three months
employment by an additional month of severance pay
for each additional full month employed up to a
maximum of six months. In the event of termination
with cause, you will have no entitlement to
severance pay. "Cause" includes both conduct and
performance problems.
- Start Date: Thursday, October 15, 1998
We are very excited about this opportunity and look forward to you joining the
Paul Harris team!
Sincerely,
/s/ Charlotte Fischer
Charlotte G. Fischer
Chairman, President, and CEO
Accepted:
/s/ Thomas McCain 10/15/98
- ------------------------------------------------------
Signature Date
<PAGE> 1
EXHIBIT 23
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the incorporation by reference in the Registration
Statements on Form S-8 (No.'s 33-60359 and 333-30079) of Paul Harris Stores,
Inc. of our report dated March 2, 1999 appearing in this Form 10-K.
PRICEWATERHOUSECOOPERS LLP
Indianapolis, Indiana
April 22, 1999
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> JAN-30-1999
<PERIOD-END> JAN-30-1999
<CASH> 7,429,000
<SECURITIES> 0
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 34,638,000
<CURRENT-ASSETS> 49,327,000
<PP&E> 72,223,000
<DEPRECIATION> (21,611,000)
<TOTAL-ASSETS> 100,685,000
<CURRENT-LIABILITIES> 22,796,000
<BONDS> 1,690,000
0
0
<COMMON> 17,793,000
<OTHER-SE> 57,124,000
<TOTAL-LIABILITY-AND-EQUITY> 100,685,000
<SALES> 241,693,000
<TOTAL-REVENUES> 241,693,000
<CGS> 149,858,000
<TOTAL-COSTS> 149,858,000
<OTHER-EXPENSES> 78,285,000
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (187,000)
<INCOME-PRETAX> 13,737,000
<INCOME-TAX> 5,151,000
<INCOME-CONTINUING> 8,586,000
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 8,586,000
<EPS-PRIMARY> 0.78
<EPS-DILUTED> 0.75
</TABLE>
