<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10 - Q
X Quarterly report pursuant to Section 13 or 15(d) of the Securities
------- Exchange Act of 1934 for the quarterly period ended JULY 31, 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)
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 periods that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
--------- ---------
Indicate by check mark whether the registrant has filed all documents and
reports required to be filed by Sections 12, 13 or 15(d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a plan
confirmed by a court. Yes X No
--------- ---------
As of September 8, 1999, 10,860,814 common shares were outstanding.
<PAGE> 2
INDEX
PAUL HARRIS STORES, INC. AND SUBSIDIARIES
<TABLE>
<CAPTION>
<S> <C>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements Page #
Consolidated Balance Sheets - July 31, 1999,
January 30, 1999 and August 1, 1998 3
Consolidated Statements of Income (Loss) -- For the thirteen
and twenty-six weeks ended July 31, 1999 and August 1, 1998 4
Consolidated Statements of Cash Flows -- For the twenty-six
weeks ended July 31, 1999 and August 1, 1998 5
Consolidated Statements of Shareholders' Equity -- For the
twenty-six weeks ended July 31, 1999 and August 1, 1998 6
Notes to Consolidated Financial Statements 7
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 8
Item 3. Quantitative and Qualitative Disclosure About Market Risk 14
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K 14
</TABLE>
2
<PAGE> 3
PAUL HARRIS STORES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands)
<TABLE>
<CAPTION>
July 31, January 30, August 1,
1999 1999 1998
------------ ---------- -----------
(unaudited) (unaudited)
<S> <C> <C> <C>
ASSETS
Current assets
Cash and cash equivalents $ 2,849 $ 7,429 $ 10,541
Merchandise inventories 38,262 34,638 33,515
Construction allowances receivable 1,012 4,977 2,133
Other receivables 1,569 902 1,041
Prepaid expenses 1,355 1,381 1,397
Deferred income taxes - - 100
--------- --------- ---------
Total current assets 45,047 49,327 48,727
--------- --------- ---------
Property, fixtures and equipment
Land, building and improvements 6,097 6,013 5,978
Store fixtures and equipment 41,877 38,229 31,869
Leasehold improvements and other 33,647 27,981 24,180
--------- --------- ---------
81,621 72,223 62,027
Less: accumulated depreciation and amortization (25,259) (21,611) (18,864)
--------- --------- ---------
Property, fixtures and equipment, net 56,362 50,612 43,163
Deferred income taxes - - 529
Other assets 4,735 746 772
--------- --------- ---------
Total assets $ 106,144 $ 100,685 $ 93,191
========= ========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities
Short-term borrowings $ 5,900 $ - $ -
Accounts payable 12,995 15,082 14,453
Compensation and related taxes 1,772 1,245 824
Deferred income taxes 1,235 1,235 -
Other accrued expenses 4,745 5,114 4,944
Current maturities of long-term debt 1,740 120 1,870
--------- --------- ---------
Total current liabilities 28,387 22,796 22,091
--------- --------- ---------
Long-term debt - 1,690 -
Deferred income taxes 2,910 2,577 -
Other non-current liabilities 3,813 3,121 3,348
Shareholders' equity
Preferred stock (no par value)
Authorized 1,000,000 shares; none issued
Common stock (no par value)
Authorized 40,000,000 shares; issued
11,359,000, 11,299,000 and 11,264,000 respectively 17,932 17,793 17,390
Additional paid-in capital 14,130 14,011 13,933
Unamortized restricted stock (66) (219) -
Retained earnings 43,454 43,332 36,891
--------- --------- ---------
75,450 74,917 68,214
Less: common stock in treasury, at cost
500,000, 500,000 and 45,000 respectively 4,416 4,416 462
--------- --------- ---------
Total shareholders' equity 71,034 70,501 67,752
--------- --------- ---------
Total liabilities and shareholders' equity $ 106,144 $ 100,685 $ 93,191
========= ========= =========
</TABLE>
See accompanying "Notes To Consolidated Financial Statements".
3
<PAGE> 4
PAUL HARRIS STORES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME (LOSS)
UNAUDITED
(Dollars in thousands, except for per share data)
<TABLE>
<CAPTION>
For the thirteen For the twenty-six
weeks ended weeks ended
---------------------------- ---------------------------
July 31, August 1, July 31, August 1,
1999 1998 1999 1998
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Net sales $ 56,488 $ 48,095 $114,930 $100,373
Cost of sales, including certain occupancy expenses
exclusive of depreciation 34,594 29,966 72,290 61,947
-------- -------- -------- --------
Gross income 21,894 18,129 42,640 38,426
Selling, general and administrative expenses 20,703 15,880 38,883 32,250
Depreciation and amortization 1,976 1,423 3,744 2,892
-------- -------- -------- --------
Operating (loss) income (785) 826 13 3,284
Interest (expense) income and other income, net (112) 124 182 247
-------- -------- -------- --------
(Loss) income before income taxes (897) 950 195 3,531
(Benefit) provision for income taxes (336) 377 73 1,386
-------- -------- -------- --------
Net (loss) income $ (561) $ 573 $ 122 $ 2,145
======== ======== ======== ========
Basic (loss) earnings per share $ (0.05) $ 0.05 $ 0.01 $ 0.19
======== ======== ======== ========
Weighted average number of shares outstanding 10,838 11,261 10,818 11,261
======== ======== ======== ========
Diluted (loss) earnings per share $ (0.05) $ 0.05 $ 0.01 $ 0.19
======== ======== ======== ========
Weighted average number of shares and
share equivalents outstanding 10,993 11,605 10,986 11,579
======== ======== ======== ========
</TABLE>
See accompanying "Notes To Consolidated Financial Statements".
4
<PAGE> 5
PAUL HARRIS STORES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
UNAUDITED
(Dollars in thousands)
<TABLE>
<CAPTION>
For the twenty-six weeks ended
----------------------------------
July 31, August 1,
1999 1998
--------------- ----------------
<S> <C> <C>
Cash flow from operating activities:
Net income $ 122 $ 2,145
Adjustments to reconcile net income to cash provided:
Depreciation and amortization 3,744 2,892
Restricted stock expense 153 -
Net loss on disposal of assets - 298
Deferred income taxes 333 447
(Increase) decrease in current assets:
Merchandise inventories 1,571 (1,575)
Construction allowances receivable 3,965 793
Other receivables (667) (637)
Prepaid expenses 26 (38)
Increase (decrease) in current liabilities:
Accounts payable (2,087) 1,728
Compensation and related taxes 527 (1,956)
Income taxes payable - (377)
Other accrued expenses (369) 599
Other 712 222
-------- --------
Net cash flow from operating activities 8,030 4,541
-------- --------
Cash flow for investing activities:
Additions to fixed assets (6,868) (11,533)
Business acquisition (11,830) -
-------- --------
Net cash flow for investing activities (18,698) (11,533)
-------- --------
Cash flow (for) from financing activities:
Direct borrowings under revolving line of credit 5,900 -
Repayment of long-term debt (70) (60)
Proceeds from issuance of common stock and
related tax benefits 258 65
Purchase of treasury stock - (462)
-------- --------
Net cash flow (for) from financing activities 6,088 (457)
-------- --------
Cash used $ (4,580) $ (7,449)
======== ========
Cash and cash equivalents:
At beginning of period $ 7,429 $ 17,990
At end of period 2,849 10,541
Cash used $ (4,580) $ (7,449)
======== ========
</TABLE>
See accompanying "Notes To Consolidated Financial Statements".
5
<PAGE> 6
PAUL HARRIS STORES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
UNAUDITED
(in thousands)
<TABLE>
<CAPTION>
For the twenty-six For the twenty-six
weeks ended weeks ended
July 31, 1999 August 1, 1998
---------------------------- ----------------------------
SHARES AMOUNT SHARES AMOUNT
------------ -------------- ------------ --------------
<S> <C> <C> <C> <C>
PREFERRED STOCK (1,000 AUTHORIZED):
COMMON STOCK (40,000 AUTHORIZED):
Beginning balance 10,799 $ 17,793 11,256 $ 17,354
Exercise of stock options 60 139 8 36
------------ -------------- ------------ -------------
Ending balance 10,859 $ 17,932 11,264 $ 17,390
============ ============== ============ =============
ADDITIONAL PAID-IN CAPITAL:
Beginning balance $ 14,011 $ 13,904
Tax benefit on exercise of stock options 119 29
------------- -------------
Ending balance $ 14,130 $ 13,933
============= =============
UNAMORTIZED RESTRICTED STOCK:
Beginning balance $ (219) $ -
Amortization of restricted stock 153 -
-------------- -------------
Ending balance $ (66) $ -
============== =============
RETAINED EARNINGS:
Beginning balance $ 43,332 $ 34,746
Net income 122 2,145
-------------- -------------
Ending balance $ 43,454 $ 36,891
============== =============
TREASURY STOCK:
Beginning balance 500 $ 4,416 - $ -
Purchase of treasury stock - - 45 462
------------ -------------- ------------ --------------
Ending balance 500 $ 4,416 45 $ 462
============ ============== ============ ==============
</TABLE>
See accompanying "Notes To Consolidated Financial Statements".
6
<PAGE> 7
PAUL HARRIS STORES, INC., AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements include the
accounts of Paul Harris Stores, Inc. and its subsidiaries (the "Company"). The
Company is a specialty retailer known for its branded private-label apparel and
accessories for women.
The unaudited consolidated financial statements of the Company have been
prepared in accordance with instructions to Form 10-Q and Article 10 of
Regulation S-X and accordingly certain information and footnote disclosures have
been condensed or omitted. These condensed financial statements should be read
in conjunction with the financial statements and notes thereto included in the
Company's January 30, 1999, Annual Report on Form 10-K.
In the opinion of management, all adjustments, which include only normal
recurring adjustments, necessary to present fairly the financial position,
results of operations and cash flows for the period ended July 31, 1999, and for
all other periods presented, have been made.
The Company's fiscal year ends on the Saturday closest to January 31. All
references in this report to fiscal years are to the calendar years in which
such fiscal years began. For example, fiscal 1999 refers to the fiscal year that
began on January 31, 1999, and will end on January 29, 2000.
The results of operations for the first and second quarter of fiscal 1999 are
not necessarily indicative of the results to be expected for all of fiscal 1999.
The Company has historically produced a majority of its income in the fourth
quarter of the fiscal year due to the stronger sales experienced during the
month of December.
Certain amounts in the prior periods have been reclassified to conform with the
current period presentation.
2. EARNINGS PER SHARE
Basic earnings per share are based on the weighted average number of common
shares outstanding during the quarter. Diluted earnings per share are based on
the weighted average number of common and common equivalent shares (dilutive
stock options) outstanding during the quarter. The following table (in
thousands) reconciles the numerators and denominators used in the basic and
diluted earnings per share computations:
<TABLE>
<CAPTION>
For the thirteen weeks ended For the twenty-six weeks ended
July 31, 1999 August 1, 1998 July 31, 1999 August 1, 1998
------------------- --------------------- ------------------------ ---------------------
Net Loss Shares Net Income Shares Net Income Shares Net Income Shares
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Basic earnings and outstanding shares $ (561) 10,838 $ 573 11,261 $ 122 10,818 $2,145 11,261
Effect of dilutive options - 155 - 344 - 168 - 318
------ ------ ------ ------ ------ ------ ------ ------
Diluted earnings and outstanding
equivalent shares $ (561) 10,993 $ 573 11,605 $ 122 10,986 $2,145 11,579
====== ====== ====== ====== ====== ====== ====== ======
</TABLE>
3. LONG-TERM DEBT AND CREDIT ARRANGEMENTS
The Company has a committed credit facility of $30.0 million, which may be used
for letters of credit or direct borrowings ("Credit Facility"). The Credit
Facility is intended to provide the Company with cash and liquidity to conduct
its operations. The Credit Facility was modified on April 19, 1999 to extend its
term to June 30, 2000 and to allow the Company to borrow a maximum of $10.0
million under the Credit Facility as a term note. The term note requires only
monthly interest payments with an interest rate equaling the prime rate (as
defined in the Credit Facility) or the LIBOR interest rate (as defined in the
Credit Facility) plus 2.0 percent. The Credit Facility remains unchanged with
respect to letter of credit issuance fees, covenants and stock repurchase
restrictions and collateralization of the Credit Facility. As of July 31, 1999,
there were $5.9 million of direct borrowings under the revolving credit
commitment. The
7
<PAGE> 8
balance of outstanding letters of credit was $8.9 million and the amount of
available borrowings under the borrowing formula of the Credit Facility was $9.6
million at July 31, 1999.
4. ACQUISITION OF ASSETS
On March 12, 1999, the Company acquired from The J. Peterman Company ("J.
Peterman") substantially all of the assets of J. Peterman for approximately
$10.0 million in cash. This transaction did not include any assumption of debt.
The estimated cost of $11.8 million includes estimated purchase liabilities of
$1.8 million primarily associated with a plan to exit three of the thirteen
acquired store locations and close the J. Peterman distribution facility. The
Company expects to complete its plan of acquisition by March 2000. The
acquisition was accounted for under the purchase method and, accordingly,
results of J. Peterman's operations are included in the consolidated financial
statements as of the date of acquisition. The purchase price has been
preliminarily allocated based upon estimated fair values of the assets acquired
which may vary once the actual fair value of the assets are determined.
The following unaudited pro forma information (dollars in thousands, except per
share data) presents a summary of the Company's consolidated results of
operations as if the acquisition of J. Peterman had taken place on January 31,
1999 and on February 1, 1998:
<TABLE>
<CAPTION>
Three months ended Six months ended
--------------------------- -------------------------
7/31/99 8/1/98 7/31/99 8/1/98
------- ------ ------- ------
<S> <C> <C> <C> <C>
Net sales $ 56,488 $ 56,873 $ 116,186 $ 118,692
Net (loss) $ (561) $ (1,164) $ (410) $ (872)
Per share data:
Basic $ (0.05) $ (0.10) $ (0.04) $ (0.08)
Diluted $ (0.05) $ (0.10) $ (0.04) $ (0.08)
</TABLE>
These unaudited pro forma results have been prepared for comparative purposes
only and include the effects of preliminary estimates of fair value and certain
adjustments and assumptions based upon available information that management
believes are reasonable in the circumstances. They do not purport to be
indicative of the results of operations which would have actually resulted had
the acquisition been in effect on February 1, 1998 or of future results of
operations.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Certain statements made in this report may constitute "forward-looking
statements" within the meaning of the Private Securities Litigation Reform Act
of 1995. Such forward-looking statements involve known and unknown risks,
uncertainties and other factors that may cause the actual results, performances
or achievements of the Company or the retailing industry to be materially
different from any future results, performance or achievements expressed or
implied by such forward-looking statements. Such factors include, among others:
local, regional and national economic conditions; extreme or unseasonable
weather conditions; legislation and regulatory matters affecting payroll costs
or other aspects of retailing; the ability to identify and respond to emerging
fashion trends; and governmental actions such as import or trade restrictions.
8
<PAGE> 9
OVERVIEW
As of July 31, 1999, the Company operated 308 stores in 29 states under the Paul
Harris and Paul Harris Direct names. These stores are a specialty retailer of
moderately priced casual apparel and accessories for women sold under the Paul
Harris, Paul Harris Design, Paul Harris Denim and other Paul Harris brand names.
The Paul Harris stores have a significant concentration of locations in the
Midwest. The Company also operates 11 stores in nine states under the J.
Peterman name. J. Peterman is a nationally recognized upscale apparel, accessory
and novelty retailer well known for its catalog and unique merchandise
collection.
The Company's stores currently average approximately 4,800 gross square feet and
are located primarily in regional enclosed shopping malls and, to a lesser
extent, strip shopping centers. During the first half of fiscal 1999, the
Company opened seven and closed three Paul Harris stores, acquired 13 J.
Peterman stores and subsequently closed three J. Peterman stores and opened one
new J. Peterman store during the period. The Company expects that any new Paul
Harris stores will be generally located in the Company's existing markets in
order to enhance recognition of the Paul Harris name, facilitate targeted
marketing efforts and efficiently utilize the Company's sales team. The Company
currently has no plans to open any new J. Peterman stores during the remainder
of the fiscal year.
RESULTS OF OPERATIONS
The following discussion is based upon the unaudited consolidated financial
statements appearing elsewhere in this report. The following table sets forth
certain income statement items as a percentage of net sales.
PAUL HARRIS STORES, INC. AND SUBSIDIARIES
RESULTS OF OPERATIONS AS A
PERCENTAGE OF NET SALES
<TABLE>
<CAPTION>
Thirteen weeks ended Twenty-six weeks ended
----------------------- ------------------------
July 31, August 1, July 31, August 1,
1999 1998 1999 1998
<S> <C> <C> <C> <C>
Net sales 100.0% 100.0% 100.0% 100.0%
Cost of sales, including certain occupancy expenses
exclusive of depreciation (1) 61.2% 62.3% 62.9% 61.7%
----- ----- ----- -----
Gross income 38.8% 37.7% 37.1% 38.3%
Selling, general and administrative expenses (2) 36.7% 33.0% 33.8% 32.1%
Depreciation and amortization 3.5% 3.0% 3.3% 2.9%
----- ----- ----- -----
Operating (loss) income (1.4%) 1.7% 0.0% 3.3%
Interest and (expense) income and other income, net (0.2%) 0.3% 0.2% 0.2%
----- ----- ----- -----
(Loss) income before income taxes (1.6%) 2.0% 0.2% 3.5%
(Benefit) provision for income taxes (0.6%) 0.8% 0.1% 1.4%
----- ----- ----- -----
Net (loss) income (1.0%) 1.2% 0.1% 2.1%
===== ===== ===== =====
</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.
9
<PAGE> 10
SECOND QUARTER OF FISCAL 1999
The Company's net sales increased to $56.5 million in the second quarter of
fiscal 1999 from $48.1 million in the second quarter of fiscal 1998, an increase
of $8.4 million or 17.5 percent. The increase in net sales was primarily
attributable to a 12.0 percent increase in the number of stores operating during
the second quarter of fiscal 1999 as compared to the second quarter of fiscal
1998. Comparable store sales increased by 4.5 percent during the quarter.
Comparable store sales were negatively impacted during the latter part of July
due to the interruption of the Company's normal distribution of merchandise to
the stores as a result of the total hardware and software conversion that took
place in early July. The Company operated 319 stores as of July 31, 1999
compared to 288 stores as of August 1, 1998.
Gross income increased to $21.9 million in the second quarter of fiscal 1999
from $18.1 million for the same period in the prior year, or an increase of $3.8
million or 20.8 percent. Gross income was positively impacted by the $8.4
million increase in sales plus an increase in selling margins and negatively
effected by a 32.2 percent increase in occupancy costs primarily due to a 25.2
percent increase in total square feet occupied. Gross income as a percentage of
net sales increased to 38.8 percent in the second quarter of 1999 compared to
37.7 percent in the second quarter of 1998. This increase was attributable to an
increase in selling margins as a result of fewer markdowns and reduced
merchandise costs; offset by an increase in occupancy expense as a percentage of
net sales due to increased occupancy costs for newer and larger stores and as a
result of the re-negotiation of leases of several existing store locations.
Selling, general and administrative expenses increased to $20.7 million, or 36.7
percent of net sales, for the second quarter of fiscal 1999 from $15.9 million,
or 33.0 percent of net sales, for the second quarter of fiscal 1998. The
increase of $4.8 million or 30.4 percent was primarily due to increased store
payroll costs a result of the increase in number of store locations. The
increase as a percent of net sales was the result of higher costs for store
personnel and the increase in occupancy costs related to the increase in total
square feet operated by the Company.
Depreciation and amortization increased to $2.0 million for the second quarter
of fiscal 1999 from $1.4 million for the second quarter of fiscal 1998, an
increase of $553,000 or 38.9 percent. As a percentage of net sales, depreciation
and amortization increased to 3.5 percent in the second quarter of fiscal 1999
from 3.0 percent in the second quarter of fiscal 1998, primarily as a result of
the approximate $43 million increase in fixed asset expenditures during the
1998 and 1997 fiscal years. The increase in fixed assets includes the new point
of sale system, which has a shorter depreciable life than most other depreciable
assets of the Company.
Operating loss of $785,000 for the second quarter of fiscal 1999 was a decrease
of $1.6 million from operating income of $826,000 for the second quarter of
fiscal 1998. As a percentage of net sales, the Company had an operating loss of
1.4 percent in the second quarter of fiscal 1999 compared to operating income of
1.7 percent in the second quarter of fiscal 1998.
Interest (expense) income and other income, net, of ($112,000) for the second
quarter of fiscal 1999 was the result of borrowings from the Company's revolving
line of credit. The Company had interest (expense) income and other income, net,
of $124,000 for the second quarter of fiscal 1998 as a result of higher invested
cash balances.
The benefit for income taxes was $336,000 for the second quarter of fiscal 1999
compared to a provision of $377,000 for the second quarter of 1998. The
Company's effective tax rate of 37.5 percent in the second quarter of fiscal
1999 was lower than the 39.7 percent in the second quarter of fiscal 1998
primarily as a result of the Company benefiting from a lower state effective
income tax rate.
As a result of the above factors, the Company's net income decreased to a loss
of $561,000 for the second quarter of fiscal 1999 from income of $573,000 for
the second quarter of fiscal 1998.
10
<PAGE> 11
FIRST HALF OF FISCAL 1999
The Company's net sales increased to $114.9 million in the first half of fiscal
1999 from $100.4 million in the first half of fiscal 1998, an increase of $14.6
million or 14.5 percent. The increase in net sales was primarily attributable to
a 10.8 percent increase in store count. The Company operated 319 stores as of
July 31, 1999 compared to 288 stores on August 1, 1998. Comparable store sales
increased by 1.2 percent for the first half of fiscal 1999.
Gross income increased to $42.6 million in the first half of fiscal 1999 from
$38.4 million for the same period in the prior year, an increase of $4.2 million
or 11.0 percent. Gross income increased primarily as a result of the increase in
net sales. Gross income, as a percentage of net sales, decreased to 37.1 percent
in the first half of fiscal 1999 from 38.3 percent of net sales for the first
half of fiscal 1998. Gross income, as a percentage of net sales, was negatively
impacted by the increase in occupancy expenses, especially for stores opened in
the last twelve months, and partially offset by increased selling margins.
Selling, general and administrative expenses increased to $38.9 million, or 33.8
percent of net sales, for the first half of fiscal 1999 from $32.2 million, or
32.1 percent of net sales, for the first half of fiscal 1998. The increase of
$6.6 million was primarily the result of increased store payroll costs and
occupancy expense to support the increase in the number of store locations. The
increase as a percent of net sales was primarily the result of higher costs
associated with the increase in total square feet operated by the Company.
Depreciation and amortization increased to $3.7 million for the first half of
fiscal 1999 from $2.9 million for the first half of fiscal 1998, an increase of
$852,000 or 29.5 percent. As a percentage of net sales, depreciation and
amortization increased to 3.3 percent in the first half of fiscal 1999 from 2.9
percent in the first half of fiscal 1998. The increase is a result of the
approximate $19.6 million increase in fixed asset expenditures at the end of
the first half of fiscal 1999 compared to the end of the first half of fiscal
1998.
Operating income decreased to $13,000 in the first half of fiscal 1999 from $3.3
million for the first half of fiscal 1998, a decrease of $3.3 million. As a
percentage of net sales, operating income was 0.0 percent in the first half of
fiscal 1999 compared to 3.3 percent in the first half of fiscal 1998.
Interest (expense) income and other income, net, of $182,000 for the first half
of fiscal 1999 decreased from $247,000 for the first half of fiscal 1998. This
decrease was primarily due to short term borrowing as a result of the business
acquisition in March 1999 and partially offset by the receipt of $437,000 for
unclaimed note redemption accrediting back to the Company according to the terms
of the note agreement during the first half of fiscal 1999.
The provision for income taxes, based on statutory rates, was $73,000
for the first half of fiscal 1999 compared to $1.4 million for the first half of
fiscal 1998, a decrease of $1.3 million, as a result of the decrease in income
before income taxes. The Company's effective tax rate of 37.4 percent in the
first half of fiscal 1999 was lower than the 39.3 percent in the first half of
fiscal 1998 primarily as a result of lower state effective income tax rates.
As a result of the above factors, the Company's net income decreased to $122,000
for the first half of fiscal 1999 from $2.1 million for the first half of fiscal
1998.
11
<PAGE> 12
SEASONALITY
The Company's business, like that of most retailers, is subject to seasonal
influences. A significant portion of the Company's net sales and profits are
realized during the Company's fourth fiscal quarter, which includes the holiday
selling season. Results for any quarter are not necessarily indicative of the
results that may be achieved for a full fiscal year. Quarterly results may
fluctuate materially depending upon, among other things, the timing of new store
openings, net sales and profitability contributed by new stores, increases or
decreases in comparable store sales, adverse weather conditions, shifts in the
timing of certain holidays and promotions, and changes in the Company's
merchandise mix.
LIQUIDITY AND CAPITAL RESOURCES
The Company's primary sources of working capital consist of internally generated
cash and a $30.0 million secured revolving credit facility. The Credit Facility
is intended to provide the Company with cash and liquidity to conduct its
operations. The Company may make direct borrowings of up to the maximum amount
of the credit facility. The credit facility expires June 30, 2000. The Company
anticipates that it will be able to extend the current credit facility with
similar terms and conditions. The annual interest rate on the direct borrowings
outstanding under the credit facility is a variable rate equal to the prime rate
of the Company's lender. Borrowings under a term note have an annual interest
rate equal to the lenders prime rate or LIBOR plus 2 percent. In addition,
letters of credit carry an initial issuance fee, plus a fee of 0.25 percent of
the face amount of such letters of credit. The credit facility also contains
certain financial covenants that set limits on tangible net worth and cash flow
from operations. The credit facility is secured by a security interest in the
Company's inventory, equipment, fixtures, cash and an assignment of leases. At
July 31, 1999, there were outstanding letters of credit issued in favor of the
Company under the credit facility in an aggregate amount of $8.9 million and
there was $5.9 million of direct borrowings under the revolving credit
commitment.
Net cash flow from operating activities was $8.0 million in the first half of
fiscal 1999 compared to a net cash flow of $4.5 million in the first half of
fiscal 1998. The primary reason for the increase in net cash flow from operating
activities was a result of the decrease in construction allowance receivables
for the first half of fiscal 1999 compared to the first half of fiscal 1998.
Net cash flow for investing activities was $18.7 million in the first half of
fiscal 1999, primarily for the acquisition of J. Peterman assets (see Note 4.
"Acquisition of Assets" of "Notes To Consolidated Financial Statements") and
capital expenditures for new stores and remodeling existing stores. The Company
anticipates opening a total of 21 new Paul Harris stores and will remodel or
relocate a total of 10 Paul Harris stores during the 1999 fiscal year. Excluding
the $11.8 incurred for J. Peterman (see Note 4. "Acquisition of Assets" of
"Notes To Consolidated Financial Statements"), the Company will spend
approximately $10.0 million on new store additions or remodels and spend another
$4.0 million on other capital expenditures during the 1999 fiscal year. The
company has spent approximately $6.9 million during the first half of fiscal
1999, primarily for new store additions and remodels.
Net cash flow from financing activities was $6.1 million for the first half of
fiscal 1999 and primarily was the result of direct borrowings of $5.9 million
under the Company's revolving credit facility (see Note 4. "Acquisition of
Assets" of "Notes To Consolidated Financial Statements").
Cash and cash equivalents decreased to $2.8 million at the end of the first half
of fiscal 1999 from $10.5 million at the end of the first half of fiscal 1998
due primarily to the purchase of J. Peterman.
Management believes that cash generated from operations and borrowings under the
Company's credit facility, if any, will be sufficient to meet the Company's
working capital and capital expenditure needs in the foreseeable future.
12
<PAGE> 13
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.
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 Y2K
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 $10.5
million, which includes the $6.2 million already invested in the new point of
sale systems and $3.6 million for application software and development.
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 substantially complete with the
remainder expected to be completed by the late fall of 1999. The non-critical
systems corrections should also be completed by the late fall of 1999.
Phase 5 - Test and Certification. The Company has substantially completed all
critical and important system testing and certification with 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.
13
<PAGE> 14
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.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
The Company considers the market risks of its variable interest rate borrowings
to not be material to its financial condition.
PART II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits: 4(a)(iv) Amendment to Amended and Restated Articles
of Incorporation of the Registrant dated
August 18, 1999.
10(c)(iii) Second Amendment to the 1996 Stock Option
and Incentive Plan, as amended.
27 Financial Data Schedule
(b) Reports on Form 8-K: None.
14
<PAGE> 15
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
PAUL HARRIS STORES, INC.
(Registrant)
Date: September 14, 1999 /s/ Keith L. Himmel, Jr.
--------------------------------------
Vice President - Finance, Controller and
Corporate Secretary
(Signing on behalf of the registrant and as
principal financial officer)
15
<PAGE> 1
EXHIBIT 4(A)(IV)
ARTICLES OF AMENDMENT
OF
AMENDED AND RESTATED ARTICLES OF INCORPORATION
OF
PAUL HARRIS STORES, INC.
In compliance with the requirements of the Indiana Business
Corporation Law, as amended (the "IBCL"), Paul Harris Stores, Inc., an Indiana
corporation (the "Corporation"), desiring to amend its Amended and Restated
Articles of Incorporation, hereby certifies as follows:
ARTICLE I
AMENDMENT TO THE AMENDED AND RESTATED
ARTICLES OF INCORPORATION
SECTION 1. The date of incorporation of the Corporation is April 8,
1952.
SECTION 2. The name of the Corporation is, and following the amendment
effected hereby will continue to be, Paul Harris Stores, Inc.
SECTION 3. Article V of the Amended and Restated Articles of
Incorporation of the Corporation is hereby amended so that, as amended, the
exact text of Article V shall read in its entirety as follows:
The total number of shares of capital stock ("Capital Stock") that the
Corporation shall have authority to issue is Forty-One Million
(41,000,000), consisting of Forty Million (40,000,000) shares of common
stock without par value ("Common Stock"), of which 39,513,039 shares
shall be Voting Common Stock (the "Voting Common Stock") and 486,961
shares shall be Nonvoting Common Stock (the "Nonvoting Common Stock"),
and One Million (1,000,000) shares of preferred stock without par value
("Preferred Stock").
SECTION 3. The effective date of the amendment hereby effected shall
be the date of filing of these Articles of Amendment with the office of the
Secretary of State of the State of Indiana.
ARTICLE II
MANNER OF ADOPTION AND
LEGAL COMPLIANCE
<PAGE> 2
SECTION 1. Action by Directors: The Board of Directors of the
Corporation duly adopted a resolution proposing to amend the terms and
provisions of Article V of the Amended and Restated Articles of Incorporation
and directing a meeting of the Shareholders, to be held on May 19, 1999,
allowing such Shareholders to vote on the proposed amendment. The resolution was
adopted by vote of the Board of Directors at a meeting held on March 2, 1999, at
which a quorum of such Board was present.
SECTION 2. Action by Shareholders: The Shareholders of the Corporation
entitled to vote in respect of the Articles of Amendment adopted the proposed
amendment. The amendment was adopted by vote of such Shareholders during the
meeting called by the Board of Directors. The result of such vote is as follows:
Shareholders Entitled to Vote: 10,798,814
Shareholders Voted in Favor: 8,153,851
Shareholders Voted Against: 974,082
SECTION 3. Compliance with Legal Requirements: The manner of the
adoption of the Articles of Amendment and the vote by which they were adopted
constitute full legal compliance with the provisions of the IBCL, the Amended
and Restated Articles of Incorporation, and the By-Laws of the Corporation.
<PAGE> 3
IN WITNESS WHEREOF, the Corporation has caused these Articles
of Amendment to be signed on its behalf by the undersigned duly authorized
officer on the 18th day of August 1999.
PAUL HARRIS STORES, INC.
By: /s/ Keith L. Himmel, Jr.
-----------------------------------------
Printed: KEITH L. HIMMEL, JR.
-----------------------------------------
Title: Vice President - Finance and Secretary
-----------------------------------------
<PAGE> 1
EXHIBIT 10(C)(III)
PAUL HARRIS STORES, INC.
1996 STOCK OPTION AND INCENTIVE PLAN
SECOND AMENDMENT
This Paul Harris Stores, Inc. 1996 Stock Option and Incentive Plan (the
"Plan") is hereby amended as follows:
1. Section 5(a) of the Plan is amended to read as follows:
(a) The maximum number of Shares with respect to which Awards may
be made under the Plan is 2,000,000 Shares. The Shares with respect to
which Awards may be made under the Plan may either be authorized and
unissued shares or issued shares heretofore or hereafter reacquired and
held as treasury shares. Any Award which terminates or is surrendered for
cancellation or with respect to Restricted Stock or Performance Shares
which is forfeited (so long as any cash dividends paid on such Shares are
also forfeited), may be subject to new Awards under the Plan with respect
to the number of Shares as to which such termination or forfeiture has
occurred.
2. Except as expressly amended, the provisions of the Plan shall remain
in full force and effect.
3. This Amendment shall be effective immediately upon approval by the
Company's Board of Directors and shareholders of the Company.
Adopted by the Board
this 2nd day of March, 1999
Approved by the Shareholders
this 19th day of May, 1999
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> JAN-31-1999
<PERIOD-START> MAY-01-1999
<PERIOD-END> JUL-31-1999
<CASH> 2,849,000
<SECURITIES> 0
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 38,262,000
<CURRENT-ASSETS> 45,047,000
<PP&E> 81,621,000
<DEPRECIATION> (25,259,000)
<TOTAL-ASSETS> 106,144,000
<CURRENT-LIABILITIES> 28,387,000
<BONDS> 0
0
0
<COMMON> 17,932,000
<OTHER-SE> 57,518,000
<TOTAL-LIABILITY-AND-EQUITY> 106,144,000
<SALES> 114,930,000
<TOTAL-REVENUES> 114,930,000
<CGS> 72,290,000
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