<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 OCTOBER 28, 2000 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
----- ------
(The Company filed a voluntary petition pursuant to provisions of Chapter 11 of
United States Bankruptcy Code on October 16, 2000. No plan has been filed with
the court.)
As of December 5, 2000, 10,947,567 common shares were outstanding.
<PAGE> 2
INDEX
PAUL HARRIS STORES, INC. AND SUBSIDIARIES
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements Page #
Consolidated Condensed Balance Sheets - October 28, 2000,
January 29, 2000 and October 30, 1999 3
Consolidated Condensed Statements of Loss - For the thirteen and
thirty-nine weeks ended October 28, 2000 and October 30, 1999 4
Consolidated Condensed Statements of Cash Flows -- For the
thirty-nine weeks ended October 28, 2000 and October 30, 1999 5
Notes to Consolidated Condensed Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 9
Item 3. Quantitative and Qualitative Disclosure About Market Risk 14
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 14
Item 6. Exhibits and Reports on Form 8-K 15
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PAUL HARRIS STORES, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEETS
(Dollars in thousands)
<TABLE>
<CAPTION>
October 28, January 29, October 30,
2000 2000 1999
---------- ---------- ----------
(unaudited) (unaudited)
<S> <C> <C> <C>
ASSETS
Current assets
Cash and cash equivalents $ 4,105 $ 3,587 $ 1,686
Merchandise inventories 35,730 52,411 57,469
Construction allowances receivable 1,003 1,736 2,268
Income tax recoverable (see Note 5) 1,700 2,221 3,641
Other receivables 505 1,223 514
Prepaid expenses 5,460 2,199 1,738
--------- --------- ---------
Total current assets 48,503 63,377 67,316
--------- --------- ---------
Property, fixtures and equipment, net 53,657 56,640 58,776
Other assets 588 5,029 4,649
--------- --------- ---------
Total assets $ 102,748 $ 125,046 $ 130,741
========= ========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities
Short-term borrowings $ 28,399 $ 15,100 $ 18,400
Accounts payable 4,477 15,711 22,826
Compensation and related taxes 2,005 1,388 1,945
Deferred income taxes (see Note 5) - 1,946 856
Other accrued expenses 4,919 5,172 5,649
Current maturities of long-term debt - 1,710 1,720
--------- --------- ---------
Total current liabilities 39,800 41,027 51,396
--------- --------- ---------
Deferred income taxes (see Note 5) - 5,316 5,249
Non-current liabilities 5,055 4,505 4,057
Liabilities subject to compromise (see Note 2) 23,878 - -
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
11,448,000, 11,402,000 and 11,401,000, respectively 18,056 17,933 17,933
Additional paid-in capital 14,130 14,130 14,130
Unamortized restricted stock - (29) (36)
Retained earnings 6,245 46,580 42,428
--------- --------- ---------
38,431 78,614 74,455
Less: common stock in treasury, 500,000 at cost 4,416 4,416 4,416
--------- --------- ---------
Total shareholders' equity 34,015 74,198 70,039
--------- --------- ---------
Total liabilities and shareholders' equity $ 102,748 $ 125,046 $ 130,741
========= ========= =========
</TABLE>
See accompanying "Notes To Consolidated Condensed Financial Statements."
3
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PAUL HARRIS STORES, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF LOSS
UNAUDITED
(Amounts in thousands, except per share data)
<TABLE>
<CAPTION>
For thirteen weeks ended For the thirty-nine weeks ended
--------------------------- -------------------------------
October 28, October 30, October 28, October 30,
2000 1999 2000 1999
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Net sales $ 57,930 $ 62,565 $ 180,112 $ 177,495
Cost of sales, including certain occupancy expenses
exclusive of depreciation 44,621 39,709 134,435 111,999
Provision for loss on disposition of J. Peterman
inventories 2,621 - 7,239 -
--------- --------- --------- ---------
Gross income 10,688 22,856 38,438 65,496
Selling, general and administrative expenses 23,361 22,031 68,284 60,914
Employee separation expense - - 3,048 -
Provision for loss on disposition of other
J. Peterman assets - - 2,916 -
Depreciation and amortization 2,166 2,157 6,707 5,901
Gain on sale of asset (1,001) - (1,001) -
Interest expense, net 1,387 311 2,780 129
--------- --------- --------- ---------
Loss before reorganization expense and income taxes (15,225) (1,643) (44,296) (1,448)
Reorganization expense 3,057 - 3,057 -
--------- --------- --------- ---------
Loss before income taxes (18,282) (1,643) (47,353) (1,448)
Income tax expense (benefit) 3,884 (617) (7,018) (544)
--------- --------- --------- ---------
Net loss $ (22,166) $ (1,026) $ (40,335) $ (904)
========= ========= ========= =========
Basic loss per share $ (2.03) $ (0.09) $ (3.69) $ (0.08)
========= ========= ========= =========
Weighted average number of shares outstanding 10,946 10,887 10,939 10,841
========= ========= ========= =========
Diluted loss per share $ (2.03) $ (0.09) $ (3.69) $ (0.08)
========= ========= ========= =========
Weighted average number of shares and
share equivalents outstanding 10,946 10,982 10,939 10,984
========= ========= ========= =========
</TABLE>
See accompanying "Notes To Consolidated Condensed Financial Statements."
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PAUL HARRIS STORES, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
(Unaudited)
<TABLE>
<CAPTION>
For the thirty-nine weeks ended
-------------------------------
October 28, October 30,
2000 1999
---------- ----------
<S> <C> <C>
Net cash flow used for operating activities (8,129) (1,106)
Cash flow for investing activities:
Additions to fixed assets (6,273) (11,376)
Proceeds from disposal of J. Peterman assets 4,300 -
Business acquisition - (11,830)
-------- --------
Net cash flow used for investing activities (1,973) (23,206)
-------- --------
Cash flow from financing activities:
Direct borrowings under revolving line of credit 13,299 18,400
Repayment of long-term debt (1,710) (90)
Proceeds from issuance of common stock 17 259
Debt issue costs paid (986) -
-------- --------
Net cash flow provided from financing activities 10,620 18,569
-------- --------
Net Cash provided (used) $ 518 $ (5,743)
======== ========
Cash and cash equivalents:
At beginning of period $ 3,587 $ 7,429
At end of period 4,105 1,686
-------- --------
Net Cash provided (used) $ 518 $ (5,743)
======== ========
Supplemental disclosure of noncash investing activities:
A noncash gain of $1.001 on sale of an asset was recognized when the
Company sold the asset for inventory.
</TABLE>
See accompanying "Notes To Consolidated Condensed Financial Statements."
5
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PAUL HARRIS STORES, INC., AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION
The accompanying unaudited consolidated condensed financial statements of Paul
Harris Stores, Inc. and its subsidiaries (the "Company") have been prepared in
accordance with the American Institute of Certified Public Accountants Statement
of Position 90-7: "Financial Reporting by Entities in Reorganization Under the
Bankruptcy Code" ("SOP 90-7") and generally accepted accounting principles
applicable to a going concern, which principles, except as otherwise disclosed,
assume that assets will be realized and liabilities will be discharged in the
normal course of business. The Company and its subsidiary filed petitions for
relief under Chapter 11 of the United States Bankruptcy Code on October 16,
2000. The Company is presently operating its business as a debtor-in-possession
subject to the jurisdiction of the United States Bankruptcy Court for the
Southern District of Indiana.
The unaudited consolidated condensed 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 Annual Report on Form 10-K for the fiscal year ended January 29, 2000.
The information furnished, in the opinion of management, includes all normal
recurring adjustments necessary to present fairly the financial position,
results of operations and cash flows for the periods reported.
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 2000 refers to the fiscal year that
began on January 30, 2000, and will end on February 3, 2001.
The results of operations for the first, second and third quarters of fiscal
2000 are not necessarily indicative of the results to be expected for all of
fiscal 2000. 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 years have been reclassified to conform to the
current year presentation.
2. CHAPTER 11 BANKRUPTCY
On October 16, 2000 (the "Petition Date"), the Company filed a voluntary
petition for relief under Chapter 11 of the United States Bankruptcy Code (the
"Bankruptcy Code") with the United States Bankruptcy Court for the Southern
District of Indiana at Indianapolis, Indiana (the "Bankruptcy Court"), Case No.
00-12467 (the "Chapter 11 Case").
The Company's financial statements have been prepared on a going-concern basis,
which contemplates continuity of operations, realization of assets, liquidation
of liabilities and commitments in the normal course of business. The Chapter 11
Case, related circumstances and the losses from operations raise substantial
doubt about the Company's ability to continue as a going concern. The
appropriateness of reporting on a going-concern basis is dependent upon, among
other things, confirmation of a plan of reorganization and future profitable
operations. Realization of the Company's assets and liquidation of its
liabilities at their recorded amounts is subject to significant uncertainty.
While under the protection of Chapter 11, the Company may sell or otherwise
dispose of assets, and liquidate or settle liabilities, for amounts other than
those reflected in the accompanying financial statements. The financial
statements do not include any adjustments relating to the recoverability of the
value of recorded asset amounts or the amounts
6
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and classification of liabilities that might be necessary as a consequence of a
plan of reorganization.
The Company expects to reorganize under Chapter 11 and propose a reorganization
plan that provides for emergence from bankruptcy during 2001. At this time, it
is not possible to predict the outcome of the Chapter 11 Case or its effects on
the Company's business. Those Petition Date liabilities that are expected to be
paid or compromised under a plan of reorganization are separately classified as
"Liabilities Subject to Compromise" in the accompanying unaudited Consolidated
Condensed Balance Sheet and as of October 28, 2000 include the following items
(in thousands):
Accounts payable $ 17,876
Deferred compensation 1,993
Estimated rejected lease claims 1,521
Other accrued liabilities 1,426
Tax liabilities 1,062
------------
Total $ 23,878
============
The expense resulting from the Company's Chapter 11 filing and subsequent
reorganization efforts has been separated from ordinary operations and is
classified as reorganization expense in the accompanying Consolidated Condensed
Statements of Loss for the thirteen and thirty-nine weeks ended October 28,
2000. These expenses include the following items (in thousands):
Estimated rejected lease claims $ 1,521
Write-off of leasehold improvements,
equipment and fixtures 1,158
Professional fees 378
------------
Total $ 3,057
============
As part of its reorganization activities, the Company is undertaking a review of
the long-term profitability of all store sites and of the recoverability of any
related recorded asset values. However, the Company cannot, at this time, make a
determination as to the impact of this review on its financial statements in
future periods.
3. EARNINGS PER SHARE
Basic earnings per share are based on the weighted average number of common
shares outstanding during the quarter and fiscal year-to-date. Diluted earnings
per share are based on the weighted average number of common and common
equivalent shares (dilutive stock options) outstanding during the quarter and
fiscal year-to-date. The potential common shares in fiscal 2000 of approximately
6,000 and 50,000 for the quarter and fiscal year-to-date, respectively, were
excluded because their inclusion would have had an anti-dilutive effect on
earnings per share. The following table (in thousands) reconciles the numerators
and denominators used in the basic and diluted earnings per share computations:
<TABLE>
<CAPTION>
For the thirteen weeks ended For the thirty-nine weeks ended
---------------------------- -------------------------------
October 28, 2000 October 30, 1999 October 28, 2000 October 30, 1999
------------------- --------------------- ------------------- ----------------------
Net Loss Shares Net Loss Shares Net Loss Shares Net Income Shares
--------- ------- ---------- ------- --------- ------- ---------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Basic loss and outstanding shares $ (22,166) 10,946 $ (1,026) 10,887 $ (40,335) 10,939 $ (904) 10,841
Effect of dilutive options - - - 95 - - - 143
--------- ------- ---------- ------- --------- ------- --------- --------
Diluted loss and outstanding
equivalent shares $ (22,166) 10,946 $ (1,026) 10,982 $ (40,335) 10,939 $ (904) 10,984
========= ======= ========== ======= ========= ======= ========= ========
</TABLE>
7
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4. LONG-TERM DEBT AND CREDIT ARRANGEMENTS
On October 17, 2000, the Bankruptcy Court approved Debtor-In-Position Financing
("DIP Facility") on an interim basis amending and assuming an existing committed
credit facility of $45.0 million, which may be used for direct borrowings and
letters of credit. The DIP Facility matures on June 30, 2001. The agreement
allows the Company to borrow at interest rates equaling the prime rate (as
defined in the DIP Facility) plus 2.0 percent. Letters of credit issued under
the DIP Facility carry initial issuance fees plus negotiation fees of 2.0
percent of the face amount of each letter of credit.
The DIP Facility is collateralized by the Company's inventory, equipment,
fixtures, cash and assignment of leases. The Company is also required to
maintain its primary operating cash accounts with the institution which is party
to the facility.
The DIP Facility contains financial covenants related to maximum disbursements,
minimum sales and the submission of certain financial information.
As of October 28, 2000, there were $28.4 million of direct borrowings under the
financing, outstanding letters of credit of $8.1 million and available
borrowings under the borrowing formula of the facility of $1.2 million.
5. INCOME TAXES
The Company has provided a full valuation allowance to offset tax benefits
arising from current year losses as their ultimate realization is uncertain.
6. DISPOSITION OF ASSETS
In October 2000, the Company entered into agreements selling substantially all
of the assets of The J. Peterman Company. The decision to sell the assets of J.
Peterman was announced on August 18, 2000 based on management's decision to
focus on the core business of Paul Harris. In accordance with SFAS 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
be Disposed of," ("SFAS 121") and APB 30, "Reporting the Results of Operations -
Reporting the Effects of Disposal of a Segment of a Business, and Extraordinary,
Unusual and Infrequently Occurring Events and Transactions", the Company has
recorded a $10.2 million "Provision for Loss on Disposition", $7.5 million of
which was reported in the second quarter. The additional provision in the third
quarter relates primarily to the further write-down of inventory to fair market
value. The portion of the provision related to inventories is recorded as a
separate adjustment to Gross Income with the remaining portion as a separate
line in operating expenses on the Consolidated Condensed Statements of Loss. The
net carrying value of the assets sold and proceeds were as follows (in
thousands):
Merchandise inventories $ 8,774
Furniture, fixtures and equipment 1,182
Other intangible assets, net 4,004
Accrued exit costs 495
Fair market value adjustment (10,155)
------------
Net Proceeds $ 4,300
============
Exclusive of the "Provision for Loss on Disposition", J. Peterman's revenues and
pre-tax results of operations did not exceed five percent of the Company's
consolidated revenues and pre-tax results of operations for any periods
presented.
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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 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;
the availability of adequate financing to meet working capital and other needs;
locating stores correctly and generating increased sales and productivity;
legislation and regulatory matters affecting payroll costs or other aspects of
retailing; the ability to identify and respond to emerging fashion trends;
internal computerized systems functioning properly; foreign and domestic labor
and manufacturing conditions; governmental actions such as import or trade
restrictions; and the results of the Company's pending Chapter 11 Bankruptcy
proceedings.
On October 16, 2000 (the "Petition Date"), Paul Harris filed a voluntary
petition for relief under Chapter 11 of the United States Bankruptcy Code with
the United States Bankruptcy Court for the Southern District of Indiana. Under
Chapter 11, the Company will operate its business as a debtor-in-possession.
Additionally, a creditor committee has been formed and will have the right to
review and object to any non-ordinary course business transactions and
participate in the formulation of any plan or plans of reorganization.
As of the Petition Date, actions to collect pre-petition indebtedness are stayed
and other contractual obligations may not be enforced against the Company. In
addition, the Company may reject executory contracts and lease obligations, and
other parties affected by these rejections may file claims with the Bankruptcy
Court in accordance with the reorganization process. Substantially all
liabilities as of the Petition Date are subject to settlement under a plan of
reorganization to be developed and ultimately to be voted upon by all impaired
classes of creditors and equity holders and approved by the Bankruptcy Court.
OVERVIEW
As of October 28, 2000, the Company operated 307 stores in 28 states under the
Paul Harris ("PH") and Paul Harris Direct ("PHD") 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's stores currently average approximately 4,900 gross square feet and
are located primarily in regional enclosed shopping malls and, to a lesser
extent, strip shopping centers. During the first three quarters of fiscal 2000,
the Company opened 9 and closed 20 PH stores. The Company has recently finalized
agreements to dispose of substantially all of the J. Peterman assets resulting
in the closing of all J. Peterman stores (see Note 6. "Disposition of Assets" of
"Notes To Consolidated Condensed Financial Statements").
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RESULTS OF OPERATIONS
The following discussion is based upon the unaudited consolidated condensed
financial statements appearing elsewhere in this report. The following table
sets forth certain statement of loss items as a percentage of net sales.
PAUL HARRIS STORES, INC. AND SUBSIDIARIES
RESULTS OF OPERATIONS AS A PERCENT OF NET SALES
<TABLE>
<CAPTION>
Thirteen weeks ended Thirty-nine weeks ended
----------------------- ------------------------
October 28, October 30, October 28, October 30,
2000 1999 2000 1999
---------- ---------- ---------- ----------
<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) 77.0% 63.5% 74.6% 63.1%
Provision for loss on disposition of J. Peterman
inventories 4.5% 0.0% 4.0% 0.0%
------- ------- ------- -------
Gross income 18.5% 36.5% 21.4% 36.9%
Selling, general and administrative expenses (2) 40.3% 35.2% 37.9% 34.3%
Employee separation expense 0.0% 0.0% 1.7% 0.0%
Provision for loss on disposition of other
J. Peterman assets 0.0% 0.0% 1.6% 0.0%
Depreciation and amortization 3.7% 3.4% 3.7% 3.3%
Gain on sale of asset (1.7%) 0.0% (0.6%) 0.0%
Interest expense, net 2.4% 0.5% 1.5% 0.1%
------- ------- ------- -------
Loss before reorganization expense and income taxes (26.2%) (2.6%) (24.4%) (0.8%)
Reorganization expense 5.3% 0.0% 1.7% 0.0%
------- ------- ------- -------
Loss before income taxes (31.5%) (2.6%) (26.1%) (0.8%)
Income tax expense (benefit) 6.7% (1.0%) (3.9%) (0.3%)
------- ------- ------- -------
Net loss (38.2%) (1.6%) (22.2%) (0.5%)
======= ======= ======= =======
</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.
THIRD QUARTER OF FISCAL 2000
The Company's net sales decreased to $57.9 million in the third quarter of
fiscal 2000 from $62.6 million in the third quarter of fiscal 1999, a decrease
of $4.6 million or 7.4 percent. The decrease in net sales was primarily
attributable to a 15.5 percent decrease in apparel sales price per unit and a
29.6 percent decrease in accessory units sold, offset in part by an 8.6 percent
increase in apparel units sold during the third quarter of fiscal 2000 as
compared to the third quarter of fiscal 1999. Comparable store sales decreased
by 8.1 percent during the quarter. The Company operated 307 stores as of October
28, 2000, compared to 329 stores as of October 30, 1999.
Gross income decreased to $10.7 million in the third quarter of fiscal 2000 from
$22.9 million for the same period in the prior year, a decrease of $12.2 million
or 53.4 percent. Gross income as a percentage of net sales decreased to 18.5
percent in the third quarter of 2000 compared to 36.5 percent in the third
quarter of 1999. Gross income was negatively affected by a 27.1 percent decrease
in selling margins primarily due to the impact of price discounting on
end-of-season inventories, a "Provision for Loss on Disposition of J. Peterman
Inventories" and additional reserves on spring/summer merchandise. The
"Provision for Loss on Disposition" is a $2.6 million
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write-down of the recorded value of J. Peterman inventories to estimated fair
market value. On October 10, 2000, the Company entered into an agreement to
dispose of the J. Peterman inventory (see Note 6. "Disposition of Assets" of
"Notes To Consolidated Condensed Financial Statements").
Selling, general and administrative expenses increased to $23.4 million, or 40.3
percent of net sales, for the third quarter of fiscal 2000 from $22.0 million,
or 35.2 percent of net sales, for the third quarter of fiscal 1999. The largest
components of the $1.3 million increase were $368,000 in additional occupancy
related costs for PH stores and $313,000 for increased business services costs.
Gain on sale of asset of $1.0 million represents the excess over the recorded
value of an asset sold to an overseas vendor in exchange for merchandise on
order with such vendor.
Interest expense, net, was an expense of $1.4 million for the third quarter of
fiscal 2000 compared to an expense of $311,000 for the third quarter of fiscal
1999. The increased expense primarily resulted from additional borrowings under
the Company's revolving line of credit to fund seasonal inventories and
operations, higher interest rates and amortization of increased deferred loan
costs.
Reorganization expense of $3.1 million includes estimated rejected lease claims
of $1.5 million on nine stores closed at the end of the third quarter, $1.2
million for the write-off of leasehold improvements, equipment and fixtures on
those stores and $378,000 in professional fees. The Bankruptcy Code allows the
rejection of unfavorable leases and requires the estimation of a liability at
the greater of one year's lease payments or 15 percent of scheduled lease
payments over the remaining lease life.
Income tax expense of $3.9 million for the third quarter of fiscal 2000 reflects
the impact of a full valuation allowance being recorded on current year losses.
The $617,000 of accrued benefit for the third quarter of fiscal 1999 was accrued
at an effective interest rate of 37.5 percent.
As a result of the above factors, the Company recorded a net loss of $22.2
million or $2.03 per diluted share for the third quarter of fiscal 2000 compared
to a net loss of $1.0 million or $0.09 per diluted share for the third quarter
of fiscal 1999.
FIRST NINE MONTHS OF FISCAL 2000
The Company's net sales increased to $180.1 million in the first nine months of
fiscal 2000 from $177.5 million in the first nine months of fiscal 1999, an
increase of $2.6 million or 1.5 percent. The increase in net sales was primarily
attributable to higher J. Peterman sales resulting from a 183 percent increase
in units sold. The significant increase in units includes the impact of units
sold during a special promotion in four cities. The Company operated 307 stores
as of October 28, 2000 compared to 329 stores on October 30, 1999. Comparable
store sales decreased by 2.5 percent for the first nine months of fiscal 2000.
Gross income decreased to $38.4 million in the first nine months of fiscal 2000
from $65.5 million for the same period in the prior year, a decrease of $27.1
million or 41.4 percent. Gross income, as a percentage of net sales, decreased
to 21.4 percent in the first nine months of fiscal 2000 from 36.9 percent of net
sales for the first nine months of fiscal 1999. Gross income was negatively
impacted by a 9.2 percentage point decrease in selling margins, a "Provision for
Loss on Disposition of J. Peterman Inventories" and additional reserves to
reduce the carrying value of out-of-season inventories on-hand at the end of the
first nine months of fiscal 2000. The selling margin decrease is primarily due
to management's decision to reduce the selling price on all spring/summer
inventories in order to sell through the inventory by the end of the third
quarter and an 8.6 percent increase in apparel cost per unit sold. The
"Provision for Loss on Disposition" is a $7.2 million write-down of the recorded
value of J. Peterman inventories to estimated fair market value (see Note 6.
"Disposition of Assets" of "Notes To Consolidated Condensed Financial
Statements"). The 1.5 percent increase in sales partially offset the selling
margin decrease.
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Selling, general and administrative expenses increased to $68.3 million, or 37.9
percent of net sales, for the first nine months of fiscal 2000 from $60.9
million, or 34.3 percent of net sales, for the first nine months of fiscal 1999.
The largest components of the $7.4 million increase were $1.3 for increased
business services costs, $1.3 million resulting from increased J. Peterman store
and overhead expenses in fiscal 2000 including incremental distribution and
administrative costs, $1.2 million in additional occupancy related costs for PH
stores primarily related to store openings, expansions and scheduled lease
increases, $867,000 in higher PH store wages primarily attributable to a 9.3
percent increase in average hourly store wages, $529,000 for increased medical
insurance claims and administrative costs and $453,000 for costs associated with
a J. Peterman special promotion.
Employee separation expense is a one-time $3.0 million charge for a settlement
reached on March 13, 2000, between the Company's Board of Directors and the
Company's former CEO to buy-out the remaining years of the CEO's employment
contract. The expense includes deferred compensation to be paid out over the
next three years plus other costs associated with the settlement. On the balance
sheet, the deferred compensation is classified under liabilities subject to
compromise.
Provision for loss on disposition of other J. Peterman assets is a $2.9 million
accrual to write-down the recorded value of J. Peterman assets to their
estimated fair market value. In October 2000, the Company signed agreements to
dispose of substantially all of the J. Peterman assets (see Note 6. "Disposition
of Assets" of "Notes To Consolidated Condensed Financial Statements").
Depreciation and amortization increased to $6.7 million for the first nine
months of fiscal 2000 from $5.9 million for the second half of fiscal 1999, an
increase of $806,000 or 13.7 percent. As a percentage of net sales, depreciation
and amortization increased to 3.7 percent in the first nine months of fiscal
2000 from 3.3 percent in the first nine months of fiscal 1999. The increase was
primarily a result of approximately $7.8 million in fixed asset expenditures
during the fourth quarter of fiscal 1999 and first nine months of fiscal 2000.
The increase in fixed assets includes the installation of a new merchandising
and general ledger system in the second half of fiscal 1999, which has a shorter
depreciable life than most other depreciable assets of the Company.
Gain on sale of asset of $1.0 million represents the excess over the recorded
value of an asset sold to an overseas vendor in exchange for merchandise on
order with such vendor.
Interest expense, net, was $2.8 million for the first nine months of fiscal 2000
compared to $129,000 for the first nine months of fiscal 1999. The increased
expense of $2.7 million was primarily due to additional short-term borrowings to
fund seasonal inventories and operations, higher interest rates and amortization
of increased deferred loan costs.
Reorganization expense of $3.1 million includes estimated rejected lease claims
of $1.5 million on nine stores closed at the end of the third quarter, $1.2
million for the write-off of leasehold improvements, equipment and fixtures on
those stores and $378,000 in professional fees. The Bankruptcy Code allows the
rejection of unfavorable leases and requires the estimation of a liability at
the greater of one year's lease payments or 15 percent of scheduled lease
payments over the remaining lease life.
Income tax benefit of $7.0 million for the first nine months of fiscal 2000
reflects the impact of a full valuation allowance being recorded on current year
losses. The $544,000 of accrued benefit for the first nine months of fiscal 1999
was accrued at an effective interest rate of 37.5 percent.
As a result of the above factors, the Company incurred a net loss of $40.3
million or $3.69 per diluted share for the first nine months of fiscal 2000
compared to a net loss of $904,000 or $0.08 per diluted share for the first nine
months of fiscal 1999.
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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
On October 17, 2000, the Bankruptcy Court approved a DIP Facility on an interim
basis amending and assuming an existing committed credit facility of $45.0
million, which may be used for direct borrowings and letters of credit. The DIP
Facility matures on June 30, 2001. The Company's primary sources of working
capital consist of internally generated cash and its DIP facility borrowings.
The Company may make direct borrowings up to the maximum of the facility subject
to a prescribed borrowing formula. As of October 28, 2000, there were $28.4
million of direct borrowings under the DIP facility. The balance of outstanding
letters of credit was $8.1 million and the amount of available borrowings under
the borrowing formula of the DIP facility was $1.2 million at October 28, 2000.
The annual interest rate on the direct borrowings outstanding under the DIP
facility is a variable rate equal to the prime rate of the Company's lender plus
2.0 percent. In addition, letters of credit carry an initial issuance fee, plus
a negotiation fee of 2.0 percent of the face amount of such letters of credit.
The DIP facility also contains certain financial covenants that set limits on
maximum disbursements and minimum sales and requires the submission of certain
financial information. A failure to comply with these covenants could adversely
affect the Company's liquidity. The DIP facility is secured by a security
interest in the Company's inventory, equipment, fixtures, cash and assignment of
leases.
Net cash used for operating activities was $8.1 million in the first nine months
of fiscal 2000 compared to net cash used of $1.1 million in the first nine
months of fiscal 1999. The primary reason for the decrease in net cash flow from
operating activities includes a $32.6 million reduction in cash flows from
earnings (net of non-cash reconciling items), offset by a $7.9 million decrease
in inventories from year-end 1999 compared to a prior-period increase of $17.6
million from year-end 1998. The significant change in cash flows from
inventories is primarily due to the timing of inventory receipts and the
handling of spring/summer merchandise. Inventory typically received during the
month of October was delayed until November due to the Company's cash shortage
which ultimately resulted in the filing for Chapter 11 Bankruptcy protection
(see Notes 2. "Chapter 11 Bankruptcy" of "Notes To Consolidated Financial
Statements"). In fiscal 2000, spring/summer merchandise was retained at the
store and substantially sold through by the end of the third quarter, in
contrast to fiscal 1999 when spring/summer merchandise was returned to
headquarters to be redistributed to the stores in spring 2000.
Net cash used for investing activities was $2.0 million in the first nine months
of fiscal 2000 primarily for $6.3 million in capital expenditures for the
remodeling/relocation of 15 existing stores and opening of 9 new stores, offset
by proceeds of $4.3 million from the disposal of J. Peterman assets. Net cash
used in the first nine months of fiscal 1999 was $23.2 million, which included
$11.8 million for the acquisition of J. Peterman assets, $6.7 million primarily
related to opening, remodeling and relocating of stores and $4.7 million for
costs associated with implementing a new merchandising and general ledger
system. The Company expects to spend approximately $6.5 million on store
remodels/relocations, new stores and other capital expenditures during fiscal
2000, of which $6.3 million had been spent as of October 28, 2000.
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Net cash flow from financing activities was $10.6 million for the first nine
months of fiscal 2000 primarily the result of direct borrowings of $13.3 million
under the Company's revolving credit and DIP facilities, which includes $1.7
million used to pay-off the mortgage on the Company's headquarters and
distribution center.
The Company believes that its cash balance at the end of the first nine months
of fiscal 2000, combined with its cash flow from operations and borrowings under
its DIP Facility, will be sufficient to satisfy its currently anticipated
working capital and capital expenditure requirements through fiscal 2000 and
into fiscal 2001. The Company's uses of capital for the remainder of fiscal 2000
are expected to include working capital for operating expenses and satisfaction
of liabilities incurred subsequent to the Petition Date, expenditures related to
maintaining its stores, interest payments on outstanding borrowings and costs
associated with the Chapter 11 Case. The Company's capital requirements, and its
ability to obtain financing, may vary significantly from those anticipated,
however, depending particularly on operating results and other factors. The
Company's long-term liquidity and the adequacy of the Company's capital
resources cannot be determined until a plan of reorganization has been developed
and confirmed in connection with the Chapter 11 Case.
As a debtor-in-possession, actions against the Company to collect pre-petition
indebtedness are stayed and certain contractual obligations may not be enforced
against the Company. With the approval of the Bankruptcy Court, certain of these
obligations may be paid prior to the confirmation of a reorganization plan. To
date, the Company has received approval to pay customary obligations associated
with the daily operations of its business, including the timely payment of new
inventory shipments, employee wages and other obligations. The ultimate amount
of, and settlement terms for, the Company's pre-petition liabilities are subject
to the approval of a plan of reorganization and, accordingly, the timing and
form of settlement are not presently determinable.
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 1. LEGAL PROCEEDINGS
On October 16, 2000, Paul Harris filed a voluntary petition for relief under
Chapter 11 of the Bankruptcy Code with the United States Bankruptcy Court for
the Southern District of Indiana, Indianapolis, Indiana 98101, Case No.
00-12467. Under Section 362 of the Bankruptcy Code, during the Chapter 11 Case,
creditors and other parties in interest may not, without Bankruptcy Court
approval: (i) commence or continue judicial, administrative or other proceedings
against the Company that were or could have been commenced prior to commencement
of the Chapter 11 Case, or recover a claim that arose prior to commencement of
the case; (ii) enforce any pre-petition judgments against the Company; (iii)
take any action to obtain possession of or exercise control over property of the
Company or its estate; (iv) create, perfect or enforce any lien against the
property of the Company; (v) collect, assess or recover claims against the
Company that arose before the commencement of the case; or (vi) set off any debt
owing to the Company that arose prior to the commencement of the case against a
claim of such creditor or party in interest against the Company that arose
before the commencement of the case.
Although the Company is authorized to operate its business and manage its
properties as a debtor-in-possession, it may not engage in transactions outside
of the ordinary course of business without complying with the notice and hearing
provisions of the Bankruptcy Code and obtaining Bankruptcy Court approval. As a
debtor-in-possession, the Company has the right, subject to Bankruptcy Court
approval and certain other limitations, to assume or reject executory,
pre-petition contracts and unexpired leases. Any damages resulting from
rejection are treated as
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general unsecured claims in the reorganization case, subject to certain
limitations under the Bankruptcy Code.
Under the Bankruptcy Code, as a general matter, a creditor's claim is treated as
secured only to the extent of the value of such creditor's collateral, and the
balance of such creditor's claim is treated as unsecured. Generally, unsecured
and undersecured debt does not accrue interest after the Petition Date.
Pre-petition claims that were contingent or unliquidated at the commencement of
the Chapter 11 Case are generally allowable against the Company in amounts to be
fixed by the Bankruptcy Court or otherwise agreed upon. These claims, including
without limitation those which arise in connection with the rejection of
executory contracts and leases, are expected to be substantial. The Company has
established certain reserves approximating what the Company believes will be its
liability under some of these claims.
Inherent in a successful plan of reorganization is a capital structure, which
permits the Company to generate sufficient cash flow after reorganization to
meet its restructured obligations and fund the current obligations of the
Company. Under the Bankruptcy Code, the rights and treatment of pre-petition
creditors and stockholders may be substantially altered. At this time, it is not
possible to predict the outcome of the Chapter 11 Case, in general, or the
effects of the Chapter 11 Case on the business of the Company or on the
interests of creditors or shareholders.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits: 4(a)(iii) Forbearance and Second Amendment to Loan and
Security Agreement dated as of October 13, 2000.
4(a)(iv) Amended and Restated Assumption Agreement and
Amendment to Loan Documents dated as of November 9,
2000.
27 Financial Data Schedule
(b) Reports on Form 8-K:
None.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
PAUL HARRIS STORES, INC.
(Registrant)
Date: December 15, 2000 /s/ Richard R. Hettlinger
-----------------------------------------
Sr. VP and Chief Financial Officer
(Signing on behalf of the registrant and
as principal financial officer)
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