<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 29, 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)
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 6, 2000 10,937,148 common shares were outstanding. The aggregate
market value of the common shares held by non-affiliates (based upon the closing
price on April 6, 2000 on The Nasdaq Stock Market of $3.34375 per share) was
approximately $36,446,000. For the purposes of such calculation, all outstanding
shares of common stock have been considered held by non-affiliates, other than
the 37,500 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.
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PART I
ITEM 1. BUSINESS
The Company is a specialty retailer that offers moderately priced casual
attire for fashion-conscious women under the Paul Harris name. In March 1999,
the Company acquired substantially all the assets of The J. Peterman Company
("J. Peterman"). J. Peterman is a nationally recognized upscale apparel,
accessory and novelty retailer.
As of January 29, 2000, the Company operated 318 Paul Harris stores in 29
states, of which 257 are located in regional enclosed shopping malls, and 12 J.
Peterman stores in nine states. 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, 1999 refers to the fiscal year that began on
January 31, 1999 and ended on January 29, 2000.
The Company operated retail stores in the following states on the dates
indicated:
NUMBER OF STORES AS OF NUMBER OF STORES AS OF
---------------------- ----------------------
JANUARY 29, JANUARY 30, JANUARY 29, JANUARY 30,
2000 1999 2000 1999
---- ---- ---- ----
Arkansas....... 2 2 New Jersey...... 7 7
California..... 2 - New York........ 5 3
Connecticut.... 4 4 North Carolina.. 15 15
Delaware....... 1 l Ohio............ 30 28
Florida........ 20 19 Pennsylvania.... 28 24
Georgia........ 15 11 South Carolina.. 7 6
Illinois....... 32 32 South Dakota.... 1 1
Indiana........ 37 37 Tennessee....... 15 13
Iowa........... 9 7 Texas .......... 13 12
Kentucky....... 7 5 Vermont......... 2 1
Louisiana...... 8 8 Virginia........ 12 12
Maryland....... 16 17 Washington...... 1 -
Massachusetts.. 6 5 Wisconsin....... 8 6
---- ----
Michigan....... 11 12 TOTAL STORES.... 330 304
==== ====
Mississippi.... 3 3
Missouri....... 10 10 Paul Harris..... 318 304
Nebraska....... 2 2 J. Peterman..... 12 -
---- ----
New Hampshire.. 1 1 TOTAL STORES.... 330 304
==== ====
The Company sells quality merchandise and emphasizes casual clothing
coordinated by color, style and fabric. Approximately 88 percent of all products
sold by the Company consist of apparel with the balance being accessories and
home furnishings.
Merchandise is available from a large number of domestic and foreign
suppliers under a variety of trade terms and conditions. During 1999, no
supplier provided more than 7.7 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 56 percent of all merchandise was purchased from
foreign suppliers in 1999. 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.
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The Company uses various trademarks such as "Paul Harris", "Paul Harris
Design", "PHD", "PH Sport", "J. Peterman", "The Owner's Manual" and other
trademarks of lesser importance. The Company has no patents, licenses,
franchises or other concessions that are considered important to its operations.
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 10.3 percent
of the Company's total sales during 1999.
During 1999, the average sale per PHFC transaction was $58, which compares
to an average sale per transaction of $27 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 1999, approximately 43.5 percent
of the Company's sales were for cash (including checks). Approximately 46.2
percent of the Company's sales were from major national credit cards in 1999.
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 3,500 permanent employees (full and
part-time) as of January 29, 2000. During the 1999 holiday peak-shopping season,
the Company hired approximately 1,800 additional temporary employees.
On March 12, 1999, the Company acquired from J. Peterman substantially all
the assets, free and clear of all liens and encumbrances for $11.1 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.
Assets acquired include inventory, intellectual property, fixed assets, mailing
list and store lease rights. The Company moved J. Peterman's warehousing and
corporate functions to its Indianapolis headquarters from Lexington, Kentucky
and closed three of the original 13 stores. The Company subsequently opened two
new stores in Indianapolis.
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
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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 had
utilized approximately 85% of this facility and leased the remaining space to an
unaffiliated party for a term expiring in 2001. On February 7, 2000, pursuant to
an early termination clause, the Company took possession of the remaining space
leased to such unaffiliated party to accommodate current and future staffing
requirements. 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 6. 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 1999.
EXECUTIVE OFFICERS OF THE REGISTRANT
Officers are elected by the Board of Directors and serve at the discretion
of the Board. The following sets forth the name, age, position(s) and business
experience of the executive officers of the Company.
NAME AGE TITLE
---- --- -----
Glenn S. Lyon........ 49 President and General Merchandising Manager
Sally M. Tassani..... 51 Executive Vice President
Keith L. Himmel, Jr.. 48 Vice President of Finance, Controller and
Corporate Secretary
Mr. Lyon became President and General Merchandising Manager in March 2000.
From February 1997 until January 2000, he was president of Modern Woman, Inc., a
division of Charming Shoppes, Inc. From May 1995 to January 1997, he was the
senior vice president and general merchandise manager of Modern Woman, Inc.
Modern Woman, Inc., based in New York City, is a 150-store specialty chain
dedicated to the plus size female customer. From October 1990 until June 1994,
he was the executive vice president of The Ormond Shops Inc., a New Jersey-based
200-store chain specializing in budget and moderate price women's apparel.
Approximately 20 months after he left The Ormond Shops Inc., an involuntary
bankruptcy petition was filed against The Ormond Shops Inc. on February 27,
1996.
Ms. Tassani became Executive Vice President 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.
3
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Mr. Himmel became Vice President of Finance in April 1996. He has held the
titles of Controller and Corporate Secretary with the Company since January
1995. From May 1994 until December 1994, he was Assistant Controller of the
Company. From November 1992 until April 1994, he was the Manager of Financial
Reporting and Analysis for the Company.
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.
MARKET PRICE OF COMMON STOCK
----------------------------
1999 QUARTERS 1998 QUARTERS
-------------------------- ------------------------------
1ST 2ND 3RD 4TH 1ST 2ND 3RD 4TH
----- ----- ----- ----- ------ ------ ------ ------
High......... $8.00 $7.38 $6.25 $4.38 $15.13 $16.00 $11.38 $14.13
Low.......... $5.88 $5.44 $3.63 $2.44 $ 8.00 $ 9.75 $ 5.13 $ 6.88
There were approximately 1,343 registered holders of record of common stock
on April 6, 2000. 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
registered equity securities pursuant to any exemption from the registration
provisions of the Securities Act of 1933, as amended.
4
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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.
1999 1998 1997 1996 1995
------------------------------------------------
(DOLLARS IN MILLIONS, EXCEPT FOR PER SHARE DATA)
INCOME STATEMENT DATA:
Net sales................... $ 264.0 $ 241.7 $ 209.2 $ 190.3 $ 167.5
Cost of sales, including
certain occupancy
expenses (1)............. 163.8 149.9 130.6 118.1 112.3
-------- -------- -------- -------- --------
Gross income................ 100.2 91.8 78.6 72.2 55.2
Selling, general and
administrative
expenses (2)............. 86.6 72.0 59.7 53.3 47.1
Depreciation and
amortization............. 8.0 6.3 4.1 3.3 3.5
-------- -------- -------- -------- --------
Operating income............ 5.6 13.5 14.8 15.6 4.6
Interest expense (income)
and other income, net.... 0.5 (0.2) (0.9) 1.2 2.0
-------- -------- -------- -------- --------
Income before income taxes.. 5.1 13.7 15.7 14.4 2.6
Provision for income taxes.. 1.9 5.1 6.0 5.6 1.0
-------- -------- -------- -------- --------
Net income.................. $ 3.2 $ 8.6 $ 9.7 $ 8.8 $ 1.6
======== ======== ======== ======== ========
Basic earnings per share.... $ 0.30 $ 0.78 $ 0.89 $ 0.88 $ 0.16
======== ======== ======== ======== ========
Diluted earnings per share.. $ 0.30 $ 0.75 $ 0.86 $ 0.85 $ 0.16
======== ======== ======== ======== ========
OPERATING AND STORE DATA:
Gross income percent........ 38.0% 38.0% 37.6% 38.0% 33.0%
Operating income percent.... 2.2% 5.6% 7.1% 8.2% 2.8%
Weighted average sales
per store (000's)........ $ 823 $ 844 $ 875 $ 845 $ 683
Comparable store sales
(decrease) increase (3).. (1%) (2%) 2% 20% (7%)
Stores open at beginning
of period................ 304 275 223 235 239
Stores opened during
period (4)............... 36 50 65 19 19
Stores closed during
period................... (10) (21) (13) (31) (23)
-------- -------- -------- -------- --------
Stores open at end of
period................... 330 304 275 223 235
======== ======== ======== ======== ========
BALANCE SHEET DATA
(AT END OF PERIOD):
Working capital............. $ 22.4 $ 26.5 $ 34.4 $ 21.4 $ 24.5
Total assets................ 125.0 100.7 91.3 57.3 57.9
Long-term debt.............. - 1.7 1.8 1.9 17.6
Shareholders' equity........ 74.2 70.5 66.0 36.9 22.9
- -----------------------------
(1) Occupancy expenses include store level base rent, percentage rent and real
estate taxes, exclusive of depreciation.
(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.
(4) 1999 includes 13 stores acquired as part of the J. Peterman acquisition.
5
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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:
1999 1998 1997
-------------------------
Net sales.................................... 100.0% 100.0% 100.0%
Cost of sales, including certain occupancy
expenses exclusive of depreciation (1).... 62.0 62.0 62.4
----- ----- -----
Gross income................................. 38.0 38.0 37.6
Selling, general and administrative
expenses (2).............................. 32.8 29.8 28.5
Depreciation and amortization................ 3.0 2.6 2.0
----- ----- -----
Operating income............................. 2.2 5.6 7.1
Interest expense (income) and other
income, net............................... 0.2 (0.1) (0.4)
----- ----- -----
Income before income taxes................... 2.0 5.7 7.5
Provision for income taxes................... 0.7 2.1 2.9
----- ----- -----
Net income................................... 1.3% 3.6% 4.6%
===== ===== =====
- ----------------------------
(1) Occupancy expenses include store level base rent, percentage rent and real
estate taxes.
(2) Includes all store level occupancy expenses not included in cost of sales.
1999 COMPARED TO 1998
The Company's net sales increased to $264.0 million in 1999 from $241.7
million in 1998, an increase of $22.3 million or 9.2 percent. The increase in
net sales was primarily attributable to a 9.6 percent increase in the amount of
total square feet operated during 1999, due to the increase in store count and
remodeled stores, and negatively impacted by a 1.3 percent decline in comparable
store sales. The Company operated 330 stores on January 29, 2000, compared to
304 stores on January 30, 1999. During 1999, the Company opened 21 stores and
closed 7 stores. The Company also acquired 13 J. Peterman stores, subsequently
closing 3 stores and opening 2 new stores.
Gross income increased to $100.2 million in 1999 from $91.8 million in
1998, an increase of $8.4 million or 9.2 percent. Gross income increased
primarily due to the increase in net sales. As a percentage of net sales, gross
income remained flat at 38.0 percent in 1999.
Selling, general and administrative expenses increased to $86.6 million in
1999 from $72.0 million in 1998, an increase of $14.5 million or 20.2 percent.
As a percentage of net sales, selling, general and administrative expenses
increased to 32.8 percent in 1999 from 29.8 percent in 1998. The increase in
selling, general and administrative expenses resulted primarily from the 8.6
percent increase in the number of stores operated during the year, a 5.7 percent
increase in the average hourly rate paid to store personnel, a $1.1 million
increase in Company provided benefits (primarily due to higher medical claims
and cost of workers' compensation coverage), $900,000 in additional fourth
quarter marketing expenditures and $400,000 for the settlement of an outstanding
lawsuit (see Note 6. "Commitments and Contingent Liabilities" of "Notes To
Consolidated Financial Statements").
Depreciation and amortization increased to $8.0 million in 1999 from $6.3
million in 1998, an increase of $1.8 million or 28.4 percent. As a percentage of
net sales, depreciation and amortization increased to 3.0 percent in 1999 from
2.6 percent in 1998. The increase was primarily due to the opening/acquisition
of 86 new stores and
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major remodels of 21 stores within the last two years, the installation of a new
merchandising and general ledger system (which has a shorter depreciable life
than most other fixed assets of the Company) and amortization of intangible
assets acquired in the J. Peterman acquisition (see Note 1. "Description of
Business and Summary of Significant Accounting Policies" and Note 4.
"Acquisition of Asset" of "Notes To Consolidated Financial Statements").
Operating income decreased to $5.6 million in 1999 from $13.5 million in
1998, a decrease of $7.9 million or 58.2 percent. As a percentage of net sales,
operating income decreased to 2.2 percent in 1999 from 5.6 percent in 1998.
Interest expense (income) and other income, net, was an expense of $462,000
in 1999 compared to income of $187,000 in 1998, an increase in expense of
$649,000. The increase was due to increased short-term borrowings as a result of
the J. Peterman acquisition in March 1999 (see Note 4. "Acquisition of
Asset" of "Notes To Consolidated Financial Statements") and funding of seasonal
inventories and operations. The 1999 expense was partially offset by a receipt
of $435,000 for unclaimed note redemption accredited back to the Company
according to the terms of the note agreement.
Provision for income taxes decreased to $1.9 million in 1999 from $5.1
million in 1998, a decrease of $3.2 million, or 62.2 percent. The Company's
effective income tax rate remained at 37.5 percent in 1999.
As a result of all the above factors, the Company's net income decreased to
$3.2 million or $0.30 per diluted share in 1999 from $8.6 million or $0.75 per
diluted share in 1998, a decrease of $5.3 million or 62.2 percent.
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 an 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.
Operating income decreased to $13.5 million in 1998 from $14.8 million in
1997, 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 expense (income) and other income, net, was income of $187,000 in
1998 compared to income of $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.
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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.
SEASONALITY AND QUARTERLY RESULTS
The Company's business, like that of many 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 1999 and 1998. 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 1, JUL. 31, OCT. 30, JAN. 29, MAY 2, AUG. 1 OCT. 31, JAN. 30,
-----------------------------------------------------------------------------
1999 1999 1999 2000 1998 1998 1998 1999
-----------------------------------------------------------------------------
(DOLLARS IN THOUSANDS, EXCEPT FOR PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net sales................... $58,442 $56,488 $62,565 $86,530 $52,278 $48,095 $61,212 $80,108
Gross income................ 20,746 21,894 22,856 34,755 20,297 18,129 23,686 29,723
Operating income (loss)..... 798 (785) (1,332) 6,977 2,458 826 2,872 7,394
Income (loss) before income
taxes 1,092 (897) (1,643) 6,644 2,581 950 2,781 7,425
Net income (loss)........... $ 683 $ (561) $(1,026) $ 4,152 $ 1,572 $ 573 $ 1,682 $ 4,759
Basic earnings (loss)
per share................ $ 0.06 $ (0.05) $ (0.09) $ 0.38 $ 0.14 $ 0.05 $ 0.15 $ 0.44
Diluted earnings (loss)
per share................ $ 0.06 $ (0.05) $ (0.09) $ 0.38 $ 0.14 $ 0.05 $ 0.15 $ 0.43
AS A PERCENTAGE OF NET SALES:
Gross income................ 35.5% 38.8% 36.5% 40.2% 38.8% 37.7% 38.7% 37.1%
Operating income (loss)..... 1.4 (1.4) (2.1) 8.1 4.7 1.7 4.7 9.2
Income (loss) before
income taxes............. 1.9 (1.6) (2.6) 7.7 4.9 2.0 4.6 9.3
Net income (loss)........... 1.2% (1.0%) (1.6%) 4.8% 3.0% 1.2% 2.8% 5.9%
</TABLE>
LIQUIDITY AND CAPITAL RESOURCES
The Company's primary sources of working capital consist of internally
generated cash and its $37.0 million collateralized, 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 up to the
maximum of the credit facility. The credit facility was amended on April 6, 2000
to increase borrowings to the current level and extended the maturity until June
30, 2001 (see Note 2. "Long-term Debt and Credit Arrangements" of "Notes To
Consolidated Financial Statements"). 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 plus .25 percent or LIBOR plus 2.5 percent.
In addition, letters of credit carry an initial issuance fee, plus a fee of
0.125 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;
earnings before interest, income taxes, depreciation and amortization ("EBITDA")
and other financial benchmarks. The agreement also requires the Company to
reduce all outstanding revolving loans to no more than $10.0 milliom for a
period of forty-five consecutive days during the fiscal year. The credit
facility is collateralized by an interest in the Company's inventory, equipment,
fixtures, cash and an assignment of leases. As of January 29, 2000, there were
$15.1 million of direct borrowings under the revolving credit commitment. The
balance of
8
<PAGE> 10
outstanding letters of credit was $9.3 million and the amount of available
borrowings under the borrowing formula of the Credit Facility was $10.2 million
at January 29, 2000.
Net cash used for investing activities was $24.0 million in 1999, which
included capital expenditures of $12.9 million, primarily for new stores and the
remodeling of existing stores (approximately $9.4 million) plus computer
hardware and software cost ($3.5 million for a new merchandising and general
ledger system) and $11.1 million for the acquisition of J. Peterman assets (see
Note 4. "Acquisition of Assets" of "Notes To Consolidated Financial
Statements"). 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 expects to make capital expenditures in 2000 of
approximately $5.6 million for the remodeling of 20 existing stores
(approximately $3.0 million) and opening 4 net new stores.
Net cash flow from operating activities was $4.9 million in 1999 compared
to $16.3 million in 1998. The primary reasons for the decrease was a $12.4
million increase in merchandise inventories during 1999 primarily due to a 10.3
percent increase in Paul Harris average per store inventory, which includes a
7.6 percent increase in Paul Harris stores selling square feet and $4.5 million
in J. Peterman inventory increase after the acquisition. The Company experienced
a $5.0 million decrease in cash provided from net income due to reduced
earnings, which was offset by a $5.3 million increase in cash flows from
construction allowance receivables primarily due to collection of receivables
outstanding at fiscal year-end 1998 and reduced construction during 1999.
Net cash flow from financing activities was $15.3 million in 1999 primarily
due to an increase in net short-term borrowings. For 1998, the net cash flow
used for financing activities was $4.3 million primarily for the purchase of
treasury stock.
Cash and cash equivalents were $3.6 million at the end of 1999 compared to
$7.4 million at the beginning of 1999, a decrease of $3.8 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.
INFLATION
The effect of changing prices had minimal impact on sales and cost of sales
during the past three years. Occupancy costs and certain selling, general and
administrative costs have been affected by inflation during the period. In
general these increases have been modest and reflect current trends.
9
<PAGE> 11
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
PAGE NO.
--------
Consolidated Balance Sheets -- As January 29, 2000
and January 30, 1999................................ 11
Consolidated Statements of Income -- for 1999,
1998 and 1997....................................... 12
Consolidated Statements of Cash Flows -- for 1999,
1998 and 1997....................................... 13
Consolidated Statements of Shareholders' Equity -- for
1999, 1998 and 1997 ................................ 14
Notes to Consolidated Financial Statements............. 15
Report of Independent Accountants...................... 23
(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.
10
<PAGE> 12
PAUL HARRIS STORES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands)
January 29, January 30,
2000 1999
---------------- ---------------
ASSETS
Current assets
Cash and cash equivalents $ 3,587 $ 7,429
Merchandise inventories 52,411 34,638
Construction allowances receivable 1,736 4,977
Other receivables 3,444 902
Prepaid expenses 2,199 1,381
---------------- ---------------
Total current assets 63,377 49,327
---------------- ---------------
Property, fixtures and equipment
Land, building and improvements 6,192 6,013
Store fixtures and equipment 46,393 38,229
Leasehold improvements and other 32,582 27,981
---------------- ---------------
85,167 72,223
Less: accumulated depreciation
and amortization (28,527) (21,611)
---------------- ---------------
Property, fixtures and
equipment, net 56,640 50,612
Other assets 5,029 746
---------------- ---------------
Total assets $ 125,046 $ 100,685
================ ===============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities
Short-term borrowings $ 15,100 $ -
Accounts payable 15,711 15,082
Compensation and related taxes 1,388 1,245
Deferred income taxes 1,946 1,235
Other accrued expenses 5,172 5,114
Current maturities of long-term debt 1,710 120
---------------- ---------------
Total current liabilities 41,027 22,796
---------------- ---------------
Long-term debt - 1,690
Deferred income taxes 5,316 2,577
Deferred rent 4,505 3,121
Commitments and contingent
liabilities (see Note 6)
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 11,402,000 and 11,299,000,
respectively 17,933 17,793
Additional paid-in capital 14,130 14,011
Unamortized restricted stock (29) (219)
Retained earnings 46,580 43,332
---------------- ---------------
78,614 74,917
Less: common stock in treasury,
at cost 500,000 and 500,000
respectively 4,416 4,416
---------------- ---------------
Total shareholders' equity 74,198 70,501
---------------- ---------------
Total liabilities and
shareholders' equity $ 125,046 $ 100,685
================ ===============
See accompanying "Notes To Consolidated Financial Statements."
11
<PAGE> 13
PAUL HARRIS STORES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(Dollars in thousands, except per share data)
For the fifty-two weeks ended
-------------------------------------
January 29, January 30, January 31,
2000 1999 1998
----------- ----------- -----------
Net sales $ 264,025 $ 241,693 $ 209,236
Cost of sales, including certain
occupancy expenses exclusive
of depreciation 163,774 149,858 130,589
----------- ----------- -----------
Gross income 100,251 91,835 78,647
Selling, general and administrative
expenses 86,557 72,025 59,733
Depreciation and amortization 8,036 6,260 4,148
----------- ----------- -----------
Operating income 5,658 13,550 14,766
Interest expense (income) and
other income, net 462 (187) (941)
----------- ----------- -----------
Income before income taxes 5,196 13,737 15,707
Provision for income taxes 1,948 5,151 5,979
----------- ----------- -----------
Net income $ 3,248 $ 8,586 $ 9,728
=========== =========== ===========
Basic earnings per share $ 0.30 $ 0.78 $ 0.89
=========== =========== ===========
Weighted average number of
shares outstanding 10,856 11,077 10,880
=========== =========== ===========
Diluted earnings per share $ 0.30 $ 0.75 $ 0.86
=========== =========== ===========
Weighted average number of shares and
share equivalents outstanding 10,980 11,378 11,292
=========== =========== ===========
See accompanying "Notes To Consolidated Financial Statements."
12
<PAGE> 14
PAUL HARRIS STORES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
For fifty-two weeks ended
----------------------------------------
January 29, January 30, January 31,
2000 1999 1998
----------- ----------- -----------
Cash flow from operating activities:
Net income $ 3,248 $ 8,586 $ 9,728
Adjustments to reconcile net
income to cash provided:
Depreciation and amortization 8,036 6,260 4,148
Restricted stock expense 190 128 -
Net loss on disposal of assets 279 326 463
Deferred income taxes 3,460 4,888 (1,076)
Utilization of tax net
operating loss carryforward - - 2,835
Changes in assets and
liabilities (excluding
effect of business
acquisition):
Merchandise inventories (12,428) (2,698) (12,181)
Construction allowances
receivable 3,241 (2,051) (2,494)
Other receivables (2,552) (498) 25
Prepaid expenses (751) (22) (523)
Other assets (39) 21 (87)
Accounts payable 629 2,357 4,210
Compensation and
related taxes 143 (1,535) (994)
Other accrued expenses 58 392 1,131
Other non-current liabilities 1,379 106 802
----------- ----------- -----------
Net cash flow provided from
operating activities 4,893 16,260 5,987
----------- ----------- -----------
Cash flow for investing activities:
Additions to fixed assets (12,879) (22,484) (20,408)
Business acquisition (11,115) - -
----------- ----------- -----------
Net cash flow used for
investing activities (23,994) (22,484) (20,408)
----------- ----------- -----------
Cash flow from (for) financing
activities:
Direct borrowings under
revolving line of credit 15,100 - -
Repayment of long-term debt (100) (120) (120)
Proceeds from issuance of
common stock and related
tax benefits 259 199 16,530
Purchase of treasury stock - (4,416) -
----------- ----------- -----------
Net cash flow provided from
(used for) financing activities 15,259 (4,337) 16,410
----------- ----------- -----------
Cash (used) provided $ (3,842) $ (10,561) $ 1,989
=========== =========== ===========
Cash and cash equivalents:
At beginning of period $ 7,429 $ 17,990 $ 16,001
At end of period 3,587 7,429 17,990
----------- ----------- -----------
Cash (used) provided $ (3,842) $ (10,561) $ 1,989
=========== =========== ===========
Supplemental disclosures of cash
flow information:
Cash paid for interest $ 994 $ 430 $ 385
=========== =========== ===========
Cash paid for income taxes $ 137 $ 2,074 $ 2,684
=========== =========== ===========
See accompanying "Notes To Consolidated Financial Statements."
13
<PAGE> 15
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 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
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
Exercise of stock options, including
related tax benefit 63 140 119 - - - -
Issuance of stock grants 40 - - - - - -
Amortization of restricted stock - - - 190 - - -
Net income for 1999 - - - - - - 3,248
-------- --------- --------- --------- --------- --------- ---------
Balance as of January 29, 2000 11,402 $ 17,933 $ 14,130 $ (29) 500 $ 4,416 $ 46,580
======== ========= ========= ========= ========= ========= =========
</TABLE>
See accompanying "Notes To Consolidated Financial Statements."
14
<PAGE> 16
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. and its consolidated subsidiaries ("the Company")
is a specialty retailer offering 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 318 Paul Harris stores in 29 states, with a significant
concentration of stores in the Midwest. The Company also operates 12 stores in
nine states under the J. Peterman name. J. Peterman is a nationally recognized
upscale apparel, accessory and novelty retailer.
Definition of Fiscal Year
The Company's fiscal year ends on the Saturday closest to January 31.
References to 1999, 1998 and 1997 are to the 52 weeks ended January 29, 2000,
January 30, 1999, and January 31, 1998, respectively.
Principles of Consolidation
The consolidated financial statements include the accounts of the Company
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 ("SFAS") No. 109, "Accounting for Income Taxes" 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>
1999 1998 1997
-------------- -------------- --------------
Net Net Net
Income Shares Income Shares Income Shares
-------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Basic earnings per share $3,248 10,856 $8,586 11,077 $9,728 10,880
Effect of dilutive options - 124 - 301 - 412
------ ------ ------ ------ ------ ------
Diluted earnings per share $3,248 10,980 $8,586 11,378 $9,728 11,292
====== ====== ====== ====== ====== ======
</TABLE>
15
<PAGE> 17
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 values due to the relatively short period of time until expected
realization. Due to the short-term nature of the Company's debt, the carrying
value approximates fair value.
Merchandise Inventories
Merchandise inventory is stated at the lower of first-in, first-out (FIFO)
cost or market.
Store Supplies
Supplies for stores including, but not limited to, hangers, signage, bags
and gift boxes are capitalized based upon physical inventories taken at or near
to January 29, 2000 and January 30, 1999.
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; and Leasehold Improvements 1-15 years.
Other Assets
Other assets are amortized on a straight-line basis over periods ranging
from 5 to 12 years. The Company assesses the recoverability of its long-lived
assets whenever adverse events or changes in circumstances or business climate
indicate the carrying value may not be recoverable. If undiscounted cash flows
are not sufficient to support the recorded asset, an impairment is recognized to
reduce the carrying value of the asset. The amount of the impairment loss is
determined by comparing the discounted expected future cash flows with the
carrying value.
Accumulated amortization of other assets was $345 and $0 as of January 29,
2000 and January 30, 1999, respectively.
Accounts Payable
Accounts payable includes a book overdraft reclassification of $3,412 and
$0 as of January 29, 2000 and January 30, 1999, respectively.
Revenue Recognition
Sales are recorded upon purchase by customers and are reported net of
returns and allowances on the consolidated statement of income.
Business Segments and Related Disclosures
In fiscal 1999, the Company adopted SFAS No. 131 "Disclosure About Segments
of an Enterprise and Related Information", which establishes annual and interim
reporting standards for an enterprise's operating segments and related
disclosures about its products, services, geographic areas and major customers.
Given the economic characteristics of the store formats, the type of customer
and method of distribution, the operations of the Company are aggregated into
one reportable segment.
Interest Expense (Income) and Other Income, Net
Interest expense (income) and other income, net includes interest income
of $26, $378 and $999 in fiscal years ended January 29, 2000, January 30, 1999
and January 31, 1998, respectively and other income of $435 in fiscal 1999
related to unredeemed notes accredited back to the Company.
16
<PAGE> 18
NOTE 2. LONG-TERM DEBT AND CREDIT ARRANGEMENTS
The Company has a committed credit facility, which is used for letters of
credit or direct borrowings ("Credit Facility"). The facility was amended April
6, 2000 to increase the facility from $35,000 to $37,000 and extend the term to
June 30, 2001. The Credit Facility is intended to provide the Company with the
cash and liquidity to conduct its operations. The Credit Facility was previously
modified on October 21, 1999 to increase the facility to $35,000. The latter
facility was due on June 30, 2000 and allowed the Company to borrow a maximum of
$10,000 under the Credit facility as a term note. The April 6, 2000 amended
facility does not include a provision for term note borrowings.
As of January 29, 2000, there were outstanding short-term direct borrowings
of $15,100 under the Credit Facility. The balance of outstanding letters of
credit was $9,253 and the amount of available borrowings under the borrowing
formula of the Credit Facility was $10,184. There were no term note borrowings
as of January 29, 2000.
Under the new arrangements, the Company may, at its option, borrow under
the Credit Facility at the Prime Rate (as defined in the Credit Facility) plus
.25 percent or at the LIBOR Interest Rate (as defined in the Credit Facility)
plus 2.5 percent. Under the previous version of the facility, interest rate on
borrowings was at the Prime Rate (as defined in the Credit Facility) or at the
LIBOR Interest Rate (as defined in the Credit Facility) plus 2.0 percent.
Letters of credit issued under the Credit Facility continue to carry initial
issuance fees plus negotiation fees of 0.125 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,
EBITDA and other financial benchmarks. The agreement also requires the Company
to reduce all outstanding revolving loans to no more than $10,000 for a period
of forty-five consecutive days during the fiscal year.
The Company also has a term loan of $1,710 collateralized by a mortgage on
the Company's land and buildings with a book value of $4,037. As part of the
amended facility, the term loan principal and all applicable interest will be
paid off prior to April 29, 2000. The term loan required monthly principal
payments of $10 plus interest at 7.33 percent (7.83 percent in 1998). 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.
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. 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 $11,115. This
transaction did not include any assumption of debt. The total purchase price
includes costs of $1,084 primarily associated with a plan to exit three of the
thirteen acquired store locations and close the J. Peterman distribution
facility. 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. In accordance
with APB 16, "Business Combinations", the purchase price has been assigned based
upon the fair values of assets acquired:
17
<PAGE> 19
Merchandise inventories $ 5,345
Store fixtures and equipment 1,078
Other assets 4,692
----------
$ 11,115
==========
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 February 1,
1998:
THREE MONTHS ENDED TWELVE MONTHS ENDED
--------------------- ----------------------
01/29/00 01/30/99 01/29/00 01/30/99
-------- -------- -------- --------
Net sales $ 86,530 $101,981 $265,281 $295,195
Net earnings (loss) $ 4,152 $(15,435) $ 2,716 $(15,772)
Per share data:
Basic $ 0.38 $ (1.43) $ 0.25 $ (1.42)
Diluted $ 0.38 $ (1.39) $ 0.25 $ (1.39)
These unaudited pro forma results have been prepared for comparative
purposes only and include the effects of the fair values assigned and certain
adjustments and assumptions based upon unaudited 1998 J. Peterman information
which management believes is 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.
NOTE 5. 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, 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:
1999 1998 1997
--------- -------- --------
Current tax expense:
Federal.................... $ (1,356) $ 1,333 $ 4,061
State...................... (156) 183 1,061
Deferred tax expense:
Federal.................... 3,104 3,194 643
State...................... 356 441 214
--------- -------- --------
$ 1,948 $ 5,151 $ 5,979
========= ======== ========
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:
18
<PAGE> 20
1999 1998 1997
------ ------ ------
Federal taxes at statutory rate........... $1,818 $4,708 $5,498
State and local taxes, net of
federal benefit......................... 130 410 782
Non-deductible compensation expense....... - - 350
Reduction of valuation allowance
on deferred tax assets................. - - (695)
Other..................................... - 33 44
------ ------ ------
$1,948 $5,151 $5,979
====== ====== ======
Deferred tax assets (liabilities) are comprised of the following:
1999 1998
-------- ---------
Rent expense accruals................... $ 1,710 $ 1,186
Tax credits............................. 659 -
Other................................... 410 376
-------- ---------
Total deferred tax assets........... 2,779 1,562
-------- ---------
Retail inventory accruals............... (2,305) (1,555)
Depreciation............................ (7,282) (3,516)
Prepaid pension......................... (209) (162)
Other................................... (245) (141)
-------- ---------
Total deferred tax liabilities ...... (10,041) (5,374)
-------- ---------
Net deferred tax liabilities............ $ (7,262) $ (3,812)
======== =========
NOTE 6. 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/office 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 0.1
percent of rental expense for 1999, 0.7 percent for 1998 and 1.6 percent for
1997; (2) The Company has a number of leases with rent calculated based on a
percentage of monthly sales. Such leases accounted for 6.0 percent of rental
expense in 1999, 7.7 percent in 1998 and 11.8 percent in 1997; and (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 $29,354 for 1999, $23,325 for 1998 and $17,293 for
1997.
Future minimum lease payments at January 29, 2000, were as follows:
2000......................... $ 27,906
2001......................... 27,128
2002......................... 26,953
2003......................... 26,276
2004......................... 23,584
Thereafter................... 80,212
----------
Total .................. $ 212,059
==========
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 and damages in excess of $3,000. On October
19
<PAGE> 21
11, 1999, the Company paid $400 to settle this matter resulting in a complete
dismissal and release of all claims involved.
The Company is subject to various other claims and contingencies arising
out of the normal course of business. Management believes that the ultimate
liability, if any, in excess of amounts already provided or covered by
insurance, is not likely to have a material adverse effect on the Company's
financial condition, results of operations or cash flows.
NOTE 7. 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.
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 29, 2000 and January 30, 1999. The following chart
summarizes the balance sheet impact, as well as the benefit obligations, assets,
funded status and rate assumptions of the plan:
1999 1998
-------- ---------
Projected benefit obligation:
Beginning obligations.................... $ 825 $ 1,071
Interest cost......................... 59 77
Actuarial (losses) gains.............. (17) 10
Benefits paid......................... (154) (457)
Other................................. 50 124
-------- ---------
Ending obligations....................... 763 825
-------- ---------
Fair value of plan assets:
Beginning fair value..................... 1,245 1,484
Actual return on plan assets.......... 44 218
Benefits paid......................... (154) (457)
-------- ---------
Ending fair value........................ 1,135 1,245
-------- ---------
Funded status of the plan................ 372 420
Unrecognized net loss.................... 216 171
-------- ---------
Net balance sheet asset.................. $ 588 $ 591
======== =========
Rate Assumptions:
Discount rate............................ 7.25% 7.25%
Rate of return on plan assets............ 8.00% 8.00%
NOTE 8. 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 SFAS No. 123, "Accounting for Stock-based
Compensation" and pursuant to its provisions the Company has elected to continue
using the intrinsic-value method of accounting for stock-based
20
<PAGE> 22
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 3,000 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 August 30, 1999, 2000 and 2001, respectively. The
Company recorded compensation expense of $190 and $128 in 1999 and 1998,
respectively and issued 40 shares in 1999 related to this grant.
The following table summarizes options outstanding and available under
these plans and arrangements:
(SHARES IN THOUSANDS, EXCEPT FOR SHARE DATA)
1999 1998 1997
------ ------ ------
Options outstanding at beginning of year..... 1,627 1,198 1,170
Options granted.............................. 577 564 336
Options exercised............................ (103) (43) (146)
Options expired.............................. (241) (92) (162)
------ ------ ------
Options outstanding at end of year .......... 1,860 1,627 1,198
====== ====== ======
Options exercisable at end of year........... 1,207 1,194 841
====== ====== ======
Options available for grant at end of year... 1,038 374 845
====== ====== ======
Weighted average option prices per share:
At beginning of year......................... $ 8.61 $ 8.73 $ 6.30
Granted...................................... 5.19 8.82 16.54
Exercised.................................... 4.07 2.16 3.19
Expired...................................... 11.69 14.73 12.49
Outstanding at end of year................... 7.41 8.61 8.73
Exercisable at end of year................... $ 7.95 $ 7.78 $ 6.79
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 1999, 1998 and 1997,
respectively: dividend yield of 0.0, 0.0 and 0.0 percent; expected volatility of
59.8, 45.4 and 44.6 percent; risk free interest rates of 5.8, 5.2 and 5.9
percent; and expected lives of 4.4, 4.0 and 4.0 years. The results are listed in
the following table:
1999 1998 1997
------- ------ ------
Weighted average fair value per option of
options granted during the year $ 2.73 $ 3.46 $ 6.16
21
<PAGE> 23
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:
1999 1998 1997
------ ------ ------
Net income
As reported.............................. $3,248 $8,586 $9,728
Pro forma................................ $2,715 $7,520 $9,075
Basic earnings per share
As reported.............................. $ .30 $ 0.78 $ 0.89
Pro forma................................ $ .25 $ 0.68 $ 0.83
Diluted earnings per share
As reported.............................. $ .30 $ 0.75 $ 0.86
Pro forma................................ $ .25 $ 0.66 $ 0.80
The following table summarizes information about stock options
outstanding and stock options exercisable at January 29, 2000: (shares
in thousands)
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
----------------------------------------- ------------------------
NUMBER WEIGHTED WEIGHTED NUMBER WEIGHTED
OUTSTANDING AVERAGE AVERAGE EXERCISABLE AVERAGE
RANGE OF AT JAN. 29, CONTRACTUAL EXERCISE AT JAN. 29, EXERCISE
EXERCISE PRICES 2000 LIFE (IN YEARS) PRICE 2000 PRICE
- --------------- ----------- -------------- -------- ----------- ----------
<S> <C> <C> <C> <C> <C>
$ 1.31 116 5.70 $ 1.31 116 $ 1.31
$ 1.50 - $ 3.75 257 8.18 2.66 116 2.12
$ 4.00 - $ 5.68 497 5.64 5.41 374 5.65
$ 6.50 - $10.25 672 8.74 7.35 341 7.97
$11.50 - $27.69 318 7.37 16.72 260 16.79
</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 $150, $135 and $70 for 1999, 1998 and 1997,
respectively.
NOTE 9. SUBSEQUENT EVENT - MANAGEMENT CHANGE (UNAUDITED)
On March 13, 2000, the Paul Harris Board of Directors and CEO reached a
settlement agreement to buy-out the remaining years of the CEO's employment
agreement. In connection with this settlement, a one time pretax charge of
$3,078 will be recorded in the first quarter of fiscal 2000.
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 10 present fairly, in all material
respects, the financial position of Paul Harris Stores, Inc. and its
subsidiaries at January 29, 2000 and January 30, 1999, and the results of their
operations and their cash flows for each of the three years in the period ended
January 29, 2000 in conformity with accounting principles generally accepted in
the United States. 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 auditing standards generally accepted in the
United States, 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
February 25, 2000
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 21, 2000 By: /s/ GLENN S. LYON
---------------------------------
Glenn S. Lyon President,
General Merchandising Manager and
Director
(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/ GLENN S. LYON President, General Merchandising April 21, 2000
- ---------------------------------------- Manager and Director
Glenn S. Lyon (Principal Executive Officer)
/s/ SALLY M. TASSANI Executive Vice President April 21, 2000
- ---------------------------------------- and Director
Sally M. Tassani
/s/ KEITH L. HIMMEL, JR. Vice President - Finance, Controller April 21, 2000
- ---------------------------------------- and Corporate Secretary
Keith L. Himmel, Jr. (Principal Accounting and Financial
Officer)
/s/ RICHARD A. FEINBERG, PH.D. Director April 21, 2000
- ----------------------------------------
Richard A. Feinberg, Ph.D.
/s/ LESLIE NATHANSON JURIS, PH.D. Director April 21, 2000
- ----------------------------------------
Leslie Nathanson Juris, Ph. D.
/s/ JAMES T. MORRIS Director April 21, 2000
- ----------------------------------------
James T. Morris
/s/ JOHN E. PETERS Director April 21, 2000
- ----------------------------------------
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).
(iv) Amendment to Amended and Restated Articles of Incorporation dated
August 18, 1999 (incorporated herein by reference, filed as Exhibit
4(a)(iv) from Form 10-Q for the fiscal quarter ended July 31,
1999).
(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 (incorporated herein by reference, filed as Exhibit
(4)(a)(viii) from Form 10-K for the fiscal year ended January 30,
1999).
(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(incorporated herein by
reference, filed as Exhibit (4)(a)(ix) from Form 10-K for the
fiscal year ended January 30, 1999).
25
<PAGE> 27
(x) Eight Modification of Secured Credit Agreement and Other Loan
Documents dated as of April 19, 1999 by and between the Registrant
and LaSalle National Bank (incorporated herein by reference, filed
as Exhibit (4)(a)(x) from Form 10-Q for the fiscal quarter ended
May 1, 1999).
(xi) Ninth Modification of Secured Credit Agreement and Other Loan
Waver and Documents dated as of October 21, 1999 by and between the
Registrant and LaSalle National Bank (incorporated herein by
reference, filed as Exhibit (4)(a)(xi) from Form 10-Q for the
fiscal quarter ended October 30, 1999).
(xii) Waver and Tenth Modification of Secured Credit Agreement and Other
Loan Documents dated as of December 31, 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).
(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).
(iii) *Second Amendment to the 1996 Stock Option and Incentive Plan, as
amended (incorporated herein by reference, filed as Exhibit
(10)(c)(iii) from Form 10-Q for the fiscal quarter ended July 31,
1999).
(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 August 12, 1998 to Sally Tassani describing terms of
employment. (incorporated herein by reference, filed as Exhibit
(10) (h) from Form 10-K for the fiscal year ended January 30,
1999)
(h) * Letter dated September 12, 1998 to Thomas McCain describing terms
of employment.(incorporated herein by reference, filed as Exhibit
(10) (i) from Form 10-K for the fiscal year ended January 30,
1999)
(i) * Severance Agreement between the Company and Charlotte G. Fischer
dated March 13, 2000.
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
Exhibit 4(xii)
WAIVER AND TENTH MODIFICATION OF AMENDED AND RESTATED
SECURED CREDIT AGREEMENT
AND OTHER RELATED DOCUMENTS
THIS WAIVER AND TENTH MODIFICATION OF AMENDED AND RESTATED SECURED
CREDIT AGREEMENT AND OTHER RELATED DOCUMENTS (this "Amendment") is made as of
December 31, 1999, by and among PAUL HARRIS STORES, INC., an Indiana corporation
("PH Stores"), PAUL HARRIS MERCHANDISING, INC., an Indiana corporation ("PH
Merchandising"), PAUL HARRIS RETAILING, INC., an Indiana corporation ("PH
Retailing"), and THE J. PETERMAN COMPANY, an Indiana corporation ("Peterman"),
and LASALLE BANK NATIONAL ASSOCIATION, 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 ascribed to such terms in that certain Secured Credit
Agreement originally 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 and amended by those
certain First through Ninth Modifications of the Amended and Restated Secured
Credit Agreement, and Related Documents dated as of October 31, 1994, January
31, 1995, September 28, 1995, May 8, 1996, April 9, 1997, November 19, 1998,
February 1, 1999, April 19, 1999, and October 21, 1999 (as so amended, the
"Credit Agreement").
WHEREAS, Borrower (as that term is defined in the Credit Agreement) has
requested that Bank grant certain waivers and make various modifications to the
Credit Agreement and certain of the Related 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 Amendment are fully incorporated herein by
this reference thereto with the same force and effect as though restated herein.
2. Each definition, numbered section and provision of the Credit
Agreement set forth below in this paragraph 2 supersedes and replaces the
corresponding definition, numbered section and provision of the Credit
Agreement. To the extent that any of the definitions, numbered sections and
provisions of the Credit Agreement set forth below in this paragraph 2 do not
correspond to any definition, numbered section or provision of the Credit
Agreement, such definition, numbered section or provision shall be deemed to
have been added to the Credit Agreement as set forth below and in the
appropriate order. The Table of Contents to the Credit Agreement shall be
understood to have been modified to reflect these changes and incorporated
provisions. Accordingly, effective as of December 31, 1999 (the "Modification
Date"), the Credit Agreement is modified as set forth below in this Section
6.2.2:
<PAGE> 2
3. "6.2.2 ANNUAL REDUCTION OF REVOLVING CREDIT COMMITMENT AND TERM B
LOAN COMMITMENT. Except as set forth in the following sentence, all amounts
outstanding pursuant to the Revolving Loans provisions of the Revolving Credit
Commitment and the Term B Loans provisions of the Term B Loan Commitment must
simultaneously be reduced by the Borrower to zero ($0.00) for a period of ninety
(90) consecutive days during each fiscal year of the Borrower. Notwithstanding
anything expressed or implied to the contrary in the preceding sentence, the
aggregate amounts outstanding pursuant to the Revolving Loans provisions of the
Revolving Credit Commitment and the Term B Loans provisions of the Term B Loan
Commitment must be $8,000,000 or less on each day for a period of thirty (30)
consecutive days during the fiscal year of the Borrower ending January 31, 2000.
For purposes of this section, amounts outstanding with respect to Revolving
Loans and Term B Loans shall not be construed to include the face amount of
undrawn Letters of Credit issued at the request of Borrower pursuant to the
provisions of Section 2.3."
4. WAIVER. Borrower requests that the Bank waive compliance with the
provisions of Section 6.2.2 of the Credit Agreement effective as of December 31,
1999, subject to the other provisions of this Amendment. Bank consents to
Borrower's non-compliance as of December 31, 1999 with the provisions of Section
6.2.2 of the Credit Agreement and waives the effects and consequences of such
non-compliance, provided that the Borrower shall have complied with the
provisions of Section 6.2.2 of the Credit Agreement as amended hereby from and
after December 31, 1999. The foregoing waiver (the "Waiver") is specifically
limited in time and scope to the individual occurrence described above and shall
not be deemed to extend or apply to any other event or occurrence in existence
as of the date hereof or arising hereafter. In addition, the Waiver shall not be
deemed to constitute a custom or a practice on the part of the Bank.
5. REFERENCES. All references in the Loan Documents to the Credit
Agreement hereby are understood to be to the Credit Agreement as modified
hereby.
6. 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 Amendment, this Amendment shall be deemed to be effective as
of December 31, 1999 (the "Effective Date"), provided all of the following
conditions are satisfied in a manner, form and substance acceptable to Bank:
(a) EXECUTION OF AMENDMENT. This Amendment duly authorized and
fully executed, and 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
2
<PAGE> 3
Joinder and any other document, instrument or agreement executed or
delivered in connection therewith by the Borrower shall have been
delivered to Bank; and
(ii) Such other documents, instruments or agreements as the
Bank may reasonably request shall have been delivered to Bank.
7. In the event of any conflict among the terms of the Credit
Agreement and the Related Documents as modified by this Amendment, the terms of
the Credit Agreement as modified by this Amendment shall control. All terms and
provisions of the Related Documents corresponding to terms and provisions of the
Credit Agreement prior to the date of this Amendment shall be deemed modified in
accordance with the terms of this Amendment.
8. 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 Amendment, Bank does not waive
any condition or obligation in the Credit Agreement and the Related Documents.
9. 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.
10. Borrower agrees to pay all fees and expenses associated with the
consummation of the transactions contemplated in this Amendment, including,
without limitation, reasonable fees and expenses of Bank's counsel and related
expenses.
11. Time is of the essence of this Amendment.
12. This Amendment 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 Amendment.
13. 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 Credit Agreement and the Related
Documents, each as modified hereby.
3
<PAGE> 4
IN WITNESS WHEREOF, the undersigned, intending to be legally bound
hereby, have executed and delivered this Amendment as of the day and year first
above written.
BORROWER: PAUL HARRIS STORES, INC.,
an Indiana corporation
By: /s/ KEITH L. HIMMEL, JR.
-------------------------
Name: Keith L. Himmel, Jr.
Title: Vice President of Finance,
Controller and Corporate Secretary
PAUL HARRIS MERCHANDISING, INC.,
an Indiana corporation
By: /s/ KEITH L. HIMMEL, JR.
-------------------------
Name: Keith L. Himmel, Jr.
Title: Vice President of Finance,
Controller and Corporate Secretary
PAUL HARRIS RETAILING INC.,
an Indiana corporation
By: /s/ KEITH L. HIMMEL, JR.
-------------------------
Name: Keith L. Himmel, Jr.
Title: Vice President of Finance,
Controller and Corporate Secretary
THE J. PETERMAN COMPANY,
an Indiana corporation
By: /s/ KEITH L. HIMMEL, JR.
-------------------------
Name: Keith L. Himmel, Jr.
Title: Vice President of Finance,
Controller and Corporate Secretary
BANK: LASALLE BANK NATIONAL ASSOCIATION,
a national banking association
By: /s/ ANN H. ELLINGSEN
--------------------
Name: Ann H. Ellingsen
Title: Vice President
<PAGE> 1
EXHIBIT 10.(i)
AGREEMENT
This Agreement is made and entered on March 13, 2000, by and between
Charlotte G. Fischer ("Fischer") and Paul Harris Stores, Inc., an Indiana
corporation (the "Company").
RECITALS
A. Pursuant to an Employment Agreement made as of February 1, 1998 by and
between Fischer and the Company (the "Employment Agreement"), Fischer was
employed as the Chief Executive Officer of the Company.
B. Fischer and the Company desire to fully resolve certain matters related
to the termination of Fischer's employment with the Company, including but not
limited to the respective rights and obligations of the parties under the
Employment Agreement, to cancel the Employment Agreement and their respective
rights and obligations thereunder, and to otherwise finally settle and resolve
all other matters outstanding between them.
NOW, THEREFORE, in consideration of the foregoing and the other agreements
contained herein, the parties hereto agree as follows:
TERMS AND CONDITIONS
1. Cancellation of Employment Agreement and Termination of Employment.
Fischer's employment by the Company is terminated and the Employment Agreement
is cancelled effective as of the close of business on March 13, 2000 (the
"Effective Time"). From and after the Effective Time, (a) Fischer shall not be
required to perform any duties for the Company or be bound by any restrictive
covenants other than as set forth herein, (b) Fischer shall have no further
rights with respect to her employment relationship with the Company other than
as set forth herein and (c) neither Fischer (on the one hand) nor the Company
(on the other hand) shall have any further rights or obligations under the
Employment Agreement. Fischer hereby resigns from all corporate offices held
with the Company and any subsidiary or affiliate of the Company, and as a member
of the Board of Directors of the Company and each of its subsidiaries and
affiliates, as of the Effective Time.
2. Payments to Fischer.
(a) In consideration of the covenants contained in this Agreement
including but not limited to the cancellation of the obligations of the Company
to Fischer under the Employment Agreement, and subject to the condition that
Fischer shall not have exercised her right to rescind this Agreement as provided
in Section 24, the Company shall:
(i) Pay to Fischer the following amounts on the Company's regularly
scheduled paydays:
1
<PAGE> 2
----------------------------------------------------------------------
Pay Period Amount Pay Period Amount
----------------------------------------------------------------------
March 22, 2000 $32,692.31 September 5, 2001 $35,576.92
----------------------------------------------------------------------
April 5, 2000 $32,692.31 September 19, 2001 $35,576.92
----------------------------------------------------------------------
April 19, 2000 $32,692.31 October 3, 2001 $35,576.92
----------------------------------------------------------------------
May 3, 2000 $32,692.31 October 17, 2001 $35,576.92
----------------------------------------------------------------------
May 17, 2000 $32,692.31 October 31, 2001 $35,576.92
----------------------------------------------------------------------
May 31, 2000 $32,692.31 November 14, 2001 $35,576.92
----------------------------------------------------------------------
June 14, 2000 $32,692.31 November 28, 2001 $35,576.92
----------------------------------------------------------------------
June 28, 2000 $32,692.31 December 12, 2001 $35,576.92
----------------------------------------------------------------------
July 12, 2000 $32,692.31 December 26, 2001 $35,576.92
----------------------------------------------------------------------
July 26, 2000 $32,692.31 January 9, 2002 $35,576.92
----------------------------------------------------------------------
August 9, 2000 $32,692.31 January 23, 2002 $35,576.92
----------------------------------------------------------------------
August 23, 2000 $32,692.31 February 6, 2002 $38,461.54
----------------------------------------------------------------------
September 6, 2000 $32,692.31 February 20, 2002 $38,461.54
----------------------------------------------------------------------
September 20, 2000 $32,692.31 March 6, 2002 $38,461.54
----------------------------------------------------------------------
October 4, 2000 $32,692.31 March 20, 2002 $38,461.54
----------------------------------------------------------------------
October 18, 2000 $32,692.31 April 3, 2002 $38,461.54
----------------------------------------------------------------------
November 1, 2000 $32,692.31 April 17, 2002 $38,461.54
----------------------------------------------------------------------
November 15, 2000 $32,692.31 May 1, 2002 $38,461.54
----------------------------------------------------------------------
November 29, 2000 $32,692.31 May 15, 2002 $38,461.54
----------------------------------------------------------------------
December 13, 2000 $32,692.31 May 29, 2002 $38,461.54
----------------------------------------------------------------------
December 27, 2000 $32,692.31 June 12, 2002 $38,461.54
----------------------------------------------------------------------
January 10, 2001 $32,692.31 June 26, 2002 $38,461.54
----------------------------------------------------------------------
January 24, 2001 $32,692.31 July 10, 2002 $38,461.54
----------------------------------------------------------------------
February 7, 2001 $35,576.92 July 24, 2002 $38,461.54
----------------------------------------------------------------------
February 21, 2001 $35,576.92 August 7, 2002 $38,461.54
----------------------------------------------------------------------
March 7, 2001 $35,576.92 August 21, 2002 $38,461.54
----------------------------------------------------------------------
March 21, 2001 $35,576.92 September 4, 2002 $38,461.54
----------------------------------------------------------------------
April 4, 2001 $35,576.92 September 18, 2002 $38,461.54
----------------------------------------------------------------------
April 18, 2001 $35,576.92 October 2, 2002 $38,461.54
----------------------------------------------------------------------
May 2, 2001 $35,576.92 October 16, 2002 $38,461.54
----------------------------------------------------------------------
May 16, 2001 $35,576.92 October 30, 2002 $38,461.54
----------------------------------------------------------------------
May 30, 2001 $35,576.92 November 13, 2002 $38,461.54
----------------------------------------------------------------------
June 13, 2001 $35,576.92 November 27, 2002 $38,461.54
----------------------------------------------------------------------
June 27, 2001 $35,576.92 December 11, 2002 $38,461.54
----------------------------------------------------------------------
July 11, 2001 $35,576.92 December 25, 2002 $38,461.54
----------------------------------------------------------------------
July 25, 2001 $35,576.92 January 8, 2003 $38,461.54
----------------------------------------------------------------------
August 8, 2001 $35,576.92 January 22, 2003 $38,461.54
----------------------------------------------------------------------
August 22, 2001 $35,576.92
----------------------------------------------------------------------
Notwithstanding the preceding provisions, in no event shall the
payments set forth in this Section 2(a)(i) continue beyond Fischer's death.
2
<PAGE> 3
(ii) On or before March 21, 2000, pay to Fischer $392,017.44.
(iii) Reimburse to Fischer all business expenses incurred by her on
behalf of the Company prior to the Effective Time upon the presentation of
expense vouchers that are in sufficient detail to identify the nature, amount
and date of the expense, and the person to whom payment was made.
(iv) Reimburse to Fischer the amount of legal fees and expenses
paid by her to Baker & McKenzie with respect to its representation of Fischer
during the period beginning October 1, 1999, and ending at the Effective Time,
subject to (A) the submission to the Company of its statements for those fees
and expenses (without the identification of the specific services performed) and
(B) the limitation that the obligation of the Company under this subparagraph
shall not exceed $50,000. The Company shall reimburse Fischer under this Section
2(a)(iv) within 30 days of Fischer's submission to the Company of Baker &
McKenzie's statements for fees and expenses.
(v) On or before March 21, 2000, pay to Fischer $13,489 for club
dues and $12,267.23 for her waiver of group health coverage beyond the coverage
required by Section 6.
(b) In the event Fischer obtains a final judgment in her favor, from a
court of competent jurisdiction from which no appeal may be taken, whether
because the time to do so has expired or otherwise, on any claim for payments
owed by the Company under Section 2 herein, or in the event any such claim is
settled by the Company prior to the rendering of such a judgment, the Company
shall pay the reasonable legal fees and expenses and court costs incurred by
Fischer in bringing such claim.
3. Stock Options.
(a) At or prior to the Effective Time, the Company will deliver to
Fischer an agreement evidencing the grant to her as of January 31, 2000, of a
fully vested and immediately exercisable option to purchase 25,000 shares of the
Company's Common Stock, at an exercise price equal to the fair market value of
the Company's Common Stock at the close of business on January 31, 2000, which
option will expire on the tenth anniversary of the grant date, in satisfaction
of the obligation of the Company set forth in Section 3(c)(ii) of the Employment
Agreement. The option may be exercised in any manner permitted under the
Company's 1996 Stock Option and Incentive Plan. No additional options will be
issued to Fischer.
(b) Notwithstanding anything to the contrary contained in any stock
option plan of the Company or any stock option agreement between Fischer and the
Company, Fischer (or in the event of her death, the person to whom the stock
option is transferred by will or the laws of descent and distribution) may
exercise the stock options heretofore granted to her by the Company at any time
on or before the expiration date for each such stock option set forth on the
attached Exhibit A.
3
<PAGE> 4
4. Restricted Stock Awards.
(a) On or before March 21, 2000, and subject to the condition that
Fischer shall not have exercised her right to rescind this Agreement as provided
in Section 24 hereof, the Company will grant to Fischer a stock award for 25,000
shares of the Company's Common Stock, in satisfaction of the obligation of the
Company set forth in Section 3(d)(ii) of the Employment Agreement. The Company
will cause a stock certificate for such 25,000 shares to be delivered to Fischer
on or before April 21, 2000. No additional restricted stock awards will be
issued to Fischer.
(b) All shares of the Company's Common Stock that have been the subject
of a restricted stock award granted to Fischer under Section 3(d) of the
Employment Agreement shall become fully vested as of the Effective Time. The
Company will cause a stock certificate for such vested shares (that is, for
10,000 shares of the Company's Common Stock) to be delivered to Fischer on or
before April 21, 2000.
5. Taxes. With respect to the payments made to Fischer pursuant to Section
2(a)(i), the Company shall withhold from any such payments any and all
applicable federal, state and local ordinary income, capital gains and/or
Fischer's share (but not the Company's share) of employment taxes (collectively,
"Taxes"). With respect to all other payments made to Fischer under Section 2,
Fischer shall be solely responsible for the payment of any and all Taxes that
may be due and owing as a result of the payments by the Company to Fischer made
pursuant to this Agreement or with respect to her status as an employee of the
Company. Except with regard to amounts subject to the withholding of Taxes
(above), Fischer shall indemnify and hold the Company harmless from any loss or
expense that it may incur (including but not limited to Tax liabilities,
interest and penalties) as a result of not withholding any Taxes.
6. Health Insurance. Simultaneously with the execution of this Agreement,
the Company will deliver to Fischer an election form under the Consolidated
Omnibus Budget Reconciliation Act of 1985, as amended ("COBRA"), whereby she may
elect, at her own cost, to continue coverage under the Company's group health
plan for her and her qualified beneficiaries for a period of 18 months or such
other period as required under COBRA.
7. Automobile. The Company shall pay or reimburse to Fischer, as incurred,
the lease payments for the Company Mercedes currently being used by Fischer as
of the date of this Agreement, until the expiration of the current lease, at
which time she shall return the automobile to the Company.
8. Merchandise Discount. The Company shall, through January 31, 2003,
continue to provide Fischer with the discount(s) presently available to her on
her purchase of merchandise for her personal use from the Company's stores and
the stores of J. Peterman Co.; provided the Company shall cease to have any
obligation under this Section 8 from and after the date that Fischer becomes
employed by another company in the women's retail clothing industry.
9. Tax-Qualified Retirement Plans. Simultaneously with the execution of
this Agreement, the Company will deliver to Fischer distribution election forms
whereby she may elect the form, timing and manner of distribution of her
benefits under the Company's tax-qualified retirement plans. The Company shall
cause the Company's tax-
4
<PAGE> 5
qualified retirement plans to distribute Fischer's plan benefits to her in
accordance with her distribution election.
10. Cooperation. Fischer shall cooperate with the Company, and shall make
herself available to the Company upon reasonable notice at reasonable times and
from time to time as the Company may request, in connection with the defense or
prosecution of any claims made against or by the Company either pending at the
date of this Agreement or made in the future. The Company shall compensate
Fischer at the rate of $250 per hour for the time she spends at the Company's
request, and the Company shall reimburse Fischer for all expenses, including
legal fees and costs, incurred by Fischer in performing her obligations under
this Section 10 of the Agreement.
11. Indemnification. Fischer shall retain all rights to indemnification to
which she was otherwise entitled under Indiana law and under the terms of the
governing documents of the Company as of the date of this Agreement.
12. Releases and Covenants Not to Sue.
(a) Of the Company by Fischer. Fischer, for herself and her personal
representatives, heirs and assigns, RELEASES AND FOREVER DISCHARGES the Company,
and its subsidiaries, affiliates (and the current or former officers, directors,
employees and agents of the Company and any former chief executive officer of
the Company and his or her spouse), and any and all employee benefit plans (and
all fiduciaries of those plans) sponsored by any of them, and the successors and
assigns of all of the foregoing (collectively, the "Company Affiliates"), from
any and all claims (including, but not limited to, claims for attorneys' fees),
demands, losses, damages, agreements, actions, promises or causes of action
(known or unknown) that she now has or may later discover or that may hereafter
exist against them, or any of them, in connection with or arising directly or
indirectly out of, or in any way related to, any and all matters, agreements,
transactions, events or other things occurring prior to the date hereof,
including but not limited to matters arising out of or in connection with (i)
the employment of Fischer by the Company, the Employment Agreement and the
termination of her employment, (ii) any events, facts or circumstances that
either preceded the cessation of her employment or which occurred during the
course of her employment with Company or incidental thereto, or (iii) any other
matter or claim of any kind whatsoever (including but not limited to ownership
of shares of the Company) and whether pursuant to common law, statute,
ordinance, regulation or otherwise and including claims of fraud or
misrepresentation in the making, negotiation or execution of this Agreement,
excepting only the obligations created by this Agreement. Claims or actions
released and/or waived hereby include, but are not limited to, those based on
allegations of wrongful discharge and/or breach of contract; those arising under
the National Labor Relations Act; those alleging discrimination on the basis of
race, color, sex, religion, national origin, age or disability under Title VII
of the Civil Rights Act of 1964, the Age Discrimination in Employment Act of
1967 ("ADEA"), the Rehabilitation Act of 1973, the Equal Pay Act of 1963, the
Americans with Disabilities Act of 1990, the Civil Rights Act of 1991, the
Family and Medical Leave Act, the Indiana Civil Rights Law (all as amended) or
any other federal, state or local law, ordinance, rule or regulation; and those
arising under ERISA. The parties agree that Fischer's release does not include
rights or claims she may have under the
5
<PAGE> 6
ADEA which may arise after the execution of this Agreement. Fischer acknowledges
that (i) she may be giving up possible future legal and/or administrative
claims, and (ii) the Company has advised her to consult with an attorney prior
to executing this Agreement and she has done so.
(b) Of Fischer by the Company. The Company RELEASES AND FOREVER
DISCHARGES Fischer and her personal representatives, heirs and assigns, from any
and all claims (including, but not limited to, claims for attorneys' fees),
demands, losses, damages, agreements, actions, promises or causes of action
(known or unknown) that it now has or may later discover or that may hereafter
exist against them in connection with or arising directly or indirectly out of,
or in any way related to, any and all matters, agreements, transactions, events
or other things occurring prior to the date hereof, including but not limited to
matters arising out of or in connection with (i) the employment of Fischer by
the Company, the Employment Agreement and the termination of her employment,
(ii) any events, facts or circumstances that either preceded the cessation of
her employment or which occurred during the course of her employment with
Company or incidental thereto, or (iii) any other matter or claim of any kind
whatsoever (including but not limited to ownership of shares of the Company) and
whether pursuant to common law, statute, ordinance, regulation or otherwise and
including claims of fraud or misrepresentation in the making, negotiation or
execution of this Agreement, excepting only the obligations created by this
Agreement.
(c) Covenants Not to Sue. Neither Fischer, on the one hand, nor the
Company, on the other hand, shall file or otherwise institute any litigation or
other adversarial proceeding against the other (or, in the case of Fischer, any
Company Affiliate), seeking to assert any claim or demand that is within the
scope of the matters covered by the releases contained in subsections (a) and
(b) above, respectively.
(d) Recovery of Amounts Paid. The Company shall be entitled to
recoupment and/or restitution of the lesser of (i) all sums paid to Fischer
pursuant to this Agreement or (ii) the amount recovered by Fischer from the
Company, in the event that Fischer (A) successfully challenges the validity of
the release granted in subsection (a), or (B) breaches her covenant contained in
subsection (c).
13. Confidential Information.
(a) Fischer shall keep confidential and shall not make any
unauthorized use or disclosure of, or use for her own benefit or the benefit of
others, any financial information, sales and marketing information or plans,
cost and pricing data, customer or supplier lists, computer programs or trade
secrets of the Company or its affiliates which are known to her as a result of
her employment by the Company (hereafter "Proprietary Information"); provided,
however, that nothing herein shall be construed to prevent Fischer from using
her general education, knowledge, skill and experience, whether acquired prior
to or during her employment by the Company, as long as such use does not result
in the actual disclosure of Proprietary Information. The term "trade secrets" as
used herein shall mean any information owned by the Company, including a
formula, pattern, compilation, program, device, method, technique or process,
that (1) is sufficiently secret to derive independent economic value, actual or
potential, from not being generally known to, and not being readily
ascertainable by proper means by, other persons
6
<PAGE> 7
who can obtain economic value from its disclosure or use; and (2) is the subject
of efforts that are reasonable under the circumstances to maintain its secrecy
and confidentiality.
(b) Proprietary Information does not include information that: (i) is,
or later becomes, available to the public (other than as a result of a breach of
this Agreement); or (ii) is available to Fischer from a source other than the
Company.
(c) The Company shall designate James Morris as the person responsible
for responding to any inquiries from third parties regarding Fischer, the
Company's relationships with Fischer or the termination of those relationships,
including inquiries from Fischer's prospective employers, and James Morris, in
responding to such inquires, shall not disparage or deprecate Fischer. Fischer
and the Company further agree that the Company shall issue a press release in
substantially the form attached hereto as Exhibit B.
14. No Solicitation of Employees. Fischer shall not, individually or
together with others, directly or indirectly (i) solicit or encourage any
employee of the Company to cease acting as an employee, or (ii) solicit,
contract with, or attempt to contract with, any employee of the Company. This
covenant shall expire and be of no further force or effect after September 21,
2000.
15. Acknowledgment by the Company. The Company acknowledges that it has not
reached this Agreement with the intent to hinder, delay or defraud creditors.
The Company further acknowledges that this Agreement confers significant
benefits upon it, including but not limited to a release by Fischer of the
Company's obligations under the Employment Agreement, an agreement by Fischer
not to solicit the Company's employees, and an agreement by Fischer to resign
from the Company's Board of Directors.
16. No Reliance. Fischer represents and warrants to the Company that, in
the making, negotiation and execution of this Agreement, she has not relied upon
any representation, statement or assertion of fact or opinion made by any
persons being released herein. Fischer hereby waives any right to rely upon all
prior agreements and/or oral representations made by any person being released
hereby even though made for the purpose of inducing her to enter into this
Agreement.
17. Severability. If any provision in this Agreement shall for any reason
be determined to be invalid or unenforceable, the balance of that provision and
the remaining provisions of this Agreement shall nevertheless continue to be
valid and enforceable as though the invalid or unenforceable provision had not
been a part hereof.
18. Entire Agreement. This Agreement constitutes the entire agreement
between the parties as to the subject matter hereof and this Agreement
supersedes all previous or contemporaneous agreements, written or oral, relating
to the subject matter of this Agreement to the extent that they are inconsistent
herewith. No provision of this Agreement shall be waived, altered or canceled
except in writing signed by the party against whom the waiver, alteration or
cancellation is asserted. Any waiver shall be limited to the particular instance
and the particular time when and for which it is given.
7
<PAGE> 8
19. Remedies. No breach of this Agreement shall be cause to set this
Agreement aside or to revive any of the claims being released herein.
20. Choice of Law. This Agreement shall be governed by the laws of the
State of Indiana, its rules of conflict of laws notwithstanding.
21. Expenses. Except as otherwise specifically stated herein, each of the
parties shall pay all costs and expenses incurred by it in connection with the
negotiation, preparation and performance of this Agreement or in any dispute
arising hereunder except as set forth in Section 2 herein, and neither shall
have any liability to the other with respect thereto.
22. Assignment. This Agreement shall be binding upon, and inure to the
benefit of, the parties and their respective legal representatives, heirs,
administrators, successors and permitted assigns. The Company may freely assign
its rights under this Agreement; provided, however, the Company may not delegate
its duties under the Agreement without the written consent of Fischer. Except as
otherwise provided herein, Fischer may freely assign her rights under this
Agreement without the consent of the Company.
23. Construction of the Agreement. The parties acknowledge that they have
read this Agreement, have consulted with counsel regarding its terms, and agree
with those terms as though the party had drafted this Agreement. The parties
agree that, although the Agreement was, by necessity, printed and assembled by
one party, the Agreement reflects the terms agreed to by both parties and that
the party that printed and assembled this Agreement shall be considered only as
the scrivener of the document. In the event a term of this Agreement is found to
be ambiguous, neither party shall be considered the draftsperson for the purpose
of causing the terms of this Agreement to be construed against that party.
24. Rescission Rights. The parties hereby acknowledge and agree that
Fischer has seven calendar days from and after the date hereof in which to
consider and rescind this Agreement by written notice given as prescribed in
Section 27 together with a copy thereof sent by facsimile to the Company at
(312) 857-1055 (attention: John Peters) with a copy by facsimile to Berkley W.
Duck at (317) 592-4642.
25. Headings Descriptive. The headings of the several sections of this
Agreement are inserted for convenience only and shall not in any way affect the
meaning or construction of any provision of this Agreement.
26. Execution in Counterparts. This Agreement may be executed in any number
of counterparts, each of which when so executed shall be deemed an original, but
all of which shall together constitute one and the same instrument.
27. Notices. Any notice required or permitted to be given under the terms
of this Agreement shall be deemed to have been duly given if in writing and if
served by personal delivery upon the party for whom it is intended, if delivered
by registered or certified mail, return receipt requested, or by a national
courier service:
8
<PAGE> 9
To the Company:
Paul Harris Stores, Inc.
6003 Guion Road
Indianapolis, Indiana 46254
Attention: President
with a copy to:
Ice Miller Donadio & Ryan
(for express deliveries)
One American Square
Suite 3400
Indianapolis, Indiana 46204
(for mail)
One American Square
Box 82001
Indianapolis, Indiana 46282
Attention: Berkley W. Duck
To Fischer:
Charlotte G. Fischer
3791 Bay Creek Drive
Bonita Springs, FL 34134
with a copy to:
Baker & McKenzie
One Prudential Plaza
130 East Randolph Drive
Chicago, Illinois 60601
Attn: Maura Ann McBreen
Either party (or such party's attorney) may change its or her address
for the purpose of this Section by written notice similarly given.
9
<PAGE> 10
IN WITNESS WHEREOF, the parties have signed this Agreement as of the
date first above written.
/s/ CHARLOTTE G. FISCHER
--------------------------------------------
Charlotte G. Fischer
The Company
Paul Harris Stores, Inc.
By: /s/ SALLY M. TASSANI
----------------------------------------
Its: Executive Vice President
---------------------------------------
10
<PAGE> 11
Exhibit A
Fischer Stock Options
- -------------------------------------------------------------------------------
GRANT DATE DATE NUMBER PRICE EXPIRATION
VESTED GRANTED GRANTED DATE
- -------------------------------------------------------------------------------
08/23/93 07/23/94 5,000 $ 4.75 07/23/2003
- -------------------------------------------------------------------------------
09/15/93 09/15/94 6,000 $ 4.75 09/15/2003
- -------------------------------------------------------------------------------
04/29/94 04/29/95 100,000 $ 5.68 04/29/2004
- -------------------------------------------------------------------------------
04/29/94 04/29/96 116,666 $ 5.68 04/29/2004
- -------------------------------------------------------------------------------
04/29/94 04/29/97 116,667 $ 5.68 04/29/2004
- -------------------------------------------------------------------------------
04/29/94 04/29/98 16,667 $ 5.68 04/29/2004
- -------------------------------------------------------------------------------
10/17/95 10/17/96 75,000 $ 1.31 10/17/2005
- -------------------------------------------------------------------------------
03/08/96 03/08/96 100,000 $2.125 03/08/2006
- -------------------------------------------------------------------------------
11/22/96 11/22/96 100,000 $17.50 11/22/2006
- -------------------------------------------------------------------------------
01/30/98 01/30/98 50,000 $ 8.63 01/30/2008
- -------------------------------------------------------------------------------
03/02/98 03/02/98 100,000 $8.875 03/02/2008
- -------------------------------------------------------------------------------
01/30/99 01/30/99 25,000 $ 7.63 01/30/2009
- -------------------------------------------------------------------------------
08/24/99 08/24/99 20,000 $ 5.00 08/24/2009
- -------------------------------------------------------------------------------
08/24/99 08/24/99 20,000 $ 5.00 08/24/2009
- -------------------------------------------------------------------------------
01/29/2000 01/29/2000 25,000 $ 3.03 01/29/2010
- -------------------------------------------------------------------------------
11
<PAGE> 12
EXHIBIT B
[PAUL HARRIS LOGO]
6003 GUION ROAD
P.O. BOX 68162
INDIANAPOLIS, IN 46268
(317) 293-3900
CONTACT: DAVID SEASE
SEASE, GERIG AND ASSOCIATES FOR IMMEDIATE RELEASE
(317) 634-1171 MARCH 14, 2000
FISCHER LEAVES PAUL HARRIS STORES,
COMPANY HIRES NEW PRESIDENT
INDIANAPOLIS - Paul Harris Stores Inc. (Nasdaq: PAUH) today announced that
Charlotte G. Fischer, chairman, president and CEO, has left the Company,
effective immediately, to pursue other interests. The Company and Fischer have
reached a settlement of Fischer's rights under her employment contract. This
settlement will result in a one-time charge against earnings for the quarter
ending April 30, 2000, in the amount of approximately 18 cents per share.
The Company is pleased to announce that Glenn S. Lyon of Livingston, N. J., has
been hired as president and general merchandising manager. Responsibility for
management of the Company will rest with Sally M. Tassani, executive vice
president, Lyon and Keith L. Himmel Jr., the Company's vice president of finance
and controller. The board of directors intends to move with deliberation in
selecting a new chief executive officer.
The board in a statement said, "We are excited to welcome Mr. Lyon and believe
that the depth and breadth of his background combined with Ms. Tassani's
knowledge of the Company and management expertise will provide a seamless
transition. In addition, the Company is supported by an experienced management
team and dedicated associates who are fully focused on the long-term success of
Paul Harris."
Additionally, Gerald Paul, one of the founders of the Company and its former
chairman and chief executive officer, has been retained as a consultant to the
management team and the board on an interim basis. Paul retired from the Company
in 1995.
Lyon brings to his post a quarter-century of experience in retailing. Since
1998, he has been president of Modern Woman Inc., a division of Charming Shoppes
Inc. He was senior vice president from 1995 to 1998. Modern Woman, based in New
York City, is a 150-store specialty chain dedicated to the large-size female
customer.
From 1990 to 1994, Lyon was executive vice president of Ormond Shops Inc., a New
Jersey-based 200-store chain specializing in budget and moderate women's
apparel. From 1986 to 1990 he was executive vice president of Hit or Miss Stores
Inc., a nationwide chain of more than 500 stores with annual sales of over $400
million - from 1982 to 1986, he was senior vice president and general
merchandise manager. Prior to that, he was vice president and merchandise
administrator for R.H. Macy and Co.
Tassani became a board member of Paul Harris in 1995 and joined the Company as
executive vice president in 1998 while continuing as a director. Her
responsibilities include marketing, real estate, construction and management of
the company's legal issues.
From 1995 to 1997, Tassani was senior vice president of Leo Burnett Company
Inc., one of the country's largest advertising agencies headquartered in
Chicago. Earlier, she was founder and CEO of Tassani & Paglia Inc., a
Chicago-based marketing and communications firm, which she headed from 1980 to
1995. Prior to that, she was executive vice president/creative director at
Dimensional Marketing Inc. and was executive vice president and managing
director at Jack O'Grady Graphics Inc.
Paul Harris Stores Inc. (www.paulharris.com) is a specialty retailer known for
its coordinated and versatile women's apparel and accessories. The Company
currently operates 319 Paul Harris stores located in 29 states. The Company also
operates 11 J. Peterman (www.jpeterman.com) stores located in 9 states, known
for its eclectic and timeless assortment of merchandise.
<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, 333-30079 and 333-87125) of Paul Harris
Stores, Inc. of our report dated February 25, 2000 relating to the consolidated
financial statements, which appear in this Form 10-K.
PRICEWATERHOUSECOOPERS LLP
Indianapolis, Indiana
April 21, 2000
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> JAN-29-2000
<PERIOD-END> JAN-29-2000
<CASH> 3,587,000
<SECURITIES> 0
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 52,411,000
<CURRENT-ASSETS> 63,377,000
<PP&E> 85,167,000
<DEPRECIATION> (28,527,000)
<TOTAL-ASSETS> 125,046,000
<CURRENT-LIABILITIES> 41,027,000
<BONDS> 0
0
0
<COMMON> 17,933,000
<OTHER-SE> 60,681,000
<TOTAL-LIABILITY-AND-EQUITY> 125,046,000
<SALES> 264,025,000
<TOTAL-REVENUES> 264,025,000
<CGS> 163,774,000
<TOTAL-COSTS> 163,774,000
<OTHER-EXPENSES> 94,593,000
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 462,000
<INCOME-PRETAX> 5,196,000
<INCOME-TAX> 1,948,000
<INCOME-CONTINUING> 3,248,000
<DISCONTINUED> 0
<EXTRAORDINARY> 0
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<NET-INCOME> 3,248,000
<EPS-BASIC> 0.30
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