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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10 - Q
_X_ Quarterly report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 for the quarterly period ended JULY 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)
<TABLE>
<S> <C>
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)
</TABLE>
(317) 293-3900
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter periods that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes _X_ No ___
Indicate by check mark whether the registrant has filed all documents and
reports required to be filed by Sections 12, 13 or 15(d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a plan
confirmed by a court. Yes _X_ No ___
As of September 5, 2000, 10,947,667 common shares were outstanding.
<PAGE> 2
INDEX
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PAUL HARRIS STORES, INC. AND SUBSIDIARIES
<TABLE>
<CAPTION>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements Page #
<S> <C>
Consolidated Balance Sheets - July 29, 2000,
January 29, 2000 and July 31, 1999 3
Consolidated Statements of (Loss) Income -- For the thirteen
and twenty-six weeks ended July 29, 2000 and July 31, 1999 4
Consolidated Statements of Cash Flows -- For the twenty-six
weeks ended July 29, 2000 and July 31, 1999 5
Notes to Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 7
Item 3. Quantitative and Qualitative Disclosure About Market Risk 12
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K 12
</TABLE>
2
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PAUL HARRIS STORES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands)
<TABLE>
<CAPTION>
July 29, January 29, July 31,
2000 2000 1999
--------- --------- ----------
(unaudited) (unaudited)
<S> <C> <C> <C>
ASSETS
Current assets
Cash and cash equivalents $ 3,039 $ 3,587 $ 2,849
Merchandise inventories 29,013 52,411 38,262
Income tax receivable 13,394 2,221 1,065
Other receivables 2,133 2,959 1,516
Prepaid expenses 4,355 2,199 1,355
Assets held for disposal (see note 4) 7,482 -- --
--------- --------- ---------
Total current assets 59,416 63,377 45,047
--------- --------- ---------
Property, fixtures and equipment, net 56,251 56,640 56,362
Other assets 744 5,029 4,735
--------- --------- ---------
Total assets $ 116,411 $ 125,046 $ 106,144
========= ========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities
Short-term borrowings $ 24,500 $ 15,100 $ 5,900
Accounts payable 12,662 15,711 12,995
Compensation and related taxes 2,441 1,388 1,772
Deferred income taxes 1,662 1,946 1,235
Other accrued expenses 6,821 5,172 4,745
Current maturities of long-term debt -- 1,710 1,740
--------- --------- ---------
Total current liabilities 48,086 41,027 28,387
--------- --------- ---------
Long-term debt -- -- --
Deferred income taxes 6,057 5,316 2,910
Deferred rent 4,753 4,505 3,813
Non-current liabilities 1,345 -- --
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 11,440,000,
11,402,000 and 11,359,000, respectively 18,045 17,933 17,932
Additional paid-in capital 14,130 14,130 14,130
Unamortized restricted stock -- (29) (66)
Retained earnings 28,411 46,580 43,454
--------- --------- ---------
60,586 78,614 75,450
Less: common stock in treasury, at cost
500,000, 500,000 and 500,000 respectively 4,416 4,416 4,416
--------- --------- ---------
Total shareholders' equity 56,170 74,198 71,034
--------- --------- ---------
Total liabilities and shareholders' equity $ 116,411 $ 125,046 $ 106,144
========= ========= =========
</TABLE>
See accompanying "Notes To Consolidated Financial Statements."
3
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PAUL HARRIS STORES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF (LOSS) INCOME
UNAUDITED
(Dollars in thousands, except per share data)
<TABLE>
<CAPTION>
For thirteen weeks ended For the twenty-six weeks ended
-------------------------- ------------------------------
July 29, July 31, July 29, July 31,
2000 1999 2000 1999
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Net sales $ 60,413 $ 56,488 $ 122,182 $ 114,930
Cost of sales, including certain occupancy
expenses exclusive of depreciation 46,913 34,594 89,814 72,290
Provision for loss on disposition of
J. Peterman inventories 4,618 -- 4,618 --
--------- --------- --------- ---------
Gross income 8,882 21,894 27,750 42,640
Selling, general and administrative expenses 22,800 20,703 44,923 38,883
Employee separation expense -- -- 3,048 --
Provision for loss on disposition of other
J. Peterman assets 2,916 -- 2,916 --
Depreciation and amortization 2,308 1,976 4,541 3,744
--------- --------- --------- ---------
Operating (loss) income (19,142) (785) (27,678) 13
Interest expense (income) and other
income, net 794 112 1,393 (182)
--------- --------- --------- ---------
(Loss) income before income taxes (19,936) (897) (29,071) 195
(Benefit) provision for income taxes (7,476) (336) (10,902) 73
--------- --------- --------- ---------
Net (loss) income $ (12,460) $ (561) $ (18,169) $ 122
========= ========= ========= =========
Basic (loss) earnings per share $ (1.14) $ (0.05) $ (1.66) $ 0.01
========= ========= ========= =========
Weighted average number of shares
outstanding 10,938 10,838 10,929 10,818
========= ========= ========= =========
Diluted (loss) earnings per share $ (1.14) $ (0.05) $ (1.66) $ 0.01
========= ========= ========= =========
Weighted average number of shares and
share equivalents outstanding 10,938 10,993 10,929 10,986
========= ========= ========= =========
</TABLE>
See accompanying "Notes To Consolidated Financial Statements."
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PAUL HARRIS STORES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
(Unaudited)
<TABLE>
<CAPTION>
For the twenty-six weeks ended
------------------------------
July 29, July 31,
2000 1999
--------- ---------
<S> <C> <C>
Cash flow (for) from operating activities:
Net (loss) income $ (18,169) $ 122
Adjustments to reconcile net (loss) income to cash provided:
Depreciation and amortization 4,541 3,744
Deferred income taxes 457 333
Employee separation expense 2,332 --
Provisions for loss on disposition of J. Peterman assets 7,534 --
Other 381 153
Changes in assets and liabilities (excluding effect of business
acquisition, employee separation expense and provisions for
loss on disposition of J. Peterman assets):
Merchandise inventories 13,280 1,571
Construction allowances receivable 735 3,965
Income tax receivable (11,173) (415)
Other assets (1,738) (206)
Accounts payable (3,049) (2,087)
Other accrued expenses 1,994 850
---------- ---------
Net cash flow (used for) provided from operating activities (2,875) 8,030
---------- ---------
Cash flow for investing activities:
Additions to fixed assets (5,013) (6,868)
Business acquisition -- (11,830)
---------- ---------
Net cash flow used for investing activities (5,013) (18,698)
---------- ---------
Cash flow from financing activities:
Direct borrowings under revolving line of credit 9,400 5,900
Repayment of long-term debt (1,710) (70)
Proceeds from issuance of common stock 6 258
Debt issue costs paid (356) --
---------- ---------
Net cash flow provided from financing activities 7,340 6,088
---------- ---------
Cash used $ (548) $ (4,580)
========== =========
Cash and cash equivalents:
At beginning of period $ 3,587 $ 7,429
At end of period 3,039 2,849
---------- ---------
Cash used $ (548) $ (4,580)
========== =========
</TABLE>
See accompanying "Notes To Consolidated Financial Statements."
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PAUL HARRIS STORES, INC., AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements include the
accounts of Paul Harris Stores, Inc. and its subsidiaries (the "Company"). The
Company is a specialty retailer known for its Paul Harris branded private-label
apparel and accessories for women.
The unaudited consolidated financial statements of the Company have been
prepared in accordance with instructions to Form 10-Q and Article 10 of
Regulation S-X and accordingly certain information and footnote disclosures have
been condensed or omitted. These condensed financial statements should be read
in conjunction with the financial statements and notes thereto included in the
Company's Annual Report on Form 10-K for the fiscal year ended January 29, 2000.
In the opinion of management, all adjustments, which include only normal
recurring adjustments, necessary to present fairly the financial position,
results of operations and cash flows for the period ended July 29, 2000, and for
all other periods presented, have been made.
The Company's fiscal year ends on the Saturday closest to January 31. All
references in this report to fiscal years are to the calendar years in which
such fiscal years began. For example, fiscal 2000 refers to the fiscal year that
began on January 30, 2000, and will end on February 3, 2001.
The results of operations for the first and second quarter of fiscal 2000 are
not necessarily indicative of the results to be expected for all of fiscal 2000.
The Company has historically produced a majority of its income in the fourth
quarter of the fiscal year due to the stronger sales experienced during the
month of December.
Certain amounts in the prior years have been reclassified to conform to current
year presentation.
2. EARNINGS PER SHARE
Basic earnings per share are based on the weighted average number of common
shares outstanding during the quarter. Diluted earnings per share are based on
the weighted average number of common and common equivalent shares (dilutive
stock options) outstanding during the quarter. The potential common shares in
fiscal 2000 of approximately 50,000 and 70,000 for the quarter and fiscal year,
respectively, were excluded because their inclusion would have had an
anti-dilutive effect on earnings per share. The following table (in thousands)
reconciles the numerators and denominators used in the basic and diluted
earnings per share computations:
<TABLE>
<CAPTION>
For the thirteen weeks ended For the twenty-six weeks ended
------------------------------------- ---------------------------------------
July 29, 2000 July 31, 1999 July 29, 2000 July 31, 1999
----------------- ----------------- ----------------- -------------------
Net Loss Shares Net Loss Shares Net Loss Shares Net Income Shares
-------- ------ -------- ------ -------- ------ ---------- ------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Basic (loss) earnings and outstanding shares $(12,460) 10,938 $ (561) 10,838 $(18,169) 10,929 $ 122 10,818
Effect of dilutive options -- -- -- 155 -- -- -- 168
--------- ------ -------- ------ -------- ------ ---------- ------
Diluted (loss) earnings and outstanding
equivalent shares $(12,460) 10,938 $ (561) 10,993 $(18,169) 10,929 $ 122 10,986
--------- ------ -------- ------ -------- ------ ---------- ------
</TABLE>
3. LONG-TERM DEBT AND CREDIT ARRANGEMENTS
The Company has a committed credit facility of $45.0 million, which may be used
for letters of credit or direct borrowings ("Credit Facility"). The Credit
Facility was amended on August 18, 2000 to increase the facility to its current
level and extend its term to August 31, 2001. The facility also includes an
additional $4.0 million Special Advance available until the earlier of the
disposition of J. Peterman assets (see Note 4. "Disposition of Assets" to "Notes
To Consolidated Financial Statements") or October 15, 2000. The agreement allows
the Company to borrow at interest rates equaling the prime rate (as defined in
the Credit Facility) plus 2.0 percent. Letters
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of credit issued under the Credit Facility carry initial issuance fees plus
negotiation fees of 2.0 percent of the face amount of each letter of credit.
The Credit Facility is collateralized by the Company's inventory, equipment,
fixtures, cash and assignment of leases. The Company is also required to
maintain its primary operating cash accounts with the institution which is party
to the Credit Facility.
The Credit Facility contains financial covenants related to tangible net worth,
minimum monthly sales and aggregate cash collection levels and maximum monthly
outstanding revolving loan amounts. The agreement also requires the Company to
reduce all outstanding obligations to no more than $7.0 million throughout
December 2000 and revolving loans to zero as of December 31, 2000.
As of July 29, 2000, there were $24.5 million of direct borrowings under the
revolving credit commitment, outstanding letters of credit of $7.2 million and
available borrowings under the borrowing formula of the Credit Facility of $0.
4. DISPOSITION OF ASSETS
On August 18, 2000, the Company announced its intent to dispose of substantially
all of the assets of J. Peterman. The decision to sell the assets of J. Peterman
was based on management's decision to focus on the core business of Paul Harris.
The Company expects to complete the disposition by the end of the third quarter
of fiscal 2000. In accordance with SFAS 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to be Disposed of," and APB 30,
"Reporting the Results of Operations - Discontinued Events and Extraordinary,
Unusual and Infrequently Occurring Events and Transactions", the Company has
recorded a $7.5 million "Provision for Loss on Disposition". The portion of the
"Provision" related to inventories is recorded as a separate adjustment to Gross
Income with the remaining portion as a separate line in Operating Expenses on
the Statements of Income. For Balance Sheet purposes, the assets are segregated
as "Assets Held for Disposal". The "Provision" is based upon currently available
information concerning amounts expected to be realized upon the disposition of
such assets. The net carrying value of the assets held for disposal are as
follows:
<TABLE>
<S> <C>
Merchandise inventories $ 10,118
Furniture, fixtures and equipment 1,182
Other intangible assets, net 3,716
Fair market value adjustment (7,534)
--------
$ 7,482
========
</TABLE>
Exclusive of the "Provisions for Loss on Disposition", J. Peterman's revenues
and pre-tax results of operations did not exceed five percent of the Company's
consolidated revenues and pre-tax results of operations for any periods
presented.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Certain statements made in this report may constitute "forward-looking
statements" within the meaning of the Private Securities Litigation Reform Act
of 1995. Such forward-looking statements involve known and unknown risks,
uncertainties and other factors that may cause the actual results, performances
or achievements of the Company or the retailing industry to be materially
different from any future results, performance or achievements expressed or
implied by such forward-looking statements. Such factors include, among others:
local, regional and national economic conditions; extreme or unseasonable
weather conditions; the availability of adequate financing to meet working
capital and other needs; locating stores correctly and generating increased
sales and productivity; legislation and regulatory matters affecting payroll
costs or other aspects of retailing; the ability to identify and respond to
emerging fashion trends;
7
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internal computerized systems functioning properly; foreign and domestic labor
and manufacturing conditions; and governmental actions such as import or trade
restrictions.
OVERVIEW
As of July 29, 2000, the Company operated 317 stores in 29 states under the Paul
Harris ("PH") and Paul Harris Direct ("PHD") names. These stores are a specialty
retailer of moderately priced casual apparel and accessories for women sold
under the Paul Harris, Paul Harris Design, Paul Harris Denim and other Paul
Harris brand names. The Paul Harris stores have a significant concentration of
locations in the Midwest. The Company also operated 11 stores in nine states
under the J. Peterman name.
The Company's stores currently average approximately 4,900 gross square feet and
are located primarily in regional enclosed shopping malls and, to a lesser
extent, strip shopping centers. During the first half of fiscal 2000, the
Company opened seven and closed eight PH stores as well as closed one J.
Peterman store. The Company expects that any new PH stores will be generally
located in the Company's existing markets in order to enhance recognition of the
PH name, facilitate targeted marketing efforts and efficiently utilize the
Company's sales team. The Company has recently indicated its intent to dispose
of the J. Peterman assets (see Note 4. "Disposition of Assets" of "Notes To
Consolidated Financial Statements").
RESULTS OF OPERATIONS
The following discussion is based upon the unaudited consolidated financial
statements appearing elsewhere in this report. The following table sets forth
certain income statement items as a percentage of net sales.
PAUL HARRIS STORES, INC. AND SUBSIDIARIES
RESULTS OF OPERATIONS AS A PERCENT OF NET SALES
<TABLE>
<CAPTION>
Thirteen weeks ended Twenty-six weeks ended
---------------------- ------------------------
July 29, July 31, July 29, July 31,
2000 1999 2000 1999
-------- --------- -------- --------
<S> <C> <C> <C> <C>
Net sales 100.0% 100.0% 100.0% 100.0%
Cost of sales, including certain occupancy expenses
exclusive of depreciation (1) 77.7% 61.2% 73.5% 62.9%
Provision for loss on disposition of
J. Peterman inventories 7.6% 0.0% 3.8% 0.0%
-------- --------- -------- --------
Gross income 14.7% 38.8% 22.7% 37.1%
Selling, general and administrative expenses (2) 37.7% 36.7% 36.8% 33.8%
Employee separation expense 0.0% 0.0% 2.5% 0.0%
Provision for loss on disposition of other
J. Peterman assets 4.9% 0.0% 2.4% 0.0%
Depreciation and amortization 3.8% 3.5% 3.7% 3.3%
-------- --------- -------- --------
Operating (loss) income (31.7%) (1.4)% (22.7%) 0.0%
Interest expense (income) and other income, net 1.3% 0.2% 1.1% (0.2%)
-------- --------- -------- --------
(Loss) income before income taxes (33.0%) (1.6)% (23.8%) .2%
(Benefit) provision for income taxes (12.4%) (0.6)% (8.9%) 0.1%
-------- -------- --------- ---------
Net (loss) income (20.6%) (1.0)% (14.9%) .1%
======== ======== ========= =========
</TABLE>
(1) Occupancy expenses include store level base rent, percentage rent and real
estate taxes.
(2) Includes all store level occupancy expenses not included in cost of sales.
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SECOND QUARTER OF FISCAL 2000
The Company's net sales increased to $60.4 million in the second quarter of
fiscal 2000 from $56.5 million in the second quarter of fiscal 1999, an increase
of $3.9 million or 6.9 percent. The increase in net sales was primarily
attributable to a 13.7 percent increase in the number of units sold, offset by a
5.9 percent decrease in sales price per unit during the second quarter of fiscal
2000 as compared to the second quarter of fiscal 1999. Comparable store sales
increased by 2.3 percent during the quarter. The Company operated 328 stores as
of July 29, 2000, compared to 319 stores as of July 31, 1999.
Gross income decreased to $8.9 million in the second quarter of fiscal 2000 from
$21.9 million for the same period in the prior year, a decrease of $13.0 million
or 59.4 percent. Gross income as a percentage of net sales decreased to 14.7
percent in the second quarter of 2000 compared to 38.8 percent in the second
quarter of 1999. Gross income was negatively affected by a 19.0 percent decrease
in selling margins primarily due to the impact of price discounting on
end-of-season inventories, a "Provision for Loss on Disposition of J. Peterman
Inventories", additional reserves on spring/summer merchandise and a 5.8 percent
increase in certain occupancy costs primarily from a 6.2 percent increase in
selling square feet. In fiscal 2000, management made the decision to lower
selling prices on the spring/summer merchandise to substantially sell through
the inventory by the end of the third quarter. In fiscal 1999, the out-of-season
spring/summer merchandise was returned to the distribution center to be
re-merchandised in spring 2000. The "Provision for Loss on Disposition" is a
$4.6 million accrual to write-down the recorded value of J. Peterman inventories
to their estimated fair market value. On August 18, 2000, the Company announced
its intent to dispose of the J. Peterman assets (see Note 4. "Disposition of
Assets" of "Notes To Consolidated Financial Statements"). The 6.9 percent
increase in sales partially offsets the impact of lower margins and higher
occupancy costs.
Selling, general and administrative expenses increased to $22.8 million, or 37.7
percent of net sales, for the second quarter of fiscal 2000 from $20.7 million,
or 36.7 percent of net sales, for the second quarter of fiscal 1999. The largest
components of the $2.1 million increase were $543,000 for increased business
consulting services, $501,000 in additional occupancy related costs for PH
stores primarily due to the 2.9 percent increase in store counts, store
expansions and relocations and $384,000 for increased medical insurance claims
and administrative costs.
Provision for loss on disposition of other J. Peterman assets is a $2.9 million
accrual to write-down the recorded value of J. Peterman assets to their
estimated fair market value. On August 18, 2000, the Company announced its
intent to dispose of the J. Peterman assets (see Note 4. "Disposition of Assets"
of "Notes To Consolidated Financial Statements").
Depreciation and amortization increased to $2.3 million or 3.8 percent of sales
for the second quarter of fiscal 2000 from $2.0 million or 3.5 percent of sales
for the second quarter of fiscal 1999, an increase of $332,000 or 16.8 percent.
The increase was primarily a result of approximately $11.0 million in fixed
asset expenditures during second half of fiscal 1999 and first half of fiscal
2000. The increase in fixed assets includes the installation of a new
merchandising and general ledger system in the second half of fiscal 1999, which
has a shorter depreciable life than most other depreciable assets of the
Company.
The operating loss of $19.1 million for the second quarter of fiscal 2000 was an
increase of $18.4 million from an operating loss of $785,000 for the second
quarter of fiscal 1999. As a percentage of net sales, the Company had operating
losses of 31.7 percent in the second quarter of fiscal 2000 compared to 1.4
percent in the second quarter of fiscal 1999.
Interest expense (income) and other income, net, was expense of $794,000 for the
second quarter of fiscal 2000 compared to expense of $112,000 for the second
quarter of fiscal 1999. The increased expense primarily resulted from additional
borrowings under the Company's revolving line of credit to fund seasonal
inventories and operations and higher interest rates.
As a result of the above factors, the Company recorded a net loss of $12.5
million or $1.14 per diluted share for the second quarter of fiscal 2000
compared to a net loss of $561,000 or $0.05 per diluted share for the second
quarter of fiscal 1999.
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FIRST HALF OF FISCAL 2000
The Company's net sales increased to $122.2 million in the first half of fiscal
2000 from $114.9 million in the first half of fiscal 1999, an increase of $7.3
million or 6.3 percent. The increase in net sales was attributable to an 8.0
percent increase in units sold. The Company operated 328 stores as of July 29,
2000 compared to 319 stores on July 31, 1999. Comparable store sales increased
by 0.6 percent for the first half of fiscal 2000.
Gross income decreased to $27.8 million in the first half of fiscal 2000 from
$42.6 million for the same period in the prior year, a decrease of $14.9 million
or 34.9 percent. Gross income, as a percentage of net sales, decreased to 22.7
percent in the first half of fiscal 2000 from 37.1 percent of net sales for the
first half of fiscal 1999. Gross income was negatively impacted by a 7.7
percentage point decrease in selling margins, a "Provision for Loss on
Disposition of J. Peterman Inventories" and additional reserves to reduce the
carrying value of out-of-season inventories on-hand at the end of the first half
of fiscal 2000. The selling margin decrease is primarily due to management's
decision to reduce the selling price on all spring/summer inventories in order
to sell through the inventory by the end of the third quarter and a 10.2 percent
increase in apparel cost per unit sold. In fiscal 1999, the out-of-season
spring/summer merchandise was returned to the distribution center to be
re-merchandised in spring 2000. The "Provision for Loss on Disposition" is a
$4.6 million accrual to write-down the recorded value of J. Peterman inventories
to their estimated fair market value. On August 18, 2000, the Company announced
its intent to dispose of the J. Peterman assets (see Note 4. "Disposition of
Assets" of "Notes to Consolidated Financial Statements"). The 6.3 percent
increase in sales partially offsets the selling margin decrease.
Selling, general and administrative expenses increased to $44.9 million, or 36.8
percent of net sales, for the second half of fiscal 2000 from $38.9 million, or
33.8 percent of net sales, for the second half of fiscal 1999. The largest
components of the $6.0 million increase were $1.1 million in additional
occupancy related costs for PH stores primarily related to store
openings, expansions and scheduled lease increases, $923,000 resulting from
increased J. Peterman store and overhead expenses in fiscal 2000 including
distribution and administrative costs not incurred in fiscal 1999, $921,000 for
increased business consulting services, $533,000 for increased medical insurance
claims and administrative costs and $453,000 for costs associated with the J.
Peterman "Big City Tour".
Employee separation expense is a one-time $3.0 million charge for a settlement
reached on March 13, 2000, between the Company's Board of Directors and the
Company's former CEO to buy-out the remaining years of the CEO's employment
contract. The expense includes deferred compensation to be paid out over the
next three years plus other costs associated with the settlement. On the balance
sheet, other costs and the current portion of the deferred compensation are
recorded as part of compensation and related taxes and the non-current portion
of the deferred compensation is classified as other non-current liabilities.
Provision for loss on disposition of other J. Peterman assets is a $2.9 million
accrual to write-down the recorded value of J. Peterman assets to their
estimated fair market value. On August 18, 2000, the Company announced its
intent to dispose of the J. Peterman assets (see Note 4. "Disposition of Assets"
of "Notes To Consolidated Financial Statements").
Depreciation and amortization increased to $4.5 million for the first half of
fiscal 2000 from $3.7 million for the second half of fiscal 1999, an increase of
$797,000 or 21.3 percent. As a percentage of net sales, depreciation and
amortization increased to 3.7 percent in the first half of fiscal 2000 from 3.3
percent in the first half of fiscal 1999. The increase was primarily a result of
approximately $11.0 million in fixed asset expenditures during the second half
of fiscal 1999 and first half of fiscal 2000 and $185,000 for amortization and
depreciation of assets acquired as part of the J. Peterman acquisition. The
increase in fixed assets includes the installation of a new merchandising and
general ledger system in the second half of fiscal 1999, which has a shorter
depreciable life than most other depreciable assets of the Company.
Operating loss of $27.7 million in the first half of fiscal 2000 was a decrease
of $27.7 million from operating income of $13,000 for the first half of fiscal
1999. As a percentage of net sales, the operating loss was 22.7 percent in the
first half of fiscal 2000 compared to 0.0 percent in the first half of fiscal
1999.
Interest (expense) income and other income, net, was an expense of $1.4 million
for the first half of fiscal 2000 compared to income of $182,000 for the first
half of fiscal 1999. The increased expense of $1.6 million was primarily due to
additional short-term borrowings to fund seasonal inventories and operations and
higher interest rates. The first half of fiscal 1999 included the receipt of
$435,000 for unclaimed note redemption accrediting back to the Company according
to the terms of the note agreement.
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As a result of the above factors, the Company incurred a net loss of $18.2
million or $1.66 per diluted share for the first half of fiscal 2000 compared to
net income of $122,000 or $0.01 per diluted share for the first half of fiscal
1999.
SEASONALITY
The Company's business, like that of most retailers, is subject to seasonal
influences. A significant portion of the Company's net sales and profits are
realized during the Company's fourth fiscal quarter, which includes the holiday
selling season. Results for any quarter are not necessarily indicative of the
results that may be achieved for a full fiscal year. Quarterly results may
fluctuate materially depending upon, among other things, the timing of new store
openings, net sales and profitability contributed by new stores, increases or
decreases in comparable store sales, adverse weather conditions, shifts in the
timing of certain holidays and promotions, and changes in the Company's
merchandise mix.
LIQUIDITY AND CAPITAL RESOURCES
The Company's primary sources of working capital consist of internally generated
cash and its $45.0 million 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. As of July 29, 2000, there were $24.5 million of direct
borrowings under the revolving credit commitment. The balance of outstanding
letters of credit was $7.2 million and the amount of available borrowings under
the borrowing formula of the credit facility was $0 at July 29, 2000. The credit
facility was amended as of August 18, 2000, to increase borrowings to the
current level and extended the maturity until August 31, 2001. The facility also
includes an additional $4.0 million Special Advance available until the earlier
of the disposition of J. Peterman assets (see Note 4. "Disposition of Assets"
to"Notes To Consolidated Financial Statements") or October 15, 2000. 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 2.0
percent. In addition, letters of credit carry an initial issuance fee, plus a
negotiation fee of 2.0 percent of the face amount of such letters of credit. The
credit facility also contains certain financial covenants that set limits on
tangible net worth, minimum monthly sales and aggregate cash collection levels
and maximum monthly outstanding revolving loan amounts. A failure to comply with
these covenants could adversely affect the Company's liquidity. The credit
facility is secured by a security interest in the Company's inventory,
equipment, fixtures, cash and assignment of leases.
Net cash used for operating activities was $2.9 million in the first half of
fiscal 2000 compared to net cash provided of $8.0 million in the first half of
fiscal 1999. The primary reason for the decrease in net cash flow from operating
activities includes $11.2 million in income tax receivables primarily related to
current year losses, a $7.3 million reduction in cash flows from earnings (net
of non-cash reconciling items) and a decrease of $3.2 million in net collections
of construction allowance receivables resulting from timing of store growth,
offset by a $13.3 million decrease in inventories from year-end 1999 compared to
a modest decrease of $1.6 million from year-end 1998. The inventory decrease in
fiscal 2000 can be attributed to an 8.0 percent increase in units sold and
additional out-of-season reserves.
Net cash used for investing activities was $5.0 million in the first half of
fiscal 2000 primarily for the remodeling/relocation of 12 existing stores and
opening of seven new stores. Net cash used in the first half of fiscal 1999 was
$18.7 million, which included $11.8 million for the estimated cost to acquire J.
Peterman assets, $3.6 million primarily related to opening, remodeling and
relocating of stores and $3.2 million for costs associated with implementing a
new merchandising and general ledger system and Year 2000 compliance. The
Company anticipates remodeling/relocating a total of 15 Paul Harris stores with
no significant change in number of stores during fiscal 2000. The Company
expects to spend approximately $6.5 million on store remodels/relocations, new
stores and other capital expenditures during fiscal 2000.
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Net cash flow from financing activities was $7.3 million for the first half of
fiscal 2000 primarily the result of direct borrowings of $9.4 million under the
Company's revolving credit facility, which includes $1.7 million used to pay-off
the mortgage on the Company's headquarters and distribution center.
As previously announced, the Company is experiencing a cash shortage because of
reduced operating margins, the need to pay for merchandise in advance rather
than on traditional credit terms and other factors. The Company is in arrears
on rent payments for its stores and has offered its landlords a payment schedule
to cure the arrears by yearend. The increased line of credit has mitigated the
cash shortage and a successful disposition of the J. Peterman assets should
further alleviate the liquidity problem. However, without improved operating
results there can be no assurance that cash generated from operations and
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.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
The Company considers the market risks of its variable interest rate borrowings
to not be material to its financial condition.
Part II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits: 4(a)(ii) First Amendment to Amended and Restated Loan and
Security Agreement dated as of August 18, 2000.
27 Financial Data Schedule
(b) Reports on Form 8-K:
None.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
PAUL HARRIS STORES, INC.
(Registrant)
Date: September 12, 2000 /s/ Richard R. Hettlinger
-------------------------
Sr. VP and Chief Financial Officer
(Signing on behalf of the registrant and as
principal financial officer)
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Exhibit Index
(a) Exhibits: 4(a)(ii) First Amendment to Amended and Restated Loan and
Security Agreement dated as of August 18, 2000.
27 Financial Data Schedule
