-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, Qx9b4WS0Yw8YPKbnt9ZCX8fDF0aBOvPsbXghIUwTAhrHU5vLxtgTh3G6/xnLUkYJ 0zcw87Turfq0A6byLSarRQ== 0000950137-99-004477.txt : 19991215 0000950137-99-004477.hdr.sgml : 19991215 ACCESSION NUMBER: 0000950137-99-004477 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 19991030 FILED AS OF DATE: 19991214 FILER: COMPANY DATA: COMPANY CONFORMED NAME: PAUL HARRIS STORES INC CENTRAL INDEX KEY: 0000045791 STANDARD INDUSTRIAL CLASSIFICATION: RETAIL-WOMEN'S CLOTHING STORES [5621] IRS NUMBER: 350907402 STATE OF INCORPORATION: IN FISCAL YEAR END: 0131 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 000-07264 FILM NUMBER: 99774454 BUSINESS ADDRESS: STREET 1: 6003 GUION RD CITY: INDIANAPOLIS STATE: IN ZIP: 46254 BUSINESS PHONE: 3172933900 MAIL ADDRESS: STREET 1: 6003 GUION ROAD CITY: INDIANAPOLIS STATE: IN ZIP: 46254 10-Q 1 FORM 10-Q 1 SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10 - Q X Quarterly report pursuant to Section 13 or 15(d) of the Securities - ----- Exchange Act of 1934 for the quarterly period ended OCTOBER 30, 1999 or Transition report pursuant to Section 13 or 15(d) of the Securities - ----- Exchange Act of 1934 for the transition period from _______________ to ________________ Commission File Number 0-7264 PAUL HARRIS STORES, INC. (Exact name of registrant as specified in its charter) INDIANA 35-0907402 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 6003 GUION RD., INDIANAPOLIS, IN 46254 (Address of principal executive offices) (Zip Code) (317) 293-3900 (Registrant's telephone number, including area code) 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 December 1, 1999, 10,900,814 common shares were outstanding. 2 INDEX PAUL HARRIS STORES, INC. AND SUBSIDIARIES PART I. FINANCIAL INFORMATION Item 1. Financial Statements Page # Consolidated Balance Sheets - October 30, 1999, January 30, 1999 and October 31, 1998 3 Consolidated Statements of Income (Loss) -- For the thirteen and thirty-nine weeks ended October 30, 1999 and October 31, 1998 4 Consolidated Statements of Cash Flows -- For the thirty-nine weeks ended October 30, 1999 and October 31, 1998 5 Consolidated Statements of Shareholders' Equity -- For the thirty-nine weeks ended October 30, 1999 and October 31, 1998 6 Notes to Consolidated Financial Statements 7 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 8 Item 3. Quantitative and Qualitative Disclosure About Market Risk 14 PART II. OTHER INFORMATION Item 1. Legal Proceedings 14 Item 6. Exhibits and Reports on Form 8-K 14 2 3 PAUL HARRIS STORES, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (Dollars in thousands)
October 30, January 30, October 31, 1999 1999 1998 ----------- ----------- ----------- (unaudited) (unaudited) ASSETS Current assets Cash and cash equivalents $ 1,686 $ 7,429 $ 3,000 Merchandise inventories 57,469 34,638 45,951 Construction allowances receivable 2,268 4,977 4,082 Income tax receivable 3,641 650 823 Other receivables 514 252 316 Prepaid expenses 1,738 1,381 1,402 Deferred income taxes - - 502 --------- --------- --------- Total current assets 67,316 49,327 56,076 --------- --------- --------- Property, fixtures and equipment Land, building and improvements 6,166 6,013 5,978 Store fixtures and equipment 45,389 38,229 38,096 Leasehold improvements and other 34,419 27,981 24,812 --------- --------- --------- 85,974 72,223 68,886 Less: accumulated depreciation and amortization (27,198) (21,611) (20,509) --------- --------- --------- Property, fixtures and equipment, net 58,776 50,612 48,377 Other assets 4,649 746 752 --------- --------- --------- Total assets $ 130,741 $ 100,685 $ 105,205 ========= ========= ========= LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities Short-term borrowings $ 18,400 $ - $ 4,900 Accounts payable 22,826 15,082 19,735 Compensation and related taxes 1,945 1,245 2,247 Deferred income taxes 856 1,235 - Other accrued expenses 5,649 5,114 6,517 Current maturities of long-term debt 1,720 120 1,840 --------- --------- --------- Total current liabilities 51,396 22,796 35,239 --------- --------- --------- Long-term debt - 1,690 - Deferred income taxes 5,249 2,577 992 Other non-current liabilities 4,057 3,121 3,468 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 11,401,000, 11,299,000 and 11,277,000 respectively 17,933 17,793 17,410 Additional paid-in capital 14,130 14,011 13,939 Unamortized restricted stock (36) (219) - Retained earnings 42,428 43,332 38,573 --------- --------- --------- 74,455 74,917 69,922 Less: common stock in treasury, at cost 500,000, 500,000 and 500,000 respectively 4,416 4,416 4,416 --------- --------- --------- Total shareholders' equity 70,039 70,501 65,506 --------- --------- --------- Total liabilities and shareholders' equity $ 130,741 $ 100,685 $ 105,205 ========= ========= =========
See accompanying "Notes To Consolidated Financial Statements". 3 4 PAUL HARRIS STORES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME (LOSS) UNAUDITED (Dollars in thousands, except for per share data)
For the thirteen For the thirty-nine weeks ended weeks ended -------------------------- -------------------------- October 30, October 31, October 30, October 31, 1999 1998 1999 1998 ----------- ----------- ----------- ----------- Net sales $ 62,565 $ 61,212 $ 177,495 $ 161,585 Cost of sales, including certain occupancy expenses exclusive of depreciation 39,709 37,526 111,999 99,473 --------- --------- --------- --------- Gross income 22,856 23,686 65,496 62,112 Selling, general and administrative expenses 22,031 19,157 60,914 51,407 Depreciation and amortization 2,157 1,657 5,901 4,549 --------- --------- --------- --------- Operating (loss) income (1,332) 2,872 (1,319) 6,156 Interest (expense) income and other income, net (311) (91) (129) 156 --------- --------- --------- --------- (Loss) income before income taxes (1,643) 2,781 (1,448) 6,312 (Benefit) provision for income taxes (617) 1,099 (544) 2,485 --------- --------- --------- --------- Net (loss) income $ (1,026) $ 1,682 $ (904) $ 3,827 ========= ========= ========= ========= Basic (loss) earnings per share $ (0.09) $ 0.15 $ (0.08) $ 0.34 ========= ========= ========= ========= Weighted average number of shares outstanding 10,887 11,000 10,841 11,174 ========= ========= ========= ========= Diluted (loss) earnings per share $ (0.09) $ 0.15 $ (0.08) $ 0.33 ========= ========= ========= ========= Weighted average number of shares and share equivalents outstanding 10,982 11,248 10,984 11,469 ========= ========= ========= =========
See accompanying "Notes To Consolidated Financial Statements". 4 5 PAUL HARRIS STORES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS UNAUDITED (Dollars in thousands)
For the thirty-nine weeks ended ------------------------------- October 30, October 31, 1999 1998 ----------- ----------- Cash flow from operating activities: Net (loss) income $ (904) $ 3,827 Adjustments to reconcile net (loss) income to cash (used) provided: Depreciation and amortization 5,901 4,549 Restricted stock expense 183 - Net loss on disposal of assets 82 160 Deferred income taxes 2,293 1,566 (Increase) decrease in current assets: Merchandise inventories (17,636) (14,011) Construction allowances receivable 2,709 (1,156) Income tax receivable (2,991) (823) Other receivables (262) 88 Prepaid expenses (357) (43) Increase (decrease) in current liabilities: Accounts payable 7,744 7,010 Compensation and related taxes 700 (533) Income taxes payable - (377) Other accrued expenses 535 2,172 Other 897 363 -------- -------- Net cash flow (for) from operating activities (1,106) 2,792 -------- -------- Cash flow for investing activities: Additions to fixed assets (11,376) (18,267) Business acquisition (11,830) - -------- -------- Net cash flow for investing activities (23,206) (18,267) -------- -------- Cash flow from financing activities: Direct borrowings under revolving line of credit 18,400 4,900 Repayment of long-term debt (90) (90) Proceeds from issuance of common stock and related tax benefits 259 91 Purchase of treasury stock - (4,416) -------- -------- Net cash flow from financing activities 18,569 485 -------- -------- Cash used $ (5,743) $(14,990) ======== ======== Cash and cash equivalents: At beginning of period $ 7,429 $ 17,990 At end of period 1,686 3,000 -------- -------- Cash used $ (5,743) $(14,990) ======== ========
See accompanying "Notes To Consolidated Financial Statements". 5 6 PAUL HARRIS STORES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY UNAUDITED (in thousands)
For the thirty-nine For the thirty-nine weeks ended weeks ended October 30, 1999 October 31, 1998 ---------------------- --------------------- SHARES AMOUNT SHARES AMOUNT ------ -------- ------ -------- PREFERRED STOCK (1,000 AUTHORIZED): COMMON STOCK (40,000 AUTHORIZED): Beginning balance 10,799 $ 17,793 11,256 $ 17,354 Issuance of stock grants 40 - - - Exercise of stock options 62 140 21 56 ------ --------- ------ --------- Ending balance 10,901 $ 17,933 11,277 $ 17,410 ====== ========= ====== ========= ADDITIONAL PAID-IN CAPITAL: Beginning balance $ 14,011 $ 13,904 Tax benefit on exercise of stock options 119 35 --------- --------- Ending balance $ 14,130 $ 13,939 ========= ========= UNAMORTIZED RESTRICTED STOCK: Beginning balance $ (219) $ - Amortization of restricted stock 183 - --------- --------- Ending balance $ (36) $ - ========= ========= RETAINED EARNINGS: Beginning balance $ 43,332 $ 34,746 Net (loss) income (904) 3,827 --------- --------- Ending balance $ 42,428 $ 38,573 ========= ========= TREASURY STOCK: Beginning balance 500 $ 4,416 - $ - Purchase of treasury stock - - 500 4,416 ------ --------- ------ --------- Ending balance 500 $ 4,416 500 $ 4,416 ====== ========= ====== =========
See accompanying "Notes To Consolidated Financial Statements". 6 7 PAUL HARRIS STORES, INC., AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. BASIS OF PRESENTATION The accompanying unaudited consolidated financial statements include the accounts of Paul Harris Stores, Inc. and its subsidiaries (the "Company"). The Company is a specialty retailer known for its branded private-label apparel and accessories for women. The unaudited consolidated financial statements of the Company have been prepared in accordance with instructions to Form 10-Q and Article 10 of Regulation S-X and accordingly certain information and footnote disclosures have been condensed or omitted. These condensed financial statements should be read in conjunction with the financial statements and notes thereto included in the Company's January 30, 1999, Annual Report on Form 10-K. In the opinion of management, all adjustments, which include only normal recurring adjustments, necessary to present fairly the financial position, results of operations and cash flows for the period ended October 30, 1999, and for all other periods presented, have been made. The Company's fiscal year ends on the Saturday closest to January 31. All references in this report to fiscal years are to the calendar years in which such fiscal years began. For example, fiscal 1999 refers to the fiscal year that began on January 31, 1999, and will end on January 29, 2000. The results of operations for the first, second and third quarters of fiscal 1999 are not necessarily indicative of the results to be expected for all of fiscal 1999. The Company has historically produced a majority of its income in the fourth quarter of the fiscal year due to the stronger sales experienced during the month of December. Certain amounts in the prior periods have been reclassified to conform with the current period presentation. 2. EARNINGS PER SHARE Basic earnings per share are based on the weighted average number of common shares outstanding during the quarter. Diluted earnings per share are based on the weighted average number of common and common equivalent shares (dilutive stock options) outstanding during the quarter. The following table (in thousands) reconciles the numerators and denominators used in the basic and diluted earnings per share computations:
For the thirteen weeks ended For the thirty-nine weeks ended ---------------------------- ------------------------------- October 30, 1999 October 31, 1998 October 30, 1999 October 31, 1998 ------------------ ------------------ ------------------ ------------------ Net Loss Shares Net Income Shares Net Loss Shares Net Income Shares -------- ------ ---------- ------ -------- ------ ---------- ------ Basic earnings and outstanding shares $ (1,026) 10,887 $ 1,682 11,000 $ (904) 10,841 $ 3,827 11,174 Effect of dilutive options - 95 - 248 - 143 - 295 -------- ------ ---------- ------ -------- ------ ---------- ------ Diluted earnings and outstanding equivalent shares $ (1,026) 10,982 $ 1,682 11,248 $ (904) 10,984 $ 3,827 11,469 ======== ====== ========== ====== ======== ====== ========== ======
3. LONG-TERM DEBT AND CREDIT ARRANGEMENTS The Company has a committed credit facility of $35.0 million, which may be used for letters of credit or direct borrowings ("Credit Facility"). The facility was amended October 21, 1999 to increase the facility to its current level and the maximum revolving credit available to $25.0 million. The Credit Facility is intended to provide the Company with cash and liquidity to conduct its operations. The Credit Facility was previously modified on April 19, 1999 to extend its term to June 30, 2000 and to allow the Company to borrow a maximum of $10.0 million under the Credit Facility as a term note. The term note requires only monthly interest payments with an interest rate equaling the prime rate (as defined in the Credit Facility) or the LIBOR interest rate (as defined in the Credit Facility) plus 2.0 percent. The Credit Facility remains unchanged with respect to letter of credit issuance fees, covenants and stock repurchase restrictions and collateralization of the Credit Facility. As of October 30, 1999, there were $18.4 7 8 million of direct borrowings under the revolving credit commitment. The balance of outstanding letters of credit was $8.0 million and the amount of available borrowings under the borrowing formula of the Credit Facility was $8.6 million at October 30, 1999. 4. ACQUISITION OF ASSETS On March 12, 1999, the Company acquired from The J. Peterman Company ("J. Peterman") substantially all of the assets of J. Peterman for approximately $10.0 million in cash. This transaction did not include any assumption of debt. The estimated cost of $11.8 million includes estimated purchase liabilities of $1.8 million primarily associated with a plan to exit three of the thirteen acquired store locations and close the J. Peterman distribution facility. The Company expects to complete its plan of acquisition by March 2000. The acquisition was accounted for under the purchase method and, accordingly, results of J. Peterman's operations are included in the consolidated financial statements as of the date of acquisition. The purchase price has been preliminarily allocated based upon estimated fair values of the assets acquired which may vary once the actual fair value of the assets are determined. The following unaudited pro forma information (dollars in thousands, except per share data) presents a summary of the Company's consolidated results of operations as if the acquisition of J. Peterman had taken place on January 31, 1999 and on February 1, 1998:
Three months ended Nine months ended ------------------------ ------------------------ 10/30/99 10/31/98 10/30/99 10/31/98 -------- -------- -------- -------- Net sales $ 62,565 $ 74,522 $ 178,751 $ 193,214 Net (loss) earnings $ (1,026) $ 536 $ (1,436) $ (337) Per share data: Basic $ (0.09) $ 0.05 $ (0.13) $ (0.03) Diluted $ (0.09) $ 0.05 $ (0.13) $ (0.03)
These unaudited pro forma results have been prepared for comparative purposes only and include the effects of preliminary estimates of fair value and certain adjustments and assumptions based upon available information that management believes are reasonable in the circumstances. They do not purport to be indicative of the results of operations which would have actually resulted had the acquisition been in effect on February 1, 1998 or of future results of operations. ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Certain statements made in this report may constitute "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995. Such forward-looking statements involve known and unknown risks, uncertainties and other factors that may cause the actual results, performances or achievements of the Company or the retailing industry to be materially different from any future results, performance or achievements expressed or implied by such forward-looking statements. Such factors include, among others: local, regional and national economic conditions; extreme or unseasonable weather conditions; locating stores correctly and generating increased sales and productivity; legislation and regulatory matters affecting payroll costs or other aspects of retailing; the ability to identify and respond to emerging fashion trends; internal computerized systems functioning properly; Year 2000 readiness of direct and down line vendors and service providers; foreign and domestic labor and manufacturing conditions; and governmental actions such as import or trade restrictions. 8 9 OVERVIEW As of October 30, 1999, the Company operated 317 stores in 29 states under the Paul Harris name. These stores are a specialty retailer of moderately priced casual apparel and accessories for women sold under the Paul Harris, Paul Harris Design, Paul Harris Denim and other Paul Harris brand names. The Paul Harris stores have a significant concentration of locations in the Midwest. The Company also operates 12 stores in nine states under the J. Peterman name. J. Peterman is a nationally recognized upscale apparel, accessory and novelty retailer well known for its catalog and unique merchandise collection. The Company's stores currently average approximately 4,900 gross square feet and are located primarily in regional enclosed shopping malls and, to a lesser extent, strip shopping centers. During the first nine months of fiscal 1999, the Company opened 18 and closed five Paul Harris stores, acquired 13 J. Peterman stores and subsequently closed three J. Peterman stores and opened two new J. Peterman stores during the period. The Company expects that any new Paul Harris stores will be generally located in the Company's existing markets in order to enhance recognition of the Paul Harris name, facilitate targeted marketing efforts and efficiently utilize the Company's sales team. The Company currently has no plans to open any new J. Peterman stores during the remainder of the fiscal year. RESULTS OF OPERATIONS The following discussion is based upon the unaudited consolidated financial statements appearing elsewhere in this report. The following table sets forth certain income statement items as a percentage of net sales. PAUL HARRIS STORES, INC. AND SUBSIDIARIES RESULTS OF OPERATIONS AS A PERCENT OF NET SALES
Thirteen weeks ended Thirty-nine weeks ended -------------------- ----------------------- October 30, October 31, October 30, October 31, 1999 1998 1999 1998 ---- ---- ---- ---- Net sales 100.0% 100.0% 100.0% 100.0% Cost of sales, including certain occupancy expenses exclusive of depreciation (1) 63.5% 61.3% 63.1% 61.6% ------------- ------------- ------------- ------------- Gross income 36.5% 38.7% 36.9% 38.4% Selling, general and administrative expenses (2) 35.2% 31.3% 34.3% 31.8% Depreciation and amortization 3.4% 2.7% 3.3% 2.8% ------------- ------------- ------------- ------------- Operating (loss) income (2.1%) 4.7% (0.7%) 3.8% Interest (expense) income and other income, net (0.5%) (0.1%) (0.1%) 0.1% ------------- ------------- ------------- ------------- (Loss) income before income taxes (2.6%) 4.6% (0.8%) 3.9% (Benefit) provision for income taxes (1.0%) 1.8% (0.3%) 1.5% ------------- ------------- ------------- ------------- Net (loss) income (1.6%) 2.8% (0.5%) 2.4% ============= ============= ============= =============
- ------------------------------------- (1) Occupancy expenses include store level base rent, percentage rent and real estate taxes. (2) Includes all store level occupancy expenses not included in cost of sales. 9 10 THIRD QUARTER OF FISCAL 1999 The Company's net sales increased to $62.6 million in the third quarter of fiscal 1999 from $61.2 million in the third quarter of fiscal 1998, an increase of $1.4 million or 2.2 percent. The increase in net sales was primarily attributable to a 12.7 percent increase in the number of stores operating during the third quarter of fiscal 1999 as compared to the third quarter of fiscal 1998. Comparable store sales decreased by 7.8 percent during the quarter. Comparable store sales were negatively impacted during August and early September due to the interruption of the Company's normal distribution of merchandise to the stores as a result of a significant hardware and software conversion that took place in early July. The Company operated 329 stores as of October 30, 1999 compared to 292 stores as of October 31, 1998. Gross income decreased to $22.9 million in the third quarter of fiscal 1999 from $23.7 million for the same period in the prior year, a decrease of $830,000 or 3.5 percent. Gross income was negatively effected by a 16.4 percent increase in occupancy costs primarily due to a 19.4 percent increase in total square feet occupied and positively impacted by the $1.4 million increase in sales. Gross income as a percentage of net sales decreased to 36.5 percent in the third quarter of 1999 compared to 38.7 percent in the third quarter of 1998. The decrease was attributable to lower selling margins primarily due to our knit business and higher occupancy expense as a percentage of net sales due to increased occupancy costs for newer and larger stores and as a result of the re-negotiation of leases of several existing store locations. Selling, general and administrative expenses increased to $22.0 million, or 35.2 percent of net sales, for the third quarter of fiscal 1999 from $19.2 million, or 31.3 percent of net sales, for the third quarter of fiscal 1998. The increase of $2.9 million or 15.0 percent of net sales was primarily due to increased store-payroll and occupancy costs as a result of the increase in number of store locations, the settlement of an outstanding legal dispute (see Part II, Item 1) and an unanticipated non-recurring employee medical claim of approximately $200,000. Depreciation and amortization increased to $2.2 million for the third quarter of fiscal 1999 from $1.7 million for the third quarter of fiscal 1998, an increase of $500,000 or 30.2 percent. As a percentage of net sales, depreciation and amortization increased to 3.4 percent in the third quarter of fiscal 1999 from 2.7 percent in the third quarter of fiscal 1998, primarily as a result of approximately $34 million in fixed asset expenditures during the 1999 and 1998 fiscal years. The increase in fixed assets includes the new point of sale system, which has a shorter depreciable life than most other depreciable assets of the Company. The operating loss of $1.3 million for the third quarter of fiscal 1999 was a decrease of $4.2 million from operating income of $2.9 million for the third quarter of fiscal 1998. As a percentage of net sales, the Company had an operating loss of 2.1 percent in the third quarter of fiscal 1999 compared to operating income of 4.7 percent in the third quarter of fiscal 1998. Interest (expense) income and other income, net, of ($311,000) for the third quarter of fiscal 1999 was the result of increased borrowings under the Company's revolving line of credit resulting from a business acquisition in March 1999 and to fund seasonal inventories and operations. The Company had interest (expense) income and other income, net, of ($91,000) for the third quarter of fiscal 1998 as a result of borrowings from the Company's revolving line of credit to fund seasonal inventories. The benefit for income taxes was $617,000 for the third quarter of fiscal 1999 compared to a provision of $1.1 million for the third quarter of 1998. The Company's effective tax rate of 37.5 percent in the third quarter of fiscal 1999 was lower than the 39.5 percent in the third quarter of fiscal 1998 primarily as a result of the Company benefiting from a lower state effective income tax rate. As a result of the above factors, the Company's net income decreased to a loss of $1.0 million or $0.09 per diluted share for the third quarter of fiscal 1999 from income of $1.7 million or $0.15 per diluted share for the third quarter of fiscal 1998. 10 11 FIRST NINE MONTHS OF FISCAL 1999 The Company's net sales increased to $177.5 million in the first nine months of fiscal 1999 from $161.6 million in the first nine months of fiscal 1998, an increase of $15.9 million or 9.8 percent. The increase in net sales was primarily attributable to a 12.7 percent increase in store count. The Company operated 329 stores as of October 30, 1999 compared to 292 stores on October 31, 1998. Comparable store sales decreased by 2.0 percent for the first nine months of fiscal 1999. Gross income increased to $65.5 million in the first nine months of fiscal 1999 from $62.1 million for the same period in the prior year, an increase of $3.4 million or 5.4 percent. Gross income increased primarily as a result of the increase in net sales. Gross income, as a percentage of net sales, decreased to 36.9 percent in the first nine months of fiscal 1999 from 38.4 percent for the same period of fiscal 1998. Gross income, as a percentage of net sales, was negatively impacted by the increase in occupancy expenses, especially for stores opened in the last twelve months. Selling, general and administrative expenses increased to $60.9 million, or 34.3 percent of net sales, for the first nine months of fiscal 1999 from $51.4 million, or 31.8 percent of net sales, for the first nine months of fiscal 1998. The increase of $9.5 million was primarily the result of increased store payroll costs and occupancy expenses to support the increase in the number of store locations, the settlement of an outstanding legal dispute (see Part II, Item 1) and an unanticipated non-recurring employee medical claim of approximately $200,000. The increase as a percent of net sales was primarily the result of higher costs associated with the increase in total square feet operated by the Company. Depreciation and amortization increased to $5.9 million for the first nine months of fiscal 1999 from $4.5 million in fiscal 1998, an increase of $1.4 million or 29.7 percent. As a percentage of net sales, depreciation and amortization increased to 3.3 percent in the first nine months of fiscal 1999 from 2.8 percent in the same period of fiscal 1998. The increase is a result of the approximate $15.6 million in fixed asset expenditures since the end of the third quarter of fiscal 1998. The first nine months of fiscal 1999 resulted in an operating loss of $1.3 million, a decrease of $7.5 million from operating income of $6.2 million for the same period of fiscal 1998. As a percent of net sales, the operating loss in the first nine months of fiscal 1999 was a negative 0.7 percent compared to 3.8 percent for the operating income in the first nine months of fiscal 1998. Interest (expense) income and other income, net, of ($129,000) for the first nine months of fiscal 1999 decreased from income of $156,000 for the first nine months of fiscal 1998. This decrease was primarily due to short term borrowing as a result of the business acquisition in March 1999 and funding of seasonal inventories and operations, partially offset by the receipt of $435,000 for unclaimed note redemption accrediting back to the Company according to the terms of the note agreement during the first nine months of fiscal 1999. Income taxes was a benefit of $544,000 for the first nine months of fiscal 1999 compared to expense of $2.5 million for the first nine months of fiscal 1998, a decrease of $3.0 million, as a result of the decrease in income before income taxes. The Company's effective tax rate of 37.5 percent in the first nine months of fiscal 1999 was lower than the 39.4 percent in the first nine months of fiscal 1998 primarily as a result of lower state effective income tax rates. As a result of the above factors, the Company posted a net loss of $904,000 or $0.08 per diluted share for the first nine months of fiscal 1999 compared to net income of $3.8 million or $0.33 per diluted share for the same period of fiscal 1998. 11 12 SEASONALITY The Company's business, like that of most retailers, is subject to seasonal influences. A significant portion of the Company's net sales and profits are realized during the Company's fourth fiscal quarter, which includes the holiday selling season. Results for any quarter are not necessarily indicative of the results that may be achieved for a full fiscal year. Quarterly results may fluctuate materially depending upon, among other things, the timing of new store openings, net sales and profitability contributed by new stores, increases or decreases in comparable store sales, adverse weather conditions, shifts in the timing of certain holidays and promotions, and changes in the Company's merchandise mix. LIQUIDITY AND CAPITAL RESOURCES The Company's primary sources of working capital consist of internally generated cash and a $35.0 million secured revolving credit facility. The Credit Facility is intended to provide the Company with cash and liquidity to conduct its operations. The credit facility expires June 30, 2000. The Company anticipates that it will be able to extend or replace the current credit facility with similar terms and conditions. The annual interest rate on the direct borrowings outstanding under the credit facility is a variable rate equal to the prime rate of the Company's lender. Term note borrowings under the facility have an annual interest rate equal to the lender's prime rate or LIBOR plus 2 percent. In addition, letters of credit under the facility carry an initial issuance fee, plus a fee of 0.25 percent of the face amount of such letters of credit. The credit facility also contains certain financial covenants that set limits on tangible net worth and cash flow from operations. The credit facility is secured by a security interest in the Company's inventory, equipment, fixtures, cash and an assignment of leases. As of October 30, 1999, there were $18.4 million of direct borrowings under the revolving credit commitment. The balance of outstanding letters of credit was $8.0 million and the amount of available borrowings under the borrowing formula of the Credit Facility was $8.6 million at October 30, 1999. Net cash used for operating activities was $1.1 million in the first nine months of fiscal 1999 compared to net cash provided of $2.8 million in the first nine months of fiscal 1998. The primary reason for the decrease in net cash flow from operating activities was reduced cash flows from earnings and higher inventory levels for the first nine months of fiscal 1999 compared to the first nine months of fiscal 1998. Net cash used for investing activities was $23.2 million in the first nine months of fiscal 1999, which includes capital expenditures of $11.8 million for the acquisition of J. Peterman assets (see Note 4. "Acquisition of Assets" of "Notes To Consolidated Financial Statements") and $11.4 million for new stores, computer system upgrades and remodeling existing stores. The Company anticipates opening a total of 21 new Paul Harris stores and will remodel or relocate a total of 10 Paul Harris stores during the 1999 fiscal year. Excluding the $11.8 incurred for J. Peterman, the Company will spend approximately $14.0 million on new store additions, remodels and other capital expenditures during the 1999 fiscal year. Net cash flow from financing activities was $18.6 million for the first nine months of fiscal 1999 and primarily was the result of direct borrowings of $18.4 million under the Company's revolving credit facility (see Note 4. "Acquisition of Assets" of "Notes To Consolidated Financial Statements"). Management believes that cash generated from operations and borrowings under the Company's credit facility, if any, will be sufficient to meet the Company's working capital and capital expenditure needs in the foreseeable future. 12 13 YEAR 2000 COMPLIANCE The year 2000 ("Y2K") will pose a unique set of challenges to those industries reliant on information technology. As a result of methods employed by early programmers, many software applications and operational programs may be unable to distinguish the year 2000 from the year 1900. If not effectively addressed, this problem could result in the production of inaccurate data, or, in the worst cases, the inability of the systems to continue to function. The problem also extends to many non-software systems, that are operating and control systems that rely on embedded chip systems. The Company and other retailers are vulnerable to the industry's dependence on electronic point of sale, inventory control systems and other system failures such as payroll, accounting and security. The Company must also be aware of the effect of Y2K failures on the part of its suppliers, landlords and public or private infrastructure service providers, which include electricity, water, gas, transportation and communication. The Company's efforts in addressing the Y2K issues are directed by senior-level management. These efforts represent a significant commitment of time of the Company's information system staff, the efforts of outside consultants and software testing applications. Management periodically reports to the Board of Directors with respect to the Company's Y2K efforts. In May 1996, the Company initiated the process of preparing its computer systems and applications for Y2K when the decision to replace the store point of sale equipment was made. The store point of sale systems were replaced during the third quarter of 1997. The Y2K process also involves upgrading corporate hardware and software components. Management estimates the total cumulative costs will be approximately $11.7 million, which includes the $6.2 million already invested in the new point of sale systems and $5.2 million for application software and development. The Company's six-phase approach and anticipated timing of each phase are described below. Phase 1 - Inventory. The Company's hardware and software (including business and operational applications and operating systems) have already been inventoried. Third party businesses have already been solicited as to their preparation on this issue. Phase 2 - Assessment. The Y2K task force has completed the assessment of the business systems and established a priority for their repair or replacement. The assessment process for internal non-IT systems and for key third-party businesses has also been completed. Systems that are known to be critical or important are receiving top priority in the remediation phase. Phase 3 - Strategy. This phase involves the development of appropriate remedial strategies for both IT and non-IT systems. These strategies may include repairing, testing and certifying, replacing or abandonment of particular systems. The strategy phase has been completed for all IT and non-IT systems. Phase 4 - Remediation. The remediation phase involves the execution of the strategies chosen. The IT systems remediation and non-critical systems corrections have been substantially completed. Phase 5 - Test and Certification. The Company has substantially completed all system testing and certification. Testing for non-IT systems has been initiated: however, due to the Company's reliance on many third-party vendors, this phase, with respect to non-IT systems, may not be completed by December 31, 1999. Phase 6 - Contingency Planning. This phase involves addressing operational issues that may arise due to the failure of the Company's or third-party preparations. The Company has assessed and developed plans for such issues as the loss of communication, banking, transportation and infrastructure services. Based upon its efforts to date, the Company believes that the vast majority of both its IT and its non-IT systems will remain up and running after January 1, 2000. Accordingly, the Company does not currently anticipate that internal systems failure will result in any material adverse effect 13 14 to its operations or financial condition. At this time, the Company believes that the most likely "worst case" scenario involves potential disruptions in areas in which the Company's operations must rely on third-party systems. Nonetheless, the Y2K problem is pervasive and complex and can potentially affect any system. Accordingly, no assurance can be given that Y2K compliance can be achieved without additional unanticipated expenditures and uncertainties that might affect future financial results. ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK The Company considers the market risks of its variable interest rate borrowings to not be material to its financial condition. PART II. OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS On October 15, 1997, the Company initiated a declaratory judgement 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 $3.0 million. On October 11, 1999, the Company paid Citibank $400,000 to settle this matter resulting in a complete dismissal and release of all claims involved. ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits: 4(a)(xi) Ninth Modification of Amended and Restated Secured Credit Agreement and Other Related Documents dated October 21, 1999 27 Financial Data Schedule (b) Reports on Form 8-K: None. 14 15 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. PAUL HARRIS STORES, INC. (Registrant) Date: December 14, 1999 /s/ Keith L. Himmel, Jr. ------------------------ Vice President - Finance, Controller and Corporate Secretary (Signing on behalf of the registrant and as principal financial officer) 15 EX-4.(A)(XI) 2 9TH MOD. OF AMEND & RESTATED AGMTS DATED 10/21/99 1 EXHIBIT 4(a)(xi) NINTH MODIFICATION OF AMENDED AND RESTATED SECURED CREDIT AGREEMENT AND OTHER RELATED DOCUMENTS THIS NINTH MODIFICATION OF AMENDED AND RESTATED SECURED CREDIT AGREEMENT AND OTHER RELATED DOCUMENTS (this "Agreement") is made as of October 21, 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, the successor to LaSalle National Bank (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 Eighth 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, and April 19, 1999 (as so amended, the "Credit Agreement"). WHEREAS, Borrower (as that term is defined in the Credit Agreement) has requested that Bank 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 Agreement 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 2 provisions. Accordingly, effective as of October 21, 1999 (the "Modification Date"), the Credit Agreement is modified as set forth below in this paragraph 2: (a) ""MAXIMUM REVOLVING CREDIT AVAILABILITY" means, as of any given date, the lesser of (i) the Borrowing Base minus the Letter of Credit Reserve minus the Revolving Loan Balance and minus the Term B Loan Balance or (II) $25,000,000 minus the Letter of Credit Reserve minus the Revolving Loan Balance and minus the Term B Loan Balance, each such amount calculated as of such date and subject further to the limitations set forth in Section 2.1.@ (b) "2.1 (a) REVOLVING CREDIT COMMITMENT. On the terms and subject to the conditions set forth in this Agreement, Bank agrees to make Revolving Loans to Borrower and to issue Letters of Credit, pursuant to Section 2.3, for the account of the Borrower, from time to time before the Revolving Credit Termination Date in such aggregate amounts as Borrower may from time to time request but not exceeding at any one time outstanding the lesser of (i) the Borrowing Base or (ii) $25,000,000; provided, however, that the issuance of standby Letters of Credit shall be limited to $1,000,000 in the aggregate. Borrower shall have the right to repay and reborrow any of the Revolving Loans in increments of $100,000 (or $25,000 integral multiples); provided, however, that it shall be a condition precedent to any reborrowing that as of the date of any reborrowing all of the conditions to borrowing set forth in this Agreement shall be satisfied and all representations and warranties made herein shall be true and correct in all material respects as of such date.@ (c) "2.5 REVOLVING LOAN AND TERM B LOAN NON-USE FEE. During the term of this Agreement and continuing until, but excluding, the Maturity Termination Date, Borrower shall pay to Bank, on a quarterly basis, a non-use fee of one-quarter of one percent (0.25%) per annum on the lesser of (i) the excess of (A) $35,000,000.00 over (B) the daily average of the aggregate principal amount of (X) all outstanding Revolving Loans and (Y) all outstanding Term B Loans and (Z) all Letters of Credit for the quarter (or, if applicable, shorter period) then ending and (ii) $15,000,000.00. Such non-use fee shall be payable in arrears on the first day of each May, August, November and February, for the quarters ending on January 31, April 30, July 31 and October 31 of each year during the term of this Agreement and on the Revolving Credit Termination Date." 3. REFERENCES. All references in the Loan Documents to the Credit Agreement hereby are understood to be to the Credit Agreement as modified hereby. 4. CONDITIONS TO EFFECTIVENESS. Provided that no unwaived Default or Event of Default shall then exist other than those that would exist but for the execution of this Amendment, this Amendment shall be deemed to be effective as of October 21, 1999 (the "Effective Date"), 2 3 provided all of the following conditions are satisfied in a manner, form and substance acceptable to Bank: (a) EXECUTION OF AMENDMENT. This Amendment (including the attached Joinder) and a Second Amended and Restated Revolving Note, 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 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. 5. In the event of any conflict among the terms of the Credit Agreement and the Related Documents as modified by this Agreement, the terms of the Credit Agreement as modified by this Agreement shall control. All terms and provisions of the Related Documents corresponding to terms and provisions of the Credit Agreement prior to the date of this Agreement shall be deemed modified in accordance with the terms of this Agreement. 6. Borrower hereby warrants and represents that (i) Borrower has no defense, offset or counterclaim with respect to the payment of any sum owed to Bank, or with respect to any covenant in the Loan Documents; (ii) Bank, on and as of the date hereof, has fully performed all obligations to Borrower which it may have had or has on and as of the date hereof; and (iii) other than as expressly set forth herein, by entering into this Agreement, Bank does not waive any condition or obligation in the Credit Agreement and the Related Documents. 7. Borrower hereby agrees to execute and deliver promptly to Bank, at Bank's request, such other documents as Bank, in its reasonable discretion, shall deem necessary or appropriate to evidence the transaction contemplated herein. 8. Borrower agrees to pay all fees and expenses associated with the consummation of the transactions contemplated in this Agreement, including, without limitation, reasonable fees and expenses of Bank's counsel and related expenses. 9. Time is of the essence of this Agreement. 10. This Agreement may be executed in any number of counterparts, each of which shall constitute an original, but all of which, taken together, shall constitute one and the same Agreement. 3 4 11. Except as otherwise set forth herein to the contrary, the Loan Documents remain unmodified and continue in full force and effect. Borrower hereby reaffirms, confirms and ratifies each and every covenant, condition, obligation and provision set forth in the Credit Agreement and the Related Documents, each as modified hereby. [END OF PAGE] 4 5 IN WITNESS WHEREOF, the undersigned, intending to be legally bound hereby, have executed and delivered this Agreement as of the day and year first above written. BORROWER: PAUL HARRIS STORES, INC., an Indiana corporation By: /s/ Keith L. Himmel, Jr. -------------------------------- Name: Keith L. Himmel, Jr. ------------------------------ Title: Vice President - 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 - 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 - 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 - 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 ------------------------------ Commercial Banking ------------------------------ 5 6 SECOND AMENDED AND RESTATED REVOLVING NOTE $25,000,000.00 CHICAGO, ILLINOIS AS OF OCTOBER 21, 1999 FOR VALUE RECEIVED, PAUL HARRIS STORES, INC., an Indiana corporation PAUL HARRIS MERCHANDISING, INC., an Indiana corporation, PAUL HARRIS RETAILING, INC., an Indiana corporation, and THE J. PETERMAN COMPANY, an Indiana corporation (together with their successors and assigns, "Maker"), jointly and severally, promise to pay to the order of LASALLE BANK NATIONAL ASSOCIATION, a national banking association (together with its successors and assigns, "Bank"), on or before the Revolving Credit Maturity Date, at the Bank's principal office in Chicago, Illinois, the principal sum of TWENTY-FIVE MILLION AND NO/100 DOLLARS ($25,000,000.00), or, if less, the Revolving Loan Balance at such time, plus accrued and unpaid interest thereon and all other charges applicable thereto, all as set forth more fully in that Amended and Restated Secured Credit Agreement dated as of January 20, 1994, among Maker and Bank (as the same may be amended, modified, supplemented or restated from time to time, the "Credit Agreement"). All capitalized terms used but not elsewhere defined herein shall have the same meanings as are ascribed to them in the Credit Agreement. This Note is executed to evidence the Revolving Loan described in, and is subject to the terms and conditions of, the Credit Agreement. This Note shall bear interest at the applicable rates set forth in the Credit Agreement, and interest on this Note shall be paid, and principal on this Note shall and may be prepaid, in accordance with the terms of the Credit Agreement. Payments of both principal and interest are to be made in the lawful money of the United States of America. This Note is secured pursuant to the Credit Agreement and various Collateral Documents referred to therein, and reference is made thereto for a statement of terms and provisions. In addition to, and not in limitation of, the foregoing and the provisions of the Credit Agreement hereinabove referred to, Maker further agrees, subject only to any limitation imposed by applicable law, to pay all expenses, including reasonable attorneys' fees and expenses, incurred by the holder of this Note in seeking to collect any amounts payable hereunder which are not paid when due, whether by acceleration or otherwise. 7 This Note is binding upon Maker and its successors and assigns, jointly and severally, and shall inure to the benefit of the Bank and its successors and assigns. This Note is made under and governed by the laws of the State of Illinois without regard to conflict of laws principles. This Note is an amendment and restatement in the entirety of that certain Amended and Restated Revolving Note made by Maker dated April 19, 1999 and is made in substitution and not in payment thereof, and is not intended and shall not be deemed to constitute a novation. 2 8 IN WITNESS WHEREOF, the undersigned, intending to be legally bound hereby, have executed and delivered this Note, on a joint and several basis, as of the day and year first above written. MAKER: PAUL HARRIS STORES, INC., an Indiana corporation By: /s/ Keith L. Himmel, Jr. --------------------------------- Name: Keith L. Himmel, Jr. ------------------------------- Title: Vice President - 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 - 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 - 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 - Finance, ------------------------------ Controller and Corporate ------------------------------ Secretary ------------------------------ 3 EX-27 3 FINANCIAL DATA SCHEDULE
5 3-MOS JAN-31-2000 OCT-30-1999 1,686,000 0 0 0 57,469,000 67,316,000 85,974,000 (27,198,000) 130,741,000 51,396,000 0 0 0 17,933,000 56,522,000 130,741,000 177,495,000 177,495,000 111,999,000 111,999,000 66,815,000 0 (129,000) (1,448,000) (544,000) (904,000) 0 0 0 (904,000) (0.08) (0.08)
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