<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON MAY 9, 1997
REGISTRATION NO. 333-25053
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- -------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------------
AMENDMENT NO. 2
TO
FORM S-3
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
----------------
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 ROAD
INDIANAPOLIS, INDIANA 46254
(317) 293-3900
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF
REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
----------------
CHARLOTTE G. FISCHER
CHAIRMAN OF THE BOARD, PRESIDENT
AND CHIEF EXECUTIVE OFFICER
6003 GUION ROAD
INDIANAPOLIS, INDIANA 46254
(317) 293-3900
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE,
OF AGENT FOR SERVICE)
----------------
COPIES TO:
DAVID C. WORRELL MARY A. BERNARD
BAKER & DANIELS KING & SPALDING
300 NORTH MERIDIAN STREET 120 WEST 45TH STREET
SUITE 2700 NEW YORK, NEW YORK 10036
INDIANAPOLIS, INDIANA 46204 (212) 556-2100
(317) 237-0300
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as
is practicable after the effective date of this Registration Statement.
If the only securities being registered on this Form are being offered
pursuant to dividend or interest reinvestment plans, please check the
following box. [_]
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, other than securities offered only in connection with dividend or
interest reinvestment plans, check the following box. [_]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following
box and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [_]
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [_]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [X]
CALCULATION OF REGISTRATION FEE
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<TABLE>
<CAPTION>
PROPOSED
PROPOSED MAXIMUM
TITLE OF EACH CLASS OF MAXIMUM AGGREGATE AMOUNT OF
SECURITIES AMOUNT TO BE OFFERING PRICE OFFERING REGISTRATION
TO BE REGISTERED REGISTERED(1) PER SHARE(2) PRICE(2) FEE(3)
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<S> <C> <C> <C> <C>
Common Stock, without 3,450,000
par value.............. shares $13.56 $46,790,625 $14,179
</TABLE>
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(1) Includes 450,000 shares subject to over-allotment options granted to the
Underwriters.
(2) Estimated solely for purposes of calculating the registration fee pursuant
to Rule 457(c) based on the average of the high and low sales prices of
the Common Stock on the Nasdaq National Market System on April 4, 1997.
(3) Included in amount previously paid.
----------------
THIS REGISTRATION STATEMENT SHALL HEREAFTER BECOME EFFECTIVE IN ACCORDANCE
WITH SECTION 8(A) OF THE SECURITIES ACT OF 1933 ON SUCH DATE AS THE
COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A), MAY DETERMINE.
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- -------------------------------------------------------------------------------
<PAGE>
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A +
+REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE +
+SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY +
+OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT +
+BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR +
+THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE +
+SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE +
+UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF +
+ANY SUCH STATE. +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
SUBJECT TO COMPLETION--DATED MAY 9, 1997
PROSPECTUS
- --------------------------------------------------------------------------------
3,000,000 Shares
LOGO
Common Stock
- --------------------------------------------------------------------------------
Of the 3,000,000 shares of common stock, without par value (the "Common Stock")
offered hereby (the "Offering"), 500,000 shares are being sold by Paul Harris
Stores, Inc. (the "Company") and 2,500,000 shares are being sold by a
shareholder of the Company (the "Selling Shareholder"). The Company will not
receive any of the proceeds from the sale of shares of Common Stock by the
Selling Shareholder. See "Principal and Selling Shareholders."
The Common Stock of the Company is included in The Nasdaq Stock Market's
National Market (the "Nasdaq National Market") under the symbol "PAUH." On May
7, 1997, the last reported sales price of the Common Stock on the Nasdaq
National Market was $15.00 per share. See "Price Range of Common Stock."
SEE "RISK FACTORS" ON PAGES 7 TO 9 FOR A DISCUSSION OF CERTAIN MATERIAL FACTORS
THAT SHOULD BE CONSIDERED IN CONNECTION WITH AN INVESTMENT IN THE COMMON STOCK
OFFERED HEREBY.
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THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION, NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
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<TABLE>
<CAPTION>
Underwriting Proceeds to
Price to Discounts and Proceeds to Selling
Public Commissions(1) Company(2) Shareholder(2)
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<S> <C> <C> <C> <C>
Per Share....................... $ $ $ $
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Total(3) ....................... $ $ $ $
</TABLE>
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(1) The Company and the Selling Shareholder have agreed to indemnify the
several Underwriters against certain liabilities, including liabilities
under the Securities Act of 1933. See "Underwriting."
(2) Before deducting expenses payable by the Company estimated to be $66,667,
and expenses payable by the Selling Shareholder estimated to be $333,333.
(3) The Company has granted the several Underwriters a 30-day over-allotment
option to purchase up to 450,000 additional shares of the Common Stock on
the same terms and conditions as set forth above. If all such additional
shares are purchased by the Underwriters, the total Price to Public will be
$ , the total Underwriting Discounts and Commissions will be $ ,
the total Proceeds to Company will be $ and the total Proceeds to
Selling Shareholder will be $ . See "Underwriting."
- --------------------------------------------------------------------------------
The shares of Common Stock are offered by the several Underwriters subject to
delivery by the Company and the Selling Shareholder and acceptance by the
Underwriters, to prior sale and to withdrawal, cancellation or modification of
the offer without notice. Delivery of the shares to the Underwriters is
expected to be made at the office of Prudential Securities Incorporated, One
New York Plaza, New York, New York, on or about May , 1997.
PRUDENTIAL SECURITIES INCORPORATED
ROBERTSON, STEPHENS & COMPANY
RODMAN & RENSHAW, INC.
May , 1997
<PAGE>
[LOGO]
[WE MAKE IT EASY TO LOOK GOOD!]
[PHOTOS OF INTERIOR AND EXTERIOR OF STORE]
----------------
CERTAIN PERSONS PARTICIPATING IN THE OFFERING MAY ENGAGE IN TRANSACTIONS THAT
STABILIZE, MAINTAIN OR OTHERWISE AFFECT THE PRICE OF THE COMMON STOCK,
INCLUDING PURCHASES OF THE COMMON STOCK TO STABILIZE ITS MARKET PRICE,
PURCHASES OF THE COMMON STOCK TO COVER SOME OR ALL OF A SHORT POSITION IN THE
COMMON STOCK MAINTAINED BY THE UNDERWRITERS AND THE IMPOSITION OF PENALTY BIDS.
FOR A DESCRIPTION OF THESE ACTIVITIES, SEE "UNDERWRITING."
IN CONNECTION WITH THIS OFFERING, CERTAIN UNDERWRITERS (AND SELLING GROUP
MEMBERS) MAY ENGAGE IN PASSIVE MARKET MAKING TRANSACTIONS IN THE COMMON STOCK
ON THE NASDAQ NATIONAL MARKET IN ACCORDANCE WITH RULE 103 OF REGULATION M UNDER
THE SECURITIES EXCHANGE ACT OF 1934. SEE "UNDERWRITING."
2
<PAGE>
DOCUMENTS INCORPORATED BY REFERENCE
The following documents previously filed by the Company under the Securities
Exchange Act of 1934, as amended (the "Exchange Act") (File No. 0-7264) with
the Securities and Exchange Commission (the "Commission") are incorporated
herein by reference:
1. The Company's Annual Report on Form 10-K, as amended, for the fiscal
year ended February 1, 1997;
2. The Company's Current Report on Form 8-K, dated April 11, 1997; and
3. The description of the Common Stock contained in the Company's
Registration Statement on Form 8-A filed with the Commission on September
17, 1992, including any amendments or reports filed for the purpose of
updating such description.
Each document filed by the Company subsequent to the date of this Prospectus
pursuant to Section 13(a), 13(c), 14 or 15(d) of the Exchange Act and prior to
termination of the Offering shall be deemed to be incorporated by reference in
this Prospectus and shall be a part hereof from the date of filing of such
document. Any statement contained herein or in a document incorporated or
deemed to be incorporated by reference herein shall be deemed to be modified
or superseded for purposes of this Prospectus to the extent that a statement
contained in this Prospectus or in any other subsequently filed document that
is also incorporated or deemed to be incorporated by reference herein modifies
or supersedes such statement. Any such statement so modified or superseded
shall not be deemed, except as so modified or superseded, to constitute a part
of this Prospectus. Subject to the foregoing, all information appearing in
this Prospectus is qualified in its entirety by the information appearing in
the documents incorporated by reference.
The Company will provide without charge to each person to whom this
Prospectus is delivered, upon written or oral request, a copy of any or all
such documents that have been or may be incorporated by reference herein
(other than exhibits to such documents which are not specifically incorporated
by reference into such documents). Requests for such documents should be
directed to Secretary, Paul Harris Stores, Inc., 6003 Guion Road,
Indianapolis, Indiana 46254, telephone (317) 293-3900.
AVAILABLE INFORMATION
The Company has filed a Registration Statement on Form S-3 (together with
all amendments and exhibits filed or to be filed in connection therewith, the
"Registration Statement") under the Securities Act of 1933, as amended (the
"Securities Act"), with respect to the Common Stock offered hereby. This
Prospectus does not contain all the information set forth in the Registration
Statement, certain parts of which are omitted in accordance with the rules and
regulations of the Commission. Statements contained herein concerning the
provisions of documents are necessarily summaries of such documents, and each
statement is qualified in its entirety by reference to the copy of the
applicable document filed with the Commission.
The Company is subject to the informational requirements of the Exchange Act
and, in accordance therewith, files reports, proxy statements and other
information with the Commission. Such reports, proxy statements and other
information can be inspected and copied at the public reference facilities
maintained by the Commission at Room 1024, 450 Fifth Street, N.W., Washington,
D.C. 20549, and at the Commission's regional offices located at 7 World Trade
Center, Suite 1300, New York, New York 10048, and 500 West Madison Street,
Suite 1400, Chicago, Illinois 60661. Copies of such material can also be
obtained from the Public Reference Section of the Commission at 450 Fifth
Street, N.W., Washington, D.C. 20549, at prescribed rates. In addition, the
Commission maintains a site on the World Wide Web at http://www.sec.gov that
contains reports, proxy and information statements and other information
regarding registrants that file electronically with the Commission. The Common
Stock is included in the Nasdaq National Market and such reports, proxy
statements and other information concerning the Company are available for
inspection at the office of the National Association of Securities Dealers,
Inc. at 1735 K Street, Washington, D.C. 20006.
3
<PAGE>
[THIS PAGE INTENTIONALLY LEFT BLANK]
4
<PAGE>
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by the more detailed
information, including the Consolidated Financial Statements and Notes thereto,
included or incorporated by reference in this Prospectus. The Company's fiscal
year ends on the Saturday closest to January 31. All references herein to any
fiscal year are to the calendar year in which such fiscal year began. Fiscal
1996 consisted of 52 weeks, fiscal 1995 consisted of 53 weeks and fiscal 1994
consisted of 52 weeks. Unless otherwise indicated, the information in this
Prospectus assumes that the Underwriters' over-allotment option will not be
exercised.
THE COMPANY
Paul Harris Stores, Inc. ("Paul Harris" or the "Company") is a specialty
retailer of moderately-priced sportswear and accessories sold under the Paul
Harris Design, Paul Harris Denim and PHD brand names. The Company currently
operates 221 stores located in 26 states and the District of Columbia, with the
greatest concentration of stores in the Midwest. The Company's merchandising
strategy emphasizes core basic items, including sweaters, turtlenecks, tee
shirts, leggings, twill and denim pants, and shorts, that can be coordinated by
color, style and fabric. The Company also features accent pieces and
accessories such as embroidered vests, print and patterned sweaters, jewelry
and scarves which enable the customer to assemble a complete outfit, generally
for under $100. The Company's merchandise mix is designed to provide the Paul
Harris customer with easy access to versatile and stylish sportswear outfits
for work or casual occasions.
The Company believes it addresses an underserved market by providing
merchandise for style and value conscious women ages 25 to 45 with a moderate
annual income. The Company's merchandise layouts promote a classic,
fashionable, color-coordinated and comfortable Paul Harris look. Such layouts
emphasize complete outfits grouped by separates and accessories that provide
customers with wardrobe ideas. Sales Associates are trained to help customers
assemble outfits and provide information on fashion trends and current
promotions. The Company believes that the atmosphere of its stores contributes
to repeat business and inspires loyalty to the Paul Harris brand.
The Company is expanding and remodeling its store base. The Company's stores
average 4,100 gross square feet and are located primarily in regional enclosed
shopping malls and, to a lesser extent, strip shopping centers. The Company
plans to open 30 net new stores in fiscal 1997 and 45 to 50 net new stores in
fiscal 1998. In addition, the Company plans to remodel 30 to 35 stores in
fiscal 1997 and intends to remodel 80 to 100 stores in the three fiscal years
thereafter.
In January 1995, the Board of Directors appointed Charlotte G. Fischer as
Chief Executive Officer. Ms. Fischer assembled a new senior management team and
took action to improve the Company's revenues and profitability. These actions
included: (i) remerchandising and expanding the product assortment; (ii)
upgrading stores through new fixtures and leasehold improvements; (iii) closing
the Company's discount store division; (iv) expanding sourcing to be more cost-
effective and efficient; and (v) improving inventory management. The Company's
operating performance has improved significantly as a result of these actions.
The Company's net sales in fiscal 1996 were $190.3 million, a 13.6% increase
over fiscal 1995 net sales on a base of 20 fewer average stores. The Company
experienced positive comparable store sales for each month of fiscal 1996, with
increases of 10% or more in each of the last 11 months, resulting in a 20%
increase for the fiscal year. For fiscal 1996 compared to fiscal 1995, average
sales per store increased to $845,000 from $683,000. Gross income as a
percentage of net sales increased to 38.0% in fiscal 1996 from 33.0% in fiscal
1995. Operating income increased to $15.7 million in fiscal 1996 from $4.7
million in fiscal 1995, an increase of 234.9%, on 7.2% less gross square
footage.
The Company's principal business goal is to become a leading specialty
retailer of moderately-priced apparel to its target customer group. The
Company's operating strategies include: (i) continued focus on the Company's
target customer; (ii) promotion of the high-quality, high-value Paul Harris
brand; (iii) emphasis on a broad offering of fully coordinated apparel and
accessories; and (iv) commitment to a store design which facilitates a pleasant
shopping experience and builds brand loyalty.
The Company was incorporated under the laws of the State of Indiana in 1952.
The Company's principal executive offices are located at 6003 Guion Road,
Indianapolis, Indiana 46254, and the Company's telephone number is (317) 293-
3900.
5
<PAGE>
THE OFFERING
<TABLE>
<S> <C>
Common Stock Offered by the Company............ 500,000 shares
Common Stock Offered by the Selling 2,500,000 shares
Shareholder...................................
Common Stock to be Outstanding after the 10,620,403 shares (1)
Offering......................................
Use of Proceeds by the Company................. For general corporate purposes.
See "Use of Proceeds."
Nasdaq National Market Symbol.................. PAUH
</TABLE>
- --------
(1) Excludes 2,184,381 shares which may be issued pursuant to the Company's
stock option programs, under which options to purchase an aggregate of
1,201,078 shares of Common Stock were outstanding on May 7, 1997 (including
126,100 shares underlying options which have been granted subject to
shareholder approval).
SUMMARY CONSOLIDATED FINANCIAL AND OPERATING DATA
<TABLE>
<CAPTION>
TWENTY-SIX
WEEKS ENDED FISCAL YEAR
--------------------- ---------------------------------------
AUGUST 2, JANUARY 30,
1992(1) 1993(1) 1993 1994 1995 1996
--------- ----------- -------- -------- -------- --------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Net sales............... $60,606 $84,968 $154,309 $167,778 $167,523 $190,288
Gross income............ 19,701 32,076 54,753 56,381 55,226 72,222
Operating income........ 58 10,322 12,352 7,512 4,673 15,652
Income (loss) before
taxes, reorganization
items and extraordinary
items.................. (201) 9,122 9,301 4,973 2,639 14,417
Net income.............. $ 6,790 $ 5,721 $ 5,771 $ 3,078 $ 1,629 $ 8,819
Net income per share
(2).................... -- $ 0.61 $ 0.59 $ 0.31 $ 0.16 $ 0.83
OPERATING DATA:
Stores open at beginning
of period.............. 201 211 239 235
Stores opened during
period................. 22 40 19 19
Stores closed during
period................. (12) (12) (23) (31)
-------- -------- -------- --------
Stores open at end of
period................. 211 239 235 223
======== ======== ======== ========
Weighted average sales
per store.............. $ 748 $ 740 $ 683 $ 845
Comparable store sales
increase (decrease)
(3).................... 3% 0% (7%) 20%
Inventory turnover...... 4.9x 4.6x 4.7x 5.1x
</TABLE>
<TABLE>
<CAPTION>
FEBRUARY 1, 1997
-----------------------
ACTUAL AS ADJUSTED (4)
------- ---------------
<S> <C> <C>
BALANCE SHEET DATA:
Working capital......................................... $21,457 $28,515
Total assets............................................ 57,319 64,377
Long-term debt.......................................... 1,930 1,930
Shareholders' equity.................................... 36,911 43,969
</TABLE>
- --------
(1) From February 1991 until the third quarter of fiscal 1992, the Company
operated under Chapter 11 of the Bankruptcy Code. The Company emerged from
bankruptcy upon the confirmation of its Plan of Reorganization (the
"Plan"). In accordance with AICPA guidelines, the Company restated its
balance sheet with the adoption of "fresh start" accounting to reflect the
impact of the Plan as of August 2, 1992. A "black line" has been drawn
between the pre- and post-emergence financial information delineating their
non-comparability.
(2) Net income per share is not disclosed for the period prior to the twenty-
six weeks ended January 30, 1993, due to significant changes in the capital
structure as part of the Plan.
(3) Calculated using net sales of stores opened for at least a 12 month period.
(4) Adjusted to give effect to the Offering at an assumed public offering price
of $15.00 per share (the last reported sales price of the Common Stock on
the Nasdaq National Market on May 7, 1997) and the application of the
estimated net proceeds therefrom to the Company. See "Use of Proceeds" and
"Capitalization."
6
<PAGE>
RISK FACTORS
An investment in the shares of Common Stock offered hereby involves a high
degree of risk. Prospective investors should consider carefully the following
risk factors, in addition to the other information contained in this
Prospectus, in connection with an investment in the Common Stock offered
hereby.
This Prospectus 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 Prospectus 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 financing plans; (iii) the Company's business and growth strategies;
(iv) the use of the net proceeds to the Company of this Offering; and (v) 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. The accompanying information contained in this Prospectus,
including without limitation the information set forth under the headings
"Risk Factors," "Management's Discussion and Analysis of Financial Condition
and Results of Operations," and "Business," as well as information contained
in the Company's filings with the Commission, identify important factors that
could cause such differences.
NEW STORE OPENINGS. The Company's continued growth will depend in part on
its ability to open and operate new stores on a profitable basis. The Company
currently intends to open 30 net new stores in fiscal 1997 and 45 to 50 net
new stores in fiscal 1998. The Company's ability to open new stores on a
timely and profitable basis is subject to various contingencies, some of which
are beyond the Company's control. These contingencies include the Company's
ability to locate suitable store sites, negotiate acceptable lease terms,
build-out or refurbish sites on a timely and cost-effective basis, hire, train
and retain skilled managers and personnel, obtain adequate capital resources
and successfully integrate new stores into existing operations. There can be
no assurance that the Company will be able to achieve its planned expansion or
that its new stores will achieve levels of sales and profitability comparable
to the Company's existing stores. Failure of the Company to achieve its
planned expansion on a profitable basis could have a material adverse effect
on the Company's results of operations and financial condition. See
"Business--Business Strategy" and "--Expansion Strategy."
LEASE EXPIRATIONS. As of February 1, 1997, a total of 65 of the Company's
stores (29.1% of all stores) were operated under leases with terms that expire
in less than one year, including 29 leases on a month-to-month basis. There
can be no assurance that the Company will be able to maintain its existing
store locations as leases expire or to locate alternative sites on acceptable
terms. Failure to maintain existing store locations or to locate alternative
sites could have a material adverse effect on the Company's results of
operations and financial condition. See "Business--Properties."
MERCHANDISE TRENDS. The Company's success depends in part on its ability to
anticipate and respond in a timely manner to changing merchandise trends and
consumer preferences. The failure of the Company to anticipate, identify and
respond to changing merchandise trends could lead to, among other things,
lower sales, excess inventories and more frequent markdowns, any of which
could have a material adverse effect on the Company's results of operations
and financial condition as well as its reputation with its customers.
DEPENDENCE ON SENIOR MANAGEMENT. The success of the Company's business will
continue to depend on the members of its senior management team, in general,
and Charlotte G. Fischer, the Company's Chairman of the Board, President and
Chief Executive Officer, in particular. The loss of the services of one or
more members of the Company's senior management team could have a material
adverse effect on the Company's results of operations and financial condition.
See "Management."
7
<PAGE>
COMPARABLE STORE SALES. The Company's comparable store sales have
experienced significant fluctuations in the past due to, among other things,
changes in the Company's merchandising strategy, timing of promotions, adverse
weather conditions, shifts in the timing of certain holidays, prevailing
economic conditions, changes in merchandise trends, the Company's ability to
source merchandise efficiently, and the timing and concentration of store
openings. There can be no assurance that these and other factors will not
result in declining or fluctuating comparable store sales, which could have a
material adverse effect on the Company's results of operations and financial
condition. In addition, the Company has achieved significant increases in
comparable store sales in recent fiscal years as a result of the
implementation of its operating strategies. The Company does not expect to
achieve similar comparable store sales increases in future periods.
SEASONALITY AND QUARTERLY RESULTS. The Company's business is affected by the
seasonal pattern common to most retailers. Historically, its highest net sales
and net income have been during the fourth quarter, which includes the holiday
selling season. During fiscal 1996, approximately 36.0% of the Company's net
sales and 77.1% of the Company's net income were generated during the fourth
quarter. Accordingly, any adverse trend in net sales for such period could
have a material adverse effect on the Company's results of operations for the
quarter as well as for the entire year. In addition, the Company's results of
operations may fluctuate from quarter to quarter depending upon, among other
things, the timing of new store openings, net sales contributed by new stores,
increases or decreases in comparable store sales, adverse weather conditions,
shifts in the timing of certain holidays or promotions and changes in the
Company's merchandise mix. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations--Seasonality and Quarterly
Results."
COMPETITION. The women's retail apparel industry is highly competitive. The
Company believes that the key competitive factors are price, quality, fashion
and merchandise selection. Other competitive factors include brand name
recognition, store location and layout, and customer service. The Company
competes with a variety of national and regional women's apparel retailers and
a variety of national and regional department and chain stores, mass merchants
and outlet malls. Many of the Company's competitors are considerably larger,
with similar lines of merchandise and comparable locations, and have
substantially greater financial and other resources than the Company. There
can be no assurance that the Company will be able to compete successfully with
its competitors in the future. See "Business--Competition."
IMPACT OF GENERAL ECONOMIC CONDITIONS. The Company's business is sensitive
to consumer spending patterns, which in turn are subject to prevailing
economic conditions. Adverse local, regional or national economic conditions
may cause shifts in consumer spending that could have a material adverse
effect on the Company's results of operations and financial condition.
IMPLEMENTATION OF NEW POINT-OF-SALE SYSTEM. The Company intends to begin
replacing the point-of-sale ("POS") system used by its stores commencing in
the second quarter of fiscal 1997 with completion expected by the end of
fiscal 1997. There can be no assurance that implementation of the new POS
system in all of the Company's stores will not cause significant disruption in
store operations and materially adversely affect the Company's results of
operations and financial condition during implementation of the new POS system
and for some period thereafter. See "Business--Management Information
Systems."
RELATIONSHIP WITH SUPPLIERS; IMPORT RISKS. All of the Company's merchandise
is manufactured by third parties. The Company's business is dependent on its
ability to obtain merchandise on a timely basis and at competitive prices.
During fiscal 1996, the Company obtained approximately 63% of its merchandise
from overseas third-party manufacturers, primarily in the Far East.
Substantially all of the Company's foreign purchases are negotiated and paid
for in U.S. dollars. To the extent that the Company relies on overseas sources
for a large portion of its purchases, any event causing a disruption of
imports, including the imposition of import restrictions, could have a
material adverse effect on the Company's results of operations and financial
condition. Trade restrictions in the form of tariffs or quotas, or both,
applicable to apparel items could affect the importation of apparel generally
and could increase the cost and reduce the supply of apparel available to the
Company. In addition, the Company's import operations may be adversely
affected by political instability resulting in the disruption of trade from
exporting countries, significant fluctuation in the value of the U.S. dollar
against foreign currencies, and restrictions on the international transfer of
funds. See "Business--Planning, Sourcing and Distribution."
8
<PAGE>
RISKS RELATING TO DOING BUSINESS IN HONG KONG. In fiscal 1996, the Company
purchased approximately 21.1% of its merchandise from third-party
manufacturers located in Hong Kong. On July 1, 1997, sovereignty over Hong
Kong will be transferred from the United Kingdom to the People's Republic of
China (the "PRC"), and Hong Kong will become a Special Administrative Region
("SAR") of the PRC. As provided in the Sino-British Joint Declaration on the
Question of Hong Kong and the Basic Law of the Hong Kong SAR of the PRC (the
"Basic Law"), the Hong Kong SAR will have a high degree of autonomy except in
foreign affairs and defense. Under the Basic Law, the Hong Kong SAR is to have
its own legislature, legal and judicial systems and economic autonomy for 50
years. There can be no assurance that there will not be an adverse change in
existing political, economic or commercial conditions in Hong Kong or that any
such change would not have a material adverse effect on the Company's results
of operations or financial condition. Furthermore, the Company cannot predict
the effect that changes in the economic and political conditions in the PRC
could have on the economics of doing business with Hong Kong manufacturers in
light of the return of Hong Kong to China. Although the Company believes that
it could find alternative manufacturing sources for the merchandise it
currently sources from Hong Kong, the loss of a substantial portion of its
Hong Kong third-party manufacturers could have a material adverse effect on
the Company's results of operations and financial condition while
transitioning to alternative manufacturers.
SHARES ELIGIBLE FOR FUTURE SALE. After the completion of the Offering, the
Company will have 10,620,403 shares of Common Stock outstanding (11,070,403 if
the Underwriters' over-allotment option is exercised in full). Of those
shares, a total of 9,844,624 (10,294,624 if the Underwriters' over-allotment
option is exercised in full) will be freely tradeable without restriction or
further registration under the Securities Act, unless purchased or held by
"affiliates" of the Company as that term is defined in Rule 144 under the
Securities Act. The Company's executive officers and directors and the Selling
Shareholder, which own an aggregate of 3,275,779 shares of Common Stock
(including 2,500,000 shares to be sold in the Offering), and the Company have
agreed with the Underwriters that they will not, directly or indirectly,
offer, sell, offer to sell, contract to sell, pledge, grant any option to
purchase or otherwise sell or dispose (or announce any offer, sale, offer of
sale, contract of sale, pledge, grant of any option to purchase or other sale
or disposition) any shares of Common Stock or other capital stock or any
securities convertible into or exercisable or exchangeable for, or any rights
to purchase or acquire any shares of Common Stock or other capital stock of
the Company for a period of 120 days after the date of this Prospectus without
the prior written consent of Prudential Securities Incorporated, on behalf of
the Underwriters, except for options granted pursuant to the Company's
existing stock option programs. Prudential Securities Incorporated may, in its
sole discretion, at any time and without notice, release all or any portion of
the shares of Common Stock subject to such agreements. Sales of substantial
amounts of Common Stock in the public market, or the perception that such
sales could occur, could adversely affect the prevailing market price for the
Common Stock and could impair the Company's ability to raise capital through a
public offering of equity securities. See "Shares Eligible for Future Sale."
DISCRETION IN USE OF PROCEEDS. All of the net proceeds of the Offering to
the Company will be added to the Company's working capital and will be
available for general corporate purposes. As of the date of this Prospectus,
the Company cannot specify with certainty the particular uses for such net
proceeds to be added to its working capital and, accordingly, management will
have broad discretion in the application of such net proceeds. See "Use of
Proceeds" and "Management's Discussion and Analysis of Financial Condition and
Results of Operations--Liquidity and Capital Resources."
CERTAIN ANTI-TAKEOVER PROVISIONS. The division of the Company's Board of
Directors into classes, the ability of the Board of Directors to issue shares
of preferred stock in one or more series and to determine the designation,
voting and other rights, preferences, privileges and restrictions applicable
to such shares, together with the heightened shareholder approval requirements
associated with certain business combination transactions, certain provisions
of Indiana law and the Company's recently adopted shareholder rights plan, may
have the effect of discouraging or delaying a merger, tender offer, proxy
contest or other business combination involving the Company. See "Description
of Capital Stock."
9
<PAGE>
USE OF PROCEEDS
The net proceeds to the Company from the sale of the 500,000 shares of
Common Stock offered by the Company hereby, at an assumed public offering
price of $15.00 per share (the last reported sales price of the Common Stock
on the Nasdaq National Market on May 7, 1997) and after deducting underwriting
discounts and commissions and the Company's estimated Offering expenses, are
estimated to be $7.1 million ($13.4 million if the Underwriters' over-
allotment option is exercised in full). The Company will not receive any
proceeds from the sale of Common Stock by the Selling Shareholder. See
"Principal and Selling Shareholders."
The net proceeds to the Company from the Offering will be added to the
Company's working capital and used for general corporate purposes. Pending the
Company's use of the net proceeds of this Offering, the net proceeds will be
invested in short-term, investment-grade securities or certificates of
deposits.
PRICE RANGE OF COMMON STOCK
The Common Stock is included in the Nasdaq National Market under the symbol
"PAUH." The following table sets forth, for the periods indicated, the high
and low sales prices for the Common Stock as reported on the Nasdaq National
Market.
<TABLE>
<CAPTION>
HIGH LOW
------ ------
<S> <C> <C>
FISCAL 1995
First Quarter.................................................. $ 3.13 $ 1.25
Second Quarter................................................. 2.63 1.38
Third Quarter.................................................. 2.50 1.25
Fourth Quarter................................................. 2.63 1.06
FISCAL 1996
First Quarter.................................................. $ 5.13 $ 1.75
Second Quarter................................................. 8.50 4.00
Third Quarter.................................................. 13.25 6.25
Fourth Quarter................................................. 22.50 11.25
FISCAL 1997
First Quarter.................................................. $23.13 $12.50
Second Quarter (through May 7, 1997)........................... $15.50 $13.00
</TABLE>
On May 7, 1997, the last reported sales price of the Common Stock on the
Nasdaq National Market was $15.00 per share. There are currently approximately
1,600 holders of record of the Common Stock.
DIVIDEND POLICY
The Company has not declared or paid any cash dividends on the Common Stock
since fiscal 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, contractual restrictions, if any,
financial condition and other factors considered relevant by the Company's
Board of Directors.
10
<PAGE>
CAPITALIZATION
The following table sets forth the consolidated capitalization of the
Company at February 1, 1997 on an actual basis and as adjusted to give effect
to the Offering at an assumed public offering price of $15.00 per share (the
last reported sales price of the Common Stock on the Nasdaq National Market on
May 7, 1997) and the application of the estimated net proceeds therefrom to
the Company. See "Use of Proceeds" and "Principal and Selling Shareholders."
This table should be read in conjunction with the Consolidated Financial
Statements and Notes thereto included in this Prospectus.
<TABLE>
<CAPTION>
FEBRUARY 1, 1997
-------------------
ACTUAL AS ADJUSTED
------- -----------
(IN THOUSANDS)
<S> <C> <C>
Long-term debt (excluding current portion)................. $ 1,930 $ 1,930
------- -------
Shareholders' equity:
Preferred Stock, without par value;
1,000,000 shares authorized;
none issued............................................. -- --
Common Stock, without par value;
20,000,000 shares authorized;
10,114,971 shares issued and outstanding;
10,614,971 shares issued and outstanding, as adjusted
(1)..................................................... 1,930 8,988
Additional paid-in capital............................... 9,963 9,963
Retained earnings........................................ 25,018 25,018
------- -------
Total shareholders' equity............................. 36,911 43,969
------- -------
Total capitalization................................... $38,841 $45,899
======= =======
</TABLE>
- --------
(1) Excludes 2,190,000 shares of Common Stock which may be issued pursuant to
the Company's stock option programs, under which options to purchase an
aggregate of 1,170,000 shares of Common Stock were outstanding on February
1, 1997 (including 91,100 shares underlying options which have been
granted subject to shareholder approval).
11
<PAGE>
SELECTED CONSOLIDATED FINANCIAL AND OPERATING DATA
The following table sets forth selected consolidated income statement data
and selected consolidated balance sheet data of the Company for, and as of the
end of, each of the four fiscal years in the period ended February 1, 1997,
and the twenty-six weeks ended August 2, 1992 and January 30, 1993. Such data
were derived from, and are qualified by reference to, the Consolidated
Financial Statements of the Company, which have been audited by Price
Waterhouse LLP, independent accountants. The audited Consolidated Financial
Statements and Notes thereto of the Company for each of the three years in the
period ended, and as of the end of the two years in the period ended, February
1, 1997 are included in this Prospectus. 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
Prospectus.
<TABLE>
<CAPTION>
TWENTY-SIX WEEKS ENDED FISCAL YEAR
-------------------------- ---------------------------------------
AUGUST 2, JANUARY 30,
1992 (1) 1993 (1) 1993 1994 1995 1996
----------- ------------ -------- -------- -------- --------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Net sales............... $ 60,606 $ 84,968 $154,309 $167,778 $167,523 $190,288
Cost of sales, including
occupancy expenses
exclusive of
depreciation (2)....... 40,905 52,892 99,556 111,397 112,297 118,066
----------- ----------- -------- -------- -------- --------
Gross income............ 19,701 32,076 54,753 56,381 55,226 72,222
Selling, general and
administrative expenses
(3).................... 17,443 19,749 38,905 45,539 47,081 53,300
Depreciation and
amortization........... 2,200 2,005 3,496 3,330 3,472 3,270
----------- ----------- -------- -------- -------- --------
Operating income........ 58 10,322 12,352 7,512 4,673 15,652
Interest expense, net... 259 1,200 3,051 2,539 2,034 1,235
----------- ----------- -------- -------- -------- --------
Income (loss) before
taxes, reorganization
items and extraordinary
items.................. (201) 9,122 9,301 4,973 2,639 14,417
Reorganization items.... 507 -- -- -- -- --
Provision for income
taxes.................. -- 3,401 3,530 1,895 1,010 5,598
Extraordinary items..... 6,484 -- -- -- -- --
----------- ----------- -------- -------- -------- --------
Net income.............. $ 6,790 $ 5,721 $ 5,771 $ 3,078 $ 1,629 $ 8,819
=========== =========== ======== ======== ======== ========
Net income per share
(4).................... $ -- $ 0.61 $ 0.59 $ 0.31 $ 0.16 $ 0.83
=========== =========== ======== ======== ======== ========
Weighted average common
and common equivalent
shares outstanding..... -- 9,445 9,822 9,981 10,067 10,616
OPERATING DATA:
Gross income %.......... 35.5% 33.6% 33.0% 38.0%
Operating income %...... 8.0% 4.5% 2.8% 8.2%
Stores open at beginning
of period.............. 201 211 239 235
Stores opened during
period................. 22 40 19 19
Stores closed during
period................. (12) (12) (23) (31)
-------- -------- -------- --------
Stores open at end of
period................. 211 239 235 223
======== ======== ======== ========
Weighted average sales
per store.............. $ 748 $ 740 $ 683 $ 845
Comparable store sales
increase
(decrease) (5)......... 3% 0% (7%) 20%
Inventory turnover...... 4.9x 4.6x 4.7x 5.1x
</TABLE>
12
<PAGE>
<TABLE>
<CAPTION>
TWENTY-SIX WEEKS ENDED FISCAL YEAR
------------------------- -------------------------------
AUGUST 2, JANUARY 30,
1992 (1) 1993 (1) 1993 1994 1995 1996
---------- ------------ ------- ------- ------- -------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA (AT
END OF PERIOD):
Working capital......... $ 7,906 $ 15,750 $24,603 $24,446 $24,481 $21,457
Total assets............ 67,000 53,684 58,553 63,454 57,850 57,319
Long-term debt.......... 29,670 27,025 26,290 21,970 17,640 1,930
Shareholders' equity.... 1,575 7,296 15,096 19,890 22,904 36,911
</TABLE>
- --------
(1) From February 1991 until the third quarter of fiscal 1992, the Company
operated under Chapter 11 of the Bankruptcy Code. The Company emerged from
bankruptcy upon the confirmation of its Plan of Reorganization (the
"Plan"). In accordance with AICPA guidelines, the Company restated its
balance sheet with the adoption of "fresh start" accounting to reflect the
impact of the Plan as of August 2, 1992. A "black line" has been drawn
between the pre- and post-emergence financial information delineating
their non-comparability.
(2) Occupancy expenses include store level base rent, percentage rent and real
estate taxes.
(3) Includes all other store level occupancy expenses not included in cost of
sales.
(4) Net income per share and share data are not disclosed for the period prior
to the twenty-six weeks ended January 30, 1993, due to significant changes
in the capital structure as part of the Plan.
(5) Calculated using net sales of stores opened for at least a 12 month
period.
13
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion should be read in conjunction with the Selected
Financial and Operating Data and the Consolidated Financial Statements and
Notes thereto appearing elsewhere herein.
OVERVIEW
The Company was founded in 1952 and currently operates 221 stores in 26
states and the District of Columbia. Substantially all of the Company's stores
are operated under the Paul Harris name ("Paul Harris Stores"). Primarily as a
result of a very weak fourth quarter in fiscal 1990, the Company disposed of
slow-moving inventory at substantial markdowns, resulting in substantial
losses in both fiscal 1990 and fiscal 1991 and defaults under the Company's
debt agreements. On February 27, 1991, the Company and two subsidiaries filed
for protection from their creditors under Chapter 11 of the Bankruptcy Code.
The Company's Chapter 11 Plan was confirmed on August 31, 1992. Under the
Plan, liabilities subject to compromise were settled through initial and
deferred payments of cash, shares of Common Stock and $24.0 million aggregate
principal amount of 11.375% Notes due January 31, 2000 (the "11.375% Notes")
issued by the Company.
In January 1995, the Board of Directors appointed Charlotte G. Fischer as
Chief Executive Officer. Ms. Fischer assembled a new senior management team
and took action to improve the Company's revenues and profitability. These
actions included: (i) remerchandising and expanding the product assortment to
better serve the Company's target customer; (ii) upgrading stores through new
fixtures and leasehold improvements; (iii) closing the Company's discount
store division, which had operated under "The $5-$10-$15-$20 Place" name (the
"$5-$20 Stores") and marketed off-priced apparel and close-out merchandise;
(iv) expanding sourcing to be more cost-effective and efficient; and (v)
improving inventory management.
During fiscal 1995, the implementation of these new actions, particularly
the reduction of excess inventories and the phasing out of the $5-$20 Stores,
adversely affected operating results. Beginning in the third quarter of fiscal
1995, the Company's operating results began to recover as these actions began
to take effect. The Company reported record operating income for fiscal 1996.
In addition, the Company reduced its financial leverage by repaying $4.2
million of its 11.375% Notes in fiscal 1995 and the remaining $19.8 million in
fiscal 1996, three years ahead of schedule.
In fiscal 1996, the Company opened 19 stores of which 18 were opened in the
second half of the year. The Company also opened a new format store in April
1996 and is currently operating seven new format stores. The new format stores
incorporate the latest version of the Company's store layout and fixture
package, larger dressing rooms, an expanded accessory department and, in some
cases, seating and children's play areas. The Company anticipates opening 30
net new stores in fiscal 1997 and 45 to 50 net new stores in fiscal 1998.
Approximately one-third of the stores to be opened in fiscal 1997 are expected
to be new format stores. The Company is also remodeling stores based largely
on the positive customer feedback and financial performance of its new format
stores. The Company remodeled 15 stores in fiscal 1996. The Company expects to
remodel 30 to 35 stores in fiscal 1997 and 80 to 100 stores in the three
fiscal years thereafter. See "Risk Factors--New Store Openings."
14
<PAGE>
RESULTS OF OPERATIONS
The following table sets forth certain income statement items and operating
data as a percentage of net sales.
<TABLE>
<CAPTION>
FISCAL YEAR
-------------------
1994 1995 1996
----- ----- -----
<S> <C> <C> <C>
Net sales.............................................. 100.0% 100.0% 100.0%
Cost of sales, including occupancy expenses exclusive
of depreciation (1)................................... 66.4 67.0 62.0
----- ----- -----
Gross income......................................... 33.6 33.0 38.0
Selling, general and administrative expenses (2)....... 27.1 28.1 28.0
Depreciation and amortization.......................... 2.0 2.1 1.8
----- ----- -----
Operating income..................................... 4.5 2.8 8.2
Interest expense, net.................................. 1.5 1.2 0.7
----- ----- -----
Income before income taxes........................... 3.0 1.6 7.5
Provision for income taxes........................... 1.2 0.6 2.9
----- ----- -----
Net income............................................. 1.8% 1.0% 4.6%
===== ===== =====
</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.
FISCAL 1996 COMPARED TO FISCAL 1995
The Company's net sales increased to $190.3 million in fiscal 1996 from
$167.5 million in fiscal 1995, an increase of $22.8 million or 13.6%. The
increase in net sales was primarily attributable to a 20% increase in
comparable store sales, which was partially offset by a decrease in the
average number of stores open during fiscal 1996. The increase in comparable
store sales in fiscal 1996 was primarily a result of an increase in consumer
demand generally and wider acceptance of the Company's product offering, as
reflected by a 22.5% increase in average customer transactions per store. The
Company experienced positive comparable store sales for each month of fiscal
1996, with increases of 10% or more in each of the last 11 months, including a
23% increase for December 1996. The Company operated 223 stores on February 1,
1997, compared to 235 stores on February 3, 1996. During fiscal 1996, the
Company opened 19 stores and closed 31 stores (excluding three $5-$20 Stores
converted to Paul Harris Stores).
Gross income increased to $72.2 million in fiscal 1996 from $55.2 million in
fiscal 1995, an increase of $17.0 million or 30.8%. As a percentage of net
sales, gross income increased to 38.0% in fiscal 1996 from 33.0% in fiscal
1995. Gross income increased primarily due to the increase in net sales. Gross
income as a percentage of net sales increased as a result of a higher
percentage of lower cost merchandise from overseas sources and a growth in net
sales of accessories, which generally have higher gross margins than apparel.
Selling, general and administrative expenses increased to $53.3 million in
fiscal 1996 from $47.1 million in fiscal 1995, an increase of $6.2 million or
13.2%. As a percentage of net sales, selling, general and administrative
expenses decreased to 28.0% in fiscal 1996 from 28.1% in fiscal 1995. Of the
$6.2 million increase, $3.7 million was attributable to increased incentive
compensation payable as a result of the Company's attainment of performance
targets set by the Board of Directors for net sales (for field personnel) and
pretax income (for headquarters personnel). The remaining $2.5 million
resulted from increases in payroll, credit card and other expenses.
Depreciation and amortization decreased to $3.3 million in fiscal 1996 from
$3.5 million in fiscal 1995, a decrease of $202,000 or 5.8%. As a percentage
of net sales, depreciation and amortization decreased to 1.8% in fiscal 1996
from 2.1% in fiscal 1995.
15
<PAGE>
Operating income increased to $15.7 million in fiscal 1996 from $4.7 million
in fiscal 1995, an increase of $11.0 million or 234.9%. As a percentage of net
sales, operating income increased to 8.2% in fiscal 1996 from 2.8% in fiscal
1995.
Interest expense, net, decreased to $1.2 million in fiscal 1996 from $2.0
million in fiscal 1995, a decrease of $799,000 or 39.3%. The decrease resulted
primarily from repayment of the 11.375% Notes.
Provision for income taxes increased to $5.6 million in fiscal 1996 from
$1.0 million in fiscal 1995, an increase of $4.6 million, or 454.3%, primarily
because of the increase in income before income taxes. The Company's effective
income tax rate increased to 38.8% in fiscal 1996 from 38.3% in fiscal 1995.
The Company had approximately $3.4 million of federal income tax loss
carryforwards remaining available after the provision for income taxes for
fiscal 1996. Due to the utilization of federal and state income tax loss
carryforwards, the Company benefited in fiscal 1996 from a reduction of income
taxes payable (reflected as a credit to additional paid-in capital) of $5.0
million.
As a result of all the above factors, the Company's net income increased to
$8.8 million in fiscal 1996 from $1.6 million in fiscal 1995, an increase of
$7.2 million, or 441.4%.
FISCAL 1995 COMPARED TO FISCAL 1994
The Company's net sales decreased to $167.5 million in fiscal 1995 from
$167.8 million in fiscal 1994, a decrease of $255,000 or less than 1.0%. The
decrease in net sales was primarily attributable to a 7% decline in total
comparable store sales, which was partially offset by an increase in the
average number of stores open during fiscal 1995. The fiscal 1995 decline in
comparable store sales included a (i) 6% decline in comparable store sales for
the Paul Harris Stores due to fewer customers, fewer units sold per
transaction and a lower price per unit sold and (ii) an 18% decline in
comparable store sales for the $5-$20 Stores due to fewer customers and a
lower price per unit sold, partially offset by an increase in units sold per
transaction. The Company operated 235 stores on February 3, 1996, compared to
239 stores on January 28, 1995. During fiscal 1995, the Company opened 19
stores and closed 23 stores (excluding 15 $5-$20 Stores that were converted to
Paul Harris Stores).
Gross income decreased to $55.2 million in fiscal 1995 from $56.4 million in
fiscal 1994, a decrease of $1.2 million or 2.0%. As a percentage of net sales,
gross income decreased to 33.0% in fiscal 1995 from 33.6% in fiscal 1994.
Gross income decreased due to the decrease in net sales, which was partially
offset by negotiated lower pricing on increased amounts of merchandise sourced
overseas.
Selling, general, and administrative expenses increased to $47.1 million in
fiscal 1995 from $45.5 million in fiscal 1994, an increase of $1.6 million or
3.4%. As a percentage of net sales, selling, general and administrative
expenses increased to 28.1% in fiscal 1995 from 27.1% in fiscal 1994. Higher
common area maintenance and utility charges resulted in increased selling,
general and administrative expenses. Further, fiscal 1994 expenses were
reduced (relative to fiscal 1995) by a one-time curtailment gain, net of
current pension expense, of $428,000 that resulted from the Company's decision
to freeze its defined benefit pension plan.
Depreciation and amortization increased to $3.5 million in fiscal 1995 from
$3.3 million in fiscal 1994, an increase of $142,000 or 4.3%. As a percentage
of net sales, depreciation and amortization increased to 2.1% in fiscal 1995
from 2.0% in fiscal 1994.
Operating income decreased to $4.7 million in fiscal 1995 from $7.5 million
in fiscal 1994, a decrease of $2.8 million or 37.8%. As a percentage of net
sales, operating income decreased to 2.8% in fiscal 1995 from 4.5% in fiscal
1994.
Interest expense, net, decreased to $2.0 million in fiscal 1995 from $2.5
million in fiscal 1994, a decrease of $505,000 or 19.9%. The decrease resulted
primarily from payment on the 11.375% Notes and interest income earned on
higher cash balances during fiscal 1995.
16
<PAGE>
Provision for income taxes decreased to $1.0 million in fiscal 1995 from
$1.9 million in fiscal 1994, a decrease of $885,000 or 46.7%, primarily
because of the decrease in income before income taxes. The Company's effective
income tax rate for fiscal 1995 was 38.3% as compared to 38.1% for fiscal
1994. The Company had approximately $18.2 million of federal income tax loss
carryforwards remaining available after the provision for income taxes for
fiscal 1995. Due to the utilization of federal and state income tax loss
carryforwards and recognition of prior and current years' state tax loss
carryforwards, the Company benefited in fiscal 1995 from a reduction of
federal income taxes payable (reflected as a credit to additional paid-in
capital) of $1.4 million (including $440,000 for recognition of current and
prior years' state tax loss carryforwards).
As a result of all the above factors, the Company's net income decreased to
$1.6 million for fiscal 1995 from $3.1 million in fiscal 1994, a decrease of
$1.5 million or 47.1%.
SEASONALITY AND QUARTERLY RESULTS
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. See "Risk Factors--Seasonality and Quarterly
Results."
The following table sets forth certain unaudited quarterly income statement
information for fiscal 1996 and fiscal 1995. 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
----------------------------------------------------------------------------------------
APRIL 29, JULY 29, OCTOBER 28, FEBRUARY 3, MAY 4, AUGUST 3, NOVEMBER 2, FEBRUARY 1,
1995 1995 1995 1996 1996 1996 1996 1997
--------- -------- ----------- ----------- ------- --------- ----------- -----------
(DOLLARS IN THOUSANDS, EXCEPT FOR PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net sales............... $34,801 $36,509 $36,880 $59,333 $39,639 $36,721 $45,413 $68,515
Gross income............ 10,184 11,717 11,634 21,691 12,827 12,560 18,074 28,761
Operating income (loss). (1,468) (767) (442) 7,350 610 404 3,427 11,211
Income (loss) before
income taxes........... (1,982) (1,283) (996) 6,900 232 107 3,058 11,020
Net income (loss)....... $(1,215) $ (780) $ (612) $ 4,236 $ 138 $ 64 $ 1,821 $ 6,796
Net income (loss) per
share.................. $ (0.12) $ (0.08) $ (0.06) $ 0.42 $ 0.01 $ 0.01 $ 0.17 $ 0.62
AS A PERCENTAGE OF NET SALES:
Net sales............... 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%
Gross income............ 29.3 32.1 31.5 36.6 32.4 34.2 39.8 42.0
Operating income (loss). (4.2) (2.1) (1.2) 12.4 1.5 1.1 7.5 16.4
Income (loss) before
income taxes........... (5.7) (3.5) (2.7) 11.6 0.6 0.3 6.7 16.1
Net income (loss)....... (3.5%) (2.1%) (1.7%) 7.1% 0.3% 0.2% 4.0% 9.9%
</TABLE>
17
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
The Company's primary source of working capital consists of internally
generated cash and its secured, revolving credit facility which was recently
increased to $30.0 million. While this credit facility is principally intended
for letters of credit for import merchandise, the Company may make direct
borrowings of up to the maximum amount of the credit facility. The credit
facility expires June 30, 1999. The annual interest rate on borrowings
outstanding under the credit facility is a variable rate equal to the prime
rate of the Company's lender plus 0.25%. In addition, the letters of credit
carry an initial issuance fee plus a fee of 0.25% of the face amount of such
letters of credit. The credit facility also contains certain financial
covenants which set limits on tangible net worth and cash flow from
operations. The credit facility is secured by a security interest in the
Company's inventory, equipment, fixtures, cash and an assignment of leases. At
February 1, 1997, there were outstanding letters of credit issued in favor of
the Company under the credit facility in an aggregate amount of $9.6 million.
On the same date, there were no outstanding direct borrowings under the credit
facility.
The Company made capital expenditures of approximately $5.2 million in
fiscal 1996, primarily for opening new stores (approximately $1.3 million) and
remodeling existing stores and updating store fixtures (approximately $2.8
million). The Company expects to make capital expenditures in fiscal 1997 of
approximately $12.5 million, primarily for the new POS system (approximately
$4.4 million), for opening new stores (approximately $2.9 million) and for
remodeling existing stores (approximately $3.7 million). The Company
anticipates opening 30 net new stores and remodeling 30 to 35 stores during
fiscal 1997.
Net cash flow from operating activities was $21.0 million in fiscal 1996.
Net cash outflow for financing activities aggregated $19.7 million in fiscal
1996, including the repayment of $19.9 million of long-term debt, primarily
the 11.375% Notes, net of $214,000 received from the sale of Common Stock in
connection with the exercise of stock options.
Net cash flow from operating activities was $5.1 million in fiscal 1995. The
Company's investing activities in fiscal 1995 included the investment of $2.2
million in capital improvements. Net cash outflow for financing activities
aggregated $4.3 million in fiscal 1995 and was attributable to the repayment
of $4.3 million of long-term debt, primarily the 11.375% Notes.
Cash and cash equivalents decreased to $16.0 million at the end of fiscal
1996 from $19.9 million at the beginning of fiscal 1996, a decrease of $3.9
million or 19.5%.
Management believes that the net proceeds to the Company from the Offering
together with 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.
18
<PAGE>
BUSINESS
GENERAL
The Company is a specialty retailer of moderately-priced sportswear and
accessories sold under the Paul Harris Design, Paul Harris Denim and PHD brand
names. The Company currently operates 221 stores located in 26 states and the
District of Columbia, with the greatest concentration of stores in the
Midwest. The Company's merchandising strategy emphasizes core basic items,
including sweaters, turtlenecks, tee shirts, leggings, twill and denim pants,
and shorts, that can be coordinated by color, style and fabric. The Company
also features accent pieces and accessories such as embroidered vests, print
and patterned sweaters, jewelry and scarves which enable the customer to
assemble a complete outfit, generally for under $100. The Company's
merchandise mix is designed to provide the Paul Harris customer with easy
access to versatile and stylish sportswear outfits for work or casual
occasions.
The Company believes it addresses an underserved market by providing
merchandise for style and value conscious women ages 25 to 45 with a moderate
annual income. The Company's merchandise layouts promote a classic,
fashionable, color-coordinated and comfortable Paul Harris look. Such layouts
emphasize complete outfits grouped by separates and accessories that provide
customers with wardrobe ideas. Sales Associates are trained to help customers
assemble outfits and provide information on fashion trends and current
promotions. The Company believes that the atmosphere of its stores contributes
to repeat business and inspires loyalty to the Paul Harris brand.
The Company is expanding and remodeling its store base. The Company's stores
average 4,100 gross square feet and are located primarily in regional enclosed
shopping malls and, to a lesser extent, strip shopping centers. The Company
plans to open 30 net new stores in fiscal 1997 and 45 to 50 net new stores in
fiscal 1998. In addition, the Company plans to remodel 30 to 35 stores in
fiscal 1997 and intends to remodel 80 to 100 stores in the three fiscal years
thereafter.
BUSINESS STRATEGY
The Company's principal business goal is to become a leading specialty
retailer of moderately-priced apparel to its target customer group. In order
to achieve its business goal, the Company pursues the following operating
strategies:
Customer-Focused Retailer. The Company principally focuses on a style and
value conscious woman age 25 to 45 with a moderate annual income. The
clothing designs that she chooses are classic, though fashionable, with
versatility for both career and casual dressing. The Company's target
customer has limited time, and seeks a convenient and pleasant shopping
experience. The Company uses ongoing focus groups, exit polls and surveys
to remain current with the fashion needs of its target customer. In order
to measure customer acceptance, the Company tests new merchandise in a
small number of stores.
Paul Harris Branded Merchandise. The Company creates a distinctive Paul
Harris look by developing and marketing its apparel under its exclusive
Paul Harris brands. The Paul Harris look is classic, fashionable, color
coordinated and comfortable. The Company believes that its merchandise
styles and fabrications, combined with its exclusive Paul Harris brand,
appeals to the Company's target customer. A Paul Harris customer can create
a distinctive outfit, generally for less than $100, which management
believes builds strong Paul Harris brand loyalty.
Fully-Coordinated Apparel and Accessories. The Company's merchandising
strategy emphasizes a broad offering of basic apparel, including sweaters,
turtlenecks, tee shirts, leggings, twill and denim pants, and shorts, which
form a core wardrobe and which can be complemented by accent pieces and
accessories to enable the customer to purchase complete outfits. The
Company's product line features classic neutral
19
<PAGE>
and muted tones that are consistent with current color trends, plus basics
such as white, black and taupe. Merchandise is displayed to provide
customers with mix and match ideas and Sales Associates are trained to help
customers assemble outfits.
Enjoyable Shopping Experience. The Company's stores are designed to
assist customers in assembling a complete wardrobe and to make customers
feel at ease. Outfits are emphasized by grouping separates together and
accessorizing the displays to provide wardrobing ideas. New and remodeled
stores offer spacious and well lit dressing rooms and, in some of the new
format stores, seating areas for shopping companions and children's play
areas. In addition, the Company uses a moveable racking system to make it
easier to arrange merchandise to offer customers a new look every few
weeks. Paul Harris trains its Sales Associates to provide helpful customer
service. Sales Associates greet each customer and provide information about
fashion trends and current promotions. The Company believes that the
atmosphere of its stores makes customers feel they are in a more upscale
store, contributes to repeat business and inspires brand loyalty.
Commitment to Quality. The Company works closely with its third-party
manufacturers to provide quality levels for its merchandise that are
recognized as good value by its customers. The Company's quality assurance
procedures are designed to confirm that the Company's specifications on
fabrication, fit and comfort are met by manufacturers. All merchandise
carries the Company's "hassle free" return policy. The Company also has a
toll-free customer service hotline.
EXPANSION STRATEGY
Paul Harris commenced a store expansion program in fiscal 1996, opening 19
stores of which 18 were opened in the second half of the year. The Company
opened a new format store in April 1996 and is currently operating a total of
seven new format stores. The Company anticipates opening 30 net new stores in
fiscal 1997 and 45 to 50 net new stores in fiscal 1998. Approximately one-
third of the stores to be opened in fiscal 1997 are expected to be new format
stores. The Company is also remodeling stores based largely on the positive
customer feedback and financial performance of its new format stores. Fifteen
stores were remodeled in fiscal 1996. The Company expects to remodel 30 to 35
stores in fiscal 1997 and 80 to 100 stores in the three fiscal years
thereafter. See "Risk Factors--New Store Openings."
New stores are generally expected to be located in the Company's existing
markets. Management believes that clustering the Company's stores within a
market area enhances recognition of the Paul Harris name, leverages retail
management, permits more efficient targeting of marketing efforts, and
utilizes the Company's sales team at its greatest operational efficiency.
20
<PAGE>
Paul Harris Stores
The Company currently operates a total of 221 stores in 26 states and the
District of Columbia, with the greatest concentration of stores in the Midwest.
Store locations are set forth below:
[MAP SHOWING STORE LOCATIONS APPEARS HERE]
[ ] No Stores
[ ] 1-9 Stores
[ ] 10-19 Stores
[ ] 20+ Stores
Store Locations by State
Arkansas 2
- -------------------------
Little Rock (2)
Delaware 1
- -------------------------
Newark
District of Columbia 1
- -------------------------
Florida 6
- -------------------------
Jacksonville
Orlando
Tampa (4)
Georgia 8
- -------------------------
Atlanta (4)
Macon (2)
Savannah
Columbus
Illinois 29
- -------------------------
Carbondale
Champaign
Chicago (23)
Fairview Heights
Moline
Peoria
Springfield
Indiana 34
- -------------------------
Anderson (3)
Bloomington (2)
Clarksville
Columbus (2)
Evansville (2)
Ft. Wayne (3)
Indianapolis (11)
Kokomo
Lafayette
Marion
Merrillville
Michigan City
Muncie
Richmond
South Bend
Terre Haute
Valparaiso
Iowa 7
- -------------------------
Ames
Davenport
Des Moines (2)
Dubuque
Iowa City
Sioux City
Kentucky 5
- -------------------------
Erlanger
Florence
Louisville
Owensboro
Paducah
Louisiana 2
- -------------------------
Kenner
Monroe
Maryland 8
- -------------------------
Baltimore (4)
Cumberland
Frederick
Hagerstown
Westminster
Massachusetts 1
- -------------------------
Worcester
Michigan 2
- -------------------------
Holland
Saginaw
Mississippi 2
- -------------------------
Jackson (2)
Missouri 10
- -------------------------
Cape Girardeau
Columbia
St. Louis (8)
Nebraska 1
- -------------------------
Omaha
New Jersey 5
- -------------------------
Deptford
Mays Landing
Moorestown
Vineland
Voorhees
New York 2
- -------------------------
Staten Island
Yorktown Heights
North Carolina 12
- -------------------------
Burlington
Cary
Charlotte (2)
Gastonia
Greenville
Raleigh-Durham (3)
Winston-Salem (3)
Ohio 26
- -------------------------
Cleveland (6)
Cincinnati (8)
Columbus (4)
Dayton (3)
Findlay
Lima
St. Clairsville
Toledo (2)
Pennsylvania 23
- -------------------------
Allentown
Camp Hill
Chambersburg
Easton
Johnstown
Lancaster
Monaca
North Hanover
Philadelphia (7)
Pittsburgh (3)
Pottstown
Scranton
State College
Uniontown
York
South Carolina 5
- -------------------------
Anderson
Charleston
Columbia
Myrtle Beach
Spartanburg
South Dakota 1
- -------------------------
Sioux Falls
Tennessee 10
- -------------------------
Chattanooga
Clarksville
Memphis (4)
Nashville (4)
Texas 6
- -------------------------
Arlington
Dallas
Friendswood
Houston
San Antonio (2)
Virginia 7
- -------------------------
Danville
Fairfax
McLean
Richmond (2)
Roanoke
Springfield
Wisconsin 5
- -------------------------
Kenosha
Milwaukee (3)
Racine
Total Stores 221
21
<PAGE>
Of the Company's 221 stores, a total of 181 are located in regional enclosed
shopping malls and 40 are located in strip shopping centers. Thirteen of the
Company's stores, operated under the name "Paul Harris Direct," are located
primarily in factory and value-oriented discount centers. New stores are
generally expected to be located in the Company's existing markets. Management
believes that the clustering of the Company's stores within a market area
enhances recognition of the Paul Harris name, leverages retail management,
permits more efficient targeting of marketing programs and utilizes the
Company's sales team to its greatest operational efficiency. Site selection
criteria include market demographics, traffic counts, the retail mix of the
potential mall or center, visibility within the center and from major
thoroughfares, overall retail activity of the area and the proposed lease
terms.
The Company leases all of its stores. The Company's stores generally range
in size from 3,500 to 5,500 gross square feet, with an average in fiscal 1996
of approximately 4,100 gross square feet. Stores can be opened within
approximately 60 days following execution of a lease agreement. The cost of
opening a store can range from $30,000 to $250,000, depending on the condition
of the property, store format, location and anticipated sales volume. These
costs include leasehold improvements and fixtures, and exclude point-of-sale
equipment, landlord allowances and inventory. In fiscal 1996, the average cost
of opening a store, including leasehold improvements and fixtures, and
excluding point-of-sale equipment, landlord allowances and inventory, was
$212,000 for new format stores and $40,000 for other stores. The average
inventory investment in fiscal 1996 was $95,000 for new format stores and
$72,000 for other stores.
The Company intends to remodel existing stores and, where economically
feasible, expand existing stores to include some or all of the elements of the
Company's new format stores. The Company remodeled 15 stores in fiscal 1996
and expects to remodel 30 to 35 stores in fiscal 1997 and 80 to 100 additional
stores over the three fiscal years thereafter. See "Risk Factors--New Store
Openings." The cost of the remodel depends on the profitability of the
existing location, its potential sales productivity and its current store
size. The cost of the remodel could range from $20,000, which includes
painting, new carpet and the relocation of the sales counter, to $250,000,
which is the cost of a new format store.
MERCHANDISING
Product Design and Development. The Company sells its merchandise under its
exclusive Paul Harris brands, including Paul Harris Design, Paul Harris Denim
and PHD. An internal product development team, headed by the Executive Vice
President--Merchandising and Planning/Distribution, develops products in
response to the Company's ongoing customer research and works directly with
third-party manufacturers who produce the merchandise. Customer research
methods include focus groups, exit polls, and surveys of both current
customers and potential customers. The product development team also develops
merchandise ideas from a variety of other sources, including domestic and
international travel, fashion shows and industry publications. New styles,
colors, fabrications, silhouettes and product concepts are tested in a small
number of stores prior to making a significant purchase commitment. The
merchandise planning and product development team develops the corporate
merchandise plan, which specifies the number of units and dollar commitments
by stock-keeping-unit ("SKU"). The product development team works with the
Company's third-party manufacturers to develop exact specifications and
production schedules per SKU.
The Company continually reevaluates its product line through in-store
testing and other market research. In fiscal 1995, the Company's Paul Harris
Stores introduced dresses, which are currently sold in 80 stores. In the third
quarter of fiscal 1996, the Company introduced the Paul Harris Denim
collection, which is displayed in a boutique environment within each of the
Company's stores. The denim collection includes denim jeans, skirts, jumpers
and jackets. In addition, the Company began testing a new activewear line in
the fiscal 1996 Fall and holiday seasons, and is now testing a Spring
activewear line. Based on the results, the Company will determine whether to
introduce an activewear line throughout its stores.
Apparel. The Company's merchandising strategy emphasizes depth of product in
a number of core basic items that can be coordinated by color, style and
fabric. Core items include sweaters, turtlenecks, tee shirts,
22
<PAGE>
leggings, twill and denim pants, and shorts. Accent pieces, each of which is
exclusive to the Company's stores, include embroidered vests, applique and
collage tee shirts and print and patterned sweaters. The color assortment
allows the Company's target customer to assemble a variety of outfits. The
Company offers a variety of fabrications, including cotton, rayon, linen,
denim, twill, silk and polyester blends.
Accessories. Accessories, such as costume jewelry, socks, tights, panties,
belts, hairgoods and novelty gift items, enable customers to build a complete
outfit, with the exception of footwear. Paul Harris accessories are developed
to mix, match and complement the Company's apparel and generally produce
higher margins than sales of apparel. Since the beginning of fiscal 1995, the
Company has added new categories of accessories and introduced an expanded
accessory section of 500 square feet in its new format stores. To generate
impulse purchases, the accessory section has been relocated closer to the
checkout registers in approximately 20% of the Company's stores.
Merchandise Mix. The following table sets forth the Company's merchandise
mix by major product category as a percentage of net sales:
<TABLE>
<CAPTION>
FISCAL YEAR
-------------------
1994 1995 1996
----- ----- -----
<S> <C> <C> <C>
Knits................................................... 51.9% 47.4% 46.4%
Wovens.................................................. 37.3 40.8 40.2
----- ----- -----
Total sportswear...................................... 89.2 88.2 86.6
Dresses................................................. 1.0 3.3 2.9
----- ----- -----
Total apparel......................................... 90.2 91.5 89.5
Accessories............................................. 9.8 8.5 10.5
----- ----- -----
Total................................................. 100.0% 100.0% 100.0%
===== ===== =====
</TABLE>
Pricing. The Company strives to combine quality with moderate price points
to create merchandise at a good value as compared to competing branded and
private-label merchandise. Virtually all items are priced under $100 and most
items within a given category are priced similarly. The Company continually
offers promotional pricing to its customers which is communicated through in-
store signage. In addition, the Company uses markdowns to clear slow-moving
merchandise.
The following table sets forth the range of ticketed price points for the
Company's major product categories in fiscal 1996:
<TABLE>
<CAPTION>
LOW HIGH
------ ------
<S> <C> <C>
Knits.......................................................... $18.00 $89.00
Wovens......................................................... 24.00 99.00
Total sportswear............................................. 18.00 99.00
Dresses........................................................ 29.00 59.00
Total apparel................................................ 18.00 99.00
Accessories.................................................... 1.00 25.00
</TABLE>
The majority of the Company's merchandise is sold at promotional prices that
are below ticketed price points. The above table excludes merchandise of the
type typically sold in $5-$20 Stores. The Company operated 18 $5-$20 Stores at
the beginning of fiscal 1996. The remaining $5-$20 Stores were closed or
converted to Paul Harris Stores during fiscal 1996. Merchandise typically sold
in $5-$20 Stores accounted for less than 1.0% of the Company's net sales in
fiscal 1996.
MARKETING AND PROMOTION
The Company employs an in-store marketing strategy featuring merchandise
presentation, point-of-sale promotions, in-store signage, and the Company's
private label credit card, the Paul Harris Fashion Card ("PHFC").
The Company introduced the PHFC in August 1994. During fiscal 1996,
purchases made on the PHFC accounted for approximately 10.8% of the Company's
net sales and the average sale per PHFC transaction was
23
<PAGE>
$60, compared to an average sale per transaction for all other methods of
payment of $29. PHFC accounts currently number in excess of 250,000.
Management believes that the PHFC provides the Company with an exclusive
marketing database of its target customers. As a result, the Company uses the
monthly PHFC billing statement to communicate merchandise information that
encourages PHFC holders to visit a store. The Company also uses direct mail to
notify PHFC holders of sales and other special events. The Company promotes
the PHFC through a 10% discount on the first purchase when a PHFC account is
opened, point-of-purchase signage, and periodic incentive programs that reward
Sales Associates for opening new PHFC accounts. The Company assumes no credit
risk for the PHFC, but pays a percentage of sales as a service fee to an
unaffiliated third party.
STORE OPERATIONS
Each of the Company's stores is managed by a three-member management team
generally consisting of a Store Manager and two Assistant Managers.
Approximately 95 higher-volume stores operate with an Associate Manager in
place of one of the Assistant Managers. Depending on store sales volume and
the season, the number of Sales Associates in a particular store ranges from
five to 20.
Store management teams are responsible for total store operations, including
hiring, training and scheduling of Sales Associates, receiving and processing
of shipments, visual merchandising and in-store marketing. Store Managers are
expected to achieve sales projections while offering the best in customer
service in their stores. Store level administrative functions are centrally
controlled from corporate headquarters. These functions include accounting,
purchasing, store maintenance, information systems, advertising, distribution
and pricing.
The Company's stores are divided into five regions, each supervised by a
Regional Manager who reports directly to the Senior Vice President of Stores.
Each region is divided into districts comprised of six to eight stores within
a specific geographic area. Each district is supervised by a District Manager.
Regional Managers, District Managers, Store Managers and Associate Managers
receive compensation in the form of salaries and bonuses of up to 100% of base
salary for achieving specific sales and operational goals. Assistant Managers
and Sales Associates are paid on an hourly basis. Assistant Managers receive
bonuses in the form of Company merchandise certificates. The vast majority of
the Company's Sales Associates are part-time employees.
PLANNING, SOURCING AND DISTRIBUTION
The Company maintains tight control over inventory through a structured
planning process. Senior management approves initial plans for each of the six
selling seasons, which the product development team then allocates by style.
The key components of the plans are the Company's expectations for sales
growth, inventory turnover and merchandise promotions, all of which dictate
the quantity of merchandise to be purchased. Each component is monitored on a
weekly basis and pricing adjustments are made based on the performance of each
style relative to plan. The Executive Vice President--Merchandising and
Planning/Distribution meets weekly with the Company's product developers and
planners to review the performance of the Company relative to plan and approve
recommendations from the product development team. Based on the corporate
merchandise plan, management also develops store-level assortment plans, which
specify merchandise assortments and scheduled deliveries for each store. The
Company uses the corporate merchandise plan to schedule the production of its
merchandise. The Company's quality assurance staff, which includes independent
agents, inspects all aspects of merchandise production, from fabric and trim
specifications to color accuracy and sizing, prior to shipment.
Merchandise sourcing is managed by the Company's product development team,
which develops specifications in conjunction with the Company's third-party
manufacturers. The Company uses approximately 400 domestic and foreign
manufacturers to produce the merchandise that it develops. An in-house product
service team of five people quality checks all third-party manufacturers. The
certification process focuses on the manufacturer's ability to produce
merchandise to size and quality specifications and within the required time
24
<PAGE>
frame. During fiscal 1996, 40 manufacturers supplied 68% of the Company's
merchandise purchases; however, no manufacturer accounted for more than 7% of
the Company's merchandise purchases. Approximately 63% of the Company's
merchandise was purchased from foreign sources, primarily in the Far East,
during fiscal 1996. The Company does not have any long-term supply contracts
with its third-party manufacturers. See "Risk Factors--Relationship With
Suppliers; Import Risks" and "--Risks Relating to Doing Business in Hong
Kong."
All merchandise is shipped first to the Company's Indianapolis distribution
center, where each order is processed prior to shipment to the stores.
Processing tasks include count verification and allocation of shipments to the
individual stores. Over 95% of merchandise shipments received by the
distribution facility are preticketed and prepacked. Merchandise is shipped to
each store on a daily basis, excluding weekends, and arrives at the store
within one to four days after shipment. The majority of shipments have been
outsourced to national parcel delivery services which have installed computer
tracking equipment in the Company's distribution center.
MANAGEMENT INFORMATION SYSTEMS
Management has selected a new store POS system, which will be installed in
the Company's stores beginning in the second quarter of fiscal 1997.
Management expects that the new system will be installed in all of the
Company's stores by the end of fiscal 1997. The present POS system was first
installed in 1985 and provides corporate headquarters with sales, inventory
and gross margin information from each of the Company's stores on a next-day
basis. The new POS system will provide significant enhancements, including
full price management (including price look-up) and promotional tracking
capabilities. In addition, the new system will provide scanning, check
approval, customer tracking and integrated labor management. Following the
installation of the new POS system, the Company expects to replace its present
IBM mainframe with a client server or AS 400 in early fiscal 1998, which will
allow the Company to move to a database system and accommodate dating
transactions concerning the year 2000. See "Risk Factors--Implementation of
New Point-of-Sale System."
PROPERTIES
Store Leases. All of the Company's stores are leased. The table below sets
forth as of February 1, 1997 the number of the Company's leases for existing
stores that will expire each year (assuming the lease is not terminated by
either party prior to the expiration of the term).
<TABLE>
<CAPTION>
NUMBER OF LEASES
FISCAL YEAR EXPIRING EACH YEAR
----------- ------------------
<S> <C>
1997.................. 65(1)
1998.................. 30
1999.................. 14
2000.................. 14
2001.................. 7
2002.................. 11
2003.................. 28
2004.................. 23
2005.................. 15
2006 and thereafter... 16
</TABLE>
- --------
(1) Includes 29 stores currently leased on a month-to-month basis.
In general, the Company's leases have an initial term of three to 10 years,
with some having one or more five-year options to extend. Some leases have a
"kick-out" clause, which normally permits either party to terminate if sales
have not reached an acceptable level after a certain number of years of
operation. See "Risk Factors--Lease Expirations."
Headquarters. The Company owns its headquarters and distribution center,
which are located in a single 435,000 square feet building in Indianapolis,
Indiana. The Company utilizes approximately 85% of the facility.
25
<PAGE>
The Company leases approximately 65,000 square feet to an unaffiliated party
for an initial term expiring in 1997 and a four-year option to expire in 2001.
Either party may terminate the lease with six months' prior notice. The
Company believes that the facility is sufficient to accommodate planned
growth. The property is subject to a mortgage of approximately $2.0 million at
February 1, 1997. See Note 2 to the Consolidated Financial Statements.
TRADEMARKS
The Company owns "Paul Harris" and other federally registered trademarks and
servicemarks. The Company believes its marks are valuable and, accordingly,
intends to maintain its marks and the related registrations. The Company is
not aware of any pending claims of infringement or other challenges to the
Company's right to use its marks in the United States. The Company has no
patents, licenses, franchises or other concessions which are considered
material to its operations.
COMPETITION
The women's apparel retailing industry is highly competitive. The Company
believes that the key competitive factors are price, quality, fashion and
merchandise selection. Other competitive factors include brand name
recognition, store location and layout, and customer service. The Company
competes with a variety of national and regional women's apparel retailers,
including national specialty retailers, discount stores and a variety of
national and regional department and chain stores, mass merchants and outlet
malls. Many of the Company's competitors are considerably larger, with similar
lines of merchandise and comparable locations, and have substantially greater
financial and other resources than the Company. There can be no assurance that
the Company will be able to compete successfully with its competitors in the
future.
EMPLOYEES
As of February 1, 1997, the Company had approximately 2,500 non-seasonal
employees, of whom approximately 940 were employed on a part-time basis. In
addition, during the 1996 peak holiday shopping season, the Company hired
approximately 1,400 temporary employees. Fourteen of the 21 full-time
employees at the distribution center are represented by a labor union. The
Company believes that its relationship with its employees is good.
LEGAL PROCEEDINGS
The Company is involved from time to time in legal proceedings arising in
the ordinary course of its business. In the opinion of management, no pending
proceedings will have a material adverse effect on the Company's results of
operations or financial condition.
On February 27, 1991, the Company and two of its subsidiaries filed a
petition for relief from creditors under Chapter 11 of the Bankruptcy Code in
the United States Bankruptcy Court in the Southern District of Indiana, Case
No. 91-2100-RLB-11. The Company's Plan was confirmed by the Bankruptcy Court
on August 31, 1992. Under the Plan, liabilities subject to compromise were
settled through initial and deferred payments of cash, shares of Common Stock
and the 11.375% Notes. The final deferred cash payments required pursuant to
the Plan were paid during the fourth quarter of fiscal 1993. Certain of the
shares of Common Stock and 11.375% Notes, which were required to be
distributed upon final resolution of all claims, were distributed during the
second quarter of fiscal 1996.
26
<PAGE>
MANAGEMENT
EXECUTIVE OFFICERS AND DIRECTORS
The following table sets forth certain information about the Company's
current executive officers and directors.
<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<S> <C> <C>
Charlotte G. Fischer................. 47 Chairman of the Board, President and
Chief Executive Officer
Ana P. Porter........................ 32 Executive Vice President--Merchandis-
ing and Planning/Distribution
John H. Boyers....................... 52 Senior Vice President--Finance and
Treasurer
Richard A. Feinberg, Ph.D............ 46 Director
Rudy Greer........................... 72 Director
Robert I. Logan...................... 78 Director
James T. Morris...................... 54 Director
Gerald Paul.......................... 72 Director
John Rau............................. 48 Director
Sally M. Tassani..................... 48 Director
</TABLE>
Charlotte G. Fischer became the Chairman of the Board, President and Chief
Executive Officer of the Company in January 1995. From April 1994 until
January 1995, Ms. Fischer was Vice Chairman of the Board and Chief Executive
Officer Designate. She was a consultant to the Company from September 1993,
when she first joined the Board, until April 1994. From October 1991 to March
1994, Ms. Fischer was an independent retail consultant. In addition, she was
the President of C.G.F., Inc., a specialty company, which she founded in
November 1992. Ms. Fischer was employed by Claire's Boutiques, Inc., a
specialty retailer of accessories, from 1986 to 1991, serving as its President
and Chief Operating Officer from October 1986 to September 1989 and its
President and Chief Executive Officer thereafter. She was also a director of
its parent corporation, Claire's Stores, Inc. Ms. Fischer is a director of
Trans World Entertainment Corp., Inc.
Ana P. Porter was named Executive Vice President--Merchandising and
Planning/Distribution in February 1997. From December 1996 to February 1997,
Ms. Porter was an independent retail consultant. She was Vice President--
Merchandising, Marketing and Planning/Allocation for Cotton Ginny Ltd. of
Canada, a women's apparel retailer, from January 1993 to December 1996 and
Merchandise Manager of Cotton Ginny Ltd. of Canada from January 1991 until
January 1993. Ms. Porter also served as a director of Cotton Ginny Ltd. from
1993 to 1995.
John H. Boyers was named Senior Vice President--Finance and Treasurer in
March 1995. From January 1995 to March 1995, he acted as a consultant to the
Company. Mr. Boyers was self-employed as a consultant for the period of July
1994 to January 1995. From 1990 through July 1994, he was Director of
Financial Reporting for The Wackenhut Corporation, a provider of security
personnel, in Coral Gables, Florida, and also served as Controller of
Wackenhut Corrections Corporation, a subsidiary of The Wackenhut Corporation.
Richard A. Feinberg, Ph.D., is Professor of Consumer Sciences and Retailing
at Purdue University, a position he has held since 1989. His other current
positions with Purdue University include Department Head, Department of
Consumer Sciences and Retailing, Director of the Purdue Retail Institute,
Acting Director of the Center for Customer Driven Quality, an Associate of the
Business and Industrial Development Center, and Director of the Graduate
Program, Department of Consumer Sciences and Retailing. Dr. Feinberg was
elected a director of the Company in April 1997.
Rudy Greer has been an independent consultant in the retail and marketing
fields for more than the past five years. Mr. Greer has served as a director
of the Company since 1992.
Robert I. Logan was a director and Executive Vice President of Cole Taylor
Bank and Cole Taylor Financial Group, a commercial bank and its parent holding
company, respectively, until 1989. Since that time, he has served on the
boards of directors of several private companies. Mr. Logan has served as a
director of the Company since 1992.
27
<PAGE>
James T. Morris is the Chairman of the Board and President and Chief
Executive Officer of IWC Resources Corporation, a water utility holding
company, positions he has held for more than the past five years. Mr. Morris
was elected a director of the Company in December 1996.
Gerald Paul, a co-founder of the Company, is currently Chairman Emeritus of
the Company. From February 1995 to February 1997 he served as a consultant to
the Company. Mr. Paul was Chairman of the Board of the Company from June 1985
until his retirement in January 1995, and President of the Company from 1954
until his retirement. Mr. Paul has served as a director of the Company since
1952.
John Rau has been President and Chief Executive Officer of Chicago Title &
Trust Company since January 1997. From July 1993 to December 1996 he was Dean
of the Indiana University School of Business. From April 1991 to June 1993, he
was a visiting scholar at the Kellogg Graduate School of Management. Mr. Rau
has served as a director of the Company since August 1996. Mr. Rau is also a
director of the First Industrial Realty Trust Inc. and LaSalle National Bank.
Sally M. Tassani has been Senior Vice President and Director of Operations
for Leo Burnett, Inc., an advertising agency, since October 1995. From August
1995 to September 1995, she was Senior Vice President of Bender, Browning,
Dolly & Sanderson, an advertising agency. Prior to August 1995, she was the
Chief Executive Officer of Tassani & Paglia, Inc., a Chicago-based marketing
consulting firm that she founded, for more than five years. Ms. Tassani has
served as a director of the Company since 1995.
28
<PAGE>
PRINCIPAL AND SELLING SHAREHOLDERS
The following table sets forth certain information concerning the beneficial
ownership of the Common Stock as of March 24, 1997 and as adjusted to reflect
consummation of the Offering by (i) the Selling Shareholder; (ii) each person
who is known to the Company to be the beneficial owner of more than 5% of the
outstanding Common Stock; and (iii) the Company's Chief Executive Officer.
Except as set forth below, the shareholders named below have sole voting and
investment power with respect to all shares of Common Stock shown as
beneficially owned by them.
<TABLE>
<CAPTION>
SHARES SHARES
BENEFICIALLY BENEFICIALLY
OWNED PRIOR OWNED AFTER
TO THE OFFERING THE OFFERING
NAME AND ADDRESS OF ----------------- SHARES ---------------
BENEFICIAL OWNER NUMBER PERCENT BEING OFFERED NUMBER PERCENT
------------------- --------- ------- ------------- ------- -------
<S> <C> <C> <C> <C> <C>
The Prudential Insurance
Company of America (1)...... 3,013,039 29.8% 2,500,000 513,039 4.8%
Four Gateway Center
Newark, New Jersey 07102
Vinik Partners, L.P., et al.
(2)......................... 929,300 9.2% -- 929,300 8.8%
260 Franklin Street
Boston, Massachusetts 02110
Charlotte G. Fischer (3)..... 661,133 6.2% -- 661,133 5.9%
6003 Guion Road,
Indianapolis, Indiana 46254
</TABLE>
- --------
(1) Represents 3,013,039 shares of the Company's Nonvoting Common Stock of
which 2,500,000 shares will, prior to consummation of the Offering, be
converted into 2,500,000 shares of Common Stock. The Nonvoting Common
Stock is convertible into an equal number of shares of Common Stock at
any time on or after the occurrence of certain events, including a public
sale of Common Stock by the Company.
(2) The source of the information for this group of persons is a Schedule 13D
filed with the Securities and Exchange Commission, as amended January 28,
1997. The other members of this group are: Vinik Asset Management, L.P.,
Jeffrey N. Vinik, Michael S. Gordon, Mark D. Hostetter, VGH Partners,
L.L.C., and Vinik Asset Management, L.L.C. According to such statement,
the members of the group share voting or dispositive power with respect
to certain of the shares.
(3) Includes presently exercisable stock options to purchase 619,333 shares.
Also includes 2,400 shares held by members of Ms. Fischer's family, the
beneficial ownership of which are disclaimed by Ms. Fischer.
29
<PAGE>
DESCRIPTION OF CAPITAL STOCK
The Company's authorized capital stock consists of 1,000,000 shares of
Preferred Stock, without par value (the "Preferred Stock"), 16,500,000 shares
of Common Stock, without par value (the "Common Stock"), and 3,500,000 shares
of Nonvoting Common Stock, without par value (the "Nonvoting Common Stock").
The only outstanding shares of Nonvoting Common Stock are the 3,013,039 shares
beneficially owned by the Selling Shareholder. See "Principal and Selling
Shareholders."
COMMON STOCK
All outstanding shares of Common Stock are fully paid and nonassessable and
holders thereof have no redemption, preemptive or subscription rights.
Subject to the rights of any holders of Preferred Stock, the holders of
shares of Common Stock are entitled to share ratably in such dividends as may
be declared by the Board of Directors and paid by the Company out of funds
legally available therefor, and, upon dissolution and liquidation, to share
ratably in the net assets available for distribution to shareholders. Holders
of shares of Common Stock are entitled to one vote per share for the election
of directors and on all matters to be submitted to a vote of the Company's
shareholders.
NONVOTING COMMON STOCK
Holders of shares of Nonvoting Common Stock are entitled to all the rights
and privileges of holders of the Common Stock, except that Nonvoting Common
Stock is not entitled to vote on any matter except as required by law and
certain matters specified in the Company's Amended and Restated Articles of
Incorporation (the "Restated Articles"). The following matters must be
approved by the holders of a majority of the outstanding shares of Common
Stock and Nonvoting Common Stock, voting together as a single class: (i) a
merger or consolidation to which the Company is a party; (ii) the sale, lease
or other disposition of all or substantially all of the Company's assets;
(iii) dissolution of the Company; and (iv) amendment of the Restated Articles.
Holders of the Nonvoting Common Stock may request to convert shares of
Nonvoting Common Stock on a share for share basis upon the occurrence of
certain events specified in the Restated Articles, including the sale by the
Company to the public of shares of Common Stock in an underwritten public
offering.
PREFERRED STOCK
The Company's Restated Articles authorize the Board of Directors (without
shareholder approval) to issue shares of Preferred Stock from time to time in
one or more series, each series to have such powers, designations, preferences
and rights, and qualifications, limitations or restrictions thereof, as may be
determined by the Board of Directors. Because the Board of Directors has the
power to establish the preferences and rights of each series of Preferred
Stock, it may afford the holders of any series of Preferred Stock preferences
and rights, voting or otherwise, that are senior to rights of holders of
Common Stock. In connection with the Company's Shareholder Rights Plan, the
Board of Directors authorized the issuance of up to 104,000 shares of Series A
Participating Cumulative Preferred Stock upon exercise of rights under the
Rights Agreement. See "--Shareholder Rights Plan." The Company currently has
no shares of Preferred Stock outstanding.
SHAREHOLDER RIGHTS PLAN
General. On April 9, 1997, the Board of Directors of the Company declared a
dividend of one right (a "Right") for each share of Common Stock, without par
value, and Nonvoting Common Stock, without par value (collectively, the
"Common Stock"), outstanding on April 25, 1997 (the "Record Date"), and, in
addition, authorized the issuance of one Right with respect to each share of
Common Stock that becomes outstanding thereafter, and until the earlier of the
Distribution Date (as defined herein), Redemption Date (as defined herein), or
April 10, 2007 (the tenth anniversary of the Rights Agreement) ("Expiration
Date"). Each Right, when it becomes exercisable as described below, will
entitle the registered holder to purchase from the
30
<PAGE>
Company one one-hundredth (1/100th) of a share of Series A Participating
Cumulative Preferred Stock (the "Series A Preferred Shares") at a price of
$90, subject to adjustment in certain circumstances (the "Purchase Price").
The description and terms of the Rights are set forth in a Rights Agreement
(the "Rights Agreement") between the Company and the Rights Agent named
therein. The Rights will not be exercisable until the Distribution Date and
will expire on the Expiration Date, unless earlier redeemed by the Company as
described below. Until a Right is exercised, the holder thereof, as such, will
have no rights as a shareholder of the Company, including, without limitation,
the right to vote or to receive dividends with respect to the Rights or the
Series A Preferred Shares relating thereto. Unless the context otherwise
requires, references herein to the Common Stock include the related Rights.
Distribution Date. Under the Rights Agreement, the distribution date
("Distribution Date") is the earlier of (i) such time as the Company learns
that a person or group (including any affiliate or associate of such person or
group) has acquired, or has obtained the right to acquire, beneficial
ownership of more than 15% of the outstanding shares of Common Stock (such
person or group being an "Acquiring Person"), unless provisions exempting
certain persons from the definition of Acquiring Person apply, and (ii) the
close of business on such date, if any, as may be designated by the Board of
Directors of the Company following the commencement of, or first public
disclosure of an intent to commence, a tender or exchange offer for more than
15% of the outstanding shares of Common Stock. Any person or group (or any
affiliate or associate of such person or group) that acquires more than 15% of
the outstanding shares of Common Stock pursuant to a transaction that is
approved in advance by the Board of Directors is not an Acquiring Person, nor
is the Selling Shareholder with respect to the Common Stock owned by it and
its affiliates on the Record Date. A person or group (or any affiliate or
associate of such person or group) that inadvertently acquires more than 15%
of the outstanding shares of Common Stock will not be deemed to be an
Acquiring Person, provided that such person or group reduces the percentage of
beneficial ownership to less than 15% of the outstanding shares of Common
Stock by the close of business on the fifth business day after notice from the
Company that such person's or group's ownership interest exceeds 15% of the
outstanding shares of Common Stock. Such person or group will be deemed to be
an Acquiring Person at the end of such five business day period absent such
reduction.
Evidence of Rights. Until the Distribution Date, the Rights will be
evidenced by the certificates for Common Stock registered in the names of the
holders thereof (which certificates for Common Stock shall also be deemed to
be Rights Certificates, as defined below) rather than separate Rights
Certificates. Therefore, on and after the Record Date and until the
Distribution Date, the Rights will be transferred with and only with the
Common Stock and each transfer of Common Stock also will transfer the
associated Rights. As soon as practicable following the Distribution Date,
separate certificates evidencing the Rights ("Rights Certificates") will be
mailed to holders of record of the Common Stock as of the close of business on
the Distribution Date (and to each initial record holder of certain Common
Stock originally issued after the Distribution Date), and such separate Rights
Certificates alone will thereafter evidence the Rights.
Adjustments. The number of Series A Preferred Shares or other securities
issuable upon exercise of the Rights, the Purchase Price, the Redemption Price
(as defined below) and the number of Rights associated with each share of
Common Stock are all subject to adjustment from time to time in the event of
any change in the Common Stock or the Series A Preferred Shares, whether by
reason of stock dividends, stock splits, recapitalizations, mergers,
consolidations, combinations or exchanges of securities, split-ups, split-
offs, spin-offs, liquidations, other similar changes in capitalization or any
distribution or issuance of cash, assets, evidences of indebtedness or
subscription rights, options or warrants to holders of Common Stock or Series
A Preferred Shares.
The Company may, but is not required to, issue fractional Rights or
distribute Rights Certificates that evidence fractional Rights. In lieu of
such fractional Rights, the Company may make a cash payment based on the
market price of such rights. In addition, the Company may, but is not required
to, issue fractions of shares upon the exercise of the Rights or distribute
certificates that evidence fractional Series A Preferred Shares. In lieu of
fractional Preferred Shares, the Company may utilize a depository arrangement
as provided by the terms of the Series A Preferred Shares and, in the case of
fractions other than one one-hundredth (1/100th) of a Series A Preferred Share
or integral multiples thereof, may make a cash payment based on the market
price of such shares.
31
<PAGE>
Triggering Event and Effect of Triggering Event. At such time as there is an
Acquiring Person, the Rights will entitle each holder (other than such
Acquiring Person) to a right to purchase, for the Purchase Price, that number
of one one-hundredths (1/100ths) of a Series A Preferred Share equivalent to
the number of shares of Common Stock that at the time of such event would have
a market value of twice the Purchase Price.
In the event the Company is acquired in a merger or other business
combination by an Acquiring Person or an affiliate or associate of an
Acquiring Person that is a publicly traded corporation or 50% or more of the
Company's assets or assets representing 50% or more of the Company's revenues
or cash flow are sold, leased, exchanged or otherwise transferred (in one or
more transactions) to an Acquiring Person or an affiliate or associate of an
Acquiring Person that is a publicly traded corporation, each Right will
entitle its holder (subject to the next paragraph) to purchase, for the
Purchase Price, that number of common shares of such corporation that at the
time of the transaction would have a market value of twice the Purchase Price.
In the event the Company is acquired in a merger or other business combination
by an Acquiring Person or an affiliate or associate of an Acquiring Person
that is not a publicly traded entity or 50% or more of the Company's assets or
assets representing 50% or more of the Company's revenues or cash flow are
sold, leased, exchanged or otherwise transferred (in one or more transactions)
to an Acquiring Person or an affiliate or associate of an Acquiring Person
that is not a publicly traded entity, each Right will entitle its holder
(subject to the next paragraph) to purchase, for the Purchase Price, at such
holder's option, (i) that number of shares of the surviving corporation in the
transaction with such entity (which surviving corporation could be the
Company) that at the time of the transaction would have a book value of twice
the Purchase Price, (ii) that number of shares of the Principal Party in the
transaction (as defined in the Rights Agreement, and which may include the
ultimate parent of the surviving corporation) that at the time of the
transaction would have a book value of twice the Purchase Price or (iii) if
such entity has an affiliate which has publicly traded common shares, that
number of common shares of such affiliate that at the time of the transaction
would have a market value of twice the Purchase Price.
Any Rights that are at any time beneficially owned by an Acquiring Person
(or any affiliate or associate of an Acquiring Person) will be null and void
and nontransferable and any holder of any such Rights (including any purported
transferee or subsequent holder) will be unable to exercise or transfer any
such Rights.
Redemption. On any date prior to the earlier of (i) such time as a person or
group becomes an Acquiring Person and (ii) the Expiration Date, the Board of
Directors may redeem the Rights in whole, but not in part, at a price (in cash
or Common Stock or other securities of the Company deemed by the Board of
Directors to be at least equivalent in value) of $.01 per Right (which amount
shall be subject to adjustment as provided in the Rights Agreement) (the
"Redemption Price"). Immediately upon the action of the Board of Directors
ordering the redemption of the Rights (the date of such redemption being the
"Redemption Date"), and without any further action and without any notice, the
right to exercise the Rights will terminate and the only right of the holders
of Rights will be to receive the Redemption Price. Within 10 business days
after the action of the Board of Directors ordering the redemption of the
Rights, the Company will give notice of such redemption to the holders of the
then-outstanding Rights by mail. Each such notice of redemption will state the
method by which payment of the Redemption Price will be made.
In addition, at any time after there is an Acquiring Person, the Board of
Directors may elect to exchange each Right (other than Rights that have become
null and void and nontransferable as described above) for consideration per
Right consisting of one-half of the securities that would be issuable at such
time upon exercise of one Right pursuant to the terms of the Rights Agreement.
Amendment. At any time prior to the Distribution Date, the Company may,
without the approval of any holder of any Rights, supplement or amend any
provision of the Rights Agreement (including, without limitation, the date on
which the Distribution Date shall occur, the definition of Acquiring Person,
the time during which the Rights may be redeemed, or the terms of the Series A
Preferred Shares), except that no supplement or amendment shall be made that
reduces the Redemption Price (other than pursuant to certain adjustments
therein) or provides for an earlier Expiration Date. From and after the
Distribution Date and subject to applicable law, the Company may amend the
Rights Agreement without the approval of any holders of Rights Certificates
(i) to cure any ambiguity or to correct or supplement any provision contained
in the Rights Agreement or (ii) to make
32
<PAGE>
any other provisions which the Company may deem necessary or desirable and
which shall not adversely affect the interests of the holders of Rights
Certificates (other than an Acquiring Person or an affiliate or an associate
of an Acquiring Person). Any supplement or amendment adopted during any period
after any person or group has become an Acquiring Person but prior to the
Distribution Date shall be null and void unless such supplement or amendment
could have been adopted under the prior sentence from and after the
Distribution Date.
Certain Effects of the Rights Plan. The Rights Plan is designed to protect
shareholders of the Company in the event of unsolicited offers to acquire the
Company and other coercive takeover tactics which, in the opinion of the Board
of Directors, could impair its ability to represent shareholder interests. The
provisions of the Rights Plan may render an unsolicited takeover of the
Company more difficult or less likely to occur or might prevent such a
takeover, even though such takeover may offer shareholders the opportunity to
sell their stock at a price above the prevailing market rate and may be
favored by a majority of the shareholders of the Company.
CERTAIN PROVISIONS OF RESTATED ARTICLES AND BY-LAWS
Certain provisions of the Company's Restated Articles and By-Laws may have
the effect of discouraging or delaying a merger, tender offer, proxy contest
or other business combination involving the Company, although such proposals,
if made, might be considered desirable by a majority of the Company's
shareholders. These provisions include: (i) the division of the Board of
Directors into three classes, with each class serving "staggered" terms of
office of three years as required by the Restated Articles; (ii) the ability
of the Board of Directors to issue shares of Preferred Stock in one or more
series and to determine the designation, voting and other rights, preferences,
privileges and restrictions applicable to such shares; and (iii) requirements
in the Company's By-Laws for advance notice for raising business or making
nominations at shareholders' meetings.
The Company's By-Laws establish an advance notice procedure with regard to
business to be brought before an annual or special meeting of shareholders of
the Company and with regard to the nomination, other than by or at the
direction of the Board of Directors, of candidates for election as directors.
Although the Company's By-Laws do not give the Board of Directors any power to
approve or disapprove shareholder nominations for the election of directors or
proposals for action, they may have the effect of precluding a contest for the
election of directors or the consideration of shareholder proposals if the
proper procedures are not followed, and of discouraging or deterring a third
party from conducting a solicitation of proxies to elect its own slate of
directors or to approve its proposal without regard to whether consideration
of such nominees or proposals might be harmful or beneficial to the Company
and its shareholders.
CERTAIN PROVISIONS OF INDIANA LAW
The Company is governed by Indiana law, which includes certain provisions
regarding control share acquisitions and business combinations with
shareholders owning 10% or more of the outstanding Common Stock.
Pursuant to Indiana Code (S)23-1-42, an "acquiring person" who makes a
"control share acquisition" in an "issuing public corporation" may not
exercise voting rights on any "control shares" unless such voting rights are
conferred by a majority vote of the disinterested shareholders of the issuing
corporation at a special meeting of such shareholders held upon the request
and at the expense of the acquiring person. In the event that control shares
acquired in a control share acquisition are accorded full voting rights and
the acquiring person acquires control shares with a majority or more of all
voting power, all shareholders of the issuing corporation have dissenters'
rights to receive the fair value of their shares. "Control shares" means
shares acquired by a person that, when added to all other shares of the
issuing public corporation owned by that person or in respect of which that
person may exercise or direct the exercise of voting power, would otherwise
entitle that person to exercise voting power of the issuing public corporation
in the election of directors within any of the following ranges: (i) one-fifth
or more but less than one-third; (ii) one-third or more but less than a
majority; or (iii) a majority or more. "Control share acquisition" means,
subject to certain exceptions, the acquisition, directly or indirectly, by any
person of ownership of, or the power to direct the exercise of voting power
with respect to, issued and
33
<PAGE>
outstanding control shares. Shares acquired within 90 days or pursuant to a
plan to make a control share acquisition are considered to have been acquired
in the same acquisition. "Issuing public corporation" means a corporation
which is organized in Indiana, has 100 or more shareholders, its principal
place of business, its principal office or substantial assets within Indiana
and either (i) more than 10% of its shareholders resident in Indiana, (ii)
more than 10% of its shares owned by Indiana residents or (iii) 10,000
shareholders resident in Indiana. The above provisions do not apply if, before
a control share acquisition is made, the corporation's articles of
incorporation or by-laws provide that said provisions do not apply. The
Restated Articles and the Company's By-Laws do not exclude the Company from
the restrictions imposed by such provisions.
Indiana Code (S)23-1-43 restricts the ability of a "resident domestic
corporation" to engage in any combination with an "interested shareholder" for
five years after the interested shareholder's date of acquiring shares unless
the combination or the purchase of shares by the interested shareholder on the
interested shareholder's date of acquiring shares is approved by the board of
directors of the resident domestic corporation before that date. If the
combination was not previously approved, the interested shareholder may effect
a combination after the five-year period only if such shareholder receives
approval from a majority of the disinterested shares or the offer meets
certain fair price criteria. For purposes of the above provisions, "resident
domestic corporation" means an Indiana corporation that has 100 or more
shareholders. "Interested shareholder" means any person, other than the
resident domestic corporation or its subsidiaries, who is (i) the beneficial
owner, directly or indirectly, of 10% or more of the voting power of the
outstanding voting shares of the resident domestic corporation or (ii) an
affiliate or associate of the resident domestic corporation and at any time
within the five-year period immediately before the date in question was the
beneficial owner of 10% or more of the voting power of the then outstanding
shares of the resident domestic corporation. The term "business combination"
is broadly defined to include mergers, sales or leases of assets, transfers of
shares of the corporation, proposals for liquidation and the receipt by an
interested shareholder of any financial assistance or tax advantage from the
corporation, except proportionately as a shareholder of the corporation.
Indiana Code (S)23-1-22 provides that, in addition to any other provision
authorized by any other section of the Indiana Business Corporation Law or
contained in the articles of incorporation or the by-laws, a corporation may
establish one or more procedures to regulate transactions that would, when
consummated, result in a change of "control" of the corporation. Such a
procedure may be established in the original articles of incorporation or by-
laws, by an amendment to the articles of incorporation, or notwithstanding the
fact that a vote of the shareholders would otherwise be required by any other
provision of the Indiana Business Corporation Law or the articles of
incorporation, by an amendment to the by-laws. For purposes of this section,
"control" means, for any corporation that has 100 or more shareholders, the
beneficial ownership, or the direct or indirect power to direct the voting, of
not less than 10% of the voting shares of a corporation's outstanding voting
shares.
Indiana Code (S)23-1-35-1 provides that directors are required to discharge
their duties: (i) in good faith; (ii) with the care an ordinarily prudent
person in a like position would exercise under similar circumstances; and
(iii) in a manner the directors reasonably believe to be in the best interests
of the Company. However, this section also provides that a director is not
liable for any action taken as a director, or any failure to act, unless the
director has breached or failed to perform the duties of the director's office
and the action or failure to act constitutes willful misconduct or
recklessness. This statutory exoneration from liability does not affect the
liability of directors for violations of the federal securities laws.
The overall effect of the above statutory provisions and the provisions of
the Restated Articles and the Company's By-Laws may be to render more
difficult or to discourage a merger, tender offer, proxy contest, the
assumption of control of the Company by a holder of a large block of the
Company's stock or other person, or the removal of the incumbent management,
even if such actions may be beneficial to the Company's shareholders
generally.
TRANSFER AGENT AND REGISTER
The Transfer Agent and Registrar for the Common Stock is The First National
Bank of Boston.
34
<PAGE>
SHARES ELIGIBLE FOR FUTURE SALE
After the completion of the Offering, the Company will have 10,620,403
shares of Common Stock outstanding (11,070,403 if the Underwriters' over-
allotment option is exercised in full). Of those shares, a total of 9,844,624
(10,294,624 if the Underwriters' over-allotment option is exercised in full)
will be freely tradeable without restriction or further registration under the
Securities Act, unless purchased or held by "affiliates" of the Company as
that term is defined in Rule 144 under the Securities Act ("Rule 144"). In
general, under Rule 144 as currently in effect, any affiliate of the Company
who has beneficially owned restricted securities for at least one year would
be entitled to sell within any three-month period a number of shares that does
not exceed the greater of 1% of the then outstanding shares of Common Stock
(approximately 106,000 shares based upon the number of shares assumed to be
outstanding after the Offering) or the reported average weekly trading volume
in the over-the-counter market for the four weeks preceding the sale. Sales
under Rule 144 are also subject to certain manner of sale restrictions and
notice requirements and to the availability of current public information
concerning the Company. All shares of Common Stock held by affiliates of the
Company will be eligible for sale immediately following consummation of the
Offering pursuant to Rule 144, subject to certain restrictions under Rule 144.
The Company's executive officers and directors and the Selling Shareholder,
which own an aggregate of 3,275,779 shares of Common Stock (including
2,500,000 shares to be sold in the Offering), and the Company have agreed with
the Underwriters that they will not, directly or indirectly, offer, sell,
offer to sell, contract to sell, pledge, grant any option to purchase or
otherwise sell or dispose (or announce any offer, sale, offer of sale,
contract of sale, pledge, grant of any option to purchase or other sale or
disposition) any shares of Common Stock or other capital stock or any
securities convertible into or exercisable or exchangeable for, or any rights
to purchase or acquire any shares of Common Stock or other capital stock of
the Company for a period of 120 days after the date of this Prospectus without
the prior written consent of Prudential Securities Incorporated, on behalf of
the Underwriters, except for options granted pursuant to the Company's
existing stock option programs. Prudential Securities Incorporated may, in its
sole discretion, at any time and without notice, release all or any portion of
the shares of Common Stock subject to such agreements. Sales of substantial
amounts of Common Stock in the public market, or the perception that such
sales could occur, could adversely affect the prevailing market price for the
Common Stock and could impair the Company's ability to raise capital through a
public offering of equity securities.
No predictions can be made as to the effect, if any, that future sales of
shares, or the availability of shares for future sale, will have on the
prevailing market price for the Common Stock. Sales of substantial amounts of
Common Stock, or the perception that such sales could occur, could adversely
affect prevailing market prices for the Common Stock and could impair the
Company's future ability to raise capital through an offering of equity
securities.
35
<PAGE>
UNDERWRITING
The Underwriters named below (the "Underwriters"), for whom Prudential
Securities Incorporated, Robertson, Stephens & Company LLC and Rodman &
Renshaw, Inc. are acting as representatives (the "Representatives"), have
severally agreed, subject to the terms and conditions contained in the
Underwriting Agreement, to purchase from the Company and the Selling
Shareholder the number of shares of Common Stock set forth opposite their
respective names.
<TABLE>
<CAPTION>
NUMBER
UNDERWRITER OF SHARES
----------- ---------
<S> <C>
Prudential Securities Incorporated.................................
Robertson, Stephens & Company LLC .................................
Rodman & Renshaw, Inc..............................................
---------
Total ........................................................... 3,000,000
=========
</TABLE>
The Company and the Selling Shareholder are obligated to sell, and the
Underwriters are obligated to purchase, all the shares of Common Stock offered
hereby if any are purchased.
The Underwriters, through their Representatives, have advised the Company
and the Selling Shareholder that they propose to offer the Common Stock
initially at the public offering price set forth on the cover page of this
Prospectus; that the Underwriters may allow to selected dealers a concession
of $ per share; and that such dealers may reallow a concession of
$ per share to certain other dealers. After the public offering, the
public offering price and the concessions may be changed by the
Representative.
The Company has granted the Underwriters an over-allotment option,
exercisable for 30 days from the date of this Prospectus, to purchase up to
450,000 additional shares of Common Stock at the public offering price, less
underwriting discounts and commissions, as set forth on the cover page of this
Prospectus. The Underwriters may exercise such option solely for the purpose
of covering over-allotments incurred in the sale of the shares of Common Stock
offered hereby. To the extent such option to purchase is exercised, each
Underwriter will become obligated, subject to certain conditions, to purchase
approximately the same percentage of such additional shares as the number set
forth next to such Underwriter's name in the preceding table bears to
3,000,000.
The Company, the Selling Shareholder and the Underwriters have agreed,
subject to certain limitations, to indemnify each other or contribute to
losses arising out of certain liabilities, including liabilities under the
Securities Act.
The Company, its executive officers and directors and the Selling
Shareholder have agreed not to, directly or indirectly, offer, sell, offer to
sell, contract to sell, pledge, grant any option to purchase or otherwise sell
or dispose (or announce any offer, sale, offer of sale, contract of sale,
pledge, grant of any option to purchase or other sale or disposition) of any
shares of Common Stock or other capital stock of the Company or any securities
convertible into, or exercisable or exchangeable for, any shares of Common
Stock or other capital stock of the Company or any right to purchase or
acquire Common Stock or other capital stock of the Company for a period of 120
days after the date of this Prospectus without the prior written consent of
Prudential Securities Incorporated, on behalf of the Underwriters, except for
options granted pursuant to the Company's existing stock option plans.
Prudential Securities Incorporated may, in its sole discretion, at any time
and without prior notice, release all shares or any portion thereof subject to
such agreements.
In connection with the Offering, certain Underwriters and selling group
members (if any) who are qualified registered market makers on the Nasdaq
National Market may engage in passive market making transactions in the Common
Stock on the Nasdaq National Market in accordance with Rule 103 under
Regulation M under the Exchange Act during the business day prior to the
pricing of the Offering before the commencement of offers and sales of Common
Stock. Passive market makers must comply with applicable volume and price
limitations and must be identified as such. In general, a passive market maker
must display its bid at a price in excess of the highest independent bid for
such security; if all independent bids are lowered below the passive market
maker's bid, however, such bid must then be lowered when certain purchase
limits are exceeded.
36
<PAGE>
In connection with the Offering, certain Underwriters and selling group
members (if any) and their respective affiliates may engage in transactions
that stabilize, maintain or otherwise affect the market price of the Common
Stock. Such transactions may include stabilization transactions effected in
accordance with Rule 104 of Regulation M, pursuant to which such persons may
bid for or purchase Common Stock for the purpose of stabilizing its market
price. The Underwriters also may create a short position for the account of
the Underwriters by selling more Common Stock in connection with the Offering
than they are committed to purchase from the Company and the Selling
Shareholder, and in such case may purchase Common Stock in the open market
following completion of the Offering to cover all or a portion of such short
position. The Underwriters may also cover all or a portion of such short
position, up to 450,000 shares of Common Stock, by exercising the
Underwriters' over-allotment option referred to above. In addition, Prudential
Securities Incorporated, on behalf of the Underwriters, may impose "penalty
bids" under contractual arrangements with the Underwriters whereby it may
reclaim from an Underwriter (or any selling group member participating in the
Offering) for the account of the other Underwriters, the selling concession
with respect to Common Stock that is distributed in the Offering but
subsequently purchased for the account of the Underwriters in the open market.
Any of the transactions described in this paragraph may result in the
maintenance of the price of the Common Stock at a level above that which might
otherwise prevail in the open market. None of the transactions described in
this paragraph are required and, if they are undertaken, then they may be
discontinued at any time.
Prudential Securities Incorporated is an affiliate of the Selling
Shareholder and, as a result, may be deemed an affiliate of the Company for
purposes of Rule 2720 of the Rules of Conduct of the National Association of
Securities Dealers, Inc. As a result, the Offering is being conducted in
accordance with the applicable provisions of Rule 2720. The Representatives
have advised the Company and the Selling Shareholder that the Underwriters do
not intend to confirm sales to any accounts over which they exercise
discretionary authority.
LEGAL MATTERS
Certain legal matters with respect to the Common Stock offered hereby will
be passed upon for the Company by Baker & Daniels, Indianapolis, Indiana. The
validity of the shares of Common Stock offered hereby will be passed upon for
the Underwriters by King & Spalding, New York, New York.
EXPERTS
The Consolidated Financial Statements of the Company for each of the three
fiscal years in the period ended February 1, 1997, and as of February 3, 1996
and February 1, 1997 included and incorporated by reference in this Prospectus
have been so included and incorporated in reliance on the report of Price
Waterhouse LLP, independent accountants, given on the authority of said firm
as experts in accounting and auditing.
37
<PAGE>
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Report of Independent Accountants......................................... F-2
Consolidated Balance Sheets as of February 3, 1996 and February 1, 1997... F-3
Consolidated Statements of Income for Fiscal 1994, Fiscal 1995 and Fiscal
1996..................................................................... F-4
Consolidated Statements of Cash Flows for Fiscal 1994, Fiscal 1995 and
Fiscal 1996.............................................................. F-5
Consolidated Statements of Shareholders' Equity for Fiscal 1994, Fiscal
1995 and Fiscal 1996..................................................... F-6
Notes to Consolidated Financial Statements................................ F-7
</TABLE>
F-1
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Shareholders of
Paul Harris Stores, Inc.
In our opinion, the accompanying consolidated balance sheets and the related
consolidated statements of income, of cash flows and of shareholders' equity
present fairly, in all material respects, the financial position of Paul
Harris Stores, Inc. and its subsidiaries at February 1, 1997 and February 3,
1996, and the results of their operations and their cash flows for each of the
three years in the period ended February 1, 1997, in conformity with generally
accepted accounting principles. 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 generally accepted auditing
standards 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.
Price Waterhouse LLP
Indianapolis, Indiana
February 27, 1997, except as to Note 9,
which is as of April 10, 1997
F-2
<PAGE>
PAUL HARRIS STORES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
FEBRUARY 3, FEBRUARY 1,
1996 1997
----------- -----------
(IN THOUSANDS)
<S> <C> <C>
ASSETS
Current assets
Cash and cash equivalents............................ $19,886 $16,001
Merchandise inventories.............................. 17,645 19,759
Other receivables.................................... 539 861
Prepaid expenses..................................... 1,013 836
------- -------
Total current assets............................... 39,083 37,457
------- -------
Property, fixtures and equipment
Land, building and improvements...................... 5,715 5,787
Store fixtures and equipment......................... 11,575 14,067
Leasehold improvements and other..................... 11,389 12,567
------- -------
28,679 32,421
Less accumulated depreciation and amortization....... (10,785) (13,315)
------- -------
Property, fixtures and equipment, net.............. 17,894 19,106
Other assets........................................... 873 756
------- -------
$57,850 $57,319
======= =======
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities
Accounts payable..................................... $ 6,012 $ 8,515
Compensation and related taxes....................... 778 3,774
Income taxes payable................................. 45 37
Other accrued expenses............................... 3,447 3,554
Current maturities of long-term debt................. 4,320 120
------- -------
Total current liabilities.......................... 14,602 16,000
------- -------
Long-term debt......................................... 17,640 1,930
Other non-current liabilities.......................... 2,704 2,478
Commitments and contingent liabilities (see Note 5).... -- --
Shareholders' equity
Preferred stock (no par value)
Authorized 1,000 shares; none issued
Common stock (no par value)
Authorized 20,000 shares; issued and outstanding
10,115 and 10,019, respectively..................... 1,716 1,930
Additional paid-in capital........................... 4,989 9,963
Retained earnings.................................... 16,199 25,018
------- -------
Total shareholders' equity......................... 22,904 36,911
------- -------
$57,850 $57,319
======= =======
</TABLE>
See accompanying "Notes To Consolidated Financial Statements".
F-3
<PAGE>
PAUL HARRIS STORES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
FOR THE FOR THE FOR THE
FIFTY-TWO FIFTY-THREE FIFTY-TWO
WEEKS ENDED WEEKS ENDED WEEKS ENDED
JANUARY 28, FEBRUARY 3, FEBRUARY 1,
1995 1996 1997
----------- ----------- -----------
(IN THOUSANDS, EXCEPT PER SHARE
DATA)
<S> <C> <C> <C>
Net sales.................................. $167,778 $167,523 $190,288
Cost of sales, including occupancy expenses
exclusive of depreciation................. 111,397 112,297 118,066
-------- -------- --------
Gross income............................... 56,381 55,226 72,222
Selling, general and administrative
expenses.................................. 45,539 47,081 53,300
Depreciation and amortization.............. 3,330 3,472 3,270
Interest expense, net...................... 2,539 2,034 1,235
-------- -------- --------
Income before income taxes................. 4,973 2,639 14,417
Provision for income taxes................. 1,895 1,010 5,598
-------- -------- --------
Net income................................. $ 3,078 $ 1,629 $ 8,819
======== ======== ========
Net income per common share................ $ .31 $ .16 $ .83
======== ======== ========
Weighted average number of shares and
share equivalents outstanding............. 9,981 10,067 10,616
======== ======== ========
</TABLE>
See accompanying "Notes To Consolidated Financial Statements".
F-4
<PAGE>
PAUL HARRIS STORES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
FOR THE FOR THE FOR THE
FIFTY-TWO FIFTY-THREE FIFTY-TWO
WEEKS ENDED WEEKS ENDED WEEKS ENDED
JANUARY 28, FEBRUARY 3, FEBRUARY 1,
1995 1996 1997
----------- ----------- -----------
(IN THOUSANDS)
<S> <C> <C> <C>
Cash flow from operating activities:
Net income................................ $ 3,078 $ 1,629 $ 8,819
Adjustments to reconcile earnings to cash
provided:
Depreciation and amortization........... 3,330 3,472 3,270
Net loss on disposal of assets.......... 328 169 560
Utilization of net operating loss
carryforward........................... 1,629 1,353 4,974
(Increase) decrease in current assets:
Merchandise inventories............... (530) 1,922 (2,114)
Other receivables..................... 350 410 (322)
Prepaid expenses...................... (41) 3 177
Increase (decrease) in current
liabilities:
Accounts payable...................... 1,653 (1,595) 2,503
Compensation and related taxes........ (33) (604) 2,996
Income taxes payable.................. 25 (371) (8)
Other accrued expenses................ (800) (1,718) 107
Other................................... (422) 412 79
------- ------- --------
Net cash flow from operating activities... 8,567 5,082 21,041
------- ------- --------
Net cash flow from investing activities:
Additions to fixed assets............... (3,781) (2,247) (5,230)
------- ------- --------
Cash flow from financing activities:
Repayment of long-term debt............. (737) (4,330) (19,910)
Proceeds from sale of common stock...... 87 32 214
------- ------- --------
Net cash flow from financing activities... (650) (4,298) (19,696)
------- ------- --------
$ 4,136 $(1,463) $ (3,885)
======= ======= ========
Cash and cash equivalents
At beginning of period.................. $17,213 $21,349 $ 19,886
At end of period........................ 21,349 19,886 16,001
------- ------- --------
$ 4,136 $(1,463) $ (3,885)
======= ======= ========
Supplemental disclosures of cash flow
information:
Cash paid during the period for
interest............................... $ 3,122 $ 4,321 $ 2,188
======= ======= ========
Cash paid during the period for income
taxes................................... $ 119 $ 11 $ 632
======= ======= ========
</TABLE>
See accompanying "Notes To Consolidated Financial Statements".
F-5
<PAGE>
PAUL HARRIS STORES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
COMMON STOCK ADDITIONAL
------------- PAID-IN RETAINED
SHARES AMOUNT CAPITAL EARNINGS
------ ------ ---------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Balance as of January 29,
1994..................... 9,662 $1,597 $2,007 $11,492
Issuance of stock
grants................. 301 -- -- --
Exercise of stock
options................ 35 87 -- --
Benefit of net operating
loss carryforward...... -- -- 1,629 --
Net income for fiscal
year 1994.............. -- -- -- 3,078
------ ------ ------ -------
Balance as of January 28,
1995..................... 9,998 1,684 3,636 14,570
Exercise of stock
options................ 21 32 -- --
Benefit of net operating
loss carryforward...... -- -- 1,353 --
Net income for fiscal
year 1995.............. -- -- -- 1,629
------ ------ ------ -------
Balance as of February 3,
1996..................... 10,019 1,716 4,989 16,199
Exercise of stock
options................ 96 214 -- --
Benefit of net operating
loss carryforward...... -- -- 4,974 --
Net income for fiscal
year 1996.............. -- -- -- 8,819
------ ------ ------ -------
Balance as of February 1,
1997..................... 10,115 $1,930 $9,963 $25,018
====== ====== ====== =======
</TABLE>
See accompanying "Notes To Consolidated Financial Statements".
F-6
<PAGE>
PAUL HARRIS STORES, INC., AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Nature of Business
Paul Harris Stores, Inc. (the "Company") is a specialty retailer of
moderately-priced sportswear and accessories sold under the Paul Harris
Design, Paul Harris Denim and PHD brand names. Stores are located primarily in
regional enclosed shopping malls and, to a lesser extent, strip shopping
centers, with the greatest concentration of stores in the Midwest.
Definition of Fiscal Year
The Company's fiscal year ends on the Saturday closest to the last day of
January. Fiscal 1995 included 53 weeks. Fiscal 1996 and 1994 were 52 weeks
each.
Principles of Consolidation
The consolidated financial statements include the accounts of Paul Harris
Stores, Inc. and its wholly-owned subsidiaries. All significant intercompany
balances and transactions are eliminated in consolidation. Certain amounts in
the prior year 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 results could differ from those estimates.
Fair Value of Financial Instruments
Management has estimated that the carrying value of cash and cash
equivalents, receivables, prepaid expenses and trade accounts payable
approximates their fair value due to the relatively short period of time until
expected realization. Management has estimated the fair value of long-term
debt using discounted cash flow analyses, based on the Company's current
expected borrowing rates for similar types of borrowing arrangements.
Property, Fixtures and Equipment
Property, fixtures and equipment are recorded 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 improvements 15-40 years; Store fixtures and
equipment 3-10 years; Leasehold improvements 1-15 years.
Cash and Cash Equivalents
Cash equivalents are highly liquid investments with a maturity of less than
three months (primarily money market funds). Investment income is recognized
when earned.
Merchandise Inventories
Inventories of merchandise on hand are valued at the lower of cost or market
as determined by the first-in, first-out ("FIFO") retail inventory method,
which approximates FIFO cost.
F-7
<PAGE>
PAUL HARRIS STORES, INC., AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Net Income Per Share
Net income per share of common stock is based on the weighted average number
of common and dilutive common equivalent shares outstanding.
Income Taxes
Income taxes have been provided in accordance with Statement of Financial
Accounting Standards No. 109 (SFAS 109), "Accounting for Income Taxes". SFAS
109 is an asset and liability approach which requires the recognition of
deferred tax liabilities and assets for the expected future tax consequences
of temporary differences, based on current tax rates, between the financial
reporting bases and tax bases of assets and liabilities.
Stock Based Compensation
The Company has elected to continue following the existing accounting rules
for stock options as contained in the Accounting Principles Board Opinion No.
25, "Accounting for Stock Issued to Employees" (APB Opinion No. 25).
NOTE 2. LONG-TERM DEBT AND CREDIT ARRANGEMENTS
The Company has entered into an agreement with a financial institution for a
revolving credit facility. This agreement was modified as of May 8, 1996 to
increase the line of credit facility from $13.5 million to $20 million and
extend the term to June 30, 1997. The financial institution has agreed to make
revolving loans and to issue letters of credit in amounts not to exceed $20
million, with the direct borrowings limited to $10 million. The Company made
no direct borrowings during fiscal 1996. Letters of credit outstanding as of
February 1, 1997 were $9.6 million. The annual interest rate on the direct
borrowings is a variable rate equal to the prime rate of the bank plus 1
percent. The letters of credit carry an initial issuance fee plus negotiation
fees of three eighths of a percent (0.375%) of the face amount of each letter
of credit. Also, during January 1994, the Company entered into a term loan
(mortgage) with the same financial institution for $2.4 million with monthly
principal payments of $10,000 plus interest at 7.84% per annum. The balance of
this term loan (mortgage) is due in full February 1999 and is secured by the
land and buildings of the Company. The revolving credit facility contains
several covenants which set limits on indebtedness, tangible net worth, cash
balances, cash flow from operations, capital expenditures, liquid assets and
also restrict dividends. The Company is also required to maintain all of its
primary operating accounts with this institution. The revolving credit
facility is secured by the Company's inventory, equipment, fixtures, cash and
assignment of leases.
On September 15, 1992 the Company issued notes in an aggregate principal
amount of $24 million bearing interest of 11.375% per annum, payable semi-
annually (the "11.375% Notes"). The principal amount of the 11.375% Notes were
required to be redeemed pro rata in eight equal installments of $2.1 million
payable on each January 31 and July 31 commencing with July 31, 1995 and
ending with January 31, 1999 and the final two installments of $3.6 million on
July 31, 1999 and January 31, 2000. The Indenture relating to the 11.375%
Notes also contained several covenants relating to certain operational and
financial requirements. The Company repaid the $19,800,000 balance outstanding
on these 11.375% Notes at February 3, 1996 (current and long-term portion) in
fiscal 1996.
F-8
<PAGE>
PAUL HARRIS STORES, INC., AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Long-term debt, exclusive of amounts maturing in one year, is summarized
below:
<TABLE>
<CAPTION>
FEBRUARY 3, FEBRUARY
1996 1, 1997
----------- ----------
<S> <C> <C>
Notes payable in semi-annual payments from July
31, 1995 through January 31, 2000 plus interest
payable at the rate of 11.375% per annum....... $15,600,000 --
Term loan (mortgage) on land and buildings
payable in monthly payments through February
1999 including interest at the fixed rate of
7.84% per year................................. 2,040,000 $1,930,000
----------- ----------
Total long-term debt.......................... $17,640,000 $1,930,000
=========== ==========
</TABLE>
The term loan (mortgage) has covenants restricting indebtedness, tangible
net worth, cash balances, cash flow from operations, capital expenditures,
liquid assets and also restricts dividends. The book value of assets subject
to this lien as of February 1, 1997 was $4,486,000.
Scheduled maturities of long-term debt over the next three fiscal years are:
$120,000 in each of fiscal 1997 and 1998 and $1,810,000 in fiscal 1999.
The estimated fair market value of the term loan (mortgage) was $2,012,000
and $1,915,000 as of February 3, 1996 and February 1, 1997, respectively. The
estimated fair market value of the 11.375% Notes was $15,897,000 as of
February 3, 1996.
NOTE 3. SHAREHOLDERS' EQUITY
All outstanding shares are shares of voting common stock with the exception
of 3,013,039 shares of non-voting common stock held by a single institutional
holder. This holder may request to convert the non-voting common stock to
voting common stock on a share for share basis upon the occurrence of certain
events specified in the Company's Amended and Restated Articles of
Incorporation, including the sale of shares of common stock by the Company in
an underwritten public offering.
Pursuant to the Company's confirmed Plan of Reorganization (the "Plan"),
certain of the shares of Common Stock and the 11.375% Notes to be distributed
under the Plan were to be distributed upon final resolution of all claims to
the holders of allowed claims on a pro rata basis. On May 10, 1996 the Company
completed the distribution. Of the 305,723 shares of Common Stock required to
be distributed, 162,127 shares were issued as Non-voting Common Stock. All of
these shares of Common Stock to be distributed under the Plan have been
reflected in the Company's financial statements as issued and outstanding
since the confirmation of the Plan in 1992.
The Company and a major shareholder are parties to a stock transfer
agreement whereby under specific guidelines, at the option of the
shareholder's estate, the Company must repurchase shares of the Company's
stock from the immediate family of the shareholder upon his death, to the
extent that the Company receives net proceeds from life insurance policies
held by the Company on the life of that shareholder. As of February 1, 1997,
the Company owns and is the beneficiary of approximately $225,000 in face
amount of life insurance on the life of the shareholder.
F-9
<PAGE>
PAUL HARRIS STORES, INC., AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE 4. INCOME TAXES
The provision for income taxes was as follows:
<TABLE>
<CAPTION>
FISCAL FISCAL FISCAL
1994 1995 1996
---------- ---------- ----------
<S> <C> <C> <C>
Current tax expense:
Federal................................ $ 80,000 $ 72,000 $ 293,000
State.................................. 67,000 25,000 325,000
Deferred tax expense:
Federal................................ 1,519,000 780,000 4,431,000
State.................................. 229,000 133,000 549,000
---------- ---------- ----------
Income tax provision..................... $1,895,000 $1,010,000 $5,598,000
========== ========== ==========
</TABLE>
The provision for income taxes differs from the amount of income tax
determined by applying the U.S. statutory Federal income tax rate to pretax
income from continuing operations as a result of the following differences:
<TABLE>
<CAPTION>
FISCAL FISCAL FISCAL
1994 1995 1996
---------- ---------- ----------
<S> <C> <C> <C>
Statutory U.S. taxes................... $1,703,000 $ 897,000 $4,945,000
State and local taxes, net
of federal benefit.................... 196,000 104,000 574,000
Other.................................. (4,000) 9,000 79,000
---------- ---------- ----------
$1,895,000 $1,010,000 $5,598,000
========== ========== ==========
</TABLE>
Deferred tax assets (liabilities) are comprised of the following:
<TABLE>
<CAPTION>
FEBRUARY 3, FEBRUARY 1,
1996 1997
----------- -----------
<S> <C> <C>
Deferred rent................................... $ 991,000 $ 943,000
Depreciation.................................... 10,000 465,000
Minimum tax credit.............................. 671,000 958,000
Loss carryforwards.............................. 6,925,000 1,292,000
Other........................................... 181,000 162,000
----------- -----------
Gross deferred tax assets..................... 8,778,000 3,820,000
----------- -----------
Pre-paid pension................................ (162,000) (162,000)
Other........................................... (193,000) (209,000)
----------- -----------
Gross deferred tax liabilities................ (355,000) (371,000)
----------- -----------
Valuation allowance............................. (8,423,000) (3,449,000)
----------- -----------
Net deferred taxes.............................. $ -- $ --
=========== ===========
</TABLE>
In accordance with SFAS 109, deferred tax assets are established to give
recognition to prior loss carryforwards. Additionally, deferred assets and
liabilities are established related to normal temporary differences. Due to
the seasonal nature of the Company's business (and its historical reliance on
fourth quarter results), the volatility of trends in women's apparel, and the
relatively short amount of time that has passed since the Company's emergence
from Chapter 11, the net deferred tax assets have been reduced by a valuation
allowance until realization of those assets is reasonably assured. As required
by SOP 90-7, any utilization of net operating loss carryforwards results in an
increase in additional paid-in capital. Approximately $3,404,000 of the
Company's loss carryforwards remain at February 1, 1997 which, if unused, will
expire in fiscal 2006 and 2007.
F-10
<PAGE>
PAUL HARRIS STORES, INC., AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE 5. COMMITMENTS AND CONTINGENT LIABILITIES
All stores are leased under operating leases which expire on various dates
through fiscal 2007. Approximately 73% of the store leases contain rent
escalation clauses. Expense related to these leases is recorded on a straight-
line basis. The Company also leases automobiles under operating leases with
terms of 24 to 36 months. Following is a summary of future minimum rental
payments required by operating leases at February 1, 1997:
<TABLE>
<CAPTION>
PAYABLE
IN MINIMUM RENTAL
FISCAL PAYMENTS
YEAR STORES AND OTHER
------- ----------------
<S> <C>
1997............................. $11,728,000
1998............................. 10,200,000
1999............................. 8,273,000
2000............................. 7,495,000
2001............................. 6,814,000
Later Years...................... 19,230,000
-----------
Total.......................... $63,740,000
===========
</TABLE>
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 2% of
rental expense for fiscal 1996, 1% for fiscal 1995, and 1% for fiscal 1994;
(2) the Company has a number of leases which are paid based on a percentage of
monthly sales dollars. Such leases accounted for 13% of rental expense in
fiscal 1996, 10% for fiscal 1995 and 6% for fiscal 1994; (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 $15,089,000 for fiscal 1996, $14,904,000 for fiscal
1995 and $13,026,000 for fiscal 1994.
In January 1997 the Company entered into various agreements for the purchase
of new "point of sale" hardware and related software in an aggregate amount of
approximately $4,900,000.
In December 1993 the Company contracted with a local printing company to
provide the Company with printing services and has agreed to purchase annual
print volume of $500,000 per year for a period of five (5) years.
NOTE 6. RETIREMENT PLAN
The Company has a non-contributory defined benefit pension plan covering
substantially all full-time employees. 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. No new employees will be able to enter into the plan.
Participants will maintain benefits accrued through December 31, 1994, but
will not accrue any benefit for service or compensation in future years. As a
result of freezing the accrued benefits, a curtailment as described under
Statement of Accounting Financial Standards No. 88 (SFAS 88) "Employers'
Accounting for Settlements and Curtailments of Defined Benefit Pension Plans
and for Termination Benefits" occurred in fiscal 1994. The curtailment gain of
$572,000 is included in the Company's results of operations for fiscal 1994,
net of fiscal 1994 pension expense of $144,000.
F-11
<PAGE>
PAUL HARRIS STORES, INC., AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Net pension expense (income) for fiscal 1994, 1995 and 1996 includes the
following components:
<TABLE>
<CAPTION>
FISCAL FISCAL FISCAL
1994 1995 1996
--------- --------- ---------
<S> <C> <C> <C>
Service expense--benefits earned
during the year...................... $ 211,000 $ -- $ --
Interest expense on projected benefit
obligation........................... 156,000 106,000 91,000
Actual loss (gain) on plan assets..... 266,000 (332,000) (278,000)
Net amortization and deferral......... (489,000) 210,000 133,000
--------- --------- ---------
Net pension expense (income).......... $ 144,000 $ (16,000) $(54,000)
========= ========= =========
</TABLE>
The funded status of the plan is as follows:
<TABLE>
<CAPTION>
FEBRUARY 3, FEBRUARY 1,
1996 1997
----------- -----------
<S> <C> <C>
Vested........................................... $1,201,000 $1,173,000
Nonvested........................................ 63,000 32,000
---------- ----------
Accumulated benefit obligation................... 1,264,000 1,205,000
Projected impact of future salary increases...... -- --
---------- ----------
Projected benefit obligation..................... 1,264,000 1,205,000
Market value of plan assets available for
benefits........................................ 1,825,000 1,869,000
---------- ----------
Funded position.................................. $ 561,000 $ 664,000
========== ==========
Consisting of:
Unrecognized loss (gain) on assets............. $ 107,000 $ 131,000
Prepaid asset.................................. 454,000 533,000
---------- ----------
Funded position.................................. $ 561,000 $ 664,000
========== ==========
</TABLE>
The assets of the plan, comprised almost entirely of U.S. Government
obligations and high grade stocks and bonds, included 6,363 shares of the
Company's common stock as of January 28, 1995, February 3, 1996, and February
1, 1997.
The weighted-average discount rates utilized in determining the actuarial
present value of the projected benefit obligations were 7% and 7.25% for
fiscal 1995 and 1996, respectively. The expected long-term rate of return on
assets was 8% in fiscal 1995 and 1996.
NOTE 7. EMPLOYEE BENEFIT PLANS
Stock Option Plans
The Company has options outstanding under its 1992 Non-Qualified Stock
Option Plan (the "1992 Plan") and pursuant to an agreement with its Chief
Executive Officer. In addition, the Board of Directors has approved two other
stock based compensation plans--the 1996 Stock Option and Incentive Plan (the
"1996 Plan") and the Outside Directors Stock Option Plan (the "Directors
Plan"). Both the adoption of the 1996 Plan and the Directors Plan and the
options granted under such plans are subject to shareholders approval at the
1997 annual meeting of shareholders.
The Company has elected to continue following the existing accounting rules
for stock options as contained in APB Opinion No. 25 as they relate to the
recognition of compensation expense in the Statement of Operations.
Accordingly, no compensation expense has been recognized in the results of
operations of the Company.
F-12
<PAGE>
PAUL HARRIS STORES, INC., AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The 1992 Plan provides additional incentive to key employees and persons who
are not employees of the Company but whose efforts are expected to be of
substantial benefit to the Company. The 1992 Plan provides that a Committee,
appointed by the Board of Directors, may from time to time grant to employees
of the Company and to persons who are not employees of the Company, stock
options to purchase shares of common stock of the Company. The Committee is
authorized to issue options to purchase up to 900,000 shares of common stock
of the Company under the 1992 Plan. In addition, grants of options were made
to non-employee directors in 1992, 1993 and 1994. As of February 1, 1997
virtually all options under the 1992 Plan have been granted at an exercise
price ranging from $1.31 to $17.50 per share.
The 1996 Plan provides a means for attracting and retaining officers and key
employees of the Company. The 1996 Plan is to be administered by a Committee
appointed by the Board of Directors. The maximum number of shares of common
stock of the Company that may be granted under the 1996 Plan is 1,000,000
shares. Grants may be in the form of stock options, restricted stock, or stock
appreciation rights. Stock options granted under the 1996 Plan may be in the
form of non-qualified stock options or incentive stock options. As of February
1, 1997 options to purchase 76,100 shares of common stock of the Company have
been granted at an exercise price of $17.00 per share.
Generally, options may be granted under the above plans at any time prior to
the tenth anniversary of their respective effective dates. Options awarded to
date generally vest in equal amounts from one to three years and expire ten
years from grant date under these plans. Generally the price of the options
may be tendered in cash or in shares of common stock valued at fair market
value on the date of exercise for each plan.
The Directors Plan encourages increased common stock ownership of the
Company by members of the Board of Directors who are not employees of the
Company. The Directors Plan reserves for the issuance of 100,000 shares of
common stock of the Company. Each eligible director is automatically granted
an option to purchase 3,000 shares of stock in the month following each annual
meeting of shareholders held after June 19, 1996. In addition, an eligible
director who did not receive options under the Company's 1992 Plan is entitled
to receive options to purchase 5,000 shares of common stock in the month
following the month in which he or she is first elected as a director. As of
February 1, 1997, options to purchase 15,000 shares of common stock of the
Company have been granted under this plan.
Pursuant to an employment agreement by and between the Company and Ms.
Fischer the compensation committee granted a non-transferable option to
purchase 350,000 shares of the common stock of the Company at an exercise
price of $5.68 per share.
F-13
<PAGE>
PAUL HARRIS STORES, INC., AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The following table summarizes options outstanding and available for
issuance under these plans and arrangements:
<TABLE>
<CAPTION>
FISCAL FISCAL FISCAL
1994 1995 1996
--------- --------- ----------
<S> <C> <C> <C>
Options outstanding at beginning of
year................................. 553,000 883,000 904,000
Options granted..................... 572,000 385,000 444,000
Options exercised................... (35,000) (21,000) (96,000)
Options expired..................... (207,000) (343,000) (82,000)
--------- --------- ----------
Options outstanding at year-end....... 883,000 904,000 1,170,000
========= ========= ==========
Options exercisable at year-end....... 429,000 684,000 657,000
========= ========= ==========
Options available for grant at year-
end.................................. 324,000 282,000 1,020,000
========= ========= ==========
Weighted average option prices per
share:
At beginning of year................ $ 3.62 $ 4.68 $ 3.47
Granted............................. 5.32 1.50 10.39
Exercised........................... 2.52 1.50 2.23
Expired............................. 3.60 4.32 2.66
Outstanding at year-end............. 4.68 3.47 6.30
Exercisable at year-end............. $ 3.41 $ 3.83 $ 5.75
</TABLE>
For the weighted average fair value of options granted during the 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 1995 and 1996, respectively: dividend yield of
0.0 and 0.0 percent; expected volatility of 37.8 and 41.4 percent; risk free
interest rates of 6.1 and 6.3 percent; and expected lives of 4.4 and 7.3
years.
<TABLE>
<CAPTION>
FISCAL FISCAL
1995 1996
------ ------
<S> <C> <C>
Weighted-average fair value per option of options granted
during the year.......................................... $0.54 $5.17
</TABLE>
Had compensation expense for the Company's stock options been determined
based on the fair value at the grant dates for the awards under those plans
consistent with the method of Statement of Financial Accounting Standards No.
123, "Accounting for Stock-Based Compensation," the Company's net income and
earnings per share would have been reduced to the pro forma amounts indicated
below:
<TABLE>
<CAPTION>
FISCAL FISCAL
1995 1996
------ ------
<S> <C> <C>
Net income (in thousands)
As reported.............................................. $1,629 $8,819
Pro forma................................................ $1,596 $7,863
Net income per common share
As reported.............................................. $ .16 $ .83
Pro forma................................................ $ .16 $ .74
</TABLE>
Compensation expense based on the fair value of options granted prior to
January 29, 1995 were not included in the preceding pro forma calculations.
Therefore, the resulting pro forma compensation expense may not be
representative of that to be expected in future years.
F-14
<PAGE>
PAUL HARRIS STORES, INC., AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The following table summarizes information about stock options outstanding
and options exercisable at February 1, 1997.
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
--------------------------------- ---------------------
NUMBER WEIGHTED- WEIGHTED- NUMBER WEIGHTED-
RANGE OF OUTSTANDING AVERAGE AVERAGE EXERCISABLE AVERAGE
EXERCISE AT FEB. 1, CONTRACTUAL EXERCISE AT FEB. 1, EXERCISE
PRICES 1997 LIFE PRICE 1997 PRICE
-------- ----------- ----------- --------- ----------- ---------
<S> <C> <C> <C> <C> <C>
$ 1.31 221,500 8.70 $ 1.31 117,900 $ 1.31
$ 1.32-$ 3.99 243,500 8.36 1.96 157,900 2.02
$ 4.00-$ 5.99 429,500 7.26 5.57 281,200 5.54
$ 6.00-$12.99 61,500 9.59 9.37 0 0.00
$13.00-$17.50 214,000 9.80 $17.24 100,000 $17.50
</TABLE>
Thrift/Profit-Sharing Plan
The Company has established a thrift/profit-sharing plan for substantially
all employees which allows participating employees to authorize payroll
deductions from their earnings for contribution to the plan. The Company
contributes amounts as a set percentage of employees 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.
NOTE 8. QUARTERLY INFORMATION (UNAUDITED)
<TABLE>
<CAPTION>
FISCAL 1995 QUARTERS
----------------------------------
1ST 2ND 3RD 4TH
------- ------- ------- -------
(IN THOUSANDS, EXCEPT PER SHARE
DATA)
<S> <C> <C> <C> <C>
Net sales................................... $34,801 $36,509 $36,880 $59,333
Gross income................................ 10,184 11,717 11,634 21,691
Income (loss) before income taxes........... (1,982) (1,283) (996) 6,900
Net income (loss)........................... $(1,215) $ (780) $ (612) $ 4,236
======= ======= ======= =======
Net income (loss) per share................. $ (.12) $ (.08) $ (.06) $ .42
======= ======= ======= =======
<CAPTION>
FISCAL 1996 QUARTERS
----------------------------------
1ST 2ND 3RD 4TH
------- ------- ------- -------
(IN THOUSANDS, EXCEPT PER SHARE
DATA)
<S> <C> <C> <C> <C>
Net sales................................... $39,639 $36,721 $45,413 $68,515
Gross income................................ 12,827 12,560 18,074 28,761
Income before income taxes.................. 232 107 3,058 11,020
Net income.................................. $ 138 $ 64 $ 1,821 $ 6,796
======= ======= ======= =======
Net income per share........................ $ .01 $ .01 $ .17 $ .62
======= ======= ======= =======
</TABLE>
NOTE 9. SUBSEQUENT EVENTS
Bank Revolving Credit Facility
On April 9, 1997, the Company and its lender agreed to modify the secured
revolving credit facility described in "Note 2. Long-Term Debt and Credit
Arrangements." The revised agreement increases the credit facility from
$20,000,000 to $30,000,000. The Company may use the entire amount of the
credit facility for letters of credit or direct borrowings.
F-15
<PAGE>
PAUL HARRIS STORES, INC., AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONCLUDED)
The term of the credit facility has been extended to June 30, 1999. The annual
interest rate on the direct borrowings was decreased from a variable rate
equal to the prime rate of the lender plus one percent to the prime rate plus
one quarter of one percent (.250%). Issuance fees for letters of credit were
reduced to one quarter of one percent (.250%) from three eighths of one
percent (0.375%) of the face amount of each letter of credit. The advance rate
on inventory for the period of August 1 to November 30 was increased from 60%
to 70%. The previous agreement contained several covenants such as those items
relating to indebtedness, capital expenditures, dividends and cash balances.
The new agreement has eliminated many of these covenants for the credit
facility and term loan (mortgage) and modified the remaining covenants related
to tangible net worth and operating cash flow requirements.
SHAREHOLDER RIGHTS PLAN
On April 10, 1997 the Company adopted a shareholder rights plan. The plan is
designed to ensure that the Company's shareholders receive fair treatment in
the event of an unsolicited attempt to acquire control of the Company. Under
the plan, holders of the Company's outstanding common stock on April 25, 1997
will receive one Right for each share they hold. Initially each Right will
represent the right to purchase one one-hundredth (1/100th) of a share of the
Company's Series A Participating Cumulative Preferred Stock at an exercise
price of $90. The Company may redeem the Rights for $.01 in cash or securities
at any time prior to the acquisition by a person or group of beneficial
ownership of 15% or more of the Company's common stock or the expiration of
the Rights on April 10, 2007. The Rights are not exercisable or transferable
apart from the Company's common stock unless a person or group discloses an
intent or becomes a beneficial owner of 15% or more of the Company's
outstanding common stock. When the Rights become exercisable and transferable,
each holder of a Right (other than the person or group acquiring or attempting
to acquire 15% or more of the Company's common stock) will be entitled to
purchase at the Right's then-current exercise price, shares of the Preferred
Stock having a value of twice the Rights exercise price.
F-16
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
NO DEALER, SALESPERSON OR ANY OTHER PERSON HAS BEEN AUTHORIZED TO GIVE INFORMA-
TION OR TO MAKE ANY REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS PROSPEC-
TUS IN CONNECTION WITH THE OFFER MADE BY THIS PROSPECTUS AND, IF GIVEN OR MADE,
SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN AU-
THORIZED BY THE COMPANY, THE SELLING SHAREHOLDER OR ANY OF THE UNDERWRITERS.
THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR THE SOLICITATION OF ANY
OFFER TO BUY ANY SECURITY OTHER THAN THE SHARES OF COMMON STOCK OFFERED BY THIS
PROSPECTUS, NOR DOES IT CONSTITUTE AN OFFER TO SELL OR THE SOLICITATION OF ANY
OFFER TO BUY THE SHARES OF COMMON STOCK BY ANYONE IN ANY JURISDICTION IN WHICH
SUCH AN OFFER OR SOLICITATION IS NOT AUTHORIZED, OR IN WHICH THE PERSON MAKING
SUCH OFFER OR SOLICITATION IS NOT QUALIFIED TO DO SO, OR TO ANY PERSON TO WHOM
IT IS UNLAWFUL TO MAKE SUCH OFFER OR SOLICITATION. NEITHER THE DELIVERY OF THIS
PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE
ANY IMPLICATION THAT THE INFORMATION CONTAINED HEREIN IS CORRECT AS OF ANY TIME
SUBSEQUENT TO THE DATE HEREOF.
---------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Documents Incorporated by Reference....................................... 3
Available Information..................................................... 3
Prospectus Summary........................................................ 5
Risk Factors.............................................................. 7
Use of Proceeds........................................................... 10
Price Range of Common Stock............................................... 10
Dividend Policy........................................................... 10
Capitalization............................................................ 11
Selected Consolidated Financial and Operating Data........................ 12
Management's Discussion and Analysis of Financial Condition and Results of
Operations............................................................... 14
Business.................................................................. 19
Management................................................................ 27
Principal and Selling Shareholders........................................ 29
Description of Capital Stock.............................................. 30
Shares Eligible for Future Sale........................................... 35
Underwriting.............................................................. 36
Legal Matters............................................................. 37
Experts................................................................... 37
Index to Consolidated Financial Statements................................ F-1
</TABLE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
3,000,000 Shares
LOGO
Common Stock
-------------
PROSPECTUS
-------------
PRUDENTIAL SECURITIES INCORPORATED
ROBERTSON, STEPHENS & COMPANY
RODMAN & RENSHAW, INC.
May , 1997
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
PART II
INFORMATION NOT REQUIRED IN THE PROSPECTUS
ITEM 14. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The expenses, other than Underwriter's compensation, in connection with the
issuance and distribution of the securities being registered hereunder are:
<TABLE>
<CAPTION>
TO BE TO BE
BORNE BY BORNE BY
THE THE SELLING
REGISTRANT SHAREHOLDER
---------- -----------
<S> <C> <C>
Securities and Exchange Commission registration
fee.............................................. $2,363 $11,816
NASD filing fee................................... 863 4,316
Nasdaq listing fee................................ 1,667 8,333
Blue Sky fees and expenses........................ 2,500 12,500
Transfer agent's fees and expenses................ 500 2,500
Printing costs.................................... 18,333 91,667
Accounting fees and expenses...................... 11,000 55,000
Legal fees and expenses (other than Blue Sky fees
and expenses).................................... 20,833 104,167
Miscellaneous..................................... 8,608 43,034
------- --------
Total......................................... $66,667 $333,333
======= ========
</TABLE>
- --------
All amounts except the registration fees and NASD fees are estimated. Items
which are not included will be supplied by amendment. Expenses will be borne
pro rata by the Registrant and the Selling Shareholder, based upon the number
of shares offered by each. Amounts shown assume that the Underwriters' over-
allotment option will not be exercised.
ITEM 15. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
Article IX of the Company's Restated Articles requires the Company to
indemnify every person (and the estate, heirs and personal representatives of
such person) against all liabilities and expenses, including, without
limitation, fees and disbursements of counsel and judgments, fines or
penalties incurred by or awarded against, and amounts paid in settlement by or
on behalf of such persons, in connection with or resulting from any pending,
threatened or completed claim, action, suit or proceeding, and all appeals
thereof (each, a "Claim"), in which such person may become involved by reason
of the fact that he or she is or was a director, officer, employee or agent of
the Company, or is or was serving at the request of the Company as a director,
officer, employee, agent or fiduciary of another corporation, partnership,
joint venture, trust, employee benefit plan or other entity; provided,
however, that if any such person is not wholly successful in defending any
such claim, he or she shall be indemnified only if it is determined by a court
of competent jurisdiction or by the Board of Directors, upon advice of legal
counsel, that such person acted in good faith in what he or she reasonably
believed to be in the best interests of the Company, or at least not opposed
to the Company's interests, and, in addition, with respect to any criminal
claim, that such person had no reasonable cause to believe that his or her
conduct was unlawful. Such indemnification is in addition to any rights to
which any subject person may otherwise be entitled.
Reference is also made to the Form of Underwriting Agreement filed as
Exhibit 1 hereto which provides for indemnification of the directors and
officers signing the Registration Statement and certain controlling persons of
the Registrant against certain liabilities including certain liabilities under
the Securities Act of 1933, as amended (the "Securities Act"), in certain
instances by the Underwriters and the Selling Shareholder.
In addition, the Company has a directors' and officers' liability and
company reimbursement policy that insures against certain liabilities,
including liabilities under the Securities Act, subject to applicable
retentions.
S-1
<PAGE>
ITEM 16. EXHIBITS.
The list of exhibits is incorporated by reference to the Index to Exhibits
beginning on page E-1.
ITEM 17. UNDERTAKINGS
(a) The undersigned Registrant hereby undertakes that, for purposes of
determining any liability under the Securities Act of 1933, each filing of the
Registrant's annual report pursuant to Section 13(a) or Section 15(d) of the
Securities Exchange Act of 1934 (and, where applicable, each filing of an
employee benefit plan's annual report pursuant to Section 15(d) of the
Securities Exchange Act of 1934) that is incorporated by reference in the
registration statement shall be deemed to be a new registration statement
relating to the securities offered therein, and the offering of such
securities at that time shall be deemed to be the initial bona fide offering
thereof.
(b) The undersigned Registrant hereby undertakes that:
(1) For purposes of determining any liability under the Securities Act of
1933, the information omitted from the form of Prospectus filed as part of
this Registration Statement in reliance upon Rule 430A and contained in a
form of Prospectus filed by the Registrant pursuant to Rule 424(b)(1) or
(4) or 497(h) under the Securities Act shall be deemed to be part of this
Registration Statement as of the time it was declared effective.
(2) For the purpose of determining any liability under the Securities Act
of 1933, each post-effective amendment that contains a form of Prospectus
shall be deemed to be a new registration statement relating to the
securities offered therein, and the offering of such securities at that
time shall be deemed to be the initial bona fide offering thereof.
(c) Insofar as indemnification for liabilities arising under the Securities
Act of 1933 may be permitted to directors, officers and controlling persons of
the Registrant pursuant to the foregoing provisions, or otherwise, the
Registrant has been advised that in the opinion of the Securities and Exchange
Commission such indemnification is against public policy as expressed in the
Securities Act and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the
Registrant of expenses incurred or paid by a director, officer or controlling
person of the Registrant in the successful defense of any action, suit or
proceeding) is asserted by such director, officer or controlling person in
connection with the securities being registered, the Registrant will, unless
in the opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question whether
such indemnification by it is against public policy as expressed in the Act
and will be governed by the final adjudication of such issue.
S-2
<PAGE>
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THE REGISTRANT
CERTIFIES THAT IT HAS REASONABLE GROUNDS TO BELIEVE THAT IT MEETS ALL OF THE
REQUIREMENTS FOR FILING ON FORM S-3 AND HAS DULY CAUSED THIS AMENDMENT TO
REGISTRATION STATEMENT TO BE SIGNED ON ITS BEHALF BY THE UNDERSIGNED,
THEREUNTO DULY AUTHORIZED, IN THE CITY OF INDIANAPOLIS, STATE OF INDIANA, ON
THE 9TH DAY OF MAY, 1997.
Paul Harris Stores, Inc.
/s/ Charlotte G. Fischer
By: _________________________________
Charlotte G. Fischer
Chairman of the Board, President
and
Chief Executive Officer
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THIS AMENDMENT
TO REGISTRATION STATEMENT HAS BEEN SIGNED BY THE FOLLOWING PERSONS IN THEIR
RESPECTIVE CAPACITIES AND ON THE RESPECTIVE DATES SET FORTH OPPOSITE THEIR
NAMES.
<TABLE>
<CAPTION>
SIGNATURE CAPACITY DATE
--------- -------- ----
<S> <C> <C>
/s/ Charlotte G. Fischer Chairman of the Board, May 9, 1997
____________________________________ President and Chief
Charlotte G. Fischer Executive Officer
/s/ John H. Boyers Senior Vice President-- May 9, 1997
____________________________________ Finance and Treasurer
John H. Boyers (Principal Financial
Officer)
/s/ Keith L. Himmel, Jr. Vice President--Finance, May 9, 1997
____________________________________ Controller and Corporate
Keith L. Himmel, Jr. Secretary (Principal
Accounting Officer)
*/s/ Richard A. Feinberg, Ph.D. Director May 9, 1997
____________________________________
Richard A. Feinberg, Ph.D.
Director May , 1997
____________________________________
Rudy Greer
*/s/ Robert I. Logan Director May 9, 1997
____________________________________
Robert I. Logan
Director May , 1997
____________________________________
James T. Morris
*/s/ Gerald Paul Director May 9, 1997
____________________________________
Gerald Paul
*/s/ John E. Rau Director May 9, 1997
____________________________________
John E. Rau
*/s/ Sally M. Tassani Director May 9, 1997
____________________________________
Sally M. Tassani
</TABLE>
/s/ John H. Boyers
*By: __________________________
John H. Boyers
Attorney-in-fact
S-3
<PAGE>
INDEX TO EXHIBITS
<TABLE>
<C> <S>
1* Form of Underwriting Agreement among the Registrant, the Selling
Shareholder, and Prudential Securities Incorporated, Robertson,
Stephens & Company LLC, and Rodman & Renshaw, Inc., as
Representatives of the Underwriters.
4-A Amended and Restated Articles of Incorporation of the Registrant
dated September 8, 1992 (incorporated herein by reference to the
Registrant's Form 8-K dated April 11, 1997).
4-B Amendment to the Amended and Restated Articles of Incorporation of
the Registrant dated July 6, 1993 (incorporated herein by reference
to the Registrant's Form 8-K dated April 11, 1997).
4-C Amendment to Amended and Restated Articles of Incorporation dated
April 10, 1997 (incorporated herein by reference to the Registrant's
Form 8-K dated April 11, 1997).
4-D Restated By-Laws of the Registrant (incorporated herein by reference
to the Registrant's Form 10-K for the fiscal year ended February 1,
1997).
4-E Secured Credit Agreement dated as of October 28, 1993, by and
between the Registrant and LaSalle National Bank (incorporated
herein by reference from the Registrant's Form 10-Q for the fiscal
quarter ended October 30, 1993).
4-F 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 from the Registrant's Form 10-Q
for the fiscal quarter ended April 30, 1994).
4-G 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 from the Registrant's Form 10-K for the fiscal year ended
January 28, 1995).
4-H 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 from the Registrant's Form 10-K for the fiscal year ended
January 28, 1995).
4-I 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 from the Registrant's Form 10-Q for the fiscal quarter
ended October 28, 1995).
4-J 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 from the Registrant's Form 10-Q for the fiscal quarter
ended May 4, 1996).
4-K Fifth Modification of Secured Credit Agreement, Revolving Note and
Other Loan Documents dated as of April 9, 1997, by and between
Registrant and LaSalle National Bank (incorporated herein by
reference to the Registrant's Form 10-K for the fiscal year ended
February 1, 1997).
4-L Rights Agreement between the Registrant and The First National Bank
of Boston, as rights agent, dated April 10, 1997 (incorporated
herein by reference to the Registrant's Form 8-K dated April 11,
1997).
5* Opinion of Baker & Daniels.
23-A* Consent of Price Waterhouse LLP.
23-B* Consent of Baker & Daniels (contained in Exhibit 5).
24 The power of attorney is on the signature page.
</TABLE>
- --------
*Filed with this amendment.
E-1
<PAGE>
PAUL HARRIS STORES, INC.
3,000,000 Shares/1/
Common Stock
UNDERWRITING AGREEMENT
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May ___, 1997
PRUDENTIAL SECURITIES INCORPORATED
ROBERTSON, STEPHENS & COMPANY LLC
RODMAN & RENSHAW, INC.
As Representatives of the several Underwriters
c/o Prudential Securities Incorporated
One New York Plaza
New York, New York 10292
Dear Sirs:
Paul Harris Stores, Inc., an Indiana corporation (the "Company"), and The
Prudential Insurance Company of America (the "Selling Securityholder"), hereby
confirm their agreement with the several underwriters named in Schedule 1 hereto
(the "Underwriters"), for whom you have been duly authorized to act as
representatives (in such capacities, the "Representatives"), as set forth below.
If you are the only Underwriters, all references herein to the Representatives
shall be deemed to be to the Underwriters.
1. Securities. Subject to the terms and conditions herein contained, the
Company and the Selling Securityholder propose to sell to the several
Underwriters an aggregate of 3,000,000 shares (the "Firm Securities") of the
Company's Common Stock, without par value ("Common Stock"), of which 500,000
shares will be issued and sold by the Company (the
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/1/ Plus an option to purchase from Paul Harris Stores, Inc. up to 450,000
additional shares to cover over-allotments.
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"Company's Firm Securities") and 2,500,000 shares will be sold by the Selling
Securityholder (the "Selling Securityholder's Firm Securities"). The Company
also proposes to issue and sell to the several Underwriters not more than
450,000 additional shares of Common Stock if requested by the Representatives as
provided in Section 3 of this Agreement. Any and all shares of Common Stock to
be purchased by the Underwriters pursuant to such option are referred to herein
as the "Option Securities," and the Firm Securities and any Option Securities
are collectively referred to herein as the "Securities."
2. Representations and Warranties of the Company.
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(a) The Company represents and warrants to, and agrees with, each of the
several Underwriters that:
(i) The Company meets the requirements for use of Form S-3 under the
Securities Act of 1933, as amended (the "Act"). A registration statement on
such form (File No. 333-25053) with respect to the Securities, including a
prospectus subject to completion, has been filed by the Company with the
Securities and Exchange Commission (the "Commission") under the Act, and
one or more amendments to such registration statement may have been so
filed. After the execution of this Agreement, the Company will file with
the Commission either (A) if such registration statement, as it may have
been amended, has been declared by the Commission to be effective under the
Act, either (1) if the Company relies on Rule 434 under the Act, a Term
Sheet (as hereinafter defined) relating to the Securities, that shall
identify the Preliminary Prospectus (as hereinafter defined) that it
supplements and, if required to be filed pursuant to Rules 434(c)(2) and
424(b), an Integrated Prospectus (as hereinafter defined), in either case,
containing such information as is required or permitted by Rules 434, 430A
and 424(b) under the Act or (2) if the Company does not rely on Rule 434
under the Act, a prospectus in the form most recently included in an
amendment to such registration statement (or, if no such amendment shall
have been filed, in such registration statement), with such changes or
insertions as are required by Rule 430A under the Act or permitted by Rule
424(b) under the Act, and in the case of either clause (A)(1) or (A)(2) of
this sentence as have been provided to and approved by the Representatives
prior to the execution of this Agreement or (B) if such registration
statement, as it may have been amended, has not been declared by the
Commission to be effective under the Act, an amendment to such registration
statement, including a form of prospectus, a copy of which amendment has
been furnished to and approved by the Representatives prior to the
execution of this Agreement. The Company may also file a related
registration statement with the Commission pursuant to Rule 462(b) under
the Act for the purpose of registering certain additional Securities, which
registration shall be effective upon filing with the Commission. As used in
this Agreement, the term "Original Registration Statement" means the
registration statement initially filed relating to the Securities, as
amended at the time when it was or is declared effective, including (x) all
financial schedules and exhibits thereto, (Y) all documents incorporated by
reference therein filed under the
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Securities Exchange Act of 1934, as amended (the "Exchange Act") and (Z)
any information omitted therefrom pursuant to Rule 430A under the Act and
included in the Prospectus (as hereinafter defined) or, if required to be
filed pursuant to Rules 434(c)(2) and 424(b), in the Integrated Prospectus;
the term "Rule 462(b) Registration Statement" means any registration
statement filed with the Commission pursuant to Rule 462(b) (including the
Original Registration Statement and any Preliminary Prospectus or
Prospectus incorporated therein at the time such Registration Statement
becomes effective); the term "Registration Statement" includes both the
Original Registration Statement and any Rule 462(b) Registration Statement;
the term "Preliminary Prospectus" means each prospectus subject to
completion filed with the Original Registration Statement or any amendment
thereto (including the prospectus subject to completion, if any, included
in the Registration Statement or any amendment thereto at the time it was
or is declared effective), including all documents incorporated by
reference therein filed under the Exchange Act; the term "Prospectus"
means:
(A) If the Company relies on Rule 434 under the Act, the Term
Sheet relating to the Securities that is first filed pursuant to Rule
424(b)(7) under the Act, together with the Preliminary Prospectus
identified therein that such Term Sheet supplements;
(B) if the Company does not rely on Rule 434 under the Act, the
prospectus first filed with the Commission pursuant to Rule 424(b)
under the Act; or
(C) if the Company does not rely on Rule 434 under the Act and if
no prospectus is required to be filed pursuant to Rule 424(b) under
the Act, the prospectus included in the Registration Statement,
including, in the case of the immediately foregoing clauses (A), (B) or (C)
of this sentence, all documents incorporated by reference therein filed
under the Exchange Act; the term "Integrated Prospectus" means a prospectus
first filed with the Commission pursuant to Rules 434(c)(2) and 424(b)
under the Act; and the term "Term Sheet" means any abbreviated Term Sheet
that satisfies the requirements of Rule 434 under the Act. Any reference in
this Agreement to an "amendment or supplement" to any Preliminary
Prospectus, the Prospectus or any Integrated Prospectus or an "amendment"
to any registration statement (including the Registration Statement) shall
be deemed to include any document incorporated by reference therein that is
filed with the Commission under the Exchange Act after the date of such
Preliminary Prospectus, Prospectus or any Integrated Prospectus, or
registration statement, as the case may be; any reference herein to the
"date" of a Prospectus that includes a Term Sheet shall mean the date of
such Term Sheet. For purposes of the preceding sentence, any reference to
the "effective date" of an amendment to a registration statement shall, if
such amendment is effected by means of the filing with the Commission under
the Exchange Act of a document incorporated by
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reference in such registration statement, be deemed to refer to the date on
which such document was filed with the Commission.
(ii) The Commission has not issued any order preventing or suspending
the use of any Preliminary Prospectus. When any Preliminary Prospectus and any
amendment or supplement thereto was filed with the Commission it (A) contained
all statements required to be stated therein in accordance with, and complied in
all material respects with the requirements of, the Act, the Exchange Act and
the rules and regulations of the Commission thereunder and (B) did not include
any untrue statement of a material fact or omit to state any material fact
necessary in order to make the statements therein, in the light of the
circumstances under which they were made, not misleading. When the Registration
Statement or any amendment thereto was or is declared effective, it (A)
contained or will contain all statements required to be stated therein in
accordance with, and complied or will comply in all material respects with the
requirements of, the Act, the Exchange Act and the rules and regulations of the
Commission thereunder and (B) did not or will not include any untrue statement
of a material fact or omit to state any material fact necessary to make the
statements therein not misleading. When the Prospectus or any Term Sheet that
is a part thereof or any Integrated Prospectus or any amendment or supplement to
the Prospectus is filed with the Commission pursuant to Rule 424(b) (or, if the
Prospectus or part thereof or such amendment or supplement is not required to be
so filed, when the Registration Statement or the amendment thereto containing
such amendment or supplement to the Prospectus was or is declared effective) on
the date when the Prospectus is otherwise amended or supplemented and on the
Firm Closing Date and any Option Closing Date (both as hereinafter defined),
each of the Prospectus and, if required to be filed pursuant to Rules 434(c)(2)
and 424(b) under the Act, the Integrated Prospectus, as amended or supplemented
at any such time, (A) contained or will contain all statements required to be
stated therein in accordance with, and complied or will comply in all material
respects with the requirements of, the Act, the Exchange Act and the respective
rules and regulations of the Commission thereunder and (B) did not or will not
include any untrue statement of a material fact or omit to state any material
fact necessary in order to make the statements therein, in the light of the
circumstances under which they were made, not misleading. The foregoing
provisions of this paragraph (ii) do not apply to statements or omissions made
in any Preliminary Prospectus or any amendment or supplement thereto, the
Registration Statement or any amendment thereto, the Prospectus or, if required
to be filed pursuant to Rules 434(c)(2) and 424(b) under the Act, the Integrated
Prospectus or any amendment or supplement thereto in reliance upon and in
conformity with written information furnished to the Company by any Underwriter
through the Representatives specifically for use therein.
(iii) If the Company has elected to rely on Rule 462(b) and the Rule
462(b) Registration Statement has not been declared effective (A) the Company
has filed a Rule 462(b) Registration Statement in compliance with and that is
effective upon filing
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pursuant to Rule 462(b) and has received confirmation of its receipt and (B) the
Company has given irrevocable instructions for transmission of the applicable
filing fee in connection with the filing of the Rule 462(b) Registration
Statement, in compliance with Rule 111 promulgated under the Act or the
Commission has received payment of such filing fee.
(iv) The Company has been duly organized and is validly existing as a
corporation under the laws of Indiana and is duly qualified to transact business
as a foreign corporation and is in good standing under the laws of all other
jurisdictions where the ownership or leasing of its properties or the conduct of
its business requires such qualification, except where the failure to be so
qualified would not have a material adverse effect on the condition (financial
or otherwise), business prospects, net worth or results of operations of the
Company.
(v) The Company has full power (corporate and other) to own or lease
its properties and conduct its business as described in the Registration
Statement, the Prospectus and any Integrated Prospectus (or, if the Prospectus
and any required Integrated Prospectus are not in existence, the most recent
Preliminary Prospectus); and the Company has full power (corporate and other) to
enter into this Agreement and to carry out all the terms and provisions hereof
to be carried out by it.
(vi) The Company does not directly or indirectly own any shares of
stock or any other equity securities of any corporation or have any direct or
indirect equity interest in any firm, partnership, association or other entity,
which corporation, firm, partnership, association or other entity would,
individually or when aggregated with all such other corporations, firms,
partnerships, associations or other entities, be considered a "significant
subsidiary" within the meaning of Rule 1-02 of Regulation S-X under the Act.
(vii) The Company has an authorized, issued and outstanding
capitalization as set forth in each of the Prospectus and any Integrated
Prospectus (or, if the Prospectus and any required Integrated Prospectus are not
in existence, the most recent Preliminary Prospectus). All of the issued shares
of capital stock of the Company (including but not limited to the Securities
being sold by the Selling Securityholder) have been duly authorized and validly
issued, are fully paid and nonassessable and have been issued in compliance with
all applicable federal and state securities laws. The Firm Securities and
Option Securities being issued and sold by the Company have been duly authorized
and at the Firm Closing Date or Option Closing Date (as the case may be), after
payment therefor in accordance herewith, will be validly issued, fully paid and
nonassessable. No holders of outstanding shares of capital stock of the Company
are entitled as such to any preemptive or other rights to subscribe for any of
the Securities, and no holder of securities of the Company has any right which
has not been fully exercised or waived to
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require the Company to register the offer or sale of any securities owned by
such holder under the Act in the public offering contemplated by this Agreement.
(viii) The capital stock of the Company conforms to the description
thereof contained in each of the Prospectus and any Integrated Prospectus (or,
if the Prospectus and any required Integrated Prospectus are not in existence,
the most recent Preliminary Prospectus).
(ix) The consolidated financial statements and schedules of the
Company and its consolidated subsidiaries included in the Registration Statement
and each of the Prospectus and any Integrated Prospectus (or, if the Prospectus
and any required Integrated Prospectus are not in existence, the most recent
Preliminary Prospectus) fairly present the financial position of the Company and
its consolidated subsidiaries and the results of operations and cash flows as of
the dates and periods therein specified. Such financial statements and schedules
have been prepared in accordance with generally accepted accounting principles
consistently applied throughout the periods involved (except as otherwise noted
therein). The selected consolidated financial data set forth under the caption
"Selected Consolidated Financial and Operating Data" in each of the Prospectus
and any Integrated Prospectus (or, if the Prospectus and any required Integrated
Prospectus are not in existence, the most recent Preliminary Prospectus) and in
the Company's Annual Report on Form 10-K for the fiscal year ended February 1,
1997 fairly present, on the basis stated in each of the Prospectus, any
Integrated Prospectus and such Annual Report (or such Preliminary Prospectus),
the information included therein.
(x) Price Waterhouse LLP, who have audited certain financial
statements of the Company and its consolidated subsidiaries and delivered their
report with respect to the audited consolidated financial statements and
schedules included in the Registration Statement and each of the Prospectus and
any Integrated Prospectus (or, if the Prospectus and any required Integrated
Prospectus are not in existence, the most recent Preliminary Prospectus), are
independent public accountants as required by the Act, the Exchange Act and the
applicable rules and regulations thereunder.
(xi) The execution and delivery of this Agreement have been duly
authorized by the Company, and this Agreement has been duly executed and
delivered by the Company and is the valid and binding agreement of the Company,
enforceable against the Company in accordance with its terms.
(xii) No legal or governmental proceedings are pending to which the
Company is a party or to which the property of the Company is subject that are
required to be described in the Registration Statement, the Prospectus or any
Integrated Prospectus and are not described therein (or, if the Prospectus or
any required Integrated Prospectus are not in existence, the most recent
Preliminary Prospectus), and, no such proceedings have been threatened against
the Company or with respect to any of its properties; and no
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contract or other document is required to be described in the Registration
Statement, the Prospectus or any Integrated Prospectus or to be filed as an
exhibit to the Registration Statement that is not described therein (or, if the
Prospectus or any required Integrated Prospectus are not in existence, the most
recent Preliminary Prospectus) or filed as required.
(xiii) The issuance, offering and sale of the Securities being issued
and sold by the Company to the Underwriters pursuant to this Agreement, the
compliance by the Company with the other provisions of this Agreement and the
consummation of the other transactions herein contemplated do not (A) require
the consent, approval, authorization, registration or qualification of or with
any governmental authority, except such as have been obtained, such as may be
required under state securities or blue sky laws and, if the registration
statement filed with respect to the Securities (as amended) is not effective
under the Act as of the time of the execution hereof, such as may be required
(and shall be obtained as provided in this Agreement) under the Act or (B)
conflict with or result in a breach or violation of any terms and provisions of,
or constitute a default under, any indenture, mortgage, deed of trust, lease or
other agreement or instrument to which the Company is a party or by which the
Company or any of its properties are bound, or the charter documents or bylaws
of the Company, or any statute or any judgment, decree, order, rule or
regulation of any court or other governmental authority or any arbitrator
applicable to the Company.
(xiv) Subsequent to the respective dates as of which information is
given in the Registration Statement, the Prospectus and any Integrated
Prospectus (or, if the Prospectus and any required Integrated Prospectus are not
in existence, the most recent Preliminary Prospectus), (A) the Company has not
sustained any material loss or interference with its business or properties from
fire, flood, hurricane, accident or other calamity, whether or not covered by
insurance, or from any labor dispute or any legal or governmental proceeding and
there has not been any material adverse change, or any development involving a
prospective material adverse change, in the condition (financial or otherwise),
business prospects, net worth or results of operations of the Company; (B) the
Company has not incurred any material liability or obligation, directly or
contingent, nor entered into any material transaction not in the ordinary course
of business; (C) the Company has not purchased any of its outstanding capital
stock, nor declared, paid or otherwise made any dividend or distribution of any
kind on its capital stock; and (D) there has not been any material change in the
capital stock, short-term debt or long-term debt of the Company and its
consolidated subsidiaries, except in each case as described in or contemplated
by each of the Prospectus and any Integrated Prospectus (or, if the Prospectus
and any required Integrated Prospectus are not in existence, the most recent
Preliminary Prospectus.)
(xv) The Company has not, directly or indirectly, (A) taken any action
designed to cause or to result in, or that has constituted or which might
reasonably be
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expected to constitute, the stabilization or manipulation of the price of any
security of the Company to facilitate the sale or resale of the Securities or
(B) since the filing of the Registration Statement (1) sold, bid for, purchased
or paid anyone any compensation for soliciting purchases of, the Securities or
(2) paid or agreed to pay to any person any compensation for soliciting another
to purchase any other securities of the Company (except for the sale of
Securities by the Selling Security holder under this Agreement.
(xvi) The Company has good and marketable title in fee simple to all
items of real property and marketable title to all personal property owned by
it, free and clear of any security interests, liens, encumbrances, equities,
claims and other defects, except such as do not materially and adversely affect
the value of such property and do not interfere with the use made or proposed to
be made of such property by the Company, and any real property and buildings
held under lease by the Company are held under valid, subsisting and enforceable
leases, with such exceptions as are not material and do not interfere with the
use made or proposed to be made of such property and buildings by the Company,
in each case except as described in or contemplated by each of the Prospectus
and any Integrated Prospectus (or, if the Prospectus and any required Integrated
Prospectus are not in existence, the most recent Preliminary Prospectus).
(xvii) No labor dispute with the employees of the Company exists or is
threatened or imminent that could result in a material adverse change in the
condition (financial or otherwise), business prospects, net worth or results of
operations of the Company, except as described in or contemplated by each of the
Prospectus and any Integrated Prospectus (or, if the Prospectus and any required
Integrated Prospectus are not in existence, the most recent Preliminary
Prospectus).
(xviii) The Company owns or possesses, or can acquire on reasonable
terms, all material patents, patent applications, trademarks, service marks,
trade names, licenses, copyrights and proprietary or other confidential
information currently employed by it in connection with its businesses, and the
Company has not received any notice of, or has any reasonable belief that its
use constitutes, an infringement of or conflict with asserted rights of any
third party with respect to any of the foregoing which, singly or in the
aggregate, if the subject of an unfavorable decision, ruling or finding, would
result in a material adverse change in the condition (financial or otherwise),
business prospects, net worth or results of operations of the Company, except as
described in or contemplated by each of the Prospectus and any Integrated
Prospectus (or, if the Prospectus and any required Integrated Prospectus are not
in existence, the most recent Preliminary Prospectus).
(xix) The Company is insured by insurers of recognized financial
responsibility against such losses and risks and in such amounts as are prudent
and customary in the business in which it is engaged; the Company has not been
refused any insurance coverage sought or applied for; and the Company has no any
reason to believe
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that it will not be able to renew its existing insurance coverage as and when
such coverage expires or to obtain similar coverage from similar insurers as may
be necessary to continue its business at a cost that would not materially and
adversely affect the condition (financial or otherwise), business prospects, net
worth or results of operations of the Company, except as described in or
contemplated by each of the Prospectus and any Integrated Prospectus (or, if the
Prospectus and any required Integrated Prospectus are not in existence, the most
recent Preliminary Prospectus).
(xx) The Company possesses all certificates, authorizations and
permits issued by the appropriate federal, state or foreign regulatory
authorities necessary to conduct its business, and the Company has not received
any notice of proceedings relating to the revocation or modification of any such
certificate, authorization or permit which, singly or in the aggregate, if the
subject of an unfavorable decision, ruling or finding, would result in a
material adverse change in the condition (financial or otherwise), business
prospects, net worth or results of operations of the Company, except as
described in or contemplated by each of the Prospectus and any Integrated
Prospectus (or, if the Prospectus and any required Integrated Prospectus are not
in existence, the most recent Preliminary Prospectus).
(xxi) The Company will conduct its operations in a manner that will not
subject it to registration as an investment company under the Investment Company
Act of 1940, as amended (the "Investment Company Act"), and this transaction
will not cause the Company to become an investment company subject to
registration under the Investment Company Act.
(xxii) The Company has filed all foreign, federal, state and local tax
returns that are required to be filed or have requested extensions thereof
(except in any case in which the failure so to file would not have a material
adverse effect on the condition (financial or otherwise), business prospects,
net worth or results of operations of the Company) and has paid all taxes
required to be paid by it and any other assessment, fine or penalty levied
against it, to the extent that any of the foregoing is due and payable, except
for any such assessment, fine or penalty that is currently being contested in
good faith or as described in or contemplated by each of the Prospectus and any
Integrated Prospectus (or, if the Prospectus and any required Integrated
Prospectus are not in existence, the most recent Preliminary Prospectus).
(xxiii) The Company is not in violation of any federal or state law or
regulation relating to (A) the environment or hazardous or toxic substances or
wastes, pollutants or contaminants or to the storage, handling or transportation
of hazardous or toxic material ("Environmental Laws") or (B) occupational safety
and health and the Company has received all permits, licenses or other approvals
required of it under applicable federal and state occupational safety and health
and Environmental Laws and regulations to conduct its business, and the Company
is in compliance with all terms and
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conditions of any such permit, license or approval, except for any such
violation of law or regulation, failure to receive required permits, licenses or
other approvals or failure to comply with the terms and conditions of such
permits, licenses or approvals which would not, singly or in the aggregate,
result in a material adverse change in the condition (financial or otherwise),
business prospects, net worth or results of operations of the Company, except as
described in or contemplated by each of the Prospectus and any Integrated
Prospectus (or, if the Prospectus and any required Integrated Prospectus are not
in existence, the most recent Preliminary Prospectus). The Company has no
pending or threatened Environmental Law or occupational safety and health claims
against it nor are there circumstances with respect to any property or
operations of the Company that could reasonably be anticipated to form the basis
of an Environmental Law or occupational safety and health claim against the
Company which, singly or in the aggregate, would result in a material adverse
change in the condition (financial or otherwise), business prospects, net worth
or results of operations of the Company, except as described in or contemplated
by each of the Prospectus and any Integrated Prospectus (or, if the Prospectus
and any required Integrated Prospectus are not in existence, the most recent
Preliminary Prospectus).
(xxiv) Each certificate signed by any officer of the Company and
delivered to the Representatives or counsel for the Underwriters pursuant to
this Agreement shall be deemed to be a representation and warranty by the
Company to each Underwriter as to the matters covered thereby.
(xxv) The Company maintains a system of internal accounting controls
sufficient to provide reasonable assurance that (A) transactions are executed in
accordance with management's general or specific authorizations; (B)
transactions are recorded as necessary to permit preparation of financial
statements in conformity with generally accepted accounting principles and to
maintain asset accountability; (C) access to assets is permitted only in
accordance with management's general or specific authorization; and (D) the
recorded accountability for assets is compared with the existing assets at
reasonable intervals and appropriate action is taken with respect to any
differences.
(xxvi) No default exists, and no event has occurred which, with notice
or lapse of time or both, would constitute a default in the due performance and
observance of any term, covenant or condition of any indenture, mortgage, deed
of trust, lease or other agreement or instrument to which the Company is a party
or by which the Company or any of its properties is bound.
(xxvii) All offers and sales of the Company's capital stock from
September 15, 1992 through the date hereof, were at all relevant times either
registered pursuant to the Act or exempt from the registration requirements of
the Act, and were the
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subject of an available exemption from the registration requirements of all
applicable state securities or blue sky laws.
(xxviii) Except as disclosed in each of the Prospectus and any Integrated
Prospectus (or, if the Prospectus and any required Integrated Prospectus are not
in existence, the most recent Preliminary Prospectus), there are no outstanding
(A) securities or obligations of the Company convertible into or exchangeable
for any capital stock of the Company, (B) warrants, rights or options to
subscribe for or purchase from the Company any such capital stock or any such
convertible or exchangeable securities or obligations or (C) obligations of the
Company to issue any shares of capital stock, any such convertible or
exchangeable securities or obligations, or any such warrants, rights or options.
(xxix) The Company has not distributed and, prior to the later of (A)
the Firm Closing Date and (B) the completion of the distribution of the
Securities, will not distribute any offering material in connection with the
offering and sale of the Securities other than the Registration Statement or any
amendment thereto, any Preliminary Prospectus, the Prospectus or any Integrated
Prospectus or any supplement or amendment thereto, or any materials, if any
permitted by the Act.
(xxx) The Company has complied with all provisions of Section 517.075,
Florida Statutes (Chapter 92-198, Laws of Florida) to the extent such provisions
are applicable to the Company.
(b) The Selling Securityholder represents and warrants to, and agrees with,
each of the several Underwriters that:
(i) The Selling Securityholder has full corporate power to enter into this
Agreement and to sell, assign, transfer and deliver to the Underwriters the
Securities to be sold by the Selling Securityholder hereunder in accordance with
the terms of this Agreement; the execution and delivery of this Agreement have
been duly authorized by all necessary corporate actions of the Selling
Securityholder; and this Agreement has been duly executed and delivered by the
Selling Securityholder and is the valid and binding agreement of such Selling
Securityholder, enforceable against such Selling Securityholder in accordance
with its terms.
(ii) The Selling Securityholder has duly executed and delivered a custody
agreement (the "Custody Agreement") in the form heretofore delivered to the
Representatives, appointing The First National Bank of Boston, as custodian
thereunder (the "Custodian"). Certificates in negotiable form, endorsed in
blank or accompanied by blank stock powers duly executed, with signatures
appropriately guaranteed, representing the Securities to be sold by the Selling
Securityholder hereunder have been deposited with the Custodian pursuant to the
Custody Agreement for the purpose of delivery
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pursuant to this Agreement. The Selling Securityholder has full corporate power
to enter into the Custody Agreement and to perform its obligations under the
Custody Agreement. The Custody Agreement has been duly executed and delivered by
the Selling Securityholder and, assuming due authorization, execution and
delivery by the Custodian, is the valid and binding agreement of the Selling
Securityholder, enforceable against the Selling Securityholder in accordance
with its terms.
(iii) The Selling Securityholder agrees that each of the Securities
represented by the certificates on deposit with the Custodian is subject to the
interests of the Underwriters hereunder, that the arrangements made for such
custody are to that extent irrevocable and that the obligations of the Selling
Securityholder hereunder shall not be terminated, except as provided in this
Agreement or the Custody Agreement, by any act of the Selling Securityholder, by
operation of law or otherwise. If the Selling Securityholder shall liquidate or
dissolve, or if any other event should occur, before the delivery of such
Securities hereunder, the certificates for such Securities deposited with the
Custodian shall be delivered by the Custodian in accordance with the respective
terms and conditions of this Agreement as if such termination, liquidation or
dissolution or other event had not occurred, regardless of whether or not the
Custodian shall have received notice thereof.
(iv) The Selling Securityholder is the lawful record and beneficial
owner of the Securities to be sold by the Selling Securityholder hereunder and
upon sale and delivery of, and payment for, such Securities as provided herein,
the Selling Securityholder will convey good and marketable title to such
Securities, free and clear of any security interests, liens, encumbrances,
equities, claims or other defects.
(v) The Selling Securityholder has not, directly or indirectly, (A)
taken any action designed to cause or result in, or that has constituted or
which might reasonably be expected to constitute, the stabilization or
manipulation of the price of any security of the Company to facilitate the sale
or resale of the Securities or (B) since the filing of the Registration
Statement (1) sold, bid for, purchased or paid anyone any compensation for
soliciting purchases of, the Securities or (2) paid or agreed to pay to any
person any compensation for soliciting another to purchase any other securities
of the Company (except for the sale of Securities by the Selling Securityholder
under this Agreement).
(vi) The sale by the Selling Securityholder of Securities pursuant
hereto is not prompted by any adverse information concerning the Company that is
not set forth in the Registration Statement or the Prospectus (or, if the
Prospectus is not in existence, the most recent Preliminary Prospectus).
(vii) The sale of the Securities to the Underwriters by the Selling
Securityholder pursuant to this Agreement, the compliance by the Selling
Securityholder with the other provisions of this Agreement and the Custody
Agreement and the
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consummation of the other transactions herein contemplated do not (A) require
the consent, approval, authorization, registration or qualification of or with
any governmental authority, except such as has been obtained, such as may be
required under state securities or blue sky laws and, if the registration
statement filed with respect to the Securities (as amended) is not effective
under the Act as of the time of execution hereof, such as may be required (and
shall be obtained as provided in this Agreement) under the Act or (B) conflict
with or result in a breach or violation of any of the terms and provisions of,
or constitute a default under any indenture, mortgage, deed of trust, lease or
other agreement or instrument to which the Selling Securityholder is a party or
by which the Selling Securityholder or any of the Selling Securityholder's
properties are bound, or any statute or any judgment, decree, order, rule or
regulation of any court or other governmental authority or any arbitrator
applicable to the Selling Securityholder.
(viii) To the extent that any statements or omissions are made in the
Registration Statement, any Preliminary Prospectus, the Prospectus or any
Integrated Prospectus, or any amendment or supplement thereto in reliance upon
and in conformity with written information furnished to the Company by the
Selling Securityholder specifically for use therein, such information in the
Preliminary Prospectus, the Registration Statement, the Prospectus or any
Integrated Prospectus, and any amendments or supplements thereto, when they
become effective or are filed with the Commission, as the case may be, did and
will conform in all material respects to the requirements of the Act, the
Exchange Act and the respective rules and regulations of the Commission
thereunder and will not contain any untrue statement of a material fact or omit
to state any material fact required to be stated therein or necessary to make
the statements therein, in the light of the circumstances under which they are
made, not misleading. The Selling Securityholder has reviewed each of the
Prospectus and any Integrated Prospectus (or if the Prospectus and any required
Integrated Prospectus are not in existence, the most recent Preliminary
Prospectus) and the Registration Statement, and the information regarding the
Selling Securityholder set forth therein under the caption "Principal and
Selling Shareholders" is complete and accurate; provided, that for purposes of
the foregoing, the information regarding the Selling Securityholder under such
caption shall only consist of the following items of information: (i) the
information set forth under the column entitled "Name and Address of Beneficial
Owner", (ii) the information set forth under the column entitled "Shares
Beneficially Owned Prior to the Offering -- Number", (iv) the information set
forth under the column entitled "Shares Being Offered", (v) the information set
forth under the column entitled "Shares Beneficially Owned After the Offering --
Number" and (vi) footnote one under such caption.
(ix) The Selling Securityholder has not distributed and, prior to the
later of (A) the Firm Closing Date and (B) the completion of the distribution of
the Securities, will not distribute any offering material in connection with the
offering and sale of the Securities other than the Registration Statement or any
amendment thereto, any
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Preliminary Prospectus, the Prospectus and any Integrated Prospectus or any
supplement or amendment thereto, or any materials, if any permitted by the
Act.
3. Purchase, Sale and Delivery of the Securities.
---------------------------------------------
(a) On the basis of the representations, warranties, agreements and
covenants herein contained and subject to the terms and conditions herein set
forth, the Company agrees to issue and sell to, and the Selling Securityholder
agrees to sell to, each of the Underwriters, and each of the Underwriters,
severally and not jointly, agrees to purchase from the Company and the Selling
Securityholder at a purchase price of $______ per share, the number of Firm
Securities set forth opposite the name of such Underwriter in Schedule 1 hereto.
The Company's Firm Securities shall consist of 500,000 shares of Common Stock
and the Selling Securityholder's Firm Securities shall consist of 2,500,000
shares of Common Stock. The number of Firm Securities to be purchased by each
Underwriter from the Company and the Selling Securityholder shall be as nearly
as practicable in the same proportion to the total number of Firm Securities
being sold by the Company and the Selling Securityholder as the total number of
Firm Securities to be purchased by such Underwriter bears to the total number of
Firm Securities to be purchased by the Underwriters hereunder. The obligations
of the Company and of the Selling Securityholder shall be several and not
joint. One or more certificates in definitive form for the Firm Securities that
the several Underwriters have agreed to purchase hereunder, and in such
denomination or denominations and registered in such name or names as the
Representatives request upon notice to the Company and the Selling
Securityholder at least 48 hours prior to the Firm Closing Date, shall be
delivered by or on behalf of the Company and the Selling Securityholder to the
Representatives for the respective accounts of the Underwriters, against payment
by or on behalf of the Underwriters of the purchase price therefor by wire
transfer payable in same-day funds (the "Wired Funds") to the order of the
Company in the case of the Company's Firm Securities and to the order of the
Custodian in the case of the Selling Securityholder's Firm Securities. At the
election of the several Underwriters, which election shall be made by the
Representatives on behalf of such Underwriters, delivery of the Firm Securities
may be made through the book-entry facilities of The Depository Trust Company on
behalf of the Company to Prudential Securities Incorporated for the account of
such Underwriters. Such delivery of and payment for the Firm Securities shall
be made at the offices of King & Spalding, 120 West 45th Street, New York, New
York 10036 at 9:30 A.M., New York time, on May __, 1997; or at such other place,
time or date as the Representatives and the Company may agree upon or as the
Representatives may determine pursuant to Section 9 hereof, such time and date
of delivery against payment being herein referred to as the "Firm Closing Date."
The Company and the Selling Securityholder will make such certificate or
certificates for the Firm Securities available for checking and packaging by the
Representatives at the offices in New York, New York of the Company's transfer
agent or registrar or of Prudential Securities Incorporated at least 24 hours
prior to the Firm Closing Date.
(b) For the purpose of covering any over-allotments in connection with the
distribution and sale of the Firm Securities as contemplated by the Prospectus,
the Company hereby grants to the several Underwriters an option to purchase,
severally and not jointly, the
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Option Securities. The purchase price to be paid for any Option Securities shall
be the same price per share as the price per share for the Firm Securities set
forth above in paragraph (a) of this Section 3. The option granted hereby may be
exercised as to all or any part of the Option Securities from time to time
within thirty days after the date of the Prospectus (or, if such 30th day shall
be a Saturday or Sunday or a holiday, on the next business day thereafter when
the Nasdaq National Market is open for trading). The Underwriters shall not be
under any obligation to purchase any of the Option Securities prior to the
exercise of such option. The Representatives may from time to time exercise the
option granted hereby by giving notice in writing or by telephone (confirmed in
writing) to the Company setting forth the aggregate number of Option Securities
as to which the several Underwriters are then exercising the option and the date
and time for delivery of and payment for such Option Securities. Any such date
of delivery shall be determined by the Representatives but shall not be earlier
than two business days or later than five business days after such exercise of
the option and, in any event, shall not be earlier than the Firm Closing Date.
The time and date set forth in such notice, or such other time on such other
date as the Representatives and the Company may agree upon or as the
Representatives may determine pursuant to Section 9 hereof, is herein called the
"Option Closing Date" with respect to such Option Securities. Upon exercise of
the option as provided herein, the Company shall become obligated to sell to
each of the several Underwriters, and, subject to the terms and conditions
herein set forth, each of the Underwriters (severally and not jointly) shall
become obligated to purchase from the Company, the same percentage of the total
number of the Option Securities as to which the several Underwriters are then
exercising the option as such Underwriter is obligated to purchase of the
aggregate number of Firm Securities, as adjusted by the Representatives in such
manner as they deem advisable to avoid fractional shares. If the option is
exercised as to all or any portion of the Option Securities, one or more
certificates in definitive form for such Option Securities, and payment
therefor, shall be delivered on the related Option Closing Date in the manner,
and upon the terms and conditions, set forth in paragraph (a) of this Section 3
with respect to the sale of the Firm Securities, except that reference therein
to the Firm Securities and the Firm Closing Date shall be deemed, for purposes
of this paragraph (b), to refer to such Option Securities and Option Closing
Date, respectively.
(c) The Company and the Selling Securityholder hereby acknowledge that the
wire transfer by or on behalf of the Underwriters of the purchase price for any
Securities does not constitute the closing of a purchase and sale of the
Securities. Only execution and delivery of a receipt for Securities by the
Underwriters indicates completion of the closing of a purchase of the Securities
from the Company and the Selling Securityholder. Furthermore, in the event that
the Underwriters wire funds to the Company and the Selling Securityholder prior
to the completion of the closing of a purchase of the Securities, the Company
and the Selling Securityholder hereby acknowledge that until the Underwriters
execute and deliver a receipt for the Securities, by facsimile or otherwise, the
Company and the Selling Securityholder will not be entitled to the Wired Funds
and shall return the Wired Funds to the Underwriters as soon as practicable (by
wire transfer of same-day funds) upon demand. In the event that the closing of a
purchase of the Securities is not completed and the Wired Funds are not returned
by the Company and the Selling Securityholder to the Underwriters on the same
day the Wired Funds were received by
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<PAGE>
the Company and the Selling Securityholder, the Company and the Selling
Securityholder agree to reimburse the Underwriters for each day the Wired Funds
are not returned, in same-day funds, interest on the amount of Wired Funds in an
amount equal to each day's interest, based on an annual interest rate, simple
interest, representing the Underwriters' cost of financing as reasonably
determined by Prudential Securities Incorporated. Upon satisfactory receipt of
the Securities by the Underwriters in accordance with all the terms of this
Agreement and the compliance by the Company and the Selling Securityholder with
all the terms of this Agreement to be performed on or before the Closing Date,
the Underwriters shall execute the receipt described above for the Securities.
(d) It is understood that either of you, individually and not as one of
the Representatives, may (but shall not be obligated to) make payment on behalf
of any Underwriter or Underwriters for any of the Securities to be purchased by
such Underwriter or Underwriters. No such payment shall relieve such Underwriter
or Underwriters from any of its or their obligations hereunder.
4. Offering by the Underwriters. Upon your authorization of the release
of the Firm Securities, the several Underwriters propose to offer the Firm
Securities for sale to the public upon the terms set forth in the Prospectus.
5. Covenants of the Company and the Selling Securityholder.
(a) The Company covenants and agrees with each of the Underwriters that:
(i) The Company will use its best efforts to cause the Registration
Statement, if not effective at the time of execution of this Agreement, and
any amendments thereto to become effective as promptly as possible. If
required, the Company will file the Prospectus or any Term Sheet that
constitutes a part thereof, any Integrated Prospectus and any amendment or
supplement thereto with the Commission in the manner and within the time
period required by Rules 434 and 424(b) under the Act. During any time when
a prospectus relating to the Securities is required to be delivered under
the Act, the Company (A) will comply with all requirements imposed upon it
by the Act, the Exchange Act and the respective rules and regulations of
the Commission thereunder to the extent necessary to permit the continuance
of sales of or dealings in the Securities in accordance with the provisions
hereof and each of the Prospectus and any Integrated Prospectus, as then
amended or supplemented and (B) will not file with the Commission the
Prospectus, Term Sheet or Integrated Prospectus or the amendment referred
to in the second sentence of Section 2(a)(i) hereof, any amendment or
supplement to such Prospectus, Term Sheet, Integrated Prospectus or any
amendment to the Registration Statement or any Rule 462(b) Registration
Statement of which the Representatives shall not previously have been
advised and furnished with a copy for a reasonable period of time prior to
the proposed filing and as to which filing the Representatives shall not
have given their consent. The Company will prepare and file with the
Commission, in
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accordance with the rules and regulations of the Commission, promptly upon
request by the Representatives or counsel for the Underwriters, any
amendments to the Registration Statement or any Rule 462(b) Registration
Statement or amendments or supplements to the Prospectus any Integrated
Prospectus that may be necessary or advisable in connection with the
distribution of the Securities by the several Underwriters, and will use
its best efforts to cause any such amendment to the Registration Statement
to be declared effective by the Commission as promptly as possible. The
Company will advise the Representatives, promptly after receiving notice
thereof, of the time when the Registration Statement or any amendment
thereto has been filed or declared effective or the Prospectus and any
Integrated Prospectus or any amendment or supplement thereto has been filed
and will provide evidence satisfactory to the Representatives of each such
filing or effectiveness.
(ii) The Company will advise the Representatives, promptly after
receiving notice or obtaining knowledge thereof, of (A) the issuance by the
Commission of any stop order suspending the effectiveness of the Original
Registration Statement or any Rule 462(b) Registration Statement or any
amendment thereto or any post-effective amendment thereto or any order
directed at any document incorporated by reference in the Registration
Statement, the Prospectus or any required Integrated Prospectus or any
amendment or supplement thereto or any order preventing or suspending the
use of any Preliminary Prospectus, the Prospectus or any Integrated
Prospectus or any amendment or supplement thereto, (B) the suspension of
the qualification of the Securities for offering or sale in any
jurisdiction, (C) the institution, threatening or contemplation of any
proceeding for any such purpose or (D) any request made by the Commission
for amending the Original Registration Statement or any Rule 462(b)
Registration Statement, for amending or supplementing any Preliminary
Prospectus, the Prospectus or any Integrated Prospectus or for additional
information. The Company will use its best efforts to prevent the issuance
of any such stop order and, if any such stop order is issued, to obtain the
withdrawal thereof as promptly as possible.
(iii) The Company will arrange for the qualification of the
Securities for offering and sale (with the assistance of counsel for the
Underwriters) under the securities or blue sky laws of such jurisdictions
as the Representatives may designate and will continue such qualifications
in effect for as long as may be necessary to complete the distribution of
the Securities; provided, however, that in connection therewith the Company
shall not be required to qualify as a foreign corporation or to execute a
general consent to service of process in any jurisdiction.
(iv) If, at any time prior to the later of (A) the final date when a
prospectus relating to the Securities is required to be delivered under the
Act or (B) the Option Closing Date, any event occurs as a result of which
the Prospectus or any Integrated Prospectus, as then amended or
supplemented, would include any untrue statement of a material fact or omit
to state a material fact necessary in order to make the statements
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<PAGE>
therein, in the light of the circumstances under which they were made, not
misleading, or if for any other reason it is necessary at any time to amend
or supplement the Prospectus or any Integrated Prospectus to comply with
the Act, the Exchange Act or the respective rules or regulations of the
Commission thereunder, the Company will promptly notify the Representatives
thereof and, subject to Section 5(a)(i) hereof, will prepare and file with
the Commission, at the Company's expense, an amendment to the Registration
Statement or an amendment or supplement to the Prospectus or any Integrated
Prospectus that corrects such statement or omission or effects such
compliance.
(v) The Company will, without charge, provide (A) to the
Representatives and to counsel for the Underwriters three signed copies of
the registration statement originally filed with respect to the Securities
and each amendment thereto and any Rule 462(b) Registration Statement (in
each case including exhibits thereto) as the Representatives and counsel to
the Underwriters may reasonably request, (B) to each other Underwriter, a
conformed copy of such registration statement and any Rule 462(b)
Registration Statement and each amendment thereto (in each case without
exhibits thereto) and (C) so long as a prospectus relating to the
Securities is required to be delivered under the Act, as many copies of
each Preliminary Prospectus, the Prospectus or any Integrated Prospectus or
any amendment or supplement thereto as the Representatives may reasonably
request; without limiting the application of clause (C) of this sentence,
the Company, not later than (1) 6:00 PM, New York City time, on the date of
determination of the public offering price, if such determination occurred
at or prior to 10:00 AM, New York City time, on such date or (2) 2:00 PM,
New York City time, on the business day following the date of determination
of the public offering price, if such determination occurred after 10:00
AM, New York City time, on such date, will deliver to the Underwriters,
without charge, as many copies of the Prospectus and any amendment or
supplement thereto as the Representatives may reasonably request for
purposes of confirming orders that are expected to settle on the Firm
Closing Date.
(vi) The Company, as soon as practicable, will make generally
available to its securityholders and to the Representatives a consolidated
earnings statement of the Company and its subsidiaries that satisfies the
provisions of Section 11(a) of the Act and Rule 158 thereunder.
(vii) The Company will apply the net proceeds from the sale of the
Securities as set forth under "Use of Proceeds" in the Prospectus or any
Integrated Prospectus.
(viii) The Company will not, directly or indirectly, without the
prior written consent of Prudential Securities Incorporated, on behalf of
the Underwriters, offer, sell, offer to sell, contract to sell, pledge,
grant any option to purchase or otherwise sell or dispose (or announce any
offer, sale, offer of sale, contract of sale, pledge, grant of any option
to purchase or other sale or disposition) of any shares of Common Stock or
any securities convertible into, or exchangeable or exercisable for, Common
Stock or other
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capital stock of the Company, or any right to purchase or acquire Common
Stock or other capital stock of the Company for a period of 120 days after
the date hereof, except pursuant to this Agreement, and except for
issuances of options pursuant to stock option plans and employment
agreements in existence on the date hereof.
(ix) The Company will not, directly or indirectly, (A) take any
action designed to cause or to result in, or that has constituted or which
might reasonably be expected to constitute, the stabilization or
manipulation of the price of any security of the Company to facilitate the
sale or resale of the Securities or (B) (1) sell, bid for, purchase, or pay
anyone any compensation for soliciting purchases of, the Securities or (2)
pay or agree to pay to any person any compensation for soliciting another
to purchase any other securities of the Company (except for the sale of
Securities by the Selling Securityholder under this Agreement).
(x) If at any time during the 25-day period after the Registration
Statement becomes effective or the period prior to the Option Closing Date,
any rumor, publication or event relating to or affecting the Company shall
occur as a result of which in your opinion the market price of the Common
Stock has been or is likely to be materially affected (regardless of
whether such rumor, publication or event necessitates a supplement to or
amendment of the Prospectus and any Integrated Prospectus), the Company
will, after written notice from you advising the Company to the effect set
forth above, forthwith, prepare, consult with you concerning the substance
of, and disseminate a press release or other public statement, reasonably
satisfactory to you, responding to or commenting on such rumor, publication
or event.
(xi) The Company will obtain the agreements described in Section 7(g)
hereof from all persons other than the Selling Securityholder prior to the
Firm Closing Date.
(xii) The Company, during the period when the Prospectus is required
to be delivered under the Act or the Exchange Act, will file all documents
required to be filed with the Commission pursuant to Section 13, 14 or 15
of the Exchange Act within the time periods required by the Exchange Act
and the rules and regulations thereunder.
(xiii) The Company will cause Firm Securities and Option Securities
to be issued and sold by it to be included in the Nasdaq National Market
prior to the Firm Closing Date. The Company will ensure that the Securities
remain included for trading on the Nasdaq National Market following the
Firm Closing Date.
(xiv) During a period of three years from the effective date of the
Registration Statement, the Company will furnish to you and, upon request,
to each of the other Underwriters, without charge, (A) copies of all
reports or other communications (financial or other) furnished to
securityholders, (B) as soon as they are available, copies of any reports
and financial statements furnished to or filed with the Commission or any
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national securities exchange and (C) such additional publicly available
information concerning the business and financial condition of the Company, if
any, as you may reasonably request.
(xv) If the Company elects to rely on Rule 462(b), the Company shall
both file a Rule 462(b) Registration Statement with the Commission in compliance
with Rule 462(b) and pay the applicable fees in accordance with Rule 111
promulgated under the Act by the earlier of (A) 10:00 P.M. Eastern time on the
date of this Agreement and (B) the time confirmations are sent or given, as
specified by Rule 462(b)(2).
(b) The Selling Securityholder covenants and agrees with each of the
Underwriters that:
(i) The Selling Securityholder will not, directly or indirectly,
without the prior written consent of Prudential Securities Incorporated, on
behalf of the Underwriters, offer, sell, offer to sell, contract to sell,
pledge, grant any option to purchase or otherwise sell or dispose (or announce
any offer, sale, offer of sale, contract of sale, pledge, grant of any option to
purchase or other sale or disposition) of any shares of Common Stock or any
securities convertible into, or exchangeable or exercisable for, Common Stock or
other capital stock of the Company, or any right to purchase or acquire Common
Stock or other capital stock of the Company for a period of 120 days after the
date hereof, except (A) pursuant to this Agreement, (B) as required to comply
with the insurance law of the State of New Jersey, (C) in a transaction effected
other than on the Nasdaq National Market that is exempt from the registration
requirements of the Act or (D) as consented to in writing by Prudential
Securities Incorporated.
(ii) The Selling Securityholder will not, directly or indirectly, (A)
take any action designed to cause or to result in, or that has constituted or
which might reasonably be expected to constitute, the stabilization or
manipulation of the price of any security of the Company to facilitate the sale
or resale of the Securities or (B) (1) sell, bid for, purchase, or pay anyone
any compensation for soliciting purchases of, the Securities or (2) pay or agree
to pay to any person any compensation for soliciting another to purchase any
other securities of the Company (except for the sale of Securities by the
Selling Securityholder under this Agreement).
(iii) In order to document the Underwriters' compliance with the
reporting and withholding provisions of the Internal Revenue Code of 1986, as
amended, with respect to the transactions herein contemplated, the Selling
Securityholder agrees to deliver to the Representatives prior to or on the Firm
Closing Date a properly completed and executed United States Treasury Department
Form W-8 or W-9 (or other applicable form or statement specified by the Treasury
Department regulations in lieu thereof).
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6. Expenses. The Company and the Selling Securityholder jointly and
severally will pay all costs and expenses incident to the performance of the
obligations of the Company and the Selling Securityholder under this Agreement,
whether or not the transactions contemplated herein are consummated or this
Agreement is terminated pursuant to Section 11 hereof, including all costs and
expenses incident to (a) the printing or other production of documents with
respect to the transactions, including any costs of printing the registration
statement originally filed with respect to the Securities and any amendment
thereto, any Rule 462(b) Registration Statement, any Preliminary Prospectus, the
Prospectus and any Integrated Prospectus and any amendment or supplement
thereto, this Agreement and any blue sky memoranda, (b) all arrangements
relating to the delivery to the Underwriters of copies of the foregoing
documents, (c) the fees and disbursements of the counsel, the accountants and
any other experts or advisors retained by the Company, (d) preparation, issuance
and delivery to the Underwriters of any certificates evidencing the Securities,
including transfer agent's and registrar's fees and the Custodian's fees, (e)
the qualification of the Securities under state securities and blue sky laws,
including filing fees and fees and disbursements of counsel for the Underwriters
relating thereto, (f) the filing fees of the Commission and the National
Association of Securities Dealers, Inc. relating to the Securities, (g) any
listing of the Securities on the Nasdaq National Market, (h) meetings with
prospective investors in the Securities (other than shall have been specifically
approved by the Representatives to be paid for by the Underwriters) and (i)
advertising relating to the offering of the Securities (other than as shall have
been specifically approved by the Representatives to be paid for by the
Underwriters). Any transfer taxes imposed on the sale of the Securities to the
several Underwriters will be paid by the Company and the Selling Securityholder
pro rata. If the sale of the Securities provided for herein is not consummated
because any condition to the obligations of the Underwriters set forth in
Section 7 hereof is not satisfied, because this Agreement is terminated pursuant
to Section 11 hereof or because of any failure, refusal or inability on the part
of the Company or the Selling Securityholder to perform all obligations and
satisfy all conditions on its part to be performed or satisfied hereunder other
than by reason of a default by any of the Underwriters, the Company and the
Selling Securityholder will jointly and severally reimburse the Underwriters
severally upon demand for all out-of-pocket expenses (including counsel fees and
disbursements) that shall have been incurred by them in connection with the
proposed purchase and sale of the Securities. The Company and the Selling
Securityholder shall not in any event be liable to any of the Underwriters for
the loss of anticipated profits from the transactions covered by this Agreement.
7. Conditions of the Underwriters' Obligations. The obligations of the
several Underwriters to purchase and pay for the Firm Securities shall be
subject, in the Representatives' sole discretion, to the accuracy of the
representations and warranties of the Company and the Selling Securityholder
contained herein as of the date hereof and as of the Firm Closing Date, as if
made on and as of the Firm Closing Date, to the accuracy of the statements of
the Company's officers made pursuant to the provisions hereof, to the
performance by the Company and the Selling Securityholder of its covenants and
agreements hereunder and to the following additional conditions:
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(a) If the Original Registration Statement or any amendment thereto filed
prior to the Firm Closing Date has not been declared effective as of the time of
execution hereof, the Original Registration Statement or such amendment and, if
the Company has elected to rely upon Rule 462(b), the Rule 462(b) Registration
Statement shall have been declared effective not later than the earlier of (i)
11:00 A.M., New York time, on the date on which the amendment to the
registration statement originally filed with respect to the Securities or to the
Registration Statement, as the case may be, containing information regarding the
initial public offering price of the Securities has been filed with the
Commission and (ii) the time confirmations are sent or given as specified by
Rule 462(b)(2) or, with respect to the Original Registration Statement, such
later time and date as shall have been consented to by the Representatives; if
required, the Prospectus or any Term Sheet that constitutes a part thereof and
any Integrated Prospectus and any amendment or supplement thereto shall have
been filed with the Commission in the manner and within the time period required
by Rules 434 and 424(b) under the Act; no stop order suspending the
effectiveness of the Registration Statement or any post-effective amendment
thereto and no order directed at any document incorporated by reference in the
Registration Statement, the Prospectus or any Integrated Prospectus or any
amendment or supplement thereto shall have been issued, and no proceedings for
that purpose shall have been instituted or threatened or, to the knowledge of
the Company or the Representatives, shall be contemplated by the Commission; and
the Company shall have complied with any request of the Commission for
additional information (to be included in the Registration Statement, the
Prospectus or any Integrated Prospectus or otherwise).
(b) The Representatives shall have received an opinion, dated the Firm
Closing Date, of Baker & Daniels, counsel for the Company, to the effect that:
(i) the Company has been duly organized and is validly existing as a
corporation in good standing under the laws of Indiana and is duly
qualified to transact business as a foreign corporation and is in good
standing under the laws of all other jurisdictions where the ownership or
leasing of its properties or the conduct of its business requires such
qualification, except where the failure to be so qualified would not have a
material adverse effect on the condition (financial or otherwise), business
prospects, net worth or results of operations of the Company.
(ii) the Company has the corporate power to own or lease its
properties and conduct its business as described in the Registration
Statement, the Prospectus and any Integrated Prospectus, and the Company
has the corporate power to enter into this Agreement and to carry out all
the terms and provisions hereof to be carried out by it;
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(iii) the Company has an authorized, issued and outstanding
capitalization as set forth in each of the Prospectus and any Integrated
Prospectus; all of the issued shares of capital stock of the Company
(including but not limited to the Securities being sold by the Selling
Securityholder) have been duly authorized and validly issued and are fully
paid and nonassessable, and were not issued in violation of or subject to
any statutory or, to the best knowledge of such counsel, contractual
preemptive rights or other rights to subscribe for or purchase securities;
the Firm Securities and Option Securities being issued and sold by the
Company have been duly authorized and, when issued and delivered to and
paid for by the Underwriters pursuant to this Agreement, will be validly
issued, fully paid and nonassessable; the Securities being issued and sold
by the Company have been duly listed for trading on the Nasdaq National
Market; no holders of outstanding shares of capital stock of the Company
are entitled as such to any statutory or, to the best knowledge of such
counsel, contractual preemptive or other rights to subscribe for any of the
Securities; and, to the best knowledge of such counsel, no holders of
securities of the Company are entitled to have such securities registered
under the Registration Statement;
(iv) to the best knowledge of such counsel, the Company does not
directly or indirectly own any shares of stock or any other equity
securities of any corporation or have any direct or indirect equity
interest in any firm, partnership, association or other entity, which
corporation, firm, partnership, association or other entity would,
individually or when aggregated with all such other corporations, firms,
partnerships, associations or other entities, be considered a "significant
subsidiary" within the meaning of Rule 1-02 of Regulation S-X under the
Act.
(v) the statements set forth under the heading "Description of
Capital Stock" in each of the Prospectus and any Integrated Prospectus,
insofar as such statements purport to summarize certain provisions of the
capital stock of the Company, provide a fair summary of such provisions,
and the statements set forth under the headings "Business - Legal
Proceedings" in each of the Prospectus and any Integrated Prospectus,
insofar as such statements constitute a summary of the matters referred to
therein, provide a fair summary of such matters;
(vi) the execution and delivery of this Agreement have been duly
authorized by all necessary corporate action of the Company, and this
Agreement has been duly executed and delivered by the Company;
(vii) (A) to the best knowledge of such counsel, no legal or
governmental proceedings are pending to which the Company is a party or to
which the property of the Company is subject that are required to be
described in the Registration Statement, the Prospectus and any Integrated
Prospectus and are
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not described therein, no such proceedings have been threatened against the
Company or with respect to any of its properties and (B) no contract or
other document known to such counsel is required to be described in the
Registration Statement, the Prospectus and any Integrated Prospectus or to
be filed as an exhibit to the Registration Statement that is not described
therein or filed as required;
(viii) the issuance, offering and sale of the Securities being issued
and sold by the Company to the Underwriters pursuant to this Agreement, the
compliance by the Company with the other provisions of this Agreement and
the consummation of the other transactions herein contemplated do not (A)
require the consent, approval, authorization, registration or qualification
of or with any governmental authority, except such as have been obtained
and such as may be required under state securities or blue sky laws or (B)
conflict with or result in a breach or violation of any of the terms and
provisions of, or constitute a default under, any indenture, mortgage, deed
of trust, lease or other agreement or instrument known to such counsel to
which the Company is a party or by which the Company or any of its
properties are bound, or the charter documents or the bylaws of the
Company, or any statute or any judgment, decree, order, rule or regulation
of any court or other governmental authority or any arbitrator known to
such counsel after investigation and applicable to the Company;
(ix) the Registration Statement is effective under the Act; any
required filing of the Prospectus or any Term Sheet that constitutes a part
thereof and of any Integrated Prospectus pursuant to Rules 434 and 424(b)
has been made in the manner and within the time period required by Rules
434 and 424(b); and no stop order suspending the effectiveness of the
Registration Statement or any post-effective amendment thereto and no order
directed at any document incorporated by reference in the Registration
Statement, the Prospectus or any Integrated Prospectus or any amendment or
supplement thereto has been issued, and no proceedings for that purpose
have been instituted or threatened or, to the best knowledge of such
counsel, are contemplated by the Commission;
(x) the registration statement originally filed with respect to the
Securities and each amendment thereto, any Rule 462(b) Registration
Statement, the Prospectus and any Integrated Prospectus (in each case
including the documents incorporated by reference therein but not including
the financial statements and other financial information contained therein,
as to which such counsel need express no opinion) comply as to form in all
material respects with the applicable requirements of the Act, the Exchange
Act and the respective rules and regulations of the Commission thereunder;
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(xi) the Company is not an "investment company" under the Investment
Company Act of 1940, as amended, and consummation of the transactions
herein contemplated will not cause the Company to become an investment
company subject to registration under the Investment Company Act;
(xii) except as disclosed in each of the Prospectus and any
Integrated Prospectus (or, if the Prospectus and any required Integrated
Prospectus are not in existence, the most recent Preliminary Prospectus)
there are no outstanding (A) securities or obligations of the Company
convertible into or exchangeable for any capital stock of the Company, (B)
warrants, rights or options to subscribe for or purchase from the Company
any such capital stock or any such convertible or exchangeable securities
or obligations, or (C) obligations of the Company to issue any shares of
capital stock, any such convertible or exchangeable securities or
obligations, or any such warrants, rights or options.
(xiii) If the Company elects to rely on Rule 434, the Prospectus is
not "materially different", as such term is used in Rule 434, from the
prospectus included in the Registration Statement at the time of its
effectiveness or any effective post-effective amendment thereto (including
such information that is permitted to be omitted pursuant to Rule 430A).
Such counsel shall also state that they have no reason to believe (A) that
the Registration Statement, as of its effective date, contained any untrue
statement of a material fact or omitted to state any material fact required to
be stated therein or necessary to make the statements therein not misleading and
(B) that each of the Prospectus and any Integrated Prospectus, as of its date or
the date of such opinion, included or includes any untrue statement of a
material fact or omitted or omits to state a material fact necessary in order to
make the statements therein, in the light of the circumstances under which they
were made, not misleading.
In rendering any such opinion, such counsel may rely, as to matters of
fact, to the extent such counsel deems proper, on certificates of responsible
officers of the Company and public officials. The opinion shall also state that
as to matters of Indiana law, King & Spalding, counsel to the Underwriters,
shall be entitled to rely upon such opinion.
References to the Registration Statement and the Prospectus or any
Integrated Prospectus in this paragraph (b) shall include any amendment or
supplement thereto at the date of such opinion.
(c) The Representatives shall have received an opinion, dated the Firm
Closing Date of Deborah G. Shulevitz, Esq., counsel for the Selling
Securityholder, to the effect that:
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(i) the Selling Securityholder has full corporate power to enter into
this Agreement and the Custody Agreement and to sell, assign, transfer and
deliver to the Underwriters the Securities to be sold by the Selling
Securityholder hereunder in accordance with the terms of this Agreement,
and to perform its obligations under the Custody Agreement; the execution
and delivery of this Agreement and the Custody Agreement have been duly
authorized by all necessary corporate action of the Selling Securityholder;
this Agreement and the Custody Agreement have been executed and delivered
by the Selling Securityholder; assuming due authorization, execution and
delivery by the Custodian, the Custody Agreement is the valid and binding
agreement of the Selling Securityholder, enforceable against such Selling
Securityholder in accordance with its terms, except as may be limited by
bankruptcy, insolvency, reorganization, moratorium or similar laws
affecting creditors' rights generally, general equitable principles and the
discretion of courts in granting equitable remedies;
(ii) assuming that the Underwriters purchased the Securities being
sold hereunder in good faith without notice of any adverse claims as
defined in Section 8-302 of the Uniform Commercial Code, the delivery by
the Selling Securityholder to the Underwriters of certificates for the
Securities being sold hereunder by the Selling Securityholder against
payment therefor as provided herein, will convey good and marketable title
to the Securities to the several Underwriters, free and clear of any
security interests, liens, encumbrances, equities, claims or other defects;
and
(iii) the sale of the Securities to the Underwriters by the Selling
Securityholder pursuant to this Agreement, the compliance by the Selling
Securityholder with the other provisions of this Agreement and the Custody
Agreement and the consummation of the other transactions herein
contemplated do not (A) require the consent, approval, authorization,
registration or qualification of or with any governmental authority, except
such as has been obtained and such as may be required under state
securities or blue sky laws or (B) conflict with or result in a breach or
violation of any of the terms and provisions of, or constitute a default
under any indenture, mortgage, deed of trust, material lease or other
material agreement or instrument known to such counsel to which the Selling
Securityholder is a party or by which the Selling Securityholder or any of
such Selling Securityholder's properties are bound, or any statute or any
judgment, decree, order, rule or regulation of any court or other
governmental authority or any arbitrator known to such counsel applicable
to such Selling Securityholder.
In rendering any such opinion, such counsel may rely, as to matters of
fact, to the extent such counsel deems proper, on certificates of responsible
officers of the Company, the Selling Securityholder and public officials.
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References to the Registration Statement and the Prospectus or any
Integrated Prospectus in this paragraph (c) shall include any amendment or
supplement thereto at the date of such opinion.
(d) The Representatives shall have received an opinion, dated the Firm
Closing Date, of King & Spalding, counsel for the Underwriters, with respect to
the issuance and sale of the Firm Securities, the Registration Statement, the
Prospectus or any Integrated Prospectus, and such other related matters as the
Representatives may reasonably require, and the Company shall have furnished to
such counsel such documents as they may reasonably request for the purpose of
enabling them to pass upon such matters. In rendering such opinion, such
counsel may rely as to all matters of Indiana law upon the opinion of Baker &
Daniels.
(e) The Representatives shall have received from Price Waterhouse LLP a
letter or letters dated, respectively, the date hereof and the Firm Closing
Date, in form and substance satisfactory to the Representatives, to the effect
that:
(i) they are independent accountants with respect to the Company and
its subsidiaries (the "Subsidiaries") within the meaning of the Act, the
Exchange Act and the applicable rules and regulations thereunder;
(ii) in their opinion, the audited consolidated financial statements
and schedules of the Company included in the Registration Statement, the
Prospectus and any Integrated Prospectus comply in form in all material
respects with the applicable accounting requirements of the Act, the
Exchange Act and the related published rules and regulations;
(iii) on the basis of (A) their review, in accordance with standards
established by the American Institute of Certified Public Accountants in
SAS 71, Interim Financial Information, of any interim unaudited
consolidated financial statements of the Company and its consolidated
subsidiaries included in the Registration Statement, the Prospectus and any
Integrated Prospectus (which do not constitute an examination made in
accordance with generally accepted auditing standards), (B) a reading of
the interim consolidated financial data for the period from the date of the
latest balance sheet included in the Registration Statement, Prospectus and
any Integrated Prospectus to the date of the latest available interim
consolidated financial data, (C) a reading of the minute books of the
shareholders, the board of directors and any committees thereof of the
Company and its Subsidiaries, from February 2, 1997 through a date not more
than five days prior to the date of such letter, and (D) inquiries of
certain officials of the Company who have responsibility for financial and
accounting matters, nothing came to their attention that caused them to
believe that:
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(X) the interim unaudited consolidated financial statements, if
any, of the Company and its consolidated Subsidiaries included in the
Registration Statement, the Prospectus and any Integrated Prospectus
do not comply in form in all material respects with the applicable
accounting requirements of the Act and the related published rules and
regulations thereunder or that any material modifications should be
made to said interim unaudited consolidated financial statements for
them to be in conformity with generally accepted accounting principles
applied on a basis substantially consistent with that of the audited
consolidated financial statements included in the Registration
Statement, the Prospectus and any Integrated Prospectus;
(Y) at the date of the latest available interim consolidated
financial data and at a specific date not more than five business days
prior to the date of such letter, there was any change in long-term or
short-term debt of the Company and its Subsidiaries or any decreases
in net current assets (working capital) or shareholders' equity of the
Company and its Subsidiaries, in each case compared with amounts shown
on the February 1, 1997 audited consolidated balance sheet included in
the Registration Statement, the Prospectus and any Integrated
Prospectus, or for the period from February 2, 1997 to such specified
date there were any decreases, as compared with the prior comparable
period, in net sales or income before income taxes or total or per
share amounts of net income of the Company and its Subsidiaries,
except in all instances for changes, decreases or increases set forth
in such letter; and
(iv) they have carried out certain specified procedures (as requested
by the Representatives and which Price Waterhouse LLP is willing to perform
and report upon), not constituting an audit, with respect to certain
amounts, percentages and financial information that are derived from the
general accounting records of the Company and its Subsidiaries and are
included in the Registration Statement, the Prospectus and any Integrated
Prospectus and the documents incorporated by reference in the Registration
Statement, the Prospectus and any Integrated Prospectus, and have compared
such amounts, percentages and financial information with such records of
the Company and its Subsidiaries or with information derived from such
records and have found them to be in agreement, excluding any questions of
legal interpretation.
In the event that the letters referred to above set forth any such changes,
decreases or increases, it shall be a further condition to the obligations of
the Underwriters that (A) such letters shall be accompanied by a written
explanation from the Company as to the significance thereof, unless the
Representatives deem such explanation unnecessary and (B) such changes,
decreases or increases do not, in the sole judgment of the
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Representatives, make it impractical or inadvisable to proceed with the purchase
and delivery of the Securities as contemplated by the Registration Statement, as
amended as of the date hereof.
References to the Registration Statement, the Prospectus and any Integrated
Prospectus in this paragraph (e) with respect to either letter referred to
above shall include any amendment or supplement thereto at the date of such
letter.
(f) The Representatives shall have received a certificate, dated the Firm
Closing Date, of the principal executive officer and the principal financial or
accounting officer of the Company to the effect that:
(i) the representations and warranties of the Company in this
Agreement are true and correct as if made on and as of the Firm Closing
Date; the Registration Statement, as amended as of the Firm Closing Date,
does not include any untrue statement of a material fact or omit to state
any material fact necessary to make the statements therein not misleading,
and each of the Prospectus and any Integrated Prospectus, as amended or
supplemented as of the Firm Closing Date, does not include any untrue
statement of a material fact or omit to state any material fact necessary
in order to make the statements therein, in the light of the circumstances
under which they were made, not misleading; and the Company has performed
all covenants and agreements and satisfied all conditions on its part to be
performed or satisfied at or prior to the Firm Closing Date;
(ii) no stop order suspending the effectiveness of the Registration
Statement or any amendment thereto and no order directed at any document
incorporated by reference in the Registration Statement, the Prospectus or
any Integrated Prospectus, or any amendment or supplement thereto, has been
issued, and no proceedings for that purpose have been instituted or
threatened or, to the best of the Company's knowledge, are contemplated by
the Commission; and
(iii) subsequent to the respective dates as of which information is
given in the Registration Statement and each of the Prospectus and any
Integrated Prospectus, (A) the Company has not sustained any material loss
or interference with its business or properties from fire, flood,
hurricane, accident or other calamity, whether or not covered by insurance,
or from any labor dispute or any legal or governmental proceeding and there
has not been any material adverse change, or any development involving a
prospective material adverse change, in the condition (financial or
otherwise), business prospects, net worth or results of operations of the
Company; (B) the Company has not incurred any material liability or
obligation, direct or contingent, nor entered into any material transaction
not in the ordinary course of business; (C) the Company has not purchased
any of its outstanding capital stock, nor declared, paid or otherwise
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made any dividend or distribution of any kind on its capital stock; and (D)
there has not been any material change in the capital stock, short-term
debt or long-term debt of the Company and its consolidated subsidiaries,
except in each case as described in or contemplated by the Prospectus and
any Integrated Prospectus (exclusive of any amendment or supplement
thereto).
(g) The Representatives shall have received from the Selling
Securityholder and each executive officer and director of the Company an
agreement to the effect that such person or entity will not, directly or
indirectly, without the prior written consent of Prudential Securities
Incorporated, on behalf of the Underwriters, offer, sell, offer to sell,
contract to sell, pledge, grant any option to purchase or otherwise sell or
dispose (or announce any offer, sale, pledge, offer of sale, contract of sale,
grant of an option to purchase or other sale or disposition) of any shares of
Common Stock or any securities convertible into, or exchangeable or exercisable
for, shares of Common Stock or other capital stock of the Company, or any right
to purchase or acquire Common Stock or other capital stock of the Company for a
period of 120 days after the date of this Agreement, except (A) pursuant to this
Agreement, (B) for issuances of options pursuant to stock option plans and
employment agreements in existence on the date hereof and (C) with respect to
the Selling Securityholder, (i) as required to comply with the insurance law of
the State of New Jersey, (ii) in a transaction effected other than on the Nasdaq
National Market that is exempt from the registration requirements of the Act or
(iii) as consented to in writing by Prudential Securities Incorporated.
(h) On or before the Firm Closing Date, the Representatives and counsel
for the Underwriters shall have received such further certificates, documents or
other information as they may have reasonably requested from the Company.
(i) Prior to the commencement of the offering of the Securities, the
Securities to be issued and sold by the Company shall have been included in the
Nasdaq National Market.
(j) The Underwriters shall have received a certificate from the Selling
Securityholder, signed by the Selling Securityholder, dated the Firm Closing
Date, to the effect that:
(i) the representations and warranties of the Selling Securityholder
in this Agreement are true and correct as if made on and as of the Firm
Closing Date;
(ii) with respect to statements or omissions in (A) the Registration
Statement, as amended as of the Firm Closing Date, made in reliance upon
and in conformity with written information furnished to the Company by the
Selling Securityholder specifically for use in the Registration Statement
therein, the Registration Statement does not include any untrue statement
of a material fact or
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omit to state any material fact necessary to make the statements therein
not misleading, and (B) either the Prospectus or any Integrated Prospectus,
as amended or supplemented as of the Firm Closing Date, made in reliance
upon and in conformity with written information furnished to the Company by
the Selling Securityholder specifically for use in the Registration
Statement therein does not include any untrue statement of a material fact
or omit to state any material fact necessary in order to make the statement
therein, in the light of the circumstances under which they were made, not
misleading; and
(iii) the Selling Securityholder has performed all covenants and
agreements on his or its part to be performed or satisfied at or prior to
the Firm Closing Date.
All opinions, certificates, letters and documents delivered pursuant to
this Agreement will comply with the provisions hereof only if they are
reasonably satisfactory in all material respects to the Representatives and
counsel for the Underwriters. The Company shall furnish to the Representatives
such conformed copies of such opinions, certificates, letters and documents in
such quantities as the Representatives and counsel for the Underwriters shall
reasonably request.
The respective obligations of the several Underwriters to purchase and pay
for any Option Securities shall be subject, in their discretion, to each of the
foregoing conditions to purchase the Firm Securities, except that all references
to the Firm Securities and the Firm Closing Date shall be deemed to refer to
such Option Securities and the related Option Closing Date, respectively.
8. Indemnification and Contribution.
--------------------------------
(a) The Company agrees to indemnify and hold harmless each Underwriter, the
Selling Securityholder and each person, if any, who controls any Underwriter or
the Selling Securityholder within the meaning of Section 15 of the Act or
Section 20 of the Exchange Act, against any losses, claims, damages or
liabilities, joint or several, to which such Underwriter, the Selling
Securityholder or such controlling person may become subject under the Act or
otherwise, insofar as such losses, claims, damages or liabilities (or actions in
respect thereof) arise out of or are based upon:
(i) any untrue statement or alleged untrue statement made by the
Company in Section 2 of this Agreement,
(ii) any untrue statement or alleged untrue statement of any
material fact contained in (A) the Registration Statement or any amendment
thereto, any Preliminary Prospectus, the Prospectus or any Integrated
Prospectus or any amendment or supplement thereto or (B) any application or
other document, or any amendment or supplement thereto, executed by the
Company or based upon written information furnished by or on behalf of the
Company filed in any jurisdiction in order to qualify the Securities under
the
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securities or blue sky laws thereof or filed with the Commission or any
securities association or securities exchange (each an "Application"),
(iii) the omission or alleged omission to state in the Registration
Statement or any amendment thereto, any Preliminary Prospectus, the
Prospectus or any Integrated Prospectus or any amendment or supplement
thereto, or any Application a material fact required to be stated therein
or necessary to make the statements therein not misleading, or
(iv) any untrue statement or alleged untrue statement of any material
fact contained in any audio or visual materials supplied by the Company to
be used in connection with the marketing of the Securities, including
without limitations, slides, videos, films and tape recordings,
and will reimburse, as incurred, each Underwriter, the Selling Securityholder
and each such controlling person for any legal or other expenses reasonably
incurred by such Underwriter, the Selling Securityholder or such controlling
person in connection with investigating, defending against or appearing as a
third-party witness in connection with any such loss, claim, damage, liability
or action; provided, however, that the Company will not be liable in any such
case to the extent that any such loss, claim, damage or liability arises out of
or is based upon any untrue statement or alleged untrue statement or omission or
alleged omission made in such Registration Statement or any amendment thereto,
any Preliminary Prospectus, the Prospectus or any Integrated Prospectus or any
amendment or supplement thereto or any Application in reliance upon and in
conformity with written information furnished to the Company by such Underwriter
or the Selling Securityholder, as the case may be, through the Representatives
specifically for use therein. This indemnity agreement will be in addition to
any liability which the Company may otherwise have. The Company will not,
without the prior written consent of the Underwriter or Underwriters purchasing,
in the aggregate, more than fifty percent (50%) of the Securities, settle or
compromise or consent to the entry of any judgment in any pending or threatened
claim, action, suit or proceeding in respect of which indemnification may be
sought hereunder (whether or not any such Underwriter, the Selling
Securityholder or any person who controls any such Underwriter or the Selling
Securityholder, as the case may be, within the meaning of Section 15 of the Act
or Section 20 of the Exchange Act is a party to such claim, action, suit or
proceeding), unless such settlement, compromise or consent includes an
unconditional release of the Selling Securityholder, all of the Underwriters and
such controlling persons from all liability arising out of such claim, action,
suit or proceeding. Notwithstanding anything to the contrary contained herein,
the liability of the Company to the Selling Securityholder and any person who
controls the Selling Securityholder within the meaning of Section 15 of the Act
or Section 20 of the Exchange Act under the indemnity agreement contained in
this Section 8(a) shall be limited to $1,000,000.
(b) The Selling Securityholder (except as provided in Section 8(f)) agrees
to indemnify and hold harmless each Underwriter and each person, if any, who
controls any
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Underwriter within the meaning of Section 15 of the Act or Section 20 of the
Exchange Act against any losses, claims, damages or liabilities, joint or
several, to which such Underwriter or such controlling person may become subject
under the Act or otherwise, insofar as such losses, claims, damages or
liabilities (or actions in respect thereof) arise out of or are based upon:
(i) any untrue statement or alleged untrue statement of any material
fact contained in the Registration Statement or any amendment thereto, any
Preliminary Prospectus, the Prospectus or any Integrated Prospectus or any
amendment or supplement thereto; or
(ii) the omission or the alleged omission to state therein a material
fact required to be stated in the Registration Statement or any amendment
thereto, any Preliminary Prospectus, the Prospectus or any Integrated
Prospectus or any amendment or supplement thereto, or any Application or
necessary to make the statements therein not misleading;
but only to the extent that such untrue statement or alleged untrue statement or
omission or alleged omission was made in reliance upon and in conformity with
written information furnished to the Company by the Selling Securityholder for
use therein. This indemnity agreement will be in addition to any liability
which the Selling Securityholder may otherwise have. The Selling Securityholder
will not, without the prior written consent of the Underwriter or Underwriters
purchasing, in the aggregate, more than fifty percent (50%) of the Securities,
settle or compromise or consent to the entry of any judgment in any pending or
threatened claim, action, suit or proceeding in respect of which indemnification
may be sought hereunder (whether or not such Underwriter or any person who
controls such Underwriter within the meaning of Section 15 of the Act or Section
20 of the Exchange Act is a party to such claim, action, suit or proceeding),
unless such settlement, compromise or consent includes an unconditional release
of the Underwriters and each such controlling person from all liability arising
out of such claim, action, suit or proceeding.
(c) Each Underwriter, severally and not jointly, will indemnify and hold
harmless the Company, each of its directors, each of its officers who signed the
Registration Statement, the Selling Securityholder and each person, if any, who
controls the Company or the Selling Securityholder within the meaning of Section
15 of the Act or Section 20 of the Exchange Act against any losses, claims,
damages or liabilities to which the Company, any such director or officer of the
Company, the Selling Securityholder or any such controlling person of the
Company or such Selling Securityholder may become subject under the Act or
otherwise, insofar as such losses, claims, damages or liabilities (or actions in
respect thereof) arise out of or are based upon (i) any untrue statement or
alleged untrue statement of any material fact contained in the Registration
Statement or any amendment thereto, any Preliminary Prospectus, the Prospectus
or any Integrated Prospectus or any amendment or supplement thereto, or any
Application or (ii) the omission or the alleged omission to state therein a
material fact required to be stated in the Registration Statement or any
amendment thereto, any Preliminary Prospectus,
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the Prospectus or any Integrated Prospectus or any amendment or supplement
thereto, or any Application necessary to make the statements therein not
misleading, in each case to the extent, but only to the extent, that such untrue
statement or alleged untrue statement or omission or alleged omission was made
in reliance upon and in conformity with written information furnished to the
Company by such Underwriter through the Representatives specifically for use
therein; and, subject to the limitation set forth immediately preceding this
clause, will reimburse, as incurred, any legal or other expenses reasonably
incurred by the Company or any such director, officer or controlling person or
the Selling Securityholder in connection with investigating or defending any
such loss, claim, damage, liability or any action in respect thereof. This
indemnity agreement will be in addition to any liability which such Underwriter
may otherwise have.
(d) Promptly after receipt by an indemnified party under this Section 8 of
notice of the commencement of any action, such indemnified party will, if a
claim in respect thereof is to be made against the indemnifying party under this
Section 8, notify the indemnifying party of the commencement thereof; but the
omission so to notify the indemnifying party will not relieve it from any
liability which it may have to any indemnified party otherwise than under this
Section 8. In case any such action is brought against any indemnified party,
and it notifies the indemnifying party of the commencement thereof, the
indemnifying party will be entitled to participate therein and, to the extent
that it may wish, jointly with any other indemnifying party similarly notified,
to assume the defense thereof, with counsel satisfactory to such indemnified
party; provided, however, that if the defendants in any such action include both
the indemnified party and the indemnifying party and the indemnified party shall
have reasonably concluded that there may be one or more legal defenses available
to it and/or other indemnified parties which are different from or additional to
those available to the indemnifying party, the indemnifying party shall not have
the right to direct the defense of such action on behalf of such indemnified
party or parties and such indemnified party or parties shall have the right to
select separate counsel to defend such action on behalf of such indemnified
party or parties. After notice from the indemnifying party to such indemnified
party of its election so to assume the defense thereof and approval by such
indemnified party of counsel appointed to defend such action, the indemnifying
party will not be liable to such indemnified party under this Section 8 for any
legal or other expenses, other than reasonable costs of investigation,
subsequently incurred by such indemnified party in connection with the defense
thereof, unless (i) the indemnified party shall have employed separate counsel
in accordance with the proviso to the next preceding sentence (it being
understood, however, that in connection with such action the indemnifying party
shall not be liable for the expenses of more than one separate counsel (in
addition to local counsel) in any one action or separate but substantially
similar actions in the same jurisdiction arising out of the same general
allegations or circumstances, designated by the Representatives in the case of
paragraph (a) of this Section 8, representing the indemnified parties under such
paragraph (a) who are parties to such action or actions) or (ii) the
indemnifying party does not promptly retain counsel satisfactory to the
indemnified party or (iii) the indemnifying party has authorized the employment
of counsel for the indemnified party at the expense of the indemnifying party.
After such notice from the indemnifying party to such indemnified party, the
indemnifying party will
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not be liable for the costs and expenses of any settlement of such action
effected by such indemnified party without the consent of the indemnifying
party.
(e) In circumstances in which the indemnity agreement provided for in the
preceding paragraphs of this Section 8 is unavailable or insufficient, for any
reason, to hold harmless an indemnified party in respect of any losses, claims,
damages or liabilities (or actions in respect thereof), each indemnifying party,
in order to provide for just and equitable contribution, shall contribute to the
amount paid or payable by such indemnified party as a result of such losses,
claims, damages or liabilities (or actions in respect thereof) in such
proportion as is appropriate to reflect (i) the relative benefits received by
the indemnifying party or parties on the one hand and the indemnified party on
the other from the offering of the Securities or (ii) if the allocation provided
by the foregoing clause (i) is not permitted by applicable law, not only such
relative benefits but also the relative fault of the indemnifying party or
parties on the one hand and the indemnified party on the other in connection
with the statements or omissions or alleged statements or omissions that
resulted in such losses, claims, damages or liabilities (or actions in respect
thereof), as well as any other relevant equitable considerations. The relative
benefits received by the Company and the Selling Securityholder on the one hand
and the Underwriters on the other shall be deemed to be in the same proportion
as the total proceeds from the offering (before deducting expenses) received by
the Company and the Selling Securityholder bear to the total underwriting
discounts and commissions received by the Underwriters. The relative fault of
the parties shall be determined by reference to, among other things, whether the
untrue or alleged untrue statement of a material fact or the omission or alleged
omission to state a material fact relates to information supplied by the
Company, the Selling Securityholder or the Underwriters, the parties' relative
intents, knowledge, access to information and opportunity to correct or prevent
such statement or omission, and any other equitable considerations appropriate
in the circumstances. The Company, the Selling Securityholder and the
Underwriters agree that it would not be equitable if the amount of such
contribution were determined by pro rata or per capita allocation (even if the
Underwriters were treated as one entity for such purpose) or by any other method
of allocation that does not take into account the equitable considerations
referred to above in this paragraph (e). Notwithstanding any other provision of
this paragraph (e), no Underwriter shall be obligated to make contributions
hereunder that in the aggregate exceed the total public offering price of the
Securities purchased by such Underwriter under this Agreement, less the
aggregate amount of any damages that such Underwriter has otherwise been
required to pay in respect of the same or any substantially similar claim, and
no person guilty of fraudulent misrepresentation (within the meaning of Section
11(f) of the Act) shall be entitled to contribution from any person who was not
guilty of such fraudulent misrepresentation. The Underwriters' obligations to
contribute hereunder are several in proportion to their respective underwriting
obligations and not joint, and contributions among Underwriters shall be
governed by the provisions of the Prudential Securities Incorporated Master
Agreement Among Underwriters. For purposes of this paragraph (e), each person,
if any, who controls an Underwriter within the meaning of Section 15 of the Act
or Section 20 of the Exchange Act shall have the same rights to contribution as
such Underwriter, and each director of the Company, each officer of the Company
who signed the Registration Statement and each person, if any, who
-35-
<PAGE>
controls the Company or any Selling Securityholder within the meaning of Section
15 of the Act or Section 20 of the Exchange Act, shall have the same rights to
contribution as the Company or such Selling Securityholder, as the case may be.
(f) Notwithstanding anything contained herein to the contrary, the
liability of the Selling Securityholder under the indemnity and contribution
agreements contained in this Section 8 shall be limited to an amount equal to
the public offering price of the Securities to be sold by such Selling
Securityholder to the Underwriters minus the amount of the underwriting discount
paid thereon to the Underwriters by the Selling Securityholder.
9. Default of Underwriters. If one or more Underwriters default in their
obligations to purchase Firm Securities or Option Securities hereunder and the
aggregate number of such Securities that such defaulting Underwriter or
Underwriters agreed but failed to purchase is ten percent or less of the
aggregate number of Firm Securities or Option Securities to be purchased by all
of the Underwriters at such time hereunder, the other Underwriters may make
arrangements satisfactory to the Representatives for the purchase of such
Securities by other persons (who may include one or more of the non-defaulting
Underwriters, including the Representatives), but if no such arrangements are
made by the Firm Closing Date or the related Option Closing Date, as the case
may be, the other Underwriters shall be obligated severally in proportion to
their respective commitments hereunder to purchase the Firm Securities or Option
Securities that such defaulting Underwriter or Underwriters agreed but failed to
purchase. If one or more Underwriters so default with respect to an aggregate
number of Securities that is more than ten percent of the aggregate number of
Firm Securities or Option Securities, as the case may be, to be purchased by all
of the Underwriters at such time hereunder, and if arrangements satisfactory to
the Representatives are not made within 36 hours after such default for the
purchase by other persons (who may include one or more of the non-defaulting
Underwriters, including the Representatives) of the Securities with respect to
which such default occurs, this Agreement will terminate without liability on
the part of any non-defaulting Underwriter or the Company other than as provided
in Section 10 hereof if the default is with respect to the Firm Closing Date and
without liability for the Option Shares if such default is with respect to the
Option Closing Date. In the event of any default by one or more Underwriters as
described in this Section 9, the Representatives shall have the right to
postpone the Firm Closing Date or the Option Closing Date, as the case may be,
established as provided in Section 3 hereof for not more than seven business
days in order that any necessary changes may be made in the arrangements or
documents for the purchase and delivery of the Firm Securities or Option
Securities, as the case may be. As used in this Agreement, the term
"Underwriter" includes any person substituted for an Underwriter under this
Section 9. Nothing herein shall relieve any defaulting Underwriter from
liability for its default.
10. Survival. The respective representations, warranties, agreements,
covenants, indemnities and other statements of the Company and its officers, the
Selling Securityholder and the several Underwriters set forth in this Agreement
or made by or on behalf of them, respectively, pursuant to this Agreement shall
remain in full force and effect, regardless of (i) any
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<PAGE>
investigation made by or on behalf of the Company, any of its officers or
directors, the Selling Securityholder, any Underwriter or any controlling person
referred to in Section 8 hereof and (ii) delivery of and payment for the
Securities. The respective agreements, covenants, indemnities and other
statements set forth in Sections 6 and 8 hereof shall remain in full force and
effect, regardless of any termination or cancellation of this Agreement.
11. Termination.
(a) This Agreement may be terminated with respect to the Firm Securities or
any Option Securities in the sole discretion of the Representatives by notice to
the Company or the Selling Securityholder given prior to the Firm Closing Date
or the related Option Closing Date, respectively, in the event that the Company
or the Selling Securityholder shall have failed, refused or been unable to
perform all obligations and satisfy all conditions on their part to be performed
or satisfied hereunder at or prior thereto or, if at or prior to the Firm
Closing Date or such Option Closing Date, respectively,
(i) the Company shall have, in the sole judgment of the
Representatives, sustained any material loss or interference with its business
or properties from fire, flood, hurricane, accident or other calamity, whether
or not covered by insurance, or from any labor dispute or any legal or
governmental proceeding or there shall have been any material adverse change, or
any development involving a prospective material adverse change (including
without limitation a change in management or control of the Company), in the
condition (financial or otherwise), business prospects, net worth or results of
operations of the Company, except in each case as described in or contemplated
by each of the Prospectus and any Integrated Prospectus (exclusive of any
amendment or supplement thereto);
(ii) trading in the Common Stock shall have been suspended by the
Commission or the Nasdaq National Market;
(iii) trading in securities generally on the New York Stock Exchange
or the Nasdaq National Market shall have been suspended or minimum or maximum
prices shall have been established on any such exchange or market system;
(iv) banking moratorium shall have been declared by New York or
United States authorities; or
(v) there shall have been (A) an outbreak or escalation of hostilities
between the United States and any foreign power, (B) an outbreak or escalation
of any other insurrection or armed conflict involving the United States or (C)
any other calamity or crisis or material adverse change in general economic,
political or financial conditions having an effect on the United States
financial markets that, in the sole judgment of the Representatives, makes it
impractical or inadvisable to proceed with the public offering
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<PAGE>
or the delivery of the Securities as contemplated by the Registration Statement,
as amended as of the date hereof.
(b) Termination of this Agreement pursuant to this Section 11 shall be
without liability of any party to any other party except as provided in Section
10 hereof.
12. Information Supplied by Underwriters. The statements set forth in the
last paragraph on the front cover page and in the first and third paragraphs
under the heading "Underwriting" in any Preliminary Prospectus, the Prospectus
or any Integrated Prospectus (to the extent such statements relate to the
Underwriters) constitute the only information furnished by any Underwriter
through the Representatives to the Company for the purposes of Sections 2(a)(ii)
and 8 hereof. The Underwriters confirm that such statements (to such extent)
are correct.
13. Notices. All communications hereunder shall be in writing and, if
sent to any of the Underwriters, shall be delivered or sent by mail, telex or
facsimile transmission and confirmed in writing to Prudential Securities
Incorporated, One New York Plaza, New York, New York 10292, Attention: Equity
Transactions Group; if sent to the Company, shall be delivered or sent by mail,
telex or facsimile transmission and confirmed in writing to the Company at 6003
Guion Road, Indianapolis, Indiana 46254, Attention: Chief Executive Officer and
President; if sent to the Selling Securityholder shall be delivered or sent by
mail, telex or facsimile transmission and confirmed in writing to the Selling
Securityholder at Four Gateway Center, Newark, New Jersey 07102-4069, Attention:
Paul Meiring.
14. Successors. This Agreement shall inure to the benefit of and shall be
binding upon the several Underwriters, the Company, the Selling Securityholder
and their respective successors and legal representatives, and nothing expressed
or mentioned in this Agreement is intended or shall be construed to give any
other person any legal or equitable right, remedy or claim under or in respect
of this Agreement, or any provisions herein contained, this Agreement and all
conditions and provisions hereof being intended to be and being for the sole and
exclusive benefit of such persons and for the benefit of no other person except
that (i) the indemnities of the Company and the Selling Securityholder contained
in Section 8 of this Agreement shall also be for the benefit of any person or
persons who control any Underwriter within the meaning of Section 15 of the Act
or Section 20 of the Exchange Act and (ii) the indemnities of the Underwriters
contained in Section 8 of this Agreement shall also be for the benefit of the
directors of the Company, the officers of the Company who have signed the
Registration Statement and any person or persons who control the Company or the
Selling Securityholder within the meaning of Section 15 of the Act or Section 20
of the Exchange Act. No purchaser of Securities from any Underwriter shall be
deemed a successor because of such purchase.
15. Applicable Law. The validity and interpretation of this Agreement,
and the terms and conditions set forth herein, shall be governed by and
construed in accordance with the laws of the State of New York, without giving
effect to any provisions relating to conflicts of laws.
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<PAGE>
16. Counterparts. This Agreement may be executed in two or more
counterparts, each of which shall be deemed an original, but all of which
together shall constitute one and the same instrument.
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<PAGE>
If the foregoing correctly sets forth our understanding, please indicate
your acceptance thereof in the space provided below for that purpose, whereupon
this letter shall constitute an agreement binding the Company, the Selling
Securityholder and each of the several Underwriters.
Very truly yours,
PAUL HARRIS STORES, INC.
By:
________________________________________________
Name:
Title:
THE PRUDENTIAL INSURANCE COMPANY OF AMERICA
By:
________________________________________________
Name:
Title:
The foregoing Agreement
is hereby confirmed and
accepted as of the date
first above written.
PRUDENTIAL SECURITIES INCORPORATED
ROBERTSON, STEPHENS & COMPANY LLC
RODMAN & RENSHAW, INC.
By: PRUDENTIAL SECURITIES INCORPORATED
By: __________________________________
Name: Jean-Claude Canfin
Title: Managing Director
For itself and on behalf of the Representatives.
<PAGE>
SCHEDULE 1
UNDERWRITERS
Number of Company's
Firm Securities to be
Underwriter Purchased
- ----------- ---------------------
Prudential Securities Incorporated.............
Robertson, Stephens & Company LLC..............
Rodman & Renshaw, Inc..........................
Total................................. 500,000
-------
<PAGE>
EXHIBIT 5
BAKER & DANIELS
EST. 1863
300 NORTH MERIDIAN STREET, SUITE 2700, INDIANAPOLIS, INDIANA 46204-1782
(317) 237-0300 FAX (317) 237-1000
May 9, 1997
Paul Harris Stores, Inc.
6003 Guion Road
Indianapolis, IN 46254
Ladies and Gentlemen:
We have examined the corporate records and proceedings of Paul Harris
Stores, Inc., an Indiana corporation (the "Company"), with respect to:
(a) the organization of the Company;
(b) the legal sufficiency of all corporate proceedings of the Company
taken in connection with the authorization, issuance, forms, validity and
nonassessability of all of the presently issued and outstanding shares of
common stock, without par value, of the Company ("Common Stock") and shares
of nonvoting common stock, without par value, of the Company ("Nonvoting
Common Stock") which are convertible into shares of Common Stock on a
share-for-share basis; and
(c) the legal sufficiency of all corporate proceedings of the Company
taken in connection with the authorization, issuance, form, validity and
nonassessability of the authorized but unissued shares (including the
shares to cover an over-allotment option) of Common Stock to be offered for
sale by the Company under its Registration Statement on Form S-3
(Registration No. 333-25053) as amended (the "Registration Statement"), in
connection with which this opinion is given.
Based on such examination, we are of the opinion that:
1. The Company is a duly organized and validly existing corporation under
the laws of the State of Indiana.
<PAGE>
Paul Harris Stores, Inc -2- May 9, 1997
2. The Company is authorized to have outstanding 16,500,000 shares of
Common Stock and 3,500,000 shares of Nonvoting Common Stock. Of such shares, at
May 8, 1997, 7,620,403 shares of Common Stock and 3,013,039 shares of Nonvoting
Common Stock, including the shares of Nonvoting Common Stock beneficially owned
by the Selling Shareholder, were outstanding, all of which shares were validly
authorized, legally issued and fully paid and nonassessable.
3. When the Registration Statement shall have become effective, the
shares of Nonvoting Common Stock being offered by the Selling Shareholder
pursuant thereto shall have been converted into shares of Common Stock, and the
authorized but unissued shares of Common Stock being offered by the Company
pursuant thereto shall have been sold upon the terms and conditions described in
the Registration Statement and set forth in the Underwriting Agreement, all of
such shares will be validly authorized, legally issued and fully paid and
nonassessable.
We hereby consent to the filing of this opinion as Exhibit 5 to the
Registration Statement and to the references to us in the Prospectus which is a
part of the Registration Statement. In giving this consent, we do not admit that
we come within the category of persons whose consent is required under Section 7
of the Securities Act of 1933, as amended, or rules and regulations of the
Securities and Exchange Commission promulgated thereunder.
Very truly yours,
Baker & Daniels
<PAGE>
EXHIBIT 23-A
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the use in the Prospectus constituting part of this
Registration Statement on Form S-3 of our report dated February 27, 1997,
except as to Note 9, which is as of April 10, 1997, relating to the
consolidated financial statements of Paul Harris Stores, Inc., which appears
in such Prospectus and which is incorporated by reference in such Prospectus
from the Paul Harris Stores, Inc. Annual Report on Form 10-K for the year
ended February 1, 1997. We also consent to the references to us under the
headings "Experts" and "Selected Consolidated Financial and Operating Data" in
such Prospectus. However, it should be noted that Price Waterhouse LLP has not
prepared or certified such "Selected Consolidated Financial and Operating
Data".
Price Waterhouse LLP
Indianapolis, Indiana
May 8, 1997
