HARRIS PAUL STORES INC, S-3, 1997-04-11

HARRIS PAUL STORES INC
S-3, 1997-04-11
WOMEN'S CLOTHING STORES

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AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON APRIL 11, 1997

REGISTRATION NO. 333-
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------------
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
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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.
----------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT
SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS
REGISTRATION STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH
SECTION 8(A) OF THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT
SHALL BECOME EFFECTIVE ON SUCH DATE AS THE SECURITIES AND EXCHANGE COMMISSION,
ACTING PURSUANT TO SAID SECTION 8(A), MAY DETERMINE.
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++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+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 APRIL 11, 1997

PROSPECTUS

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3,000,000 Shares

LOGO

Common Stock

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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
April 9, 1997, the last reported sales price of the Common Stock on the Nasdaq
National Market was $16.06 per share. See "Price Range of Common Stock."

SEE "RISK FACTORS" ON PAGES 6 TO 8 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 $100,000,
and expenses payable by the Selling Shareholder estimated to be $350,000.
(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."

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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.
April , 1997
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[PHOTOS]

----------------

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
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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 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
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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.

4
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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 10,619,403 shares (1)
Offering......................................
Use of Proceeds by the Company................. For general corporate purposes.
See "Use of Proceeds."
Nasdaq National Market Symbol.................. PAUH
</TABLE>
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(1) Excludes 2,185,381 shares which may be issued pursuant to the Company's
stock option programs, under which options to purchase an aggregate of
1,196,078 shares of Common Stock were outstanding on April 9, 1997
(including 121,100 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)
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<S> <C> <C>
BALANCE SHEET DATA:
Working capital......................................... $21,457 $28,987
Total assets............................................ 57,319 64,849
Long-term debt.......................................... 1,930 1,930
Shareholders' equity.................................... 36,911 44,441
</TABLE>
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(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 $16.06 per share (the last reported sales price of the Common Stock on
the Nasdaq National Market on April 9, 1997) and the application of the
estimated net proceeds therefrom to the Company. See "Use of Proceeds" and
"Capitalization."

5
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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."

6
<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."

7
<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 10,619,403 shares of Common Stock outstanding (11,069,403 if
the Underwriters' over-allotment option is exercised in full). Of those
shares, a total of 9,851,918 (10,301,918 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 3,267,485 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."

8
<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 $16.06 per share (the last reported sales price of the Common Stock
on the Nasdaq National Market on April 9, 1997) and after deducting
underwriting discounts and commissions and the Company's estimated Offering
expenses, are estimated to be $7.5 million ($14.4 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 (through April 9, 1997).......................... $23.13 $12.50
</TABLE>

On April 9, 1997, the last reported sales price of the Common Stock on the
Nasdaq National Market was $16.06 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.

9
<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 $16.06 per share (the last
reported sales price of the Common Stock on the Nasdaq National Market on April
9, 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 9,460
Additional paid-in capital............................... 9,963 9,963
Retained earnings........................................ 25,018 25,018
------- -------
Total shareholders' equity............................. 36,911 44,441
------- -------
Total capitalization................................... $38,841 $46,371
======= =======
</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).

10
<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>

11
<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.

12
<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.

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."

13
<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.

14
<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.

15
<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>

16
<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.

17
<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.

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 all of its merchandise and marketing its apparel
and accessories only 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, typically
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

18
<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.

19
<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 7
- -------------------------
Atlanta (4)
Macon
Savannah
Columbus

Illinois 29
- -------------------------
Carbondale
Champaign
Chicago (23)
Fairview Heights
Moline
Peoria
Springfield

Indiana 35
- -------------------------
Anderson (3)
Bloomington (2)
Clarksville
Columbus (2)
Evansville (2)
Ft. Wayne (3)
Indianapolis (12)
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

20
<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. Major retail shopping malls are expected to generate sales per gross
square foot in excess of $300, while primary strip shopping centers typically
perform at lower levels.

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 new
store cost, excluding inventory, for traditional and new format stores was
$67,000 and $158,000, respectively, and the average inventory investment for
traditional and new format stores was $78,000 and $95,000, respectively.

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 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,

21
<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................................................... 52.8% 48.1% 46.4%
Wovens.................................................. 38.0 41.6 40.2
----- ----- -----
Total sportswear...................................... 90.8 89.7 86.6
Dresses................................................. -- 2.5 2.9
----- ----- -----
Total apparel......................................... 90.8 92.2 89.5
Accessories............................................. 9.2 7.8 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.

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

22
<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 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

23
<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.

24
<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.

25
<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...................... 52 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 costume jewelry, 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.

26
<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 February 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.

27
<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.

28
<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") of the
Rights. Each Right, when it becomes exercisable as described below, will
entitle the registered holder to purchase from the

29
<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.

30
<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

31
<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

32
<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.

33
<PAGE>

SHARES ELIGIBLE FOR FUTURE SALE

After the completion of the Offering, the Company will have 10,619,403 shares
of Common Stock outstanding (11,069,403 if the Underwriters' over-allotment
option is exercised in full). Of those shares, a total of 9,851,918 (10,301,918
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 two years (one year commencing April 29,
1997) 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 3,267,485 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.

34
<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 and the Selling Shareholder have agreed to indemnify the several
Underwriters 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.

35
<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.

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.

36
<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........................................................ 4
Risk Factors.............................................................. 6
Use of Proceeds........................................................... 9
Price Range of Common Stock............................................... 9
Dividend Policy........................................................... 9
Capitalization............................................................ 10
Selected Consolidated Financial and Operating Data........................ 11
Management's Discussion and Analysis of Financial Condition and Results of
Operations............................................................... 13
Business.................................................................. 18
Management................................................................ 26
Principal and Selling Shareholders........................................ 28
Description of Capital Stock.............................................. 29
Shares Eligible for Future Sale........................................... 34
Underwriting.............................................................. 35
Legal Matters............................................................. 36
Experts................................................................... 36
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.

April , 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................................
Blue Sky fees and expenses........................
Transfer agent's fees and expenses................
Printing costs....................................
Accounting fees and expenses......................
Legal fees and expenses (other than Blue Sky fees
and expenses)....................................
Miscellaneous.....................................
------ -------
Total......................................... $ $
====== =======
</TABLE>
- --------

All amounts except the registration fees and NASD fees are estimated. Items
which are not included will be supplied by amendment.

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 REGISTRATION
STATEMENT TO BE SIGNED ON ITS BEHALF BY THE UNDERSIGNED, THEREUNTO DULY
AUTHORIZED, IN THE CITY OF INDIANAPOLIS, STATE OF INDIANA, ON THE 10TH DAY OF
APRIL, 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
REGISTRATION STATEMENT HAS BEEN SIGNED BY THE FOLLOWING PERSONS IN THEIR
RESPECTIVE CAPACITIES AND ON THE RESPECTIVE DATES SET FORTH OPPOSITE THEIR
NAMES. EACH PERSON WHOSE SIGNATURE APPEARS BELOW HEREBY AUTHORIZES EACH OF
CHARLOTTE G. FISCHER AND JOHN H. BOYERS, EACH WITH FULL POWER OF SUBSTITUTION,
TO EXECUTE IN THE NAME AND ON BEHALF OF SUCH PERSON ANY AMENDMENT OR ANY POST-
EFFECTIVE AMENDMENT TO THIS REGISTRATION STATEMENT AND TO FILE THE SAME, WITH
EXHIBITS THERETO, AND OTHER DOCUMENTS IN CONNECTION THEREWITH, MAKING SUCH
CHANGES IN THIS REGISTRATION STATEMENT AS THE REGISTRANT DEEMS APPROPRIATE,
AND APPOINTS EACH OF CHARLOTTE G. FISCHER AND JOHN H. BOYERS, EACH WITH FULL
POWER OF SUBSTITUTION, ATTORNEY-IN-FACT TO SIGN ANY AMENDMENT AND ANY POST-
EFFECTIVE AMENDMENT TO THIS REGISTRATION STATEMENT AND TO FILE THE SAME, WITH
EXHIBITS THERETO, AND OTHER DOCUMENTS IN CONNECTION THEREWITH.

<TABLE>
<CAPTION>
SIGNATURE CAPACITY DATE
--------- -------- ----
<S> <C> <C>
/s/ Charlotte G. Fischer Chairman of the Board, April 10, 1997
____________________________________ President and Chief
Charlotte G. Fischer Executive Officer

/s/ John H. Boyers Senior Vice President-- April 10, 1997
____________________________________ Finance and Treasurer
John H. Boyers (Principal Financial
Officer)

/s/ Keith L. Himmel, Jr. Vice President--Finance, April 10, 1997
____________________________________ Controller and Corporate
Keith L. Himmel, Jr. Secretary (Principal
Accounting Officer)

/s/ Richard A. Feinberg, Ph.D. Director April 10, 1997
____________________________________
Richard A. Feinberg, Ph.D.

Director April , 1997
____________________________________
Rudy Greer

/s/ Robert I. Logan Director April 10, 1997
____________________________________
Robert I. Logan

Director April , 1997
____________________________________
James T. Morris

/s/ Gerald Paul Director April 10, 1997
____________________________________
Gerald Paul

/s/ John E. Rau Director April 10, 1997
____________________________________
John E. Rau

/s/ Sally M. Tassani Director April 10, 1997
____________________________________
Sally M. Tassani

</TABLE>

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>

- --------
* To be filed by amendment.

E-1

<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
April 10, 1997