<PAGE>
Filed pursuant to Rule 424(a)
SEC File No. 333-04117
SUBJECT TO COMPLETION, DATED MAY 20, 1996
PROSPECTUS
585,000 SHARES
HAROLD'S
[LOGO]
COMMON STOCK
__________________
Of the 585,000 shares of Common Stock offered hereby (the "Shares"),
400,000 shares are being sold by Harold's Stores, Inc. ("Harold's" or the
"Company") and 185,000 shares are being sold by certain shareholders of the
Company (the "Selling Shareholders"). See "Selling Shareholders." The Company
will not receive any of the proceeds from the sale of the shares of Common Stock
by the Selling Shareholders.
The Common Stock is listed on the American Stock Exchange ("AMEX") under
the trading symbol HLD. On May 20, 1996, the last reported sale price of the
Common Stock on the AMEX was $16.25 per share. See "Price Range of Common Stock
and Dividend Policy."
__________________
SEE "RISK FACTORS" BEGINNING ON PAGE 6 OF THIS PROSPECTUS FOR A DISCUSSION
OF CERTAIN FACTORS THAT SHOULD BE CONSIDERED BY PROSPECTIVE INVESTORS BEFORE
PURCHASING ANY OF THE SHARES OFFERED HEREBY.
__________________
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 COMMIS-
SION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS.
ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
<TABLE>
<CAPTION>
===============================================================================
PROCEEDS TO
UNDERWRITING PROCEEDS TO SELLING
PRICE TO PUBLIC DISCOUNTS(1) COMPANY (2) SHAREHOLDERS(2)
<S> <C> <C> <C> <C>
Per Share.. $ $ $ $
Total (3).. $ $ $ $
===============================================================================
</TABLE>
(1) The Company and the Selling Shareholders have agreed to indemnify the
Underwriter against certain liabilities, including liabilities under the
Securities Act of 1933, as amended. See "Underwriting."
(2) Before deducting expenses estimated to be $ , all of which will be
paid by the Company.
(3) The Company and the Selling Shareholders have granted the Underwriter a 30-
day option to purchase up to 87,750 additional shares of Common Stock on
the same terms as set forth above solely to cover over-allotments, if any.
If the option is exercised in full, the total Price to Public, Underwriting
Discounts, Proceeds to Company, and Proceeds to Selling Shareholders will
be $ , $ , $ and $ , respectively. See
"Underwriting."
The Shares being offered by this Prospectus are offered by the Underwriter,
subject to prior sale, when, as and if delivered to and accepted by the
Underwriter and subject to certain conditions. It is expected that certificates
for the shares of Common Stock will be available for delivery against payment
therefor on or about , 1996, at the offices of Scott & Stringfellow,
Inc., Richmond, Virginia.
__________________
SCOTT & STRINGFELLOW, INC.
__________________
The date of this Prospectus is , 1996
<PAGE>
The following legend will appear in the left margin of the immediately
preceding cover page of the Prospectus:
Information contained herein is subject to completion to 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 become
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.
<PAGE>
AVAILABLE INFORMATION
The Company is subject to the informational requirements of the Securities
Exchange Act of 1934, as amended (the "1934 Act"), and, in accordance therewith,
files reports, proxy statements and other information with the Securities and
Exchange Commission (the "SEC"). Reports, proxy statements and other
information filed by the Company can be inspected and copied at the public
reference facilities maintained by the SEC at 450 Fifth Street, N.W., Judiciary
Plaza, Room 1024, Washington, D.C. 20549 and at its Regional Offices at Seven
World Trade Center, Suite 1300, New York, New York 10048 and at Citicorp Atrium
Center, 500 West Madison Street, Suite 1400, Chicago, Illinois 60611. Copies of
such materials also may be obtained at prescribed rates from the Public
Reference Section of the SEC, 450 Fifth Street, N.W., Judiciary Plaza,
Washington, D.C. 20549. The Common Stock is listed on the American Stock
Exchange, and such reports, proxy statements and other information concerning
the Company may be inspected and copied at the offices of the American Stock
Exchange, 86 Trinity Place, New York, New York 10006.
The Company has filed with the SEC a Registration Statement on Form S-2 (the
"Registration Statement"), of which this Prospectus constitutes a part, under
the Securities Act of 1933, as amended (the "Securities Act"), with respect to
the Shares. This Prospectus does not contain all the information set forth in
or incorporated by reference in the Registration Statement and the exhibits and
schedules thereto in accordance with the rules and regulations of the SEC. For
further information with respect to the Company and the Shares, reference is
made to the Registration Statement and the exhibits and schedules thereto.
Copies of the Registration Statement and the exhibits thereto are on file at the
offices of the SEC and may be obtained upon payment of a prescribed fee or may
be examined without charge at the Public Reference Section of the SEC,
Washington, D.C. Statements contained in this Prospectus concerning the
provisions of documents filed with the Registration Statement as exhibits are
necessarily summaries of such documents, and each such statement is qualified in
its entirety by reference to the copy of the applicable document filed with the
SEC.
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
Incorporated by reference in this Prospectus as of the date of its filing, and
subject in such case to information contained in this Prospectus, is the
Company's Annual Report on Form 10-K for the fiscal year ended February 3, 1996,
which has been filed by the Company with the SEC pursuant to the 1934 Act.
The Company will provide, without charge, to each person to whom a copy of this
Prospectus is delivered, on the written or oral request of such person, a copy
of any or all of the documents incorporated by reference in this Prospectus
(other than exhibits and schedules thereto, unless such exhibits or schedules
are specifically incorporated by reference into the information that this
Prospectus incorporates). Written or telephonic requests for such copies should
be directed to H. Rainey Powell, Harold's Stores, Inc., 765 Asp Avenue, Norman,
Oklahoma 73069, telephone (405) 329-4045.
____________________
IN CONNECTION WITH THIS OFFERING, THE UNDERWRITER MAY OVER-ALLOT OR EFFECT
TRANSACTIONS THAT STABILIZE OR MAINTAIN THE MARKET PRICE OF THE COMMON STOCK AT
A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN MARKET. SUCH
TRANSACTIONS MAY BE EFFECTED ON THE AMERICAN STOCK EXCHANGE OR OTHERWISE. SUCH
STABILIZING, IF COMMENCED, MAY BE DISCONTINUED AT ANY TIME.
2
<PAGE>
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by, and should be read in
conjunction with, the more detailed information and consolidated financial
statements (including the Notes thereto) appearing elsewhere in this Prospectus.
All share and per share information set forth herein has been adjusted to
reflect the 5% stock dividend paid in fiscal 1996 and the 10% stock dividends
paid in fiscal 1995, fiscal 1994 and fiscal 1993. Unless otherwise indicated,
all information contained herein assumes no exercise of the Underwriter's over-
allotment option or of options granted pursuant to the Company's stock option
and equity incentive plan. See "Underwriting" and "Selling Shareholders."
THE COMPANY
Harold's Stores, Inc., through a 31-location store chain of women's and men's
specialty apparel stores in 15 states, offers high-quality, classically inspired
apparel to the upscale, quality-conscious consumer primarily in the 20 to 50
year old age group. The stores typically are strategically located in shopping
centers and malls with other top-of-the-line specialty retailers and are
enhanced by an eclectic mix of antiques, together with specially designed
fixtures and visual props, to create an appealing stage for presentation of the
Company's distinctive women's and men's apparel and accessories. More than 85%
of sales consists of the Company's designs controlled by Harold's own stylists
and designers and resourced by Harold's buyers from domestic, European and Asian
manufacturers. See "Business - Product Development and Sourcing Programs." The
remainder consists of branded merchandise selected to complement Harold's
merchandise presentation.
The Company's 31 stores are comprised of 12 full-line women's and men's
apparel stores, nine women's apparel stores which include a presentation of
men's sportwear featuring the Company's Old School Clothing brand, eight stores
featuring women's apparel only and two outlet stores to clear markdowns and
slow-moving merchandise. Retail stores range in size from about 2,100 to 14,000
square feet, with the typical store ranging from 4,000 to 6,000 square feet. The
Company's store occupancy costs were 7.3% of store sales in fiscal 1996 and 7.2%
of store sales in fiscal 1995. Store occupancy costs include base and
percentage rent, common area maintenance expense, utilities and depreciation of
leasehold improvements.
The Company achieved comparable store sales growth of 8.7% in fiscal 1996 and
10.7% in fiscal 1995. The Company believes that this increase in comparable
store sales is attributable to Harold's product development and merchandising
and Harold's commitment to customer service through its sales associates. The
Company's average sales per square foot for stores open during the entire fiscal
year were $628 and $599 for fiscal 1996 and fiscal 1995, respectively, on a 52-
week basis. The Company believes its sales per square foot are higher than
industry averages.
The Company believes that its future success will be achieved by expanding the
number of its women's and men's apparel stores, maintaining sales momentum at
existing stores, and increasing circulation of its direct response catalog. The
Company recently embarked on an aggressive expansion program, adding in the
aggregate eight retail stores during fiscal 1995 and fiscal 1996 and thereby
increasing the chain store count by approximately 40%.
The Company's expansion plan has focused and will continue to focus primarily
on markets currently served by the Company and in new markets that represent a
geographical progression from existing markets. Thus far during fiscal 1997,
the Company has opened stores in Greenville, South Carolina and Leawood, Kansas
(Kansas City metro) and plans to open four additional stores. These four stores
are planned for opening during the balance of fiscal 1997 in regional shopping
malls in Raleigh, North Carolina, Tyson's Corner (Northern Virginia), Houston
and Denver. All six stores will feature a full line of women's merchandise,
while four will include a full line of men's merchandise and two will offer
men's sportwear.
Beginning in 1990, the Company created a direct response catalog that, in
addition to contributing to sales, has provided market research and initial
promotion of new store openings. Catalog sales have increased from $620,000 in
fiscal 1992 to $9,384,000 in fiscal 1996. In fiscal 1996, the Company mailed
six issues of the catalog, averaging 48 pages, with aggregate circulation of
approximately 6.5 million issues.
The mailing address and telephone number of the Company's principal executive
offices are 765 Asp Avenue, Norman, Oklahoma 73069, (405) 329-4045.
3
<PAGE>
THE OFFERING
Common Stock Offered by(1)
The Company.............................. 400,000 shares
The Selling Shareholders................. 185,000 shares
Shares Outstanding
After this Offering(2)................... 5,365,245 shares
Use of Proceeds........................... To reduce indebtedness, to
finance expansion of the
Company's chain of stores
and its credit card
receivables and for working
capital.
AMEX Symbol................................ HLD
________________________
(1) Assumes that the Underwriter's over-allotment option to purchase up to
87,750 shares will not be exercised. See "Underwriting."
(2) Excludes 376,276 shares of Common Stock reserved for issuance pursuant to
outstanding stock options as of May 1, 1996.
FISCAL YEARS
The Company operates on a 52-53 week fiscal year which ends on the Saturday
closest to January 31. References herein to fiscal 1997, fiscal 1996, fiscal
1995, fiscal 1994, fiscal 1993 and fiscal 1992 refer to the years ended February
1, 1997, February 3, 1996, January 28, 1995, January 29, 1994, January 30, 1993
and February 1, 1992.
4
<PAGE>
SUMMARY CONSOLIDATED FINANCIAL INFORMATION
The following summary financial information is derived from the
consolidated financial statements of the Company for the fiscal years 1992
through 1996 and the first quarter of fiscal 1997.
<TABLE>
<CAPTION>
FISCAL YEAR FISCAL QUARTER ENDED
---------------------------------------------------------------------
APRIL 29, MAY 4,
1992 1993 1994 1995 1996 1995 1996
---------------------------------------------------------------------
(Dollar amounts in thousands, except per share data)
STATEMENTS OF EARNINGS DATA:
<S> <C> <C> <C> <C> <C> <C> <C>
Sales $40,553 $49,279 $60,940 $75,795 $94,264 $21,316 $
Gross profit on sales(1) 12,990 16,303 20,349 26,407 34,433 7,448
Earnings before income taxes 1,148 1,875 2,783 3,539 4,645 811
Net earnings 647 1,052 1,612 2,088 2,787 486
Earnings per common share(2) $ 0.15 $ 0.25 $ 0.35 $ 0.42 $ 0.56 $ 0.10 $
BALANCE SHEET DATA:
Working capital $ 8,732 $ 9,985 $12,540 $12,524 $21,829 $12,272 $
Total assets 20,085 21,947 26,441 34,661 42,609 35,759
Long-term debt(3) - 1,177 669 594 9,540 575
Stockholders' equity 14,302 15,366 19,996 22,260 25,299 22,819
Net book value per share(4) $ 3.36 $ 3.61 $ 4.07 $ 4.51 $ 5.10 $ 4.62 $
OTHER OPERATING DATA:
Stores open at end of period(5) 15 18 21 25 29 26
Growth in comparable store 1.1% 8.1% 7.4% 10.7% 8.7% 7.8%
sales (52-53 week basis)
- -------------------------
</TABLE>
(1) In accordance with retail industry practice, gross profit on sales is
calculated by subtracting cost of goods sold (including occupancy and
central buying expenses) from sales.
(2) Net earnings per common share are based on the weighted average number of
common shares outstanding during each period restated for the 5% stock
dividend in fiscal 1996 and the 10% stock dividends in fiscal 1995, fiscal
1994 and fiscal 1993, and include Common Stock equivalents of 53,181 shares
in fiscal 1996.
(3) In fiscal 1996, the Company renewed its line of credit to be payable at a
fixed maturity rather than on demand which required the loan to be
reclassified as long-term debt.
(4) Net book value per share is based on the number of common shares
outstanding at the end of each fiscal year restated for the 5% stock
dividend in fiscal 1996 and the 10% stock dividends in fiscal 1995, fiscal
1994 and fiscal 1993.
(5) The number of stores open at the end of the period has been restated to
reflect the consolidation of the stand alone "Old School Clothing Company"
into the 50 Penn Place Store in Oklahoma City.
5
<PAGE>
RISK FACTORS
Prospective investors should consider carefully the following factors as well
as the other information contained in this Prospectus before purchasing any of
the Shares offered hereby:
PRODUCT DEVELOPMENT; MERCHANDISE INVENTORIES. As a consequence of the
Company's product development programs, a substantial portion of the Company's
merchandise purchases are concentrated among a small number of vendors. The
Company believes that fewer vendor relationships advance the Company's product
development objectives of increasing control over design and manufacturing
processes, providing the Company enhanced control over the quality and cost of
the Company's inventory purchases. However, since the Company works with a
limited number of vendors, non-delivery or late delivery by any one of the
Company's principal vendors could adversely affect the Company's operations. In
the event of the termination of the relationship with the Company's principal
vendor, the Company believes that more than one new vendor would be required to
replace the loss of that vendor. Although management believes that replacement
vendors could be located if any buying relationship is terminated, until
replacement vendors are located, the operating results of the Company could be
materially adversely affected.
The Company's product development programs also require it to be involved
earlier in the process of creating merchandise and to make financial commitments
sooner than would otherwise be necessary were it relying solely on outside
vendor developed merchandise. The Company's investment in piece goods (fabric)
and work in process has increased significantly during the last fiscal year.
Since the Company, in most instances, purchases piece goods to be used in its
products direct from various mills, there is a relatively long lead time
involved in the manufacturing process and investment in piece goods before these
goods are cut and sewn. As a result, the Company is vulnerable to demand and
pricing shifts and to errors in selection and timing of merchandise purchases.
See "Business - Product Development and Sourcing Programs."
EXPANSION PLANS. The Company has grown from 21 stores in 1994 to 31 stores
as of May 1, 1996 and its sales have grown significantly in the past several
years. The Company intends to continue to pursue its aggressive store opening
strategy. The continued growth of the Company is dependent, in large part, upon
the Company's ability to open new stores on a timely basis and to operate them
profitably. The Company plans to open approximately six new stores in fiscal
1997, two of which are already open. As of May 1, 1996, the Company had signed
leases with respect to three new stores and had reached an agreement in
principle with respect to one additional new store to open in fiscal 1997.
Successful expansion is subject to various contingencies, some of which are
beyond the Company's control. These contingencies include, among others, (i)
the Company's ability to hire, train and retain qualified managers and other
personnel, and to maintain good relations with all of its employees, (ii) the
availability of adequate inventory, capital resources and external financing,
(iii) the Company's ability to identify and secure suitable store sites on a
timely basis and on satisfactory terms and to complete any necessary
construction or refurbishment of these sites, (iv) the successful integration of
new stores into existing operations and (v) the Company's ability to adjust its
merchandise mix to accommodate various consumer preferences and climates in
markets where the Company has not previously operated. There can be no
assurance that the Company will be able to achieve its targets for opening new
stores, that its new stores will be profitable or achieve sales and
profitability comparable to the Company's existing stores, or that comparable
store sales increases will continue. Furthermore, there can be no assurance
that the Company will anticipate all of the changing demands which its expanding
operations will impose on its systems and personnel. The Company's failure to
expand internal systems or to hire, train and retain qualified personnel as
required by its growth could adversely affect its future operating results. See
"Business - General."
REGULATIONS AND FOREIGN CURRENCY EXCHANGE. The Company purchased
approximately 13.4% of its merchandise based on cost in fiscal 1996 directly
from vendors located abroad, primarily in the United Kingdom, Italy, France, and
the Far East. In addition, the Company believes that a substantial portion of
the goods the Company purchases from domestic vendors are manufactured abroad.
These arrangements are subject to the risks of relying on products manufactured
abroad, including import duties and quotas, loss of "most favored nation"
trading status and currency risk associated with the purchase of merchandise.
The Company must continuously seek out buying opportunities from both its
existing suppliers and new sources, for which it competes with other apparel
retailers.
6
<PAGE>
Although the Company believes that its management has long standing and
excellent relationships with its suppliers, there can be no assurance that the
Company will be successful in maintaining a continuing and, in light of the
anticipated addition of new stores, an increasing supply of quality merchandise
at attractive prices. See "Business - Retail Merchandising." Substantially all
of the Company's purchases from the Far East, including Hong Kong, are priced in
U.S. dollars. However, its European purchases are denominated in local currency
and, therefore, are subject to fluctuating currency exchange rates. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations - Results of Operations."
The United States has recently proposed trade sanctions against the People's
Republic of China, including tariffs on certain imported goods. Due to the
limited categories and quantities of merchandise imported by the Company from
the People's Republic of China, the Company does not believe that the effects of
the proposed sanctions will be significant to the Company. However, due to
uncertainties concerning whether, and to what extent, the sanctions will be
adopted, there can be no assurances concerning the effect of the proposed
sanctions on the Company.
DEPENDENCE UPON KEY PERSONNEL. The Company's success depends to a significant
extent upon the leadership and performance of its senior management team,
particularly Harold G. Powell, Chairman of the Board, Rebecca Powell Casey, Vice
Chairman of the Board and Chief Executive Officer, H. Rainey Powell, President
and Chief Operating and Financial Officer, and Kenneth C. Row, Executive Vice
President. While the Company believes that its senior management team has
significant depth, the loss of services of any of the executive officers of the
Company could have a material adverse impact on the Company. See "Management
and Directors."
CONTROL OF THE COMPANY. Harold G. Powell, Chairman of the Board of the
Company, members of his family (including Rebecca Powell Casey and H. Rainey
Powell, officers of the Company) and certain trusts, the beneficiaries of which
are Powell family members, currently own beneficially approximately 54.1% of the
outstanding shares of Common Stock. After giving effect to this offering, the
aggregate beneficial ownership of members of the Powell family and certain
trusts will be reduced to approximately 46.6% of the outstanding shares of
Common Stock. Members of the Powell family may continue to effectively control
the business and affairs of the Company following completion of this offering.
See "Description of Capital Stock."
In the ordinary course of business, the Company engages in transactions with
entities owned by the Powell family. During fiscal 1996, payments by the
Company to these entities totaled approximately $362,000, representing lease
payments with respect to the Company's distribution and receiving facility in
Norman, Oklahoma, its Dallas, Texas buying and administrative offices, and its
Norman, Oklahoma retail store and related facilities. See "Business -
Merchandise Buying Office and Distribution Center" and Notes to Consolidated
Financial Statements - Note 8.
COMPETITION AND OTHER BUSINESS FACTORS. All aspects of the retail apparel
business are highly competitive. The Company competes primarily with better
department stores, specialty retailers and boutiques engaged in the retail sale
of better quality women's and men's apparel, many of which are larger and have
greater resources than the Company. Although the Company believes its emphasis
on classically inspired styles makes it less vulnerable to changes in fashion
trends than many other apparel retailers, the Company's sales and earnings
nevertheless depend to a significant extent upon its ability to respond to
changes in fashion. See "Business - Competition." The Company's future
performance will be subject to a number of factors beyond its control, including
economic downturns, cyclical variations in the retail market for better quality
apparel and rapid changes in fashion preferences. In addition, in order to
continue to grow at the rates achieved in recent years, the Company will have to
continue to open new stores. Such growth will be dependent upon general
economic and business conditions affecting consumer spending, the availability
of desirable locations and the negotiation of acceptable lease terms for new
locations. See "Business - General."
SEASONALITY AND QUARTERLY FLUCTUATIONS. The Company has historically
experienced and expects to continue to experience seasonal fluctuations in its
sales, operating income and net income. The highest sales periods for the
Company are the early autumn and Christmas seasons falling in the third and
fourth fiscal quarters, respectively. A disproportionate amount of the
Company's sales, operating income and net income are generally realized during
the fourth quarter. In anticipation of increased sales activity during these
months, the Company purchases substantial
7
<PAGE>
amounts of inventory and hires a significant number of temporary employees to
bolster its permanent store staff. If, for any reason, the Company's sales were
below seasonal norms during the third and fourth fiscal quarters, including as a
result of merchandise delivery delays due to receiving or distribution problems,
the Company's annual operating results, particularly operating income and net
income, could be adversely affected. Historically, sales, operating income and
net income have been weakest during the first fiscal quarter, and the Company
expects this trend to continue. The Company's quarterly results of operations
may also fluctuate significantly as a result of a variety of factors, including
the timing of new store openings, the sales contributed by new stores, shifts in
the timing of certain holidays and the merchandise mix. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations -
Seasonality."
USE OF PROCEEDS
The net proceeds to the Company from the sale of the Shares are estimated to be
approximately $ (approximately $ if the Underwriter's over-
allotment option is exercised in full). Substantially all of the net proceeds
to the Company will be used to reduce indebtedness, to finance the expansion of
the Company's chain of retail stores, to finance the Company's credit card
receivables and for working capital. Pending any such uses, the Company intends
to reduce borrowing under its working capital lines. See "Business - Catalog
Publication and Order Fulfillment and - Merchandise Inventory Replenishment and
Distribution," and Notes to Consolidated Financial Statements - Note 4.
The Company will not receive any proceeds from the sale of shares of Common
Stock by the Selling Shareholders.
PRICE RANGE OF COMMON STOCK AND DIVIDEND POLICY
The Company's Common Stock is listed on the American Stock Exchange under the
symbol "HLD." The table below presents the range of high and low sale prices of
the Common Stock for the periods indicated. The price per share information
contained in the following table is restated to reflect a 5% stock dividend paid
in fiscal 1996 and a 10% stock dividend paid in fiscal 1995.
<TABLE>
<CAPTION>
FISCAL 1997 HIGH LOW
- ------------------------ ------ ------
<S> <C> <C>
1st Quarter $18.00 $11.75
2nd Quarter (through 16.75 15.63
May 20, 1996)
FISCAL 1996 HIGH LOW
- ------------------------ ------ ------
1st Quarter $10.60 $ 9.40
2nd Quarter 10.60 9.52
3rd Quarter 10.36 9.17
4th Quarter 11.79 9.40
FISCAL 1995 HIGH LOW
- ------------------------ ------ ------
1st Quarter $ 8.66 $ 6.39
2nd Quarter 12.34 8.01
3rd Quarter 10.71 7.58
4th Quarter 10.17 8.66
</TABLE>
8
<PAGE>
The last sale price of the Common Stock as reported on the American Stock
Exchange on May 20, 1996, was $16.25. As of May 1, 1996, there were 595 record
holders of the Company's Common Stock. The Company has never declared or paid
cash dividends on its capital stock and presently intends to retain all earnings
for the operation and expansion of its business for the foreseeable future. Any
future determination as to the payment of cash dividends will depend on the
Company's earnings, capital requirements, financial condition and other factors
as the Company's Board of Directors may deem relevant.
CAPITALIZATION
The following table sets forth the unaudited consolidated capitalization of the
Company as of the end of the Company's fiscal quarter on May 4, 1996, and as
adjusted to give effect to the sale by the Company of 400,000 shares of Common
Stock offered hereby (excluding 60,000 shares issuable upon exercise of the
Underwriter's over-allotment option). This table should be read in conjunction
with the consolidated financial statements of the Company and the notes thereto
appearing elsewhere, or incorporated by reference, in this Prospectus.
<TABLE>
<CAPTION>
AS OF MAY 4, 1996
----------------------
ACTUAL AS ADJUSTED
------- -------------
(In thousands)
<S> <C> <C>
Short-term obligations (includes current portion
of long-term debt) $ 75 $
Long-term obligations (excludes current portion
of long-term debt)(1) 9,418
Stockholders' equity:
Preferred Stock; $0.01 par value; 1,000,000
shares authorized; none issued -
Common Stock: $0.01 par value; 7,500,000
shares authorized; 4,965,245 shares issued
(5,365,245 shares as adjusted)(2)(3) 50
Additional paid-in capital 20,673
Retained earnings ______ _______
Total stockholders' equity ______ _______
Total capitalization $ $
======= ==========
- --------------------
</TABLE>
(1) See Notes to Consolidated Financial Statements - Note 4 for information
concerning long-term indebtedness of the Company.
(2) 5,425,245 shares if the Underwriter's over-allotment option is exercised in
full.
(3) See Notes to Consolidated Financial Statements - Note 6. Excludes
approximately 376,276 shares of Common Stock reserved for issuance pursuant
to outstanding awards under the Company's stock option and equity incentive
plan as of May 4, 1996.
9
<PAGE>
SELECTED CONSOLIDATED FINANCIAL DATA
The following selected consolidated financial information is derived from the
audited consolidated financial statements of the Company and should be read in
conjunction with "Management's Discussion and Analysis of Financial Condition
and Results of Operations" and the consolidated financial statements and the
notes thereto, appearing elsewhere or incorporated by reference in this
Prospectus.
<TABLE>
<CAPTION>
FISCAL YEARS
----------------------------------------------------
1992 1993 1994 1995 1996
--------- --------- --------- --------- --------
(In thousands, except store and per share data)
STATEMENTS OF EARNINGS DATA:
<S> <C> <C> <C> <C> <C>
Sales $40,553 $49,279 $60,940 $75,795 $94,264
Percentage increase 6.8% 21.5% 23.7% 24.4% 24.4%
Gross profit on sales(1) $12,990 $16,303 $20,349 $26,407 $34,433
Percentage of sales 32.0% 33.1% 33.4% 34.8% 36.5%
Earnings before income taxes $ 1,148 $ 1,875 $ 2,783 $ 3,539 $ 4,645
Percentage of sales 2.8% 3.8% 4.5% 4.7% 4.9%
Net earnings $ 647 $ 1,052 $ 1,612 $ 2,088 $ 2,787
Percentage of sales 1.6% 2.1% 2.6% 2.8% 3.0%
Earnings per common share(2) $ 0.15 $ 0.25 $ 0.35 $ 0.42 $ 0.56
OTHER OPERATING DATA:
Stores open at end of period(3) 15 18 21 25 29
Growth in comparable store sales 1.1% 8.1% 7.4% 10.7% 8.7%
(52-53 week basis)
BALANCE SHEET DATA:
Working capital $ 8,732 $ 9,985 $12,540 $12,524 $21,829
Total assets 20,085 21,947 26,441 34,661 42,609
Long-term debt(4) - 1,177 669 594 9,540
Stockholders' equity 14,302 15,366 19,996 22,260 25,299
Net book value per share(5) $ 3.36 $ 3.61 $ 4.07 $ 4.51 $ 5.10
- ---------------------------
</TABLE>
(1) In accordance with retail industry practice, gross profit on sales is
calculated by subtracting cost of goods sold (including occupancy and
central buying expenses) from sales.
(2) Net earnings per common share are based on the weighted average number of
shares of Common Stock outstanding during each period restated for the 5%
percent stock dividend in fiscal 1996 and the 10% stock dividends in fiscal
1995, fiscal 1994 and fiscal 1993, and includes Common Stock equivalents of
53,181 shares in fiscal 1996.
(3) The number of stores open at the end of the period has been restated to
reflect the consolidation of the stand alone "Old School Clothing Company"
into the 50 Penn Place Store in Oklahoma City.
(4) In fiscal 1996, the Company renewed its line of credit to be payable at a
fixed maturity rather than on demand which required the loan to be
reclassified as long-term debt.
(5) Net book value per share is based on the number of shares of Common Stock
outstanding at the end of each fiscal year restated for the 5% stock
dividend in fiscal 1996 and the 10% stock dividends in fiscal 1995, fiscal
1994 and fiscal 1993.
10
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
The following table reflects items in the Company's statement of earnings as a
percentage of sales for the periods indicated:
<TABLE>
<CAPTION>
FISCAL YEAR
----------------------------
1994 1995 1996
-------- -------- --------
<S> <C> <C> <C>
Sales 100.0% 100.0% 100.0%
Cost of goods sold (66.6) (65.2) (63.5)
Selling, general and administrative expenses (19.8) (19.7) (20.5)
Advertising expense (6.5) (7.8) (8.3)
Depreciation and amortization (2.3) (2.3) (2.3)
Interest expense (0.3) (0.3) (0.5)
------- ------- -------
Earnings before income taxes
Provision for income taxes 4.5 4.7 4.9
(1.9) (1.9) (1.9)
Net earnings ------- ------- -------
2.6% 2.8% 3.0%
======= ======= =======
The following table reflects the sources of the increases in Company sales for the periods
indicated:
FISCAL YEAR
-----------
1994 1995 1996
------- ------- -------
Store sales (000's) $55,504 $68,901 $84,880
Catalog sales (000's) 5,436 6,894 9,384
------- ------- -------
Sales (000's)
$60,940 $75,795 $94,264
Total sales growth ======= ======= =======
Growth in comparable store sales (52-53 week basis)
Growth in catalog sales 23.7% 24.4% 24.4%
7.4 10.7 8.7
Store locations: 68.6 26.8 36.1
Existing stores beginning of period
New stores opened during period
18 21 25
Total stores at end of period 3 4 4
------- ------- -------
21 25 29
======= ======= =======
</TABLE>
The opening of new stores, the expansion of existing stores, as well as the
increase in comparable store sales and the growth in catalog sales, contributed
to total sales growth for fiscal years 1994, 1995, and 1996. New stores opened
during fiscal 1996 included a 4,221 square foot men's and women's store in St.
Louis, Missouri opened in March 1995 (first quarter); a 4,292 square foot
women's and "Old School" store opened in Louisville, Kentucky in September 1995
(third quarter); a 5,200 square foot full-line men's and women's store opened in
Baton Rouge, Louisiana in November 1995 (third quarter); and Harold's second
outlet center, a 5,160 square foot store in Hillsboro, Texas in December 1995
(fourth quarter).
New stores opened during fiscal year 1995 included a 4,000 square foot women's
and "Old School" store in Charlotte, North Carolina opened in July 1994 (second
quarter); a 3,300 square foot women's store opened in Austin, Texas in September
1994 (third quarter); a 5,500 square foot full-line men's and women's store
opened in Plano, Texas
11
<PAGE>
in October 1994 (third quarter); and a 5,000 square foot women's and "Old
School" store opened in Phoenix, Arizona in November 1994 (fourth quarter).
Significant increases in mail order catalog sales are the direct result of the
Company's expansion of this segment of the business. Since the 1989 test market
of Harold's first catalog, the Company has expanded its regular catalog to
include six seasonal issues each year. For fiscal 1996, the Company's catalog
averaged 48 pages per issue with an aggregate mailing (including abridged
issues) of approximately 6.5 million catalogs.
The Company's gross margin increased for fiscal 1996 compared to fiscal 1995
and fiscal 1994. This increase is the result of a combination of several
factors. Increased sales volume has enabled the Company to more easily meet the
minimums required in the purchase of piece goods and the manufacturing of
garments. This has resulted in a reduction of overbuys and markdowns.
Verticalization in product development has created opportunities for increases
in initial markups. Improved control of downflow of merchandise to the outlet
stores has contributed to the reduction in ultimate markdowns. Any increase in
net earnings as a percentage of sales will be the result of increasing sales
while controlling selling, general and administrative expenses and improvement
in gross profit on sales.
Selling, general and administrative expenses continue to increase as sales
increase. Catalog production cost increased 38% and 51% in fiscal years 1996
and 1995, respectively. These increases in costs were due to the expansion of
catalog operations. In fiscal 1997, the Company plans to decrease the rate of
sales growth in the catalog division and decrease catalog expenses as a
percentage of sales. Additionally, an increase of approximately 29% in sales
salaries is associated with the Company's efforts to improve the quality of
customer service in all stores. The Company anticipates a leveling of this
expense category as a percentage of sales. Management anticipates that selling,
general and administrative expenses will continue to increase as a result of the
Company's expansion plans to open six new stores in fiscal 1997 compared to four
new stores in fiscal 1996.
The average balance on total outstanding debt was $7,633,000 in fiscal 1996
compared to $3,668,000 for fiscal 1995. Average interest rates on the Company's
line of credit were higher in fiscal 1996, resulting in an increase in the
Company's cost of borrowed capital. As the Company's growth continues, cash
flow may require additional borrowed funds which may cause an increase in
interest expense.
The Company's purchases denominated in foreign currency are of a short term
nature. The Company does not hedge these foreign currency transactions and it
has not been adversely affected in the past. The Company has no assurances that
the impact in the future may not be material.
The Company's income tax rate of 42% in fiscal 1994 and 41% in fiscal 1995
decreased to 40% in fiscal 1996. This decreased tax rate is attributable to
the Company's estimation of higher tax rates on temporary differences in fiscal
1994 and fiscal 1995 compared to the tax rates currently estimated.
CAPITAL EXPENDITURES, CAPITAL RESOURCES AND LIQUIDITY
CASH FLOWS FROM OPERATING ACTIVITIES. For fiscal 1996, net cash provided by
operating activities was $709,000 as compared to $569,000 for fiscal 1995. The
significant increase in cash flows from operating activities is partially
attributable to the difference in timing of cash disbursements as reflected in
an increase in accounts payable of $242,000 for fiscal 1996, as compared to an
increase in accounts payable of $1,326,000 for fiscal 1995. In addition, the
difference in cash flows from operating activities between the two fiscal
periods is partially due to an increase of $3,800,000 in the Company's
merchandise inventories for fiscal 1996, as compared to fiscal 1995, during
which inventories increased by $5,200,000, primarily as a result of the change
in the relationship with CMT Enterprises, Inc. (see "Liquidity"). Management
expects the dollar amount of its merchandise inventories will continue to
increase as it expands its product development and private label merchandise and
expands its chain of retail stores and catalog operations, with related
increases in trade accounts receivable and accounts payable. Period-to-period
differences in timing of inventory purchases and deliveries will affect
comparability of cash flows from operating activities.
12
<PAGE>
In addition, the increased net earnings from fiscal 1996 and fiscal 1995 of
$2,787,000 and $2,088,000, respectively, resulted in an increase in accrued
expenses of $642,000 as compared to $656,000 for fiscal 1996 and 1995,
respectively.
CASH FLOWS FROM INVESTING ACTIVITIES. For fiscal 1996 net cash used in
investing activities was $4,857,000 as compared to $3,952,000 for fiscal 1995.
Capital expenditures totaled $5,159,000 for fiscal 1996 and $3,994,000 for
fiscal 1995 and were invested in the new stores and in remodeling and equipment
expenditures in existing operations.
CASH FLOWS FROM FINANCING ACTIVITIES. During fiscal 1996, the Company made
periodic borrowings under its revolving credit facility (see "Liquidity") to
finance its inventory purchases, store expansion, remodeling and equipment
purchases for the fiscal year.
The Company has available a long-term line of credit with its bank (see
"Liquidity"). This line had an average balance of $7,000,000 and $2,961,000 for
the fiscal years 1996 and 1995, respectively. During fiscal 1996, this line of
credit had a high balance of $10,337,000 and a $9,021,000 balance as of February
3, 1996. The balance at March 29, 1996, was $9,817,000.
LIQUIDITY. The Company considers the following as measures of liquidity and
capital resources as of the dates indicated:
<TABLE>
<CAPTION>
FISCAL YEAR
-------------------------
<S> <C> <C> <C>
1994 1995 1996
------- ------- -------
Working capital (000's) $12,540 $12,524 $21,829
Current ratio 3.23:1 2.08:1 3.89:1
Ratio of working capital to total assets .47:1 .36:1 .51:1
Ratio of long-term debt (including current
maturities) to stockholders' equity .11:1 .25:1 .38:1
</TABLE>
In fiscal 1996, the Company renewed its line of credit to be payable at a fixed
maturity rather than on demand. As a result the loan was reclassified as long-
term debt rather than as a current liability.
As a result of the change in fiscal 1995 in the relationship with CMT
Enterprises, Inc., the Company was required to increase its borrowings
approximately $5,200,000 to finance the purchase of raw materials and
manufacturing of finished goods. Previously, CMT sold finished goods to the
Company. Under the new arrangement, CMT acts as the Company's agent in the
purchase of raw materials (i.e. fabrics, linings, buttons, etc.) and supervises
the manufacturing process of the Company's merchandise with manufacturing
contractors. Increases in inventory because of the Company's expansion have
required increased borrowings under the Company's credit line.
The Company's primary needs for liquidity are to finance its inventories and
revolving charge accounts and to invest in new stores, remodeling , fixtures and
equipment.
Management believes cash flow from operations and its existing banking
arrangements should be sufficient to meet its operating needs and capital
expenditures through fiscal 1997. The Company's capital expenditures budget for
fiscal 1997 is approximately $3,700,000. Subsequent to February 3, 1996, the
Company increased the above line of credit to $15,000,000. Additionally, a
$3,000,000 line of credit was obtained from a separate banking institution for
the purpose of issuing letters of credit.
Management believes that cash flow from operations and its existing banking
arrangements should be sufficient to meet its operating needs and capital
requirements through the fiscal year ending February 1, 1997. However, in
order to take advantage of opportunities to finance the Company's growth,
management believes it prudent to increase the equity capitalization of the
Company rather than finance this expansion through additional borrowings.
13
<PAGE>
SEASONALITY
The Company's business is subject to seasonal influences, with the major
portion of sales realized during the fall season (third and fourth quarters) of
each fiscal year, which includes the back-to-school and the holiday selling
seasons. In light of this pattern, selling, general and administrative expenses
were typically higher as a percentage of sales during the spring seasons (first
and second quarters) of each fiscal year.
INFLATION
Inflation affects the costs incurred by the Company in its purchase of
merchandise and in certain components of its selling, general and administrative
expenses. The Company attempts to offset the effects of inflation through price
increases and control of expenses, although the Company's ability to increase
prices is limited by competitive factors in its markets. Inflation has had no
meaningful effect on sales, or net earnings of the Company.
IMPACT OF PENDING ACCOUNTING ANNOUNCEMENTS
In March 1995, the Financial Accounting Standards Board issued Statement 121,
"Accounting for the Impairment of Long-Lived Assets to be Disposed of"
("Statement 121"). Statement 121 is required to be adopted for fiscal years
beginning after December 15, 1995. Statement 121 establishes accounting
standards for impairment of long-lived assets, certain identifiable intangibles,
and goodwill related to those assets to be held and used and for long-lived
assets and certain identifiable intangibles to be disposed of.
In October 1995, the Financial Accounting Standards Board issued Statement 123,
"Accounting for Stock-Based Compensation" ("Statement 123"). Statement 123 is
required to be adopted for fiscal years beginning after December 15, 1995.
Statement 123 establishes financial accounting and reporting standards for
stock-based employee compensation plans. The Company does not intend to adopt
the value-based accounting measurements recommended by Statement 123.
Management believes that the adoption of Statements 121 and 123 will not have a
significant impact on the financial condition or the results of operations of
the Company.
14
<PAGE>
BUSINESS
GENERAL
Harold's Stores, Inc., through a 31-location store chain of women's and men's
specialty apparel stores in 15 states, offers high-quality, classically inspired
apparel to the upscale, quality-conscious consumer primarily in the 20 to 50
year old age group. The stores typically are strategically located in shopping
centers and malls with other top-of-the-line specialty retailers and are
enhanced by an eclectic mix of antiques, together with specially designed
fixtures and visual props, to create an appealing stage for presentation of the
Company's distinctive women's and men's apparel and accessories. More than 85%
of sales consists of the Company's designs controlled by Harold's own stylists
and designers and resourced by Harold's buyers from domestic, European and Asian
manufacturers. The remainder consists of branded merchandise selected to
complement Harold's merchandise presentation. See "Business - Product
Development and Sourcing Programs."
The Company's 31 stores are comprised of 12 full-line women's and men's apparel
stores, nine women's apparel stores which include a presentation of men's
sportswear featuring the Company's Old School Clothing brand, eight stores
featuring women's apparel only and two outlet stores to clear markdowns and
slow-moving merchandise. Retail stores range in size from about 2,100 to 14,000
square feet, with the typical store ranging from 4,000 to 6,000 square feet.
The Company's store occupancy costs were 7.3% of store sales in fiscal 1996 and
7.2% of store sales in fiscal 1995. Store occupancy costs include base and
percentage rent, common area maintenance expense, utilities and depreciation of
leasehold improvements.
The Company achieved comparable store sales growth of 8.7% in fiscal 1996 and
10.7% in fiscal 1995. The Company believes that this increase in comparable
store sales is attributable to Harold's product development and merchandising
and Harold's commitment to customer service through its sales associates. The
Company's average sales per square foot for stores open during the entire fiscal
year were $628 and $599 for fiscal 1996 and fiscal 1995, respectively, on a 52-
week basis. The Company believes its sales per square foot are higher than
industry averages.
The Company believes that its future success will be achieved by expanding the
number of its women's and men's apparel stores, maintaining sales momentum at
existing stores, and increasing circulation of its direct response catalog. The
Company recently embarked on an aggressive expansion program, adding in the
aggregate eight retail stores during fiscal 1995 and fiscal 1996 and thereby
increasing the chain store count by approximately 40%.
The Company's expansion plan has focused and will continue to focus primarily
on markets currently served by the Company and in new markets that represent a
geographical progression from existing markets. Thus far during fiscal 1997,
the Company has opened stores in Greenville, South Carolina and Leawood, Kansas
(Kansas City metro) and plans to open four additional stores. These four stores
are planned for opening during the balance of fiscal 1997 in regional shopping
malls in Raleigh, North Carolina, Tyson's Corner (North Virginia), Houston and
Denver. All six stores will feature a full line of women's merchandise while
four will include a full line of men's merchandise and two will offer men's
sportswear.
RETAIL MERCHANDISING
The Company's merchandise mix in women's apparel includes coordinated
sportswear, dresses, coats, outerwear, shoes and accessories, all in updated
classic styles. A fundamental feature of the Company's marketing strategy is
the development of original exclusive and semi-exclusive apparel items. The
Company estimates that approximately 90% of its women's apparel sales are
attributable to the Company's product development and proprietary label
programs. In fiscal 1996, women's apparel accounted for approximately 80% of
sales.
The men's apparel product line includes tailored clothing, suits, sportcoats,
furnishings, sportswear, and shoes. The style is what is known in the apparel
trade as "updated traditional," classic styling with a contemporary influence.
The young executive and college markets account for a substantial portion of the
Company's men's store sales. Branded
15
<PAGE>
lines include Polo, Corbin, Alden, and Kenneth Gordon. In fiscal 1996, the
Company's proprietary label apparel accounted for more than 80% of total men's
sales. The majority of the men's proprietary label sales are in the Company's
Old School Clothing line. In fiscal 1996, men's apparel accounted for
approximately 20% of sales.
The following table sets forth the approximate percentage of sales attributable
to the various merchandise categories offered by the Company in the past three
fiscal years:
<TABLE>
<CAPTION>
FISCAL 1994 FISCAL 1995 FISCAL 1996
--------------- --------------- ---------------
(Dollar amounts in thousands)
Women's Merchandise
<S> <C> <C> <C> <C> <C> <C>
Sportswear $38,943 63.9% $50,464 66.6% $65,009 69.0%
Shoes 3,270 5.4 3,914 5.2 5,196 5.5
Handbags, Belts and Accessories 3,608 5.9 4,438 5.9 4,962 5.3
Men's Merchandise
Suits, Sportcoats, Slacks and
Furnishings 4,904 8.0 5,338 7.0 6,493 6.9
Shoes 728 1.2 845 1.1 991 1.0
Sportswear and Accessories 9,001 14.8 10,337 13.6 11,256 11.9
Other 486 0.8 459 0.6 357 0.4
------- ----- ------- ----- ------- -----
Total
$60,940 100.0% $75,795 100.0% $94,264 100.0%
======= ===== ======= ===== ======= =====
</TABLE>
COMPANY STORES
The Company's 31 stores range in size from 2,100 to 14,000 square feet, with
the typical store ranging from 4,000 to 6,000 square feet. The following table
lists Harold's store locations with selected information for each location.
Product lines in the table are defined as follows:
W/M Stores with the Company's full-line women's and men's apparel.
W/OS Stores with the Company's full-line women's apparel and also featuring
the Company's "Old School Clothing Company" concept.
W Stores featuring women's apparel only.
<TABLE>
<CAPTION>
METROPOLITAN PRODUCT SQUARE
AREA LOCATION TYPE OF LOCATION LINES FOOTAGE
- -------------------- ------------------------ ------------------------ ------- -------
<S> <C> <C> <C> <C>
Atlanta, GA Lenox Square Regional Shopping Center W 2,446
Atlanta, GA Park Place Specialty Center W 3,413
Austin, TX Arboretum Market Place Specialty Center W 3,300
Austin, TX 8611 N. Mopac Expressway Free Standing* W/M 13,200
Baton Rouge, LA CitiPlace Market Center Specialty Center W/M 5,200
Birmingham, AL Riverchase Galleria Regional Shopping Center W/OS 2,713
Charlotte, NC Shops on the Park Specialty Center W/OS 4,000
Dallas, TX Dallas Galleria Regional Shopping Center W 4,974
Dallas, TX Highland Park Village Specialty Center W/M 7,503
</TABLE>
16
<PAGE>
<TABLE>
<CAPTION>
METROPOLITAN PRODUCT SQUARE
AREA LOCATION TYPE OF LOCATION LINES FOOTAGE
- -------------------- ------------------------ ------------------------ ------- -------
<S> <C> <C> <C> <C>
Ft. Worth, TX University Park Village Specialty Center W/M 4,863
Germantown, TN Saddle Creek South Specialty Center W/OS 3,909
(Memphis metro)
Greenville, SC Greenville Mall Regional Shopping Center W/OS 5,076
Hillsboro, TX Hillsboro Outlet Mall Outlet Mall* W/M 5,160
Houston, TX Highland Village Specialty Center W/M 6,189
Jackson, MS The Rogue Compound Free Standing W 2,100
Leawood, KS Town Center Plaza Regional Shopping Center W/M 5,000
(Kansas City
metro)
Kansas City, MO Country Club Plaza Regional Shopping Center W 4,155
Kensington, MD White Flint Mall Regional Shopping Center W/OS 4,605
(Washington, DC
metro)
Louisville, KY Mall St. Matthews Regional Shopping Center W/OS 4,292
Lubbock, TX 8201 Quaker Avenue Specialty Center W/OS 3,897
Nashville, TN The Mall at Greenhills Regional Shopping Center W/M 5,975
Norman, OK Campus Corner Center Specialty Center W/M 5,350
Oklahoma City, OK 106 Park Avenue Street Location W/M 3,760
Oklahoma City, OK 50 Penn Place Specialty Center W/M 14,240
Omaha, NE One Pacific Place Specialty Center W 3,272
Phoenix, AZ Biltmore Fashion Park Regional Shopping Center W/OS 5,033
Plano, TX Park and Preston Free Standing W/M 5,525
(Dallas metro)
San Antonio, TX Broadway and Austin Free Standing W 3,312
Highway
St. Louis, MO Plaza Frontenac Regional Shopping Center W/OS 4,221
Tulsa, OK Farm Shopping Center Specialty Center W/M 3,888
Tulsa, OK Utica Square Regional Shopping Center W/M 4,625
- ----------------------
</TABLE>
*Outlet Store
The employee population of a typical full-line Harold's store consists of a
store manager, two assistant managers (women's and men's), one or two desk
associates, and five to seven sales associates most of whom work on a flex-time
basis (20-25 hours per week). Sales associates are paid a commission against a
draw. Commissions range from 7% to 10% based on the type of product sold and
the scale of the associate. Store managers are paid on a salary plus a
performance bonus based on attainment of sales goals and expense control.
The Company's stores generally are open seven days per week and evenings. In
addition to the Company's own "Harold's" credit card, the Company accepts VISA,
MasterCard and American Express cards.
17
<PAGE>
PRODUCT DEVELOPMENT AND SOURCING PROGRAMS
The Company's product development and sourcing programs enable it to offer
exclusive and semi-exclusive items not available in competing stores or
catalogs. More than 85% of sales is merchandise where the Company has created
or controlled the design, demonstrating the Company's commitment to a unique
product mix. The Company believes that this unique product mix enables it to
compete with, and differentiates it from, larger apparel chains by offering
customers an exclusive garment at a price below designers and similar open
market merchandise. Direct creation and control of merchandise also enables the
Company to improve its initial mark up.
The Company's private label merchandise consists of (i) items developed by the
Company and manufactured exclusively for the Company and individual
contractors, (ii) items developed by the Company and manufactured on a semi-
exclusive basis for the Company, and (iii) vendor-developed, non-exclusive items
to which the Company's private labels are affixed.
An important component of the Company's product development programs is market
research of styles and fabrics. The Company's buyers shop European and domestic
markets for emerging fashion trends, for new vendors, and for fabric, artwork
and samples for new garment designs. Through sophisticated, computer-aided
design technologies, the product development staff adapts and develops fabric
designs and garment models. These design models assist the Company in sourcing
and in negotiations with mills and vendors. The Company's product development
programs allow it to participate directly in the design and manufacturing of an
exclusive product without investing in costly manufacturing equipment. The
Company's development program is complemented by association with independent
buying offices in New York and Florence.
The Company's product development programs enable it to offer new styles, often
before similar merchandise is available at other specialty or department stores
or catalogs. The Company imports a significant portion of its merchandise
directly from the United Kingdom, Italy, France and through domestic importers
from the Far East.
The Company's merchandisers travel to Europe, including popular fashion meccas
such as Paris and Milan, three to four times each year, searching out new styles
and collecting vintage fabrics and antique wallpaper, and original art for
pattern development. In addition to purchasing original art work created for
pattern development, merchandisers have ongoing contact with several art studios
in Europe where artists hand paint intricate patterns and prints exclusively for
the Company. The European development work helps the Company spot emerging
trends among fashion forward Europeans for development into the Company's
classically-inspired merchandise.
The Company merchandisers review the collected material, analyze fashion
directions and select the best pieces to convert into prints and patterns for
the next season. Once the new patterns are selected, the team then "specs" out
various styles - detailing a garment's cut, fit, fabric, color and trim. An
advanced textile computer-aided design system makes designing new pieces much
easier by providing color "proofs" which allow the Company to correct
inaccuracies in a design before a working sample is made. This process reduces
costs and contributes to the inherent value of each item. After the specs have
been finalized, the piece goods - materials for making the product - are ordered
from domestic and international fabric mills. The finished fabric is then
shipped to manufacturers who cut, sew and trim the completed design.
The Company's line of leather goods is made by European craftsmen, primarily in
Italy. Shoes, belts, handbags, wallets and other leather products are co-
designed by the Company's merchandisers and Italian artisans. Italian-made
leather goods are marketed under a variety of Company-owned labels and are
featured in all of the Company's stores and in its catalog.
Reflecting the Company's product development programs, a substantial portion of
the Company's merchandise purchases are concentrated among a small number of
vendors. The Company believes that fewer vendor relationships advance the
Company's product development objectives by increasing control over the design
and manufacturing process. During fiscal 1995, the Company entered into a new
arrangement with its largest apparel vendor, CMT
18
<PAGE>
Enterprises, Inc. ("CMT"). Previously, Harold's controlled the design process
and paid CMT for finished goods when produced and manufactured. Under the new
arrangement, the process has become more verticalized. CMT acts as the
Company's agent in the purchase of raw materials (i.e. fabrics, linings,
buttons, etc.) and supervises the manufacturing process of the Company's
merchandise with manufacturing contractors. The Company purchases raw materials
directly from suppliers and pays for the manufacturing process as costs are
incurred. CMT is paid a commission based on actual cost of the finished goods.
This change has resulted in a cost savings, but has also resulted in an increase
in the Company's inventory of piece goods and work in process. The Company
believes its new relationship with CMT permits the Company to control the
quality and cost of the Company's inventory purchases. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations -
Results of Operations and - Capital Resources, Capital Expenditures and
Liquidity" and "Risk Factors."
CATALOG PUBLICATION AND ORDER FULFILLMENT
In March 1990, using an in-house data base, the Company mailed its first direct
response catalog to over 100,000 addresses. In addition to contributing to
sales, the catalog has become an increasingly important market research and new
store promotion tool. During fiscal 1996, the Company used its mail order buyer
list (currently containing approximately 120,000 names), its retail customer
list (currently containing approximately 220,000 names) and a variety of rental
lists to mail six issues with an average of 48 pages, and an aggregate
circulation of approximately 6.5 million copies (including abridged issues).
The catalogs are designed and produced in-house with photography, prepress and
printing services being outsourced. On-line computerized inventory systems and
order processing programs offer control of fulfillment and shipping times and
record the purchase history of catalog buyers and the performance of each
individual mailing list. Orders are processed daily and inventory adjustments
are managed accordingly.
The direct response catalog has experienced sales increases from $620,000 in
fiscal 1992 to $9,384,000 in fiscal 1996. As a stand-alone venture and as costs
are currently accounted, the catalog has recorded a loss from operations each
year. There are several principal reasons for the losses: (i) absence of
critical mass is partially to blame for the catalog losses as industry norms
consider at least $10 million to be the threshold for successful catalog
operations; (ii) in addition to its primary merchandising role, the catalog is
employed as an advertising vehicle to stimulate customer traffic in the existing
Harold's stores, and also as a market research and development tool in
connection with expanding the chain into new markets; and (iii) at the end of a
specific catalog's run the unsold merchandise that was allocated to the catalog
center is marked down sufficiently to allow it to be sold at a profit in the
Company's stores. Any profit is booked in the store, and is not passed back to
the catalog center as an offset. The Company has not undertaken to account for
the advertising and traffic-building benefits of mailing the catalog to its
known retail customers, for the profits earned from catalog close-outs sold in
the outlet stores, or for the catalog's contribution to developing potential new
store locations. To the extent that these attributes of the catalog are a
benefit to the Company, they are not credited from an accounting point of view
to the catalog operations.
Management continues to emphasize further expansion of catalog operations and
to the extent that the financial results of the catalog operations improve,
principally as a consequence of increased sales and associated absorption of
fixed overhead, net earnings of the Company will improve as a percentage of
sales.
MERCHANDISE INVENTORY REPLENISHMENT AND DISTRIBUTION
The specialty retail apparel business fluctuates according to changes in
customer preferences dictated by fashion and season. These fluctuations affect
the inventory owned by apparel retailers, since merchandise usually must be
ordered well in advance of the season and sometimes before fashion trends are
evidenced by customer purchases. The Company's policy of carrying basic
merchandise items in full assortments of sizes and colors requires it to carry a
significant amount of inventory. The Company must enter into contracts for the
purchase and manufacture of proprietary label apparel well in advance of its
selling seasons.
The Company continually reviews its inventory level in order to identify slow-
moving merchandise and broken assortments (items no longer in stock in a
sufficient range of styles, colors and sizes) and may use markdowns to clear
19
<PAGE>
this merchandise. Markdowns also may be used if inventory exceeds customer
demand for reasons of style, seasonal adaptation, changes in customer preference
or if it is determined that the inventory in stock will not sell at its
currently marked price. Such markdowns may have an adverse impact on earnings,
depending on their extent and the amount of inventory affected. The Company
utilizes its two outlet stores to dispose of slow-moving merchandise. In
addition, slow-moving merchandise is cleared through regional off-site discount
sales held in January, June and August and which are promoted under the name
"Harold's Warehouse Sale".
The Company operates a 22,000 square foot distribution facility in Norman,
Oklahoma. All of the Company's merchandise, over three million units projected
for fiscal 1997, will route through the distribution center from various
manufacturers. Each item is examined, sorted and tagged with bar coded tickets
which track the merchandise for analysis by multiple parameters, including,
vendor lot number, color and size. The merchandise is then boxed for shipment
to the Company's 31 stores and catalog operation. This process is done in a
time sensitive manner in a substantially paperless environment, utilizing
computers, bar codes and scanners.
A 64,000 square foot expansion of the existing distribution center is scheduled
for completion during the summer of 1996. When the expansion is completed, the
facility will have the capability of processing merchandise for 64 stores and
increasing to 128 stores with a modest additional investment.
SEASONALITY
The Company's business follows a seasonal pattern, peaking twice a year during
the late summer back to school (August through early September) and holiday
(Thanksgiving through Christmas) periods. In fiscal 1996, approximately 57% of
the Company's sales occurred and 64% of net income was earned during the third
and fourth fiscal quarters.
COMPETITION
The Company's business is highly competitive. The Company's stores compete
with national and local department stores, specialty and discount store chains,
catalogers and independent retail stores which offer similar lines of specialty
apparel. Many of these competitors have significantly larger sales volumes and
assets than the Company.
Depth of selection in sizes, colors and styles of merchandise, merchandise
procurement and pricing, ability to anticipate fashion trends and customer
preferences, inventory control, reputation, quality of private-label
merchandise, store design and location, advertising and customer service are all
important factors in competing successfully in the retail industry. Given the
large number of companies in the retail industry, the Company cannot estimate
the number of its competitors or its relative competitive position.
In addition, the success of the Company's operations depends upon a number of
factors relating to economic conditions and general consumer spending. If
current economic conditions worsen and consumer spending is restricted, the
Company's growth and profitability will be negatively impacted.
CUSTOMER CREDIT
The Company's stores accept the proprietary "Harold's" credit card, and VISA,
MasterCard, and American Express credit cards. The Company's catalog operation
accepts VISA, MasterCard and the Company's credit card. Credit card sales were
69.6% of sales in fiscal 1994, 70.2% in fiscal 1995, and 73.4% in fiscal 1996.
In fiscal 1996, 12.8% of sales were made with the Harold's credit card and 60.6%
were made with third party credit cards. The Company maintains a credit
department for customer service, credit authorizations, credit investigation,
billing and collections. As of February 3, 1996, the allowance for bad debts
from Company credit cards sales was approximately 1.3% of the Harold's credit
card sales for fiscal 1996.
Harold's has offered customers its proprietary credit card since 1974. The
Company believes that providing its own credit card enhances customer loyalty
while providing customers with additional credit. At February 3, 1996, the
20
<PAGE>
Company had approximately 32,000 credit accounts, 40.2% which had been used at
least once during the prior 12 months, and the average card holder had a line of
$1,200 and an outstanding balance of $365 with the total balance being
$15,932,482.
ADVERTISING
The Company maintains an in-house advertising department which has won numerous
Addy awards at the local, district and national levels. The advertising
department staff produces in-house print advertising for daily and weekly
newspapers and other print media, and designs the Company's direct response
catalogs and other direct mail pieces. In fiscal 1996, the Company spent
$7,807,000 (8.3% of sales) on advertising as compared to $5,912,000 in fiscal
1995 (7.8% of sales). The advertising department is also involved in the
production of quarterly and annual reports to the Company's stockholders, sales
training materials, internal marketing materials, and all corporate logos and
labeling.
MANAGEMENT INFORMATION SYSTEMS
The Company has placed great emphasis on upgrading and integrating its
management information systems ("MIS"). The Company believes these upgrades
will enable it to maintain more efficient control of its operations and
facilitate faster and more informed responses to potential opportunities and
problems. The Company maintains a MIS team to oversee these information
management systems, which include credit, sales reporting, accounts payable and
merchandise control, reporting and distribution.
The Company uses an integrated point-of-sale ("POS") inventory and management
system to control merchandising and sales activities. This system automatically
polls each location every 24 hours and provides a detailed report by merchandise
category the next morning. Management evaluates this information daily and
implements merchandising controls and strategies as needed. The Company's POS
system has been updated to allow additional functions to be programmed into the
system. Recently, the Company added new personnel scheduling and timekeeping
capabilities, and is currently in the process of implementing a new customer
profile function to better identify and track consumer demographics.
The Company continues to implement newer and better inventory control systems.
The Company routinely conducts its own inventory using a sophisticated scanning
system. POS scanning devices record and track SKU bar codes which are assigned
to every piece of merchandise. This information is downloaded into the
Company's IBM AS400 computer which generates a detailed report within 24 hours
of the physical inventory.
The Company has also implemented ARTHUR(R), a computerized merchandise planning
system which interacts with the Company's AS400 and Island Pacific software.
ARTHUR(R) facilitates seasonal planning by department and store, and provides
certain data for financial planning.
The Company plans to continue implementing upgrades and improving its
management information system to keep abreast of the retail industry's
increasing technological advances.
TRADEMARKS, SERVICE MARKS, AND COPYRIGHTS
"Harold's", "Harold Powell", "Old School Clothing Company", "OSCC Bespoke" and
other trademarks either have been registered, or have trademark applications
pending, with the United States Patent and Trademark Office and with the
registries of various foreign countries. The Company files U.S. copyright
registrations on the original design and artwork purchased or developed by the
Company.
The Company's Houston store is called "Harold Powell" rather than "Harold's" to
avoid confusion with a local men's apparel store which operates in Houston under
the name "Harold's" with prior usage in this market predating the Company's
federal registration.
21
<PAGE>
EMPLOYEES
At May 1, 1996, the Company had approximately 480 full-time and 626 part-time
employees. Additionally, the Company hires temporary employees during the peak
late summer and holiday seasons. None of the Company's employees belongs to any
labor union and the Company believes that it has good relations with its
employees.
STORE LEASES
At May 1, 1996, the Company had 30 leased stores. The Company believes rent
payable under its store leases is a key factor in determining the sales volume
at which a store can be profitably operated. The leases typically provide for
an initial term of 12 years. In most cases, the Company pays a base rent plus a
contingent rent based on the store's net sales in excess of a certain threshold,
typically four to five percent of net sales in excess of the applicable
threshold. Among current store leases, one store lease has fixed rent with no
percentage rent. One store lease has percentage rent only. All other store
leases provide for a base rent with percentage rent payable above specified
minimum sales. All stores open during all of fiscal 1996 except four operated
at sales volumes above the breakpoint (the sales volume below which only rent is
payable). Based on the Company's current level of sales per square foot, some
of the risk from any decline in future sales volume in these stores is reduced
because a corresponding decline in occupancy expense would occur.
Substantially all of the leases require the Company to pay property taxes,
insurance, utilities and common area maintenance charges. The current terms of
the Company's leases, including automatic renewal options, expire as follows:
<TABLE>
<CAPTION>
YEARS LEASES NUMBER OF
EXPIRE STORES
- ---------------- ---------
<S> <C>
1996-1977 3
1998-1999 4
2000-2002 7
2003 and later 16
</TABLE>
The Company generally has been successful in renewing its store leases as they
expire.
During fiscal 1996, the Company entered into new leases for stores in St.
Louis, Louisville, Hillsboro, Texas, Baton Rouge, Houston, Leawood, Kansas and
Greenville, South Carolina. Management believes the terms of these leases are
comparable with other similar national retailers in these locations. Base rent
(minimum rent under terms of lease) in current leases ranges from $6 per square
foot to $41 per square foot over the terms of the leases. Total base rent has
continued to increase based on new store leases. Occupancy cost has increased
slightly as the Company has entered new markets. The following table sets forth
the fixed and variable components of the Company's rent expenses for the fiscal
years indicated:
<TABLE>
<CAPTION>
FISCAL YEAR
-----------
1994 1995 1996
---------- ---------- ----------
<S> <C> <C> <C>
Base Rent $1,461,000 $1,791,000 $2,222,000
Additional amounts computed as a
percentage of sales 666,000 922,000 1,112,000
---------- ---------- ----------
Total $2,127,000 $2,713,000 $3,334,000
========== ========== ==========
</TABLE>
22
<PAGE>
CORPORATE HEADQUARTERS AND CATALOG FULFILLMENT CENTER
The Company owns a complex of contiguous buildings in Norman, Oklahoma
comprised of approximately 36,500 square feet, with 22,000 square feet of this
space being utilized by the Company for its executive offices, administrative
functions and catalog fulfillment center. Data processing, accounting, credit,
and marketing departments are housed together with the catalog telephone center,
inventory and shipping facilities. The remainder of this complex is currently
rented and can be used for expansion of the catalog fulfillment center and other
Company needs.
MERCHANDISE BUYING OFFICE AND DISTRIBUTION CENTER
The Company leases a 10,000 square foot building in Dallas used as a
buying office and a 22,000 square foot distribution center in Norman. The
distribution center is equipped with automated systems for receiving, processing
and distributing merchandise. Substantially all merchandise is shipped from
vendors directly to the distribution center, where it is received, inspected and
ticketed for inventory control. The merchandise is then shipped by Company
trucks or common carrier to the stores.
The lessor the Dallas buying office and the distribution center is a
limited partnership whose partners include Rebecca Powell Casey, Michael T.
Casey, H. Rainey Powell and Lisa Powell Hunt, all of whom are shareholders and
directors of the Company. The term of the buying office lease is 16 years
commencing April 1, 1996, with annual rent payments of $158,000 plus insurance,
utilities and property taxes until April, 2000, at which time the rent will
become $180,000, plus insurance, utilities and property taxes, increasing $2,500
each year thereafter until expiration of the lease. The term of the
distribution center lease is 10 years commencing December 1, 1992, with annual
rent payments of $64,000 plus insurance, utilities and property taxes.
The Company has an option to purchase the distribution center for a
purchase price equal to the greater of the adjusted cost basis of the lessor at
the time of closing or 90% of appraised value, exercisable through the fifth
year of the lease. At the end of the third lease year on November 30, 1995, the
lessor's adjusted cost of the distribution center was approximately $798,000.
MANAGEMENT AND DIRECTORS
The following persons serve as executive officers and directors of the
Company. Unless otherwise noted, the executive officers serve in the following
capacities at the pleasure of the Board of Directors of the Company:
<TABLE>
<CAPTION>
OFFICER OR
NAME AGE DIRECTOR SINCE POSITION
- ------------------------- --- -------------- ----------------------------------------
<S> <C> <C> <C>
Harold G. Powell 72 1948 Chairman of the Board of Directors
Rebecca Powell Casey 44 1977 Chief Executive Officer and Director
H. Rainey Powell 42 1978 President, Chief Operating and
Financial Officer, Treasurer, Secretary
and Director
Kenneth C. Row 31 1986 Executive Vice President and Director
Janet F. Firth 39 1984 Vice President - Ladies' Merchandise
Manager
Jeffrey T. Morrell 37 1993 Vice President - Stores
</TABLE>
23
<PAGE>
<TABLE>
<CAPTION>
OFFICER OR
NAME AGE DIRECTOR SINCE POSITION
- ------------------------- --- -------------- ----------------------------------------
<S> <C> <C> <C>
Linda L. Daugherty 41 1994 Vice President and Controller
James R. Agar 64 1987 Director
Michael T. Casey 47 1988 Director
Robert B. Cullum, Jr. 47 1993 Director
Lisa Powell Hunt 40 1987 Director
W. Howard Lester 60 1995 Director
Gary C. Rawlinson 54 1987 Director
William F. Weitzel, PhD 59 1989 Director
</TABLE>
Harold G. Powell, the founder of the Company, has been Chairman of the
Board of the Company since its organization in 1987, and was Chief Executive
Officer from 1987 to 1992. Prior to 1987, he was chief executive officer and/or
chairman of the board of directors of each of the predecessor corporations
through which the Company's business was conducted. Mr. Powell opened the first
clothing store at the Company's Norman, Oklahoma location in 1948. Mr. Powell
is employed pursuant to an employment agreement which expires January 31, 1998.
Rebecca Powell Casey was appointed Chief Executive Officer of the
Company in 1992, and prior to that time had been the President from 1987 to
1988, and Executive Vice President - Merchandise and Product Development from
1989 to 1991. Ms. Casey has been employed by the Company and its predecessors
in various managerial positions since 1977. Ms. Casey is employed pursuant to
an employment agreement which expires January 31, 1998.
H. Rainey Powell has been Chief Financial Officer, Treasurer,
Secretary and a Director of the Company since 1987. Mr. Powell was elected
President and Chief Operating Officer in 1992. Mr. Powell has been employed by
the Company and its predecessors in various managerial positions since 1978.
Mr. Powell is employed pursuant to an employment agreement which expires January
31, 1998.
Kenneth C. Row has served as Executive Vice President and a Director
of the Company since 1992. Prior to that time and since 1988, Mr. Row was Vice
President - Marketing. Mr. Row has been employed by the Company and its
predecessors in various managerial positions since 1986.
Janet F. Firth has served as Vice President - Ladies' Merchandise
Manager of the Company since 1987. Prior to that time, Ms. Firth was employed
by the Company and its predecessors in various managerial capacities since 1984.
Jeffrey T. Morrell has served as Vice President - Stores of the
Company since 1993. Prior to that time, Mr. Morrell was employed in various
managerial capacities since 1990.
Linda L. Daugherty has served as Vice President and Controller of the
Company since 1994. Prior to that time, Ms. Daugherty was employed by the
Company and its predecessors in various managerial capacities since 1980.
James R. Agar is President of Agar, Inc. and Advisory Director of
Agar, Ford, Jarmon and Muldrow Insurance Agency.
24
<PAGE>
Michael T. Casey has served as Chairman of the Board of Grand Prairie
State Bank, Texas, a privately held bank, since 1989, and is President of Casey
Bancorp, Inc. Prior to and since that time, Mr. Casey has been engaged in
investments and banking. He previously served as a Senior Vice President of the
Company from 1989 until 1991.
Robert B. Cullum, Jr. is a partner of Fairway Capital Partners, Ltd
and Wayfair Capital Partners, Ltd, both of which are privately held real estate
investment partnerships based in Dallas, Texas. Mr. Cullum was involved for 30
years in the supermarket industry with Cullum Co., Inc.
Lisa Powell Hunt is engaged in investments and was formerly employed
by the First Boston Corporation as a registered institutional sales executive
from 1980 to 1984.
W. Howard Lester has been Chairman and Chief Executive Officer of
Williams-Sonoma, Inc. since 1978.
Gary C. Rawlinson is a shareholder-director of the law firm of Crowe &
Dunlevy, A Professional Corporation, which firm serves as general counsel to the
Company.
William F. Weitzel, PhD has served as Professor of Business
Administration at the University of Oklahoma since 1983 and as a Director of the
College of Business Administration's Skills Enhancement Program since 1986. Mr.
Weitzel is President of William Weitzel, Inc., a management consulting
organization.
DESCRIPTION OF CAPITAL STOCK
The Company is authorized to issue 7,500,000 shares of Common Stock,
par value $0.01 per share, and 1,000,000 shares of Preferred Stock, par value
$0.01 per share. As of May 1, 1996, there were 4,965,245 shares of Common Stock
outstanding. No shares of Preferred Stock have been issued.
The following summary description of the Company's capital stock does
not purport to be complete and is qualified in its entirety by this reference to
the Company's Certificate of Incorporation and Bylaws, copies of which have been
filed as exhibits to the Registration Statement of which this Prospectus is a
part. See "Capitalization" and "Selling Shareholders."
COMMON STOCK
Holders of Common Stock are entitled, among other things, to one vote
per share on each matter submitted to a vote of shareholders and, in the event
of liquidation, to share ratably in the distribution of assets remaining after
payment of liabilities. At a meeting of shareholders at which a quorum is
present, a majority of the votes cast decides all questions, unless the matter
is one upon which a different vote is required by express provisions of law or
the Company's Certificate of Incorporation or Bylaws. Holders of Common Stock
have no cumulative voting rights, and, accordingly, the holders of a majority of
the outstanding shares have the ability to elect all of the directors. Holders
of Common Stock have no preemptive or other rights to subscribe for shares.
Holders of Common Stock are entitled to such dividends as may be declared by the
Board of Directors out of funds legally available therefor, when and if so
declared. See "Price Range of Common Stock and Dividend Policy." All
outstanding shares are, and the shares issuable pursuant to the offering will
be, when issued and paid, fully paid and non-assessable.
PREFERRED STOCK
No shares of Preferred Stock are outstanding. The Company's
Certificate of Incorporation authorizes the Board of Directors to issue
Preferred Stock from time to time in one or more series. The Board of
Directors, without shareholder approval, is authorized to determine the rights,
preferences, privileges and restrictions granted to, and imposed upon, each
series of Preferred Stock and to fix the number of shares of any series of
Preferred Stock and the designation of any such series. The issuance of
Preferred Stock could be used, under certain circumstances, as a method of
preventing a takeover of the Company and could permit the Board of Directors,
without any action by holders of the
25
<PAGE>
Common Stock, to issue Preferred Stock which could adversely affect the rights
of holders of the Common Stock, including loss of voting control. The issuance
of any series of Preferred Stock and the relative powers, preferences, rights,
qualifications, limitations and restrictions of such series, if and when
established, will depend upon, among other things, the future capital needs of
the Company, the then-existing market conditions and other facts that, in the
judgment of the Board of Directors, might warrant the issuance of Preferred
Stock. The Company has no present plans, agreements or understandings to issue
any shares of Preferred Stock.
OKLAHOMA LAW AND CERTAIN CHARTER PROVISIONS
The Company's Certificate of Incorporation provides that, to the
fullest extent permitted by the Oklahoma General Corporation Act, its directors
shall not be liable for monetary damages for breach of the directors' fiduciary
duty of care to the Company and its shareholders. The provision in the
Certificate of Incorporation does not eliminate the duty of care and in
appropriate circumstances, equitable remedies such as injunctive or other forms
of non-monetary relief will remain available under Oklahoma law. However, such
remedies may not be effective in all cases. In addition, each director will
continue to be subject to liability for breach of the director's duty of loyalty
to the Company, as well as for acts or omissions not in good faith or involving
intentional misconduct, for knowing violations of law, for actions leading to
improper personal benefit to the director, and for payment of dividends or
approval of stock repurchases or redemptions that are unlawful under Oklahoma
law. The provision also does not affect a director's responsibilities under any
other law, such as the state or federal securities laws.
Under the Oklahoma General Corporation Act, the Company has broad
powers to indemnify its directors and officers against liabilities they may
incur in such capacities, including liabilities under the Securities Act. The
Company's Certificate of Incorporation provides that the Company shall indemnify
its directors and officers to the fullest extent permitted by the Oklahoma
General Corporation Act, except as to any action, suit or proceeding brought by
or on behalf of such persons without prior approval of the Board of Directors.
The Certificate of Incorporation requires the Company to indemnify such persons
against expenses, judgments, fines, settlements and other amounts incurred in
connection with any proceedings, except for certain proceedings brought by or on
behalf of such persons as indicated above, whether actual or threatened, to
which any such person may be made a party by reason of the fact that such person
is or was a director or an officer of the Company, or is or was serving at the
request of the Company as a director or officer of another enterprise, provided
such person acted in good faith and in a manner such person reasonably believed
to be in or not opposed to the best interests of the Company, and with respect
to any criminal proceeding, had no reasonable cause to believe his conduct was
unlawful. However, in the case of a derivative action, an officer or director
will not be entitled to indemnification in respect of any claim, issue or matter
as to which such person is adjudged to be liable to the Company, unless and only
to the extent that the court in which the action was brought determines that
such person is fairly and reasonably entitled to indemnity for expenses.
In addition, the Company has entered into Indemnity Agreements with
each director of the Company which require the Company to indemnify such persons
against certain liabilities and expenses incurred by any such persons by reason
of their status or service as directors or officers of the Company and which set
forth procedures that will apply in the event of a claim for indemnification
under such agreements. The Company believes that these agreements enhance its
ability to attract and retain highly qualified directors.
As of the date of this Prospectus, there is no pending litigation or
proceeding involving a director or officer of the Company as to which
indemnification is being sought nor is the Company aware of any threatened
litigation that may result in claims for indemnification by any officer or
director.
TRANSFER AGENT
Liberty Bank and Trust Company of Oklahoma City, N.A. is the transfer
agent and registrar for the Common Stock.
26
<PAGE>
SELLING SHAREHOLDERS
The following table sets forth certain information with respect to the
beneficial ownership of the Company's Common Stock as of May 1, 1996 by each of
the Selling Shareholders. Except as otherwise indicated in the footnotes to
this table, the Company believes that each Selling Shareholder has sole voting
and investment power with respect to the shares indicated as beneficially owned,
subject to applicable community property laws. For a description of related
party transactions, see "Business - Merchandise Buying Office and Distribution
Center."
<TABLE>
<CAPTION>
SHARES BENEFICIALLY SHARES OWNED BENEFICIALLY
OWNED PRIOR TO OFFERING AFTER OFFERING(1)
SHARES BEING
SELLING SHAREHOLDERS NUMBER PERCENT OFFERED(1) NUMBER PERCENT
- ------------------------------- ----------- ------------ --------------- ------------ ------------
<S> <C> <C> <C> <C> <C>
Harold G. Powell(2)(6) 513,003 10.3% 62,500 450,503 8.4%
The Security National Bank 638,943 12.9% 62,500 576,443 10.7%
and Trust Company of
Norman, as Trustee (3)(6)
Rebecca Powell Casey(4)(6) 750,678 15.0% 45,000 705,678 13.1%
Lisa Powell Hunt(5)(6) 364,813 7.3% 15,000 349,813 6.5%
</TABLE>
- ----------------------
(1) Except as otherwise indicated, assumes the Underwriters' over-allotment
option is not exercised. See "Under writing." If the Underwriters' over-
allotment option is exercised in full, the Selling Shareholders intend to
sell additional shares as follows: Harold G. Powell - additional
shares; The Security National Bank and Trust Company of Norman, as Trustee
("Security") - additional shares; Rebecca Powell Casey -
additional shares; and Lisa Powell Hunt - additional shares. Sale
of such additional shares will result in beneficial ownership after the
offering as follows: Harold G. Powell - shares ( %); Security -
shares ( %); Rebecca Powell Casey - shares ( %); and Lisa
Powell Hunt - shares ( %).
(2) Harold G. Powell is Chairman of the Board of Directors of the Company. The
shares indicated as beneficially owned by Mr. Powell include (i) 21,318
shares that Mr. Powell has the right to acquire upon exercise of currently
exercisable stock options granted under the Company's 1993 Performance and
Equity Incentive Plan and (ii) 273,865 shares held by Security, as Trustee
of the Elizabeth M. Powell Trust A, over which Mr. Powell possesses a
general power of appointment exercisable at his death. The shares
indicated as beneficially owned by Mr. Powell do not include 365,078 shares
held by Security, as Trustee of the Elizabeth M. Powell Trust B, over which
Mr. Powell may be deemed to have shared voting power.
(3) Consists of 273,865 shares held by Security, as Trustee of the Elizabeth M.
Powell Trust A, and 365,078 shares held by Security, as Trustee of the
Elizabeth M. Powell Trust B. All of the shares being sold by Security are
held by Security in its capacity as Trustee of the Elizabeth M. Powell
Trust A. The shares held by Security, as Trustee of the Elizabeth M.
Powell Trust A, are also included in the shares indicated as beneficially
owned by Mr. Powell. See footnote (2) above.
(4) Rebecca Powell Casey is Chief Executive Officer and Vice Chairman of the
Board of Directors of the Company. The shares indicated as beneficially
owned by Ms. Casey include (i) 23,028 shares that Ms. Powell has the right
to acquire upon exercise of currently exercisable stock options granted
under the Company's 1993 Performance and Equity Incentive Plan and (ii)
91,068 shares held by Ms. Casey as custodian for the benefit of her minor
children. The shares indicated as beneficially owned by Ms. Casey do not
include 294,846 shares held by Michael T. Casey, a director of the Company
and the spouse of Ms. Casey, as to which shares Ms. Casey disclaims
beneficial ownership. Ms. Casey is the daughter of Harold G. Powell.
27
<PAGE>
(5) Lisa Powell Hunt is a director of the Company. The shares indicated as
beneficially owned by Ms. Hunt include (i) 4,725 shares that Ms. Hunt has
the right to acquire upon exercise of currently exercisable stock options
granted under the Company's 1993 Performance and Equity Incentive Plan and
(ii) 73,411 shares held by Ms. Hunt as custodian for the benefit of her
minor children. The shares indicated as beneficially owned by Ms. Hunt do
not include 30,356 shares held by the spouse of Ms. Hunt, as to which
shares Ms. Hunt disclaims beneficial ownership. Ms. Hunt is the daughter
of Harold G. Powell.
(6) Pursuant to a Shareholders Agreement, effective August 18, 1987, Harold G.
Powell, Rebecca Powell Casey, Lisa Powell Hunt, Security and certain other
shareholders have agreed to vote the Common Stock held by them in
accordance with the decision of those holding a majority of the shares of
Common Stock subject to the Shareholders Agreement. Such group of
shareholders may be treated as the beneficial owners of 2,756,478 shares,
or approximately 54.7% of the outstanding Common Stock of the Company.
Except as otherwise indicated above, the shares indicated as beneficially
owned by each Selling Shareholder do not include shares held by other
members of the group.
UNDERWRITING
Under the terms and subject to the conditions set forth in an Underwriting
Agreement dated the date hereof (the "Underwriting Agreement"), Scott &
Stringfellow, Inc. (the "Underwriter") has agreed to purchase, and the Company
and the Selling Shareholders have agreed to sell to the Underwriter, the number
of shares of Common Stock set forth opposite the Underwriter's name below:
Underwriter Number of Shares
----------- ----------------
Scott & Stringfellow, Inc.
----------
Total 585,000
=======
The Underwriting Agreement provides that the obligation of the Underwriter to
purchase shares of Common Stock is subject to the approval of certain legal
matters by counsel and certain other conditions. The Underwriter is obligated
to take and pay for all such shares of Common Stock, if any are taken.
The Underwriter proposes initially to offer such shares of Common Stock
directly to the public at the public offering price set forth on the cover page
of this Prospectus and to certain dealers at such price less a concession not in
excess of $ per share. The Underwriter may allow, and such dealers
may allow, a concession not in excess of $ per share to certain
other dealers. After the shares of Common Stock are released for sale to the
public, the offering price and such concessions may be changed.
The Company and the Selling Shareholders have granted to the Underwriter an
option, expiring at the close of business on the 30th day after the date of this
Prospectus, to purchase up to 87,750 additional shares of Common Stock at the
public offering price, less the underwriting discount. The Underwriter may
exercise such option solely for the purpose of covering over-allotments, if any.
The Company and certain of its shareholders have agreed not to offer, sell,
contract to sell or otherwise dispose of any shares of Common Stock or any
securities convertible into or exercisable or exchangeable for shares of Common
Stock, for a period of 120 days after the date hereof, without the prior written
consent of Scott & Stringfellow, Inc., with certain limited exceptions.
The Company and the Selling Shareholders have agreed to indemnify the
Underwriter against certain liabilities, including liabilities under the
Securities Act.
28
<PAGE>
LEGAL MATTERS
The validity of the issuance of the shares of Common Stock offered hereby will
be passed upon for the Company by Crowe & Dunlevy, A Professional Corporation,
Tulsa, Oklahoma. Gary C. Rawlinson, a shareholder and director of Crowe &
Dunlevy, is a director of the Company and is the beneficial owner of 9,962
shares of Common Stock, including 4,725 shares issuable upon exercise of
outstanding options to purchase Common Stock granted to Mr. Rawlinson in
connection with his service as a director. Certain legal matters in connection
with the offering will be passed upon for the Underwriter by Hunton & Williams,
Richmond, Virginia.
EXPERTS
The consolidated balance sheets of the Company and subsidiaries as of February
3, 1996 and January 28, 1995, and the related consolidated statements of
earnings, shareholders' equity, and cash flows for the 53-week period ended
February 3, 1996 and 52-week periods ended January 28, 1995 and January 29,
1994, have been included and incorporated by reference herein and in the
Registration Statement in reliance upon the report of KPMG Peat Marwick LLP,
independent certified public accountants, appearing elsewhere and incorporated
by reference herein, and upon the authority of said firm as experts in
accounting and auditing.
29
<PAGE>
[THIS PAGE INTENTIONALLY LEFT BLANK]
30
<PAGE>
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
<S> <C>
Independent Auditors' Report........................................... F-3
Consolidated Financial Statements:
Consolidated Balance Sheets
February 3, 1996, and January 28, 1995............................. F-4
Consolidated Statements of Earnings
53 Weeks Ended February 3, 1996, 52 Weeks Ended January 28, 1995,
and January 29, 1994............................................... F-5
Consolidated Statements of Stockholders' Equity
53 Weeks Ended February 3, 1996, 52 Weeks Ended January 28, 1995,
and January 29, 1994............................................... F-7
Consolidated Statements of Cash Flows
53 Weeks Ended February 3, 1996, 52 Weeks Ended January 28, 1995,
and January 29, 1994............................................... F-8
Notes to Consolidated Financial Statements.............................. F-9
</TABLE>
F-1
<PAGE>
[THIS PAGE INTENTIONALLY LEFT BLANK]
F-2
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Shareholders
Harold's Stores, Inc.:
We have audited the accompanying consolidated balance sheets of Harold's
Stores, Inc. and subsidiaries (the Company) as of February 3, 1996 and January
28, 1995, and the related consolidated statements of earnings, stockholders'
equity and cash flows for the 53 week period ended February 3, 1996, and the 52
week periods ended January 28, 1995 and January 29, 1994. These consolidated
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards 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. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Harold's Stores,
Inc. and subsidiaries as of February 3, 1996, and January 28, 1995, and the
results of their operations and their cash flows for the 53 week period ended
February 3, 1996, and the 52 week periods ended January 28, 1995, and January
29, 1994, in conformity with generally accepted accounting principles.
KPMG PEAT MARWICK LLP
Oklahoma City, Oklahoma
March 29, 1996
F-3
<PAGE>
HAROLD'S STORES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
ASSETS
(In Thousands)
<TABLE>
<CAPTION>
February 3, 1996 January 28, 1995
----------------- -----------------
Current assets:
<S> <C> <C>
Cash and cash equivalents $ 2 109
Trade accounts receivable, less allowance
for doubtful accounts of $200 and $175, respectively 4,687 4,238
Other accounts receivable 568 671
Merchandise inventories 21,647 17,847
Prepaid expenses 1,759 646
Deferred income taxes 710 622
------- ------
Total current assets 29,373 24,133
------- ------
Property and equipment, at cost 18,999 15,186
Less accumulated depreciation and amortization (6,097) (4,955)
------- ------
Net property and equipment 12,902 10,231
------- ------
Other assets 334 297
------- ------
Total assets $42,609 34,661
======= ======
</TABLE>
See accompanying notes to consolidated financial statements.
F-4
<PAGE>
HAROLD'S STORES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
LIABILITIES AND STOCKHOLDERS' EQUITY
(In Thousands Except Share Data)
<TABLE>
<CAPTION>
February 3, 1996 January 28, 1995
---------------- ----------------
Current liabilities:
<S> <C> <C>
Current maturities of long-term debt $ 75 4,977
Accounts payable 4,396 4,154
Redeemable gift certificates 672 509
Accrued bonuses and payroll expenses 1,624 1,129
Accrued rent expense 241 257
Income taxes payable 536 583
------- ------
Total current liabilities 7,544 11,609
------- ------
Long-term debt, net of current maturities 9,540 594
Deferred income taxes 226 198
Commitments and contingent liabilities (notes 8, 9 and 11)
Stockholders' equity:
Preferred stock of $.01 par value
Authorized 1,000,000 shares; none issued - -
Common stock of $.01 par value
Authorized 7,500,000 shares; issued and
outstanding 4,958,181 in 1996, 4,698,174 in 1995 50 47
Additional paid-in capital 20,572 17,491
Retained earnings 4,677 4,722
------- ------
Total stockholders' equity
25,299 22,260
Total liabilities and stockholders' equity ------- ------
$42,609 34,661
======= ======
</TABLE>
See accompanying notes to consolidated financial statements.
F-5
<PAGE>
HAROLD'S STORES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EARNINGS
(In Thousands Except Share Data)
<TABLE>
<CAPTION>
53 Weeks Ended 52 Weeks Ended 52 Weeks Ended
February 3, 1996 January 28, 1995 January 29, 1994
---------------- ---------------- ----------------
<S> <C> <C> <C>
Sales $ 94,264 75,795 60,940
Costs and expenses:
Costs of goods sold (including occupancy
and central buying expenses, exclusive of
items shown separately below) 59,831 49,388 40,591
Selling, general and administrative expenses 19,344 14,972 12,072
Advertising expense 7,807 5,912 3,968
Depreciation and amortization 2,185 1,710 1,409
Interest expense 452 274 117
---------- --------- ---------
89,619 72,256 58,157
---------- --------- ---------
Earnings before income taxes 4,645 3,539 2,783
Provision for income taxes 1,858 1,451 1,171
---------- --------- ---------
Net earnings $ 2,787 2,088 1,612
========== ========= =========
Earnings per common share $.56 .42 .35
Weighted average number of common shares ========== ========= =========
outstanding
5,000,033 4,923,951 4,598,846
========== ========= =========
</TABLE>
See accompanying notes to consolidated financial statements.
F-6
<PAGE>
HAROLD'S STORES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(Dollars in Thousands)
<TABLE>
<CAPTION>
53 Weeks Ended 52 Weeks Ended 52 Weeks Ended
February 3, 1996 January 28, 1995 January 29, 1994
----------------- ----------------- -----------------
<S> <C> <C> <C>
Common stock:
Balance, beginning of year $ 47 43 33
Stock dividend (5 percent) in 1996 of
235,868 shares, and (10 percent), 426,970
shares in 1995, and 386, 549 shares in 1994 3 4 4
Stock bonuses, 1,301 shares in 1996, 645
shares in 1995, and 1,315 shares in 1994 - - 1
Employee Stock Purchase Plan 22,838
shares in 1996, and 17,712 shares in 1995 - - -
Sale of 516,000 shares - - 5
------- ------ ------
Balance, end of year $ 50 47 43
======= ====== ======
Additional paid-in capital:
Balance, beginning of year $17,491 13,047 6,945
Stock dividend (5 percent) in 1996 and (10
percent) in 1995 and 1994 2,827 4,265 3,090
Stock bonuses 13 6 8
Sale of 516,000 shares, net of issuance cost
of $474,000 - - 3,004
Employee stock purchase plan 241 173 -
------- ------ ------
Balance, end of year $20,572 17,491 13,047
======= ====== ======
Retained earnings:
Balance, beginning of year $ 4,722 6,906 8,388
Net earnings 2,787 2,088 1,612
Stock dividend (5 percent) in 1996 and (10
percent) in 1995 and 1994 (2,832) (4,272) (3,094)
------- ------ ------
Balance, end of year $ 4,677 4,722 6,906
======= ====== ======
</TABLE>
See accompanying notes to consolidated financial statements.
F-7
<PAGE>
HAROLD'S STORES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In Thousands)
<TABLE>
<CAPTION>
53 Weeks Ended 52 Weeks Ended 52 Weeks Ended
February 3, 1996 January 28, 1995 January 29, 1994
----------------- ----------------- -----------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net earnings $ 2,787 $ 2,088 1,612
Adjustments to reconcile net earnings to net cash
provided by (used in) operating activities:
Depreciation and amortization 2,185 1,710 1,409
Loss (gain) on sale of assets 1 (4) (6)
Shares issued under employee incentive plans 255 179 9
Changes in assets and liabilities:
Increase in trade and other accounts receivable (346) (419) (999)
Increase in merchandise inventories (3,800) (5,200) (1,891)
Increase in income taxes receivable - 9 37
Deferred income taxes (benefits) (60) (95) 29
Decrease (increase) in other assets (37) 2 (222)
Increase in prepaid expenses (1,113) (266) (35)
Increase (decrease) in accounts payable 242 1,326 (393)
Increase (decrease) in income taxes payable (47) 583 -
Increase (decrease) in accrued expenses 642 656 (59)
-------- -------- -------
Net cash provided by (used in) operating
activities 709 569 (509)
-------- -------- -------
Cash flows from investing activities:
Acquisition of property and equipment (5,159) (3,994) (2,909)
Proceeds from disposal of property and
equipment 302 42 105
-------- -------- -------
Net cash used in investing activities (4,857) (3,952) (2,804)
-------- -------- -------
Cash flows from financing activities:
Advances on debt 32,652 26,357 18,325
Payments of debt (28,608) (23,005) (18,065)
Proceeds of common stock offering - - 3,009
Payments of fractional shares issued with stock
dividend (3) (3) -
-------- -------- -------
Net cash provided by financing activities 4,041 3,349 3,269
-------- -------- -------
Net decrease in cash and cash equivalents (107) (34) (44)
Cash and cash equivalents at beginning of year 109 143 187
-------- -------- -------
Cash and cash equivalents at end of year $ 2 109 143
======== ======== =======
Supplemental disclosure of cash flow
information:
Cash paid during the year for:
Income taxes $ 1,965 954 1,025
======== ======== =======
Interest $ 452 291 139
======== ======== =======
</TABLE>
See accompanying notes to consolidated financial statements.
F-8
<PAGE>
HAROLD'S STORES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FEBRUARY 3, 1996, JANUARY 28, 1995, AND JANUARY 29, 1994
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Nature of Entity
- ----------------
Harold's Stores, Inc., an Oklahoma corporation (the "Company"), operates a
chain of "updated traditional", classic styled ladies' and men's specialty
apparel stores. The Company offers its merchandise in 29 stores primarily
across the South and Southwest, with 10 stores located in Texas, and through its
mail order catalog. The product development and private label programs provide
an exclusive selection of upscale merchandise to the consumer. In addition, the
in-house advertising and catalog production capabilities create opportunities
for vertical integration.
Basis of Presentation
- ---------------------
The consolidated financial statements include the accounts of the Company and
its subsidiaries, all of which are wholly owned. All significant intercompany
accounts and transactions have been eliminated.
Definition of Fiscal Year
- -------------------------
The Company has a 52-53 week fiscal year which ends on the Saturday closest to
January 31. Fiscal years 1996, 1995 and 1994 ended February 3, 1996, January
28, 1995, and January 29, 1994, respectively.
Accounts Receivable and Finance Charges
- ---------------------------------------
Trade accounts receivable primarily represent the Company's credit card
receivables from customers. These customers are primarily residents of Oklahoma
and Texas. Finance charges on these revolving receivables are imposed at
various annual rates in accordance with the state laws in which the Company
operates, and are recognized in income when billed to the customers. Minimum
monthly payments are required generally equal to ten percent of the out standing
balance. The average liquidation rate at February 3, 1996, was approximately 4
months. Finance charge revenue is netted against selling, general and
administrative expenses and was approximately $705,000, $578,000, and $480,000,
in fiscal 1996, fiscal 1995, and fiscal 1994, respectively.
Merchandise Inventories
- -----------------------
Merchandise inventories are valued at the lower of cost or market using the
retail method of accounting. Inventories of raw materials are valued at the
lower of cost or market, and approximate $5,600,000 and $3,600,000 in fiscal
1996, and fiscal 1995, respectively.
Depreciation, Amortization, and Maintenance and Repairs
- -------------------------------------------------------
Depreciation is computed using the straight-line method over the estimated
useful lives of the related assets. Leasehold improvements are amortized over
the shorter of the life of the respective leases or the expected life of the
improvements. The following are the estimated useful lives used to compute
depreciation and amortization:
Buildings 30 years
Leasehold improvements 5-10 years
Furniture and equipment 4-7 years
F-9
<PAGE>
Maintenance and repairs are charged directly to expense as incurred, while
betterments and renewals are generally capitalized in the property accounts.
When an item is retired or otherwise disposed of, the cost and applicable
accumulated depreciation are removed from the respective accounts and the
resulting gain or loss is recognized.
Preopening Expenses and Catalog Costs
- -------------------------------------
Costs associated with the opening of new stores are expensed during the first
full month of operations. The costs are carried as prepaid expenses prior to
the store opening. Such costs included approximately $535,000 at February 3,
1996, and $67,000 at January 28, 1995.
The Company expenses all non-direct advertising as incurred and defers the
direct costs of producing its mail order catalogs. These costs are amortized
over the estimated sales period of the catalogs, generally three to four months.
At February 3, 1996 and January 28, 1995 approximately $257,000 and $220,000 of
deferred catalog costs are included in other assets, respectively. The Company
incurred approximately $7,807,000, $5,912,000, and $3,968,000 in adver tising
expenses of which approximately $4,818,000, $3,678,000, and $2,157,000 were
related to the mail order catalogs during fiscal years 1996, 1995 and 1994,
respectively.
Income Taxes
- ------------
Income taxes are accounted for under the asset and liability method. Deferred
tax assets and liabilities are recognized for the future tax consequences
attributable to differences between the financial statement carrying amounts of
existing assets and liabilities and their respective tax bases and operating
loss and tax credit carry forwards. Deferred tax assets and liabilities are
measured using enacted tax rates expected to apply to taxable income in the
years in which those temporary differences are expected to be recovered or
settled. The effect on deferred tax assets and liabilities of a change in tax
rates is recognized in income in the period that includes the enactment date.
Net Earnings Per Common Share
- -----------------------------
Net earnings per common share are based upon the weighted average number of
common shares outstanding during the periods restated for the five percent stock
dividend in fiscal 1996, and the ten percent stock dividends in fiscal 1995, and
fiscal 1994 and includes common stock equivalents of 53,181 in fiscal 1996.
Use of Estimates
- ----------------
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
effect the reported amount of assets and liabilities and 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.
Reclassifications
- -----------------
Certain comparative prior year amounts in the consolidated financial statements
have been reclassified to conform with the current year presentation.
2. FAIR VALUE OF FINANCIAL INSTRUMENTS
The recorded amounts for cash and cash equivalents, accounts receivable,
accounts payable and accrued expenses approximate fair value because of the
short maturity of these financial instruments. The Company's debt is at a
variable interest rate; therefore, book value approximates fair value.
F-10
<PAGE>
3. PROPERTY AND EQUIPMENT
Property and equipment at February 3, 1996 and January 28, 1995 consisted
of the following (in thousands):
1996 1995
---- ----
Land $ 665 590
Buildings 2,796 1,987
Leasehold improvements 4,934 4,310
Furniture and equipment 10,604 8,299
------- ------
$18,999 15,186
======= ======
4. NOTE PAYABLE AND LONG-TERM DEBT
Borrowings under short-term agreements were as follows (in thousands):
<TABLE>
<CAPTION>
1996 1995 1994
------- ------ -----
<S> <C> <C> <C>
Balance at end of fiscal year $ - 4,902 1,475
Weighted average interest rate at end of fiscal year - 8.5% 6.0%
Maximum balance outstanding during the year $ 7,558 5,298 2,950
Average balance outstanding during the year $ 5,552 2,961 1,051
Weighted average interest rate during the year 8.6% 7.4% 6.1%
</TABLE>
Average outstanding balances in the above table are based on the number of days
outstanding. Weighted average interest rates are the result of dividing the
related interest expense by average borrowings outstanding.
Long-term debt at February 3, 1996, and January 28, 1995 consisted of the
following (in thousands):
<TABLE>
<CAPTION>
1996 1995
------ ----
<S> <C> <C>
Borrowings under line of credit, bearing interest at a variable rate
(7.8% at February 3, 1996) payable monthly, principal due June
30, 1997. $9,021 -
Note payable to bank, secured by building and land with net book
value of $335 at February 3, 1996, bearing interest at a variable
rate (8.0% at February 3, 1996), due in monthly installments of
principal of $6 plus accrued interest, with final payment due
September 2002. 594 669
------ ----
Total long-term debt
9,615 669
Less current maturities of long-term debt
75 75
Long-term debt, net of current maturities ------ ----
$9,540 594
====== ====
</TABLE>
F-11
<PAGE>
The annual maturities of the above long-term debt as of February 3, 1996 are as
follows (in thousands):
Fiscal year ending
1997 $ 75
1998 9,096
1999 75
2000 75
2001 75
2002 and subsequent 219
------
Total $9,615
======
During fiscal 1995, the Company's line of credit was classified as short-term.
On August 22, 1995, the line of credit available was renewed with a two-year
maturity and increased to a $12,000,000 credit facility. Subsequent to February
3, 1996, the Company increased the above line of credit to $15,000,000.
Additionally, a $3,000,000 line of credit was obtained from a separate banking
institution for the purpose of issuing letters of credit.
5. INCOME TAXES
Income tax expense (benefit) for the years ended February 3, 1996, January 28,
1995, and January 29, 1994, consisted of the following (in thousands):
<TABLE>
<CAPTION>
1996 1995 1994
------- ------ ------
<S> <C> <C> <C>
Current:
Federal $1,569 1,265 925
State 349 281 217
------ ----- -----
1,918 1,546 1,142
------ ----- -----
Deferred:
Federal (50) (79) 23
State (10) (16) 6
------ ----- -----
(60) (95) 29
------ ----- -----
Total $1,858 1,451 1,171
====== ===== =====
</TABLE>
Income tax expense differs from the normal tax rate as follows:
<TABLE>
<CAPTION>
1996 1995 1994
------ ------ ------
<S> <C> <C> <C>
Statutory tax rate 34% 34% 34%
Increase in income taxes caused by:
State income taxes 6 6 6
Other, net - 1 2
------ ----- -----
Effective tax rate
40% 41% 42%
====== ===== =====
</TABLE>
F-12
<PAGE>
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and deferred tax liabilities at February 3,
1996 and January 28, 1995 are presented below (in thousands):
<TABLE>
<CAPTION>
1996 1995
----- ----
<S> <C> <C>
Deferred tax assets - current:
Allowance for doubtful accounts $ 85 74
Merchandise inventories 534 528
Deferred compensation 91 20
----- ----
Deferred tax liability - noncurrent: $ 710 622
===== ====
Property and equipment $ 226 198
===== ====
</TABLE>
The net deferred tax asset relates solely to future deductible temporary
differences and there is no valuation allowance. Management believes that it is
more likely than not that the Company will fully realize the gross deferred tax
assets; however, there can be no assurances that the Company will generate the
necessary adjusted taxable income in any future periods.
6. STOCKHOLDERS' EQUITY AND STOCK OPTIONS
The Company has authorized 1,000,000 shares of preferred stock, par value $.01
per share. This preferred stock may be issued in one or more series and the
terms and rights of such stock will be determined by the Board of Directors. No
preferred shares were issued and outstanding at either February 3, 1996, or
January 28, 1995.
The Company has reserved 1,000,000 shares of its common stock for issuance to
key employees under its current stock option and equity incentive plan which was
adopted in April 1993 and amended June 1995. The plan has a term of ten years.
The Board of Directors may grant incentive or non-qualified stock options,
restricted stock, stock appreciation rights and other stock-based and cash
awards under the provisions of the plan. The exercise price of incentive stock
options is the fair market value of the stock at the date of the grant, plus ten
percent if the employee possesses more than ten percent of the total combined
voting power of all classes of the Company's stock. Options granted may have a
term of up to ten years, except that incentive stock options granted to
stockholders who have more than ten percent of the Company's voting stock at the
time of the grant may have a term of up to five years. Any unexercised portion
of the options will automatically and without notice terminate upon the
applicable anniversary of the issuance date or termination of employment. The
following table summarizes the stock option activity for the periods indicated:
F-13
<PAGE>
<TABLE>
<CAPTION>
Range of
Shares Exercise Prices
-------- ---------------
<S> <C> <C>
Options outstanding, fiscal 1993 33,033 $ 6.30
Granted - -
Exercised - -
Terminated (3,809) 6.30
Options outstanding, fiscal 1994 29,224 6.30
Granted 303,074 8.42-9.29
Exercised -
Terminated (21,484) 6.30-9.29
Options outstanding, fiscal 1995 310,814 6.30-9.29
Granted 33,075 10.48
Exercised (304) 10.48
Terminated (12,309) 6.30-9.29
Options outstanding, fiscal 1996 331,276 6.30-10.48
Options exercisable, fiscal 1996 141,736 6.30-10.48
</TABLE>
The number of shares and exercise prices have been restated to reflect the
five percent stock dividend in fiscal 1996, and the ten percent stock dividends
in fiscal 1995, fiscal 1994, and fiscal 1993.
Additionally, as of February 3, 1996, restricted stock awards for up to
$32,700 in market value of common stock were outstanding under the plan. These
awards may be exercised over the remaining four-year vesting period in equal
annual installments at the fair market value of common stock on such installment
vesting date. After giving effect to the outstanding and exercised awards, and
based upon the price of common stock on February 3, 1996, the Company may award
666,027 shares or options under the plan.
7. RETIREMENT AND BENEFIT PLANS
The Company has a profit sharing retirement plan with a 401(k) provision that
allows participants to contribute up to 15 percent of their compensation before
income taxes. Eligible participants are employees at least 21 years of age with
one year of service. The Company's Board of Directors will designate annually
the amount of the profit sharing contribution s well as the percentage of
participants' compensation that it will match as 401(k) contributions. For the
years ended February 3, 1996, January 28, 1995, and January 29, 1994, the
Company contributed approximately $81,000, $43,000, and $24,000, respectively,
to the 401(k) plan.
The Company has reserved 200,000 shares of common stock for employees under
its stock purchase plan which covers all employees who meet minimum age and
service requirements. The Company's Board of Directors will determine from time
to time the amount of any matching contribution as well as the percentage of
participants' compensation that it will match as purchase contributions. The
purchase price of shares covered under the plan is fair market value as of the
date of purchase in the case of newly issued shares and the actual price paid in
the case of open market purchases. The plan was implemented in January 1994 and
there was no matching contribution in fiscal year 1994. For the years ended
February 3, 1996, and January 28, 1995 the Company's matching contributions were
approximately $48,000 and $35,000, and approximately 23,000 and 18,000 shares
were issued, respectively.
F-14
<PAGE>
8. RELATED PARTY TRANSACTIONS
Rent on the Norman, Oklahoma store and certain related facilities is paid to
parties related to the Company's Chairman. The store lease terms in 1996, 1995,
and 1994 provided for payment of percentage rent equal to four percent of sales
plus certain ancillary costs. During the years ended February 3, 1996, January
28, 1995, and January 29, 1994, the total of such rent for the store and certain
related facilities was approximately $140,000, $133,000, and $136,000,
respectively.
The Company leases certain office space and a distribution center facility
from a limited partnership whose partners are stockholders and directors of the
Company. The term of the office space lease is sixteen years commencing April
1, 1996, with annual rent payments of $158,000 plus insurance, utilities, and
property taxes until April, 2000, at which time the rent will be $180,000 plus
insurance, utilities and property taxes, increasing $2,500 per year until
expiration of the lease. The term of the distribution center lease is ten (10)
years commencing December 1, 1992. Rent payments are approximately $64,000 per
year payable in monthly installments plus utilities, insurance, and property
taxes.
The Company has an option to purchase the distribution center for a purchase
price equal to the greater of the adjusted cost basis of the lessor at the time
of closing or 90% of appraised value, exercisable through the fifth year of the
lease. At the end of the third lease year on November 30, 1995, the lessor's
adjusted cost of the distribution center was approximately $798,000.
See note 11 for information concerning the employment contracts with the
Company's Chairman of the Board, Chief Executive Officer and President.
9. FACILITY LEASES
The Company conducts substantially all of its retail operations from leased
store premises under leases that will expire within the next ten years. Several
of such leases contain renewal options exercisable at the option of the Company.
In addition to minimum rental payments, certain leases provide for payment of
taxes, maintenance, and percentage rentals based upon sales in excess of
stipulated amounts.
Minimum rental commitments for store and distribution premises and office
space (excluding renewal options) under noncancelable operating leases having a
term of more than one year as of February 3, 1996, were as follows (in
thousands):
<TABLE>
<S> <C>
Fiscal year ending:
1997 $ 2,827
1998 2,851
1999 2,523
2000 2,491
2001 2,314
2002 and subsequent 9,815
-------
Total $22,821
=======
</TABLE>
F-15
<PAGE>
Total rental expense for the years ended February 3, 1996, January 28, 1995, and
January 29, 1994, was as follows (in thousands):
<TABLE>
<CAPTION>
1996 1995 1994
------ ----- -----
<S> <C> <C> <C>
Base rent $2,222 1,791 1,461
Additional amounts computed
as percentage of sales 1,112 922 666
------ ----- -----
Total $3,334 2,713 2,127
====== ===== =====
</TABLE>
10. BUSINESS CONCENTRATIONS
During fiscal 1996 and fiscal 1995, more than 90% and 80%, respectively, of
the ladies' apparel sales were attributable to the Company's product development
and private label programs. The breakdown of total sales between ladies' and
men's apparel was approximately 80% and 20% for fiscal 1996, and 78% and 22% for
fiscal 1995, respectively.
The product development programs result in a substantial portion of the
Company's purchases of raw materials being concentrated among a small group of
vendors, of which some are located outside of the United States. CMT
Enterprises, Inc. acts as the Company's agent in the purchase of the raw
materials, including fabrics, linings, buttons, etc., and supervises the
manufacturing process of the Company's merchandise with manufacturing
contractors. In the event of the termination of the CMT relationship or other
of the Company's vendors, management believes that in most instances more than
one new vendor would be required to replace the loss of a principal vendor.
Although management believes that replacement vendors could be located, if any
buying relationship is terminated and until replacement vendors are located, the
operating results of the Company could be materially adversely affected.
The Company's sales are directly impacted by regional and local economics and
consumer confidence. The amount of disposable income available to consumers, as
well as their perception of the current and future direction of the economy,
impact their level of purchases. The consumer demand for the Company's apparel
fluctuates according to changes in customer preferences dictated by fashion and
season. In addition, the Company's sales are subject to seasonal influences,
with the major portion of sales being realized during the fall season, which
includes the back-to-school and the holiday selling seasons. Such fluctuations
could affect sales and the valuation of inventory, since the merchandise is
placed in the production process, or ordered, well in advance of the season and
sometimes before fashion trends are evidenced by consumer purchases.
11. COMMITMENTS AND CONTINGENT LIABILITIES
The Company issues letters of credit which are used principally in overseas
buying, cooperative buying programs, and for other contract purchases. At
February 3, 1996, the Company had outstanding, pursuant to such facility,
approximately $225,000 in letters of credit to secure orders of merchandise from
various domestic and international vendors. Subsequent to year-end the Company
renegotiated the line of credit as discussed in Note 4.
The Company currently has an employment agreement with the Chairman of the
Board which continues until January 31, 1998. Pursuant to this agreement, dated
January 31, 1993, he is paid an annual salary of $180,000 plus an annual
performance bonus and deferred annual compensation of $25,000. Subject to
certain terms, at the end of the agreement, the Chairman's employment will be
converted to that of a part-time consultant for a period of ten years at an
annual salary of $50,000.
The Company also has employment agreements with the Chief Executive Officer
and the President which terminate on January 31, 1998. The Chief Executive
Officer's agreement, dated January 31, 1993, and amended
F-16
<PAGE>
January 31, 1995, provides for annual compensation of $220,000 plus an annual
performance bonus. The President's agreement, dated January 31, 1993 and
amended January 31, 1995, provides for annual compensation of $160,000 plus an
annual performance bonus. Neither of these contracts provides for deferred
compensation or part-time consultant positions after the termination dates of
such contracts.
The Company is involved in various claims, administrative agency proceedings
and litigation arising out of the normal conduct of its business. Although the
ultimate outcome of such litigation cannot be predicted, the management of the
Company, after discussions with counsel, believes that resulting liability, if
any, will not have a material effect upon the Company's financial position or
results of operations.
12. QUARTERLY FINANCIAL DATA (Unaudited - in thousands, except per share data)
Summarized quarterly financial results are as follows:
<TABLE>
<CAPTION>
First Second Third Fourth
------- ------ ------ ------
<S> <C> <C> <C> <C>
53 Weeks Ended February 3, 1996
- ---------------------------------
Sales $21,316 19,069 25,415 28,464
Gross profit on sales 7,448 7,251 9,245 10,489
Net earnings 486 508 796 997
Net earnings per common share .10 .10 .16 .20
52 Weeks Ended January 28, 1995
- ---------------------------------
Sales $16,753 15,415 21,031 22,596
Gross profit on sales 5,656 5,403 7,494 7,854
Net earnings 222 449 632 785
Net earnings per common share .04 .09 .13 .16
</TABLE>
F-17
<PAGE>
================================================================================
No dealer, salesperson or other person has been authorized to give any
information or to make any representation not contained in this Prospectus and,
if given or made, such information or representation must not be relied upon as
having been authorized by the Company, any Selling Shareholder or the
Underwriter. Neither the delivery of this Prospectus nor any sale made
hereunder shall, under any circumstances, create any implication that the
information herein is correct as of any time subsequent to the date hereof or
that there has been no change in the affairs of the Company since such date.
This Prospectus does not constitute an offer to sell or a solicitation of an
offer to buy any securities other than the registered securities to which it
relates. This Prospectus does not constitute an offer to sell or a solicitation
of an offer to buy such securities under any circumstances in which such offer
or solicitation would be unlawful.
___________________
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Available Information............................. 2
Incorporation of Certain
Documents by Reference......................... 2
Prospectus Summary................................ 3
Risk Factors...................................... 6
Use of Proceeds................................... 8
Price Range of Common Stock
and Dividend Policy............................ 8
Capitalization.................................... 9
Selected Consolidated Financial Data.............. 10
Management's Discussion and Analysis of
Financial Condition and Results of Operations.. 11
Business.......................................... 15
Management and Directors.......................... 23
Description of Capital Stock...................... 25
Selling Shareholders.............................. 27
Underwriting...................................... 28
Legal Matters..................................... 29
Experts........................................... 29
Index to Consolidated Financial Statements........ F-1
========================================================
</TABLE>
================================================================================
585,000 SHARES
[LOGO]
COMMON STOCK
_____________________________
PROSPECTUS
_____________________________
SCOTT & STRINGFELLOW, INC.
, 1996
================================================================================
<PAGE>
HAROLD'S STORES, INC.
APPENDIX TO PRELIMINARY PROSPECTUS FILED PURSUANT TO RULE 424(A)
Pursuant to Rule 304 of Regulation S-T, the following is a good faith
description of photographic image material not included in the foregoing
Preliminary Prospectus of Harold's Stores, Inc. filed with the Securities and
Exchange Commission pursuant to Rule 424(a) via EDGAR:
Photo No. 1 (upper left on gatefold): Exterior of Store No. 30, a full-line
ladies' and men's Old School Clothing Co. store located in CitiPlace Shopping
Center, Baton Rouge, Louisiana.
Photo No. 2 (upper right on gatefold): Ladies' interior of Store No. 06, a
full-line ladies' and men's store located in Highland Park Village, Dallas,
Texas.
Photo No. 3 (bottom of gatefold): Exterior of Store No. 18, a full-line
ladies' store located on Broadway and Austin Highway, San Antonio.
Photo No. 4 (top of inside front cover): Interior of Store No. 28, a full-line
ladies' and men's Old School Clothing Co. store located in Mall St. Matthews,
Louisville, Kentucky.
Illustration 1 (lower left of inside front cover): Map showing locations of
Harold's existing and proposed stores, outlets, distribution center,
merchandising office and corporate headquarters, as of fiscal year ending
February 3, 1996.
Photo No. 5 (upper left of inside back cover): Exterior of Store No. 29, the
Company's second men's and ladies' outlet facility, located in Southwest Outlet
Center, Hillsboro, Texas.
Photo No. 6 (upper right of inside back cover): Interior Harold's Outlet -
located in Southwest Outlet Center, Hillsboro, Texas.
Photo No. 7 (lower right of inside back cover): Exterior of Store No. 16, the
Company's first men's and ladies' outlet facility, located on Mopac Expressway,
Austin, Texas.
Photo No. 8 (lower left of inside back cover): Interior of the Company's 22,000
square foot distribution center, located in Norman, Oklahoma.
