1
SECURITIES AND EXCHANGE COMMISSION
Washington D.C. 20549
__________________________
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended Commission File No. 1-
October 31, 1998 10892
HAROLD'S STORES, INC.
(Exact name of registrant as specified in its charter)
Oklahoma 73-1308796
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
765 Asp Norman, Oklahoma 73069 (405)329-4045
(Address of principal executive (Registrant's
offices) telephone number,
(Zip Code) including area code)
Indicate by check mark whether the registrant (1) has
filed all reports required to be filed by Section 13 or
15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has
been subject to such filing requirements for the past 90
days.
Yes X . No .
Indicate the number of shares outstanding of each of the
issuer's classes of common stock, as of the latest practicable
date.
As of December 10, 1998, the registrant had 6,073,958 shares of
Common Stock outstanding.
Harold's Stores, Inc. & Subsidiaries
Index to
Quarterly Report on Form 10-Q
For the Period Ended October 31, 1998
Part I. - FINANCIAL INFORMATION Page
Item 1. Financial Statements
Consolidated Balance Sheets - October 31, 1998
(unaudited) and January 31, 1998 3
Consolidated Statements of Earnings -
Thirteen Weeks and Thirty-nine Weeks ended October
31, 1998 (unaudited)and November 1, 1997 (unaudited) 5
Consolidated Statements of Stockholders' Equity -
Thirty-nine Weeks ended October 31, 1998 (unaudited)
and November 1, 1997 (unaudited) 6
Consolidated Statements of Cash Flows -
Thirty-nine Weeks ended October 31, 1998 (unaudited)
and November 1, 1997 (unaudited) 7
Notes to Interim Consolidated Financial Statements 8
Item 2.Management's Discussion and Analysis of
Financial Condition and Results of Operations 9
Part II - OTHER INFORMATION
Item 1. Legal Proceedings 13
Item 6. Exhibits and Reports on Form 8-K 13
Signature 14
HAROLD'S STORES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
ASSETS
(In Thousands)
October 31, January 31,
1998 1998
(unaudited)
Current Assets:
Cash $ 2,610 130
Trade accounts receivable, less
allowance for doubtful account of 6,850 5,822
$239 in 1999 & $222 in 1998
Other accounts receivable 639 886
Merchandise inventories 31,172 31,440
Prepaid expenses 2,705 2,688
Prepaid income tax 71 961
Deferred income taxes
1,154 1,154
Total current assets 45,201 43,081
Property and equipment, at cost 30,636 28,533
Less accumulated depreciation and
amortization (11,242) (10,197)
Net property and equipment 19,394 18,336
Other receivables, non current 1,873 2,084
Other assets 590 428
Total assets $ 67,058 63,929
HAROLD'S STORES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
LIABILITIES AND STOCKHOLDERS' EQUITY
(In Thousands Except Share Data)
October 31, January 31,
1998 1998
(unaudited)
Current liabilities:
Current maturities of long-term debt $513 734
Accounts payable 5,272 4,789
Redeemable gift certificates 561 916
Accrued bonuses and payroll expenses 2,260 953
Accrued rent expense 196 259
Total current liabilities 8,802 7,651
Long-term debt, net of current maturities 19,958 19,708
Deferred income taxes 104 104
Stockholders' equity:
Preferred stock of $.01 par value
Authorized 1,000,000 shares; none - -
issued Common stock of $.01 par value
Authorized 25,000,000 shares; issued
6,073,958 in October and 6,044,105 in January 61 60
Treasury stock, 90 shares at cost (1) -
Additional paid-in capital 34,162 33,947
Retained earnings 3,972 2,459
Total stockholders' equity 38,194 36,466
Total liabilities and stockholders' $ 67,058 63,929
equity
HAROLD'S STORES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EARNINGS
(In Thousands Except Share Data)
13 Weeks Ended 39 Weeks Ended
October 31, November 1, October November 1,
1998 1997 31, 1998 1997
(Unaudited)
Sales $ 32,220 31,979 93,475 87,214
Costs and expenses:
Cost of goods sold
(including occupancy and
central buying expenses, 20,835 22,440 61,378 59,696
exclusive of items
shown separately below)
Selling, general and 8,862 8,068 26,067 24,684
administrative expenses
Depreciation and 974 884 2,835 2,603
amortization
Interest expense 200 314 623 708
30,871 31,706 90,903 87,691
Earnings (loss) before income
taxes and cumulative effect 1,349 273 2,572 (477)
of change in accounting
principle
Provision for income taxes 520 109 1,009 (191)
Earnings (loss) before
cumulative effect of change
in accounting principle 829 164 1,563 (286)
Cumulative effect of change
in accounting principle - - 50 -
Net earnings (loss) $ 829 164 1,513 (286)
Net earnings (loss) per
common share before
cumulative effect of change
in accounting principle:
Basic and diluted $ 0.14 0.03 0.26 (0.05)
Net earnings (loss) per
common share:
Basic and diluted $ 0.14 0.03 0.25 (0.05)
Weighted average number of
common shares (Basic) 6,072,909 6,027,341 6,062,572 6,014,968
HAROLD'S STORES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(Dollars in Thousands)
39 Weeks Ended
October 31, November 1,
1998 1997
(Unaudited)
Common stock:
Balance, beginning of period $ 60 57
Employee Stock Purchase Plan 1 -
Balance, end of period $ 61 57
Treasury Stock:
Balance, beginning of period - -
Employee Stock Purchase Plan (1) -
Balance, end of period $ (1) -
Additional paid-in capital:
Balance, beginning of period $ 33,947 31,548
Employee Stock Purchase Plan 215 310
Balance, end of period $ 34,162 31,858
Retained earnings:
Balance, beginning of period $ 2,459 4,430
Net earnings (loss) 1,513 (286)
Balance, end of period $ 3,972 4,144
HAROLD'S STORES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In Thousands)
39 Weeks Ended
October November 1,
31, 1998 1997
(Unaudited)
Cash flows from operating activities:
Net earnings (loss) $ 1,513 (286)
Adjustments to reconcile net earnings
(loss) to net cash
provided by (used in) operating
activities:
Depreciation and amortization 2,835 2,603
Loss (gain) on sale of assets 10 (2)
Shares issued under employee 215 310
incentive plan
Changes in assets and liabilities:
Increase in trade and other
accounts receivable (907) (1,218)
Decrease (increase) in
merchandise inventories 268 (8,599)
Decrease (increase) in other (162) 664
assets
Increase in prepaid expenses (17) (485)
Decrease (increase) in prepaid 890 (751)
income tax
Increase in accounts payable 483 3,541
Decrease in income taxes payable - (942)
Increase (decrease) in accrued
expenses 889 (832)
Net cash provided by (used in)
operating activities 6,017 (5,997)
Cash flows from investing activities:
Acquisition of property and (3,951) (3,392)
equipment
Proceeds from disposal of property
and equipment 48 9
Payment of principal on term loan to
others 337 51
Net cash used in investing activities (3,566) (3,332)
Cash flows from financing activities:
Advances on revolving line of credit 34,030 34,072
Payments on revolving line of credit (32,732) (26,010)
Borrowings of long-term debt - 1,024
Payments of long-term debt (1,269) (174)
Net cash provided by financing
activities 29 8,912
Increase (decrease) in cash and cash
equivalents 2,480 (417)
Cash and cash equivalents at beginning
of period 130 433
Cash and cash equivalents at end of
period $ 2,610 16
HAROLD'S STORES, INC. AND SUBSIDIARIES
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
October 31, 1998 and November 1, 1997
(Unaudited)
1. Unaudited Interim Periods
In the opinion of the Company's management, all
adjustments (all of which are normal and recurring) have been
made which are necessary to fairly state the financial position
of the Company as of October 31, 1998 and the results of its
operations and cash flows for the thirteen-week and thirty-nine
week periods ended October 31, 1998 and November 1, 1997. The
results of operations for the thirteen- week and thirty-nine
week periods ended October 31, 1998 and November 1, 1997 are
not necessarily indicative of the results of operations that
may be achieved for the entire fiscal year.
2. Definition of Fiscal Year
The Company has a 52-53 week fiscal year which ends on the
Saturday closest to January 31. The period from February 1,
1998 through January 30, 1999, has been designated as fiscal
1999.
3. Reclassifications
Certain comparative prior year amounts in the consolidated
financial statements have been reclassified to conform with the
current year presentation.
4. Net Earnings Per Common Share
Basic earnings per common share are based upon the
weighted average number of common shares outstanding during the
period restated for the five percent stock dividend in fiscal
1998. Diluted earnings per share reflect the potential
dilution that could occur if the Company's outstanding stock
options were exercised (calculated using the treasury stock
method). Options to purchase 598,096 shares of common stock at
prices ranging from $6.38 to $16.71 per share were outstanding
during 1998, but were not included in the computation of
earnings per share because the options exercise price was greater
than the average market price of common shares.
13 Weeks 13 Weeks 39 Weeks 39 Weeks
ended ended ended ended
October November 1, October November 1,
31, 1998 1997 31, 1998 1997
(Amounts in thousands, except per share data)
Net earnings (loss)
applicable to common shares,
basic and diluted $ 829 $ 164 $ 1,513 $ 286
Weighted average number of
common shares outstanding - 6,073 6,027 6,063 6,015
basic
Dilutive effect of potential
common shares issuable upon
exercise of employee stock
options 2 9 5 31
Weighted average number of
common shares outstanding -
diluted 6,075 6,036 6,068 6,046
Net earnings (loss) per
common share:
Basic and Diluted $ 0.14 $0.03 $ 0.25 $(0.05)
5. Adoption of New Accounting Pronouncement
The Company elected early adoption of The American Institute
of Certified Public Accountants Statement of Position (SOP) 98-5
"Reporting on the Costs of Start-Up Activities". This SOP
requires that costs incurred during start-up activities,
including organization costs, be expensed as incurred. The
$83,000 effect ($50,000 net of tax) of this early adoption is
reported as the cumulative effect of a change in accounting
principle. Had the Company not elected early adoption of SOP 98-
5, net earnings for the thirty-nine week period ended October 31,
1998 would have increased by $34,000.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Results of Operations
The following table sets forth for the periods indicated,
the percentage of net sales represented by items in the
Company's statement of earnings.
13 Weeks Ended 39 Weeks Ended
October November October 31, November
31, 1998 1, 1997 1998 1, 1997
Sales 100.0% 100.0% 100.0% 100.0%
Cost of goods sold
(including occupancy
and central buying
expenses, (64.7) (70.2) (65.7) (68.4)
exclusive of items
shown separately
below)
Selling, general and (27.5) (25.2) (27.9) (28.3)
administrative expenses
Depreciation and (3.0) (2.8) (3.0) (3.0)
amortization
Interest expense (0.6) (0.9) (0.6) (0.8)
Earnings (loss) before
income taxes and
cumulative effect of
change in accounting 4.2 0.9 2.8 (0.5)
principle
Provision for income
taxes (1.6) (0.4) (1.1) 0.2
Earnings (loss) before
cumulative effect of
accounting principle 2.6 0.5 1.7 (0.3)
Cumulative effect of
change in accounting
principle - - (0.1) -
Net earnings (loss) 2.6% 0.5% 1.6% (0.3)%
The following table reflects the sources of the increases
in Company sales for the periods indicated.
13 Weeks Ended 39 Weeks Ended
October November 1, October 31, November 1,
31, 1998 1997 1998 1997
Store sales (000's) $ 30,491 29,558 86,972 80,183
Catalog sales
(000's) 1,729 2,421 6,503 7,031
Net sales (000's) $ 32,220 31,979 93,475 87,214
Total sales growth 0.8% 8.8% 7.2% 14.3%
Decrease in
comparable store
sales (52 week (3.5)% (5.7)% (2.9)% (4.5)%
basis)
Growth (decrease)
in catalog sales (28.6)% 6.0% (7.5)% 16.9%
Store locations:
Existing stores 42 39 41 36
New stores opened - 2 1 5
Total stores at
end of period 42 41 42 41
During the thirty-nine weeks ended October 31, 1998, the
Company opened one new store location (San Antonio, Texas) and
relocated the Galleria mall store in Dallas, Texas to a larger
location as compared to the opening of five stores (Memphis,
Tennessee; Wichita, Kansas; Columbus, Ohio; Richmond, Virginia
and a second store in Birmingham, Alabama) in the same period
of the prior year. The opening of new stores and expansion of
existing stores contributed to total sales growth for the third
quarter and for the thirty-nine weeks ended October 31, 1998.
Catalog sales declined during the third quarter and thirty-nine
week period of fiscal 1999 as compared to the same period of
the prior year as a result of a strategic initiative to reduce
the total number of catalogs circulated during the
period.
Comparable stores sales declined during the third quarter
and thirty-nine week period of fiscal 1999, as compared to the
same periods of fiscal 1998. The Company believes the decline
experienced in comparable store sales during the periods was
primarily attributable to the opening of a second store in
several key markets, including Birmingham, Alabama; Memphis,
Tennessee; San Antonio, Texas and Norman, Oklahoma.
The Company's gross margin was 35.3% for the third quarter
of fiscal 1999, as compared to 29.8% in the same period of last
year. The gross margin also increased for the thirty-nine week
period ended October 31, 1998 to 34.3%, from a level of 31.6%
in the same period of last year. The increase in gross margin
for both periods can be primarily attributed to improved
inventory planning, resulting in lower inventory levels and
reduced markdowns.
Selling, general and administrative expenses (including
advertising and catalog production costs) increased 2.3% of
sales from the third quarter of fiscal 1998 to the third
quarter of fiscal 1999 and declined 0.4% of sales for the
thirty-nine weeks ended October 31, 1998 as compared to the
same period of the prior year. The third quarter increase was
principally the result of increased payroll related expenses,
offset some what by a reduction in advertising and catalog
production costs. The reduction for the thirty-nine weeks was
principally the result of reduced advertising and catalog
production cost expenditures. Advertising and catalog
production costs were $1,831,000, or 5.7% of sales for the
third quarter and $6,006,000, or 6.4% of sales for the thirty-
nine weeks ended October 31, 1998, as compared to $2,018,000,
or 6.3% of sales in the same quarter last year and $7,220,000,
or 8.3% in the same thirty-nine week period of last year.
The average balance on total outstanding debt was
$17,700,000 for the third quarter ended October 31, 1998
compared to $19,300,000 for the third quarter of fiscal 1998.
This decrease in average balances resulted principally from
reductions in working capital needs. Average interest rates on
the Company's line of credit were approximately the same for
the quarter ended October 31, 1998 and the comparable quarter
in the prior fiscal year. As the Company's growth continues,
cash flow may require additional borrowed funds that may cause
an increase in interest expense.
The Company's effective income tax rate approximates the
prior year and is anticipated to remain consistent.
Capital Expenditures, Capital Resources and Liquidity
Cash Flows From Operating Activities. For the thirty-nine
weeks ended October 31, 1998, net cash provided by operating
activities was $6,017,000 as compared to net cash used in
operating activities of $5,997,000 for the same period in fiscal
1998. The significant increase can be attributed to a decrease
of $268,000 in the Company's inventories for the thirty-nine
weeks ended October 31, 1998 as compared to an increase of
$8,599,000 for the same period in fiscal 1998. Management expects
the dollar amount of the Company's merchandise inventories to
increase with the expansion of its product development programs,
private label merchandise and chain of retail stores 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.
In addition, the difference in cash flows from operating
activities is partially due to the timing of cash disbursements
as reflected in an increase in accounts payable of $483,000
compared to an increase in accounts payable of $3,541,000
during the same period in fiscal 1998.
Cash Flows From Investing Activities. For the thirty-nine
weeks ended October 31, 1998, net cash used in investing
activities totaled $3,566,000 compared to $3,332,000 for the same
period in fiscal 1998. Capital expenditures were invested in new
stores, and remodeling and equipment in existing operations.
Cash Flows From Financing Activities. During the thirty-
nine weeks ended October 31, 1998, the Company made periodic
borrowings under its revolving long-term line of credit to
finance its inventory purchases, product development and
private label programs, store expansion, remodeling and
equipment purchases.
The Company has available a long-term line of credit with
its bank. This line had an average balance of $13,162,000 and
$17,036,000 for the thirty-nine weeks ended October 31, 1998
and November 1, 1997, respectively. During the thirty-nine
weeks ended October 31, 1998, this line of credit had a high
balance of $16,439,000 and a high balance of $21,500,000 for
the thirty-nine weeks ended November 1, 1997. The balance
outstanding on October 31, 1998 was $16,334,000 compared to
$19,247,000 on November 1, 1997.
Liquidity. The Company considers the following as
measures of liquidity and capital resources as of the dates
indicated.
January October 31, November 1,
31, 1998 1998 1997
Working capital (000's) $35,430 $36,399 $ 37,077
Current ratio 5.63:1 5.14:1 3.89:1
Ratio of working capital .55:1 .54:1 .53:1
to total assets
Ratio of total debt to .56:1 .54:1 .60:1
stockholders' equity
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. Cash flow from
operations and proceeds from credit facilities represent the
Company's principal sources of liquidity. Management
anticipates these sources of liquidity to be sufficient in the
foreseeable future.
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 Holiday selling seasons. In light of
this pattern, selling, general and administrative expenses are
typically higher as a percentage of sales during the spring
season (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 the
other assets of the Company.
Year 2000
The Year 2000 will have a broad impact on the business
environment in which the Company operates due to the
possibility that many computerized systems across all
industries will be unable to process information containing
dates beginning in the Year 2000. The Company has established
an enterprise-wide program to prepare its computer systems and
applications for the Year 2000 and is utilizing both internal
and external resources to identify, correct and test the
systems for Year 2000 compliance. The Company anticipates that
the majority of its reprogramming will be completed by the end
of the first quarter of fiscal 2000. Testing efforts will be
substantially concluded by July 31, 1999. Further validation
through testing will be conducted throughout calendar year
1999. The Company expects that all mission-critical systems
will be Year 2000 compliant prior to the end of the 1999
calendar year.
Because third party failures could have a material impact
on the Company's ability to conduct business, questionnaires
will be sent to substantially all of the Company's vendors to
certify that plans are being developed to address the Year 2000
issue. The returned questionnaires will be assessed by the
Company, and categorized based upon readiness for the Year 2000
issues and prioritized in order of significance to the business
of the Company. To the extent that business-critical vendors
do not provide the Company with satisfactory evidence of their
readiness to handle Year 2000 issues, contingency plans will be
developed.
The Company anticipates that it will have substantially
completed an assessment of the Year 2000 compliance status of
all information technology and non-information technology
equipment by December 31, 1998, and will then address the Year
2000 compliance of such equipment.
Upgrades and replacements to the Company's information
systems and applications are expected to cost approximately $2
million from inception in calendar year 1998 through completion
in calendar year 1999. Approximately $1.5 million is expected
to be incurred in fiscal 1999 with the remaining $500,000 to be
incurred in fiscal 2000. All estimated costs have been
budgeted and are expected to be funded by cash flows from
operations.
The cost of the project and the date on which the Company
plans to complete the Year 2000 modifications are based on
management's best estimates, which were derived utilizing
numerous assumptions of future events including the continued
availability of certain resources, third party modification
plans, and other factors. Unanticipated failures by critical
vendors as well as the failure by the Company to execute its
own remediation efforts could have a material adverse effect on
the cost of the project and its completion date. As a result,
there can be no assurance that these forward-looking estimates
will be achieved and the actual cost and vendor compliance
could differ materially from those plans, resulting in material
financial risk.
Part II
ITEM 1. LEGAL PROCEEDINGS
NONE
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits. See Exhibits Index immediately
preceding exhibits.
27.1 Financial Data Schedule.
(b) Reports on Form 8-K. The Company filed no
reports on Form 8-K during the quarter ended
October 31, 1998.
SIGNATURE
Pursuant to the requirements of the Securities Exchange
Act of 1934, the Registrant has duly caused this report to be
signed on its behalf by the undersigned, hereunto duly
authorized.
HAROLD'S STORES, INC.
HAROLD'S STORES, INC.
By:\s\H. Rainey Powell
H. Rainey Powell
President, Chief Operating Officer
By:\s\Jodi L. Taylor
Jodi L. Taylor
Chief Financial Officer
Date: December 15, 1998
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<COMMON> 6,073
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