33
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
__________________________
FORM 10-K
Annual Report Pursuant to Section 13 or 15(d) of
the Securities Exchange Act of 1934
For the fiscal year ended January Commission File No. 1-
30, 1999 10892
HAROLD'S STORES, INC.
(Exact name of registrant as specified in its charter)
Oklahoma 73-1308796
(State or other jurisdiction of (I.R.S. 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)
Securities registered pursuant to
Section 12(b) of the Act : Name of each
exchange
Title of each class on which registered
Common Stock, $0.01 Par Value American Stock
Exchange
Securities registered pursuant to Section 12(g) of the Act :
None
Indicate by check mark whether the registrant (1) has
filed all reports 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 by check mark if disclosure of delinquent
filers pursuant to Item 405 of Regulation S-K is not
contained herein, and will not be contained, to the best
of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part
III of this Form 10-K or any amendment to this Form 10-K [
]
At March 15, 1999 the aggregate market value of the
Registrant's Common Stock held by non-affiliates was
$23,459,666 based on a value of $6.75 per share, the
closing price of Common Stock as quoted by the American
Stock Exchange on that date.
On March 15, 1999 the registrant had 6,073,958 shares of
Common
Stock outstanding.
DOCUMENTS INCORPORATED BY REFERENCE:
Portions of the Registrant's Annual Report to Shareholders
for the fiscal year ended January 30, 1999 ("Annual Report")
are incorporated by reference into Part II.
Portions of the Registrant's Proxy Statement for the
Annual Meeting of Shareholders to be held June 25, 1999
("Proxy Statement") are incorporated by reference into
Part III.
Harold's Stores, Inc. & Subsidiaries
Index to
Annual Report on Form 10-K
For the Fiscal Year Ended January 30, 1999
Part I. Page
Item 1 Business 3
Item 2. Properties 9
Item 3. Legal Proceedings 10
Item 4. Submission of Matters to a Vote of
Security Holders 10
Part II.
Item 5. Market for the Registrant's Common
Stock and Related Stockholder Matters 10
Item 6. Selected Consolidated Financial Data 11
Item 7. Management's Discussion and Analysis of
Financial Condition and Results
of Operations 12
Item 7a. Quantitative and Qualitative Disclosure
about Market Risk 16
Item 8. Consolidated Financial Statements and
Supplementary Data 17
Item 9. Changes in and Disagreements with Accountants
on Accounting and Consolidated Financial
Disclosure 17
Part III.
Item 10. Directors and Executive Officers of the
Registrant 17
Item 11. Executive Compensation 17
Item 12. Security Ownership of Certain Beneficial
Owners and Management 17
Item 13. Certain Relationships and Related
Transactions 17
Part IV.
Item 14 Exhibits, Consolidated Financial Statement
Schedule and Reports on Form 8-K 17
Signatures 19
PART I.
ITEM 1. BUSINESS
General
Harold's Stores, Inc. and its wholly-owned subsidiaries
(collectively "Harold's" or the "Company"), through a 46-store
location chain of women's and men's specialty apparel stores in
21 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 upscale
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 90% 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 46 stores are comprised of 25 full-line
women's and men's apparel stores, seven stores which have a
product line principally of ladies' apparel with a limited
presentation of men's sportswear featuring the Company's Old
School Clothing brand, 10 stores featuring women's apparel only
and four outlet stores to clear markdowns and slow-moving
merchandise, in addition to some merchandise produced
specifically for the outlets. In addition to the stores, the
Company has a direct response "mail order" catalog business and
also sells merchandise online at www.harolds.com. Store
occupancy costs include base and percentage rent, common area
maintenance expense, utilities and depreciation of leasehold
improvements.
There was a decline in comparable store sales of 1.3% for
fiscal 1999, compared to a decline of 5.4% for fiscal 1998.
The Company believes that the decrease in comparable store
sales for comparable periods is primarily attributable to the
opening of second stores in several key markets, including:
Birmingham, Alabama; Norman, Oklahoma; Memphis, Tennessee;
Dallas, Houston and San Antonio, Texas; and Washington, DC, as
well as the selection of fashion trends that did not sell as
well as anticipated for fiscal 1998. The Company's average
sales per square foot for stores open during the entire fiscal
year were $506 and $529 for fiscal 1999 and fiscal 1998,
respectively. The Company believes sales per square foot are
higher than industry averages for most similar stores.
The Company believes that its future success will be
achieved by expanding the number of its women's and men's
apparel stores and increasing sales momentum at existing
stores. The Company is engaged in an aggressive expansion
program, adding in the aggregate 10 retail stores during fiscal
1998 and fiscal 1999 and thereby increasing the chain store
count by approximately 22%.
The Company's expansion program 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 2000, the Company has opened
new stores in Palo Alto, California; Tampa, Florida and Dallas,
Texas, and anticipates opening a total of approximately ten
stores during the fiscal year.
The Company operates on a 52-53 week fiscal year which
ends on the Saturday closest to January 31. References herein
to fiscal 2000, fiscal 1999, fiscal 1998, and fiscal 1997 refer
to the fiscal years ended January 29, 2000, January 30, 1999,
January 31, 1998, and February 1, 1997, respectively.
Retail Merchandising
The Company's merchandise mix in women's apparel
includes coordinated sportswear, dresses, coats, outerwear,
shoes and accessories, 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 more than 95% of its women's
apparel sales are attributable to the Company's product
development and proprietary label programs. In fiscal 1999,
women's apparel accounted for approximately 79% of sales as
compared to 77% for fiscal 1998.
The men's apparel product line includes tailored clothing,
suits, sportcoats, furnishings, sportswear, and shoes. The
style is principally 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. In
fiscal 1999, the Company's proprietary label apparel accounted
for more than 90% of total men's sales. The majority of the
men's proprietary label sales are in the Company's Old School
Company and Harold Powell Clothing lines. In fiscal 1999,
men's apparel accounted for approximately 21% of sales as
compared to 23% for fiscal 1998.
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:
Fiscal 1999 Fiscal 1998 Fiscal 1997
(Dollar amounts in thousands)
Women's Merchandise
Sportswear $91,133 70.5% $81,408 67.9% $72,808 67.3%
Shoes 4,128 3.2 4,827 4.0 5,422 5.0
Handbags, Belts 6,243 4.8 5,899 4.9 5,777 5.3
and Accessories
Men's Merchandise
Suits,
Sportcoats,
Slacks
and Furnishings 11,552 8.9 10,762 9.0 8,815 8.1
Shoes 1,149 0.9 1,218 1.0 1,067 1.0
Sportswear and 14,309 11.1 14,894 12.4 13,547 12.5
Accessories
Other 710 0.6 911 0.8 821 0.8
Total: $129,224 100.0% $119,919 100.0% $108,257 100.0%
Company Stores
The Company's 46 stores range in size from 2,100 to
15,000 square feet, with the typical store ranging from 4,000
to 6,000 square feet. The Company's stores generally are open
seven days per week and evenings. The following table lists
Harold's store locations as of March 15, 1999, 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.
Metropolitan
Area Location Type of Product Square
Location Lines Footage
Atlanta, GA Lenox Square Regional W/M 6,861
Shopping Center
Atlanta, GA Park Place Specialty W 3,413
Center
Austin, TX Arboretum Specialty W/OS 4,787
Market Place Center
Austin, 8611 N. Mopac Free Standing W/M 13,20
TX(2) Expressway 0
Baton Citiplace Specialty W/M 5,200
Rouge, LA Market Center Center
Birmingham, Riverchase Regional W 2,713
AL Galleria Shopping Center
Birmingham, The Summit Specialty W/M 5,500
AL Shopping Center Center
Charlotte, Shops on the Specialty W 4,000
NC Park Center
Columbus, The Mall at Regional W/M 6,000
OH Tuttle Crossing Shopping Center
Cordova, TN Wolfchase Regional W/M 6,302
(Memphis Galleria Shopping Center
metro)
Dallas, TX Dallas Galleria Regional W/M 8,079
Shopping Center
Dallas, TX Highland Park Specialty W/M 7,503
Village Center
Ft. Worth, University Park Specialty W/M 6,000
TX Village Center
Germantown, Saddle Creek Specialty W/OS 3,909
TN South Center
(Memphis
metro)
Greenville, Greenville Mall Regional W/OS 5,076
SC Shopping Center
Hillsboro, Hillsboro Outlet Mall W/M 5,160
TX(2) Outlet Mall
Houston, TX Highland Specialty W/M 6,189
Village Center
Houston, TX Town and Specialty W/M 5,883
Country Village Center
Jackson, MS The Rogue Free Standing W 2,100
Compound
Kansas City, Country Club Regional W 4,155
MO Plaza Shopping Center
Leawood, KS Town Center Regional W/M 5,000
(Kansas City Plaza Shopping Center
metro)
Littleton, CO Park Meadows Regional W/M 5,465
(Denver Mall Shopping Center
metro)
Louisville, Mall St. Regional W/OS 4,292
KY Matthews Shopping Center
Lubbock, TX 8201 Quaker Specialty W/M 3,897
Avenue Center
McLean, VA Tyson's Regional W/M 5,083
Galleria Shopping Center
Nashville, TN The Mall at Regional W/M 5,975
Greenhills Shopping Center
Norman, OK Campus Corner Specialty W/M 9,050
Center Center
Norman, OK(2) 575 S. Free Standing W/M 15,421
University
Blvd.
Oakbrook, IL Oakbrook Center Specialty Center W 4,860
(Chicago
metro)
Oklahoma City, 106 Park Avenue Street Location W/M 3,760
OK(1)
Oklahoma City, 50 Penn Place Specialty W/M 14,240
OK Center
Omaha, NE One Pacific Specialty W 3,272
Place Center
Palo Alto, CA Stanford Regional W 4,275
(San Francisco Shopping Center Shopping Center
metro)
Phoenix, AZ Biltmore Regional W/OS 5,033
Fashion Park Shopping Center
Plano, TX Park and Free Standing W/M 5,525
(Dallas metro) Preston
Raleigh, NC Crabtree Valley Regional W/M 5,205
Mall Shopping Center
Richmond, VA River Road Specialty W/M 5,000
Shopping Center Center
Salt Lake City, Trolley Square Specialty W 5,716
UT Center Center
San Antonio, Alamo Quarry Specialty W/M 5,000
TX Market Center
Sealy, TX(2) Sealy Outlet Outlet Mall W/M 9,000
Center
Skokie, IL Old Orchard Specialty W 5,455
(Chicago Metro) Center Center
St. Louis, MO Plaza Frontenac Regional W/OS 4,221
Shopping Center
Tampa, FL Citrus Park Specialty W/OS 5,717
Town Center Center
Tulsa, OK Farm Shopping Specialty W/M 3,888
Center Center
Tulsa, OK Utica Square Regional W/M 4,625
Shopping Center
Wichita, KS The Bradley Specialty W/M 5,500
Fair Center Center
(1) Store closed on March 26, 1999.
(2) 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 a salary plus a performance bonus based on
attainment of sales goals and expense control.
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 90% 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 items developed
by the Company and manufactured exclusively for the Company and
items developed by the Company and manufactured on a semi-
exclusive basis for the Company.
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, Italy.
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, and through domestic
importers from the Far East.
The Company's merchandisers travel to Europe, including
popular fashion meccas such as Paris and Milan, six to eight
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's 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, in its catalog, and on-
line at www.harolds.com.
During fiscal 1995, the Company entered into a new
arrangement with its largest apparel vendor, CMT 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 cutting, sewing and trim costs of the finished goods. The
Company believes this relationship with CMT permits the Company
to control the quality and cost of the Company's inventory
purchases. A substantial portion of the Company's merchandise
purchases is 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. 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. See
"Management's Discussion and Analysis of Financial Condition and
Results of Operations - Results of Operations and - Capital
Resources, Capital Expenditures and Liquidity and note 11 to
Consolidated Financial Statements."
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 1999, the Company used its
mail order buyer list (currently containing approximately
175,000 names), its retail customer list (currently containing
approximately 300,000 names) and a variety of rental lists to
mail six issues with an average of 60 pages, and an aggregate
circulation of approximately 5.7 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 $8,243,000 in fiscal
1999. As a stand-alone venture with costs fully allocated, the
catalog has recorded a loss from operations each year except
for fiscal 1999, when the division recorded a profit. The
principal reasons for the losses include: (i) 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 (ii) at the end of a specific catalog's run
the unsold merchandise is reacquired from the catalog operation
at marked down cost prices to allow such merchandise to be sold
with a customary profit margin in the Company's retail stores,
and profit is recorded in the store and is not a component in
calculating the catalog's profitability. In addition, prior to
fiscal 1999, the Company did not attempt to account for the
advertising and traffic-building benefits of mailing the
catalog to its known retail customers. The Company also does
not account for any profits earned from catalog close-outs sold
in the outlet stores, or for the catalog's contribution to
developing potential new store locations.
In addition , the Company currently sells merchandise via
electronic commerce online at www.harolds.com. Sales generated
from such efforts are currently immaterial. The Company
currently offers a limited merchandise assortment online, but
plans to continue to focus on growing the online business and
expand product offerings. The Company's catalog systems allow
for expansion of the online business with minimal effort or
investment.
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 levels 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 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 four outlet stores to dispose of prior
season or slow moving merchandise as well as merchandise
developed specifically for the outlet division. In addition,
in lieu of utilizing outside liquidation resources ("jobbers"),
slow moving merchandise is periodically cleared through
regional off-site discount sales which are promoted under the
name "Harold's Warehouse Sale".
The Company operates an 85,000 square foot distribution
facility capable of processing merchandise for 74 stores in
Norman, Oklahoma. With a modest additional investment, the
facility will have the capability of processing merchandise for
138 stores. All of the Company's merchandise is routed through
the distribution center from various manufacturers. Each item
is examined, sorted, tagged with bar coded tickets which track
the merchandise for analysis by multiple parameters, including,
vendor lot number, color and size. An increasing amount of
merchandise is currently arriving at the distribution center
with tags previously placed by the vendor. The merchandise is
then boxed for shipment by company trucks or common carrier to
the Company's 46 stores and catalog operation. This process is
done in a time sensitive manner in a substantially paperless
environment, utilizing computers, bar codes and scanners.
Seasonality
The Company's business follows a seasonal pattern, peaking
twice a year during the late summer (August through early
September) and holiday (Thanksgiving through Christmas)
periods. During fiscal 1999, approximately 53% of the
Company's sales occurred and substantially all of the Company's
net income was earned during the third and fourth 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 and 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, Discover and the American
Express credit cards. The Company's catalog operation accepts
VISA, Mastercard, Discover and the Company's credit card.
Credit card sales were 74% in fiscal 1997, 76% in fiscal 1998
and 77% in fiscal 1999. In fiscal 1999, 17% of sales were made
with the Harold's credit card and 61% 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 January 30,
1999, the allowance for bad debts from Company credit card
sales was approximately 0.9% of Harold's proprietary credit
card sales for fiscal 1999.
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 costs to the Company significantly lower
than those charged by outside credit card companies (i.e. Visa,
Mastercard, Discover and American Express). At January 30,
1999, the Company had approximately 22,975 active credit
accounts and the average card holder had a line of $1,000 and
an outstanding balance of $300. Charges by holders of the
Company's credit card during fiscal 1999 totaled approximately
$22,700,000.
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 1999, the
Company spent approximately $7,800,000 (6.0% of sales) on
advertising and catalog production costs as compared to
approximately $10,000,000 (8.3% of sales) in fiscal 1998. This
expenditure includes the production and mailing costs
associated with the Company's direct response catalog. The
advertising department is also involved in the production of
annual reports to the Company's stockholders, sales training
materials, internal marketing materials, and all corporate
logos and labeling.
Management Information Systems
The Company places 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 an MIS team to oversee these
management information systems, which include credit, catalog,
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. The POS system provides personnel scheduling and time
keeping capabilities, as well as, a customer profile function
to better identify and track consumer demographics. The
Company is currently installing a new and enhanced POS product
into all stores.
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 AS400r computer which
generates a detailed report within 24 hours of the physical
inventory.
The Company has also implemented ARTHURr, a computerized
merchandise planning system which interacts with the Company's
AS400r and Island Pacific Systemsr software. ARTHURr
facilitates seasonal planning by department and store, and
provides certain data for financial planning. The Company
plans to implement the allocation product offered by Comshare
during fiscal 2000.
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 registration on the original design and artwork
purchased or developed by the Company.
The Company's two Houston stores and the Sealy, Texas
outlet bear the name "Harold Powell" rather than "Harold's" to
avoid confusion with an existing 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.
Employees
On March 15, 1999, the Company had approximately 653
full-time and 786 part-time employees. Additionally, the
Company hires temporary employees during the peak late summer
and holiday seasons. None of the Company's employees belong to
any labor union and the Company believes it has good relations
with its employees.
ITEM 2. PROPERTIES
Store Leases
At March 15, 1999, the Company owned the Austin outlet
store and leased 45 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.
Four store leases have percentage rent only. All other store
leases provide for a base rent with percentage rent payable
above specified minimum net sales. Eighteen of the leased
stores open during all of fiscal 1999 operated at sales volumes
above the breakpoint (the sales volume below which only base
rent is payable). Based on the Company's current level of
sales per square foot, the Company believes that 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:
Years Leases Number of
Expire Stores
1999 4
2000-2001 4
2002-2004 10
2005 and later 27
The Company generally has been successful in renewing its
store leases as they expire.
During fiscal 1999, the Company entered into new leases for
stores in Houston, Texas; Palo Alto, California; OakBrook and
Skokie, Illinois; Salt Lake City, Utah; and Tampa, Florida.
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 $60 per square foot annually
over the terms of the leases. Total base rent has continued to
increase based on new store leases. Occupancy costs have
increased slightly as the Company has entered new markets. The
following table sets forth the fixed and variable components of
the Company's rent expense for the fiscal years indicated:
1999 1998 1997
Base rent $ 4,350,000 3,702,000 2,806,000
Additional rents
computed as a
percentage of
sales 1,041,000 1,206,000 1,261,000
Total $ 5,391,000 4,908,000 4,067,000
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. The remainder of this complex is
currently leased to other parties and could be used for future
expansion of the catalog fulfillment center and other Company
needs.
Merchandise Buying Office, and Distribution Center
The Company leases a 50,000 square foot building used
primarily as a men's and ladies' buying office in Dallas, Texas
(the "Dallas Buying Office II") , a 10,000 square foot building
("The Dallas Buying Office I") and an 85,000 square foot
warehouse distribution center facility located in Norman,
Oklahoma.
The lessor of the Dallas locations 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 stockholders and directors of the
Company. The term of the Dallas Buying Office I lease expires
March 2012, with annual rent payments of $158,000 plus
insurance, utilities and property taxes until April, 2000, at
which time the annual rent will be $180,000, plus insurance,
utilities and property taxes, increasing $2,500 each year
thereafter until expiration of the lease. The Company is
currently engaged in negotiations with a potential sublessee
but there is no assurance that a sublease will be consummated
on terms favorable to the Company. Until such time as a lease
is consummated, the lessor is providing the Company with rent
abatements.
The term of the Dallas Buying Office II lease expires
September, 2010 with annual rent payments of $453,204 plus
insurance and property taxes until August, 2001 at which time
the annual rent will be $478,382, plus insurance, utilities and
property taxes until August, 2004 at which time the annual rent
will be $503,560, plus insurance, utilities and property taxes
until August, 2007 at which time annual rent will be $528,728,
plus insurance, utilities and property taxes until expiration
of the lease.
The term of the distribution center lease expires in June
2012, with annual rental payments of $338,438 plus insurance,
utilities and property taxes until July, 2001, at which time
the annual rent will increase annually on a fixed scale up to a
maximum of $419,951 during the final year of the lease.
ITEM 3. LEGAL PROCEEDINGS
The Company is from time to time involved in routine
litigation incidental to the conduct of its business. As of
this date, the Company is not a party to, nor is any of its
property subject to, any material pending legal proceedings.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY
HOLDERS
No matters were submitted to a vote of security holders
during the fourth quarter of the fiscal year covered by this
report.
PART II.
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK
AND RELATED STOCKHOLDER MATTERS
At March 15, 1999, there were 662 record holders of the
Company's common stock, ("Common Stock"). The Company's Common
Stock is listed on the American Stock Exchange under the symbol
"HLD". The table below presents the range of the high and low
sales prices, for the periods indicated. The price per share
information contained in the following table is restated to
reflect the 5% stock dividend paid to holders of Common Stock
on January 16, 1998. There were no stock dividends issued in
fiscal 1999.
Quarterly Common Stock Price Ranges
Fiscal 1999 High Low
1st Quarter $ 7.94 $ 6.19
2nd Quarter $ 8.38 $ 6.50
3rd Quarter $ 7.00 $ 5.31
4th Quarter $ 8.00 $ 6.75
Quarterly Common Stock Price Ranges
Fiscal 1998 High Low
1st Quarter $ 13.33 $ 8.69
2nd Quarter $ 9.41 $ 7.98
3rd Quarter $ 8.51 $ 7.02
4th Quarter $ 8.10 $ 5.95
Dividend Policy
The Company has never declared or paid cash dividends on
its Common 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 Board of Directors may deem relevant.
ITEM 6. 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 herein.
Fiscal Year
1999 1998 1997 1996 1995
(Dollar amounts in thousands, except per
share data)
Statements of Earnings
Data:
Sales $129,224 119,919 108,257 94,264 75,795
Percentage increase 7.8% 10.8% 14.8% 24.4% 24.4%
Gross profit on sales(1) $45,128 38,149 38,717 33,819 26,407
Percentage of sales 34.9% 31.8% 35.8% 35.9% 34.8%
Earnings before income $4,785 74 5,880 4,645 3,539
taxes
Percentage of sales 3.7% 0.0% 5.4% 4.9% 4.7%
Net earnings $2,841 44 3,528 2,787 2,088
Percentage of sales 2.2% 0.0% 3.3% 3.0% 2.8%
Net earnings per common
share (2):
Basic $0.47 0.01 0.61 0.51 0.38
Diluted $0.47 0.01 0.59 0.51 0.38
Other Operating Data:
Stores open at end of 44 41 36 29 25
period
Growth in comparable (1.3%) (5.4%) (0.5%) 8.7% 10.7%
store sales
(52-53 week basis)
Balance Sheet Data:
Working capital $33,044 35,430 28,016 21,301 12,524
Total assets 63,917 63,929 59,608 42,909 34,661
Long-term debt, net of 16,330 19,708 12,528 9,540 594
current maturities (3)
Stockholders' equity 39,521 36,466 36,035 25,299 22,260
Net book value per share $6.51 6.03 6.01 4.63 4.10
(4)
(1) In accordance with retail industry practice, gross profit
from sales is calculated by subtracting cost of goods
sold (including occupancy and central buying expenses) from
sales.
(2) Net earnings per common share for each period have been
restated for the 5% stock dividends in fiscal 1998,
fiscal 1997 and fiscal 1996 and the 10% stock
dividend in fiscal
1995.
(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 shares of
Common Stock outstanding at the end of each fiscal
year restated for the 5% stock dividends in fiscal 1998,
fiscal 1997 and 1996 and the 10% stock dividend in fiscal 1995.
ITEM 7. 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:
Fiscal Year
1999 1998 1997
(52 Weeks) (52 Weeks) (52 Weeks)
Sales 100.0% 100.0 100.0
Cost of goods sold (65.1) (68.2) (64.2)
Selling, general and (27.6) (28.2) (27.5)
administrative expenses
Depreciation and amortization (3.0) (2.9) (2.6)
Interest expense (0.6) (0.7) (0.3)
Earnings before income taxes and
cumulative effect of change in 3.7 0.0 5.4
accounting principle
Provision for income taxes (1.5) 0.0 (2.1)
Earnings before cumulative effect
of change in accounting principle 2.2 0.0 3.3
Cumulative effect of change in
accounting principle 0.0 - -
Net earnings 2.2% 0.0% 3.3%
The following table reflects the sources of the increases
in Company sales for the periods indicated:
Fiscal Year
1999 1998 1997
(52 Weeks) (52 Weeks) (52 Weeks)
Store sales (000's) $120,981 110,880 99,374
Catalog sales (000's) 8,243 9,039 8,883
Sales (000's) $129,224 119,919 108,257
Total sales growth 7.8% 10.8% 14.8%
Growth in comparable store sales (1.3) (5.4) (0.5)
(52-53 week basis)
Growth in catalog sales (8.8) 1.8 (5.3)
Store locations:
Existing stores beginning of 41 36 29
period
Stores closed (1) (1) -
New stores opened during period 4 6 7
Total stores at end of
period 44 41 36
Total Company sales increased 7.8% in fiscal 1999 as
compared to 10.8% in fiscal 1998 and 14.8% in fiscal 1997. The
Company believes that such increases were primarily due to the
continued store expansion program. The Company opened four
stores during fiscal 1999 and closed one store. Stores were
opened in Oak Brook and Skokie, Illinois; San Antonio, Texas
(Alamo Quarry Market) and Salt Lake City, Utah. A store closed
in San Antonio, Texas (Broadway and Austin Highway).
Total Company sales increased 10.8% in fiscal 1998 as
compared to 14.8% in fiscal 1997. The Company believes that
such increases were primarily due to the continued store
expansion program. The Company opened five stores and one
outlet during fiscal 1998 and closed one store. Stores were
opened in: Cordova, Tennessee (Memphis metro); Wichita, Kansas;
Columbus, Ohio; Richmond, Virginia; Birmingham, Alabama; and an
outlet in Sealy, Texas. A store closed in Kensington, MD
(Washington, DC metro). The Company opened six stores and one
outlet during fiscal 1997. Stores were opened in: Greenville,
South Carolina; Leawood, Kansas; Raleigh, North Carolina;
McLean, Virginia; Littleton, Colorado (Denver metro); Houston,
Texas (known as Harold Powell); and an outlet in Norman,
Oklahoma.
Comparable store sales declined 1.3% during fiscal 1999,
compared to a decline of 5.4% in fiscal 1998. The Company
believes that the declines experienced in comparable store
sales during fiscal 1999 and fiscal 1998 were primarily
attributable to the opening of second stores in several key
markets, including: Birmingham, Alabama; Norman, Oklahoma;
Memphis, Tennessee; Dallas, Houston, and San Antonio, Texas;
and Washington, DC, as well as lower than anticipated sales of
fashion apparel merchandise in fiscal 1998.
Catalog sales declined 8.8% during fiscal 1999 compared
to an increase of 1.8% during fiscal 1998. The decline during
fiscal 1999 was due to a 27.1% reduction in the total number of
catalogs circulated. 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 1999, the
Company's catalog averaged 60 pages per issue with an aggregate
mailing (including abridged issues) of approximately 5.7
million catalogs. The increase during fiscal 1998 was due to
expanded catalog circulation.
The Company's gross margin increased to 34.9% in fiscal
1999 from 31.8% in fiscal 1998. The increase in gross margin
can be primarily attributed to improved inventory planning and
customer acceptance of product offerings, resulting in lower
inventory levels and reduced markdowns. The Company's gross
margin declined from 35.8% in fiscal 1997 to 31.8% in fiscal
1998. The Company experienced higher markdowns due to excess
inventory levels, resulting from lower than anticipated sales
of fashion apparel merchandise. In addition, higher occupancy
costs that did not leverage due to lower sales negatively
impacted the gross margin. 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 margin from sales.
Selling, general and administrative expenses decreased by
0.6% of sales in fiscal 1999 compared to an increase of 0.7% of
sales in fiscal 1998. The decrease in selling, general and
administrative expenses as a percentage of sales in fiscal 1999
was primarily due to reduced advertising and catalog production
costs, offset by increased payroll related expenses. The
increase in selling, general and administrative expenses as a
percentage of sales in fiscal 1998 was primarily due to
increased catalog fulfillment cost and increases in sales
salaries in order to maintain exceptional customer service
expectations. In fiscal 1999, the Company initiated a 27.1%
reduction in the total number of catalogs circulated to reduce
costs, while attempting to minimize the reduction in sales.
The result was a $2,100,000, or 35%, decline in production
costs and an $800,000, or 8.8%, decline in catalog sales. In
fiscal 1998, the Company increased circulation in attempts to
increase the rate of sales growth in the catalog division,
resulting in an increase in catalog expenses of $1,600,000, or
36%. Non-catalog advertising expenditures decreased 1.6% in
fiscal 1999 compared to an increase of 11% in fiscal 1998.
Such expenses decreased in fiscal 1999 as a result of improved
sales and lower inventory levels and increased in fiscal 1998
as a result of promotional activity to clear excess inventory
levels.
During fiscal 1999, the total interest costs (including
capitalized interest) decreased $174,000 compared to fiscal
1998 due to lower outstanding debt balances. The average
balance on total outstanding debt was $17,217,000 in fiscal
1999, compared to $19,448,000 in fiscal 1998. The decrease in
average debt balances resulted principally from lower inventory
levels. As the Company's growth continues, cash flow may
require additional borrowed funds, which may cause an increase
in interest expense. During fiscal 1998, interest costs
(including capitalized interest) increased $788,000 as compared
to fiscal 1997 due to higher inventory balances.
The Company's income tax rate was 40% in fiscal 1999,
fiscal 1998 and fiscal 1997.
Capital Expenditures, Capital Resources and Liquidity
Cash Flows From Operating Activities. For fiscal 1999, net
cash provided by operating activities was $9,638,000 as compared
to $3,551,000 net cash used in operating activities for fiscal
1998. The increase in cash flows can be partially attributed to
(i) net earnings of $2,841,000 for fiscal 1999, compared to net
earnings of $44,000 for fiscal 1998, an increase in net earnings
of $2,797,000, (ii) the timing of accrued expenses as reflected
in an increase in accrued expenses of $365,000 in fiscal 1999,
compared to a decrease in accrued expenses of $1,051,000 in
fiscal 1998, (iii) the timing of accounts payable as reflected by
a decline in accounts payable of $329,000 in fiscal 1999,
compared to a decrease in accounts payable of $1,879,000 in
fiscal 1998.
The Company's merchandise inventories decreased $1,954,000
in fiscal 1999 compared to an increase of $2,896,000 for fiscal
1998 as a result of the Company's improved inventory planning and
customer acceptance of product offerings. 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.
Cash Flows From Investing Activities. For fiscal 1999, net
cash used in investing activities was $5,755,000, as compared to
$4,554,000 for fiscal 1998. Capital expenditures totaled
$6,280,000, compared to $4,760,000 for fiscal 1998. Capital
expenditures during such periods were invested principally in new
stores, and remodeling and equipment expenditures in existing
operations. On November 6, 1996, the Company made a term loan to
CMT Enterprises, Inc. ("CMT") in the principal amount of
$2,750,000, to be used by CMT to refinance its existing revolving
line of credit and for working capital purposes. At March 15,
1999, the outstanding balance of the loan was $2,218,000. CMT is
a major independent contractor whose assistance is instrumental
in the Company's design and manufacturing process. See note 3 to
Consolidated Financial Statements.
Cash Flows From Financing Activities. During fiscal 1999,
the Company made periodic borrowings under its revolving credit
facility to finance its inventory purchases, product
development and private label programs, store expansion,
remodeling and equipment purchases for the fiscal year (see
"Liquidity").
The Company has available a line of credit with its bank.
This line had average balances of $12,813,000 and $16,472,000
for the fiscal years 1999 and 1998, respectively. During 1999,
this line of credit had a high balance of $16,701,000 and a
balance of $12,872,000 as of January 30, 1999. The balance at
March 15, 1999 was $15,475,000.
Liquidity. The Company considers the following as
measures of liquidity and capital resources as of the dates
indicated (dollars in thousands).
Fiscal Year
1999 1998 1997
Working capital $33,044 $35,430 $28,016
Current ratio 5.14:1 5.63:1 3.57:1
Ratio of working capital .52:1 .55:1 .47:1
to total assets
Ratio of long-term debt
(including current .43:1 .56:1 .35:1
maturities) to
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 sources of liquidity. Management anticipates these
sources of liquidity to be sufficient in the foreseeable
future. The Company's capital expenditures budget for fiscal
2000 is approximately $5,000,000.
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
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 New Accounting Pronouncements
In June 1998, the Financial Accounting Standards Board
issued Statement of Financial Accounting Standards (SFAS) No.
133, "Accounting for Derivative Instruments and Hedging
Activities." SFAS No. 133 is effective for fiscal years
beginning after June 15, 1999. SFAS No. 133 establishes
standards for accounting and reporting for derivative
instruments, including certain derivative instruments embedded
in other contracts, and for hedging activities. It requires
that an entity recognize all derivatives as either assets or
liabilities in the statement of financial position and measure
those instruments at fair value. The accounting for changes in
fair value of a derivative depends on the intended use of the
derivative and the resulting designation. Management is
currently evaluating the impact of this standard and believes
its adoption will not materially affect the Company's
consolidated financial position or results of operations.
In March 1998, the American Institute of Certified Public
Accountants issued Statement of Position 98-1 (SOP 98-1)
"Accounting for the Costs of Computer Software Developed or
Obtained for Internal Use." SOP 98-1 is effective for fiscal
years beginning after December 15, 1998. The adoption of SOP
98-1 is not expected to have a material impact on the Company's
consolidated financial position or results of operations.
Year 2000
Many computer systems use only two digits to identify a year
(for example, "99" is used for the year "1999"). As a result,
these systems may be unable to process accurately dates later
than December 31, 1999, since they may recognize "00" as the year
"1900", instead of the year "2000". This anomaly is often
referred to as the "Year 2000 compliance" issue. Since 1997, the
Company has been executing a plan to remediate or replace
affected systems on a timely basis. Equipment and other non-
information technology systems that use microchips or other
embedded technology, such as certain conveyor systems at the
Company's distribution center, are also covered by the Company's
Year 2000 compliance project.
The Company's Year 2000 compliance project includes four
phases: (1) evaluation of the Company's owned or leased systems
and equipment to identify potential Year 2000 compliance issues;
(2) remediation or replacement of Company systems and equipment
determined to be non-compliant (and testing of remediated systems
before returning them to production); (3) inquiry regarding Year
2000 readiness of material business partners and other third
parties on whom the Company's business is dependent; and (4)
development of contingency plans, where feasible, to address
potential third party non-compliance or failure of material
Company systems.
The initial phase of the Company's Year 2000 compliance
project was the evaluation of all software, hardware and
equipment owned, leased or licensed by the Company, and
identification of those systems and equipment requiring Year 2000
remediation. This analysis was completed during fiscal 1999.
All computer hardware in the Company's corporate office and
distribution center that was not Year 2000 compliant has been
remediated or replaced, and all computer hardware in the
Company's retail stores that was not Year 2000 compliant will be
remediated or replaced by the end of the second quarter of fiscal
2000. Of those software systems that were found not to be Year
2000 compliant, approximately 90% of all material systems have
been remediated or replaced by Year 2000 compliant software. The
Company anticipates that all remaining material systems,
including certain operating systems used in the Company's
distribution center, will be remediated or replaced by the end of
the second quarter of fiscal 2000.
Over the past few years, the Company's strategic plan has
included significant investment in and modernization of many of
the Company's computer systems. As a result, much of the costs
and timing for replacement of certain of the Company's systems
that were not Year 2000 compliant were already anticipated as
part of the Company's planned information systems spending and
did not need to be accelerated as a result of the Company's Year
2000 project. The total cost to the Company specifically
associated with addressing the Year 2000 issue with respect to
its systems and equipment has not been, and is not anticipated to
be, material to the Company's financial position or results of
operations in any given year. The Company estimates that the
total additional cost of managing its Year 2000 project,
remediating existing systems and replacing non-compliant
systems, is approximately $2 million, of which approximately $1.5
million was expended in fiscal 1999 and the balance anticipated
to be expended in fiscal 2000.
Although the Company believes its Year 2000 compliance
efforts with respect to its systems will be successful, any
failure or delay could result in actual costs and timing
differing materially from that presently contemplated, and in a
disruption of business. The Company is developing a contingency
plan to permit its primary operations to continue if the
Company's modifications and conversions of its systems are not
successfully completed on a timely basis, but the foregoing cost
estimates do not take into account any expenditures arising out
of a response to any such contingencies that materialize. The
Company's cost estimates also do not include time or costs that
may be incurred as a result of third parties' failure to become
Year 2000 compliant on a timely basis.
The Company is communicating with its business partners,
including key manufacturers, vendors, banks and other third
parties with whom it does business, to obtain information
regarding their state of readiness with respect to the Year 2000
issue. Failure of third parties to remediate Year 2000 issues
affecting their respective businesses on a timely basis,
or to implement contingency plans sufficient to permit
uninterrupted continuation of their businesses in the event of
a failure of their systems, could have a material adverse
effect on the Company's business and results of operations.
Assessment of third party Year 2000 readiness is expected to be
substantially completed by
the end of the first quarter of Fiscal 2000. The Company will
not be able to determine its most reasonably likely worst case
scenarios until assessment of third parties' Year 2000
compliance is completed.
The Company's Year 2000 compliance project also includes
development of a contingency plan designed to support critical
business operations in the event of the occurrence of systems
failures or the occurrence of reasonably likely worst case
scenarios. The Company anticipates that contingency plans
will be substantially developed by the end of the second quarter
of Fiscal 2000.
The Company may not be able to compensate adequately
for business interruption caused by certain third parties.
Potential risks include suspension or significant curtailment of
service or significant delays by banks, utilities or common
carriers, or at U.S. ports of entry. The Company's business also
could be materially adversely affected by the failure of
governmental agencies to address Year 2000 issues affecting the
Company's operations. For example, a significant amount of
the Company's merchandise is manufactured outside the United
States, and the Company is dependent upon the issuance by
foreign governmental agencies of export visas for, and upon the
U.S. Customs Service to process and permit entry into the
United States of, such merchandise. If failures in
government systems result in the suspension or delay of
these agencies' services, the Company could experience
significant interruption or delays in its inventory flow.
The costs and timing for management's completion of Year
2000 compliance modification and testing processes are based on
management's best estimates, which were derived utilizing
numerous assumptions of future events, including the continued
availability of certain resources, the success of third parties'
Year 2000 compliance efforts and other factors. There can be no
assurance that these assumptions will be realized or that
actual results will not materially vary.
ITEM 7a. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
The primary objective of the following information is to
provide forward-looking quantitative and qualitative
information about the Company's potential exposure to market
risks. The term "market risk" for the Company refers to the
risk of loss arising from adverse changes in interest rates and
various foreign currencies. The disclosures are not meant to
be precise indicators of expected future losses, but rather
indicators of reasonably possible losses. This forward-looking
information provides indicators of how the Company views and
manages its ongoing market risk exposures.
Interest Rate
At January 30, 1999, the Company had long-term debt
outstanding of approximately $16.9 million. Of this amount,
$1.6 million bears interest at a weighted average fixed rate of
8.16%. The remaining $15.3 million bears interest at variable
rates which averaged approximately 6.62% at January 30, 1999.
A 10% increase in short-term interest rates on the variable
rate debt outstanding at January 30, 1999 would approximate 66
basis points. Such an increase in interest rates would
increase the Company's interest expense by approximately
$100,000 assuming borrowed amounts remain outstanding.
The above sensitivity analysis for interest rate risk
excludes accounts receivable, accounts payable and accrued
liabilities because of the short-term maturity of such
instruments. The analysis does not consider the effect this
movement may have on other variables including changes in sales
volumes that could be indirectly attributed to changes in
interest rates. The actions that management would take in
response to such a change are also not considered. If it were
possible to quantify this impact, the results could well be
different than the sensitivity effects shown above.
Foreign Currency
Substantially all of the Company's purchases are priced in
U.S. dollars. However, some European purchases are denominated
in local currency and, therefore, are subject to the
fluctuation in currency exchange rates. From time to time the
Company utilizes forward exchange contracts to secure firm
pricing related to purchase commitments to be denominated in
foreign currencies. The contracts are of varying short-term
durations and amounts include a window delivery feature, which
provides the Company with an option to enter into a swap
agreement in the event that all of the currency is not utilized
at the end of the contract's delivery term. The Company's
objective in managing its exposure to foreign currency exchange
rate fluctuations is to reduce the impact of adverse
fluctuations in earnings and cash flows associated with foreign
currency exchange rate changes. The principal currency hedged
is the Italian lira. The Company regularly monitors its
foreign exchange exposures to ensure the overall effectiveness
of its foreign currency hedge positions. However, there can be
no assurance the Company's foreign currency hedging activities
will substantially offset the impact of fluctuations in
currency exchange rates on its results of operations and
financial position.
The Company had no foreign exchange instruments
outstanding at January 30, 1999; therefore, a sensitivity
analysis would result in no impact to earnings. Anticipated
transactions, firm commitments, and accounts payable
denominated in foreign currencies would be excluded from the
sensitivity analysis. Additionally, as the Company utilizes
foreign currency instruments for hedging anticipated and firmly
committed transactions, a loss in fair value for those
instruments is generally offset by increases in the value of
the underlying exposure. Foreign currency fluctuations did not
have a material impact on the Company during fiscal years 1999,
1998 and 1997.
ITEM 8. CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The consolidated financial statements of the Company and
related information described below are set forth in the
Company's Annual Report to Shareholders for the fiscal year
ended January 30, 1999 (on pages 3-25) and are incorporated
herein by reference.
(a) Independent Auditors' Report.
(b) Consolidated Balance Sheets as of the Fifty-Two Weeks Ended
January 30, 1999 and January 31, 1998.
(c) Consolidated Statements of Earnings for the Fifty-Two
Weeks Ended January 30, 1999, January 31, 1998 and February 1,
1997.
(d) Consolidated Statements of Stockholders' Equity for the
Fifty-Two Weeks Ended January 30, 1999, January 31, 1998 and
February 1, 1997.
(e) Consolidated Statements fo Cash Flows for the Fifty-Two
Weeks Ended January 30, 1999, January 31, 1998 and February 1, 1997.
(f) Notes to Consolidated Financial Statements
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND CONSOLIDATED FINANCIAL DISCLOSURE
None
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required under Item 10 will be contained
in the definitive Proxy Statement of the Company for its 1999
Annual Meeting of Shareholders (the "Proxy Statement") under
the headings "Election of Directors", "Officer Compensation and
Other Information" and "Compliance with Section 16 (a) of the
Securities Exchange Act of 1934" and is incorporated herein by
reference. The Proxy Statement will be filed pursuant to
Regulation 14A with the Securities and Exchange Commission not
later than 120 days after January 30, 1999.
ITEM 11. EXECUTIVE COMPENSATION
The information required under Item 11 will be contained
in the Proxy Statement under the heading "Officer Compensation
and Other Information" and is incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT
The information required under Item 12 will be contained
in the Proxy Statement under the heading "Security Ownership of
Certain Beneficial Owners and Management" and is incorporated
herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required under Item 13 will be contained
in the Proxy Statement under the headings "Related Party
Transactions" and "Officer Compensation and Other Information-
Compensation Committee Interlocks and Insider Participation"
and is incorporated herein by reference.
PART IV.
ITEM 14. EXHIBITS, CONSOLIDATED FINANCIAL STATEMENT SCHEDULE
AND REPORTS ON FORM 8-K
(a) The following documents are filed as part of this Report:
(1) Consolidated Financial Statements: The response to this
portion of Item 14 is set forth in Item 8
of Part II of this Report.
(2) Financial Statement Schedules: Schedule II - Harold's
Stores, Inc. and Subsidiaries Valuation Account and
Independent Auditors' Report of Consolidated Financial
Statement Schedule (see pages 20-21) of this Report. All
other schedules have been omitted because they are
inapplicable, not required, or the information is
included elsewhere in the financial statements or notes
thereto.
(3) Exhibits: See accompanying Index to Exhibits. The Company
will furnish to any stockholder,upon written request, any exhibit
listed in the accompanying Indes to Exhibits upon payment
by such stockholder of the Company's reasonable expenses in
furnishing any such exhibit.
(b) Reports on Form 8-K: There were no reports on Form 8-K for
the quarter ended January 30, 1999.
SIGNATURES
Pursuant to the requirements of Section 13 or 15 (d)
of the Securities Exchange Act of 1934, the registrant has duly
caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
HAROLD'S STORES, INC.
Date: April 23, 1999 By:/s/ H. Rainey Powell,
H. Rainey Powell, President
Pursuant to the requirements of the Securities Exchange Act of
1934 this report has been signed below by the following persons
on behalf of the Registrant and in the capacities shown, and on
the dates indicated.
Signature Title Date
/s/ Harold G. Powell _________Chairman Emeritus and Director April 23, 1999
Harold G. Powell
/s/ Rebecca P. Casey Chairman of the Board April 23, 1999
Rebecca P. Casey Chief Executive Officer and
Director
/s/ H. Rainey Powell President and Director April 23, 1999
H. Rainey Powell
/s/ Jodi L. Taylor __________Chief Financial Officer April 23, 1999
Jodi L. Taylor
/s/ Lisa P. Hunt Director April 23, 1999
Lisa P. Hunt
/s/ Kenneth C. Row Executive Vice President April 23, 1999
Kenneth C. Row and Director
/s/ Linda L. Daugherty Vice-President and Controller April 23, 1999
Linda L. Daugherty (Chief Accounting Officer)
/s/ Michael T. Casey Director April 23, 1999
Michael T. Casey
/s/ Gary C. Rawlinson Director April 23, 1999
Gary C. Rawlinson
/s/ William F. Weitzel Director April 23, 1999
William F. Weitzel
/s/ James R. Agar Director April 23, 1999
James R. Agar
/s/ W. Howard Lester Director April 23, 1999
W. Howard Lester
/s/ Robert Brooks Cullum Director April 23, 1999
Robert Brooks Cullum, Jr.
INDEPENDENT AUDITORS' REPORT ON CONSOLIDATED FINANCIAL
STATEMENT SCHEDULE
The Board of Directors and Stockholders
Harold's Stores, Inc.:
Under date of March 15,1999, we reported on the consolidated
balance sheets of Harold's Stores, Inc. and subsidiaries as of
January 30, 1999 and January 31, 1998, and the related
consolidated statements of earnings, stockholders' equity and
cash flows for the 52 week periods ended January 30, 1999,
January 31, 1998 and February 1, 1997, which are included in
the annual report on Form 10-K for the 52 week period ended
January 30, 1999. In connection with our audits of the
aforementioned consolidated financial statements, we also have
audited the related consolidated financial statement schedule
listed in Item 14(a)(2). This consolidated financial statement
schedule is the responsibility of the Company's management.
Our responsibility is to express an opinion on this
consolidated financial statement schedule based on our audits.
In our opinion, such consolidated financial statement
schedule, when considered in relation to the basic consolidated
financial statements taken as a whole, presents fairly, in all
material respects, the information set forth therein.
KPMG LLP
Oklahoma City, Oklahoma
March 15, 1999
Schedule II
HAROLD'S STORES, INC. AND SUBSIDIARIES
VALUATION ACCOUNT
(In Thousands)
Additions
Balance at Additions Recoveries Deductions Balance
Description Beginning Charged of Write- at End
of to Accounts off of of
Period Expense Written off Accounts Period
52 Weeks ended
January 30, 1999:
Allowance for
doubtful $ 228 105 63 173 $ 223
receivables
52 Weeks ended
January 31, 1998:
Allowance for $ 215 168 79 234 $ 228
doubtful
receivables
52 Weeks ended
February 1, 1997:
Allowance for $ 200 134 49 168 $ 215
doubtful
receivables
INDEX TO EXHIBITS
No. Description
3.1 Certificate of Incorporation of Registrant (Incorporated by
reference to Exhibit 3.1 to Form 8-B Registration Statements,
Registration No. 1-10892).
3.2 By-laws of Registrant (Incorporated by reference to Exhibit
3.2 to Form 8-B Registration Statement, Registration No. 1-
10892).
4.1 Specimen Certificate for Common Stock (Incorporated by
reference to Exhibit 4.1 to Form S-1 Registration Statement,
Registration No. 33-15753).
9.1 Stockholders' Agreement Among Certain Stockholders of
Registrant dated August 20, 1987 (Incorporated by reference to
Exhibit 9.1 to Form S-1 Registration Statement, Registration
No. 33-15753).
9.2 First Amended and Restated Stockholders' Agreement Among
Certain Stockholders of Registrant dated June 15, 1998.
(Incorporated by reference to Exhibit 10.2 to Form 10-Q for
the quarter ended August 1, 1998).
10.1 Lease Agreement dated May 1, 1987 by and between Harold's of
Norman, Inc. and Powell Properties, Inc. (Norman, Oklahoma
Store) (Incorporated by reference to Exhibit 10.1 to Form S-1
Registration Statement, Registration No. 33-15753).
10.2 Lease Agreement dated May 1, 1987 by and between Harold's of
Norman, Inc. and Ruby K. Powell (Norman, Oklahoma Store)
(Incorporated by Reference to Exhibit 10.2 to Form S-1
Registration Statement, Registration No. 33-15753).
10.3 Lease Agreement dated October 31, 1985 by and between Harold's
Men's Apparel, Inc. predecessor to Harold's of Norman, Inc.
and Highland Park Shopping Village (Incorporated by Reference
to Exhibit 10.9 to Form S-1 Registration Statement,
Registration No. 33-15753) and Amendment to Lease dated June
15, 1988. (Incorporated by reference to Exhibit 10.8 to Form
10-K for the year ended January 31, 1989).
10.4 Lease Agreement dated November 1, 1990, by and between
Registrant and Michael T. Casey, Trustee (329 Partners-I
Limited Partnership). (Dallas Buying Office, Dallas, Texas)
(Incorporated by reference to Exhibit 10.29 to Form 10-K for
the year ended February 2, 1991).
10.5 Amended and Restated Lease Agreement dated April 1, 1996, by
and between Registrant and 329 Partners-II Limited
Partnership. (Dallas Buying Office, Dallas, Texas).
(Incorporated by reference to Exhibit 10.22 to Form 10-K for
the year ended February 1, 1992).
10.6 Lease Agreement dated October 4, 1991, by and between
Registrant and 329 Partners-II Limited Partnership. (East
Lindsey Warehouse facility, Norman, Oklahoma). (Incorporated
by Reference to Exhibit 10.22 to Form 10-K for the year ended
February 1, 1992).
10.7 Lease Agreement effective May 1, 1996 between Registrant and
Carousel Properties, Inc. (Campus Corner Store, Norman,
Oklahoma) (Incorporated by reference to Exhibit 10.7 to Form S-
2 Registration Statement, Registration No. 333-04117) and
amendment to Lease Agreement dated June 28, 1996.
(Incorporated by reference to Exhibit 10.1 to Form 10-Q for
the quarter ended November 2, 1996).
10.8 Agreement effective June 1, 1994 between Registrant and CMT
Enterprises, Inc. (Incorporated by reference to Exhibit 10.8
to Form S-2 Registration Statement, Registration No. 333-
04117).
10.9* Employment and Deferred Compensation Agreement dated February
1, 1998 between Registrant and Harold G. Powell (Incorporated
by reference to Exhibit 10.25 to Form 10-Q for quarter ended
May 2, 1998).
10.10* Employment and Deferred Compensation Agreement dated February
1, 1998 between Registrant and Rebecca Powell Casey,
(Incorporated by reference to Exhibit 10.24 to Form 10-Q for
quarter ended May 2, 1998).
10.11* Employment and Deferred Compensation Agreement dated February
1, 1998 between Registrant and H. Rainey Powell, (Incorporated
by reference to Exhibit 10.26 to Form 10-Q for quarter ended
May 2, 1998).
10.12 Form of Indemnification Agreement between Registrant and
members of its Board of Directors (Incorporated by reference
to Exhibit 10.12 to Form S-2 Registration Statement,
Registration No. 333-04117).
10.13 Amended and Restated Lease Agreement dated as of June 3, 1996
between Registrant and 329 Partners II Limited Partnership
(East Lindsey Warehouse Facility, Norman, Oklahoma)
(Incorporated by reference to Exhibit 10.13 to Amendment No. 1
to Form S-2 Registration Statement, Registration No. 333-
04117).
10.14 Lease Agreement dated as of May 31, 1996 between Registrant
and 329 Partners II Limited Partnership (Outlet Store, Norman,
Oklahoma) (Incorporated by reference to Exhibit 10.14 to
Amendment No. 1 to Form S-2 Registration Statement,
Registration No. 333-04117).
10.15 Amended and Restated Lease Agreement dated as of December 30,
1997 between Registrant and 329 Partners II Limited
Partnership (Outlet Store, Norman, Oklahoma).
10.16 Lease Agreement dated June 30, 1998 by and between Registrant
and 329 Partners-II Limited Partnership. (Dallas Buying
Office, 5919 Maple, Dallas, Texas) (Incorporated by reference
to Exhibit 10.3 to Form 10-Q for the quarter ended August 1,
1998).
10.17 Second Amended and Restated Credit Agreement dated February
28, 1996 between Registrant and Boatmen's First National Bank
of Oklahoma (Incorporated by reference to Exhibit 10.15 to
Amendment No. 1 to Form S-2 Registration Statement,
Registration No. 333-04117).
10.18 Third Amendment to Second Amended and Restated Credit
Agreement dated April 24, 1997 between Registrant and
NationsBank formerly Boatmen's First National Bank of Oklahoma
(Incorporated by reference to Exhibit 10.1 to Form 10-Q for
the quarter ended August 2, 1997).
10.19 Fourth Amendment to Second Amended and Restated Credit
Agreement dated June 25, 1997 between Registrant and
NationsBank formerly Boatmen's First National Bank of Oklahoma
(Incorporated by reference to Exhibit 10.2 to Form 10-Q for
the quarter ended August 2, 1997).
10.20 Fifth Amendment to Second Amended and Restated Credit
Agreement dated July 10, 1997 between Registrant and
NationsBank formerly Boatmen's First National Bank of Oklahoma
(Incorporated by reference to Exhibit 10.3 to Form 10-Q for
the quarter ended August 2, 1997).
10.21 Sixth Amendment to Second Amended and Restated Credit
Agreement dated July 31, 1997 between Registrant and
NationsBank (Incorporated by reference to Exhibit 10.4 to Form
10-Q for quarter ended August 2, 1997).
10.22 Seventh Amendment to Second Amended and Restated Credit
Agreement dated September 30, 1997 between Registrant and
NationsBank (Incorporated by reference to Exhibit 10.5 to Form
10-Q for the quarter ended November 1, 1997).
10.23 Third Amended and Restated Credit Agreement dated November 10,
1997 between Registrant and NationsBank (Incorporated by
reference to Exhibit 10.6 to Form 10-Q for the quarter ended
November 1, 1997).
10.24 First Amendment to the Third Amended and Restated Credit
Agreement dated June 10, 1998 between Registrant and
NationsBank (Incorporated by reference to Exhibit 10.1 to Form
10-Q for the quarter ended August 1, 1998).
10.25 Amended and Restated Term Loan and Security Agreement dated as
of November 6, 1996 among CMT Enterprises, Inc. (as borrower),
Franklin I. Bober (as Guarantor) and the Company (as lender).
(Incorporated by reference to Exhibit 10.2 to Form 10-Q for
the quarter ended November 2, 1996).
13.1 The portion of the Registrant's Annual Report to Shareholders
for the fiscal year ended January 30, 1999 consisting of the
consolidated financial statements and notes thereto and
independent auditors report set forth in pages 3-25 of the
Annual Report to Shareholders.
22.1 Subsidiaries of the Registrant (Incorporated by Reference to
Exhibit 22.1 to Form 8-B Registration Statements, Registration
No. 1-10892).
23.1 Consent of KPMG LLP.
27.1 Financial Data Schedule.
___________________________
* Constitutes a management contract or compensatory plan or
arrangement required to be filed as an exhibit to this
report.
19
Exhibit 13.1 Selected Portions of Annual Report to
Shareholders
The following consists of the portion of the Company's
Annual Report to Shareholders for the fiscal year ended January
30, 1999 containing the consolidated financial statements of
the Company and notes thereto and independent auditors' report
set forth in pages 3-25 of the Annual Report to Shareholders.
Such information is incorporated by reference in Item 8 of the
Company's Annual Report on Form 10-K for the fiscal year ended
January 30, 1999 and is filed as an exhibit thereto in
accordance with General Instruction G to Form 10-K.
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Stockholders
Harold's Stores, Inc.:
We have audited the accompanying consolidated balance
sheets of Harold's Stores, Inc. and subsidiaries (the Company)
as of January 30, 1999 and January 31, 1998, and the related
consolidated statements of earnings, stockholders' equity, and
cash flows for the 52 week periods ended January 30, 1999,
January 31, 1998, and February 1, 1997. 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 January 30, 1999 and January 31, 1998, and the results of
their operations and their cash flows for the 52 week periods
ended January 30, 1999, January 31, 1998 and February 1, 1997,
in conformity with generally accepted accounting principles.
KPMG LLP
Oklahoma City, Oklahoma
March 15, 1999
HAROLD'S STORES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
ASSETS
(In Thousands)
January 30, 1999 January 31, 1998
Current assets:
Cash and cash $ 450 130
equivalents
Trade accounts receivable,
less allowance for
doubtful accounts of
$223 in 1999 and $228 in 1998 6,335 5,822
Other receivables 1,059 886
Merchandise inventories 29,486 31,440
Prepaid expenses 2,428 2,688
Prepaid income taxes - 961
Deferred income taxes 1,268 1,154
Total current assets 41,026 43,081
Property and equipment, at cost 31,304 28,533
Less accumulated depreciation
and amortization (10,671) (10,917)
Net property and
equipment 20,633 18,336
Other receivables,
noncurrent 1,750 2,084
Other assets 508 428
Total assets $ 63,917 63,929
See accompanying notes to consolidated financial statements.
HAROLD'S STORES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
LIABILITIES AND STOCKHOLDERS' EQUITY
(In Thousands Except Share Data)
January 30, 1999 January 31, 1998
Current liabilities:
Current maturities of long-
term debt $ 549 734
Accounts payable 4,460 4,789
Redeemable gift certificates 782 916
Accrued bonuses and payroll
expenses 1,533 953
Accrued rent expense 178 259
Income taxes payable 480 -
Total current liabilities 7,982 7,651
Long-term debt, net of current
maturities 16,330 19,708
Deferred income taxes 84 104
Commitments and contingent
liabilities (notes 10 and 12)
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 and outstanding
6,073,868 in 1999 and
6,044,105 in 1998 60 60
Additional paid-in capital 34,161 33,947
Retained earnings 5,300 2,459
Total stockholders' equity 39,521 36,466
Total liabilities and
stockholders' equity $ 63,917 63,929
See accompanying notes to consolidated financial statements.
HAROLD'S STORES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EARNINGS
(In Thousands Except Share Data)
52 Weeks 52 Weeks 52 Weeks
Ended Ended Ended
January 30, 1999 January 31, 1998 February 1, 1997
Sales $ 129,224 119,919 108,257
Costs and expenses:
Cost of goods sold
(including
occupancy and central
buying expenses,
exclusive of items
shown separately below 84,096 81,770 69,540
Selling, general and
administrative
expenses 35,686 33,725 29,713
Depreciation and
amortization 3,860 3,535 2,806
Interest expense 797 815 318
124,439 119,845 102,377
Earnings before income
taxes and cumulative
effect of change in
accounting principle 4,785 74 5,880
Provision for income
taxes 1,894 30 2,352
Earnings before
cumulative
effect of change in
accounting principle 2,891 44 3,528
Cumulative effect of
change in accounting
principle, net of
income taxes 50 - -
Net earnings $ 2,841 44 3,528
Net earnings per
common share before
cumulative effect of
change in
accounting principle:
Basic $ 0.48 0.01 0.61
Diluted $ 0.48 0.01 0.59
Net earnings per
common share:
Basic $ 0.47 0.01 0.61
Diluted $ 0.47 0.01 0.59
Weighted average
number of common
shares
(Basic) 6,065,418 6,020,936 5,798,098
See accompanying notes to consolidated financial statements.
HAROLD'S STORES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(Dollars in Thousands)
52 Weeks 52 Weeks 52 Weeks
Ended Ended Ended
January 30, January 31, February 1,
1999 1998 1997
Common stock:
Balance, beginning of year $ 60 57 50
Stock dividend (5 percent) in
1998 of 287,528 shares, and (5
percent) in 1997 of 272,072
shares - 3 3
Stock bonuses, 1,857 shares in
1999, 2,306 shares in 1998, and
1,761 shares in 1997 - - -
Employee Stock Purchase Plan
27,996 shares in 1999, 40,745
shares in 1998, and 21,512
shares in 1997 - - -
Issuance of 460,000 shares in
1997 - - 4
Balance, end of year $ 60 60 57
Additional paid-in capital:
Balance, beginning of year $ 33,947 31,548 20,572
Stock dividend (5 percent) in
1998 and 1997 - 2,010 3,772
Stock bonuses 14 22 28
Issuance of 460,000 shares in
1997, net of issuance
cost of $145 - - 6,860
Employee stock purchase plan 200 367 316
Balance, end of year $ 34,161 33,947 31,548
Retained earnings:
Balance, beginning of year $ 2,459 4,430 4,677
Net earnings 2,841 44 3,528
Stock dividend (5 percent) in
1998 and 1997 - (2,015) (3,775)
Balance, end of year $ 5,300 2,459 4,430
See accompanying notes to consolidated financial statements.
HAROLD'S STORES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In Thousands)
52 Weeks 52 Weeks 52 Weeks
Ended Ended Ended
January 30, January 31, February 1,
1999 1998 1997
Cash flows from operating
activities:
Net earnings $ 2,841 44 3,528
Adjustments to reconcile net
earnings to net cash
provided by (used in) operating
activities:
Depreciation and amortization 3,860 3,535 2,806
Deferred income tax expense
(benefit) (134) 419 (685)
(Gain) loss on sale of assets 44 (44) (2)
Shares issued under employee
incentive plans 214 389 344
Changes in assets and
liabilities:
Increase in trade and
other receivables (798) (209) (798)
Decrease (increase) in
merchandise
inventories 1,954 (2,896) (6,897)
Decrease (increase) in
prepaid income taxes 961 (961) -
Decrease (increase) in
other assets (80) 558 (652)
Decrease (increase) in
prepaid expenses 260 (514) (415)
(Decrease) increase in
accounts payable (329) (1,879) 2,272
(Decrease) increase in
income taxes payable 480 (942) 106
(Decrease) increase in
accrued expenses 365 (1,051) 642
Net cash provided by (used in
operating activities 9,638 (3,551) 249
Cash flows from investing
activities:
Acquisition of property
and equipment (6,280) (4,760) (7,102)
Proceeds from disposal of
property and equipment 79 37 96
Term loan to others - - (2,750)
Payment of principal from
term loan to others 446 169 51
Net cash used in investing
activities (5,755) (4,554) (9,705)
Cash flows from financing
activities:
Borrowings on long-term debt - 4,364 956
Payments of long-term debt (1,399) (411) (97)
Advances on revolving line
of credit 45,696 46,834 44,518
Payments of revolving line
of credit (47,860) (42,983) (42,354)
Proceeds of common stock
offering - - 6,864
Payments of fractional
shares issued with
stock dividend - (2) -
Net cash provided by (used in)
financing activities (3,563) 7,802 9,887
Net increase (decrease) in
cash and cash equivalents 320 (303) 431
Cash and cash equivalents at
beginning of year 130 433 2
Cash and cash equivalents at
end of year $ 450 130 433
Supplemental disclosure of
cash flow information:
Cash paid during the year for:
Income taxes $ 1,294 756 2,239
Interest $ 1,313 1,487 699
Interest capitalized during
the year $ 516 672 381
See accompanying notes to consolidated financial statements.
HAROLD'S STORES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
January 30, 1999, January 31, 1998, and February 1, 1997
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 46 stores primarily across the South
and Southwest, with 12 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 1999, 1998, and
1997 ended January 30, 1999, January 31, 1998, and February 1,
1997, 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 outstanding balance. The
average liquidation rate at January 30, 1999 was approximately
3.7 months. Finance charge revenue is netted against selling,
general and administrative expenses and was approximately
$1,003,000, $985,000, and $864,000, in fiscal 1999, fiscal
1998, and fiscal 1997, respectively.
Derivatives
The Company uses forward exchange contracts to reduce
exposure to foreign currency fluctuations related to certain
purchase commitments. Unrealized gains or losses related to
hedges of firm commitments are deferred and included in the basis
of the transaction when completed.
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 (first-in, first-
out method) or market, and approximate $7,355,000 and
$7,121,000 in fiscal 1999 and fiscal 1998, 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
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
The Company elected early adoption in fiscal 1999 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 fifty-two week
period ended January 30, 1999 would have increased by $40,000.
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 January 30, 1999 and January 31, 1998 approximately $421,000
and $341,000, of deferred catalog costs are included in other
assets. The Company incurred approximately $7,849,000,
$10,002,000, and $8,001,000, in advertising expenses, of which
approximately $3,940,000, $6,028,000, and $4,429,000, were
related to the mail order catalogs during fiscal years 1999,
1998, and 1997, 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
Basic earnings per share is computed by dividing net
earnings (loss) applicable to common stock by the weighted
average number of common shares outstanding for the period.
The weighted average number of common shares outstanding was
restated for the five (5%) percent stock dividends in fiscal
1998 and 1997. Diluted earnings per share reflects the
potential dilution that could occur if the Company's
outstanding stock options were exercised (calculated using the
treasury stock method).
The following table reconciles the net income applicable to
common shares and weighted average common shares outstanding used
in the calculation of basic and diluted earnings per common share
for the periods indicated:
Fiscal Year
1999 1998 1997
(Amounts in thousands, except per share data)
Net earnings applicable to $ 2,841 44 3,528
common shares, basic and
diluted
Weighted average number of 6,065 6,021 5,798
common shares outstanding -
basic
Dilutive effect of potential
common shares issuable upon 5 11 147
exercise of employee stock
options
Weighted average number of 6,070 6,032 5,945
common shares outstanding -
diluted
Earnings per share:
Basic $ 0.47 $ 0.01 $ 0.61
Diluted $ 0.47 $ 0.01 $ 0.59
Options to purchase 599,099 shares of common stock at
prices ranging from $7.38 to $16.71 per share were outstanding
during 1999, 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. The
options expire through the year 2008.
Stock Options
The Company follows the intrinsic value method of
accounting for common stock options granted to employees, in
accordance with the provisions of Accounting Principles Board
Opinion No. 25, "Accounting for Stock Issued to Employees", and
related interpretations.
Cash and Cash Equivalents
Cash and cash equivalents include overnight investments
and credit card receivables collected within three business
days.
Use of Estimates
The preparation of financial statements in conformity with
generally accepted accounting principles requires management to
make estimates and assumptions that affect the reported 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.
Impairment of Long-Lived Assets
Long-lived assets and certain identifiable intangibles are
reviewed for impairment whenever events or changes in
circumstances indicate that the carrying amount of an asset may
not be recoverable. Recoverability of assets to be held and
used is measured by a comparison of the carrying amount of an
asset to future net cash flows expected to be generated by the
asset. If such assets are considered to be impaired, the
impairment to be recognized is measured by the amount by which
the carrying amount of the assets exceeds the fair value of the
assets.
Comprehensive Income
In fiscal 1999, the Company adopted SFAS No. 130,
"Reporting Comprehensive Income." SFAS No. 130 establishes
standards for reporting and display of "comprehensive income"
and its components in a set of financial statements. It
requires that all items that are required to be recognized
under accounting standards as components of comprehensive
income be reported in a financial statement that is displayed
with the same prominence as other financial statements. The
Company currently does not have any components of comprehensive
income that are not included in net earnings. Therefore no
separate statement is presented.
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
Balance Sheet: Cash and cash equivalents, accounts
receivable, accounts payable and accrued expenses approximate
fair value because of the short maturity of these financial
instruments. Other receivables and debt are at variable
interest rates, therefore, fair value approximates book value.
Off Balance sheet: There were no outstanding notional
principal amounts of forward exchange contract commitments at
January 30, 1999. The aggregate outstanding notional principal
amount of forward exchange contract commitments (approximately
$1,000,000) approximated fair value at January 31, 1998. Fair
values relating to the forward exchange contracts reflect the
estimated amounts that the Company would pay to terminate the
contracts, based on quoted market prices.
3. Other Receivables
On November 6, 1996, the Company made a term loan to CMT
Enterprises, Inc., "CMT", in the principal amount of $2,750,000
to be used by CMT to refinance its existing revolving line of
credit and for working capital purposes. CMT is a major
independent contractor whose assistance is instrumental in the
Company's design and manufacturing process.
The term loan matures December 31, 2002, and bears
interest at the national prime rate, plus 4.25%, with a floor
interest rate of 12.5%. Principal and interest on the loan are
payable in approximately equal monthly installments, subject to
semi-annual adjustments based upon changes in the prime rate.
The loan is governed by a loan agreement containing terms and
conditions customary to financing of this type. The Company
recognized $220,000, $204,000 and $51,000 of interest income
during fiscal 1999, 1998, and 1997 respectively.
The loan is secured by substantially all assets of CMT.
CMT's President and Chief Executive Officer has personally
guaranteed repayment of the loan and granted the Company a
second mortgage lien on real estate in Duchess County, New
York. As further security for the loan, the President has
pledged 100% of the outstanding stock of CMT and granted a
subordinated lien in cash collateral of
approximately $340,000. In addition, CMT is obligated to issue
a 10-year warrant to the Company to purchase 20% of the
outstanding stock of CMT.
4. Property and Equipment
Property and equipment at January 30, 1999 and January 31,
1998 consisted of the following:
1999 1998
(in thousands)
Land $ 665 665
Buildings 2,967 2,940
Leasehold improvements 9,660 8,516
Furniture and equipment 17,020 15,683
Construction in progress 992 729
$ 31,304 28,533
5. Long-term Debt
Long-term debt at January 30, 1999 and January 31, 1998
consisted of the following:
1999 1998
(in thousands)
Borrowings under line of credit with
a maximum line of $19,000,000,
bearing interest at a variable rate
(6.6% and 7.3% at January 30, 1999 $ 12,872 15,036
and January 31, 1998, respectively)
payable monthly, principal due June,
2000.
Borrowings under line of credit with
a maximum line of $3,000,000, used
to finance certain build-out costs,
secured by assignment of reimbursed
amounts received from landlords for
new store build-outs, or existing - 884
store remodeling costs, bearing
interest at a variable rate (7.3% at
January 30, 1999 and January 31,
1998), payable monthly, principal
due June, 2000.
Note payable to financial
institution, secured by the
assignment of substantially all
assets of CMT, certain security
documents, and promissory note of
CMT, bearing interest at a variable 2,029 2,282
rate (6.5% and 7.3% at January 30,
1999 and January 31, 1998,
respectively), due in monthly
installments of principal and
interest of approximately $34,000,
with final payment due January,
2005.
Note payable to financial
institution, secured by building and
land, bearing interest at a variable
rate (8.0% at January 30, 1999 and
January 31, 1998), due in monthly 369 444
installments of principal of
approximately $6,000, plus accrued
interest, with final payment due
September, 2002.
Note payable to financial
institution, secured by building and
land, bearing interest at a fixed
rate (8.3%), due in monthly 861 899
installments of principal and
interest of approximately $9,000,
with final payment due June, 2011.
Note payable to financial
institution, secured by certain
equipment, bearing interest at a
fixed rate (8.0%), due in monthly
installments of principal and 748 897
interest of approximately $18,000,
with final payment due March, 2003.
Total long-term debt 16,879 20,442
Less current maturities of long-
term debt 549 734
Long-term debt, net of current
maturities $ 16,330 19,708
The borrowing base under the Company's primary line of
credit is limited to $19 million and is based upon certain
percentages of eligible receivables and inventory as defined in
the credit agreement. The entire $19 million, less amounts
outstanding, was available at January 30, 1999. The line of
credit contain various financial and nonfinancial covenants which
limit the Company's ability to incur indebtedness, merge,
consolidate, acquire or sell assets; requires the Company to
maintain a minimum tangible net worth of $34 million; and
requires the Company to satisfy certain financial ratios. The
Company was in compliance with all covenants at January 30, 1999.
The annual maturities of the above long-term debt as of January
30, 1999 are as follows (in thousands):
Fiscal year
ending
2000 $ 549
2001 13,475
2002 642
2003 753
2004 450
2005 and
subsequent 1,010
Total $ 16,879
6. Income Taxes
Income tax expense (benefit), excluding $33,000 in 1999
related to the cumulative effect, for the years ended January 30,
1999, January 31, 1998, and February 1, 1997, consisted of the
following (in thousands):
1999 1998 1997
Current:
Federal $ 1,659 (318) 2,484
State 369 (71) 553
2,028 (389) 3,037
Deferred:
Federal (112) 349 (570)
State (22) 70 (115)
(134) 419 (685)
Total $ 1,894 30 2,352
Income tax expense differs from the normal tax rate as
follows :
1999 1998 1997
Statutory tax rate 34% 34% 34%
Increase in income taxes
caused by:
State income taxes 6 6 6
Effective tax rate 40% 40% 40%
The tax effects of temporary differences that give rise
to significant portions of the deferred tax assets and
deferred tax liabilities at January 30, 1999 and January 31,
1998 are presented below (in thousands):
1999 1998
Deferred tax assets -
current:
Allowance for doubtful
accounts $ 177 94
Insurance reserves - 37
Merchandise inventories 1,037 972
Deferred compensation 54 51
$ 1,268 1,154
Deferred tax liability -
noncurrent:
Property and equipment $ 84 104
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.
7. 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 January 30,
1999 or January 31, 1998.
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 in June 1995. The plan has a term of ten
years. The Compensation Committee of 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. A summary of the status of the Company's stock
option plan, and activity for the periods indicated, is
presented as follows:
Options Options
Outstanding Exercisable
Weighted Weighted
Shares Avg. Shares Avg.
Exercise Exercise
Price Price
Balance of options
outstanding, fiscal
1996 365,210 $ 7.84 141,736 $ 8.00
Granted 61,193 15.98
Terminated (11,025) 7.29
Balance of options
outstanding, fiscal
1997 415,378 9.05 207,470 $ 8.76
Granted 94,500 8.98
Terminated (12,682) 7.61
Balance of options
outstanding, fiscal
1998 497,196 9.07 294,056 $ 8.95
Granted 129,500 6.84
Terminated (5,173) 8.36
Balance of options
outstanding, fiscal
1999 621,523 $ 8.62 395,433 $ 8.90
At January 30, 1999, the range of exercise prices and
weighted average remaining contractual life of outstanding
options was $5.71 - $16.71, and 7.49 years, respectively. The
following table summarizes information about the Company's
stock options which were outstanding, and those which were
exercisable as of January 30, 1999:
Options Outstanding Options Exercisable
Range of Weighted Weighted Weighted
Exercise Number Average Average Number Average
Prices Outstanding Remaining Exercise Exercisable Exercisable
Life Price Price
$5.71-7.66 306,905 6.94 $7.17 181,104 $7.26
$8.42-16.71 314,618 8.02 10.03 214,329 10.16
The number of shares and exercise prices have been
restated to reflect the five percent stock dividends in fiscal
1998 and 1997.
Additionally, as of January 30, 1999, restricted stock
awards for up to $14,700 market value of common stock were
outstanding under the plan. These awards may be exercised over
the remaining two-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 January 30, 1999, the Company may award 367,599
shares or options under the plan.
The weighted average fair values of options granted under
the non-qualified plan during fiscal 1999, 1998 and 1997 were
$4.35, $5.71, and $9.08, respectively. The weighted average
fair values of options granted under the incentive plan during
fiscal 1997 was $10.68
No options were granted during fiscal 1999 or fiscal 1998
under the incentive plan. The fair value of each non-qualified
and incentive option granted was estimated using the Black-
Scholes Option Pricing Model with the following assumptions for
fiscal 1999, 1998, and 1997: risk-free interest rate of 4.75%
for fiscal 1999, 5.5% for fiscal 1998, and 5.1% for fiscal 1997;
expected dividend yield of 0% for all periods; expected lives of
approximately 9 years for all periods; and volatility of the
price of the underlying common stock of 45.4% for fiscal 1999,
43.4% for fiscal 1998, and 41.8% for fiscal 1997.
Had the Company elected to recognize compensation expense
based on the fair value of the stock options granted as of their
grant date, the Company's fiscal 1999, 1998, and 1997 pro forma
net earnings and pro forma net earnings per share would have
differed from the amounts actually reported as shown in the table
below. The pro forma amounts shown reflect only options granted
in fiscal 1996 through 1999. Therefore, the full impact of
calculating compensation cost for stock options based on their
fair value is not reflected in the pro forma net income amounts
presented because compensation cost is reflected over the
options' vesting period of up to 10 years and compensation cost
for options granted prior to January 29, 1995 is not considered.
Fiscal Years
1999 1998 1997
Net earnings As reported $2,841 44 3,528
(loss) Pro Forma $2,540 (195) 3,335
(in thousands)
Earnings As reported $0.47 0.01 0.61
(loss) per Pro Forma 0.42 (0.03) 0.58
share - basic
8. 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 as well as the percentage of participants'
compensation that it will match as 401(k) contributions. For
the years ended January 30, 1999, January 31, 1998, and
February 1, 1997, the Company contributed approximately
$121,000, $124,000, and $108,000, 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 management 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. For the years ended January 30, 1999, January
31, 1998, and February 1, 1997, the Company's matching
contributions were approximately $60,000, $74,000, and $66,000,
and approximately 28,000, 41,000, and 22,000, shares were newly
issued shares in fiscal 1999, 1998 and 1997, respectively and
15,000 shares were purchased on the open market in fiscal 1999.
9. Related Party Transactions
Rent on the Norman, Oklahoma store and certain related
facilities is paid to a corporation controlled by the Company's
Chairman Emeritus. The store lease terms in 1999, 1998, and
1997, provided for payment of percentage rent equal to four
percent of sales plus certain ancillary costs. During the
years ended January 30, 1999, January 31, 1998, and February 1,
1997, the total of such rent for the store and certain related
facilities was approximately $108,000, $131,000, and $137,000,
respectively.
The Company leases office space and a distribution center
facility and retail space 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 Company relocated its office space during
fiscal 1999 to a new facility owned by the same limited
partnership. The Company is currently engaged in negotiations
with a potential sublessee for the original office space, but
there is no assurance that a sublease will be consummated on
terms favorable to the Company. The new office space lease
expires September, 2010 with annual rent payments of $453,204
plus insurance and property taxes until August, 2001 at which
time the annual rent will be $478,382, plus insurance,
utilities and property taxes until August, 2004 at which time
the annual rent will be $503,560, plus insurance utilities and
property taxes until August, 2007 at which time annual rent
will be $528,728, plus insurance, utilities and property taxes
until expiration of the lease. The term of the distribution
center lease is sixteen years commencing July 1, 1996, with
annual rental payments of $338,438 plus insurance, utilities
and property taxes until July, 2001, at which time the annual
rent will increase annually on a fixed scale up to a maximum of
$419,951 during the final year of the lease. The term of the
retail space lease is twelve years commencing June 4, 1996, and
effective January 1, 1997, with annual rental payments of
$84,106 plus percentage rent equal to four percent of sales
plus insurance, utilities, and property taxes.
See note 12 for information concerning the employment
contracts with the Company's Chairman Emeritus, Chairman of the
Board and Chief Executive Officer, and President.
10. Facility Leases
The Company conducts a majority of its retail operations
from leased store premises under leases that will expire within
the next ten years. 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 (excluding renewal options) for
store, distribution premises, office space and equipment under
noncancelable operating leases having a term of more than one
year as of January 30, 1999 were as follows (in thousands):
Fiscal year
ending:
2000 $ 6,383
2001 6,195
2002 5,992
2003 5,893
2004 5,602
2005 and 28,272
subsequent
Total $ 58,337
Total rental expense for the years ended January 30, 1999,
January 31, 1998, and February 1, 1997, was as follows (in
thousands):
1999 1998 1997
Base rent $ 4,350 3,702 2,806
Additional rents
computed as
percentage of sales 1,041 1,206 1,261
Total $ 5,391 4,908 4,067
11. Business Concentrations
More than 90% of the ladies' apparel sales were attributable
to the Company's product development and private label programs
during fiscal 1999, 1998 and 1997. The breakdown of total sales
between ladies' and men's apparel was approximately 79% and 21%
for fiscal 1999, 77% and 23% for fiscal 1998, and 78% and 22%
for fiscal 1997.
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 acts as the Company's
agent in the purchase of the raw materials, including fabrics,
linings, buttons, etc., and supervises the manufacturing process
for a substantial portion of the Company's ladies 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 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.
12. 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 January 30, 1999, the
Company had outstanding approximately $1,750,000 in letters of
credit to secure orders of merchandise from various domestic
and international vendors.
During fiscal 1999, the Company entered into eight forward
exchange contracts with a major financial institution. The
Company had no forward exchange contracts outstanding at January
30, 1999. The forward exchange contracts require the Company to
exchange US dollars for foreign currencies at maturity, at rates
agreed to at inception of the contracts. The amount of any gain
or loss on these contracts in fiscal 1999 was immaterial. The
contracts are of varying short-term duration and include a window
delivery feature which provides the Company with an option to
enter into a swap agreement in the event that all of the currency
is not utilized at the end of the contract's delivery term. A
swap allows the Company to sell the unused currency, at the
contract's maturity, to the counterparty at the current market
rate and then buy back the same amount for the time period to
which the Company wants to extend. The counterparty to the
derivative transactions is a major financial institution. The
credit risk is generally limited to the unrealized gains or
losses in such contracts should this counterparty fail to perform
as contracted. The Company considers the risk of counterparty
default to be minimal.
Pursuant to an employment agreement dated February 1, 1998,
the Chairman Emeritus is paid an annual salary of $125,000 plus
an annual performance bonus and deferred annual compensation of
$25,000.
Pursuant to employment agreements each dated February 1, 1998,
the Chairman of the Board and the Chief Executive Officer is paid
an annual salary of $220,000 plus an annual performance bonus,
and the President is paid an annual salary of $180,000 plus an
annual performance bonus.
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.
13. Business Segments
The Company manages its operations on an individual store
basis. Financial information is maintained for each store and
provided to the Company's management for review and as a basis
for decision-making. The Company fully allocates all expenses
down to a pre-tax level and monitors each store's performance
accordingly. Given the economic characteristics of the store
formats, the similar nature of the products sold, the type of
customer and method of distribution, the operations of the
Company are aggregated into one reportable segment. While the
catalog and other miscellaneous operations qualify as operating
segments, they are not considered material to the consolidated
financial statements for the purpose of making operating
decisions and do not meet the threshold for disclosure under
Statement of Financial Accounting Standards (SFAS) No. 131
"Disclosure About Segments of an Enterprise and Related
Information."
14. Quarterly Financial Data (Unaudited - in thousands, except
per share data)
Summarized quarterly financial results are as follows:
First Second Third Fourth
52 Weeks Ended
January 30, 1999
Sales $33,541 27,714 32,220 35,749
Gross profit on sales 11,224 9,488 11,385 13,031
Net earnings 411 273 829 1,328
Net earnings per
common share:
Basic $0.07 0.05 0.14 0.22
Diluted $0.07 0.05 0.14 0.22
52 Weeks Ended
January 31, 1998
Sales $28,408 26,826 31,979 32,706
Gross profit on 9,662 8,316 9,539 10,632
sales
Net earnings (loss) 127 (577) 164 330
Net earnings (loss)
per common share:
Basic $0.02 (0.10) 0.03 0.05
Diluted $0.02 (0.10) 0.03 0.05
The first quarter of fiscal 1999 includes the cumulative
effect of a change in accounting principle of $50,000. The net
effect of this change was a decrease to earnings per share of
$0.01.
16
Exhibit 23.1
INDEPENDENT AUDITORS' CONSENT
The Board of Directors
Harold's Stores, Inc.:
We consent to incorporation by reference in the
registration statements (Nos. 33-68604 and 33-63773) on
Form S-8 of Harold's Stores, Inc. of our reports dated March
15, 1999, relating to the consolidated balance sheets of
Harold's Stores, Inc. and subsidiaries as of January 30, 1999
and January 31, 1998, the related consolidated statements of
earnings, stockholders' equity and cash flows, and the
related consolidated financial statement schedule for the 52
week periods ended January 30, 1999, January 31, 1998 and
February 1, 1997, which reports appear in the January 30,
1999 Annual Report on Form 10-K of Harold's Stores, Inc.
KPMG LLP
Oklahoma City, Oklahoma
April 22, 1999
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<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> JAN-30-1999
<PERIOD-END> JAN-30-1999
<CASH> 450
<SECURITIES> 0
<RECEIVABLES> 6,558
<ALLOWANCES> 223
<INVENTORY> 29,486
<CURRENT-ASSETS> 41,026
<PP&E> 31,304
<DEPRECIATION> 10,671
<TOTAL-ASSETS> 63,917
<CURRENT-LIABILITIES> 7,982
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0
0
<COMMON> 60
<OTHER-SE> 39,461
<TOTAL-LIABILITY-AND-EQUITY> 63,917
<SALES> 129,224
<TOTAL-REVENUES> 129,224
<CGS> 84,096
<TOTAL-COSTS> 84,096
<OTHER-EXPENSES> 39,546
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<INTEREST-EXPENSE> 797
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