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.
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.
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.
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.
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.
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.
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.
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.
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.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND CONSOLIDATED FINANCIAL DISCLOSURE
None
PART III
ITEM 10.
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.
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.
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.
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.
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.