UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington D.C. 20549
FORM 10-Q
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended May 1, 2004
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from __________ to __________
Commission File No. 1-10892
HAROLD'S STORES, INC.
(Exact name of registrant as specified in its charter)
Oklahoma
(State or other jurisdiction of
incorporation or organization)
73-1308796
(IRS Employer Identification
No.)
5919 Maple Avenue
Dallas, Texas 75235
(Address of principal
executive offices)
(Zip Code)
(214) 366-0600
(Registrant's telephone number,
including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 duringthe 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 whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act)
Yes [ ]
No [X]
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
As of May 31, 2004, the registrant had 6,212,142 shares of Common Stock
outstanding.
Harold's Stores, Inc. & Subsidiaries
Index to
Quarterly Report on Form 10-Q
For the Period Ended May 1, 2004
Part I - FINANCIAL INFORMATION
Page
Item
1.
Financial Statements
Consolidated Balance Sheets - May 1, 2004 (unaudited) and January 31, 2004
3
Consolidated Statements of Operations -
Thirteen Weeks ended May 1, 2004 (unaudited) and May 3, 2003 (unaudited)
5
Consolidated Statements of Cash Flows -
Thirteen Weeks ended May 1, 2004 (unaudited) and May 3, 2003 (unaudited)
6
Notes to Interim Consolidated Financial Statements
7
Item
2.
Management's Discussion and Analysis of Financial Condition and Results of
Operations
12
Item
3.
Quantitative and Qualitative Disclosure About Market Risk
15
Item
4.
Controls and Procedures
15
Part II - OTHER INFORMATION
Item
1.
Legal Proceedings
15
Item
2.
Changes in Securities and Use of Proceeds
15
Item
3.
Defaults Upon Senior Securities
16
Item
4.
Submission of Matters to a Vote of Security Holders
16
Item
5.
Other Information
16
Item
6.
Exhibits and Reports on Form 8-K
16
Signatures 7
17
HAROLD'S STORES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
ASSETS
(In Thousands)
May 1,
2004
January 31,
2004
(Unaudited
)
Current assets:
Cash and cash equivalents
$ 1,121
$
1,118
Trade accounts receivable, less allowance
for doubtful accounts of $200 in May and
January
7,738
7,120
Note and other receivables
95
109
Merchandise inventories
17,499
17,713
Prepaid expenses
1,826
1,130
Total current assets
28,279
27,190
Property and equipment, at cost
29,860
30,037
Less accumulated depreciation and
amortization
(20,461)
(20,064)
Net property and equipment
9,399
9,973
Total assets
$37,678
$37,163
HAROLD'S STORES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
LIABILITIES AND STOCKHOLDERS' DEFICIT
(In Thousands Except Share Data)
May 1,
2004
January
31,
2004
(Unaudite
d)
Current liabilities:
Accounts payable
$ 6,566
$ 7,526
Redeemable gift certificates
732
926
Accrued payroll expenses and bonuses
949
890
Accrued rent expense
99
102
Current maturities of long-term debt (See
Note 5)
17,968
16,858
Total current liabilities
26,314
26,302
Accrued rent expense, net of current
maturities
1,272
1,247
Long-term debt, net of current maturities
1,319
1,358
Total liabilities
28,905
28,907
Commitments and contingencies (See Note 7)
Convertible preferred stock of $.01 par
value
Amended Series 2001-A, authorized
600,000 shares, issued and outstanding
333,862 in May and 331,631 in January
6,677
6,627
Series 2002-A, authorized 300,000
shares, issued and outstanding 210,957
in May and 208,803 in January
4,183
4,133
Series 2003-A, authorized 100,000
shares, issued and outstanding 53,700
in May and 52,024 in January
5,325
5,151
2001-A and 2002-A entitled to $20.00 per
share, and 2003-A entitled to $100.00 per
share, in each case plus accrued but
unpaid dividends in liquidation
16,185
15,911
Stockholders' deficit:
Common stock of $.01 par value
Authorized 25,000,000 shares; issued and
outstanding 6,212,142 in May and
6,209,147 in January
62
62
Additional paid-in capital
34,454
34,449
Accumulated deficit
(41,926)
(42,164
)
(7,410)
(7,653)
Less: Treasury stock of 205 shares in May
and January recorded at cost
(2)
(2)
Total stockholders' deficit
(7,412)
(7,655)
Total liabilities and stockholders'
deficit
$37,678
$37,163
HAROLD'S STORES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(In Thousands Except Per Share Data)
13 Weeks Ended
May 1,
2004
May 3,
2003
(Unaudited)
Sales
$24,169
$24,695
Costs and expenses:
Costs of goods sold (including
occupancy and central buying
expenses, exclusive of items shown
separately below)
15,137
17,521
Selling, general and administrative
expenses
7,258
6,998
Depreciation and amortization
782
969
Store closing expenses
- -
1,168
Interest expense
215
228
Total costs and expenses
23,392
26,884
Income (loss) before income taxes
777
(2,189)
Provision (benefit) for income taxes
- -
- -
Net income (loss)
$ 777
$(2,189)
NET INCOME (LOSS) APPLICABLE TO COMMON
STOCKHOLDERS:
Net income (loss)
$ 777
$(2,189)
Less: Preferred stock dividends and
accretion of preferred stock issuance
costs
540
326
Net income (loss) applicable to common
stockholders
$ 237
$(2,515)
Net income (loss) per common share:
Basic
$0.04
$(0.41)
Diluted
$0.04
$(0.41)
HAROLD'S STORES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In Thousands)
13 Weeks Ended
May 1,
2004
May 3,
2003
(Unaudited)
Cash flows from operating activities:
Net income (loss)
$ 777
$(2,189)
Adjustments to reconcile net income (loss)
to net cash used in operating activities:
Depreciation and amortization
782
969
Gain on sale of assets
(5)
(4)
Changes in assets and liabilities:
Increase in trade and other accounts
receivable
(608)
(836)
Decrease in merchandise inventories
214
310
Increase in prepaid expenses
(696)
(25)
Decrease in accounts payable
(818)
(2,949)
Decrease in accrued expenses
(113)
(139)
Net cash used in operating activities
(467)
(4,863)
Cash flows from investing activities:
Acquisition of property and equipment
(208)
(73)
Proceeds from disposal of property and
equipment
5
4
Issuance of note receivable
(2)
- -
Payments received for notes receivable
6
3
Net cash used in investing activities
(199)
(66)
Cash flows from financing activities:
Payments on long-term debt
(61)
(1,080)
Advances on revolving line of credit
26,588
28,869
Payments on revolving line of credit
(25,456)
(27,438)
Proceeds from sale of preferred stock
- -
4,986
Proceeds from exercise of common stock
options
5
- -
Preferred stock dividends
(407)
(280)
Net cash provided by financing activities
669
5,057
Increase in cash
3
128
Cash and cash equivalents at beginning of
period
1,118
483
Cash and cash equivalents at end of period
$ 1,121
$
611
Non-cash investing and financing
activities:
Issuance of preferred stock in lieu of
rent
142
- -
Preferred stock dividends paid in shares
of stock
114
20
HAROLD'S STORES, INC. AND SUBSIDIARIES
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
May 1, 2004 and May 3, 2003
(Unaudited)
1. Unaudited Interim Periods
In the opinion of the Company's management, all adjustments (all
of which are normal and recurring) have been made which are necessary to
fairly state the financial position of the Company as of May 1, 2004 and
the results of its operations and cash flows for the thirteen-week
periods ended May 1, 2004 and May 3, 2003. The results of operations for
the thirteen-week periods ended May 1, 2004 and May 3, 2003 are not
necessarily indicative of the results of operations that may be achieved
for the entire year. For further information, refer to the consolidated
financial statements and footnotes thereto included in the Company's
Annual Report on Form 10-K for the year ended January 31, 2004.
2. Definition of Fiscal Year
The Company has a 52-53 week year which ends on the Saturday
closest to January 31. The period from February 1, 2004 through January
29, 2005, has been designated as 2004.
3. 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.
4. Impact of New Accounting Pronouncements
On May 15, 2003, the FASB issued SFAS No. 150, "Accounting for
Certain Financial Instruments with Characteristics of both Liabilities
and Equity". SFAS No. 150 establishes standards for classifying and
measuring as liabilities certain financial instruments that embody
obligations of the issuer and have characteristics of both liabilities
and equity. Instruments that are indexed to and potentially settled in
an issuer's own shares that are not within the scope of SFAS 150 remain
subject to existing guidance under EITF 00-14. SFAS No. 150 generally
requires liability classification for two broad classes of financial
instruments: 1. instruments that represent, or are indexed to, an
obligation to buy back the issuer's shares, regardless whether the
instrument is settled on a net-cash or gross physical basis, or 2.
obligations that can be settled in shares but meet one of the following
conditions: derive their value predominately from some other underlying
obligation, have a fixed value, or have a value to the counterparty that
moves in the opposite direction as the issuer's shares. SFAS No. 150
must be applied immediately to instruments entered into or modified after
May 31, 2003 and to all other instruments that exist as of the beginning
of the first interim financial reporting period beginning after June 15,
2003. The Company adopted this standard August 3, 2003, which did not
have a material impact on the Company's consolidated financial position.
In January 2003, the FASB issued Interpretation No. 46,
"Consolidation of Variable Interest Entities, an interpretation of
Accounting Research Bulletin No. 51" ("FIN 46"). FIN 46 requires the
consolidation of entities in which an enterprise absorbs a majority of
the entity's expected losses, receives a majority of the entity's
expected residual returns, or both, as a result of ownership, contractual
or other financial interests in the entity. Currently, entities are
generally consolidated by an enterprise when it has a controlling
financial interest through ownership of a majority voting interest in the
entity. FIN 46 applies immediately to variable interest entities created
after January 31, 2003, and to variable interest entities in which an
enterprise obtains an interest after that date. It applies in the first
fiscal year or interim period beginning after June 15, 2003, to variable
interest entities in which an enterprise holds a variable interest that
it acquired before February 1, 2003. FIN 46 may be applied prospectively
with a cumulative-effect adjustment as of the date on which it is first
applied or by restating previously issued financial statements for one or
more years with a cumulative-effect adjustment as of the beginning of the
first year restated. On October 8, 2003, the FASB deferred the effective
date of FIN 46 for all variable interests held in all entities acquired
prior to February 1, 2003 until December 31, 2003. The Company's
adoption of FIN 46 did not have a material impact on the Company's
financial position.
5. Long-term Debt
The Company's original three-year credit facility with Wells Fargo
Retail Finance II, LLC, ("WFRF") was entered into on February 5, 2003 and
provided the Company with a maximum available credit limit of $22
million. This agreement was scheduled to expire in February, 2006. As
discussed below, on April 29, 2004, the maximum available credit line was
increased to the lesser of $25 million or $22 million plus outstanding
participant advances, and the expiration date was extended to February 5,
2007. The credit facility is secured by substantially all assets of the
Company and its subsidiaries and is subject to a borrowing base
calculation based primarily on inventory and accounts receivable. The
facility has two financial covenants, a minimum excess availability
covenant of $1.35 million ($1 million in July through September) and a
maximum capital expenditure covenant, established at $2.75 million for
2004. Interest rates under the facility are at prime plus 0.5% or LIBOR
plus 2.50%, with the ability to reduce the rate if the Company achieves
certain financial criteria. The balance outstanding on the Company's
line of credit at May 1, 2004 was $17,752,000 which includes the $4
million outstanding under the bridge facility discussed below. At May 1,
2004 the Company's availability under the WFRF line of credit was
approximately $5.6 million above the minimum availability requirement of
$1.35 million and the average interest rate on the credit line was 3.77%.
Subsequent to securing the initial credit facility, the Company
negotiated an increase of $2 million in its total borrowing availability
under its existing credit facility with WFRF. The Company obtained this
increase in order to provide for additional working capital. The full $2
million was available for borrowing on July 15, 2003 and has been
extended to the Company by Wells Fargo based upon a loan participation
agreement between Wells Fargo and RonHow, LLC, an entity established in
July 2003 which is owned and controlled directly or indirectly by Ronald
de Waal and W. Howard Lester. Mr. de Waal and Mr. Lester are both major
beneficial owners of the Company's common stock, and Mr. Lester is also a
director of the Company.
In order to achieve additional liquidity, on April 29, 2004, the
Company completed an amendment to the credit facility with WFRF which
increased the Company's borrowing availability under the facility. The
amendment increased the Company's maximum inventory advance rate cap from
75% to 80% during non-peak times and from 80% to 85% during peak times.
Peak times were amended to include the eight weeks prior to Easter and
the eight weeks prior to October 1. The increase in advance rates is
expected to increase the availability under the facility by as much as $3
million depending on the level of inventories. Additionally, the
amendment extended the term of the credit facility by one year, with a
new expiration of February 5, 2007. The amendment also increased the
maximum revolver amount from $22 million to the lesser of $25 million or
$22 million plus outstanding participant advances. Finally, the
amendment provided for an additional increase of $2 million in the
Company's borrowing availability under the facility based upon an
increase in the existing loan participation agreement between WFRF and
RonHow, LLC. WFRF will continue to serve as the lending agent for the
Company under the credit facility, and the principal covenants and
conditions imposed upon the Company pursuant to the WRFR credit facility
agreement have not materially changed. RonHow, LLC's right to repayment
of any advances under the credit facility that are attributable to its
total $4 million participation is generally subordinate to the repayment
rights of the other credit facility lenders. However, the Company may
repay these advances provided it meets certain conditions, including the
maintenance of an average daily excess availability under the credit
facility of at least $2.5 million for the 30 days prior to and 30 days
projected immediately following the repayment. The average excess
availability requirement is higher than the excess availability otherwise
required of the Company under the credit facility. If the Company does
not repay the new $2 million loan participation of RonHow during the 18
months subsequent to April 29, 2004, RonHow will have an option at that
time to convert any of the incremental $2 million not repaid into shares
of authorized but unissued 2003-A Preferred Stock, which will be
convertible into shares of common stock at a price of $2.524 per share,
which was the 20-day average closing price of the Company's common stock
for the period ending immediately before closing of the loan amendment.
Additionally, if the Company has not repaid the initial $2 million of
loan participation by February 2006, the Company will pay an additional
4% fee per annum on the outstanding participation amount up to $2
million. This transaction was approved by the independent directors.
The Company was in compliance with its debt covenants for the
quarter ended May 1, 2004. Although the Company's line of credit with
WFRF does not expire until February 2007, the Company has classified its
borrowings under its line of credit as current in its consolidated
balance sheet due to the terms of its agreement with the lender. Under
the bank agreement, there is an acceleration clause which potentially
allows the bank to demand immediate payment of all outstanding borrowings
upon the occurrence of a material adverse change in the Company's
operations or financial position. Determination of what constitutes a
material adverse change is at the discretion of the bank, however, it is
subject to reasonableness standards. In addition, the Company is
required to maintain a lock-box agreement with the bank whereby all cash
received is applied against current borrowings. As a result of these
items, the Company is required to classify its borrowings as current as
proscribed by EITF 95-22, "Balance Sheet Classification of Borrowings
Outstanding under Revolving Credit Agreements that include both a
Subjective Acceleration Clause and a Lock-Box Arrangement."
6. Income Taxes
The Company's net operating losses will begin to expire in 2010.
During 2002, the Company increased its valuation allowance to fully
provide for all remaining deferred tax assets because the Company's
recent history of operating losses makes the realization of these assets
uncertain. The Company's valuation allowance as of January 31, 2004 and
May 1, 2004, is equal to 100% of its deferred tax assets.
The ability of the Company to utilize net operating loss
carryforwards to reduce future federal taxable income and federal income
tax of the Company is subject to various limitations under the Internal
Revenue Code of 1986 ("the Code"), as amended. The utilization of such
carryforwards may be limited upon the occurrence of certain ownership
changes, including the issuance or exercise of rights to acquire stock,
the purchase or sale of stock by 5% stockholders, as defined in the
Treasury regulations, and the offering of stock by the Company during any
three-year period resulting in an aggregate change of more than 50% in
the beneficial ownership of the Company.
In the event of an ownership change (as defined for income tax
purposes), Section 382 of the Code imposes an annual limitation on the
amount of a corporation's taxable income that can be offset by these
carryforwards. The limitation is generally equal to the product of (i)
the fair market value of the equity of the Company multiplied by (ii) a
percentage approximately equivalent to the yield on long-term tax exempt
bonds during the month in which an ownership change occurs.
7. Commitments and Contingencies
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.
8. Preferred Stock
On February 28, 2001, the Company executed a definitive agreement
to allow an investor to purchase from the Company 300,000 shares of
convertible preferred stock for a total purchase price of $6 million.
Under this preferred stock agreement, each of the 300,000 initially
issued shares of preferred stock are convertible into 15.6863 shares of
common stock of the Company. The preferred shares have voting rights
equal to the number of common shares into which they may be converted.
Until converted, the preferred stock is entitled to receive quarterly
dividends that cumulate annually at a rate of 10% per annum, which are
reduced to 8% per annum if the Company's operating income for any
fiscal year ending after February 28, 2001 exceeds $4,735,000.
Dividends are payable 50% in cash and 50% in additional shares of
preferred stock until February 28, 2003 and thereafter in additional
shares of preferred stock or cash as the holder of the preferred stock
may elect. Shares of preferred stock issued in respect of dividends
are convertible into common stock based upon an average market price of
the common stock as of the respective dividend dates. Following the
third anniversary of the original issuance date, the preferred shares
are redeemable at the option of the Company at a price equal to the
initial purchase price plus cumulated and accrued but unpaid dividends.
On August 2, 2002, the Company executed a definitive agreement to
allow a group of investors to purchase from the Company 200,000 shares
of Series 2002-A convertible preferred stock for a total purchase price
of $4 million. Under this preferred stock agreement, each of the
200,000 issued shares of preferred stock are convertible into common
stock of the Company at a fixed rate of $2.72 per share. The preferred
shares have voting rights equal to the number of common shares into
which they may be converted. Until converted, the preferred stock is
entitled to receive quarterly dividends that cumulate annually at a
rate of 8% per annum, which is reduced to 6% per annum if certain
profitability targets are met by the Company. Dividends are payable
50% in cash and 50% in additional shares of preferred stock until July
1, 2003 and thereafter in additional shares of preferred stock or cash
as the holder of the preferred stock may elect. Following the third
anniversary of the original issuance date, the Series 2002-A Preferred
Stock is redeemable at the option of the Company at a price equal to
the initial purchase price plus cumulated and accrued but unpaid
dividends.
On February 5, 2003, the Company closed on a $5 million private
equity investment by Inter-Him, N.V., of which Ronald de Waal is a
Managing Director, and W. Howard Lester, a director of the Company (the
"Investors"). The Investors purchased an aggregate of 50,000 shares of
a new series of preferred stock, designated Series 2003-A Preferred
Stock, at a purchase price of $100.00 per share. The Series 2003-A
Preferred Stock is convertible into common stock at a fixed rate of
$1.15 per share, and otherwise provides rights and preferences
substantially similar to the Company's existing 2002-A Preferred Stock.
The percentage ownership of common stock on an as-converted basis by
Inter-Him and Mr. de Waal is approximately 52.0% (assuming conversion
of all of the Company's outstanding preferred stock).
None of the Company's outstanding preferred shares are included
in the stockholders' equity section of the balance sheet because the
preferred shareholders have special voting rights that empower them to
elect a majority of the board of directors and maintain effective
control over the Company.
9. Stock Options
The Company follows the intrinsic value method of accounting for
common stock options to employees, in accordance with the provisions of
Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued
to Employees", and related interpretations.
Had the Company elected to recognize compensation expense based on
the fair value of the stock options granted as of their grant date per
the standards of Statement of Financial Accounting Standards No. 123, the
Company's 2004 and 2003 pro forma net income (loss) and pro forma net
income (loss) 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 1995 through 2004. Therefore, the full
impact of calculating compensation cost for stock options based on their
fair value is not reflected in the pro forma net loss 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.
13 Weeks Ended
May 1,
2004
May 3,
2003
(In thousands, except per
share data)
Net income (loss) applicable to common
stockholders, as reported
$ 237
$(2,515)
Add:
Stock-based employee compensation expense
included in reported net income (loss),
net of related tax effects
- -
- -
Deduct:
Stock-based employee compensation expense
determined under fair value based method
for all awards
187
192
Pro forma net loss applicable to common
stockholders
$ 50
$(2,707)
Net income (loss) per average common
share:
Basic, as reported
$0.04
$(0.41)
Basic, pro forma
$0.01
$(0.44)
Diluted, as reported
$0.04
$(0.41)
Diluted, pro forma
$0.01
$(0.44)
10. Revenue Recognition
Sales from store locations represented 99% of the Company's total
sales for the first quarter of 2004. These sales are recognized at the
time of the customer's purchase. During the third quarter of 2003, the
Company returned to the direct channel business by offering direct
response catalogs. The sales related to these catalogs were
approximately one percent of total sales for the thirteen weeks ended May
1, 2004, and a return reserve has been established. Direct channel sales
are recognized at the time the order is shipped to the customer. All
sales are net of returns and exclude sales tax. Gift card sales are
recognized as revenue when the gift card is redeemed, not when it is
sold.
11. Earnings per Share
Outstanding shares for purposes of basic and diluted earnings per
share were calculated as follows:
13 Weeks Ended
May 1,
2004
May 3,
2003
(in thousands)
Net income (loss) applicable to
common stockholders - basic
$ 237
$(2,515)
Preferred stock dividends
- -
- -
Net income (loss) applicable to
common stockholders - diluted
$ 237
$(2,515)
Average common shares outstanding
6,212
6,100
Effect of dilutive securities:
Employee stock options
376
- -
Convertible preferred stock
- -
- -
Diluted average common shares
outstanding
6,588
6,100
Approximately 801,575 shares and 2,170,937 shares for the thirteen
weeks ended May 1, 2004 and May 3, 2003, respectively, related to
outstanding employee stock options, were not included in the calculation
of diluted earnings per average common share because the effect of
including those shares is anti-dilutive as the exercise price of the
stock options exceeded the average common stock market price during the
respective period. Approximately 598,519 and 582,112 preferred shares
convertible into 11,226,772 and 10,926,948 common shares, for the
thirteen weeks ended May 1, 2004 and May 3, 2003, respectively, were not
included in the calculation of diluted earnings per average common share
because the effect of including those shares is anti-dilutive.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
From time to time, the Company may publish forward-looking
statements relating to certain matters including anticipated financial
performance, business prospects, the future opening or closing of stores,
inventory levels, anticipated capital expenditures, and other matters.
All statements other than statements of historical fact contained in this
Form 10-Q or in any other report of the Company are forward-looking
statements. The Private Securities Litigation Reform Act of 1995
provides a safe harbor for forward-looking statements. In order to
comply with the terms of that safe harbor, the Company notes that a
variety of factors, individually or in the aggregate, could cause the
Company's actual results and experience to differ materially from the
anticipated results or other expectations expressed in the Company's
forward-looking statements including, without limitation, the following:
the ability of the Company to generate cash flow from operations in
amounts sufficient to meet debt obligations and provide working capital
and funds for growth, consumer spending trends and habits; competition in
the retail clothing segment; weather conditions in the Company's
operating regions; laws and government regulations; general business and
economic conditions; availability of capital; success of operating
initiatives and marketing and promotional efforts; and changes in
accounting policies. In addition, the Company disclaims any intent or
obligation to update those forward-looking statements.
Results of Operations
The following table sets forth for the periods indicated, the
percentage of net sales represented by items in the Company's statement
of operations.
13 Weeks Ended
May 1,
2004
May 3,
2003
Sales
100.0%
100.0%
Costs of goods sold
(62.6)
(71.0)
Selling, general and
administrative expenses
(30.0)
(28.4)
Depreciation and amortization
(3.2)
(3.9)
Store closing expenses
- -
(4.7)
Interest expense
(0.9)
(0.9)
Income (loss) before income taxes
3.3
(8.9)
Provision (benefit) for income
taxes
- -
- -
Net income (loss)
3.3%
(8.9)%
The following table reflects the sources of the changes in Company
sales for the periods indicated, with percentage changes compared to the
comparable period of the prior year.
13 Weeks Ended
May 1,
2004
May 3,
2003
Sales (000's)
24,169
24,695
Total sales (decline) increase
(2.1)%
2.3%
Change in comparable store
sales
(52 week basis)
8.6%
6.6%
Store locations:
Existing stores, beginning of
period
42
50
Stores closed
(1)
(5)
New stores opened
- -
- -
Total stores at end of period
41
45
The Company opened no new locations during the thirteen weeks
ended May 1, 2004 and May 3, 2003 and closed one store location during
the thirteen weeks ended May 1, 2004 compared to five store closings
during the thirteen weeks ended May 3, 2003. These store closings were
responsible for the total sales decline for the thirteen weeks ended May
1, 2004 compared to the same period of the prior year. The increase in
comparable sales growth is primarily due to the favorable response of the
Company's customers to the 2004 merchandise assortments.
The Company's gross margin was 37.4% for the first quarter of
2004, as compared to 29.0% in the same period of last year. This
significant increase in the gross margin is primarily attributed to
selling a larger percentage of merchandise at full-price due to strong
customer reception of the merchandise offerings.
Selling, general and administrative expenses (including
advertising and catalog production costs) increased to 30.0% of sales for
the first quarter of 2004 compared to 28.4% for the first quarter of
2003. The increase is principally a result of increases in marketing and
transitional management expenses during the first quarter of 2004.
The Company reported net income of $777,000 or $0.04 per basic and
diluted share during the first quarter of 2004, as compared to a net loss
of $2,189,000 or $0.41 per diluted and basic share for the first quarter
of last year. Included in the results of the 2003 period are costs
associated with the closing of eight unprofitable stores during 2003, and
losses associated with an event conducted to liquidate excess inventory.
The store closing expenses recorded in the first quarter of 2003 were
$1,168,000.
The average balance of total outstanding debt was $19,244,000 for
the thirteen weeks ended May 1, 2004 compared to $18,980,000 for the same
period of 2003. This slight increase in average balances resulted
principally from the timing of accounts payable payments. Interest
expense remained essentially unchanged during the first quarter of 2004
as compared to the comparable 2003 period.
The first quarter of 2004 is the most profitable first quarter in
the Company's history and reflects the effects of various actions taken
by the Company in the last several quarters to restore ongoing
profitability. The trends are positive and the Company is optimistic,
but there is no assurance that the Company has achieved its goal of
ongoing profitability.
Liquidity and Capital Resources
The Company's primary needs for liquidity are to finance its
inventories and revolving charge accounts, cover operating cash flow
deficits and to invest in remodeling, fixtures and equipment. The
Company has relied on its bank credit facility to meet these needs as
well as proceeds from preferred stock investments of $6 million in
February 2001, $4 million in August 2002 and $5 million in February 2003.
The Company experienced deficit operating cash flows of $467,000 for the
thirteen weeks ended May 1, 2004 compared to deficit operating cash flows
of $4,863,000 for the thirteen weeks ended May 3, 2003. This increase in
cash flows is principally related to the increase in net income for the
first quarter of 2004 compared to the same period of 2003. The Company's
ability to achieve positive cash flows from operating activities depends
on its ability to continue to improve sales and sustain a return to
profitability. Additionally, the Company may experience needs for
additional capital. While the Company has been successful in covering
cash flow deficits through line of credit borrowings and private equity
investments from its principal shareholder, there can be no assurances
that these, or any other financing resources will be available for future
needs.
The Company's original three-year credit facility with Wells Fargo
Retail Finance II, LLC, ("WFRF") was entered into on February 5, 2003 and
provided the Company with a maximum available credit limit of $22
million. This agreement was scheduled to expire in February, 2006. As
discussed below, on April 29, 2004, the maximum available credit line was
increased to the lesser of $25 million or $22 million plus outstanding
participant advances, and the expiration date was extended to February 5,
2007. The credit facility is secured by substantially all assets of the
Company and its subsidiaries and is subject to a borrowing base
calculation based primarily on inventory and accounts receivable. The
facility has two financial covenants, a minimum excess availability
covenant of $1.35 million ($1 million in July through September) and a
maximum capital expenditure covenant, established at $2.75 million for
2004. Interest rates under the facility are at prime plus 0.5% or LIBOR
plus 2.50%, with the ability to reduce the rate if the Company achieves
certain financial criteria. The balance outstanding on the Company's
line of credit at May 1, 2004 was $17,752,000 which includes the $4
million outstanding under the bridge facility discussed below.
Subsequent to securing the initial credit facility, the Company
negotiated an increase of $2 million in its total borrowing availability
under its existing credit facility with WFRF. The Company obtained this
increase in order to provide for additional working capital. The full $2
million was available for borrowing on July 15, 2003 and has been
extended to the Company by Wells Fargo based upon a loan participation
agreement between Wells Fargo and RonHow, LLC, an entity established in
July 2003 which is owned and controlled directly or indirectly by Ronald
de Waal and W. Howard Lester. Mr. de Waal and Mr. Lester are both major
beneficial owners of the Company's common stock, and Mr. Lester is also a
director of the Company.
In order to achieve additional liquidity, on April 29, 2004, the
Company completed of an amendment to the credit facility with WFRF which
increased the Company's borrowing availability under the facility. The
amendment increased the Company's maximum inventory advance rate cap from
75% to 80% during non-peak times and from 80% to 85% during peak times.
Peak times were amended to include the eight weeks prior to Easter and
the eight weeks prior to October 1. The increase in advance rates is
expected to increase the availability under the facility by as much as $3
million depending on the level of inventories. Additionally, the
amendment extended the term of the credit facility by one year, with a
new expiration of February 5, 2007. The amendment also increased the
maximum revolver amount from $22 million to the lesser of $25 million or
$22 million plus outstanding participant advances. Finally, the
amendment provided for an additional increase of $2 million in the
Company's borrowing availability under the facility based upon an
increase in the existing loan participation agreement between WFRF and
RonHow, LLC. WFRF will continue to serve as the lending agent for the
Company under the credit facility, and the principal covenants and
conditions imposed upon the Company pursuant to the WRFR credit facility
agreement have not materially changed. RonHow, LLC's right to repayment
of any advances under the credit facility that are attributable to its
total $4 million participation is generally subordinate to the repayment
rights of the other credit facility lenders. However, the Company may
repay these advances provided it meets certain conditions, including the
maintenance of an average daily excess availability under the credit
facility of at least $2.5 million for the 30 days prior to and 30 days
projected immediately following the repayment. The average excess
availability requirement is higher than the excess availability otherwise
required of the Company under the credit facility. If the Company does
not repay the new $2 million loan participation of RonHow during the 18
months subsequent to April 29, 2004, RonHow will have an option at that
time to convert any of the incremental $2 million not repaid into shares
of authorized but unissued 2003-A Preferred Stock, which will be
convertible into shares of common stock at a price of $2.524 per share,
which was the 20-day average closing price of the Company's common stock
for the period ending immediately before closing of the loan amendment.
Additionally, if the Company has not repaid the initial $2 million of
loan participation by February 2006, the Company will pay an additional
4% fee per annum on the outstanding participation amount up to $2
million. This transaction was approved by the independent directors.
The Company was in compliance with its debt covenants for the
quarter ended May 1, 2004. Although the Company's line of credit with
WFRF does not expire until February 2007, the Company has classified its
borrowings under its line of credit as current in its consolidated
balance sheet due to the terms of its agreement with the lender. Under
the bank agreement, there is an acceleration clause which potentially
allows the bank to demand immediate payment of all outstanding borrowings
upon the occurrence of a material adverse change in the Company's
operations or financial position. Determination of what constitutes a
material adverse change is at the discretion of the bank, however, it is
subject to reasonableness standards. In addition, the Company is
required to maintain a lock-box agreement with the bank whereby all cash
received is applied against current borrowings. As a result of these
items, the Company is required to classify its borrowings as current as
proscribed by EITF 95-22, "Balance Sheet Classification of Borrowings
Outstanding under Revolving Credit Agreements that include both a
Subjective Acceleration Clause and a Lock-Box Arrangement."
At May 1, 2004 the Company's availability under the WFRF line of
credit was approximately $5.6 million above the minimum availability
requirement of $1.35 million and the average interest rate on the credit
line was 3.77%. The Company's credit line had an average balance of
$17,678,000 and $17,097,000 for the thirteen weeks ended May 1, 2004 and
May 3, 2003, respectively. During the thirteen weeks ended May 1, 2004,
the WFRF line of credit had a high balance of $18,494,000. The balance
outstanding on May 1, 2004 was $17,752,000.
The Company considers the following as measures of liquidity and capital
resources as of the dates indicated:
May 1,
2004
January
31,
2004
May 3,
2003
Working capital (000's) (1)
$1,965
$888
$3,527
Current ratio (1)
1.07:1
1.03:1
1.13:1
Ratio of working capital to total
assets (1)
..05:1
..02:1
..08:1
Ratio of total debt to
stockholders' equity (2)
2.20:1
2.21:1
1.54:1
(1
)
Long-term debt is classified as current to comply with accounting
pronouncement EITF 95-22. See Note 5 to the Consolidated Financial
Statements for more information. If the debt under the Company's line
of credit was classified as long-term, working capital would be
$19,717, $17,508 and $21,051 in May 2004, January 2004 and May 2003,
respectively; current ratio would be 3.30:1, 2.72:1 and 3.15 in May
2004, January 2004 and May 2003, respectively; and working capital to
total assets would be .52:1, .47:1 and .49:1 in May 2004, January 2004
and May 2003, respectively.
(2
)
Preferred stock is treated as equity for this calculation.
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 year, which includes the back-to-school and holiday
selling seasons. In light of this pattern, selling, general and
administrative expenses are typically higher as a percentage of sales
during the spring season (first and second quarters) of each year.
Inflation
Inflation affects the costs incurred by the Company in its
purchase of merchandise and in certain components of its selling, general
and administrative expenses. The Company attempts to offset the effects
of inflation through price increases and control of expenses, although
the Company's ability to increase prices is limited by competitive
factors in its markets. Inflation has had no meaningful effect on the
Company's operations.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The primary objective of this disclosure 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. There have been no significant
changes to this forward-looking information during the first quarter of
2004 that would materially alter the Company's market risk exposures.
ITEM 4. CONTROLS AND PROCEDURES
The Company's Principal Executive Officer and Principal Financial
Officer have reviewed and evaluated the effectiveness of the Company's
disclosure controls and procedures (as defined in Exchange Act Rule
240.13a-14(c)) as of the end of the period covered by this report. Based
on that evaluation, the Principal Executive Officer and the Principal
Financial Officer have concluded that the Company's current disclosure
controls and procedures are effective to ensure that information required
to be disclosed by the Company in the reports that it files or submits
under the Exchange Act is recorded, processed, summarized and reported,
within the time periods specified in the Securities and Exchange
Commission's rules and forms.
PART II
ITEM 1. LEGAL PROCEEDINGS
None.
ITEM 2. CHANGES IN SECURITIES, USE OF PROCEEDS AND ISSUER PRUCHASES
OF EQUITY SECURITIES
On February 1, 2004, and May 1, 2004, 1,114 shares and 1,117
shares, respectively, of the Company's Amended Series 2001-A Preferred
Stock ("2001 Preferred") were issued as dividends to an existing holder
of 2001 Preferred, at his election pursuant to the original terms of the
2001 Preferred. Each share of 2001 Preferred issued in the February 1,
2004 dividend is convertible into approximately 6.54 shares of Company
common stock. Each share of 2001 Preferred issued in the May 1, 2004
dividend is convertible into approximately 7.97 shares of Company common
stock.
Also, on April 1, 2004, 259 shares of the Company's Series 2003-A
Preferred Stock ("2003 Preferred") were issued as a pro rata dividend to
the existing holders of the 2003 Preferred in accordance with the
original terms of the 2003 Preferred. Each share of 2003 Preferred
issued in this dividend is convertible into approximately 36.23 shares of
Company common stock.
Finally, on April 1, 2004, 2,154 shares of the Company's Series
2002-A Preferred Stock ("2002 Preferred") were issued as a dividend to
two of the existing holders of 2002 Preferred at their election pursuant
to the original terms of the 2002 Preferred. Each share of 2002
Preferred issued in this dividend is convertible into approximately 7.25
shares of Company common stock.
Because the shares of 2003 Preferred, 2002 Preferred and 2001
Preferred described above were all issued as stock dividends in
accordance with the original terms of each series, the Company believes
that no sale of securities has occurred which would require the
registration of such shares under the Securities Act. However, even if
the issuance of such shares is deemed to be a sale for purposes of the
Securities Act, the Company believes the issuance of such shares was, in
each case, exempt from registration under the Securities Act pursuant to
Section 4(2) thereof. These shares were issued without any public
solicitation to a limited group of investors, all of whom are either
directors of the Company or beneficially own in excess of 10% of the
Company's outstanding common stock and all of whom acquired such shares
for investment.
On March 1, 2004, the Company issued 1,417 shares of 2003
Preferred to the lessor of its corporate headquarters as additional rent
pursuant to the terms of its existing lease. The Company believes the
issuance of such shares was exempt from registration under the Securities
Act pursuant to Section 4(2) thereof. These shares were issued without
any public solicitation to a single person who acquired such shares for
investment.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
ITEM 5. OTHER INFORMATION
None.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits: The following exhibits are filed as a part of
this report:
Exhibit
Number
Description
31.1
Certification of Chief Executive Officer Pursuant to
Rule 13a-14(a) under the Securities Exchange Act of 1934.
31.2
Certification of Chief Financial Officer Pursuant to
Rule 13a-14(a) under the Securities Exchange Act of 1934.
32.1
Certification of Chief Executive Officer Pursuant to 18
U.S.C. Section 1350.
32.2
Certification of Chief Financial Officer Pursuant to 18
U.S.C. Section 1350
(b) Reports on Form 8-K: The Company filed a Form 8-K dated
March 11, 2004, reporting under Item 12 a press release
announcing its earnings and operating results for the year
ended January 31, 2004.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of
1934, the Registrant has duly caused this report to be signed on its
behalf by the undersigned, hereunto duly authorized.
HAROLD'S STORES, INC.
By: /s/ Hugh Mullins
Hugh Mullins
President and Chief Executive Officer
By: /s/ Jodi L. Taylor
Jodi L. Taylor
Chief Financial Officer
Date: June 15, 2004
INDEX TO EXHIBITS
Exhibit
Number
Description
31.1
Certification of Chief Executive Officer Pursuant to
Rule 13a-14(a) under the Securities Exchange Act of 1934.
31.2
Certification of Chief Financial Officer Pursuant to
Rule 13a-14(a) under the Securities Exchange Act of 1934.
32.1
Certification of Chief Executive Officer Pursuant to 18
U.S.C. Section 1350.
32.2
Certification of Chief Financial Officer Pursuant to 18
U.S.C. Section 1350
2
See accompanying notes to interim consolidated financial statements.
6
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